-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WIn4Qist5fihlfl/mp+4r8g+64StCRX2wM2nOV64PEU4hAbqcj8di1uNHPp3dkPu BK69CuKJRpx2obgt1cnhyA== 0000950124-95-003417.txt : 19951027 0000950124-95-003417.hdr.sgml : 19951027 ACCESSION NUMBER: 0000950124-95-003417 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 45 FILED AS OF DATE: 19951026 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CMS NOMECO OIL & GAS CO CENTRAL INDEX KEY: 0000946036 STANDARD INDUSTRIAL CLASSIFICATION: GOLD & SILVER ORES [1040] IRS NUMBER: 381859381 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 033-63693 FILM NUMBER: 95584325 BUSINESS ADDRESS: STREET 1: 1 JACKSON SQ STREET 2: P.O. BOX 1150 CITY: JACKSON STATE: MI ZIP: 49204 BUSINESS PHONE: 5177879011 MAIL ADDRESS: STREET 1: 1 JACKSON SQ. STREET 2: P.O. BOX 1150 CITY: JACKSON STATE: MI ZIP: 49204 S-1 1 FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 26, 1995 REGISTRATION NO. 33- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------------ CMS NOMECO OIL & GAS CO. (Exact name of Registrant as specified in its charter) MICHIGAN 1330 38-1859381 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of Classification Code Number) Identification No.) incorporation or organization)
ONE JACKSON SQUARE P.O. BOX 1150 JACKSON, MICHIGAN 49204 (517) 787-9011 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ------------------------------ WILLIAM H. STEPHENS, III ALAN M. WRIGHT EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL SENIOR VICE PRESIDENT AND CHIEF FINANCIAL CMS NOMECO OIL & GAS CO. OFFICER ONE JACKSON SQUARE CMS ENERGY CORPORATION P.O. BOX 1150 FAIRLANE PLAZA SOUTH, SUITE 1100 JACKSON, MICHIGAN 49204 330 TOWN CENTER DRIVE (517) 787-9011 DEARBORN, MICHIGAN 48126 (313) 436-9560
(Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------------ Copies to: DENISE M. STURDY, ESQ. ANDREW H. SHAW, ESQ. KERRY C. L. NORTH, ESQ. Assistant General Counsel Sidley & Austin Baker & Botts, L.L.P. CMS Energy Corporation One First National Plaza 2001 Ross Avenue 212 W. Michigan Avenue Chicago, Illinois 60603 Dallas, Texas 75201 Jackson, Michigan 49201 (312) 853-7000 (214) 953-6500 (517) 788-0179
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / __________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / __________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM TITLE OF EACH CLASS PROPOSED MAXIMUM AGGREGATE OF SECURITIES AMOUNT BEING OFFERING PRICE OFFERING AMOUNT OF TO BE REGISTERED REGISTERED(1) PER SHARE(1) PRICE(1)(2) REGISTRATION FEE - ------------------------------------------------------------------------------------------------------- Common Stock..................... -- -- $100,000,000 $34,483 - ------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------
(1) There are being registered hereunder such presently indeterminate number of shares of Common Stock, no par value, of the Registrant with an aggregate initial offering price not to exceed $100,000,000. Pursuant to Rule 457(o) under the Securities Act of 1933 which permits the registration fee to be calculated on the basis of the maximum offering price of the securities listed, the table does not specify information as to the amount to be registered or the proposed maximum offering price per share. (2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457. ------------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K BETWEEN REGISTRATION STATEMENT AND PROSPECTUS
FORM S-1 ITEM NUMBER AND HEADING CAPTION OR LOCATION IN PROSPECTUS 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus..................... Facing Page; Cross-Reference Sheet; Outside Front Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus...................................... Inside Front Cover Page; Outside Back Cover Page; Available Information 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges.......................... Prospectus Summary; Risk Factors; The Company 4. Use of Proceeds.................................... Use of Proceeds 5. Determination of Offering Price.................... Underwriting 6. Dilution........................................... Dilution 7. Selling Security Holders........................... * 8. Plan of Distribution............................... Outside Front Cover Page; Shares Eligible for Future Sale; Underwriting 9. Description of Securities to be Registered......... Description of Capital Stock 10. Interests of Named Experts and Counsel............. * 11. Information with Respect to the Registrant......... Outside Front Cover Page; Inside Front Cover Page; Prospectus Summary; Risk Factors; The Company; Dividend Policy; Capitalization; Selected Historical Consolidated Financial Data; Pro Forma Financial Information; Notes to Pro Forma Financial Information; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business and Properties; Management; Ownership of Capital Stock; Relationship and Certain Transactions with CMS Energy; Available Information; and Financial Statements 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities..... *
- ------------------------- * Not applicable. 3 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED OCTOBER 26, 1995 PROSPECTUS , 1995 [CMS NOMECO LOGO] SHARES CMS NOMECO OIL & GAS CO. COMMON STOCK All of the shares offered hereby are being sold by the Company. The Company is currently an indirect subsidiary of CMS Energy Corporation. The capital stock of CMS Energy Corporation is listed on the New York Stock Exchange. Upon completion of this offering, CMS Energy Corporation will beneficially own % of the outstanding shares of Common Stock ( % if the Underwriters' over-allotment option is exercised in full). Prior to this offering, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price per share will be between $ and $ . See "Underwriting" for information relating to the factors to be considered in determining the initial public offering price. The Company will apply to have the Common Stock approved for quotation on the New York Stock Exchange under the symbol CNO. FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS, SEE "RISK FACTORS" BEGINNING ON PAGE 9. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- PRICE UNDERWRITING PROCEEDS TO THE DISCOUNTS AND TO THE PUBLIC COMMISSIONS(1) COMPANY(2) - ----------------------------------------------------------------------------------------------- Per Share................................ $ $ $ Total(3)................................. $ $ $
- -------------------------------------------------------------------------------- (1) See "Underwriting" for indemnification arrangements with the several Underwriters. (2) Before deducting expenses payable by the Company estimated at $ . (3) The Company has granted the Underwriters a 30-day option to purchase up to additional shares at the Price to the Public, less Underwriting Discounts and Commissions, solely to cover over-allotments, if any. If all such shares are purchased, the total Price to the Public, Underwriting Discounts and Commissions and Proceeds to the Company will be $ , $ and $ , respectively. See "Underwriting." The shares of Common Stock are offered by the several Underwriters when, as and if issued to and accepted by them, subject to various prior conditions, including their right to reject orders in whole or in part. It is expected that delivery of share certificates will be made in New York, New York on or about , 1995. 4 [MAPS OF U.S. AND NON-U.S. OIL AND GAS PROPERTIES] ------------------------ IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 5 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus assumes an initial offering price of $ per share and no exercise of the Underwriters' over-allotment option. Except as otherwise noted, all information in this Prospectus has been adjusted to reflect an approximate 1.644 for 1.0 stock split of the Common Stock effected on October 25, 1995. The June 30, 1995 estimated reserve data included throughout this Prospectus are based on the report of Ryder Scott Company ("Ryder Scott"), independent petroleum engineering consultants, and include the estimated reserves added as a result of the Company's recent acquisition of Terra Energy, Ltd. Unless otherwise indicated, references to the Company include the Company and its direct and indirect subsidiaries. Certain terms relating to the oil and gas industry are defined in "Certain Definitions." THE COMPANY GENERAL CMS NOMECO Oil & Gas Co. ("CMS NOMECO" or the "Company") is an independent oil and natural gas company engaged in the exploration, development, acquisition and production of oil and natural gas properties in the U.S. and seven other countries. Formed in 1967 to explore and develop leaseholdings located solely in Michigan, the Company has greatly expanded to become an international oil and natural gas company. In large part as a result of acquisitions and development activities, the Company has more than doubled both its estimated proved reserves and its production of oil and natural gas since January 1, 1992. As of June 30, 1995, the Company had estimated proved reserves of 118.6 MMBoe, consisting of 68.9 MMBbls of oil (97.0% of which were located outside the U.S.) and 298.1 Bcf of natural gas (94.5% of which were located in the U.S.). Approximately 64.7% of the Company's estimated proved reserves on such date were classified as proved developed. The Company's oil-producing assets are concentrated in South America (Ecuador, Venezuela and Colombia) and offshore West Africa (the Congo and Equatorial Guinea), and the Company's gas-producing assets are concentrated in Michigan, the Gulf Coast region and the Gulf of Mexico. The following table summarizes by region the Company's estimated proved reserves as of June 30, 1995 and estimated average daily production during the month of September 1995:
ESTIMATED PROVED RESERVES ESTIMATED AVERAGE DAILY PRODUCTION AS OF JUNE 30, 1995 DURING THE MONTH OF SEPTEMBER 1995 -------------------------------------------- ------------------------------------------- OIL AND NATURAL % OF OIL AND NATURAL % OF CONDENSATE(1) GAS TOTAL TOTAL CONDENSATE GAS TOTAL TOTAL (MMBBLS) (BCF) (MMBOE) RESERVES (MBBLS) (MMCF) (MBOE) PRODUCTION U.S.: Michigan.............. 1.2 238.5 40.9 34.5% 0.9 51.6 9.5 38.3% Other U.S............. 0.9 43.1 8.1 6.8 0.7 25.4 4.9 19.8 ---- ----- ----- ----- ---- ---- ---- ------ Total U.S........... 2.1 281.6 49.0 41.3 1.6 77.0 14.4 58.1 NON-U.S.: South America: Ecuador............. 16.7 -- 16.7 14.1 3.2 -- 3.2 12.9 Venezuela........... 11.3 -- 11.3 9.5 0.5 -- 0.5 2.0 Colombia............ 6.7 -- 6.7 5.7 1.1 -- 1.1 4.4 West Africa: Congo............... 15.9 -- 15.9 13.4 3.4 -- 3.4 13.7 Equatorial Guinea... 11.5 10.7 13.3 11.2 1.9 -- 1.9 7.7 Other Non-U.S......... 4.7 5.8 5.7 4.8 0.2 0.3 0.3 1.2 ---- ----- ----- ----- ---- ---- ---- ------ Total Non-U.S....... 66.8 16.5 69.6 58.7 10.3 0.3 10.4 41.9 Total Company..... 68.9 298.1 118.6 100.0% 11.9 77.3 24.8 100.0% ==== ===== ===== ===== ==== ==== ==== ======
- ------------------------- (1) Oil and condensate includes 0.2 MMBbls and 3.0 MMBbls, respectively, of U.S. and non-U.S. NGLs. 3 6 The Company is an indirect subsidiary of CMS Energy Corporation ("CMS Energy"). CMS Energy is a major international energy company with electric utility operations, natural gas utility operations, gas transmission and marketing, independent power production and, through the Company, oil and natural gas exploration, development and production. STRATEGY The Company believes that its success has resulted from its ability to capitalize on an extensive network of industry relationships, an efficient evaluation and decision-making process and broad technical competence. The Company believes that its future growth depends on maintaining an opportunistic approach which builds on the Company's existing strengths. Accordingly, the Company's business strategy is to focus on the following goals while maintaining the flexibility to respond to new opportunities and changed circumstances. BALANCE. The Company seeks to maintain a balance between its U.S. and non-U.S. interests to diversify its political, geologic and economic risk. The Company believes that projects outside the U.S. tend to have a higher potential for significant reserve growth, but often have greater risks, including political risks and the risks associated with infrastructure development necessary to market production. The Company further believes that projects in the U.S. do not have certain of these risks, but also generally do not offer as large a potential for reserve growth as non-U.S. projects. The Company has historically concentrated on natural gas in the U.S. and to date has focused its non-U.S. activities on oil, providing the Company an additional balance between natural gas and oil. EXPLORATION AND DEVELOPMENT OF EXISTING NON-U.S. PROPERTIES. In recent years, the Company has made a series of investments in properties outside the U.S. that currently have both production from proved reserves and significant potential for exploration and development. The Company is pursuing exploration and development of such properties, which include Block 16 in Ecuador, the Colon Unit in Venezuela, the Espinal Block in Colombia, the Yombo Field offshore the Congo and the Bioko Block offshore Equatorial Guinea. Most of the Company's exploration and development opportunities outside the U.S. are located in areas which have significant production histories and adequate infrastructure and, in the Company's view, have a reasonable possibility of yielding sizeable additional reserves through the application of modern exploration and development technologies. SELECTIVE ACQUISITIONS. The Company intends to continue to pursue attractive opportunities to acquire producing properties with significant exploration and development potential. The Company's primary focus is in the geographic regions where it has significant experience. The Company's recent acquisitions of Walter International, Inc. and Terra Energy, Ltd., discussed below, are illustrative of the types of opportunities the Company seeks. OPERATOR ROLE. The Company seeks to continue to expand its role as operator of both U.S. and non-U.S. projects by pursuing acquisitions and investment opportunities that allow it to do so. As operator, the Company believes that it can better manage production performance and more effectively control expenses, the allocation of capital and the timing of exploration and development of its fields. In addition, the Company believes that its experience as operator will provide it access to a broader range of additional investment opportunities. In early 1995, the Company assumed the role of operator of significant offshore producing properties in West Africa in conjunction with its acquisition of Walter International, Inc., and more recently the Company materially increased its role as operator of U.S. properties as a result of its acquisition of Terra Energy, Ltd. After giving effect to these acquisitions, the Company operates properties representing approximately 37.5% of its estimated proved reserves, including 43.9% of its U.S. proved reserves and 32.5% of its non-U.S. proved reserves. With respect to projects not operated by the Company, the Company actively monitors the performance of its operators with the same objectives it seeks for Company-operated projects. REGIONAL FOCUS. With respect to both its U.S. and non-U.S. activities, the Company intends to focus on selected geographic regions, particularly those where it is currently active. In the U.S., the Company expects to continue its emphasis on development, production and, to a lesser extent, exploration of natural gas in its core areas of Michigan, the Gulf of Mexico and the Gulf Coast region. Outside the U.S., the Company intends to concentrate on exploration, development and production of oil in South America and offshore West Africa 4 7 while evaluating opportunities to acquire additional reserves in those areas and in certain areas of Southeast Asia. By focusing activities in a relatively limited number of U.S. and non-U.S. regions, the Company has acquired significant experience in the operational, technical and legal aspects of conducting business in these regions and can utilize its base of geologic, engineering and production experience in such regions to better evaluate drilling and acquisition prospects. TECHNOLOGY. The Company expects to continue to utilize its growing technology base, including increasing use of 3-D seismic surveys, horizontal drilling, new fracturing techniques and reservoir modeling, on its existing properties as well as newly acquired properties. The Company believes it must utilize the latest available technology to continue to compete successfully as the industry focuses on properties with increasing amounts of exploration, development and production risk. RECENT DEVELOPMENTS ACQUISITION OF TERRA ENERGY, LTD. In August 1995, CMS Energy acquired Terra Energy, Ltd. ("Terra"), a significant producer of gas within the Devonian Antrim Shale ("Antrim") formation underlying a large portion of the Michigan Basin in the northern portion of Michigan's lower peninsula. The consideration relating to such acquisition, after giving effect to certain anticipated post-closing adjustments, is expected to aggregate approximately $63.6 million, payable in common stock of CMS Energy. Immediately after consummation of such acquisition, the stock of Terra was transferred to the Company (the "Terra Acquisition"). In connection with the Terra Acquisition, the Company recorded a capital contribution of $1.0 million and issued a promissory note which, after giving effect to post-closing adjustments, is expected to be in the principal amount of approximately $62.6 million. Such note is currently held by CMS Energy. As of June 30, 1995, the acquired Terra properties included 1,225 gross (95.6 net) producing Antrim gas wells and estimated net proved reserves of 91.9 Bcf of Antrim gas. During the month of September 1995, estimated average daily net production from these properties was approximately 9.5 MMcf of gas. The Company has been a significant producer and operator of Antrim gas wells for a number of years. Taking into account the Terra Acquisition, the Company operates over 1,200 Antrim gas wells, or over 25% of all producing gas wells in the Antrim formation, making the Company the largest operator of gas wells in the Antrim formation. Terra is currently serving as operator of several projects involving the planned drilling of an additional 260 Antrim development wells by December 31, 1995. Additionally, Terra has a sizeable inventory of unproved acreage in the Antrim producing trend, and management believes that a number of its existing wells have substantial potential for improved recovery. The Company believes that it is particularly well suited to capitalize on the Terra Acquisition because of its many years of experience in the natural gas industry in Michigan and its ability as part of the CMS Energy consolidated group to utilize, to a substantial extent, the nonconventional fuels (Section 29) tax credit associated with certain Antrim gas production. ACQUISITION OF WALTER INTERNATIONAL, INC. In February 1995, CMS Energy acquired Walter International, Inc. ("Walter"), an international oil and gas company, for a purchase price of approximately $28.4 million plus assumed indebtedness of $18.3 million. Immediately after consummation of such acquisition, the stock of Walter was contributed to the Company (the "Walter Acquisition" and, together with the Terra Acquisition, the "Recent Acquisitions"). In connection with the Walter Acquisition, the Company issued a promissory note in the principal amount of $6.5 million to CMS Energy to fund repayment of certain of the above-referenced assumed indebtedness of Walter. Walter owns interests in and operates fields offshore the Congo and offshore Equatorial Guinea in West Africa and in Tunisia in North Africa. As of June 30, 1995, the acquired Walter properties included 22 gross (6.6 net) producing oil and condensate wells and estimated net proved reserves of 21.0 MMBbls of oil and condensate. During the month of September 1995, estimated average daily net production from these properties was approximately 4,829 Bbls of oil and condensate. 5 8 The Company became familiar with Walter in part because of the Company's participation in the Alba Field operated by Walter offshore Equatorial Guinea. The acquisition of Walter is consistent with the Company's strategy of acquiring producing properties with exploration and development potential. The Walter Acquisition also expands the Company's role as operator of offshore and non-U.S. projects. OTHER RECENT ACQUISITIONS AND DISCOVERIES The Company experienced significant growth in reserves in 1994 primarily as a result of certain acquisitions of producing properties and one significant discovery. In December 1994, a consortium in which the Company has a 29.17% working interest agreed to assume operation of the Colon Unit in Venezuela from an affiliate of the state-owned oil company pursuant to an operating services agreement. As of June 30, 1995, the Company's estimated proved oil reserves attributable to this transaction were 11.3 MMBbls, and the Company has committed to spend approximately $47.0 million ($38.0 million for capital expenditures and $9.0 million for operating expenditures) over the next three years on rework and other development and, to a lesser extent, exploration activities at the Colon Unit. In June 1994, the Company acquired Sun Colombia, whose sole asset is a working interest in the Espinal Block in Colombia, for approximately $25.0 million. As of June 30, 1995, the Company's estimated proved oil reserves attributable to the Sun Colombia acquisition were 5.5 MMBbls. In the third quarter of 1994, the Company completed two Antrim gas property acquisitions for a total of approximately $8.5 million. The Company's estimated proved natural gas reserves attributable to these acquisitions were approximately 10.3 Bcf as of June 30, 1995. In early 1994, the Company participated in a significant discovery in the Freshwater Bayou Field in southern Louisiana. Since this discovery, four successful development wells in this field have been drilled and with their reserve additions, the Company's estimated proved natural gas reserves in the field as of June 30, 1995 were 29.4 Bcf. THE OFFERING Common Stock offered by the Company................. shares Common Stock to be outstanding after the Offering*......................................... shares Use of Proceeds..................................... To repay a portion of the indebtedness of the Company, including indebtedness to CMS Energy, and for general corporate purposes. See "Use of Proceeds." Proposed New York Stock Exchange Symbol............. CNO
- ------------------------- * After completion of the offering made hereby (the "Offering"), approximately % ( % if the Underwriters exercise their over-allotment option in full) of the outstanding Common Stock of the Company will be beneficially owned by CMS Energy by virtue of its ownership of all of the common stock of CMS Enterprises Company ("CMS Enterprises"). RISK FACTORS Prospective investors should carefully consider the factors discussed in detail elsewhere in this Prospectus under the caption "Risk Factors." 6 9 SUMMARY OIL AND NATURAL GAS RESERVE DATA The following table summarizes certain historical and pro forma estimates of the Company's net proved oil and natural gas reserves as of the dates indicated and estimated future net cash flows and standardized measure data attributable to these reserves at such dates. The reserve estimates and estimated future net cash flows as of June 30, 1995 have been prepared by Ryder Scott. The reserve estimates, estimated future net cash flows and standardized measure data as of January 1, 1993, 1994 and 1995 have been prepared by the Company's internal engineers. The June 30, 1995 standardized measure data were prepared by the Company's internal engineers based on the June 30, 1995 reserve estimates prepared by Ryder Scott. For additional information relating to the Company's oil and natural gas reserves, see "Risk Factors -- Uncertainty of Reserve Estimates," "Business and Properties -- Reserves," Supplemental Information -- Oil and Gas Producing Activities in the Notes to Consolidated Financial Statements of the Company and the supplemental oil and gas information in the Notes to the Consolidated Financial Statements relating to the Recent Acquisitions included elsewhere in this Prospectus. Attached hereto as Appendix A is a letter from Ryder Scott relating to their reserve report.
AS OF JANUARY 1, -------------------------- AS OF JUNE 30, 1993 1994 1995 1995(1) ESTIMATED PROVED RESERVES: Oil and condensate (MMBbls)(2).................................. 36.1 36.2 54.8 68.9 Natural gas (Bcf)............................................... 208.5 201.8 231.2 298.1 Net equivalent barrels of oil (MMBoe)........................... 70.9 69.8 93.3 118.6 Discounted estimated future net cash flows (millions)(2)(3)..... $347.0 $364.7 $528.5 $629.0 Standardized measure of discounted estimated future net cash flows after net income taxes (millions)(2)(4) $317.3 $318.4 $413.2 $526.0
- ------------------------- (1) Gives effect to the Terra Acquisition. (2) Includes natural gas liquids and the equity interest in estimated proved reserves in the East Shabwa Block in the Republic of Yemen. (3) The discounted estimated future net cash flows attributable to the Company's reserves were prepared using constant prices as of the calculation date, discounted at 10% per annum before income taxes. Such discounted estimated future net cash flows include the estimated value of nonconventional fuels (Section 29) tax credits. (4) The standardized measure of discounted estimated future net cash flows represents discounted estimated future net cash flows attributable to the Company's reserves after income tax, calculated in accordance with the provisions of Statement of Financial Accounting Standards No. 69. SUMMARY OPERATING DATA
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------------------ -------------------- PRO FORMA PRO FORMA 1992 1993 1994 1994(1) 1995 1995(1) OPERATING DATA: Production: Oil and condensate (MBbls)............. 1,417 1,716 2,025 3,806 3,219 3,437 Natural gas (MMcf)..................... 17,578 18,487 20,546 22,925 18,989 20,883 Natural gas liquids (MBbls)............ 291 186 193 193 172 172 Average sales price(2): Oil and condensate (per Bbl)........... $ 18.85 $ 15.52 $ 13.30 $ 13.12 $ 14.04 $ 14.02 Natural gas (per Mcf).................. 1.89 2.17 2.05 2.02 1.88 1.82 Natural gas liquids (per Bbl).......... 16.55 15.24 14.90 14.90 14.57 14.57 OPERATING EXPENSES (PER BOE): Depreciation, depletion and amortization........................... $ 7.02 $ 7.15 $ 6.19 $ 5.12 $ 5.20 $ 5.10 Production costs......................... 2.91 3.01 3.42 3.48 3.54 3.50 General and administrative............... 0.97 1.12 1.12 1.26 0.86 0.85
- ------------------------- (1) Gives effect to the Recent Acquisitions as if such transactions had been consummated as of January 1 of the period presented. (2) Adjusted to reflect amounts received or paid under futures contracts entered into to hedge the price of production. 7 10 SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA The following table presents certain historical consolidated and pro forma financial data of the Company as of the dates and for the periods indicated. The historical consolidated financial data as of and for each of the three years in the period ended December 31, 1994 are derived from the consolidated financial statements of the Company which have been audited by Arthur Andersen LLP, independent certified public accountants. The historical consolidated financial data as of and for the nine months ended September 30, 1994 and 1995 are derived from unaudited consolidated financial statements of the Company which, in the opinion of management, contain all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation thereof. The following data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Pro Forma Consolidated Financial Information" and the Consolidated Financial Statements of the Company and those relating to the Recent Acquisitions, including the Notes thereto, included elsewhere in this Prospectus. The pro forma financial data are not necessarily indicative of the results that would have been achieved if the pro forma transactions had occurred on the dates indicated or the results that will be achieved in the future. The consolidated results for the nine months ended September 30, 1995 are not necessarily indicative of the results that may be achieved for the full year ending December 31, 1995.
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, ---------------------------------- ------------------------------------------- PRO FORMA 1992 1993 1994 PRO FORMA 1994 1995 1995(2) 1994(2) (UNAUDITED) (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) INCOME STATEMENT DATA(1): Operating Revenues: Oil and condensate.................... $26,553 $26,635 $ 26,831 $ 49,847 $18,479 $ 45,423 $ 48,388 Natural gas........................... 34,391 40,995 39,904 43,946 30,550 32,927 35,163 Other operating....................... 8,408 6,275 12,333 16,719 10,107 17,738 21,904 ------- ------- -------- --------- ------- -------- -------- 69,352 73,905 79,068 110,512 59,136 96,088 105,455 Operating Expenses: Depreciation, depletion and amortization........................ 32,566 35,605 34,919 40,026 25,358 34,072 35,168 Cost center write-offs................ 5,744 9,648 5,612 5,612 452 2,184 2,184 Operating and maintenance............. 13,476 15,005 19,323 27,182 14,050 23,204 24,116 General and administrative............ 4,489 5,599 6,345 9,870 4,346 5,609 5,884 Production and other taxes............ 3,997 4,221 3,838 4,117 3,010 3,463 3,735 Cost of products sold and other....... 1,427 1,127 973 1,374 682 773 990 ------- ------- -------- --------- ------- -------- -------- 61,699 71,205 71,010 88,181 47,898 69,305 72,077 Pretax operating income................. 7,653 2,700 8,058 22,331 11,238 26,783 33,378 Other income (expense).................. 163 382 239 (680) 152 522 1,068 Interest expense, net................... 4,954 3,844 4,023 3,428 2,624 6,455 5,124 ------- ------- -------- --------- ------- -------- -------- Income (loss) before income taxes....... 2,862 (762) 4,274 18,223 8,766 20,850 29,322 Income tax provision (benefit).......... (2,100) (5,900) (5,523) (4,766) (2,148) 386 1,989 Extraordinary item, early retirement of debt.................................. -- -- -- -- -- (987) (987) Cumulative effect of accounting change................................ (1,124) -- -- -- -- -- -- ------- ------- -------- --------- ------- -------- -------- Net income.............................. $ 3,838 $ 5,138 $ 9,797 $ 22,989 $10,914 $ 19,477 $ 26,346 ======= ======= ======== ========= ======= ======== ======== Net income per common share............. $ 0.16 $ 0.21 $ 0.41 $ $ 0.45 $ 0.81 $ ======= ======= ======== ========= ======= ======== ======== Average common shares outstanding(000)...................... 24,000 24,000 24,000 24,000 24,000 OTHER DATA: EBITDA(3)............................... $46,126 $48,335 $ 48,828 $ 67,289 $37,200 $ 63,561 $ 71,798 Capital expenditures.................... 68,059 77,750 108,188 105,620 93,854 152,958(4) 156,646 (4) AS OF SEPTEMBER 30, AS OF DECEMBER 31, PRO FORMA 1992 1993 1994 1994 1995 1995(5) (UNAUDITED) (DOLLARS IN THOUSANDS) BALANCE SHEET DATA: Working capital(6)...................... $ 8,989 $ 9,847 $ 15,189 $13,671 $ 31,648 $ 31,648 Investments and other assets............ 4,218 7,088 12,539 10,814 23,121 23,121 Property, plant and equipment, net...... 346,188 375,990 438,057 440,194 547,943 547,943 Total assets............................ 370,274 402,361 472,700 476,082 662,406 662,406 Long-term debt, including current portion............................... 96,382 118,720 129,041 130,593 199,048 118,048 Stockholders' equity.................... 208,351 222,989 288,886 285,903 341,089 422,089
- ------------------------- (1) Certain reclassifications have been reflected in amounts prior to 1995 to conform with 1995 presentation. (2) Gives effect to the Recent Acquisitions and the application of assumed net proceeds of $81.0 million from the Offering as if such transactions had been consummated as of January 1 of the period presented. See "Use of Proceeds." (3) EBITDA is earnings before interest, income taxes, depreciation, depletion and amortization, extraordinary item, cumulative effect of accounting change and cost center write-offs of oil and gas assets. EBITDA is presented to provide additional information about the Company's ability to meet its future requirements for debt service, capital expenditures and working capital. EBITDA should not be considered as an alternative to net income as an indicator of operating performance or as an alternative to cash flows as a measure of liquidity. (4) Includes non-cash capital expenditures of $106.9 million relating to the Recent Acquisitions. (5) Gives effect to the application of assumed net proceeds of $81.0 million from the Offering as if such net proceeds had been applied as of September 30, 1995. See "Use of Proceeds." (6) Excluding current maturities of long-term debt. 8 11 RISK FACTORS In addition to the other information in this Prospectus, the following risk factors should be considered carefully in evaluating the Company and its business before purchasing shares of the Common Stock offered hereby. Volatility of Oil and Natural Gas Prices. Revenues generated from the Company's operations are highly dependent upon the price of, and demand for, oil and natural gas. Historically, the markets for oil and natural gas have been volatile and are likely to continue to be volatile in the future. The prices for oil and natural gas are subject to wide fluctuation in response to relatively minor changes in the supply of and demand for oil and natural gas, market uncertainty and a variety of additional factors that are beyond the control of the Company. These factors include the level of consumer product demand, weather conditions, domestic and foreign governmental regulations and taxes, the price and availability of alternative fuels, political conditions in the Middle East and other petroleum producing areas, the foreign supply of oil and natural gas, the price of foreign imports and overall economic conditions. It is impossible to predict future oil and natural gas price movements with any certainty. Declines in oil or natural gas prices would not only reduce revenue but could reduce the amount of the Company's oil and natural gas that can be produced economically and could therefore have a material adverse effect on the Company's financial condition and results of operations. In order to reduce its exposure to price risks in the sale of its oil and natural gas, the Company enters into hedging arrangements from time to time. The Company's hedging arrangements apply to only a portion of its production and provide only limited price protection against fluctuations in the oil and natural gas markets. To the extent that the Company engages in such activities, it may be prevented from realizing the benefits of price increases above the levels of the hedges. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business and Properties." Ceiling Test Write-Offs. The Company uses the full cost method of accounting for its investment in oil and natural gas properties. Under the full cost method of accounting, all costs of acquisition, exploration and development of oil and natural gas reserves are capitalized into a "full cost pool" as incurred, and properties in the pool, including estimated future development costs, are depleted and charged to operations using the unit-of-production method based on the ratio of current production to total proved oil and natural gas reserves. To the extent that such capitalized costs (net of accumulated depreciation, depletion and amortization) less deferred taxes exceed the sum of discounted estimated future net cash flows from proved oil and natural gas reserves (using unescalated prices and costs and a 10% per annum discount rate) and the lower of cost or market value of unproved properties after income tax effects (the "ceiling"), such excess costs are charged against earnings. The test is applied at the end of each fiscal quarter on a country-by-country basis and requires a write-down of oil and natural gas properties if the ceiling is exceeded, even if prices decline for only a short period. Once incurred, such a write-down of oil and natural gas properties is not reversible at a later date even if oil or natural gas prices increase. As of September 30, 1995, the Company recorded a $2.0 million write-down to the ceiling in the U.S. cost center due to low oil and natural gas prices. Excluding properties which are subject to agreements of sale, the non-U.S. cost centers in which the ceiling exceeded the Company's actual capitalized costs by the smallest amounts as of September 30, 1995 were Yemen ($3.4 million), the Congo ($6.6 million) and Colombia ($10.6 million). Significant downward revisions of the estimates of proved reserves or declines in oil and natural gas prices from those in effect on September 30, 1995 which are not offset by other factors could result in a write-down for impairment of oil and natural gas properties. Uncertainty of Reserve Estimates. The reserve data of the Company and Ryder Scott set forth in this Prospectus represent only estimates. Estimates of economically recoverable oil and natural gas reserves and of future net cash flows necessarily depend upon a number of variable factors and assumptions, such as the assumed effects of regulations by governmental agencies and assumptions concerning future oil and natural gas prices, future operating costs, severance and excise taxes, development costs and workover and remedial costs, all of which may in fact vary considerably from actual experience. Reserves located outside the U.S. are often held pursuant to complex contractual arrangements with respective foreign governments, thus further complicating reserve estimates and creating the risk of conflicting contractual interpretations. For these reasons, estimates of economically recoverable quantities of oil and natural gas attributable to any particular group of properties, classifications of such reserves based on risk of recovery, and estimates of the future net 9 12 cash flows expected therefrom prepared by different engineers or by the same engineers at different times may vary substantially and such reserve estimates may be subject to downward or upward adjustment based upon such factors. Actual production, revenues and expenditures with respect to the Company's reserves will likely vary from estimates, and such variances may be material. The discounted estimated future net cash flows referred to in this Prospectus should not be construed as the current market value of the estimated oil and natural gas reserves attributable to the Company's properties. In accordance with applicable requirements of the Securities and Exchange Commission (the "Commission"), the discounted estimated future net cash flows from proved reserves are generally based on prices and costs as of the date of the estimate, whereas actual future prices and costs may be materially higher or lower. Actual future net cash flows also will be affected by factors such as the amount and timing of actual production, supply and demand for oil and natural gas, curtailments or increases in consumption by oil and natural gas purchasers and changes in governmental regulations or taxation. The timing of actual future net cash flows from proved reserves, and actual discounted cash flow, will be affected by the timing of both the production and the incurrence of expenses in connection with development and production of oil and natural gas properties. In addition, the calculation of the discounted estimated future net cash flows using a 10% discount per annum as required by the Commission is not necessarily the most appropriate discount factor based on interest rates in effect from time to time and risks associated with the Company's reserves or the oil and natural gas industry in general. See "Business and Properties -- Reserves." Replacement of Reserves. In general, the rate of production from oil and natural gas properties declines as reserves are depleted. The rate of decline depends on reservoir characteristics and other factors. Except to the extent the Company acquires properties containing proved reserves or conducts successful exploration and development activities, or both, the estimated proved reserves of the Company will decline as reserves are produced. The Company's future oil and natural gas production, and therefore cash flow and income, are highly dependent upon the Company's level of success in finding or acquiring additional reserves. The business of exploring for, developing and acquiring reserves is capital intensive. To the extent cash flow from operations is reduced and external sources of capital become limited or unavailable, the Company's ability to make the necessary capital investment to maintain or expand its asset base of oil and natural gas reserves would be impaired. See "Business and Properties -- Reserves." Economic Risks of Oil and Natural Gas Operations. The Company's oil and natural gas operations are subject to the economic risks typically associated with exploration, development, production and marketing activities, including significant expenditures required to locate and acquire producing properties and to drill exploratory, appraisal and development wells. In conducting exploration and development activities, the Company may drill unsuccessful wells and experience losses. There is no assurance that any discovered oil or natural gas can be economically produced or satisfactorily marketed. Moreover, the presence of unanticipated pressure or irregularities in formations or accidents may cause some or all of the Company's exploration, development and production activities to be unsuccessful, and could result in a total loss of the Company's investment in such activities. The Company's operations may be materially curtailed as a result of a number of factors, including lack of infrastructure, bad weather, title problems or shortages. In addition, certain of the Company's producing properties are subject to production limitations imposed by governmental or regulatory authorities or under contracts. Consequently, the Company's actual future production may be substantially affected by factors beyond the Company's control, any of which could have a material adverse effect on the Company's financial condition or results of operations. See "Business and Properties." Oil and Natural Gas Transportation. A substantial portion of the Company's oil and most of its natural gas are transported through gathering systems and pipelines which are not owned by the Company. Transportation space on such gathering systems and pipelines is occasionally limited and at times unavailable due to repairs or improvements being made to such facilities or due to such space being utilized by other oil or natural gas shippers that may or may not have priority transportation agreements. With the exception of pipeline curtailment relating to Block 16 and related fields in Ecuador in which the Company has an interest, see "Business and Properties -- Description of Non-U.S. Operations -- South America -- Republic of Ecuador," the Company has not experienced any material inability to market its proved reserves of oil or natural gas as a result of limited access to transportation space. If transportation space is materially restricted 10 13 or is unavailable in the future, the Company's ability to market its oil or natural gas could be impaired and cash flow from the affected properties could be reduced, which could have a material adverse effect on the Company's financial condition or results of operations. See "Business and Properties -- Marketing." Limitation on Availability of Nonconventional Fuels Tax Credits. In the years 1992, 1993 and 1994, the Company generated $4.4 million, $5.6 million and $8.5 million, respectively, in tax credits under Section 29 of the Internal Revenue Code of 1986, as amended ("IRC"), for the production of natural gas from nonconventional sources ("Section 29 Credit"). Such tax credits were associated principally with its production of certain Antrim gas. Because the Company has been (and is expected to continue to be) included in the consolidated federal income tax return filed by CMS Energy, these Section 29 Credits have either been used currently to reduce the tax liability of the CMS Energy consolidated group or have created a minimum tax credit carryforward for use in future years. For 1995, it is expected that the Company will generate approximately $12 million of Section 29 Credits; for 1996 through 2002, it is expected that the Company will generate Section 29 Credits averaging approximately $14 million annually. Under the Tax Sharing Agreement that has been entered into by CMS Energy and its subsidiaries (see "Relationship and Certain Transactions with CMS Energy -- Tax Sharing Agreement"), the Company will be paid for those Section 29 Credits which it generates as such credits are utilized (either as current year Section 29 Credits or minimum tax credits) by the CMS Energy consolidated group to reduce such group's consolidated regular tax liability. Although forecasts of the CMS Energy consolidated tax position indicate that the CMS Energy consolidated group is expected to generate sufficient regular tax liabilities such that the Company will be paid for its current Section 29 Credits beginning with Section 29 Credits for the 1995 taxable year and for the accumulated minimum tax credit carryforward allocated to the Company (approximately $27.2 million at December 31, 1994) over the next five years, there can be no assurance that this will be the case. If the taxable income of the CMS Energy consolidated group were to be less than projected, the payments for the Section 29 Credits would be deferred or eliminated. Moreover, if the Company were deconsolidated from the CMS Energy consolidated group, the Company's ability to realize any benefit from past or future Section 29 Credits would be materially restricted. The Company has no plans, and has been advised by CMS Energy that CMS Energy has no plans, to effect any transaction in the foreseeable future that would cause a deconsolidation of the Company from the CMS Energy consolidated group. Further, a limitation on the ability of the Company to realize Section 29 Credits, as a result of deconsolidation or otherwise, could substantially reduce the Company's discounted estimated future net cash flows from proved reserves, thereby increasing the likelihood of the Company being required to record a non-cash charge to earnings. See "Business and Properties -- Tax Matters" and "Business and Properties -- Reserves." Potential Dual Consolidated Loss Recapture. As a result of the Walter Acquisition and related transactions, CMS NOMECO acquired certain assets located in the Congo which, prior to such transactions, were owned by affiliates of Amoco Corporation ("Amoco"). As a result of certain agreements entered into in connection with the Walter Acquisition, CMS Energy and CMS NOMECO could become jointly and severally liable to Amoco or to the Internal Revenue Service for the recapture of "dual consolidated losses" utilized by Amoco in prior years if a "triggering event" were to occur with respect to such assets or with respect to the stock of Walter or certain of its subsidiaries. The amount of such potential liability could be up to $78.2 million, plus an interest factor thereon. However, CMS Energy has agreed to indemnify CMS NOMECO for such liability if the triggering event results from acts or omissions (i) of CMS Energy or any of its subsidiaries (other than CMS NOMECO) which occur after the initial sale of the Common Stock offered hereby; (ii) of CMS NOMECO or any of its subsidiaries if such acts or omissions are approved by the Board of Directors of CMS NOMECO, which approval includes the affirmative vote of a majority of the employees of CMS Energy or any of its subsidiaries (other than CMS NOMECO) who serve on CMS NOMECO's Board of Directors; or (iii) of any person if such acts or omissions occur prior to the initial sale of the Common Stock offered hereby. In return, CMS NOMECO has agreed to indemnify CMS Energy for any such dual consolidated loss tax liability if the triggering event results from acts or omissions of CMS NOMECO on or after the date of the initial sale of the Common Stock offered hereby which have not been approved by the Board of Directors of CMS NOMECO in the manner described in the preceding sentence. CMS NOMECO's subsidiary, Walter (now named CMS NOMECO International, Inc.), could also be secondarily liable to Amoco for up to $59.0 million in potential recapture tax, plus an interest factor thereon, if 11 14 Nuevo Energy Company ("Nuevo"), an unaffiliated company, were to fail to satisfy its potential liability to Amoco with respect to the recapture of dual consolidated losses relating to certain other assets located in the Congo acquired by Nuevo's affiliate from an affiliate of Amoco simultaneously with Walter's acquisition of its Congolese assets. Because the net assets of Nuevo currently appear to be adequate to satisfy any obligation which Nuevo may have with respect to such other assets, CMS NOMECO believes that it is unlikely that Walter would have to make a payment to satisfy its secondary liability, although there can be no assurance that this will be the case. However, if Walter were required to make such a payment, it would have a claim against Nuevo, but would not be able to recover such payment from CMS Energy under the above-described indemnity. See "Business and Properties -- Tax Matters -- Dual Consolidated Losses." In addition, as a result of another acquisition, CMS NOMECO has agreed to become jointly and severally liable for potential tax liability in a lesser amount as the result of the recapture of other dual consolidated losses if triggering events were to occur after such acquisition. Such liability is not subject to the above-described CMS Energy indemnity. See "Business and Properties -- Tax Matters -- Dual Consolidated Losses." Risks of Non-U.S. Operations. The Company's non-U.S. oil and natural gas exploration, development and production activities are subject to political and economic uncertainties, expropriation of property, cancellation or modification of contract rights, foreign exchange restrictions, currency fluctuations, royalty and tax increases and other risks arising out of foreign governmental sovereignty over the areas in which the Company's operations are conducted, as well as risks of loss due to civil strife, acts of war, guerrilla activities and insurrection. Consequently, the Company's non-U.S. exploration, development and production activities may be substantially affected by factors beyond the Company's control, any of which could have a material adverse effect on the Company's financial condition or results of operations. Furthermore, in the event of a dispute arising from non-U.S. operations, the Company may be subject to the exclusive jurisdiction of courts outside the U.S. or may not be successful in subjecting non-U.S. persons to the jurisdiction of courts in the U.S., which could adversely affect the outcome of such dispute. See "Business and Properties -- Governmental Regulation." Risk of Ecuador Contract Renegotiation. Production from Block 16 and related fields in the Oriente Basin of the Ecuadorian Amazon region has steadily increased since start-up in mid-1994, with new wells and fields continuing to be brought on stream. As of June 30, 1995, these fields represented approximately 14.1% of the Company's estimated total proved reserves of oil and natural gas on a Boe basis. With lower worldwide oil prices and increases in total project costs reducing the overall economic benefit of these fields to the Ecuadorian government, the Ministry of Energy and Mines in Ecuador has notified the members of the consortium with interests in such fields that they should investigate alternatives for improving project economics to the Ecuadorian government, including the renegotiation of the service contract governing the Company's interest in these fields. The Ecuadorian government has significant leverage to force changes due to its broad governmental and regulatory powers. Authorizations have been and may in the future be withheld and/or delayed to the economic detriment of the consortium unless the discussions are productive. Discussions with the Ecuadorian government concerning various alternatives began in late September 1995 and will likely continue for the next several months. The Company cannot currently predict what impact, if any, these discussions will have on the project's economics, and there can be no assurance that these discussions or their outcome will not have a material adverse effect on the Company's estimated reserves, financial condition or results of operations. See "Business and Properties -- Description of Non-U.S. Operations -- South America - -- Republic of Ecuador." Operational Risks and Insurance. The oil and natural gas business involves certain operating hazards such as well blowouts, cratering, explosions, uncontrollable flows of oil, natural gas or well fluids, fires, formations with abnormal pressures, pollution, releases of toxic gas and other environmental hazards and risks, any of which could result in substantial losses to the Company. The Company's offshore operations also are subject to the additional hazards of marine operations, such as severe weather, capsizing and collision. In addition, the Company may be legally responsible for environmental damages caused by previous owners of 12 15 property purchased or leased by the Company. As a result, substantial liabilities to third parties or governmental entities may be incurred. In accordance with customary industry practices, the Company maintains insurance against some, but not all, of such risks and losses. The occurrence of such an event not fully covered by insurance could have a material adverse effect on the Company's financial condition or results of operations. See "Business and Properties -- Operational Risks and Insurance" and "Business and Properties -- Environmental Matters." Governmental Regulation. The Company's exploration, development, production and marketing operations are subject to regulation at the federal, state and local levels in the U.S. and by other countries in which the Company conducts business, including regulation relating to such matters as the exploration for and the development, production, marketing, pricing, transmission and storage of oil and natural gas, as well as environmental and safety matters. Failure to comply with such regulations could result in substantial liabilities to third parties or governmental entities, the payment of which could have a material adverse effect on the Company's financial condition or results of operations. Moreover, there is no assurance that laws or regulations enacted in the future or the modification of existing laws or regulations will not adversely affect the Company's exploration for or development, production or marketing of oil or natural gas. See "Business and Properties -- Governmental Regulation." Environmental Matters. Extensive federal, state and local laws and regulations relating to health and environmental quality in the United States as well as environmental laws and regulations of other countries in which the Company operates affect nearly all of the operations of the Company. These laws and regulations set various standards regulating certain aspects of health and environmental quality, provide for penalties and other liabilities for the violation of such standards and establish in certain circumstances obligations to remediate current and former facilities and off-site locations. In addition, special provisions may be appropriate or required in environmentally sensitive non-U.S. areas of operation, such as the rain forests in Ecuador where the Company has substantial interests. Significant liability could be imposed on the Company for damages, clean-up costs and/or penalties in the event of certain discharges into the environment, environmental damage caused by previous owners of property purchased by the Company or non-compliance with environmental laws or regulations. Such liability could have a material adverse effect on the Company's financial condition or results of operations. Moreover, the Company cannot predict what environmental legislation or regulations will be enacted in the future or how existing or future laws or regulations will be administered or enforced. Compliance with more stringent laws or regulations, or more vigorous enforcement policies of the regulatory agencies, could in the future require material expenditures by the Company for the installation and operation of systems and equipment for remedial measures, all of which could have a material adverse effect on the Company's financial condition or results of operations. See "Business and Properties -- Environmental Matters." Competition. The oil and natural gas industry is highly competitive. The Company faces competition in all aspects of its business, including acquiring reserves, leases, licenses and concessions, obtaining the equipment and labor needed to conduct its operations and marketing its oil and natural gas. The Company's competitors include multinational energy companies, government-owned oil and natural gas companies, other independent oil and natural gas concerns and individual producers and operators. Because both oil and natural gas are fungible commodities, the principal form of competition with respect to product sales is price competition. Many competitors have financial and other resources substantially greater than those available to the Company and, accordingly, may be better positioned to acquire and exploit prospects, hire personnel and market production. In addition, many of the Company's larger competitors may be better able to respond to factors such as changes in worldwide oil or natural gas prices or levels of production, the cost and availability of alternative fuels or the application of government regulations, which affect demand for the Company's oil and natural gas production and which are beyond the control of the Company. Moreover, many competitors have established strategic long-term positions and maintain strong governmental relationships in countries in which the Company may seek new entry. The Company expects this high degree of competition to continue. See "Business and Properties -- Competition." 13 16 Legal Proceedings. On December 18, 1987, Tribal Drilling Company and certain other plaintiffs, including J. Stuart Hunt, an affiliate of Tribal and a director of the Company, filed a lawsuit in Dallas County, Texas (the "Dallas County Lawsuit"), seeking, among other things, (i) a declaratory judgment against Heritage Resources, Inc. ("Heritage") to the effect that Heritage was not qualified to serve as the operator of Sections 21, 22 and 23 of the Crittendon Field in Winkler County, Texas, that Heritage had been properly removed as operator pursuant to a vote of non-operator working interest owners and that Tribal was the duly elected replacement operator and (ii) damages against Heritage and certain related parties in connection with Heritage's alleged failure to carry out its obligations as operator of Sections 21, 22 and 23. The Company owns non-operating working interests in Sections 21 and 23 of the Crittendon Field, but has no interest in Section 22 of such field. The Company was not originally a plaintiff in the Dallas County Lawsuit, but pursuant to a court order to join all indispensable parties, on April 20, 1988, plaintiffs filed an amended petition which included the Company as one of the plaintiffs. Heritage and certain related parties subsequently filed counterclaims against all of the approximately 20 plaintiffs in the Dallas County Lawsuit, including the Company, alleging various causes of action, including without limitation claims for breach of contract, slander of title, tortious interference with contract, tortious interference with business relations, fraud, conspiracy and intentional infliction of emotional distress. In the Dallas County Lawsuit, Heritage seeks approximately $100 million in actual damages, exemplary damages not to exceed $1 billion, attorneys' fees and declaratory relief. Trial of the Dallas County Lawsuit, including counterclaims, is currently scheduled for May 1996. On December 18, 1987, Heritage and certain related parties filed two separate lawsuits, since consolidated, in Winkler County, Texas (the "Winkler County Lawsuit"), against certain but not all non-operator working interest owners of Sections 21 and 22 of the Crittendon Field. The Company was not a party to the Winkler County Lawsuit. In the Winkler County Lawsuit, the plaintiffs in many respects alleged the same course of conduct that is the subject of the Dallas County Lawsuit, including Heritage's counterclaims. In October 1992, a jury in the Winkler County Lawsuit returned a special verdict in favor of plaintiffs and against the defendants in that litigation in an aggregate amount in excess of $80 million plus attorneys' fees in excess of $20 million. Certain defendants subsequently entered into a settlement with the plaintiffs and the non-settling plaintiffs have appealed the judgments in the Winkler County Lawsuit to the Texas Court of Appeals in El Paso, Texas. The Court of Appeals has indicated that it may rule on the appeal by late 1995 or early 1996. The Company believes that it has meritorious defenses to the counterclaims in the Dallas County Lawsuit and intends to defend itself vigorously in such lawsuit. Nonetheless, the outcome of a jury trial is difficult to predict, and there can be no assurance that the resolution of Heritage's counterclaims against the Company will not have a material adverse effect on the Company's financial condition or results of operations. See "Business and Properties -- Legal Proceedings." Acquisition Risks. The Company's rapid growth in recent years has been attributable in significant part to acquisitions of producing properties. After the Offering, the Company expects to continue to evaluate and, where appropriate, pursue acquisition opportunities on terms management considers favorable to the Company. The successful acquisition of producing properties requires an assessment of recoverable reserves, exploration potential, future oil and natural gas prices, operating costs, potential environmental and other liabilities and other factors beyond the Company's control. In connection with such an assessment, the Company performs a review of the subject properties that it believes to be generally consistent with industry practices. Nonetheless, the resulting assessments are necessarily inexact and their accuracy inherently uncertain, and such a review may not reveal all existing or potential problems nor will it necessarily permit a buyer to become sufficiently familiar with the properties to fully assess their merits and deficiencies. Inspections may not always be performed on every platform or well, and structural and environmental problems are not necessarily observable even when an inspection is undertaken. The Recent Acquisitions have been made initially by CMS Energy using common stock of CMS Energy, with the acquired companies subsequently transferred by CMS Energy, through CMS Enterprises, to the Company. Such acquisitions have generally been structured to be tax-free to the sellers. This method may not be replicated in the future, and acquisitions structured in this manner, if any, would likely require the issuance of additional Common Stock to CMS Energy or to CMS Enterprises which would result in a dilution of the 14 17 ownership interest of the public holders of Common Stock. The issuance by the Company of a significant amount of its Common Stock as consideration to a seller could result in certain adverse consequences, such as the Company being deconsolidated from the CMS Energy consolidated group for federal income tax purposes. See "Business and Properties -- Tax Matters -- Dual Consolidated Losses" and "Business and Properties -- Tax Matters -- Section 29 Credits." Accordingly, it is unlikely that the Company would issue shares of its Common Stock to the sellers in an amount sufficient to cause a deconsolidation in order to make an acquisition. If the seller were to require a tax-free transaction requiring Common Stock of the Company, it may be possible for the Company to use cash on hand and/or cash available under its credit facilities or other sources to acquire shares of its Common Stock in the open market to effect such a transaction. If a transaction could not be structured to be tax-free, a seller may be unwilling to consummate a sale or may require greater consideration than if the transaction were tax free. No assurance can be given that the Company will have sufficient cash resources to consummate large acquisitions in the future. Principal Stockholder Will Effectively Control the Company. After the Offering, CMS Enterprises will own approximately % of the issued and outstanding Common Stock of the Company ( % if the Underwriters exercise their over-allotment option in full). As a result, CMS Enterprises, and its parent company, CMS Energy, will be able to elect all members of the Board of Directors of the Company and to control all matters submitted to a vote of the Board of Directors or stockholders, including without limitation the Company's exploration, development, capital, operating and acquisition expenditure plans. The Board of Directors is currently comprised of eleven members, six of whom are directors or current or former officers of CMS Energy, CMS Enterprises or the Company. Such concentration of ownership of Common Stock may have an adverse effect on the market price of the Common Stock. See "Ownership of Capital Stock" and "Relationship and Certain Transactions with CMS Energy." Potential Conflicts Involving CMS Energy and its Affiliates. The Company and CMS Energy and certain of its other subsidiaries have entered into certain agreements, including a tax sharing agreement, services agreements and a registration rights agreement, to provide for certain transactions and relationships between the parties. The Company and CMS Energy and its other affiliates may enter into other material transactions and agreements from time to time in the future. The relationship between the Company and CMS Energy and its other affiliates may give rise to conflicts of interest with respect to, among other things, transactions and agreements among the Company and CMS Energy and its other affiliates, issuances of additional shares of voting securities, the election of directors or the payment of dividends, if any, by the Company. When the interests of CMS Energy and its other subsidiaries diverge from those of the Company, CMS Energy may exercise its influence in favor of its own interests or the interests of another of its subsidiaries over the interests of the Company. See "Relationship and Certain Transactions with CMS Energy." Dividends. The Company has not paid cash dividends on its Common Stock since 1989 and has no current plans to pay cash dividends on its Common Stock in the proximal future. The Company currently intends to retain its cash for the continued expansion of its business, including exploration, development and acquisition activities. See "Dividend Policy." No Prior Market and Determination of Public Offering Price. Prior to the Offering, there has been no public market for shares of the Common Stock, and there can be no assurance that an active public market for such shares will develop or be sustained. The initial offering price for the Common Stock has been determined by negotiation among the Company and the representatives of the Underwriters and may not be indicative of the price at which the Common Stock will trade following completion of the Offering. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. The market price of the Common Stock could also be subject to significant fluctuation in response to variations in results of operations and other factors. Shares Eligible for Future Sale. Sales of substantial amounts of Common Stock in the public market, whether issued in connection with acquisitions or otherwise, following the Offering could adversely affect the market price of the Common Stock. The Company, CMS Enterprises and CMS Energy have agreed that during the period beginning from the date of this Prospectus and continuing to and including the date 15 18 days after the date of this Prospectus, none of them will offer, sell, contract to sell or otherwise dispose of any securities of the Company (other than pursuant to employee stock option plans existing or contemplated on the date of this Prospectus and for certain other purposes) which are substantially similar to the shares of Common Stock or which are convertible or exchangeable into securities which are substantially similar to the shares of Common Stock, without the prior written consent of . The sale of shares upon the expiration of such period, or the perception of the availability of shares for sale, could adversely affect the prevailing market price of Common Stock. See "Shares Eligible for Future Sale." THE COMPANY The Company is an independent oil and natural gas company engaged in the exploration, development, acquisition and production of oil and natural gas properties in the U.S. and seven other countries (excluding two countries where the Company has properties subject to agreements of sale). Formed in 1967 to explore and develop leaseholdings located solely in Michigan, the Company has greatly expanded to become an international oil and natural gas company. In large part as a result of acquisitions and development activities, the Company has more than doubled both its estimated proved reserves and its production of oil and natural gas since January 1, 1992. As of June 30, 1995, the Company had estimated proved reserves of 118.6 MMBoe, consisting of 68.9 MMBbls of oil (97.0% of which were located outside the U.S.) and 298.1 Bcf of natural gas (94.5% of which were located in the U.S.). Approximately 64.7% of the Company's estimated proved reserves on such date were classified as proved developed. The Company's oil-producing assets are concentrated in South America (Ecuador, Venezuela and Colombia) and offshore West Africa (the Congo and Equatorial Guinea), and the Company's gas-producing assets are concentrated in Michigan, the Gulf Coast region and the Gulf of Mexico. The Company is an indirect subsidiary of CMS Energy. CMS Enterprises owns all of the outstanding stock of the Company and CMS Energy owns all of the outstanding common stock of CMS Enterprises. CMS Energy is a major international energy company with electric utility operations, natural gas utility operations, gas transmission and marketing, independent power production and, through the Company, oil and natural gas exploration, development and production. The Company's principal offices are located at One Jackson Square, Jackson, Michigan 49201. The Company's telephone number is (517) 787-9011. USE OF PROCEEDS The net proceeds from the Offering are estimated to be $ million after deducting underwriting discounts and commissions and estimated expenses ($ million if the over-allotment option is exercised in full). The Company intends to use the estimated net proceeds (i) to repay the indebtedness of the Company under a promissory note which, after giving effect to certain anticipated post-closing adjustments, is expected to be in the principal amount of approximately $62.6 million issued in connection with the Terra Acquisition and currently held by CMS Energy (the "Terra Note") and a promissory note in the principal amount of approximately $6.5 million issued to CMS Energy in connection with the Walter Acquisition (the "Walter Note" and, together with the Terra Note, the "CMS Notes"); and (ii) for general corporate purposes, which may include repayment of a portion of the Company's indebtedness ($113.3 million as of September 30, 1995) under its three year unsecured bank credit facility established under the Amended and Restated Credit Agreement dated as of November 1, 1993, as amended, among the Company, NBD Bank, as Agent, and the Banks named therein (the "Credit Agreement"). The Company issued the Terra Note to CMS Enterprises, which in turn assigned it to CMS Energy, in connection with the transfer by CMS Energy of the common stock of Terra to CMS Enterprises and then by CMS Enterprises to the Company, and the Company issued the Walter Note to CMS Energy in connection with the repayment of $6.6 million of indebtedness of Walter immediately after the consummation of the Walter Acquisition. The CMS Notes bear interest at the rate of LIBOR plus 2% and have a maturity date of November 1, 1999. See "Business and Properties -- Terra Acquisition," "Business and Properties -- Walter Acquisition" and "Relationship and Certain Transactions 16 19 with CMS Energy." Advances under the Credit Agreement during the past year were used primarily for capital expenditures, property acquisitions and working capital. The average rate of interest on indebtedness under the Credit Agreement was 7.2% per annum as of September 30, 1995 and such indebtedness is due on November 1, 1996. See "Capitalization" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Pending use of the net proceeds for the above purposes, the Company intends to invest such funds in short-term, interest bearing obligations of investment grade. DIVIDEND POLICY The Company has not paid cash dividends on its Common Stock since 1989 and has no current plans to pay cash dividends on its Common Stock in the proximal future. The Company currently intends to retain its cash for the continued expansion of its business, including exploration, development and acquisition activities. The amount of future cash dividends, if any, will depend upon future earnings, results of operations, capital requirements, covenants contained in various financing agreements of the Company, the financial condition of the Company and certain other factors as the Board of Directors deems relevant. DILUTION The net tangible book value of the Company at September 30, 1995 was $341.1 million, or $14.21 per share. Net tangible book value per share of Common Stock represents the amount of the Company's tangible net worth (tangible assets less liabilities) divided by the total number of shares of Common Stock outstanding. After giving effect to the sale by the Company of shares of Common Stock offered hereby at an assumed offering price of $ per share and the application of the estimated net proceeds therefrom, the adjusted net tangible book value of the Company at September 30, 1995 would have been $ million, or $ per share. This represents an immediate dilution in net tangible book value of $ per share to purchasers of Common Stock in the Offering, as illustrated by the following table: Assumed initial public offering price per share.............. $ ------ Net tangible book value per share at September 30, 1995.... $14.21 ------ Increase per share attributable to new investors........... ------ Net tangible book value per share after the Offering......... ------ Dilution per share to new investors.......................... $ ======
Dilution is determined by subtracting the net tangible book value per share after giving effect to the Offering from the initial public offering price per share paid by a purchaser of Common Stock in the Offering. The following table sets forth, as of September 30, 1995, the number of shares of Common Stock purchased from the Company, the total consideration paid therefor and the average price per share paid by the Company's sole existing stockholder, CMS Enterprises, and by new investors:
SHARES PURCHASED TOTAL CONTRIBUTION ------------------------- ------------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE (IN THOUSANDS) (IN THOUSANDS) CMS Enterprises........................ 24,000 % $ % $ New Investors.......................... ------ --- -------- --- ------- Total............................. % $ % $ ====== === ======== === =======
17 20 CAPITALIZATION The following table sets forth the capitalization of the Company as of September 30, 1995 and as adjusted to reflect the sale of the shares of Common Stock offered hereby and the application of the assumed net proceeds therefrom. This table should be read in conjunction with "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Pro Forma Consolidated Financial Information" and the Consolidated Financial Statements of the Company and the related Notes thereto included elsewhere in this Prospectus.
AS OF SEPTEMBER 30, 1995 ---------------------------- HISTORICAL AS ADJUSTED(1) (UNAUDITED) (DOLLARS IN THOUSANDS) Long-Term Debt: CMS Energy......................................................... $ 67,840 $ -- Credit Agreement................................................... 113,300 100,140 Other(2)........................................................... 17,908 17,908 -------- -------- Total......................................................... 199,048 118,048 Stockholders' Equity: Common Stock, no par value, 55,000,000 shares authorized; 24,000,000 shares issued and outstanding; shares issued and outstanding as adjusted(3)........................... 169,726 250,726 Preferred stock, issuable in series, 5,000,000 shares authorized, no shares issued and outstanding................................ -- -- Retained earnings.................................................. 171,363 171,363 -------- -------- Total stockholders' equity.................................... 341,089 422,089 -------- -------- Total capitalization.......................................... $ 540,137 $540,137 ======== ========
- ------------------------- (1) Adjusted to reflect the application of assumed net proceeds of $81.0 million from the Offering. (2) "Other" debt consists of (i) OPIC guaranteed loans relating to project financing in Equatorial Guinea and the Congo in the amount of $14.2 million and (ii) $3.7 million of debt assumed in the Terra Acquisition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- Financing Activities." (3) Reflects an approximate 1.644 for 1.0 stock split of the Common Stock of the Company effected October 25, 1995. 18 21 PRO FORMA CONSOLIDATED FINANCIAL INFORMATION In August 1995, CMS Energy acquired Terra for aggregate consideration of approximately $63.6 million, payable in common stock of CMS Energy. Immediately after consummation of such acquisition, the stock of Terra was transferred to the Company. In connection with the Terra Acquisition, the Company issued the Terra Note currently held by CMS Energy and recorded a $1.0 million capital contribution. The Company used the purchase method to account for this transaction. See "Business and Properties -- Recent Developments -- Terra Acquisition." In February 1995, CMS Energy acquired Walter for a purchase price of approximately $28.4 million plus assumed indebtedness of $18.3 million. Immediately after consummation of such acquisition, the stock of Walter was contributed to the Company, and the Company issued the Walter Note to fund repayment of $6.5 million of the assumed indebtedness of Walter. Shortly prior to the acquisition of Walter by CMS Energy, Walter had acquired Amoco Congo Exploration Company ("ACEC"), and an unaffiliated company had acquired Amoco Congo Petroleum Company ("ACPC" and together with ACEC, the "Amoco Congo Companies"), from Amoco Production Company ("APC"), a subsidiary of Amoco. The Company used the purchase method to account for this transaction. See "Business and Properties -- Recent Developments -- Walter Acquisition." The unaudited Pro Forma Consolidated Statement of Income for the year ended December 31, 1994 gives effect to the Terra Acquisition and the Walter Acquisition and to the application of the assumed net proceeds from the Offering as if all such transactions had been consummated as of January 1, 1994. The unaudited Pro Forma Consolidated Statement of Income for the nine months ended September 30, 1995 gives effect to the Terra Acquisition and the Walter Acquisition and to the application of the assumed net proceeds from the Offering as if all such transactions had been consummated as of January 1, 1995. The unaudited Pro Forma Consolidated Balance Sheet as of September 30, 1995 gives effect to the application of the assumed net proceeds from the Offering as if such transaction had been consummated as of September 30, 1995. See "Use of Proceeds." The Pro Forma Consolidated Financial Statements of the Company do not purport to be indicative of the results of operations of the Company had such transactions occurred on the dates assumed, nor are the Pro Forma Consolidated Financial Statements necessarily indicative of the future results of operations of the Company. The Pro Forma Consolidated Financial Statements should be read together with the Consolidated Financial Statements of the Company and those relating to the Recent Acquisitions, including the Notes thereto, included elsewhere in this Prospectus. 19 22 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors, CMS NOMECO Oil & Gas Co.: We have examined the pro forma adjustments reflecting the transactions described in the Notes to Pro Forma Consolidated Statement of Income for the year ended December 31, 1994 (the "December 31, 1994 Notes") and the application of those adjustments to the historical amounts in the accompanying Pro Forma Consolidated Statement of Income of CMS NOMECO Oil & Gas Co. (the "Company") for the year ended December 31, 1994. The historical amounts are derived from the historical consolidated financial statements of the Company, CMS NOMECO International Inc. (formerly Walter International, Inc., "CMS NOMECO International") and Terra Energy, Ltd. ("Terra"), which were audited by us, and of Amoco Congo Exploration and Petroleum Companies (the "Amoco Congo Companies"), which were audited by other accountants, all appearing elsewhere herein. Such pro forma adjustments are based upon management's assumptions described in the December 31, 1994 Notes. Our examination was made in accordance with standards established by the American Institute of Certified Public Accountants and accordingly, included such procedures as we considered necessary in the circumstances. We have reviewed the pro forma adjustments reflecting the transactions described in the Notes to Pro Forma Consolidated Statement of Income for the Nine Months Ended September 30, 1995, and the Notes to Pro Forma Consolidated Balance Sheet as of September 30, 1995 (collectively, the "September 30, 1995 Notes") and the application of those adjustments to the historical amounts in the accompanying Pro Forma Consolidated Statement of Income for the nine months ended September 30, 1995, and the Pro Forma Consolidated Balance Sheet as of September 30, 1995. The historical amounts are derived from the historical unaudited consolidated financial statements of the Company, which were reviewed by us, of the Amoco Congo Companies, which were reviewed by other accountants, of Terra and CMS NOMECO International all appearing elsewhere herein. Such pro forma adjustments are based on management's assumptions as described in the September 30, 1995 Notes. Our review was conducted in accordance with standards established by the American Institute of Certified Public Accountants and accordingly, included such procedures as we considered necessary in the circumstances. The objective of the Pro Forma Consolidated Financial Statements referred to above is to show what the significant effects on the historical financial information might have been had the transactions occurred at an earlier date. However, the Pro Forma Consolidated Financial Statements are not necessarily indicative of the results of operations, or related effects on financial position, that would have been attained had the above-mentioned transactions actually occurred earlier. In our opinion, management's assumptions provide a reasonable basis for presenting the significant effects directly attributable to the above-mentioned transactions described in the December 31, 1994 Notes, the related pro forma adjustments give appropriate effect to those assumptions, and the pro forma combined column reflects the proper application of those adjustments to the historical amounts in the Pro Forma Consolidated Statement of Income for the year ended December 31, 1994. A review is substantially less in scope than an examination, the objective of which is the expression of an opinion on management's assumptions, the pro forma adjustments and the application of those adjustments to historical financial information. Accordingly, we do not express such an opinion on the pro forma adjustments or the application of such adjustments to the Pro Forma Consolidated Statement of Income for the nine months ended September 30, 1995, and the Pro Forma Consolidated Balance Sheet as of September 30, 1995. Based on our review, however, nothing came to our attention that caused us to believe that management's assumptions do not provide a reasonable basis for presenting the significant effects directly attributable to the above-mentioned transactions described in the September 30, 1995 Notes, that the related pro forma adjustments do not give appropriate effect to those assumptions, or that the pro forma combined column does not reflect the proper application of those adjustments to the historical financial statement amounts in the Pro Forma Consolidated Statement of Income for the nine months ended September 30, 1995, and the Pro Forma Consolidated Balance Sheet as of September 30, 1995. Arthur Andersen LLP Detroit, Michigan, October 16, 1995. 20 23 PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1994
PRO FORMA ADJUSTMENTS COMPANY TERRA WALTER ------------------------- PRO FORMA HISTORICAL HISTORICAL(1) PRO FORMA(2) ACQUISITIONS OFFERING COMBINED (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Operating Revenues: Oil and condensate.................. $ 26,831 $ 433 $ 22,583 $49,847 Natural gas......................... 39,904 4,042 -- 43,946 Gain on sales of assets............. -- 12,423 -- $(12,423)(3) -- Other operating..................... 12,333 4,238 148 16,719 -------- ------- -------- -------- ------ ------- 79,068 21,136 22,731 (12,423) 110,512 Operating Expenses: Depreciation, depletion and amortization...................... 34,919 2,852 4,944 (2,689)(3) 40,026 Cost center write-offs.............. 5,612 -- -- 5,612 Operating and maintenance........... 19,323 1,005 6,854 27,182 General and administrative.......... 6,345 3,744 3,881 (4,600)(4) $ 500(5) 9,870 Production and other taxes.......... 3,838 279 -- 4,117 Costs of products sold.............. 973 -- -- 973 Other............................... -- 401 -- 401 -------- ------- -------- -------- ------ ------- 71,010 8,281 15,679 (7,289) 500 88,181 Pretax operating income............... 8,058 12,855 7,052 (5,134) (500) 22,331 Write-down of notes receivable...... -- (1,451) -- (1,451) Other income........................ 239 696 53 988 Interest expense, net............... 4,023 64 210 (869)(6) 3,428 -------- ------- -------- -------- ------ ------- Income before income taxes and minority interest................... 4,274 12,036 6,895 (5,134) 369 18,440 Minority interest in subsidiary..... -- 217 -- 217 Income tax provision (benefit)...... (5,523) 2,411 14 (1,797)(7) 129(7) (4,766) -------- ------- -------- -------- ------ ------- Net income............................ $ 9,797 $ 9,408 $ 6,881 $ (3,337) $ 240 $22,989 ======== ======= ======== ======== ====== ======= Net income per common share........... $ 0.41 ======== ======= Average common shares outstanding (000)............................... 24,000 (8) ======== ====== =======
- ------------------------- Notes to Pro Forma Consolidated Statement of Income for the Year Ended December 31, 1994: (1) The Company acquired Terra in August 1995. This column represents the historical consolidated results of operations of Terra for the twelve months ended December 31, 1994. See the Consolidated Financial Statements of Terra included elsewhere in this Prospectus. (2) The Company acquired Walter in February 1995. Walter and an unrelated company acquired the respective Amoco Congo Companies on the business day prior to the Company's acquisition of Walter. This column reflects the pro forma consolidated results of operations of Walter after giving effect to Walter's effective interest in the assets of the Amoco Congo Companies for the twelve months ended December 31, 1994. See the Pro Forma Consolidated Financial Statements of Walter and the Amoco Congo Companies included elsewhere in this Prospectus. (3) Adjustment to conform to the full cost method of accounting used by the Company and to reflect the depreciation, depletion and amortization of oil and gas properties of the Company and Terra, using the full cost method, based on the aggregate consideration for the Terra Acquisition of $63.6 million. (4) Historical general and administrative expenses for the twelve months ended December 31, 1994 have been adjusted by estimated expense reductions of $0.5 million associated with the combination of the operations of the Company and Terra. Such expenses have also been adjusted to reflect the elimination of $4.1 million of pre-acquisition employee bonuses recorded on the books of Terra as of December 31, 1994. (5) Historical general and administrative expenses for the twelve months ended December 31, 1994 have been adjusted by estimated incremental general and administrative expenses expected to be associated with the Company becoming a publicly traded entity. (6) Adjustment to reflect the application of assumed net proceeds of $81.0 million from the Offering to repay an aggregate of $81.0 million in debt (and the corresponding reduction of interest expense), including debt incurred in connection with the Recent Acquisitions. (7) Adjustment of income tax expense to reflect the combined results of operations. (8) Adjustment to reflect the issuance of shares of Common Stock in the Offering. 21 24 PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
PRO FORMA ADJUSTMENTS COMPANY TERRA WALTER ------------------------- PRO FORMA HISTORICAL(1) HISTORICAL(2) PRO FORMA(3) ACQUISITIONS OFFERING COMBINED (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Operating Revenues: Oil and condensate........... $ 45,423 $ 373 $2,592 $ 48,388 Natural gas.................. 32,927 2,236 -- 35,163 Gain on sales of assets...... -- 2,356 -- $ (2,356)(4) -- Other operating.............. 17,738 4,166 -- 21,904 --------- ------- ------ -------- -------- -------- 96,088 9,131 2,592 (2,356) 105,455 Operating Expenses: Depreciation, depletion and amortization............... 34,072 1,224 432 (560)(4) 35,168 Cost center write-offs....... 2,184 -- -- 2,184 Operating and maintenance.... 23,204 378 534 24,116 General and administrative... 5,609 15,657 306 (16,063)(5) $ 375(6) 5,884 Production and other taxes... 3,463 267 5 3,735 Costs of products sold....... 773 -- -- 773 Other........................ -- 217 -- 217 --------- ------- ------ -------- -------- -------- 69,305 17,743 1,277 (16,623) 375 72,077 Pretax operating income (loss)....................... 26,783 (8,612) 1,315 14,267 (375) 33,378 Other income (expense)....... 522 541 5 1,068 Interest expense, net........ 6,455 36 27 (1,394)(7) 5,124 --------- ------- ------ -------- -------- -------- Income (loss) before income taxes........................ 20,850 (8,107) 1,293 14,267 1,019 29,322 Income tax provision (benefit).................. 386 10 -- 1,236(8) 357(8) 1,989 --------- ------- ------ -------- -------- -------- Income (loss) before extraordinary item........... 20,464 (8,117) 1,293 13,031 662 27,333 Extraordinary item, early retirement of debt, net...... (987) -- -- -- -- (987) --------- ------- ------ -------- -------- -------- Net income (loss).............. $ 19,477 $(8,117) $1,293 $ 13,031 $ 662 $ 26,346 ========= ======= ====== ======== ======== ======== Net income per common share.... $ 0.81 $ ========= ======== Average common shares outstanding (000)............ 24,000 (9) ======== ========
- ------------------------- Notes to Pro Forma Consolidated Statement of Income for the Nine Months Ended September 30, 1995: (1) This column includes the historical results of operations of the Company, including Walter for the eight months ended September 30, 1995 and Terra for the two months ended September 30, 1995. See Consolidated Financial Statements of the Company and Pro Forma Consolidated Financial Statements of Walter included elsewhere in this Prospectus. (2) The Company acquired Terra in August 1995. This column represents the historical consolidated results of operations of Terra for the seven months ended July 31, 1995. See the Consolidated Financial Statements of Terra included elsewhere in this Prospectus. (3) The Company acquired Walter in February 1995. Walter and an unrelated company acquired the respective Amoco Congo Companies on the business day prior to the Company's acquisition of Walter. This column reflects the pro forma consolidated results of operations of Walter after giving effect to Walter's effective interest in the assets of the Amoco Congo Companies for the month ended January 31, 1995. See the Pro Forma Consolidated Financial Statements of Walter included elsewhere in this Prospectus. (4) Adjustment to conform to the full cost method of accounting used by the Company, and to reflect the depreciation, depletion and amortization of oil and gas properties of the Company and Terra, using the full cost method, based on the aggregate consideration for the Terra Acquisition of $63.6 million. (5) Historical general and administrative expenses for the seven months ended July 31, 1995 have been adjusted by estimated expense reductions of $375,000 associated with the combination of the operations of the Company and Terra. The expenses have also been adjusted to reflect the elimination of pre-acquisition employee bonuses and compensation relating to the exercise of stock options recorded on the books of Terra as of July 31, 1995. (6) Historical general and administrative expenses for the nine months ended September 30, 1995 have been adjusted by estimated incremental general and administrative expenses expected to be associated with the Company becoming a publicly traded entity. (7) Adjustment to reflect the application of assumed net proceeds of $81.0 million from the Offering to repay an aggregate of $81.0 million of debt (and the corresponding reduction of interest expense), including debt incurred in connection with the Recent Acquisitions. (8) Adjustment of income tax expense to reflect the combined results of operations. (9) Adjustment to reflect the issuance of shares of Common Stock in the Offering. 22 25 PRO FORMA CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1995
COMPANY PRO FORMA PRO FORMA HISTORICAL(1) ADJUSTMENTS COMBINED (UNAUDITED) (DOLLARS IN THOUSANDS) ASSETS Current Assets: Cash............................................... $ 5,255 $ $ 5,255 Temporary cash investments......................... 3,813 3,813 Accounts receivable................................ 69,074 69,074 Other.............................................. 13,200 13,200 --------- -------- --------- 91,342 91,342 Investments and other assets......................... 23,121 23,121 Property, plant and equipment, at cost............... 1,073,981 1,073,981 Less accumulated depreciation, depletion and amortization................................ (526,038) (526,038) --------- -------- --------- 547,943 547,943 --------- -------- --------- Total assets......................................... $ 662,406 $ $ 662,406 ========= ======== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current maturities of long-term debt............... $ 6,677 $ $ 6,677 Accounts payable................................... 49,308 49,308 Accrued interest................................... 1,171 1,171 Accrued taxes and other............................ 9,215 9,215 --------- -------- --------- 66,371 66,371 Long-term debt....................................... 192,371 (81,000)(2) 111,371 Deferred Credits: Deferred income taxes.............................. 54,590 54,590 Other.............................................. 7,985 7,985 --------- -------- --------- 62,575 62,575 Stockholders' Equity: Common stock....................................... 169,726 81,000(2) 250,726 Retained earnings.................................. 171,363 171,363 --------- -------- --------- 341,089 81,000 422,089 --------- -------- --------- Total liabilities and stockholders' equity........... $ 662,406 $ -- $ 662,406 ========= ======== =========
- ------------------------- Notes to Pro Forma Consolidated Balance Sheet as of September 30, 1995: (1) The Company's historical consolidated balance sheet includes the balances of Terra and Walter as of September 30, 1995. See the Consolidated Financial Statements of the Company included elsewhere in this Prospectus. (2) Adjustment to reflect the application of assumed net proceeds of $81.0 million from the Offering, including the repayment of $81.0 million in debt, including debt incurred in connection with the Recent Acquisitions, and to reflect the issuance of shares of Common Stock for the Offering. 23 26 SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA The following table presents selected historical consolidated financial data of the Company as of the dates and for the periods indicated. The historical consolidated financial data as of and for each of the five years in the period ended December 31, 1994 are derived from the consolidated financial statements of the Company which have been audited by Arthur Andersen LLP, independent certified public accountants. The historical consolidated financial data as of and for the nine months ended September 30, 1994 and 1995 are derived from unaudited consolidated financial statements of the Company which, in the opinion of management, contain all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation thereof. The following data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of the Company and those relating to the Recent Acquisitions, including the Notes thereto, included elsewhere in this Prospectus. The results for the nine months ended September 30, 1995 are not necessarily indicative of the results that may be achieved for the full year ending December 31, 1995.
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, -------------------------------------------------------- -------------------- 1990 1991 1992 1993 1994 1994 1995 (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA(1): Operating Revenues: Oil and condensate..................... $ 30,316 $ 24,381 $ 26,553 $ 26,635 $ 26,831 $ 18,479 $ 45,423 Natural gas............................ 34,866 36,577 34,391 40,995 39,904 30,550 32,927 Other operating........................ 6,244 7,546 8,408 6,275 12,333 10,107 17,738 -------- -------- -------- -------- -------- -------- -------- 71,426 68,504 69,352 73,905 79,068 59,136 96,088 Operating Expenses: Depreciation, depletion and amortization........................... 25,890 27,302 32,566 35,605 34,919 25,358 34,072 Cost center write-offs................... 8,176 5,339 5,744 9,648 5,612 452 2,184 Operating and maintenance................ 9,326 11,618 13,476 15,005 19,323 14,050 23,204 General and administrative............... 4,510 4,525 4,489 5,599 6,345 4,346 5,609 Production and other taxes............... 4,528 4,134 3,997 4,221 3,838 3,010 3,463 Cost of products sold and other.......... 2,440 1,256 1,427 1,127 973 682 773 -------- -------- -------- -------- -------- -------- -------- 54,870 54,174 61,699 71,205 71,010 47,898 69,305 Pretax operating income.................... 16,556 14,330 7,653 2,700 8,058 11,238 26,783 Other income............................... 331 363 163 382 239 152 522 Interest expense, net...................... 5,007 4,314 4,954 3,844 4,023 2,624 6,455 -------- -------- -------- -------- -------- -------- -------- Income (loss) before income taxes.......... 11,880 10,379 2,862 (762) 4,274 8,766 20,850 Income tax provision (benefit)............. 3,720 250 (2,100) (5,900) (5,523) (2,148) 386 Income before accounting change and extraordinary item....................... 8,160 10,129 4,962 5,138 9,797 10,914 20,464 -------- -------- -------- -------- -------- -------- -------- Extraordinary item, early retirement of debt, net................................ -- -- -- -- -- -- (987) Cumulative effect of accounting change, net of income taxes.......................... -- -- (1,124) -- -- -- -- -------- -------- -------- -------- -------- -------- -------- Net income................................. $ 8,160 $ 10,129 $ 3,838 $ 5,138 $ 9,797 $ 10,914 $ 19,477 ======== ======== ======== ======== ======== ======== ======== Net income per common share................ $ 0.34 $ 0.42 $ 0.16 $ 0.21 $ 0.41 $ 0.45 $ 0.81 ======== ======== ======== ======== ======== ======== ======== Average common shares outstanding (000).... 24,000 24,000 24,000 24,000 24,000 24,000 24,000 OTHER DATA: EBITDA(2)................................ $ 50,953 $ 47,334 $ 46,126 $ 48,335 $ 48,828 $ 37,200 $ 63,561 Capital expenditures..................... 81,834 71,431 68,059 77,750 108,188 93,854 152,958(3) BALANCE SHEET DATA (AT END OF PERIOD): Working capital(4)....................... $ 4,451 $ 10,501 $ 8,989 $ 9,847 $ 15,189 $ 13,671 $ 31,648 Investments and other assets............. 4,650 4,635 4,218 7,088 12,539 10,814 23,121 Property, plant and equipment, net....... 276,793 315,555 346,188 375,990 438,057 440,194 547,943 Total assets............................. 301,946 345,936 370,274 402,361 472,700 476,082 662,406 Long-term debt, including current portion................................ 84,500 79,600 96,382 118,720 129,041 130,593 199,048 Stockholder's equity..................... 159,084 198,713 208,351 222,989 288,886 285,903 341,089
- ------------------------- (1) Certain reclassifications have been reflected in amounts prior to 1995 to conform with 1995 presentation. (2) EBITDA is earnings before interest, income taxes, depreciation, depletion and amortization, cumulative effect of accounting change, extraordinary item and cost center write-offs of oil and gas assets. EBITDA is presented to provide additional information about the Company's ability to meet its future requirements for debt service, capital expenditures and working capital. EBITDA should not be considered as an alternative to net income as an indicator of operating performance or as an alternative to cash flows as a measure of liquidity. (3) Includes non-cash capital expenditures of $106.9 million relating to the Recent Acquisitions. (4) Excluding current maturities of long-term debt. 24 27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is intended to assist in an understanding of the Company's historical financial position and results of operations for each of the three years in the period ended December 31, 1994 and the unaudited historical financial data as of and for the nine months ended September 30, 1994 and 1995. The Company's historical Consolidated Financial Statements and Notes thereto included elsewhere in this Prospectus contain detailed information that should be referred to in conjunction with the following discussion. Additional financial information appearing in this Prospectus includes (i) unaudited Pro Forma Consolidated Financial Statements and Notes thereto reflecting the Recent Acquisitions; (ii) historical Consolidated Financial Statements and Notes thereto for CMS NOMECO International, Inc. and Subsidiaries (formerly Walter International, Inc. and Subsidiaries) as of, and for the year ended, December 31, 1994; (iii) historical Consolidated Financial Statements and Notes thereto for the Amoco Congo Companies as of December 31, 1993 and 1994 and for the years ended December 31, 1992, 1993 and 1994, respectively, and (iv) historical Consolidated Financial Statements and Notes thereto for Terra Energy, Ltd. and Subsidiaries as of and for the year ended December 31, 1994. GENERAL The Company, an indirect subsidiary of CMS Energy, is an independent oil and natural gas company engaged in the exploration, development, acquisition and production of oil and natural gas properties in the U.S. and seven other countries (excluding two countries where the Company has properties subject to agreements of sale). The Company's oil-producing assets are concentrated in South America (Ecuador, Venezuela and Colombia) and offshore West Africa (the Congo and Equatorial Guinea), and the Company's gas-producing assets are concentrated in Michigan, the Gulf Coast region and the Gulf of Mexico. The following events have recently had, and will continue to have, a significant impact on the Company's results of operations and financial condition: (i) the Terra Acquisition in August 1995; (ii) the Walter Acquisition in February 1995; (iii) the assumption by a consortium in which the Company has a 29.17% working interest of operations of the Colon Unit in Venezuela in May 1995; (iv) the June 1994 acquisition by the Company of Sun Colombia Oil Company whose sole asset is a working interest in the Espinal Block in Colombia; (v) the completion by the Company in the third quarter of 1994 of two Antrim gas property acquisitions; (vi) the commencement of Ecuador production in mid-1994 and the subsequent commencement of production from additional fields; and (vii) the commencement of production from the Freshwater Bayou Field in late 1994 and the subsequent completion of successful development wells. See "Business and Properties -- Recent Developments." The Company uses the full cost method of accounting for its investment in oil and natural gas properties. Under the full cost method of accounting, all costs of acquisition, exploration and development of oil and natural gas reserves are capitalized into a "full cost pool" as incurred, and properties in the pool, including estimated future development costs, are depleted and charged to operations using the unit-of-production method based on the ratio of current production to total proved oil and natural gas reserves. To the extent that such capitalized costs (net of accumulated depletion and amortization) less deferred taxes exceed the sum of discounted estimated future net cash flows from proved oil and natural gas reserves (using unescalated prices and costs and a 10% per annum discount rate) and the lower of cost or market value of unproved properties after income tax effects, such excess costs are charged against earnings. The test is applied at the end of each fiscal quarter on a country-by-country basis and requires a write-down of oil and natural gas properties if the ceiling is exceeded, even if prices decline for only a short period. Once incurred, such a write-down is not reversible at a later date even if oil or natural gas prices increase. Significant downward revisions of the estimates of proved reserves or declines in oil and natural gas prices from those in effect on September 30, 1995 which are not offset by other factors could result in a write-down for impairment of oil and natural gas properties. 25 28 The Company periodically utilizes collar contracts and swap agreements for portions of its oil and gas production to achieve more predictable cash flows and to reduce its exposure to fluctuations in oil and gas prices. The Company has generated significant amounts of Section 29 Credits as a result of the sale of natural gas produced from Antrim shale and, to a lesser extent, tight sands wells. For 1995, it is estimated that the Company and its subsidiaries will generate approximately $12 million of Section 29 Credits; for 1996 through 2002, it is estimated that the Company will generate Section 29 Credits averaging $14 million annually. No Section 29 Credit will be allowed for fuels sold after December 31, 2002. Forecasts of the CMS Energy consolidated group's tax position indicate that such group will be able to use and, therefore, that the Company will be paid for the Company's current year Section 29 Credits for the 1995 taxable year and that the accumulated minimum tax credit carryforward attributable to the Company's Section 29 Credits (approximately $27.2 million at December 31, 1994) will be paid to the Company over five years, but there can be no assurance that this will be the case. See "Business and Properties -- Tax Matters." If the taxable income for the CMS Energy consolidated group were to be less than projected, the payments for the Section 29 Credits would be deferred or eliminated. As of June 30, 1995, Block 16 and related fields in the Oriente Basin of the Ecuadorian Amazon region represented approximately 14.1% of the Company's estimated total proved reserves of oil and natural gas on a Boe basis. The Ministry of Energy and Mines in Ecuador has notified the members of the consortium with interests in such fields that they should investigate alternatives for improving project economics to the Ecuadorian government, including the renegotiation of the service contract governing the Company's interest in these fields. Discussions with the Ecuadorian government concerning various alternatives began in late September 1995 and will likely continue for the next several months. The Company cannot currently predict what impact, if any, these discussions will have on the project's economics, and there can be no assurance that these discussions or their outcome will not have a material adverse effect on the Company's estimated reserves, financial condition or results of operations. See "Business and Properties -- Description of Non-U.S. Operations -- South America -- Republic of Ecuador." See "Risk Factors" for more information to assist in an understanding of the Company's results of operations and financial position. RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1994 PRETAX OPERATING INCOME AND EARNINGS The Company's pretax operating income for the nine months ended September 30, 1995 increased $15.5 million (137.2%) to $26.8 million, from $11.3 million in the nine months ended September 30, 1994. The increase is primarily attributable to an increase in gains from the disposition of a gas sales contracts ($9.9 million in 1995 and $4.8 million in 1994), as well as higher sales volumes and higher average market prices for oil, partially offset by lower average market prices for natural gas and a $2.0 million U.S. cost center write-down. The volume increase includes eight months' production from the Walter properties acquired in February 1995 and two months' production from the Terra properties acquired in August 1995. Net income increased $8.6 million (78.9%) to $19.5 million in the nine months ended September 30, 1995 from $10.9 million in the comparable 1994 period, reflecting the higher operating income and a $3.0 million increase in Section 29 Credits, partially offset by an increase in interest expense, net, and an extraordinary item, early 26 29 retirement of debt, net of income taxes. The following table sets forth selected oil and gas operating statistics of the Company for the nine-month periods ended September 30, 1994 and 1995: SELECTED OIL AND GAS OPERATING STATISTICS
NINE MONTHS ENDED SEPTEMBER 30, ---------------- INCREASE 1994 1995 (DECREASE) Oil volumes (MBbl): U.S............................................................. 518 463 (10.6)% Non-U.S......................................................... 874 2,756 215.3 Total........................................................... 1,392 3,219 131.3 Average oil price (per Bbl): U.S............................................................. $15.64 $16.62 6.3 Non-U.S......................................................... 11.87 13.69 15.3 Overall*........................................................ 13.32 14.04 5.4 Gas volumes (MMcf)................................................ 15,008 18,989 26.5 Average gas price (per Mcf)*...................................... $ 2.11 $ 1.88 (10.9) NGL volumes (MBbl)................................................ 123 172 39.8 Average NGL price (per Bbl)....................................... $14.84 $14.57 (1.8) Operating expenses (per Boe): Depreciation, depletion and amortization........................ $ 6.31 $ 5.20 (17.6) Production costs................................................ 3.50 3.54 1.1 General and administrative...................................... 1.08 0.86 (20.4)
- ------------------------- * Adjusted to reflect amounts received or paid under futures contracts entered into to hedge the price of a portion of production. REVENUES Oil and Condensate. Oil and condensate revenues increased $26.9 million (145.4%) to $45.4 million in the first nine months of 1995 over the comparable period of 1994 as a result of a 1,827,000 Bbl (131.3%) increase in production and a $0.72 per Bbl (5.4%) increase in the overall average market price of oil sales (adjusted for hedging). The production increase reflected increases due to: (i) 851,000 Bbls of Ecuador production that commenced in mid-year 1994, (ii) approximately 1.1 million Bbls from the Walter properties acquired in February 1995, and (iii) 245,000 Bbls from the Espinal Block properties in Colombia acquired in mid-1994, partially offset by decreased production in New Zealand due to well performance declines. Natural Gas. Natural gas revenues increased $2.4 million (7.9%) in the first nine months of 1995 to $32.9 million as compared with $30.5 million in the comparable 1994 period. A 4.0 Bcf (26.5%) increase in gas production in the first nine months of 1995 was offset by $0.23 per Mcf (10.9%) lower average gas prices (adjusted for hedging). The volume increase included higher production in Michigan Antrim (2.7 Bcf) and the Freshwater Bayou properties in Louisiana (2.5 Bcf) which properties commenced production in late 1994. These increases more than offset lower production in other U.S. areas and in New Zealand. Other U.S. gas production declined due to lower Gulf of Mexico production and the sale of producing properties in 1994. Other Operating. Other operating revenues for the first nine months of 1995 include a $9.9 million gain from the disposition of a gas sales contract and a $1.5 million increase in hedging settlements while the comparable 1994 period included a $4.8 million gain from the disposition of a gas sales contract. The gas sales contract disposed of in 1995 had provided for sales prices of $3.25 per MMBtu in 1995, escalating 4.0% each year through December 31, 2006, and covered 5,000 MMBtu per day or 1.8 Bcf annually of the Company's gas sales. The gas sales contract disposed of in 1994 had provided for sales prices of $2.53 per MMBtu in 1994, 27 30 escalating 4.0% each year through December 31, 2006, and covered 10,000 MMBtu per day or 3.6 Bcf annually of the Company's gas sales. In the future, the Company expects to sell these gas volumes on the spot market or under term contracts providing for current market price. COSTS AND EXPENSES Depreciation, Depletion and Amortization. Depreciation, depletion and amortization expense increased $8.7 million (34.3%) to $34.1 million in the nine months ended September 30, 1995 over the comparable period of 1994 primarily due to the addition of production from the Ecuador, Walter, Terra and Espinal properties. Additionally, depletion on increased gas production more than offset the effects of lower U.S. oil production and a lower U.S. depletion rate, $0.99 per MMBtu in the first nine months of 1995 as compared with $1.13 per MMBtu for the comparable period in 1994. The rate decrease resulted from significant additions of gas reserves in the last half of 1994 in Louisiana and Michigan, coupled with the effects of the acquisition of Terra reserves in Michigan. Cost Center Write-offs. Cost center write-offs include a $2.0 million U.S. write-down in the third quarter of 1995 due to low oil and gas prices. Operating and Maintenance. Operating and maintenance expenses of $23.2 million increased $9.2 million (65.7%) in the first nine months of 1995 over the comparable period of 1994 primarily because of $10.2 million of expense due to the addition of production from the Ecuador, Walter and Espinal properties and a $1.4 million increase attributable to higher Antrim gas production, including Terra properties. The increases attributable to these items were partially offset by the elimination of 1994 expense on properties sold (producing properties and the Kalkaska Gas Processing Plant interest) and large workover expense early in 1994. General and Administrative. General and administrative expenses increased $1.3 million (30.2%) to $5.6 million in the first nine months of 1995 over the comparable period of 1994 primarily due to higher salaries and benefits. This increase primarily reflects costs associated with the addition of personnel in 1995 resulting from the Recent Acquisitions and development activities in the Colon Block in Venezuela and the Espinal Block in Colombia. Production and Other Taxes. Production and other taxes increased $0.5 million (16.7%) to $3.5 million in the first nine months of 1995 over the comparable period of 1994 due to taxes on production from the Espinal Block in Colombia acquired in mid-1994. Interest Expense, Net. Interest expense, net increased $3.8 million (140.7%) to $6.5 million in the first nine months of 1995 over the comparable period of 1994 due to higher expense and lower capitalized interest. The interest expense increase resulted from higher interest rates and higher debt levels attributable to borrowings in the last half of 1994 and in 1995 primarily associated with acquired properties (Terra, Walter and Espinal). Interest rates averaged 7.9% per annum in the first nine months of 1995 as compared with 6.6% per annum in the comparable period of 1994. Average outstanding debt balances were $147.8 million in the first nine months of 1995 and $124.8 million in the comparable period of 1994. Interest capitalized decreased $1.9 million due to lower Ecuador development-stage assets as a result of commencement of production in 1994. Extraordinary Item. On August 10, 1995, the Company repaid in full senior serial notes in the principal amount of $27.9 million and incurred a $1.5 million ($987,000 after income tax effects) prepayment penalty for the early extinguishment of debt. Income Tax Expense. Income tax expense of $0.4 million in the first nine months of 1995 is $2.5 million higher than the $2.1 million tax benefit (resulting from Section 29 Credits) in the first nine months of 1994. The expense associated with higher income in the first nine months of 1995 was partially offset by an increase in Section 29 Credits, which amounted to $9.0 million in the first nine months of 1995 as compared with $6.0 million in the comparable period of 1994. 28 31 YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993 PRETAX OPERATING INCOME AND EARNINGS The Company's 1994 pretax operating income of $8.1 million increased $5.4 million (200.0%) from 1993. A gain of $4.8 million from the disposition of a gas sales contract and a decrease of $4.0 million in cost center write-offs more than offset the effects of lower average oil and gas prices. The increase in pretax operating income also reflects lower U.S. depletion rates reduced by higher expenses that were not directly related to increased production, and lower plant products revenues. Net income increased $4.7 million (92.2%) from 1993 to $9.8 million in 1994. Income taxes were slightly higher by $0.4 million, due to an increase in income, offset by an increase in Section 29 Credits. The following table sets forth selected oil and gas operating statistics of the Company for the years ended December 31, 1993 and 1994: SELECTED OIL AND GAS OPERATING STATISTICS
YEAR ENDED DECEMBER 31, ------------------ INCREASE 1993 1994 (DECREASE) Oil volumes (MBbl): U.S........................................................... 870 690 (20.7)% Non-U.S....................................................... 846 1,335 57.8 Total......................................................... 1,716 2,025 18.0 Average oil price (per Bbl): U.S........................................................... $ 16.58 $ 15.22 (8.2) Non-U.S....................................................... 14.43 12.23 (15.2) Overall*...................................................... 15.52 13.30 (14.3) Gas volumes (MMcf).............................................. 18,487 20,546 11.1 Average gas price (per Mcf)*.................................... $ 2.17 $ 2.05 (5.5) NGL volumes (MBbl).............................................. 186 193 3.8 Average NGL price (per Bbl)..................................... $ 15.24 $ 14.90 (2.2) Operating expenses (per Boe): Depreciation, depletion and amortization...................... $ 7.15 $ 6.19 (13.4) Production costs.............................................. 3.01 3.42 13.6 General and administrative.................................... 1.12 1.12 --
- ------------------------- * Adjusted to reflect amounts received or paid under futures contracts entered into to hedge the price of a portion of production. REVENUES Oil and Condensate. Oil and condensate revenues increased $0.2 million (0.8%) in 1994 over 1993 as a result of a 309,000 Bbl (18.0%) increase in oil sales volumes, partially offset by a $2.22 per Bbl (14.3%) decrease in the average sales price. The increased volumes resulted from a 489,000 Bbl increase in non-U.S. production primarily due to a 159,000 Bbl increase in production in Colombia in 1994 as compared with 1993 and 369,000 Bbls of Ecuador production which commenced in mid-year 1994. U.S. oil sales decreased 180,000 Bbls (20.7%) in 1994 due to natural declines, sales of producing properties and well performance problems in the Gulf of Mexico. Natural Gas. Natural gas revenues decreased $1.1 million (2.7%) in 1994 to $39.9 million compared with $41.0 million in 1993. In 1994, an increase of 2.1 Bcf (11.1%) in gas sales volumes increased natural gas revenues by $0.9 million but the increase was fully offset by a $0.12 per Mcf (5.5%) decrease in the average gas price (adjusted for hedging). Contributing to the sales volume increase in 1994 were Antrim gas sales, which reached 8.8 Bcf in 1994 compared with 6.0 Bcf in 1993. The increase in Antrim gas sales volumes is attributable to production from properties acquired in 1994, the completion of several projects which were not 29 32 producing in 1993 and the utilization of improved production technology. A 0.9 Bcf increase in other Michigan gas sales volumes in 1994 partially offset decreases in other U.S. areas. Other Operating. Revenues received by the Company from the sale of processing plant liquids decreased $1.2 million (30.8%) in 1994 from 1993, due to lower revenues resulting from (i) the sale of the Company's interest in the Kalkaska Gas Processing Plant in Michigan in the fourth quarter of 1994 and (ii) a lower Btu content of the Company's Michigan gas production. Processing plant sales amounted to $2.7 million in 1994 and $3.9 million in 1993. A gain of $4.8 million attributable to the disposition of a gas sales contract is included in other revenues in 1994, while 1993 included $0.6 million of prior period items. The gas sales contract had provided for sales prices of $2.53 per MMBtu in 1994, escalating 4.0% per year to December 31, 2006 on 10,000 MMBtu per day, or 3.7 Bcf annually, of gas sales. Other revenues also included hedging settlements which resulted in receipt of $2.4 million in 1994 compared with a payment of $0.9 million in 1993. COSTS AND EXPENSES Depreciation, Depletion and Amortization. Depreciation, depletion and amortization expense decreased $0.7 million (2.0%) in 1994 compared with 1993 due to a $0.15 per MMBtu decrease in the U.S. depletion rate to $1.11 per MMBtu, partially offset by depletion attributable to increased non-U.S. oil production. The rate decrease resulted from significant 1994 estimated proved reserve additions in Louisiana and Michigan. The production increase resulted from commencement of Ecuador production in mid-year 1994 and the acquisition of Colombian properties in June 1994. Cost Center Write-offs. Cost center write-offs decreased $4.0 million (41.7%) to $5.6 million in 1994 compared with $9.6 million in 1993. These write-offs primarily included dry hole costs associated with unsuccessful exploration in Thailand ($4.2 million in 1994 and $3.9 million in 1993) and China ($3.3 million in 1993). Also included are ceiling test write-downs of $0.7 million in 1994 for Papua New Guinea and $1.9 million in 1993 for Colombian assets. Operating and Maintenance. Operating and maintenance expenses of $19.3 million increased $4.3 million (28.7%) in 1994 from 1993. This increase reflects $3.4 million in higher operating expenses in Michigan, Colombia and Ecuador where production increased, combined with workover and maintenance costs offshore Equatorial Guinea and in the Gulf of Mexico. Production and Other Taxes. Production and other taxes decreased $0.4 million (9.5%) in 1994 compared with 1993 as a result of a $3.9 million decrease in U.S. oil revenues, partially offset by increased severance tax on Antrim gas production and taxes on higher Colombian oil production attributable to the Espinal properties acquired in June 1994. Interest Expense, Net. Net interest expense for 1994 remained about the same as for 1993, $4.0 million compared with $3.8 million. The impact of higher debt levels and interest rates was offset by increased capitalized interest on the Company's investment in its Ecuador project. The Company had capitalized interest associated with Ecuador development amounting to $4.4 million in 1994 and $2.5 million in 1993. Average outstanding debt balances were $125.4 million in 1994 and $108.7 million in 1993. Income Taxes. Income taxes increased slightly in 1994 from 1993. Section 29 Credits amounted to $8.5 million in 1994 and $5.6 million in 1993. However, the $2.9 million increase in Section 29 Credits was more than offset by taxes on higher income and the tax effects of non-U.S. income and investments. Income tax expense for 1993 included $1.9 million to increase prior years' deferred taxes for the 1.0% federal income tax rate increase effective January 1, 1993. YEAR ENDED DECEMBER 31, 1993 COMPARED TO YEAR ENDED DECEMBER 31, 1992 PRETAX OPERATING INCOME AND EARNINGS The Company's 1993 pretax operating income decreased $5.0 million (64.9%) to $2.7 million compared with $7.7 million in 1992. This decrease is attributable to lower average oil prices, cost center write-offs, lower plant revenues and higher depletion, partially offset by higher average gas prices and increased oil and gas 30 33 production volumes. Net income increased $1.3 million (34.2%) in 1993 to $5.1 million due to the effects of lower income taxes and a 1992 accounting change. The following table sets forth selected oil and gas operating statistics of the Company for the years ended December 31, 1992 and 1993: SELECTED OIL AND GAS OPERATING STATISTICS
YEAR ENDED DECEMBER 31, ------------------ INCREASE 1992 1993 (DECREASE) Oil volumes (MBbl): U.S........................................................... 994 870 (12.5)% Non-U.S....................................................... 423 846 100.0 Total......................................................... 1,417 1,716 21.1 Average oil price (per Bbl): U.S........................................................... $ 19.25 $ 16.58 (13.9) Non-U.S....................................................... 17.53 14.43 (17.7) Overall....................................................... 18.85 15.52 (17.7) Gas volumes (MMcf).............................................. 17,578 18,487 5.2 Average gas price (per Mcf)*.................................... $ 1.89 $ 2.17 14.8 NGL volumes (MBbl).............................................. 291 186 (36.1) Average NGL price (per Bbl)..................................... $ 16.55 $ 15.24 (7.9) Operating expenses (per Boe): Depreciation, depletion and amortization...................... $ 7.02 $ 7.15 1.9 Production costs.............................................. 2.91 3.01 3.4 General and administrative.................................... 0.97 1.12 15.5
- ------------------------- * Adjusted to reflect amounts received or paid under futures contracts entered into to hedge the price of a portion of production. REVENUES Oil and Condensate. Oil and condensate revenues were flat in 1993, $26.6 million in both 1993 and 1992 as a result of a 299,000 Bbl (21.1%) increase in oil sales volumes, offset by a $3.33 per Bbl (17.7%) decrease in the average oil sales price and a $1.6 million (39.3%) increase in transportation costs attributable to higher Antrim gas production in Michigan and oil production in Colombia. The increased volumes resulted from a 423,000 Bbl (100.0%) increase in non-U.S. production due largely to increased production of 141,000 Bbls offshore Equatorial Guinea and 192,000 Bbls of Colombian production which commenced in 1993. U.S. oil sales decreased 124,000 Bbls (12.5%) due to natural declines without significant additions. Natural Gas. Natural gas revenues increased $6.6 million (19.2%) to $41.0 million in 1993 over 1992 as a result of a $0.28 per Mcf (14.8%) increase in the average gas sales price and 0.9 Bcf (5.1%) increase in gas sales volumes. A 1.3 Bcf increase in Antrim gas sales was partially offset by declines in other areas. Other Operating. Other operating revenues received by the Company from the sale of processing plant liquids decreased $1.6 million (29.1%) to $3.9 million in 1993 from $5.5 million in 1992. A nonrecurring gain relating to a $1.2 million settlement with Amoco Production Company was included in 1992 while 1993 included $0.6 million of prior period items. Other revenues also included hedging settlement payments of $0.9 million in 1993 and $1.0 million in 1992. COSTS AND EXPENSES Depreciation, Depletion and Amortization. Depreciation, depletion and amortization expense increased $3.0 million (9.2%) to $35.6 million in 1993 from $32.6 million in 1992 due to higher non-U.S. production volumes and an increase in the U.S. depletion rate from $1.23 per MMBtu in 1992 to $1.26 per MMBtu in 1993. The rate increase is attributable to unsuccessful U.S. exploration results in 1993 outside Michigan. 31 34 Cost Center Write-offs. Cost center write-offs increased $3.9 million (68.4%) to $9.6 million in 1993 compared with $5.7 million in 1992. These write-offs included unsuccessful exploration in Thailand ($3.9 million) and China ($3.3 million) in 1993 and the Congo ($1.3 million) in 1992. Also included are ceiling test write-downs of $1.9 million and $3.1 million in 1993 and 1992, respectively, for Colombian assets. Operating and Maintenance. Operating and maintenance expenses increased $1.5 million (11.1%) to $15.0 million in 1993 from $13.5 million in 1992. The increase corresponds with higher Antrim gas production in Michigan and the start-up of production in Colombia which commenced in early 1993, partially offset by reductions in other Michigan oil and gas production. General and Administrative. General and administrative expenses increased $1.1 million (24.4%) to $5.6 million in 1993 compared with $4.5 million in 1992. The 1993 increase included $0.6 million higher salaries and benefits, primarily due to $0.3 million of post-retirement benefits costs in 1993 general and administrative expenses while the corresponding 1992 expense was included in the cumulative effect of an accounting change. Also included in 1993 was $0.1 million of currency losses, while 1992 had $0.2 million of currency gains. Production and Other Taxes. Production and other taxes increased $0.2 million (5.0%) to $4.2 million in 1993 from $4.0 million in 1992 primarily due to Colombian taxes relating to the commencement of production in 1993. Interest Expense, Net. In 1993, net interest expense decreased $1.1 million (22.4%) to $3.8 million from $4.9 million in 1992, primarily due to increased capitalized interest in connection with the Company's Ecuador project. The Company had capitalized interest associated with Ecuador development amounting to $2.5 million in 1993 and $1.0 million in 1992. The expense associated with higher levels of debt was partially offset by lower interest rates. Average outstanding debt balances were $108.7 million in 1993 and $94.5 million in 1992. Income Taxes. Income taxes decreased $3.8 million to a $5.9 million benefit in 1993 compared with a $2.1 million benefit in 1992 due to lower pretax income, higher Section 29 Credits and the tax effects of non-U.S. income and investments. These decreases more than offset the $1.9 million effect of a 1.0% federal income tax rate increase effective January 1, 1993. Section 29 Credits amounted to $5.6 million in 1993 and $4.4 million in 1992. LIQUIDITY AND CAPITAL RESOURCES GENERAL The Company's primary needs for capital, in addition to the funding of ongoing operations, are for the exploration, development and acquisition of oil and natural gas properties and the repayment of principal and interest on debt. The Company's primary sources of liquidity have been net cash provided by operating activities, proceeds from borrowings and equity contributions from CMS Energy (effected through CMS Enterprises). Contributions from CMS Energy may not be available in the future, and acquisitions funded by such contributions, if any, would likely require the issuance of additional Common Stock to CMS Energy, which would result in a dilution of the ownership interest of the public holders of Common Stock. In addition, the issuance by the Company of a significant amount of its Common Stock as consideration to a seller of acquired properties could result in certain adverse consequences, such as the Company being deconsolidated from the CMS Energy consolidated group for federal income tax purposes. Accordingly, it is unlikely that the Company would issue shares of its Common Stock to the sellers in an amount sufficient to cause a deconsolidation in order to make an acquisition. If the Company decides not to, or does not have the ability to, issue its Common Stock or to obtain equity contributions from CMS Energy to finance acquisitions, the Company would likely need to use cash on hand and/or cash available under its credit facilities or other sources to acquire shares of its Common Stock in the open market to consummate any proposed tax-free acquisitions. See "Risk Factors -- Acquisition Risks." The Company budgets its capital expenditures based upon projected cash flows and, subject to contractual commitments, routinely adjusts its capital expenditures in response to changes in oil and natural gas prices and corresponding changes in cash flow. 32 35 The Company believes that cash generated from operations, together with the estimated net proceeds of the Offering and borrowing capacity under its existing and future financing arrangements, will be sufficient to meet its liquidity and capital requirements for 1995 and the foreseeable future. OPERATING ACTIVITIES Net cash provided by operating activities for the nine months ended September 30, 1995 was $53.2 million, an increase of $19.6 million (58.3%) from $33.6 million for the comparable 1994 period. The increase reflects income from the Ecuador, Terra, Walter and Espinal properties as well as the income from the disposition of two gas sales contracts in March 1995 ($9.9 million) and in July 1994 ($4.8 million), respectively. Net cash provided by operating activities during the year ended December 31, 1994 was $46.9 million, up $0.9 million (2.0%) from $46.0 million in the comparable 1993 period. FINANCING ACTIVITIES The Company received equity contributions totaling $32.7 million ($9.0 million in cash and $23.7 million in property) from CMS Energy through CMS Enterprises in the first nine months of 1995, primarily relating to the Walter Acquisition, which represents a decrease of $19.3 million (37.1%) from the $52.0 million received as equity contributions from CMS Energy in the first nine months of 1994. These 1994 equity contributions included $25.0 million for the Sun Colombia acquisition. The amount of net additional borrowings was $70.0 million in the first nine months of 1995 as compared with $11.9 million in the comparable 1994 period. This increase in borrowings is primarily attributable to $67.8 million of CMS Notes for the Recent Acquisitions and $15.3 million of debt assumed with these acquisitions, offset by the $27.9 million early retirement of the senior serial notes. Total debt outstanding at September 30, 1995 was $199.0 million, an increase of $70.0 million from $129.0 million at December 31, 1994. Borrowings increased $10.3 million (8.7%) in the year ended December 31, 1994 to $129.0 million at December 31, 1994. The Company also received $56.1 million in equity contributions from CMS Energy during the year ended December 31, 1994. Financing for 1993 capital expenditures was provided in part by $46.0 million of net cash provided by operating activities and in part by $9.5 million of equity contributions from CMS Energy. Long-term debt at December 31, 1993 was $118.7 million, reflecting an increase of $22.3 million (23.1%) compared with December 31, 1992. In December 1994, CMS Energy arranged for the issuance of a standby letter of credit, currently in the amount of $45.0 million, to secure the Company's performance under the operating services agreement with respect to the Colon Unit in Venezuela. The Company has agreed to reimburse CMS Energy on demand for any draw made under the letter of credit and to pay to CMS Energy a fee of 2.125% per annum of the face amount of the letter of credit. See "Relationship and Certain Transactions with CMS Energy." THE CREDIT FACILITY The Company's Credit Agreement provides a maximum lending commitment of $130.0 million (the "Credit Facility"). The Credit Facility is subject to an aggregate borrowing base limitation equal to the estimated loan value of the Company's oil and gas reserves, subject to certain exclusions, based upon forecast rates of production and current commodity pricing assessments, as periodically redetermined by the Banks which are parties to the Credit Agreement. The Banks have broad discretion in determining which of the Company's reserves to include in the borrowing base. As of September 30, 1995, the borrowing base was $135.3 million, and accordingly, the total amount available for borrowing from the Credit Facility at September 30, 1995 was $130.0 million. Of this availability, $113.3 million in borrowings was outstanding at September 30, 1995. The Company is in early stages of negotiations to, among other things, increase commitment levels and expand the borrowing base under the Credit Facility. Under the terms of the Credit Agreement, the Company must (i) maintain a ratio of current assets to current liabilities at least equal to 0.75 to 1.0, (ii) maintain a ratio of total liabilities to tangible net worth of no more than 0.75 to 1.0, (iii) maintain a minimum tangible net worth of $150.0 million, and (iv) maintain a 33 36 ratio of cash flow after dividends to fixed charges for the most recent four quarters of 2.0 to 1.0. Restrictive covenants under the Credit Agreement include certain limitations on indebtedness and contingent obligations, as well as certain restrictions on liens, investments, affiliate transactions and sales of assets. In addition, the Banks have the right to require the Company to repay all advances under the Credit Agreement within 90 days after notification to the banks that (i) CMS Energy no longer beneficially owns a majority of the outstanding voting stock of the Company or (ii) all or substantially all of the assets of the Company are sold. See "Capitalization." As of September 30, 1995, the Company's current ratio was 1.60 to 1.0, its total liabilities to tangible net worth ratio was 0.72 to 1.0, its tangible net worth was $302.0 million and its ratio of cash flow after dividends to fixed charges was 4.9 to 1.0. CMS NOTES In August 1995, the Company issued the Terra Note to CMS Enterprises, which in turn assigned it to CMS Energy, in connection with the transfer by CMS Energy of the common stock of Terra to CMS Enterprises and then by CMS Enterprises to the Company. In May 1995, the Company issued the Walter Note to CMS Energy in connection with the repayment of $6.5 million of indebtedness of Walter immediately after the consummation of the Walter Acquisition. The CMS Notes are subordinated to the Company's obligations under the Credit Agreement, bear interest at the rate of LIBOR plus 2.0% per annum and have a maturity date of November 1, 1999. See "Use of Proceeds" and "Relationship and Certain Transactions with CMS Energy." OTHER DEBT As of September 30, 1995, $14.2 million of project financing debt is outstanding under agreements with the Overseas Private Investment Corporation ("OPIC"). These OPIC guaranteed loans funded development drilling for the Alba Field in Equatorial Guinea ($5.4 million) and acquisition financing for the Yombo Field in the Congo ($8.8 million). In connection with the Terra Acquisition, the Company assumed $3.7 million of long-term debt comprised of $1.9 million of capitalized leases and $1.8 million outstanding under a term loan for financing of a processing plant under construction. INVESTING ACTIVITIES The Company's recent capital investments have focused primarily on the acquisition and development of properties with proved reserves. Capital expenditures of $153.0 million ($46.1 million in cash) for the first nine months of 1995 represented an increase of $59.1 million (62.9%) from the comparable 1994 period. Non-cash expenditures for the first nine months of 1995 include $65.1 million for the Terra Acquisition and $41.8 million for the Walter Acquisition. Expenditures for the first nine months of 1994 included $25.0 million for the Sun Colombia acquisition. The Company's capital expenditures of $108.2 million for the year ended December 31, 1994 were $30.4 million (39.1%) higher than capital expenditures of $77.8 million for the comparable 1993 period. The increase reflects a $32.6 million increase in purchases of proved reserves ($33.5 million in 1994 compared with $0.9 million in 1993) and an increase of $2.7 million for non-U.S. expenditures, offset by decreases in U.S. spending. The purchases in 1994 consisted of the Sun Colombia acquisition for $25.0 million and two acquisitions of Antrim gas properties for $8.5 million. The Company's capital expenditures for the year ended December 31, 1993 of $77.8 million were $9.7 million (14.2%) higher than the capital expenditures for the comparable 1992 period. The increase reflects a $30.8 million increase in non-U.S. expenditures, including substantial expenditures for development in Ecuador, offset by decreases of $8.1 million in U.S. spending and $13.0 million for U.S. acquisitions. In December 1994, a consortium in which the Company is a 29.17% participant entered into an agreement with Maraven, S.A. ("Maraven"), a unit of the Venezuelan state oil company, to develop the Colon Block in the Maracaibo Basin of southwest Venezuela. The agreement commits the consortium to 34 37 spend at least $160 million over three years in a development program involving reworking, re-equipping and re-entering existing wells and drilling new wells to optimize production from existing proved reserves. The Company estimates that its capital expenditures for 1995 will be approximately $193.6 million, including approximately $66.7 million for the Terra Acquisition, $41.3 million for the Walter Acquisition and additional Ecuador, Venezuela and Colombia development expenditures of over $34.0 million. As of September 30, 1995, $153.0 million of such capital expenditure budget had been spent. The Company estimates that its capital expenditures for 1996 will be approximately $120.0 million. INFLATION AND CHANGE IN PRICES The Company's revenues and the value of its oil and gas properties have been and will be affected by changes in oil and natural gas prices. The Company's ability to obtain additional capital on satisfactory terms is also substantially dependent on oil and natural gas prices, which are subject to seasonal and other fluctuations that are beyond the Company's ability to control or predict. Although certain of the Company's costs and expenses are affected by the level of inflation, inflation has not had a significant effect on the Company's results of operations during the first nine months of 1995 or during each of the three years in the period ended December 31, 1994. 35 38 BUSINESS AND PROPERTIES OVERVIEW The Company is an independent oil and natural gas company engaged in the exploration, development, acquisition and production of oil and natural gas properties in the U.S. and seven other countries (excluding two countries where the Company has properties subject to agreements of sale). Formed in 1967 to explore and develop leaseholdings located solely in Michigan, the Company has greatly expanded to become an international oil and natural gas company. In large part as a result of acquisitions and development activities, the Company has more than doubled both its estimated proved reserves and its production of oil and natural gas since January 1, 1992. As of June 30, 1995, the Company had estimated proved reserves of 118.6 MMBoe, consisting of 68.9 MMBbls of oil (97.0% of which were located outside the U.S.) and 298.1 Bcf of natural gas (94.5% of which were located in the U.S.). Approximately 64.7% of the Company's estimated proved reserves on such date were classified as proved developed. The Company's oil-producing assets are concentrated in South America (Ecuador, Venezuela and Colombia) and offshore West Africa (the Congo and Equatorial Guinea), and the Company's gas-producing assets are concentrated in Michigan, the Gulf Coast region and the Gulf of Mexico. The following table sets forth by region the Company's estimated proved reserves as of June 30, 1995, and estimated average daily production during the month of September 1995:
ESTIMATED PROVED RESERVES ESTIMATED AVERAGE DAILY PRODUCTION AS OF JUNE, 30, 1995 DURING THE MONTH OF SEPTEMBER 1995 -------------------------------------------- ---------------------------------------------- OIL AND NATURAL % OF OIL AND NATURAL % OF CONDENSATE(1) GAS TOTAL TOTAL CONDENSATE GAS TOTAL TOTAL (MMBBLS) (BCF) (MMBOE) RESERVES (MBBLS) (MMCF) (MBOE) PRODUCTION U.S.: Michigan Antrim....... -- 218.0 36.3 30.6% -- 42.8 7.1 28.6% Michigan Other........ 1.2 20.5 4.6 3.9 0.9 8.8 2.4 9.7 Freshwater Bayou...... 0.2 29.4 5.1 4.3 0.1 11.0 1.9 7.7 Gulf of Mexico........ 0.2 3.8 0.8 0.7 0.3 8.7 1.8 7.3 All Other U.S. ....... 0.5 9.9 2.2 1.8 0.3 5.7 1.2 4.8 ---- ----- ----- ----- ---- ---- ---- ----- Total U.S. ....... 2.1 281.6 49.0 41.3 1.6 77.0 14.4 58.1 NON-U.S.: South America: Ecuador............. 16.7 -- 16.7 14.1 3.2 -- 3.2 12.9 Venezuela........... 11.3 -- 11.3 9.5 0.5 -- 0.5 2.0 Colombia............ 6.7 -- 6.7 5.7 1.1 -- 1.1 4.4 Africa/Middle East: Congo............... 15.9 -- 15.9 13.4 3.4 -- 3.4 13.7 Equatorial Guinea... 11.5 10.7 13.3 11.2 1.9 -- 1.9 7.7 Yemen............... 2.6 -- 2.6 2.2 -- -- -- -- Other(2).............. 2.1 5.8 3.1 2.6 0.2 0.3 0.3 1.2 ---- ----- ----- ----- ---- ---- ---- ----- Total Non-U.S. ..... 66.8 16.5 69.6 58.7 10.3 0.3 10.4 41.9 Total Company..... 68.9 298.1 118.6 100.0% 11.9 77.3 24.8 100.0% ==== ===== ===== ===== ==== ==== ==== =====
- ------------------------- (1) Oil and condensate includes 0.2 MMBbls and 3.0 MMBbls, respectively, of U.S. and non-U.S. NGLs. (2) Consists of New Zealand and Papua New Guinea. The Company's properties in each of these countries are subject to agreements of sale. For a discussion of the amounts of revenue, operating profit and identifiable assets attributable to each region in which the Company is active, see Note 11 to the Consolidated Financial Statements of the Company included elsewhere in this Prospectus. 36 39 STRATEGY The Company believes that its success has resulted from its ability to capitalize on an extensive network of industry relationships, an efficient evaluation and decision-making process and broad technical competence. The Company believes that its future growth depends on maintaining an opportunistic approach which builds on the Company's existing strengths. Accordingly, the Company's business strategy is to focus on the following goals while maintaining the flexibility to respond to new opportunities and changed circumstances. BALANCE The Company seeks to maintain a balance between its U.S. and non-U.S. interests to diversify its political, geologic and economic risk. The Company believes that projects outside the U.S. tend to have a higher potential for significant reserve growth but often have greater risks, including political risks and the risks associated with infrastructure development necessary to market production. The Company further believes that projects in the U.S. do not have certain of these risks, but also generally do not offer as large a potential for reserve growth as non-U.S. projects. The Company has historically concentrated on natural gas in the U.S. and to date has focused its non-U.S. activities on oil, providing the Company an additional balance between natural gas and oil. EXPLORATION AND DEVELOPMENT OF EXISTING NON-U.S. PROPERTIES In recent years, the Company has made a series of investments in properties outside the U.S. that currently have both production from proved reserves and significant potential for exploration and development. The Company is pursuing exploration and development of such properties, which include Block 16 in Ecuador, the Colon Unit in Venezuela, the Espinal Block in Colombia, the Yombo Field offshore the Congo and the Bioko Block offshore Equatorial Guinea. Most of the Company's exploration and development opportunities outside the U.S. are located in areas which have significant production histories and adequate infrastructure and, in the Company's view, have a reasonable possibility of yielding sizeable additional reserves through the application of modern exploration and development technologies. SELECTIVE ACQUISITIONS The Company intends to continue to pursue attractive opportunities to acquire producing properties with significant exploration and development potential. The Company's primary focus is in the geographic regions where it has significant experience. The Company's recent acquisitions of Walter and Terra are illustrative of the types of opportunities the Company seeks. OPERATOR ROLE The Company seeks to continue to expand its role as operator of both U.S. and non-U.S. projects by pursuing acquisitions and investment opportunities that allow it to do so. As operator, the Company believes that it can better manage production performance and more effectively control expenses, the allocation of capital and the timing of exploration and development of its fields. In addition, the Company believes that its experience as operator will provide it access to a broader range of additional investment opportunities. In early 1995, the Company assumed the role of operator of significant offshore producing properties in West Africa in conjunction with the Walter Acquisition, and more recently the Company materially increased its role as operator of U.S. properties as a result of the Terra Acquisition. After giving effect to these Recent Acquisitions, the Company operates properties representing approximately 37.5% of its estimated proved reserves, including 43.9% of its U.S. proved reserves and 32.5% of its non-U.S. proved reserves. With respect to projects not operated by the Company, the Company actively monitors the performance of its operators with the same objectives it seeks for Company-operated projects. REGIONAL FOCUS With respect to both its U.S. and non-U.S. activities, the Company intends to focus on selected geographic regions, particularly those where it is currently active. In the U.S., the Company expects to 37 40 continue its emphasis on development, production and, to a lesser extent, exploration of natural gas in its core areas of Michigan, the Gulf of Mexico and the Gulf Coast region. Outside the U.S., the Company intends to concentrate on exploration, development and production of oil in South America and offshore West Africa while evaluating opportunities to acquire additional reserves in those areas and in certain areas of Southeast Asia. By focusing activities in a relatively limited number of U.S. and non-U.S. regions, the Company has acquired significant experience in the operational, technical and legal aspects of conducting business in these regions and can utilize its base of geologic, engineering and production experience in such regions to better evaluate drilling and acquisition prospects. TECHNOLOGY The Company expects to continue to utilize its growing technology base, including increasing use of 3-D seismic surveys, horizontal drilling, new fracturing techniques and reservoir modeling, on its existing properties as well as newly acquired properties. The Company believes it must utilize the latest available technology to continue to compete successfully as the industry focuses on properties with increasing amounts of exploration, development and production risk. RECENT DEVELOPMENTS TERRA ACQUISITION In August 1995, CMS Energy acquired Terra, a significant producer of gas within the Antrim formation underlying a large portion of the Michigan Basin in the northern portion of Michigan's lower peninsula. The consideration relating to such acquisition, after giving effect to certain anticipated post-closing adjustments, is expected to aggregate approximately $63.6 million, payable in common stock of CMS Energy. Immediately after consummation of such acquisition, the stock of Terra was transferred by CMS Energy, through CMS Enterprises, to the Company. In connection with the Terra Acquisition, the Company recorded a capital contribution of $1.0 million and issued the Terra Note which, after giving effect to post-closing adjustments, is expected to be in the principal amount of approximately $62.6 million. The Terra Note is currently held by CMS Energy. A portion of the net proceeds from the Offering will be used to repay indebtedness under the Terra Note. The Terra Acquisition was accounted for as a purchase. As of June 30, 1995, the acquired Terra properties included 1,225 gross (95.6 net) producing Antrim gas wells and estimated net proved reserves of 91.9 Bcf of Antrim gas. Approximately 80.8% of the reserves attributable to the acquired Terra properties at June 30, 1995 were proved developed reserves. During the month of September 1995, estimated average daily net production from these properties was approximately 9.5 MMcf of gas. The Company has been a significant producer and operator of Antrim gas wells for a number of years. Taking into account the Terra Acquisition, the Company operates over 1,200 Antrim gas wells, or over 25% of all gas wells producing from the Antrim formation, making the Company the largest operator of Antrim gas wells. Terra is currently serving as operator of several projects involving the planned drilling of an additional 260 Antrim development wells by December 31, 1995. Additionally, Terra has a sizeable inventory of unproved acreage in the Antrim producing trend, and management believes that a number of its existing wells have substantial potential for improved recovery. The Company believes that it is particularly well suited to capitalize on the Terra Acquisition because of its many years of experience in the natural gas industry in Michigan and its ability as part of the CMS Energy consolidated group to utilize, to a substantial extent, the Section 29 Credits associated with certain Antrim gas production. Consolidated Financial Statements for Terra, and the related Notes thereto, are included elsewhere in this Prospectus. See also "Pro Forma Consolidated Financial Information." WALTER ACQUISITION In February 1995, CMS Energy acquired Walter, an international oil and gas company, for a purchase price of approximately $28.4 million (of which approximately $25.0 million was payable by delivery of CMS 38 41 Energy common stock and $3.4 million was paid in cash) plus assumed indebtedness of $18.3 million. Immediately after consummation of such acquisition, the stock of Walter was contributed by CMS Energy, through CMS Enterprises, to the Company. The Company recorded a capital contribution of $28.4 million as a result of the Walter Acquisition. The Walter Acquisition was accounted for as a purchase. Of the above-referenced assumed indebtedness of Walter, $6.6 million was immediately repaid with funds which the Company borrowed from CMS Energy pursuant to the Walter Note. A portion of the net proceeds from the Offering will be used to repay the indebtedness under the Walter Note. Walter owns interests in and operates fields offshore the Congo and offshore Equatorial Guinea in West Africa and in Tunisia in North Africa. As of June 30, 1995, the acquired Walter properties included 22 gross (6.6 net) producing oil and condensate wells and estimated net proved reserves of 21.0 MMBbls of oil and condensate. Approximately 73.3% of the reserves attributable to Walter's oil and natural gas properties at June 30, 1995, on a Boe basis, were proved developed reserves. During the month of September 1995, estimated average daily net production from these properties was approximately 4,829 Bbls of oil and condensate. Walter is the operator of its fields in the Congo and Equatorial Guinea, which account for virtually all of Walter's production. The Company became familiar with Walter in part because of the Company's participation in the Alba Field operated by Walter offshore Equatorial Guinea. The acquisition of Walter is consistent with the Company's strategy of acquiring producing properties with exploration and development potential. The Walter Acquisition also expands the Company's role as operator of offshore and non-U.S. projects. Shortly prior to the acquisition of Walter by CMS Energy, Walter had acquired ACEC from APC, a subsidiary of Amoco. At the same time, an affiliate of Nuevo acquired ACPC, another subsidiary of APC which, together with ACEC, own significant interests in the Yombo Field offshore the Congo. As a result of these acquisitions and a related agreement between Walter and Nuevo, each of Walter and Nuevo owns beneficially a 21.875% working interest in the Yombo Field. Consolidated Financial Statements for Walter (now named CMS NOMECO International, Inc.), together with Combined Financial Statements for ACEC and ACPC and unaudited pro forma consolidated financial information with respect to Walter and its effective interest in the combined assets of ACEC and ACPC, and the related Notes thereto, are included elsewhere in this Prospectus. See also "Pro Forma Consolidated Financial Information." OTHER RECENT ACQUISITIONS AND DISCOVERIES The Company experienced significant growth in reserves in 1994 primarily as a result of certain acquisitions of producing properties and one significant discovery. In December 1994, a consortium in which the Company has a 29.17% working interest agreed to assume operation of the Colon Unit in Venezuela from an affiliate of the state-owned oil company pursuant to an operating services agreement. As of June 30, 1995, the Company's estimated proved oil reserves attributable to this transaction were 11.3 MMBbls, and the Company has committed to spend approximately $47.0 million ($38.0 million for capital expenditures and $9.0 million for operating expenditures) over the next three years on rework and other development and, to a lesser extent, exploration activities at the Colon Unit. In June 1994, the Company acquired Sun Colombia, whose sole asset is a working interest in the Espinal Block in Colombia, for approximately $25.0 million. As of June 30, 1995, the Company's estimated proved oil reserves attributable to the Sun Colombia acquisition were 5.5 MMBbls. In the third quarter of 1994, the Company completed two Antrim gas property acquisitions for a total of approximately $8.5 million. The Company's estimated proved natural gas reserves attributable to these acquisitions were approximately 10.3 Bcf as of June 30, 1995. In early 1994, the Company participated in a significant discovery in the Freshwater Bayou Field in southern Louisiana. Since this discovery, four successful development wells in this field have been drilled and with their reserve additions, the Company's estimated proved natural gas reserves in the field as of June 30, 1995 were 29.4 Bcf. 39 42 DESCRIPTION OF U.S. OPERATIONS MICHIGAN ANTRIM SHALE The Company has become increasingly involved in the development of Antrim natural gas projects in northern Michigan since its initial investment in such projects in 1988. The Antrim formation is a Devonian age, brittle, carbonaceous, shale which, when naturally or hydraulically fractured, yields natural gas at modest flow rates. The Antrim formation is attractive to the Company for several reasons. Antrim gas wells are inexpensive to drill and complete, can have producing lives of 30 years or more and show unusually high drilling success rates. The characteristics of Antrim projects make them relatively low in drilling risk, but economically sensitive to changes in production rates, expenses and market prices. The Company believes that it is an industry leader among Antrim producers in technical and operating capabilities, including the development and utilization of production optimization technologies. For instance, the Company has successfully employed several techniques in the Antrim formation, such as down-hole progressive cavity pumps, plunger lift and stainless steel gas lift technology, reduced density spacing, cased and multiple completions and new fracturing strategies, in order to increase production of its recoverable reserves and to minimize expenses and well workovers. Antrim shale has been determined to be a non-conventional fuel source qualifying for the Section 29 Credit under the IRC, and the Company, as part of the CMS Energy consolidated group, expects to be able to utilize such credits to a substantial extent. See "-- Tax Matters -- Section 29 Credits." Taking into account the Terra Acquisition, the Company operates over 1,200 Antrim gas wells, or over 25% of all producing gas wells in the Antrim formation, making the Company the largest operator of gas wells in the Antrim formation. Terra is currently serving as operator of projects involving the planned drilling of an additional 260 Antrim development wells by December 31, 1995. As of June 30, 1995, after giving effect to the Terra Acquisition, estimated net proved reserves in the Company's Antrim projects totaled 218.0 Bcf of natural gas (36.3 MMBoe). Estimated gross gas production for the month of September 1995 from over 2,500 producing Antrim gas wells in which the Company has an interest averaged 215.0 MMcf of natural gas per day, of which the Company's net share was 42.8 MMcf per day. The Company also has a sizeable inventory of unproved acreage in the Antrim producing trend and management believes that a number of its wells, including certain of those acquired in the Terra Acquisition, have substantial potential for improved recovery. The Company expects that capital expenditures for 1995 relating to its Antrim interests will total $15.0 million for its share of the costs of drilling 320 development wells, including non-operated wells, and construction of flowlines and production facilities. The Company made capital expenditures of $3.6 million during the first nine months of 1995. The Company expects to make capital expenditures totaling $16.7 million in 1996 for its share of the costs of drilling approximately 300 Antrim development wells and constructing flowlines and facilities to serve the new wells. OTHER MICHIGAN The Company discovered the Kalkaska 21 Field in 1971 and commenced production from the first of 14 wells in 1972. The Company owns a 100% working interest in and operates this field. As of June 30, 1995, net proved reserves in the field totaled 6.3 Bcf of natural gas (1.1 MMBoe) and 0.5 MMBbls of oil. Estimated gross production for the month of September 1995 from nine producing wells averaged 372 Bopd and 170.0 Mcf of natural gas per day, of which the Company's net share was 324 Bopd and 149.0 Mcf of natural gas per day. Horizontal wells and secondary recovery methods are being employed in the project. The Company also operates two natural gas processing plants at the field. No significant capital expenditures with respect to this field are planned for 1995 or 1996. As of June 30, 1995, other Michigan properties contained net proved reserves of 14.2 Bcf of natural gas (2.4 MMBoe) and 0.7 MMBbls of oil. Estimated net production for the month of September 1995 from other Michigan producing wells was 8.6 MMcf of natural gas per day and 600 Bopd. 40 43 GULF COAST REGION One of the Company's most significant natural gas discoveries in recent years occurred in early 1994 with the successful drilling to a depth of 19,260 feet and completion of the UNOCAL Louisiana Furs C 16 exploratory well in the Freshwater Bayou Field in Vermilion Parish, Louisiana. The discovery flowed natural gas at a rate of 30.6 MMcf per day and 192 Bcpd. The Company has a 10% working interest in the project, in which the other participants are Unocal Corporation, as operator, The Louisiana Land and Exploration Company and the Vincent Joseph Duncan Trust. In addition to the exploratory well, four successful development wells have been drilled in 1994 and 1995. As of June 30, 1995, estimated gross proved natural gas reserves in the field totaled 355.2 Bcf of natural gas, with net reserves to the Company of 29.4 Bcf of natural gas (4.9 MMBoe), and 3.0 MMBbls of condensate, with net reserves to the Company of 0.2 MMBbls of condensate. Estimated gross production for the month of September 1995 from three of the five wells averaged 133.0 MMcf per day, of which the Company's net share was 11.0 MMcf per day. Production from the remaining two wells commenced in October 1995. The Company expects that capital expenditures for 1995 will total $4.1 million for its share of the costs of drilling, completing and equipping development wells and expansion of natural gas processing and production facilities. The Company made capital expenditures of $2.8 million during the first nine months of 1995. One exploratory well may be drilled in 1996 to complete evaluation of the acreage block. The Company expects that its share of capital expenditures for such well, if drilled, and for other operations in the field, will be $1.0 million in 1996. The Company expects that capital expenditures relating to other activities in the Gulf Coast region for 1995 will total $6.2 million. The Company made capital expenditures of $5.7 million during the first nine months of 1995 relating to other activities in the region. The Company expects that capital expenditures for other operations in the region will be $3.2 million in 1996. GULF OF MEXICO The Company has been active in the Gulf of Mexico since 1970 and currently holds working interests varying from 10.0% to 37.5% in six producing blocks and 17 undeveloped blocks in the Gulf, including those referred to in the following paragraph. The Company does not operate in the Gulf of Mexico. Operators of the Company's blocks include The Louisiana Land and Exploration Company, Oryx Energy Company, Pogo Producing Company, Vastar Resources, Inc. and Apache Corporation. As of June 30, 1995, estimated gross proved reserves in the Company's producing blocks totaled 18.4 Bcf of natural gas and 1.5 MMBbls of oil, with respective net reserves to the Company of 3.8 Bcf (0.6 MMBoe) and 0.2 MMBbls. Estimated gross production for the month of September 1995 from the six producing blocks averaged 36.8 MMcf gas per day and 2,195 Bopd, of which the Company's net share was 8.7 MMcf per day and 335 Bopd. The Company's interests in the Gulf of Mexico include a recently completed successful development well on Galveston Block 313, which as of early September 1995 was flowing 15.3 MMcf of gas per day and 313 Bcpd. The Company's working interest in Galveston 313 is 37.5%. The Company participated in both the March 1994, the March 1995 and the September 1995 outer continental shelf federal offshore sales covering the central Gulf of Mexico, offshore Louisiana. Successful bids were filed on Vermilion Block 335 and Vermilion Block 346 with Pogo Producing Company as operator (with the Company's working interest being 25% and 33.33%, respectively), Ship Shoal Block 367 with Vastar Resources, Inc., as operator (with the Company's working interest being 10%) and West Cameron Block 567 and Galveston Block 331 with Apache Corporation as operator (with the Company's working interest being 25% and 33.3%, respectively). Ship Shoal Block 367 is located southwest of the Ship Shoal Block 349 subsalt discovery recently made by Phillips Petroleum Corporation. The Company will participate with its partners in acquiring and interpreting 3-D seismic data in anticipation of drilling a subsalt well on the block in 1996 or 1997. The Company has an interest in three other blocks in the Ship Shoal area surrounding the subsalt discovery. Plans are underway to evaluate the subsalt potential of each of these blocks. The Company expects that capital expenditures for 1995 will total $5.3 million principally for its share of the costs of lease and seismic acquisition programs and the drilling of three wells in the Gulf of Mexico. The Company made capital expenditures of $2.1 million during the first nine months of 1995. The Company expects to make capital expenditures of up to $8.4 million in 1996 for its share of the costs of drilling at least two exploratory wells in the Gulf. 41 44 OTHER The Company is a member of two consortia which have acquired an aggregate of 38,200 acres in the Lodgepole play, an oil project, in the Williston Basin in North Dakota, of which the Company's net share is an aggregate of 7,800 acres. One of the consortia has acquired one 3-D seismic survey of 30 square miles relating to this acreage, and a second 3-D seismic survey is planned. The Company also has interests in producing, undeveloped and unproved properties in several other areas in the U.S. DESCRIPTION OF NON-U.S. OPERATIONS SOUTH AMERICA Republic of Ecuador ("Ecuador"). A consortium in which the Company has a 14% working interest was awarded the Oriente Block 16 concession in 1986. The consortium later acquired, pursuant to special service contracts, development rights for the Tivacuno Field located north of Block 16 and for the Capiron Field which has been unitized with the Bogi Field located in Block 16. The other members of the consortium include Maxus Ecuador, Inc., Overseas Petroleum Investment Corp. (the Taiwanese state oil company), Murphy Oil Company, Ltd., and Canam Offshore Limited. The project is operated by Maxus Energy Corporation, a recently acquired subsidiary of YPF Sociedad Anonima. By the end of 1989, the consortium had acquired, processed and interpreted over 2,500 kilometers of seismic data, leading to the drilling of eight exploratory wells. Of these eight wells, seven were commercial discoveries. The consortium prepared a development plan, approved by the Ecuadorian Minister of Energy and Mines in 1991, covering five fields. Implementation of the plan commenced in 1992 and development thereunder continues to proceed. Production commenced in the Tivacuno Field in May 1994, in the Bogi-Capiron Field in June 1994 and in the Amo Field in December 1994. Production facilities, an oil pipeline and roads have been completed, resulting in oil being delivered through blending facilities at Shushufindi for transport via the Trans-Andean pipeline to the Pacific Ocean for export. As of June 30, 1995, estimated gross proved reserves in Block 16 and the Tivacuno and Capiron Fields totaled 152.6 MMBbls of oil, with net reserves to the Company of 16.7 MMBbls. Estimated gross production for the month of September 1995 from 16 producing wells averaged 31,201 Bopd, of which the Company's net share was 3,187 Bopd. The Company expects that capital expenditures for 1995 will total $15.6 million for its share of the costs of drilling 12 development wells and constructing roads, flowlines and certain production facilities. The Company made capital expenditures of $11.9 million during the first nine months of 1995. The Company expects to make capital expenditures totaling $15.0 million in 1996 for its share of the costs relating to the planned drilling of 10 development wells and the construction of additional facilities and flowlines to serve the new wells. The Block 16 project is located in a tropical rain forest environment. Extensive environmental impact assessments have been completed and the development plan has been designed to minimize impacts to the forest. The plan provides for controlled access to the development area, provides for strict levels of compliance and is designed to produce minimal disruption within the project area. Production in Block 16 and related fields is currently curtailed due to a limitation in the capacity of the Trans-Andean pipeline to 345,000 Bopd, of which Block 16's share as of September 30, 1995 was 33,000 Bopd. The Ecuadorian government has solicited bids for expansion of pipeline capacity to 460,000 Bopd but has not to date awarded a contract for such expansion. Such expansion, if undertaken, is expected to be completed no earlier than 1997. The reserves in the fields in the southern end of the block, including the Amo, Iro, Diami and Ginta Fields, have not yet been officially declared part of the national petroleum reserve by the Ecuadorian Oil Ministry. Receipt of such declaration would give the Block 16 consortium a larger pro-rated share of Trans-Andean pipeline capacity. However, the Company can give no assurance that pipeline curtailment will not limit production in Block 16 for the foreseeable future. 42 45 With lower worldwide oil prices and increases in total project costs reducing the overall economic benefit of Block 16 and related fields to the Ecuadorian government, the Ministry of Energy and Mines in Ecuador has notified the members of the consortium with interests in these fields that they should investigate alternatives for improving project economics to the Ecuadorian government, including the renegotiation of the service contract governing the Company's interest in these fields. The Ecuadorian government has significant leverage to force changes due to its broad governmental and regulatory powers. Discussions with the Ecuadorian government concerning various alternatives began in September 1995 and will likely continue for the next several months. See "Risk Factors -- Risk of Ecuador Contract Renegotiation." Republic of Venezuela ("Venezuela"). A consortium in which the Company is a member was awarded the Colon Unit in Venezuela's Marginal Fields Reactivation Program in 1994. The Company has a 29.17% working interest in the project, in which the other participants are Tecpetrol International, Inc., as operator, Wascana de Venezuela C.A. and Corexland B.V. On May 1, 1995, the consortium assumed responsibility for the unit. As of June 30, 1995, estimated gross proved reserves in the unit totaled 86.7 MMBbls of oil, with net reserves to the Company of 11.3 MMBbls. Estimated gross production during the month of September 1995 from 50 producing wells averaged 3,748 Bopd, of which the Company's net share was 479 Bopd. The operating services agreement among the consortium and Maraven commits the consortium to make capital and operating expenditures of $160.0 million over three years commencing in May 1995. The Company's share of costs relating to the project over this period is estimated to be approximately $47.0 million ($38.0 million for capital expenditures and $9.0 million for operating expenditures). The Company expects that capital expenditures for 1995 will total $12.4 million for its share of the costs of production refitting, reworks and drilling 11 development wells. The Company made capital expenditures of $4.5 million through September 30, 1995. The Company expects to make capital expenditures totaling $18.7 million in 1996 for its share of the costs of drilling 12 development wells and three exploratory wells, workovers and repair of existing wells and facilities and both conventional and 3-D seismic surveys. Republic of Colombia ("Colombia"). In June 1994, the Company acquired from Sun Company, Inc. all the capital stock of Sun Colombia, whose sole asset is a 33.33% working interest in the Espinal Block located in Colombia's Upper Magdalena Valley. LASMO Oil (Colombia) Limited ("LASMO") is the operator of and has the remaining working interest in this project. At the time of the Company's acquisition of Sun Colombia, production from the block was 4,000 Bopd (gross) from two wells in the Purificacion field. Subsequently, a third Purificacion development well was drilled and placed on line to replace one of the two producing wells. Estimated gross production for the month of September 1995 averaged 5,815 Bopd of which the Company's share was 675 Bopd. In addition to these two producing wells, the block contains three undeveloped discoveries. Development plans call for bringing two of the undeveloped fields on the block, Venganza and Revancha, into production by the second quarter of 1996. The last undeveloped field, Chenche, is scheduled to be developed in 1997 or sometime thereafter. As of June 30, 1995, estimated gross proved reserves in the block totaled 44.7 MMBbls of oil, with net reserves to the Company of 5.6 MMBbls. The Company expects that capital expenditures for 1995 will total $3.9 million for its share of the costs of drilling one development well in the Revancha Field and constructing a pipeline, flowlines and production facilities. The Company made capital expenditures of $3.4 million during the first nine months of 1995. The Company believes that the Espinal Block holds significant exploration potential. LASMO and the Company have obtained a detailed seismic survey of the block which the Company expects will lead to the drilling of three exploratory wells in 1996. Costs to the Company for 1996 capital expenditures relating to the block are expected to total $9.1 million. The association contract among LASMO, Sun Colombia and Empressa Colombiana de Petroleos ("Ecopetrol"), the state oil company, provides for an option for Ecopetrol to assume a 50% working interest in the development and production of reserves on a field-by-field basis. Ecopetrol has exercised this option with respect to the Purificacion Field, and accordingly the Company's working interest in such field is expected to be 16.7% over the remaining life of the contract. The Company has been involved in Colombia since 1981 when it initiated exploration efforts leading to discoveries in 1988 and 1989 on the Cano de la Hermosa Block. As of June 30, 1995, estimated gross proved 43 46 reserves in the block totalled 1.4 MMBbls of oil, with net reserves to the Company of 1.1 MMBbls. Estimated gross production during the month of September 1995 from two wells on the block averaged 500 Bopd, of which the Company's net share was 378 Bopd. The Company anticipates capital expenditures of $0.3 million in 1995 and $1.8 million in 1996 in connection with drilling one development well. AFRICA Republic of the Congo (the "Congo"). As a result of the Walter Acquisition, the Company acquired a 43.75% working interest in and became operator of the Marine I Exploration Permit offshore the Congo in West Africa which includes the Yombo Field. Other participants in the project are Nuevo Congo Company, Kuwait Foreign Petroleum Exploration Co. K.S.C. and Hydro-Congo, the Congolese state oil company, whose interest is being carried by the other participants. The field has been producing since 1991. As of June 30, 1995, estimated gross proved reserves totaled 50.0 MMBbls of oil, with net reserves to the Company of 15.9 MMBbls. Estimated gross production during the month of September 1995 from 20 producing wells averaged 10,860 Bopd, of which the Company's net share was 3,400 Bopd. Oil is produced into a self-contained floating production, storage and off-loading vessel anchored on site. The vessel's storage capacity is over one MMBbls of oil. The Company expects that capital expenditures for 1995 will total $7.5 million for its share of the costs of drilling two development wells. The Company made capital expenditures of $2.8 million during the first nine months of 1995. The Company expects to make capital expenditures totaling $11.6 million in 1996 for its share of costs relating to the planned drilling of eight development wells. Deeper objectives within the Yombo Field and undrilled structures on additional acreage within the Marine I Exploration Permit remain to be explored. Republic of Equatorial Guinea ("Equatorial Guinea"). In 1991, the Company joined in the development of the Alba Field, located within offshore Blocks A-12, A-13, B-12 and B-13, Equatorial Guinea. The Company's initial working interest in these blocks of 16.67% increased to 40.125% upon consummation of the Walter Acquisition in February 1995. By virtue of the Walter Acquisition, the Company became the operator of the project, the other participants in which include Samedan of North America, Globex International, Axem Resources, Inc. and Walter Oil & Gas Corporation. Production of condensate from the field commenced in December 1991. As of June 30, 1995, estimated gross proved reserves in the field totaled 25.2 MMBbls of condensate, with net reserves to the Company of 8.5 MMBbls, 9.4 MMBls (gross) of plant products, 3.0 MMBls net to the Company, and 31.3 Bcf of natural gas, 10.7 Bcf net to the Company. Estimated gross production for the month of September 1995 from two producing wells averaged 6,226 Bcpd, of which the Company's net share was 1,844 Bcpd. The condensate is being recovered, processed and sold for export. The residue gas is not currently being utilized due to the lack of a proximate market. The participants in the block recently joined with the government of Equatorial Guinea for the development of an LPG extraction plant which is scheduled for completion in late 1996. The cost of the plant is projected to be approximately $20 million, of which the Company's share is $8 million. Production is expected to be approximately 2,500 Bbls per day of LPG and an additional 400 Bcpd. The Company, as operator, has acquired a 3-D seismic survey of both the Alba Field and prospective acreage on the northern portion of the blocks. The seismic program is designed to identify a suitable location for a committed exploratory well and to study the Alba Field to determine the location of future development wells. Recent activity by other operators on nearby blocks has indicated exploration potential for the area. The Company expects that capital expenditures for 1995 will total $5.9 million for its share of the costs of conducting the 3-D seismic survey and construction of the LPG extraction plant. The Company made capital expenditures of $2.2 million during the first nine months of 1995. The Company expects to make capital expenditures totaling $9.0 million in 1996 for its share of costs relating to the planned drilling of two exploratory wells and completion of the construction of the LPG extraction plant. Republic of Tunisia ("Tunisia"). As a result of the Walter Acquisition, the Company acquired a 100% working interest in and became the operator of the El Franig concession. A shut-in gas discovery is located within the concession. Testing of this well began in October 1995. No reserves have been attributed to this 44 47 project pending the outcome of testing. If such testing proves successful, CMS Generation Co., or another CMS Energy affiliate, may become involved in the project by providing gas transmission and electric generation facilities. The Company estimates that capital expenditures for 1995 will total $1.5 million. The Company has made capital expenditures of less than $0.1 million during the first nine months of 1995. If warranted by test results, the Company expects to make capital expenditures totaling $3.0 million in 1996 for further development of the discovery. MIDDLE EAST Republic of Yemen ("Yemen"). The Company, through its 50% ownership of Comeco Petroleum, Inc., holds a 14.28% working interest in the East Shabwa Block in Yemen. Complex Resources N.L. has an option exercisable by March 31, 1996 to buy 17.5% of Comeco Petroleum, Inc.'s issued capital in the form of nonvoting shares at a price currently estimated to be $4.5 million. Other participants in the East Shabwa Block are Total Yemen, as operator, Unocal Yemen Limited, Kuwait Foreign Petroleum Exploration Co. K.S.C. and Command Petroleum Holdings N.L. The block contains three discoveries and a number of prospects and leads. A seismic program was completed in 1994 with a view to moving forward with development. As of June 30, 1995, estimated gross proved reserves in the block totaled 28.1 MMBbls of oil, with net reserves to the Company of 2.6 MMBbls. The three discoveries in the East Shabwa Block are the Kharir, Atuf N.W. and Wadi Taribah Fields. The discovery well of the Kharir Field, drilled in 1992, tested oil at a combined rate of 3,400 Bopd. Two appraisal wells have been drilled on the Kharir structure and tested at rates up to 12,250 Bopd. The discovery well of the Atuf N.W. #1 Field encountered high quality oil pays on a separate structure and was cased for testing at a later date. The discovery well of the Wadi Taribah Field, drilled in August 1995 tested oil at the rate of 1,459 Bopd. The East Shabwa Block's production is anticipated to commence in mid-1997. Construction of production facilities, flowlines and pipelines is scheduled to begin during the second half of 1996. The Company expects that capital expenditures for 1995 will total $5.1 million for its share of the costs of drilling two exploratory wells and two development wells and constructing pipelines and production facilities. The Company made capital expenditures of $2.3 million during the first nine months of 1995. The Company expects to make capital expenditures totaling $5.7 million in 1996 for its share of the costs relating to the planned drilling of two exploratory wells and one development well and continuing with pipeline and facilities construction. OTHER NON-U.S. In May 1995, the Company sold its 10% working interest in the Black Stump, Bodalla South and Kenmore producing licenses in Australia for approximately $2.2 million. Sales are pending with respect to the Company's interests in properties in New Zealand and Papua New Guinea. The Company has working interests of less than 10% in each of the properties. RESERVES The Company has interests in producing wells located in ten states and offshore the Gulf of Mexico in the U.S. and in six foreign countries (excluding two countries where the Company has properties whose disposition is pending) with most of its estimated proved reserves of natural gas located in three natural gas producing areas of the United States (northern Michigan, the Gulf Coast region and the Gulf of Mexico) and most of its estimated proved reserves of oil located in South America (Ecuador, Venezuela and Colombia) and West Africa (the Congo and Equatorial Guinea). At June 30, 1995, the Company had estimated proved reserves of 68.9 MMBbls of oil and 298.1 Bcf of natural gas, or a total of 118.6 MMBoe. 45 48 The following table sets forth the Company's net interest in estimated quantities of developed and undeveloped proved oil and natural gas reserves at June 30, 1995, after giving effect to the Terra Acquisition, as prepared by Ryder Scott, independent petroleum reserve engineers for the Company.
OIL AND CONDENSATE (MMBBLS)* NATURAL GAS (BCF) TOTAL (MMBOE) ------------------------------- ------------------------------- ------------------------------- PERCENT DEVELOPED UNDEVELOPED TOTAL DEVELOPED UNDEVELOPED TOTAL DEVELOPED UNDEVELOPED TOTAL DEVELOPED U.S.............. 2.0 0.1 2.1 248.7 32.9 281.6 43.4 5.6 49.0 88.6% South America.... 13.9 20.8 34.7 -- -- -- 13.9 20.8 34.7 40.1 Africa/Middle East........... 18.0 12.0 30.0 -- 10.7 10.7 18.0 13.8 31.8 56.6 Other............ 0.4 1.7 2.1 5.8 -- 5.8 1.4 1.7 3.1 45.2 ---- ---- ---- ----- ---- ----- ---- ---- ----- ---- Total........ 34.3 34.6 68.9 254.5 43.6 298.1 76.7 41.9 118.6 64.7% ==== ==== ==== ===== ==== ===== ==== ==== ===== ====
- ------------------------- * Oil and condensate includes 0.2 MMBbls and 3.0 MMBbls, respectively, of U.S. and non-U.S. NGLs. The Company retained Ryder Scott to prepare the above reserve estimates at June 30, 1995. A letter from Ryder Scott relating to their reserve report, dated October 2, 1995, is included as Appendix A hereto. There are numerous uncertainties inherent in estimating quantities of proved oil and natural gas reserves and in projecting future rates of production and timing of development expenditures, including many factors beyond the control of the producer. The reserve data set forth in this Prospectus represent only estimates. Reserve engineering is a subjective process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. As a result, estimates of different engineers, including those used by the Company, may vary. In addition, results of drilling, testing and production subsequent to the date of an estimate may justify revision of such estimates, and such revisions may be material. Accordingly, reserve estimates are generally different from the quantities of oil and natural gas that are ultimately recovered. As an operator of domestic oil and natural gas properties, the Company has filed Department of Energy Form EIA-23, "Annual Survey of Oil and Gas Reserves," as required by Public Law 93-275. There are differences between the reserves as reported on Form EIA-23 and as reported herein. The differences are attributable to the fact that Form EIA-23 requires that an operator report on the total reserves attributable to wells which are operated by it, without regard to ownership (i.e., reserves are reported on a gross operated basis, rather than on a net interest basis). The following table sets forth, at September 30, 1995, the standardized measure of discounted future net cash flows (in thousands) attributable to the Company's estimated proved reserves at such date as prepared by the Company's internal engineers.
SOUTH AFRICA & TOTAL U.S. AMERICA MIDDLE EAST* OTHER WORLDWIDE Future cash flows....................... $577,369 $472,746 $414,517 $39,939 $1,504,571 Future production costs................. 218,438 111,842 185,913 8,497 524,690 Future development costs................ 10,496 59,794 25,564 6,451 102,305 -------- -------- -------- ------- ---------- Total costs...................... 228,934 171,636 211,477 14,948 626,995 Future net cash flows before taxes...... 348,435 301,110 203,040 24,991 877,576 Income tax expenses (benefit)........... (15,271) 56,230 86,304 5,145 132,408 -------- -------- -------- ------- ---------- Future net cash flows................... 363,706 244,880 116,736 19,846 745,168 Discount to present value at 10% per annum................................. 110,328 74,849 41,197 9,817 236,191 -------- -------- -------- ------- ---------- Standardized measure of discounted future net cash flows................. $253,378 $170,031 $ 75,539 $10,029 $ 508,977 ======== ======== ======== ======= ==========
- ------------------------- * Includes the Company's equity interests in the East Shabwa Block in the Republic of Yemen. 46 49 The standardized measure of discounted future net cash flows from estimated production of the Company's proved oil and gas reserves after income taxes is presented in accordance with the provisions of Statement of Financial Accounting Standards No. 69, "Disclosures about Oil and Gas Producing Activities" (SFAS No. 69). In computing this data, assumptions and estimates have been utilized, and no assurance can be given that such assumptions and estimates will be indicative of future economic conditions. The Company cautions against interpreting this information as a forecast of future economic conditions or revenues. Future net cash flows are determined by using estimated quantities of proved reserves and the periods in which they are expected to be developed and produced based on September 30, 1995 economic conditions. Estimated future production is priced at September 30, 1995, except where fixed and determinable price escalations are provided by contract. The resulting estimated future net cash flows are reduced by estimated future costs to develop and produce the proved reserves based on September 30, 1995 cost levels, but not for debt service and general and administrative expenses. The discounted estimated future net cash flows referred to in this Prospectus should not be construed as the current market value of the estimated oil and natural gas reserves attributable to the Company's properties. In accordance with applicable requirements of the Commission, the discounted estimated future net cash flows from proved reserves are generally based on prices and costs as of the date of the estimate, whereas actual future prices and costs may be materially higher or lower. Actual future net cash flows also will be affected by factors such as the amount and timing of actual production, supply and demand for oil and natural gas, curtailments or increases in consumption by oil and natural gas purchasers and changes in governmental regulations or taxation. The timing of actual future net cash flows from proved reserves, and actual discounted cash flow, will be affected by the timing of both the production and the incurrence of expenses in connection with development and production of oil and natural gas properties. In addition, the calculation of the discounted estimated future net cash flows using a 10% discount per annum as required by the Commission is not necessarily the most appropriate discount factor based on interest rates in effect from time to time and risks associated with the Company's reserves or the oil and natural gas industry in general. For additional information concerning reserves, the future net cash flows and the standardized measure of discounted future net cash flows to be derived from the Company's reserves calculated in accordance with the provisions of SFAS No. 69, see "Risk Factors -- Uncertainty of Reserve Estimates" and Supplemental Information -- Oil and Gas Producing Activities in the Consolidated Financial Statements included elsewhere herein. 47 50 WELLHEAD VOLUMES, PRICES AND PRODUCTION COSTS The following table sets forth certain information regarding the Company's net wellhead production volumes of and average wellhead prices received for sales of oil and condensate, natural gas and natural gas liquids, and average production costs of sales volumes, during each of the three years in the period ended December 31, 1994 and the nine-month periods ended September 30, 1994 and 1995 and pro forma for the year ended December 31, 1994 and the nine months ended September 30, 1995, giving effect to the Recent Acquisitions as if such acquisitions had occurred on the first day of each such period.
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, ----------------------------- --------------------------------------- PRO FORMA PRO FORMA 1994 1995 1995 1992 1993 1994 1994 SALES VOLUME: Oil and Condensate (MBbls): U.S........................ 518 463 485 994 870 690 717 South America.............. 409 1,269 1,269 -- 192 720 720 Africa/Middle East......... 181 1,404 1,600 149 290 283 2,037 Other...................... 284 83 83 274 364 332 332 ------ ------ ------- ------ ------ ------ ------- Total.................... 1,392 3,219 3,437 1,417 1,716 2,025 3,806 ====== ====== ======= ====== ====== ====== ======= Natural Gas (MMcf): U.S........................ 14,793 18,903 20,797 17,384 18,197 20,300 22,679 Other...................... 215 86 86 194 290 246 246 ------ ------ ------- ------ ------ ------ ------- Total.................... 15,008 18,989 20,883 17,578 18,487 20,546 22,925 ====== ====== ======= ====== ====== ====== ======= Natural Gas Liquids (MBbls): U.S........................ 123 172 172 291 186 193 193 ====== ====== ======= ====== ====== ====== ======= AVERAGE SALES PRICES: Oil and Condensate (per Bbl): U.S........................ $15.64 $16.63 $ 16.66 $19.25 $16.58 $15.22 $ 15.25 South America.............. 10.20 13.22 13.22 -- 9.46 10.72 10.72 Africa/Middle East......... 15.29 14.09 13.99 19.32 17.14 15.97 13.31 Other...................... 12.10 13.94 13.94 16.55 14.89 12.32 12.32 Composite*............... 13.32 14.04 14.02 18.85 15.52 13.30 13.12 Natural Gas (per Mcf): U.S........................ $ 2.05 $ 1.73 $ 1.68 $ 1.97 $ 2.24 $ 1.95 $ 1.93 Other...................... 1.00 1.33 1.33 0.51 0.82 1.04 1.04 Composite*............... 2.11 1.88 1.82 1.89 2.17 2.05 2.02 Natural Gas Liquids (per Bbl): U.S........................ $14.84 $14.57 $ 14.57 $16.55 $15.24 $14.90 $ 14.90 AVERAGE PRODUCTION COSTS (PER BOE): U.S........................... $ 3.40 $ 2.58 $ 2.46 $ 2.83 $ 3.07 $ 3.29 $ 3.21 South America................. 3.85 4.97 4.97 -- 3.23 3.94 3.94 Africa/Middle East............ 7.51 4.73 4.49 6.66 4.00 6.03 4.20 Other......................... 1.70 5.03 5.03 2.00 1.64 2.02 2.02 Composite................ 3.50 3.54 3.50 2.91 3.01 3.42 3.48
- ------------------------- * Adjusted to reflect amounts received or paid under futures contracts entered into to hedge the price of production. 48 51 ACREAGE The following table sets forth the developed and undeveloped acreage in which the Company holds a leasehold, mineral or other interest at September 30, 1995. Excluded is acreage in which the Company's interest is limited to owned royalty, overriding royalty and other similar interests.
DEVELOPED UNDEVELOPED TOTAL ------------------ ---------------------- ---------------------- GROSS NET GROSS NET GROSS NET U.S.: Alabama....................... 320 2 1,065 133 1,385 135 Indiana....................... -- -- 38,444 3,844 38,444 3,844 Louisiana..................... 14,326 1,476 1,647 1,358 15,973 2,834 Michigan...................... 199,214 71,348 549,160 191,714 748,374 263,062 Mississippi................... 5,765 622 1,185 296 6,950 918 Montana....................... 680 138 -- -- 680 138 New Mexico.................... 597 14 280 240 877 254 North Dakota.................. 640 27 45,872 13,079 46,512 13,106 Offshore Gulf of Mexico....... 34,046 8,305 97,034 24,627 131,080 32,932 Ohio.......................... -- -- 17,864 4,685 17,864 4,685 Oklahoma...................... 22,983 4,239 1,283 1,120 24,266 5,359 Texas......................... 24,456 2,627 19,337 5,033 43,793 7,660 Wyoming....................... 1,025 11 -- -- 1,025 11 ------- ------- --------- --------- --------- --------- Total U.S................ 304,052 88,809 773,171 246,129 1,077,223 334,938 NON-U.S.: Colombia...................... 3,396 3,396 255,908 85,217 259,304 88,613 Congo......................... 2,000 917 41,196 17,981 43,196 18,898 Ecuador....................... 19,500 2,730 474,500 66,430 494,000 69,160 Equatorial Guinea............. 26,651 10,694 283,981 113,947 310,632 124,641 New Zealand*.................. 17,139 1,390 7,413 602 24,552 1,992 Papua New Guinea*............. -- -- 903,138 63,220 903,138 63,220 Tunisia....................... -- -- 135,782 67,891 135,782 67,891 Venezuela..................... 13,120 3,827 789,171 230,175 802,291 234,002 Yemen......................... -- -- 2,813,279 401,897 2,813,279 401,897 ------- ------- --------- --------- --------- --------- Total Non-U.S.............. 81,806 22,954 5,704,368 1,047,360 5,786,172 1,070,314 Total.................... 385,858 111,763 6,477,539 1,293,489 6,863,395 1,405,252 ======= ======= ========= ========= ========= =========
- ------------------------- * Properties in these countries are subject to agreements of sale. 49 52 PRODUCING WELL SUMMARY The following table sets forth the number of producing oil and natural gas wells in which the Company has ownership interests at September 30, 1995 in gross and net producing oil and natural gas wells:
OIL GAS TOTAL ------------- -------------- -------------- GROSS NET GROSS NET GROSS NET U.S.: Michigan Antrim................................... -- -- 2,092 412.8 2,092 412.8 Michigan Other.................................... 91 36.3 26 7.9 117 44.2 Freshwater Bayou.................................. -- -- 3 0.3 3 0.3 Offshore Gulf of Mexico........................... 23 2.9 38 5.3 61 8.2 All Other U.S..................................... 68 7.0 96 14.3 164 21.3 NON-U.S.: South America Ecuador........................................ 35 3.6 -- -- 35 3.6 Venezuela(1)................................... 73 9.7 -- -- 73 9.7 Colombia....................................... 6 2.7 -- -- 6 2.7 Africa/Middle East Congo.......................................... 20 6.3 -- -- 20 6.3 Equatorial Guinea.............................. 2 0.6 -- -- 2 0.6 Tunisia........................................ -- -- -- -- -- -- Yemen.......................................... 5 0.4 -- -- 5 0.4 Other New Zealand(2)................................. 9 0.7 2 0.1 11 0.8 Papua New Guinea(2)............................ 5 0.1 -- -- 5 0.1 --- ---- ----- ----- ----- ----- Total.......................................... 337 70.3 2,257 440.7 2,594 511.0 === ==== ===== ===== ===== =====
- ------------------------- (1) The group in which the Company participates assumed control of operations in May 1995. (2) Properties in these countries are subject to agreements of sale. Producing wells consist of producing wells and wells capable of production, including natural gas wells awaiting pipeline connections to commence deliveries and oil wells awaiting connection to production facilities. Wells that are completed in more than one producing horizon are counted as one well. Of the gross wells reported above, two had multiple completions. 50 53 DRILLING ACTIVITIES During each of the years ended December 31, 1992, 1993 and 1994, and the nine months ended September 30, 1995, the Company spent approximately $43.2 million, $55.5 million, $54.0 million and $39.4 million, respectively, for exploratory and development drilling. The Company drilled or participated in the drilling of gross and net wells as set out in the table below for the periods indicated (with the Company's participation in Antrim gas drilling shown separately):
YEAR ENDED DECEMBER 31, NINE MONTHS ------------------------------------------------------ ENDED SEPTEMBER 30, 1992 1993 1994 1995 --------------- --------------- -------------- -------------- GROSS NET GROSS NET GROSS NET GROSS NET U.S.: Development Wells Completed: Gas........................ 10.0 2.12 3.0 0.67 5.0 0.84 6.0 1.21 Oil........................ 13.0 0.74 1.0 0.20 1.0 0.29 -- -- Dry........................ 4.0 0.72 1.0 0.12 -- -- 1.0 0.28 Exploratory Wells Completed: Gas........................ 2.0 1.56 -- -- 5.0 1.86 2.0 1.17 Oil........................ 1.0 0.25 -- -- 2.0 0.56 -- -- Dry........................ 3.0 0.84 4.0 1.11 6.0 2.30 2.0 1.21 SOUTH AMERICA: Development Wells Completed: Oil........................ -- -- 6.0 0.84 10.0 1.42 7.0 0.98 AFRICA/MIDDLE EAST: Development Wells Completed: Gas........................ 1.0 0.16 -- -- -- -- -- -- Exploratory Wells Completed: Gas........................ -- -- -- -- -- -- -- -- Oil........................ -- -- -- -- -- -- 1.0 0.14 Dry........................ 3.0 0.31 -- -- -- -- -- -- OTHER: Development Wells Completed: Gas........................ -- -- -- -- -- -- 1.0 0.08 Oil........................ 3.0 0.27 2.0 0.16 3.0 0.28 1.0 0.08 Dry........................ 1.0 0.10 -- -- 2.0 0.16 -- -- Exploratory Wells Completed: Dry........................ -- -- 3.0 0.73 2.0 0.32 -- -- ----- ----- ---- ----- ---- ---- ---- ---- Total................. 41.0 7.07 20.0 3.83 36.0 8.03 25.0 5.71 ===== ===== ==== ===== ==== ==== ==== ==== MICHIGAN ANTRIM GAS WELLS:*..... 109.0 80.36 27.0 17.02 12.0 9.54 63.0 9.00 ===== ===== ==== ===== ==== ==== ==== ====
- ------------------------- * Includes drilling of 59.0 gross (6.5 net) wells by Terra from August 1 through September 30, 1995. Due to the success rates typically associated with drilling Antrim gas wells, the table above sets forth separately the Company's participation in such drilling activities. The success rate for these wells for each of the periods represented in the table above was 100%. The Company also participated in other wells during 1994 through farmouts, acreage contributions and other nonpaying interests. With the exception of Antrim gas wells, all of the Company's drilling activities are conducted on a contract basis with independent drilling contractors. Three drilling rigs were recently acquired by the Company in connection with the Terra Acquisition and are used in drilling certain Antrim gas wells. The Company owns no other material drilling equipment. Excluding the drilling of Antrim gas wells, at September 30, 1995, the Company was participating in the drilling or completion of one gross (0.1 net) well in the U.S., which was subsequently determined to be dry, two gross (0.47 net) wells in South America which will become productive when completed and one gross (0.14 net) well in Yemen which was subsequently determined to be dry. 51 54 MARKETING NATURAL GAS Approximately 60.0% of the Company's natural gas production is sold to various marketing companies on either the spot market or under short-term contracts (one year or less) providing for variable or market sensitive pricing. The balance of the Company's natural gas production is sold under long-term contracts at fixed prices with periodic adjustments based on contract formulas, principally to Consumers Power Company ("Consumers"), a local distribution company which is an affiliate of the Company. During the first nine months of 1995, sales to Consumers accounted for approximately 14.7% of the Company's consolidated revenues. See "Relationship and Certain Transactions with CMS Energy -- Gas Sales Agreements." The Company does not believe the loss of any purchaser would have a material adverse effect on its financial condition or results of operations due to the likely availability of other purchasers for the Company's production at comparable prices. OIL The Company markets its oil and condensate production from its Congo and Equatorial Guinea properties under short-term contracts at market prices on a cargo lot basis. The Company's oil production from its Ecuadorian and Colombian properties is sold by the respective operators of such properties under short-term contracts at market prices. The Company's oil production from its Venezuelan project is marketed by Maraven. With the exception of pipeline curtailment relating to Block 16 in Ecuador, see "Business and Properties -- Description of Non-U.S. Operations -- South America -- Republic of Ecuador," the Company has not experienced any material inability to market its oil as a result of limited access to transportation space. HEDGING ARRANGEMENTS The Company periodically enters into oil and natural gas price hedge arrangements to mitigate its exposure to price fluctuations on the sale of oil and natural gas. As of September 30, 1995, the Company had entered into gas price collar contracts on 1.22 Bcf of gas for delivery through December 1995 at prices ranging from $2.05 to $2.35 per MMBtu, an oil collar contract for delivery through December 1995 of 1,000 Bopd with a floor of $18.00 per Bbl and a ceiling of $19.95 per Bbl. The Company has also hedged certain of its gas supply obligations to the Midland Cogeneration Venture ("MCV") in the years 2001 through 2006 by entering into an agreement with Louis Dreyfus Exchanges Ltd. on May 1, 1989 to purchase the economic equivalent of 10,000 MMBtu per day at fixed, escalating prices starting at $2.82 per MMBtu in 2001. The settlement periods are each one year period ending December 31, 2001 through 2006 on 3.65 Bcf of natural gas. If the "floating price," generally the then current Gulf Coast spot price, for a period is higher than the "fixed price," the seller pays the Company the difference, and if the fixed price for a period is higher than the floating price, the Company pays the seller the difference. If a party's exposure at any time exceeds $2.0 million, that party is required to obtain a letter of credit in favor of the other party for the excess over $2.0 million, to a maximum of $10.0 million. At September 30, 1995, neither party was required to obtain a letter of credit. TITLE TO PROPERTIES As is customary in the oil and natural gas industry, the Company makes only a limited review of title to farmout acreage and to undeveloped U.S. oil and natural gas leases upon execution of the contracts and leases. Prior to the commencement of drilling operations, a thorough title examination is conducted and curative work is performed with respect to significant defects. To the extent title opinions or other investigations reflect title defects, the Company or other operator of the project, rather than the seller of the undeveloped property, is typically responsible to cure any such title defects at its expense. If the Company or other operator were unable to remedy or cure any title defect of a nature such that it would not be prudent to commence drilling operations on the property, the Company could suffer a loss of a portion of, or its entire investment in, the property. The Company has obtained title opinions on substantially all of its domestic producing properties and believes that it has satisfactory title to such properties in accordance with standards generally accepted in 52 55 the oil and natural gas industry. The Company's oil and natural gas properties are subject to customary royalty interests, liens for current taxes and other burdens which the Company believes do not materially interfere with the use of or affect the value of such properties. In the case of the Company's non-U.S. interests, the host government generally owns the minerals. The Company contracts with the government to explore, develop and produce oil and natural gas, and title opinions are not considered necessary. COMPETITION The oil and natural gas industry is highly competitive. The Company faces competition in all aspects of its business, including acquiring reserves, leases, licenses and concessions, obtaining the equipment and labor needed to conduct its operations and marketing its oil and natural gas. The Company's competitors include multinational energy companies, government-owned oil and natural gas companies, other independent oil and natural gas concerns and individual producers and operators. Because both oil and natural gas are fungible commodities, the principal form of competition with respect to product sales is price competition. The Company believes that its competitive position is also affected by its geological and geophysical capabilities, the qualification of certain of its U.S. natural gas interests for tax credits and ready access to markets for production. Many competitors have financial and other resources substantially greater than those available to the Company and, accordingly, may be better positioned to acquire and exploit prospects, hire personnel and market production. In addition, many of the Company's larger competitors may be better able to respond to factors such as changes in worldwide oil or natural gas prices or levels of production, the cost and availability of alternative fuels or the application of government regulations, which affect demand for the Company's oil and natural gas production and which are beyond the control of the Company. Moreover, many competitors have established strategic long-term positions and maintain strong governmental relationships in countries in which the Company may seek entry. The Company expects this high degree of competition to continue. GOVERNMENTAL REGULATION The Company's exploration, development, production and marketing operations are subject to regulation at the federal, state and local levels in the U.S. and by other countries in which the Company conducts business, including regulation relating to such matters as the exploration for and the development, production, marketing, pricing, transmission and storage of oil and natural gas, as well as environmental and safety matters. Failure to comply with such regulations could result in substantial liabilities to third parties or governmental entities, the payment of which could have a material adverse effect on the Company's financial condition or results of operations. The Company believes that it is in substantial compliance with such laws and regulations. However, there is no assurance that laws or regulations enacted in the future or the modification of existing laws or regulations will not adversely affect the Company's exploration for or development, production or marketing of oil or natural gas. In addition, non-U.S. properties, operations or investments may be adversely affected by local political and economic developments, exchange controls, currency fluctuations, royalty and tax increases, retroactive tax claims, import and export regulations and other foreign laws or policies as well as by laws and policies of the U.S. affecting foreign trade, taxation and investment. Furthermore, in the event of a dispute arising from non-U.S. operations, the Company may be subject to the exclusive jurisdiction of courts outside the U.S. or may not be successful in subjecting non-U.S. persons to the jurisdiction of courts in the U.S. The Company may also be hindered or prevented from enforcing its rights with respect to a governmental instrumentality because of the doctrine of sovereign immunity. U.S. REGULATION The oil and natural gas industry is subject to various types of regulation by federal, state and local authorities in the U.S. Legislation affecting the oil and natural gas industry is under constant review for amendment or expansion. Further, numerous departments and agencies, both federal and state, have issued rules and regulations affecting the oil and natural gas industry and its individual members, compliance with which is often difficult and costly and some of which may carry substantial penalties for non-compliance. The regulatory burden on the oil and natural gas industry increases its cost of doing business and, consequently, 53 56 affects its profitability. Inasmuch as such laws and regulations are frequently expanded, amended or reinterpreted, the Company is unable to predict the future cost or impact of complying with such regulations. Exploration and Production. Exploration and production operations of the Company are subject to various types of regulation at the federal, state and local levels. Such regulation includes requiring permits for the drilling of wells, maintaining bonding requirements in order to drill or operate wells, and regulating the location of wells, the method of drilling and casing wells, the surface use and restoration of properties upon which wells are drilled and the plugging and abandoning of wells. The Company's operations are also subject to various conservation laws and regulations. These include the regulation of the size of drilling and spacing units or proration units and the density of wells which may be drilled and the unitization or pooling of oil and natural gas properties. In this regard, some states allow the forced pooling or integration of tracts to facilitate exploration while other states rely on voluntary pooling of lands and leases. In addition, state conservation laws establish maximum rates of production from oil and natural gas wells, generally prohibit the venting or flaring of natural gas and impose certain requirements regarding the ratability of production. The effect of these regulations is to limit the amounts of oil and natural gas the Company can produce from its wells, and to limit the number of wells or the locations at which the Company can drill. A portion of the Company's oil and natural gas leases are granted by the federal government and administered by the Bureau of Land Management (the "BLM") and the Minerals Management Service (the "MMS"), both of which are federal agencies. Such leases are issued through competitive bidding, contain relatively standardized terms and require compliance with detailed BLM and MMS regulations and orders which regulate, among other matters, drilling and operations on these leases, calculation of royalty payments to the federal government and bonding requirements (and which are subject to change by the BLM and the MMS). For offshore operations, lessees must obtain MMS approval for exploration plans and development and production plans prior to the commencement of such operations. In addition to permits required from other agencies (such as the Coast Guard, Army Corps of Engineers and Environmental Protection Agency), lessees must obtain a permit from the BLM or the MMS prior to the commencement of drilling. The Mineral Lands Leasing Act of 1920 (the "MLLA") places limitations on the number of acres under federal leases that the Company may own in any one state. While subject to this law, the Company does not have a substantial federal lease acreage position in any state or in the aggregate. Natural Gas Marketing and Transportation. Federal legislation and regulatory controls in the U.S. have historically affected the price of the natural gas produced by the Company and the manner in which such production is marketed. The Federal Energy Regulatory Commission (the "FERC") regulates the interstate transportation and sale for resale of natural gas by interstate and intrastate pipelines. The FERC previously regulated the maximum selling prices of certain categories of gas sold in "first sales" in interstate and intrastate commerce under the Natural Gas Policy Act. Effective January 1, 1993, however, the Natural Gas Wellhead Decontrol Act (the "Decontrol Act") deregulated natural gas prices for all "first sales" of natural gas, which includes all sales by the Company of its own production. As a result, all sales of the Company's domestically produced natural gas may be sold at market prices, unless otherwise committed by contract. The FERC's jurisdiction over natural gas transportation and gas sales other than first sales was unaffected by the Decontrol Act. The Company's natural gas sales are affected by the regulation of intrastate and interstate gas transportation. In an attempt to restructure the interstate pipeline industry with the goal of providing enhanced access to, and competition among, alternative natural gas suppliers, the FERC, commencing in April 1992, issued Order Nos. 636, 636-A and 636-B ("Order No. 636") which have altered significantly the interstate transportation and sale of natural gas. Among other things, Order No. 636 required interstate pipelines to unbundle the various services that they had provided in the past, such as sales, transmission and storage, and to offer these services individually to their customers. By requiring interstate pipelines to "unbundle" their services and to provide their customers with direct access to pipeline capacity held by them, Order No. 636 has enabled pipeline customers to choose the levels of transportation and storage service they require, as well as to purchase natural gas directly from third-party merchants other than the pipelines and obtain transportation of such gas on a non-discriminatory basis. The effect of Order No. 636 has been to enable the 54 57 Company to market its natural gas production to a wider variety of potential purchasers. The Company believes that these changes generally have improved the Company's access to transportation and have enhanced the marketability of its natural gas production. To date, Order No. 636 has not had any material adverse effect on the Company's ability to market and transport its natural gas production. However, the Company cannot predict what new regulations may be adopted by the FERC and other regulatory authorities, or what effect subsequent regulations may have on the Company's activities. Further, even though the implementation of Order No. 636 on individual interstate pipelines is essentially complete, many of the individual pipeline restructuring proceedings, as well as Order No. 636 itself and the regulations promulgated thereunder, are subject to pending appellate review and could possibly be changed as a result of future court orders. In recent years the FERC also has pursued a number of other important policy initiatives which could significantly affect the marketing of natural gas. Some of the more notable of these regulatory initiatives include (i) a series of orders in individual pipeline proceedings articulating a policy of generally approving the voluntary divestiture of interstate natural gas pipeline-owned gathering facilities to pipeline affiliates, (ii) the completion of a rulemaking involving the regulation of interstate natural gas pipelines with marketing affiliates under Order No. 497, (iii) FERC's on-going efforts to promulgate standards for pipeline electronic bulletin boards and electronic data exchange, (iv) a generic inquiry into the pricing of interstate pipeline capacity, (v) efforts to refine FERC's regulations controlling the operation of the secondary market for released interstate natural gas pipeline capacity, and (vi) a policy statement regarding market-based rates and other non-cost-based rates for interstate pipeline transmission and storage capacity. Several of these initiatives are intended to enhance competition in natural gas markets. While any resulting FERC action would affect the Company only indirectly, the ongoing, or, in some instances, preliminary evolving nature of these regulatory initiatives makes it impossible at this time to predict their ultimate impact upon the Company's activities. In Michigan, the pricing provisions of natural gas purchase contracts with utilities are subject to modification by regulatory authorities. A Michigan Court of Appeals opinion recently affirmed that the Michigan Public Service Commission ("MPSC") has the statutory authority under certain circumstances to approve and change the pricing provisions in gas purchase contracts between common purchasers, principally natural gas utilities such as Consumers, and Michigan natural gas producers such as the Company upon the petition of the common purchaser. The court found that producers in Michigan are charged with the knowledge that the MPSC has the power to inspect and interpret the price aspect of natural gas purchase contracts entered into by common purchasers and to determine the reasonableness of such prices. NON-U.S. REGULATION The Company's non-U.S. exploration, development and production of oil and natural gas are also subject to various types of governmental regulation. In addition, non-U.S. projects in which the Company has an interest generally involve complex contractual relationships with the host government which often contain extensive provisions governing the operation of such projects. The matters addressed by these regulations and contractual provisions include spacing and location of wells, maximum rates of production from wells, access to transportation facilities, permissible volumes for transport, well abandonment procedures and environmental protection. In addition, host governments often seek to insure that the local communities in the areas of activity are strengthened and developed with the view to a better social environment and that off-shore and coastal waters and on-shore areas remain suitable for other resource development projects. ENVIRONMENTAL MATTERS Extensive federal, state and local laws and regulations relating to health and environmental quality in the U.S. as well as environmental laws and regulations of other countries in which the Company operates affect nearly all of the operations of the Company. These laws and regulations set various standards regulating certain aspects of health and environmental quality, provide for penalties and other liabilities for the violation of such standards and establish, in certain circumstances, obligations to remediate current and former facilities and off-site locations. 55 58 The Company believes that its policies and procedures in the area of pollution control, product safety and occupational health are adequate to prevent unreasonable risk of environmental and other damage, and of resulting material financial liability, in connection with its business. However, significant liability could be imposed on the Company for damages, clean-up costs and/or penalties in the event of certain discharges into the environment, environmental damage caused by previous owners of property purchased by the Company or non-compliance with environmental laws or regulations. Such liability could have a material adverse effect on the Company's financial condition or results of operations. Moreover, the Company cannot predict what environmental legislation or regulations will be enacted in the future or how existing or future laws or regulations will be administered or enforced. Compliance with more stringent laws or regulations, or more vigorous enforcement policies of the regulatory agencies, could in the future require material expenditures by the Company for the installation and operation of systems and equipment for remedial measures, all of which could have a material adverse effect on the Company's financial condition or results of operations. For instance, legislation has been proposed in the U.S. Congress from time to time that would reclassify certain oil and natural gas exploration and production wastes as "hazardous wastes," which would make the reclassified wastes subject to more stringent handling, disposal and clean-up requirements. If such legislation were to be enacted, it could have a significant impact on the operating costs of the Company, as well as the oil and natural gas industry in general. State initiatives to further regulate the disposal of oil and natural gas wastes are also pending in certain states, and these various initiatives could have a similar impact on the Company. Finally, environmental regulations are becoming increasingly stringent and more vigorously enforced in other countries where the Company operates, raising similar concerns. The United States Oil Pollution Act of 1990 (the "OPA") and regulations promulgated thereunder impose a variety of requirements on persons who are or may be responsible for oil spills in waters of the U.S. Among other things, the OPA requires owners and operators of facilities and vessels that may be the source of an oil spill to develop plans for responding to an oil spill and to acquire or have available equipment necessary to respond to a reasonably foreseeable oil spill. The OPA also requires owners and operators of "offshore facilities" to establish $150 million in financial responsibility to cover environmental cleanup and restoration costs likely to be incurred in connection with an oil spill. On August 25, 1993, the MMS published an advance notice of its intention to prepare a rule under the OPA that would define "offshore facilities" to include all oil and natural gas facilities that have the potential to affect "waters of the United States." The term "waters of the United States" has been broadly defined to include inland waterbodies, including wetlands, playa lakes and intermittent streams. Since the Company owns or operates many oil and natural gas facilities that could affect "waters of the United States," the Company could become subject to the financial responsibility rule if it is proposed as described. Under the OPA, financial responsibility could be established through insurance, guaranty, indemnity, surety bond, letter of credit, qualification as a self-insurer or a combination thereof. It is unclear whether insurance coverage will be available as a practical matter because the statute provides for direct lawsuits against insurers who provide financial responsibility coverage, and most insurers have strongly protested this requirement. The Company cannot predict the final form of the financial responsibility rule that may be proposed by the MMS under the OPA or whether pending legislation may affect it, but if such a rule were adopted and were to apply to the Company, no assurance can be given as to the Company's ability to comply with such rule or the costs of such compliance. In addition, the Federal Water Pollution Control Act, also known as the Clean Water Act, and regulations promulgated thereunder, require containment of potential discharges of oil or hazardous substances and preparation of oil spill contingency plans. The Company believes that it has adequate procedures that address containment of potential discharges and spill contingency planning. The U.S. Environmental Protection Agency has recently increased its efforts to enforce compliance with spill containment and contingency planning requirements. The failure to comply with ongoing requirements or inadequate cooperation during a spill event may subject a responsible party to civil or criminal enforcement actions. The Comprehensive Environmental Response, Compensation and Liability Act, as amended ("CERCLA"), also known as the "Superfund" law, imposes liability, without regard to fault or the legality of the original conduct, on certain classes of persons who are considered to have contributed to the release of a "hazardous substance" into the environment. These persons include the owner or operator of the disposal site 56 59 or sites where the release occurred and companies that disposed or arranged for the disposal of the hazardous substances. Under CERCLA, such persons may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment and for damages to natural resources. Furthermore, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. Most states have comparable strict liability programs to address environmental contamination. The Company is engaged in a number of site remediation activities in Michigan. The Company believes that neither the costs nor any liabilities incurred in such activities would have a material adverse effect on its financial condition or results of operations. The Company's non-U.S. exploration, development and production activities are also generally subject to environmental controls which, although often not as precisely expressed by statute or regulation as those in the U.S., are viewed by the Company as generally establishing standards comparable to those in the U.S. In addition, in environmentally sensitive non-U.S. areas of operation, such as the rain forest in Ecuador where the Company has substantial interests, especially stringent measures and special provisions may be appropriate or required. Most of the Company's non-U.S. projects involve complex contractual relationships with the host government, and the sources of environmental regulation applicable to the Company's non-U.S. projects are often contractual rather than statutory or regulatory. Host governments generally require projects within their jurisdiction to employ technologically advanced methods for preventing, monitoring and remediating environmental disturbances and discharges. During the preparation of plans of development, the project operator is often required to prepare a comprehensive environmental management plan and to submit emergency preparedness and discharge clean-up contingency procedures. Management believes that the Company is in substantial compliance with applicable environmental laws and regulations and that continued compliance with existing requirements will not have a material adverse effect on the Company. OPERATIONAL RISKS AND INSURANCE The oil and natural gas business involves certain operating hazards such as well blowouts, cratering, explosions, uncontrollable flows of oil, natural gas or well fluids, fires, formations with abnormal pressures, pollution, releases of toxic gas and other environmental hazards and risks, any of which could result in substantial losses to the Company. The Company's offshore operations also are subject to the additional hazards of marine operations, such as severe weather, capsizing and collision. These hazards can cause personal injury and loss of life, severe damage to and destruction of property and equipment, pollution or environmental damages and suspension of operations. The availability of a ready market for the Company's oil and natural gas production also depends on the proximity of reserves to, and the capacity of, oil and natural gas gathering systems, pipelines, shipping, trucking and terminal facilities. In addition, the Company may be legally responsible for environmental damages caused by previous owners of property purchased or leased by the Company. As a result, the Company could incur substantial liabilities to third parties or governmental entities, the payment of which could reduce or eliminate the funds available for exploration, development or acquisitions or result in the loss of the Company's properties. In accordance with customary industry practices, the Company maintains insurance against some, but not all, of such risks and losses. The Company currently maintains coverage with respect to general liability, commercial property, workers' compensation, automotive liability and electronic equipment and, with respect to certain properties, political risk from OPIC. The Company also maintains an umbrella liability policy and operator's extra expense policies. All such insurance is subject to normal deductible levels. Among other things, coverage is not obtainable for certain types of environmental hazards. Insurance covering the risk of contamination is hard to obtain, costly and very restrictive. It is generally limited to sudden, accidental events that must be reported in a very limited period of time after occurrence to the insurer. 57 60 The occurrence of a significant adverse event, the risks of which are not fully covered by insurance, could have a material adverse effect on the Company's financial condition or results of operation. Moreover, there can be no assurance that the Company's insurance will be adequate to cover any losses or exposure to liability or that the Company will be able to maintain adequate insurance in the future at rates it considers reasonable. TAX MATTERS DUAL CONSOLIDATED LOSSES As a result of the Walter Acquisition and related transactions in February 1995, Walter became a wholly-owned subsidiary of CMS NOMECO. Among Walter's consolidated assets at such time were certain assets located in the Congo acquired from an affiliate of Amoco shortly prior to the Walter Acquisition. As a result of certain agreements entered into by Walter in connection with the acquisition of the Congolese assets, Walter agreed to become liable for tax liabilities incurred as a result of the recapture of "dual consolidated losses" utilized by Amoco for tax purposes in prior years, if a "triggering event" were to occur with respect to such assets or with respect to the stock of Walter or certain of its subsidiaries. As part of the Walter Acquisition, CMS Energy and CMS NOMECO became jointly and severally liable for Walter's obligation to Amoco and agreed to obtain the approval of Amoco prior to entering into transactions which could constitute triggering events. It is currently estimated that the additional tax liability that could be recaptured upon a triggering event would be approximately $78.2 million, plus an interest factor thereon. CMS Energy has subsequently agreed to indemnify CMS NOMECO (the "CMS Energy Indemnity") for any liability relating to recapture of such dual consolidated losses if the triggering event results from acts or omissions (i) of CMS Energy or any of its subsidiaries (other than CMS NOMECO) which occur after the initial sale of the Common Stock offered hereby; (ii) of CMS NOMECO if such acts or omissions are approved by the Board of Directors of CMS NOMECO, which approval includes the affirmative vote of a majority of the employees of CMS Energy or any of its subsidiaries (other than CMS NOMECO) who serve on CMS NOMECO's Board of Directors; or (iii) of any person if such acts or omissions occur prior to the initial sale of the Common Stock offered hereby. Pursuant to the CMS Energy Indemnity, CMS NOMECO has also agreed to indemnify CMS Energy for any such dual consolidated loss tax liability if the triggering event results from acts or omissions of CMS NOMECO on or after the initial sale of the Common Stock offered hereby which have not been approved by the Board of Directors of CMS NOMECO in the manner described in the preceding sentence. Among the triggering events that could result in a recapture of these dual consolidated losses would be a sale of the assets in question under certain circumstances to an unrelated party. Another triggering event could be the inability to continue to include Walter in the CMS Energy consolidated group for federal income tax purposes. Such tax deconsolidation could occur if, for instance, CMS NOMECO issued sufficient shares of its Common Stock to unrelated parties so that CMS Energy and its affiliates no longer owned at least 80% of CMS NOMECO's Common Stock. A tax deconsolidation could also occur if CMS Energy reduced its holdings in CMS Enterprises, CMS Enterprises reduced its equity interest in CMS NOMECO to an extent that CMS Enterprises no longer owned at least 80% of the stock of CMS NOMECO, or another U.S. corporation acquired 80% or more of CMS Energy's stock. CMS NOMECO has no plans, and has been advised that CMS Energy has no plans, to effect any transaction in the foreseeable future that would cause such a deconsolidation. In addition, at the time the Walter group acquired Congolese assets formerly owned by Amoco's affiliate, the Nuevo group acquired from an affiliate of Amoco certain other Congolese assets. As in the case of the transaction involving Walter described above, subsequent triggering events with respect to the assets acquired by the Nuevo group (or transactions with respect to the stock of Nuevo or its affiliates) could result in recapture of dual consolidated losses with respect to such assets. Under the arrangements negotiated among Amoco, Walter and Nuevo prior to the Walter Acquisition, Walter and Nuevo would be jointly and severally liable for up to $59.0 million in potential recapture tax, plus an interest factor thereon, to Amoco if Amoco were required to recapture its dual consolidated losses as a result of triggering events occurring after the acquisitions described above. Although Walter and Nuevo have agreed to indemnify each other for payments that are required to be made to Amoco as a result of the other party's acts or omissions, if a triggering event were to occur with respect to the assets acquired by the Nuevo group, Walter could be required to make a 58 61 payment to Amoco to indemnify Amoco for the resulting tax recapture and would then have to recover such payment from Nuevo. Because the net assets of Nuevo currently appear to be adequate to satisfy any obligation which Nuevo may have with respect to a triggering event related to assets acquired from Amoco's affiliate, CMS NOMECO believes that it is unlikely that Walter would have to make a payment to satisfy its secondary liability, although there can be no assurance that this will be the case. However, if Walter were required to make such a payment, it would have a claim against Nuevo, but would not be able to recover such payment from CMS Energy under the CMS Energy Indemnity. As a result of CMS NOMECO's November 1993 acquisition (the "Yemen Acquisition") of its ownership interest in Pecten Yemen Company ("PYC"), a predecessor of Comeco Petroleum, Inc., from a member of the Shell Petroleum Inc. consolidated group (the "SPI Group"), CMS NOMECO agreed to become jointly and severally liable for tax liabilities incurred by the SPI Group as a result of the recapture of dual consolidated losses generated by PYC and utilized by the SPI Group for tax purposes in prior years, if a "triggering event" were to occur with respect to the stock or assets of PYC after such acquisition. It is estimated that CMS NOMECO's potential joint and several liability for dual consolidated loss recapture tax liability incurred by the SPI Group would be approximately $15.8 million plus an interest factor thereon. CMS Energy has not agreed to indemnify CMS NOMECO for this potential tax claim. However, if CMS NOMECO were required to make a payment in satisfaction of such liability due to a triggering event that it did not solely cause, it would have a claim against the other stockholder of Comeco for at least the amount by which such payment exceeded $7.9 million (plus an interest factor thereon). SECTION 29 CREDITS IRC Section 29 provides a "nonconventional fuels" tax credit for the domestic production of oil, natural gas and synthetic fuels derived from specified nonconventional sources and sold to unrelated persons from wells drilled after December 31, 1979 and before January 1, 1993. In general, Section 29 Credits are not allowed for fuels sold after December 31, 2002. The amount of Section 29 Credits is phased out as the average wellhead price of uncontrolled domestic oil increases. The phaseout begins when this price, known as the reference price, reaches $23.50 per Bbl (adjusted for inflation). Due to this inflation adjustment, the phaseout for 1992, 1993 and 1994 began at $43.31, $44.46 and $45.14, respectively. Since the reference price for those years was $15.98, $14.24 and $13.10, respectively, no phaseout of the Credit occurred in those years. The estimates of the Company's Section 29 Credits for the years 1995 through 2002 assume that the reference price will not exceed the point at which the phaseout of such Credits begins. The Section 29 Credits allowed for any taxable year may not exceed the excess of the regular tax (reduced by certain credits, primarily the foreign tax credit) over the tentative alternative minimum tax. To the extent that the Section 29 Credits are limited by the tentative alternative minimum tax limitation, they can be carried forward as a "minimum tax credit," which can be used to reduce regular tax in subsequent years (but not below the tentative alternative minimum tax for such subsequent year). Any Credits not used in the taxable year (or allowed as a minimum tax credit in a future year) are permanently lost. In the years 1992, 1993 and 1994, the Company generated $4.4 million, $5.6 million and $8.5 million, respectively, in Section 29 Credits as a result of the sale of natural gas produced from Antrim and, to a lesser extent, tight sands wells. Because of the limitations described in the preceding paragraph, approximately $27.2 million of Section 29 Credits have been carried forward as a minimum tax credit carryover. For the year 1995, it is estimated that the Company and its subsidiaries will generate approximately $12.0 million of Section 29 Credits; for the years 1996 through 2002, it is estimated that the Company and its subsidiaries will generate Section 29 Credits averaging $14 million annually. During the period of time it has produced natural gas qualifying for the Section 29 Credit, the Company's income has been insufficient to use those credits on a separate return basis. However, the limitations on Section 29 Credits are determined on the basis of a consolidated group's consolidated regular tax and alternative minimum tax. Because the Company has been included in the consolidated federal income tax return filed by CMS Energy, these credits have either been used currently to reduce the tax liability of the CMS Energy consolidated group or, as described above, have created a minimum tax credit carryforward for 59 62 use in future years. Under the Tax Sharing Agreement among CMS Energy and its subsidiaries, the Company will be paid for those Section 29 Credits generated by the Company which are ultimately utilized (either as current year Section 29 Credits or as alternative minimum tax credits) by the CMS Energy consolidated group to reduce its consolidated regular tax liability. These payments are made after the filing of the CMS Energy consolidated group tax return in which such Section 29 Credit (or minimum tax credit carryforward) is utilized. Because the Company is expected for the foreseeable future to continue to be included in the CMS Energy consolidated group, and because forecasts of the CMS Energy consolidated group's tax position indicate that it is expected to generate significant regular tax liabilities, it is expected that the Company will be paid for its current year Section 29 Credits for the 1995 taxable year and that the accumulated minimum tax credit carryforward allocated to the Company (approximately $27.2 million at December 31, 1994) will be paid to the Company over the next five years. The issuance of additional Common Stock of the Company, the sale of shares of the Company's Common Stock by CMS Enterprises or the sale or distribution of the shares of CMS Enterprises by CMS Energy in the future could result in the Company being deconsolidated from CMS Energy for tax purposes, which would eliminate the payments from the CMS consolidated group and restrict the ability of the Company to realize the benefit of past Section 29 Credits and those Section 29 Credits expected to be generated in the future. The Company has no plans, and has been advised by CMS Energy that CMS Energy has no plans, to effect any transaction in the foreseeable future that would cause such a deconsolidation. If the taxable income for the CMS Energy consolidated group were to be less than projected, the payments for the Section 29 Credits would be deferred or eliminated. See "Risk Factors -- Limitations on Availability of Nonconventional Fuels Tax Credits." NON-U.S. OPERATIONS The Company operates its non-U.S. oil and natural gas business primarily through direct and indirect wholly-owned U.S. subsidiaries which operate outside the U.S. The income or loss from these subsidiaries is taxable or deductible, as the case may be, for U.S. federal income tax purposes on a current basis. Through December 31, 1994, the operations of these subsidiaries have resulted in foreign source losses for U.S. income tax purposes of approximately $90.0 million. Through the date hereof, these losses have reduced the tax liability of the CMS Energy consolidated group, without causing any related decrease in the tax benefits to the other members of the consolidated group which would require an adjustment of the amount otherwise payable to the Company under the Tax Sharing Agreement. However, if previously generated or future foreign source losses of the Company or its subsidiaries result in the loss of tax benefits to which another member of the CMS Energy consolidated group would otherwise be entitled, such as foreign tax credits, the amount of such lost tax benefits would reduce the payments to the Company under the Tax Sharing Agreement or require a payment by the Company for the benefit of such other member. The Company's operations that operate outside the U.S. may be subject to foreign income taxes as well. Although the U.S. federal income tax law allows a credit for foreign income taxes on income that is subject to both foreign and U.S. income taxes, thereby avoiding a double tax on foreign source income, the provisions of that credit as they apply to the Company's income operate in a manner which may subject the Company's foreign income to tax at a combined foreign and U.S. income tax rate significantly higher than the rate applicable to corporations which conduct only U.S. operations. In addition, the Company conducts certain of its operations outside the U.S. through non-U.S. entities. The Company believes that the income from these entities will not be subject to U.S. income taxes until repatriated to the U.S. through dividends. Because the Company intends to cause its non-U.S. entities to reinvest their profits in oil and natural gas operations outside the U.S., it believes that the existing structure will postpone the payment of U.S. tax on the income from these non-U.S. affiliates. However, because of the operation of the foreign tax credit referred to above, the combined foreign and U.S. income tax rate on the income generated by the foreign affiliates may exceed the generally applicable tax rate on corporations which conduct only U.S. operations. In addition, any losses that these entities (or the other foreign entities owned by the Company) realize will not be currently deductible for U.S. income tax purposes. 60 63 LEGAL PROCEEDINGS On December 18, 1987, Tribal Drilling Company and certain other plaintiffs, including J. Stuart Hunt, an affiliate of Tribal and a director of the Company, filed a lawsuit in the 162nd Judicial District Court of Dallas County, Texas (Tribal Drilling Company, et al. v. Heritage Resources, Inc., et al.) (the "Dallas County Lawsuit"), seeking (i) a declaratory judgment against Heritage Resources, Inc. ("Heritage") to the effect that Heritage was not qualified to serve as the operator of Sections 21, 22 and 23 of the Crittendon Field in Winkler County, Texas under the applicable Joint Operating Agreements, that Heritage was removed as operator of such sections pursuant to a vote of non-operator working interest owners and that Tribal was the duly elected replacement operator and (ii) seeking damages against Heritage and certain related parties in connection with Heritage's alleged failure to carry out its obligations as operator of Sections 21, 22 and 23. The Company owns non-operating working interests in Sections 21 and 23 of the Crittendon Field, but has no interest in Section 22 of such field. The Company was not originally a plaintiff in the Dallas County Lawsuit, but pursuant to a court order to join all indispensable parties, on April 20, 1988, plaintiffs filed a Second Amended Original Petition for Declaratory Relief which included the Company as one of the plaintiffs. On June 28, 1988, Heritage filed counterclaims against all of the approximately 20 plaintiffs in the Dallas County Lawsuit, including the Company, alleging intentional interference with business relations and deliberate and malicious acts of interference with Heritage's actual and prospective business relationships. Following several amendments to the counterclaims, on or about August 25, 1995, Heritage, together with Wise Oil Ventures, Crittendon Acquisition Company, Chase Avenue Corporation and Michael B. Wisenbaker, individually, filed a Fifth Amended Counterclaim and Third Party Claim against all plaintiffs, including the Company, which alleges various causes of action, including without limitation claims for breach of contract, slander of title, tortious interference with contract, tortious interference with business relations, fraud, conspiracy and intentional infliction of emotional distress. The Fifth Amended Counterclaim seeks relief of approximately $100 million in actual damages, exemplary damages not to exceed $1 billion, attorneys' fees and declaratory relief. Discovery in the Dallas County Lawsuit has been stayed until November 17, 1995, and all pleadings must be filed by March 29, 1996. Trial of the Dallas County Lawsuit, including counterclaims, is currently scheduled for May 1996. On December 18, 1987, Heritage and certain related parties filed two separate lawsuits, since consolidated, styled Heritage Resources, Inc., et al. v. Margaret Hunt Hill, et al., in the 109th Judicial District Court of Winkler County, Texas (the "Winkler County Lawsuit"), against certain but not all non-operator working interest owners of Sections 21 and 22 of the Crittendon Field. In the Winkler County Lawsuit, the plaintiffs alleged in many respects the same course of conduct that is the subject of the Dallas County Lawsuit, including Heritage's counterclaims. The Company was not a party to the Winkler County Lawsuit. On October 23, 1992, a jury in the Winkler County Lawsuit returned a special verdict in favor of plaintiffs which found, among other things, that the defendants (i) defrauded Heritage with respect to the non-payment of costs of drilling the No. 3 well located in Section 22 (in which the Company has no interest), (ii) tortiously interfered with Heritage's alleged agreements to sell non-consent interests in such No. 3 well, (iii) tortiously interfered with Heritage's alleged agreements to sell its interest in the Crittendon Field and in the gas therefrom, and (iv) slandered Heritage's title to Sections 21 and 22. The jury's verdict in the Winkler County Lawsuit was in an aggregate amount in excess of $80 million plus attorneys' fees in excess of $20 million. The jury also found that Heritage owned an interest in Sections 21 and 22 that was sufficient for Heritage to serve as operator of those sections under the Joint Operating Agreements attendant to those sections, and that Heritage had not breached its duties under those Joint Operating Agreements. The jury found against the defendants on their counterclaims. The defendants have appealed the judgment in the Winkler County Lawsuit to the Texas Court of Appeals in El Paso, Texas. However, certain defendants have dismissed their appeal pursuant to a settlement with the plaintiffs that was arrived at pending the appeal. The non-settling defendants continue to prosecute their appeal of the judgment in the Winkler County Lawsuit. The Court of Appeals has indicated that it may rule on the appeal by late 1995 or early 1996. Although the Company was not a party to the Winkler County Lawsuit and did not participate in that litigation, Heritage moved in the Dallas County Lawsuit for judgment in its favor on all of the claims asserted against Heritage by Tribal and other plaintiffs on grounds of res judicata and collateral estoppel, i.e., that the 61 64 judgment in the Winkler County Lawsuit bars the litigation of plaintiffs' claims in the Dallas County Lawsuit. The Company opposed the Heritage motion on the ground that the Company was not a party to the Winkler County Lawsuit and should not be subject to any res judicata or collateral estoppel effect from that lawsuit. Heritage's motion was denied in September 1995. The Company believes that the verdict rendered in the Winkler County Lawsuit was based at least in part on several acts allegedly constituting misconduct by the non-operator working interest owner defendants named therein in asserting their alleged contractual rights relating to Section 22 (in which the Company has no interest) and only to a lesser extent Section 21, in which acts the Company did not actively participate (other than to vote for Heritage's removal as operator of Section 21). Although Heritage alleges in the Dallas County Lawsuit that the Company conspired with such non-operator working interest owners and that such interest owners were acting as the Company's agent with respect to all allegedly actionable conduct of all defendants, the Company contests these allegations. The Company also believes that under the applicable contracts it had the right to vote for the removal of Heritage as operator. The Company believes that it has meritorious defenses to the counterclaims in the Dallas County Lawsuit and intends to defend itself vigorously in such lawsuit. Management believes it is unlikely that the ultimate outcome of this matter will have a material adverse effect on the Company's financial condition or results of operations. However, the outcome of a jury trial is difficult to predict, and there can be no assurance that the resolution of Heritage's counterclaims against the Company will not have such material adverse effect. The Company is a named defendant in various other unrelated lawsuits and is a party in governmental proceedings from time to time arising in the ordinary course of business. While the outcome of such lawsuits and other proceedings against the Company cannot be predicted with certainty, management does not believe that these matters will have a material adverse effect on the financial condition or results of operations of the Company. OFFICES The Company's principal executive offices are located at One Jackson Square, Jackson, Michigan 49201 in approximately 29,000 square feet of leased space. The Company also maintains owned or leased district offices in Traverse City, Michigan; Houston, Texas; and Tulsa, Oklahoma; and non-U.S. offices in Sydney, Australia; Bogota, Colombia; Malabo, Equatorial Guinea; and Pointe Noire, the Congo. All offices are managed by professional geologists or petroleum engineers. Replacement of any of the Company's offices would not result in material expenditures by the Company and alternative locations to its leased space are anticipated to be readily available. EMPLOYEES As of September 30, 1995, the Company employed approximately 180 full-time employees (including approximately 50 foreign nationals) and two part-time employees. 62 65 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The table below sets forth the names, ages (as of October 1, 1995) and positions of the executive officers and directors of the Company. The Company's directors are elected annually at the annual meeting of the stockholders and hold office from the date of their election until the next succeeding annual meeting or until their successors are elected and qualified, and until their resignation or removal.
NAME AGE POSITION(S) Gordon L. Wright................... 53 President, Chief Executive Officer and Director William H. Stephens, III........... 46 Executive Vice President and General Counsel Robert A. Dunn..................... 48 Vice President Exploration T. Rodney Dykes.................... 39 Vice President Operations -- Africa and the Middle East Paul E. Geiger..................... 53 Vice President, Secretary and Treasurer Richard L. Redmond, Jr. ........... 39 Vice President Operations -- Western Hemisphere/Southeast Asia Victor J. Fryling.................. 47 Chairman of the Board Richard J. Burgess................. 64 Vice Chairman of the Board Frank M. Burke, Jr. ............... 55 Director J. Stuart Hunt..................... 74 Director Thomas K. Matthews, II............. 69 Director William T. McCormick, Jr. ......... 51 Director Charles R. Owens................... 50 Director S. Kinnie Smith, Jr. .............. 64 Director P. W. J. Wood...................... 70 Director Alan M. Wright..................... 50 Director
Set forth below is a brief description of the business experience of the executive officers and directors of the Company. Gordon L. Wright is President and Chief Executive Officer of the Company and has been a director of the Company since December 1994. He received a B.S. degree in Petroleum Engineering from West Virginia University in 1965. He is a member of the Society of Petroleum Engineers and serves on the Board of Directors and as Chairman of the Michigan Oil and Gas Association. Mr. Wright has over 25 years of industry experience. From 1968 to 1970, he was employed as a petroleum engineer by Gulf Oil Corporation. From 1970 to 1976, he held various engineering positions with Consumers. From 1976 to 1978, he was employed as Division Manager of Reef Petroleum Corporation. He became Manager of Operations for the Company in March 1978 and became Vice President of Operations in July 1981. In October 1993, Mr. Wright was named Executive Vice President and Chief Operating Officer and assumed his current position February 1, 1995. William H. Stephens, III, is Executive Vice President and General Counsel of the Company. He received an A.B. degree with Distinction in All Subjects from Cornell University in 1971. In 1974 he received his J.D. from Cornell Law School. From 1974 through mid-1980, he was engaged in the private practice of law concentrating in the oil and gas area. From June 1980 through July 1981, he was General Attorney for the Company, in August 1981 he was promoted to the position of General Counsel and in October 1983 he assumed the position of Vice President Land and Legal. In October 1993, Mr. Stephens was promoted to the position of Senior Vice President and General Counsel and assumed his current position March 1, 1995. He is Chairman of the Industry Economics and Taxation Committee and a member of the Legal and Legislative Committee of the Michigan Oil and Gas Association. He is former Chairman of the Oil and Gas Committee of the Michigan Bar Association and a member of the Section of Natural Resources Law of the American Bar Association. 63 66 Robert A. Dunn is Vice President Exploration of the Company. He received his B.A. degree in Geology from Western Michigan University in 1968 and his MBA in Finance in 1995. In 1968 he joined the Geological Survey Division, Michigan Department of Natural Resources, holding the position of Petroleum Geologist and subsequently District Geologist. He joined Consumers in 1974 as an exploration geologist, and in 1981 he was promoted by the Company to District Geologist for Michigan. He became District Exploration Manager for the Company in 1982 and assumed his current position effective October 1, 1984. He is a member of the Michigan Oil and Gas Association, the Michigan Basin Geological Society and The Geological Society of London, and is a Certified Petroleum Geologist with the American Association of Petroleum Geologists. T. Rodney Dykes is Vice President Operations -- Africa and Middle East of the Company. He received a B.S. in Petroleum Engineering from Louisiana State University in 1978. He was employed as a Petroleum Engineer with Kerr-McGee Corporation from 1978 to 1980. From 1980 until 1994, when he joined the Company, Mr. Dykes held a variety of positions with Maxus Energy Corporation (formerly Diamond Shamrock Corporation), including resident Project Manager for Block 16 in Ecuador and Manager of Engineering and Development and International Drilling Manager for a number of projects operated by Maxus in South America. He became Manager of Operations -- Africa and Middle East when he joined the Company in 1994 and assumed his current position in October 1995. Mr. Dykes is a member of the Society of Petroleum Engineers. Paul E. Geiger is Vice President, Secretary and Treasurer of the Company. He received a Bachelor of Science Degree with an Accounting major from Michigan State University in 1964. His first 13 years of employment were with Consumers where he worked in the Accounting, Internal Audit and Utility Rates Departments. His last position with Consumers was Director of Corporate Accounting. Mr. Geiger assumed his current position in March 1978. From 1971 to 1978, he served on the Budget Committee of the American Gas Association and during the operating year 1976 to 1977 served as Chairman of the Committee. Richard L. Redmond, Jr., is Vice President Operations-Western Hemisphere and Southeast Asia of the Company. He received a B.S. in Petroleum Engineering from Marietta College in 1979. Prior to joining the Company he was employed by Amoco Production Company from 1979 to 1989 where he held a variety of positions including New Ventures Engineer for the Central South America-Far East Region, Production Engineer for Galeota Point, Trinidad and Operations/Reservoir Engineer for Europe/Latin America-Far East Region. From June 1989 through July 1991, he held various engineering positions with the Company. In January 1993, he assumed the position of Manager of International Engineering & Production. He became Manager of Operations-South America and Southeast Asia in August 1994 and assumed his current position December 1, 1994. Mr. Redmond is a member of the Society of Petroleum Engineers. Victor J. Fryling is the Chairman of the Board of Directors of the Company and has been a Director of the Company since 1987. Mr. Fryling has been President of CMS Energy and Vice Chairman of Consumers since January 1992. He has been a director of CMS Energy and Consumers since 1990. Mr. Fryling is currently a director and has been President and Chief Executive Officer of CMS Enterprises since May 1995. Richard J. Burgess is Vice Chairman of the Board of Directors and has been a director of the Company since 1968. From July 1981 to January 1995, he was President and Chief Executive Officer of the Company. Frank M. Burke, Jr., has been a director of the Company since 1992. Mr. Burke has been Chief Executive Officer and Managing General Partner of Burke, Mayborn Company, Ltd. since May 1984. He has served on the boards of directors of several private and public companies. J. Stuart Hunt has been a director of the Company since 1985. Mr. Hunt is currently an investor, an oil and gas producer, a real estate owner, and a director of Pogo Producing Company, an oil and gas exploration, development and production company. Thomas K. Matthews, II, has been a director of the Company since 1988. Mr. Matthews is the retired Vice Chairman of the Board of First City National Bank of Houston. He is a director of Holly Corporation, an oil refining company. 64 67 William T. McCormick, Jr., has been a director of the Company since 1985. From December 1985 to February 1992 he served as Chairman of the Board of Directors of the Company. Mr. McCormick has been the Chairman of the Board of Directors and Chief Executive Officer of CMS Energy since December 1987, and the Chairman of the Board of Directors of Consumers since November 1985. He has been Chairman of the Board of Directors of CMS Enterprises since May 1995. In addition, Mr. McCormick serves on the boards of directors of NBD Bancorp Inc., Rockwell International Corporation and Schlumberger Ltd. He is also a director of the American Gas Association, the Edison Electric Institute and the National Petroleum Council. Charles R. Owens has been a director of the Company since 1984. Mr. Owens is President of The Owens Companies, Inc., a consulting firm. S. Kinnie Smith, Jr., has been a director of the Company since 1987. Mr. Smith has been the Vice Chairman of the Board of Directors and General Counsel of CMS Energy since November 1992 and Vice Chairman of the Board of Directors of Consumers since March 1987. He has been Vice Chairman of the Board of Directors of CMS Enterprises since January 1989. In addition, Mr. Smith serves on the boards of directors of Clarcor Corporation, a filtration and consumer packaging products company, and Michigan National Corporation. P. W. J. Wood has been a director of the Company since 1987. Mr. Wood is the President of Energy Exploration Management Company. He retired from Exxon Co. U.S.A. on August 1, 1987, as Vice President of Exploration. Alan M. Wright has been a director of the Company since 1993. Mr. Wright has been Senior Vice President and Chief Financial Officer of CMS Energy since January 1992, and in July 1994 was also elected Treasurer. He has been Senior Vice President and Chief Financial Officer of Consumers since January 1992. In addition, Mr. Wright has been Senior Vice President, Chief Financial Officer and Treasurer of CMS Enterprises since October 1994. COMMITTEES The Board of Directors of the Company has an Audit Committee, an Executive and Remuneration Committee and a Nominating Committee. The Audit Committee, of which Messrs. Burke, Matthews and Owens constitute the present members, recommends the employment of the Company's independent auditors and reviews with management and the independent auditors the Company's financial statements, basic accounting and financial policies and practices, audit scope and competency of control personnel. The Executive and Remuneration Committee, which consists of Messrs. Burgess, Fryling, McCormick and Wood, reviews and recommends to the Board of Directors the executive organization of the Company, the compensation and promotion of officers of the Company, the terms of any proposed employee benefit arrangements and the making of awards under such arrangements. The Nominating Committee, which consists of Messrs. McCormick, Fryling, Smith and Hunt, reviews and recommends to the Board of Directors modifications to Director tenure policy and Board size, compensation and composition, and aids in seeking out and attracting qualified Board candidates. COMPENSATION OF DIRECTORS The annual retainer for outside directors of the Company is $20,000. In addition, a fee of $1,500 per meeting is paid to Directors who are not officers or employees of the Company or CMS Energy for attendance of board and committee meetings. CONSULTING AND NON-COMPETE AGREEMENT The Company is a party to a consulting and non-compete agreement with Richard J. Burgess, the Company's Vice Chairman of the Board and former President and Chief Executive Officer, with an initial term ending in April 1996 and continuing month-to-month thereafter unless terminated by either party. Under the agreement, Mr. Burgess has agreed to advise the Company on issues pertaining to the Company's business and render other services as the Company may from time to time require. The agreement also provides that Mr. Burgess will not, directly or indirectly, engage in the business of the Company in any market in which the 65 68 Company currently competes. Mr. Burgess is entitled to a monthly fee of $7,500 under the agreement and an additional $1,500 for each day in excess of five days devoted in any month to services under the agreement. The monthly and daily fees shall be increased on the same basis as any increase in the meeting fees paid to directors who are not officers or employees of the Company. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Mr. Burgess, a member of the Executive and Remuneration Committee of the Company's Board of Directors, was the President and Chief Executive Officer of the Company until March 1, 1995 and is currently Vice Chairman of the Board of Directors of the Company. Mr. Burgess has a consulting and non-compete agreement with the Company. See "-- Consulting and Non-Compete Agreement." Mr. Fryling, also a member of the Executive and Remuneration Committee, is Chairman of the Board of Directors of the Company. EXECUTIVE COMPENSATION Effective with the adoption of the Executive Incentive Compensation Plan and the Long-Term Performance Incentive Plan, described below, compensation for the executive officers will consist of a base salary (as shown in the Summary Compensation Table below) which is intended to be competitive with amounts paid to senior executives with equivalent positions at other oil and gas exploration and development companies of comparable size, and substantial annual and long-term incentive compensation closely tied to the Company's success in achieving stock appreciation and other performance goals. Annual incentive (bonus) compensation payments are based on the Company's success in meeting goals as outlined below. In addition, individual performance goals are established for each executive for specific financial, operating and management achievements. The last element of executive compensation is expected to be long-term incentive awards in the form of stock option and profit sharing awards under the Company's Performance Long-Term Incentive Plan as described below. SUMMARY COMPENSATION TABLE The following table sets forth (i) a summary of compensation for services rendered in all capacities to the Company for the chief executive officer and the five other most highly compensated executive officers of the Company for the year ended December 31, 1994 and (ii) estimated 1995 annual salaries for such officers.
ANNUAL COMPENSATION --------------------- ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($)(1) Gordon L. Wright,............................... 1995(2) 189,000 President and Chief Executive Officer(3) 1994 167,000 0 157,714 William H. Stephens, III,....................... 1995(2) 152,400 Executive Vice President and General Counsel(4) 1994 141,400 0 134,347 Paul E. Geiger,................................. 1995(2) 134,400 Vice President, Secretary and Treasurer 1994 128,900 0 121,995 Robert A. Dunn,................................. 1995(2) 135,000 Vice President, Exploration 1994 127,135 0 120,134 Richard L. Redmond,............................. 1995(2) 115,000 Vice President, Operations 1994 90,335 0 66,197 W. Hemisphere and Southeast Asia Richard J. Burgess,............................. 1994 223,020 0 221,002 Vice Chairman(5)
- ------------------------- (1) Consists of Company-matched defined contribution plan contributions (Mr. Wright, $7,256; Mr. Stephens, $6,619; Mr. Geiger, $6,238; Mr. Dunn, $6,166; Mr. Redmond, $4,420 and Mr. Burgess, $11,058); cash payments under Plan A under the Employee Well Participation Program (Mr. Wright, $7,823; Mr. Stephens, $6,782; Mr. Geiger, $6,238; Mr. Dunn, $6,141; Mr. Redmond, $4,066; and Mr. Burgess, $11,376); and the value of overriding royalty interests received under Plan B under the Employee Well 66 69 Participation Program (Mr. Wright $142,635; Mr. Stephens, $120,946; Mr. Geiger, $109,519; Mr. Dunn, $107,827; Mr. Redmond, $57,711; and Mr. Burgess, $198,568). The Employee Well Participation Program, which was recently terminated as to any future wells drilled or acquired, was in effect from April 1, 1980 to October 4, 1995. The Program consisted of Plan A and Plan B. Plan A covered all executive, administrative and professional employees who were not then covered by Plan B. Under Plan A, participating employees received monthly cash incentive payments from the proceeds of a simulated 1.0% overriding royalty in properties acquired or spudded after 1980, a simulated 0.5% overriding royalty in properties acquired or spudded after 1985 and a simulated 0.25% overriding royalty in properties acquired or spudded after 1990. Plan B covered key employees designated by the President of the Company, from time to time. Certain current and former employees of the Company continue to own interests acquired when they participated in the plan as active employees. Plan B called for participating employees to receive actual property assignments that divide a 1.75% overriding royalty interest. The property assignments were allocated among the participants based on their annualized salaries plus up to 50% of the maximum year-end bonus the participants were qualified to receive. The Company reserves a right of first refusal on participants' sales of their interests. Further, participants have the option to require the Company to purchase their interests. Because they receive actual property assignments, participants are vested in the income stream for the life of the property, which may last 20 years or more. (2) Annual estimate based on current salary rate. (3) Mr. Wright was Executive Vice President and Chief Operating Officer until March 1, 1995. (4) Mr. Stephens was Senior Vice President and General Counsel until March 1, 1995. (5) Mr. Burgess was President and Chief Executive Officer prior to his retirement on March 1, 1995. EXECUTIVE INCENTIVE COMPENSATION PLAN CMS NOMECO intends to establish the Executive Incentive Compensation Plan which provides cash bonus payments for participants based on CMS NOMECO's achievement of annual performance objectives established by the Executive and Remuneration Committee of the Board with the following weighting: no less than 65% based on CMS NOMECO's earnings and finding costs and no more than 35% based on CMS Energy's earnings. Because officers of other affiliates of CMS Energy have similar incentives based at least in part on the earnings of CMS Energy, such officers have incentives to identify opportunities for CMS NOMECO. The participants in the Plan include the executive officers and other executives designated by the President. The Plan has a threshold payout at 80% of goal and a maximum payout at 120% of goal. The President is eligible for a standard annual award of 55% of the median for his/her salary grade adjusted to reflect his/her individual performance for the year. Dependent on their salary grade, other participants are eligible for awards ranging from 15% to 50% of the median for their particular salary grade. There were no awards under a predecessor plan for 1994, and there would not have been any awards under this Plan if it had been in effect in 1994. LONG-TERM PERFORMANCE INCENTIVE PLAN In connection with the Offering, the Board of Directors of the Company expects to adopt, and CMS Enterprises as the Company's sole stockholder is expected to approve, the Company's Long-Term Performance Incentive Plan. The objective of the Plan is to link the financial interests of the Company's executive officers and other executive employees directly with those of stockholders. The Plan consists of a stock option program for officers (currently six individuals) and a profit sharing plan for other key employees (currently approximately 20 individuals). Stock appreciation rights (SARs) may also be granted in conjunction with options. Restricted stock awards may also be made, but will be based on Company performance. Shares included in the Plan may not be more than 1% of the outstanding shares of the Company's Common Stock. 67 70 The Executive and Remuneration Committee, which administers the Plan, is expected to grant, subject to the completion of the Offering, options to purchase shares of Common Stock to the officers shown in the Summary Compensation Table as follows:
NAME OPTIONS Gordon L. Wright............... William H. Stephens, III....... Paul E. Geiger................. Robert A. Dunn................. Richard L. Redmond.............
Each of the options has an exercise price equal to the initial public offering price of the Common Stock offered hereby, and has a ten year term. For other executive participants, the Committee may make cash awards aggregating no more than 2% of the average of the most recent three years of the net income of the Company. Such awards may be paid to the eligible participants in equal installments over not more than three years. If a participant's employment is terminated before a payment date other than by retirement on or after age 62, or death, all rights to future payments may be forfeited. PENSION PLAN & SERP TABLE The Company is a participating employer in the Pension Plan for Employees of Consumers ("Pension Plan"), which is a noncontributory defined benefit pension plan intended to qualify under Section 401(a) of the IRC. The Company is also a participating employer in the Supplemental Executive Retirement Plan for Employees of Consumers ("SERP"). The SERP is a non-qualified plan under the IRC providing supplemental retirement income for officers and selected executives of the Company, based on their years of service and final pay, as defined in the SERP. The following table shows the aggregate annual pension benefits at normal retirement presented on a straight life annuity basis under the Pension Plan and SERP (offset by a portion of Social Security benefits).
YEARS OF SERVICE -------------------------------------------------------- COMPENSATION 15 20 25 30 35 $ 90,000.................................... $ 28,400 $ 37,800 $ 44,100 $ 50,400 $ 56,700 190,000.................................... 59,900 79,800 93,100 106,400 119,700 290,000.................................... 91,400 121,800 142,100 162,400 182,700 390,000.................................... 122,900 163,800 191,100 218,400 245,700
Regular, straight-time salary as shown in the Summary Compensation Table during the five years of highest earnings is used in computing benefits under the Pension Plan. In addition, bonuses under the bonus incentive plans as shown in the Summary Compensation Table during the five years of highest earnings are used in computing benefits under the SERP. The estimated years of service for each of Messrs. Wright, Stephens, Geiger, Dunn, Redmond and Burgess are respectively 35.00 years, 24.66 years, 35.00 years, 30.92 years, 6.55 years and 35.00 years. OWNERSHIP OF CAPITAL STOCK CMS Enterprises owns all of the outstanding Common Stock of the Company, which constitutes all of the outstanding capital stock of the Company. CMS Energy owns all of the outstanding common stock of CMS Enterprises (the "CMS Enterprises Common Stock") and Consumers owns all of the outstanding preferred stock of CMS Enterprises (the "CMS Enterprises Preferred Stock"), which together constitute all of the outstanding capital stock of CMS Enterprises. CMS Energy owns all of the outstanding common stock of Consumers. The following table sets forth certain information regarding the beneficial ownership by CMS Enterprises of the Common Stock of the Company (i) immediately prior to the Offering and (ii) as adjusted to reflect the 68 71 sale of Common Stock in the Offering. CMS Enterprises has sole voting and investment power with respect to all shares beneficially owned by it.
SHARES OWNED SHARES OWNED PRIOR TO OFFERING AFTER OFFERING ---------------------- ---------------------- NAME AND ADDRESS NUMBER PERCENT NUMBER PERCENT CMS Enterprises................................... 24,000,000 100% 24,000,000 % 330 Town Center Drive Suite 1100 Dearborn, MI 48126
The CMS Enterprises Preferred Stock may be issued in series, the terms of which may be determined by the CMS Enterprises Board of Directors without further action by stockholders, which terms may include, among others, dividend rights, voting rights, redemption and sinking fund provisions, liquidation preferences and conversion rights. The shares of CMS Enterprises Preferred Stock currently outstanding and owned by Consumers are 10 shares of Series A Preferred Stock (the "Series A Preferred Stock"). The holders of the Series A Preferred Stock are entitled to receive dividends payable, when and as declared, at the rate of $1,425,000 per share per annum, cumulative from the date of original issuance. Upon liquidation, the holders of the Series A Preferred Stock are entitled to receive $25 million per share, plus accrued dividends. On August 1, 1997 and on each August 1 thereafter, CMS Enterprises must redeem two shares of the outstanding Series A Preferred Stock at a sinking fund redemption price equal to $25 million per share, plus accrued dividends, and may opt to redeem up to two additional shares under the same terms. Further, on each such August 1, CMS Enterprises must redeem whole or fractional shares of the Series A Preferred Stock equal to 100% of the amount of cash dividends received from the Company during the preceding twelve-month period at a redemption price of $25 million per share plus accrued dividends. In addition to voting rights as otherwise provided by law, holders of Series A Preferred Stock are entitled to one noncumulative vote per share on each matter to be voted upon by the common stockholders. Holders of CMS Enterprises Preferred Stock also have the exclusive right, voting as a separate class, to elect a certain number of directors of CMS Enterprises whenever there exist triggering defaults in quarterly dividends or any mandatory sinking fund redemption. The following table sets forth certain information regarding the beneficial ownership by CMS Energy and Consumers of the CMS Enterprises Common Stock and the CMS Enterprises Preferred Stock immediately prior to the Offering. Each of CMS Energy and Consumers has sole voting and investment power with respect to their respective shares.
SHARES PERCENT NAME AND ADDRESS TITLE OF CLASS BENEFICIALLY OWNED OF CLASS CMS Energy Corporation.............. CMS Enterprises Common Stock 100 100% 330 Town Center Drive Suite 1100 CMS Enterprises Preferred 10* 100% Stock Dearborn, Michigan 48126
- ------------------------- * Represents 10 shares of Series A Preferred Stock held of record by Consumers, a subsidiary of CMS Energy of which CMS Energy owns all of the outstanding common stock. As of October 13, 1995, there were 91,100,135 shares of CMS Energy common stock outstanding (the "CMS Energy Common Stock"), no shares of CMS Energy preferred stock outstanding, and 7,552,824 shares of CMS Energy Class G common stock outstanding (the "Class G Common Stock"). The CMS Energy Common Stock and Class G Common Stock are together referred to hereinafter in this and the following two paragraphs as "common stock of CMS Energy." Both classes of common stock of CMS Energy are listed on the New York Stock Exchange. 69 72 Class G Common Stock reflects the separate performance of the gas distribution, storage and transportation businesses conducted by Consumers and Michigan Gas Storage Company, a subsidiary of Consumers (such businesses, collectively, the "Consumers Gas Group"). CMS Energy Common Stock reflects the performance of all of the businesses of CMS Energy and its subsidiaries, except for the interest in the Consumers Gas Group attributable to the outstanding shares of Class G Common Stock. The holders of both classes of common stock of CMS Energy vote as a single class, except on matters which are required by law or the Articles of Incorporation of CMS Energy to be voted on by class. Each holder of common stock of CMS Energy is entitled to one noncumulative vote per share of common stock of CMS Energy held by such holder on each matter voted upon by the stockholders. The following table sets forth, as of October 13, 1995, the number and percentage of outstanding shares of capital stock of CMS Energy that are beneficially owned by (i) each director of the Company, (ii) each executive officer of the Company named in "Management -- Summary Compensation Table," (iii) all directors and officers of the Company as a group and (iv) each person known by the Company to own beneficially more than 5% of the Common Stock of the Company by virtue of such person's ownership of any class of CMS Energy's voting securities before giving effect to the Offering. Except as otherwise indicated below, to the Company's knowledge, each individual or entity named has sole investment and voting power with respect to its respective securities, except to the extent authority is shared by spouses under applicable law.
SHARES BENEFICIALLY OWNED ---------------------------- PERCENT OF CMS ENERGY CLASS G COMMON STOCK NAME COMMON STOCK COMMON STOCK OF CMS ENERGY Gordon L. Wright.................................... 3,890 100 * William H. Stephens, III............................ 4,225 0 * Robert A. Dunn...................................... 3,223 0 * T. Rodney Dykes..................................... 0 0 * Paul E. Geiger...................................... 5,911 0 * Richard L. Redmond, Jr. ............................ 851 0 * Victor J. Fryling................................... 48,530 1,500 * Richard J. Burgess.................................. 0 0 * Frank M. Burke, Jr. ................................ 0 0 * J. Stuart Hunt...................................... 0 0 * Thomas K. Matthews, II.............................. 0 0 * William T. McCormick, Jr. .......................... 143,908 3,000 * Charles R. Owens.................................... 0 0 * S. Kinnie Smith, Jr. ............................... 58,824 2,000 * P. W. J. Wood....................................... 0 0 * Alan M. Wright...................................... 22,105 300 * --------- ----- --- All Directors and Executive Officers as a group (16 persons)........................... 291,467 6,900 * Mellon Bank Corporation............................. 6,212,000 0 6.3% Brinson Partners, Inc. ............................. 4,917,000 0 5.0%
- ------------------------- * Less than 1%. 70 73 RELATIONSHIP AND CERTAIN TRANSACTIONS WITH CMS ENERGY VOTING CONTROL After the Offering, CMS Enterprises will own approximately % ( % if the Underwriters exercise their over-allotment option in full) of the issued and outstanding Common Stock of the Company. As a result, CMS Enterprises, and indirectly CMS Energy, by virtue of its control of CMS Enterprises, will be able to direct the election of the entire Board of Directors of the Company and to control the affairs and policies of the Company, including without limitation the Company's exploration, development, capital, operating and acquisition expenditure plans. The Company's Board of Directors is currently composed of eleven members, six of whom are directors or current or former officers of CMS Energy, CMS Enterprises or the Company. CONTRACTUAL ARRANGEMENTS The Company and CMS Energy and certain of its other subsidiaries have entered into a number of agreements described below for the purpose of defining their ongoing relationship. These agreements are not the result of arm's-length negotiation between independent parties, but are believed by the Company to be at least as favorable to the Company as could be obtained from unaffiliated third parties. SERVICES AGREEMENTS The Company has entered into respective Services Agreements (the "Services Agreements") with each of CMS Energy, CMS Enterprises and Consumers which provide, among other things, that CMS Energy, CMS Enterprises and Consumers will make or cause to be made available to the Company from time to time management and consulting services such as financial services, including such administrative, clerical, managerial, professional and/or technical services as the parties may from time to time agree. REGISTRATION RIGHTS AGREEMENT Under a Registration Rights Agreement (the "Registration Rights Agreement"), the Company has agreed, upon the request of CMS Enterprises from and after , 199 , to file one or more registration statements under the Securities Act of 1933, as amended (the "Securities Act") or take other appropriate action under the laws of foreign jurisdictions in order to permit CMS Enterprises to offer and sell, domestically or abroad, securities of the Company that CMS Enterprises may hold at any time. CMS Enterprises will pay all costs relating thereto and any underwriting discounts and commissions relating to any such offering, except that the Company will pay the fees and expenses of its accountants, and any trustees, transfer agents or other agents appointed in connection therewith. There is no limitation on the number or frequency of the occasions on which CMS Enterprises may exercise its registration rights, except that the Company will not be required to comply with any registration request unless, in the case of a class of equity securities, the request involves at least the lesser of one million shares or 1% of the total number of shares of such class then outstanding, or, in the case of a class of debt securities, the principal amount of debt securities covered by the request is at least $5 million. The Company has also granted to CMS Enterprises the right to include Company securities owned by it in certain registrations under the Securities Act covering offerings of securities by the Company and the Company will pay all costs of such offerings other than incremental costs attributable to the inclusion of securities of the Company owned by CMS Enterprises in such registrations, and CMS Enterprises will pay the fees and expenses of its counsel and all underwriting discounts and commissions for the sale of securities offered by it. The Company will indemnify CMS Enterprises, its officers and directors and each underwriter, if any, and controlling persons of CMS Enterprises or any such underwriter against certain liabilities arising under the laws of any country in respect of any registration or other offering covered by the Registration Rights Agreement. The Company has the right to require CMS Enterprises to delay any exercise by CMS 71 74 Enterprises of its rights to require registration and other actions for a period of up to 90 days if, in the judgment of the Company, any underwritten offering by the Company of securities for its account then being conducted or about to be conducted would be materially adversely affected. CMS Enterprises has further agreed that it will not include any securities of the Company in any registration by the Company under the Securities Act which, in the judgment of the managing underwriters, would materially adversely affect any offering of securities by the Company. The rights of CMS Enterprises under the Registration Rights Agreement are transferable to non-affiliates of CMS Enterprises. TAX SHARING AGREEMENT The Company and its subsidiaries will continue to join in filing consolidated federal income tax returns with the CMS Energy affiliated group. In order to allocate the aggregate tax liability of the CMS Energy affiliated group among its members and provide for certain other matters relating to the payment of federal income taxes, CMS Energy has entered into the Amended and Restated Agreement for the Allocation of Income Tax Liabilities and Benefits with the Company and other members of the CMS Energy affiliated group (the "Tax Sharing Agreement") pursuant to which, in general, CMS Energy will pay each member for the reduction (and each member will pay CMS Energy for the increase) in the aggregate federal income taxes payable by the CMS Energy affiliated group resulting from the inclusion of such member in that group. CONFLICTS OF INTEREST The relationship between the Company and CMS Energy and its other affiliates may give rise to conflicts of interest with respect to, among other things, transactions and agreements between the Company and CMS Energy and its other affiliates, issuances of additional shares of voting securities, the election of directors or the payment of dividends, if any, by the Company. When the interests of CMS Energy and its other subsidiaries diverge from those of the Company, CMS Energy may exercise its influence in favor of its own interests or the interests of another of its subsidiaries over the interests of the Company. CMS Energy has advised the Company that it does not intend to engage in the exploration for natural gas and oil except through its ownership of Common Stock of the Company. However, circumstances may arise that would result in CMS Energy, by itself or through one of its affiliated entities, in connection with projects unrelated to those of the Company, engaging in the exploration for or development or production of natural gas and oil. The Company and CMS Energy and its other subsidiaries from time to time have entered into significant intercompany transactions and agreements incident to their respective businesses and may enter into similar transactions and agreements in the future. In the past, such transactions and agreements have related to, among other things, the purchase and sale of natural gas and indemnification arrangements in connection with acquisitions. See "-- Certain Transactions." The Company intends that the terms of any future agreements between the Company and CMS Energy or its other affiliates will be at least as favorable to the Company as could be obtained from unaffiliated third parties. CERTAIN TRANSACTIONS GAS SALES AGREEMENTS The Company sells natural gas to affiliates at rates approximating the average price of gas paid to other area producers. A five-year gas sales contract dated as of January 1, 1995 between the Company and Consumers provides for sales prices of $2.50 MMBtu in 1995, $2.60 MMBtu in 1996, and at negotiated rates from 1997 through 1999, or 20,000 MMBtu per day. Total sales to Consumers under certain other gas sales contracts between such parties were approximately $3.4 million in 1992, $2.6 million in 1993 and $0.7 million in 1994. Gas sales to MCV under three gas sales contracts amounted to approximately $6.4 million in 1992, $12.2 million in 1993 and $9.2 million in 1994. In 1994, the Company recognized a gain of $4.8 million attributable to the disposition of an MCV gas sales contract. The gas sales contract had provided for sales prices of $2.53 per MMBtu in 1994, escalating 4% per year to December 31, 2006 on 10,000 MMBtu per day 72 75 or 3.7 Bcf annually of gas sales. In March 1995, the Company recognized a gain of $9.9 million attributable to the disposition of another MCV gas sales contract. This gas sales contract had provided for sales prices of $3.25 per MMBtu in 1995, escalating 4% each year through December 31, 2006, and covered 3,750 MMBtu per day or 1.37 Bcf annually of the Company's gas sales. The Company expects to sell these volumes on the spot market or under term contracts providing for current market price. TERRA ACQUISITION In August 1995, CMS Energy acquired all of the outstanding capital stock of Terra, a significant producer of Antrim gas, for consideration which, after giving effect to certain anticipated post-closing adjustments, is expected to aggregate approximately $63.6 million, payable in common stock of CMS Energy. Immediately after consummation of such acquisition, and pursuant to a transfer agreement among CMS Energy, CMS Enterprises and the Company, the stock of Terra was transferred by CMS Energy, through CMS Enterprises, to the Company. In connection with the Terra Acquisition, the Company recorded a capital contribution of $1.0 million and issued the Terra Note to CMS Enterprises which, after giving effect to post-closing adjustments, is expected to be in the principal amount of $62.6 million. The Terra Note is currently held by CMS Energy. See "-- CMS Notes." A portion of the net proceeds from the Offering will be used to repay the Terra Note. WALTER ACQUISITION AND RELATED INDEMNIFICATION AGREEMENT In February 1995, CMS Energy acquired all of the outstanding capital stock of Walter, an international oil and gas company, for a purchase price of approximately $28.4 million (of which approximately $25.0 million was payable by delivery of CMS Energy common stock and $3.4 million was paid in cash) plus assumed indebtedness of $18.3 million. Immediately upon consummation of such acquisition, the stock of Walter was contributed by CMS Energy, through CMS Enterprises, to the Company. The Company recorded a capital contribution of $28.4 million as a result of the Walter Acquisition. Of the assumed indebtedness of Walter, $6.5 million was immediately repaid with funds which the Company borrowed from CMS Energy as evidenced by the Walter Note. See "-- CMS Notes." A portion of the net proceeds from the Offering will be used to repay the Walter Note. Included among the assets and liabilities of Walter and its subsidiaries at the time of the Walter Acquisition were certain Congolese assets that had been acquired by a Walter subsidiary from affiliates of Amoco and a tax indemnity obligation that had been incurred by Walter in connection with such acquisition. In connection with the Walter Acquisition, CMS Energy, the Company and Walter agreed to be jointly and severally liable for Walter's obligation to indemnify Amoco for tax liabilities attributable to the recapture of "dual consolidated losses" utilized by Amoco for tax purposes in prior years, if a "triggering event" (as defined under U.S. federal income tax laws relating to dual consolidated losses) were to occur with respect to such assets or with respect to the stock of such entities or certain of their subsidiaries. CMS Energy has agreed to indemnify the Company under the CMS Energy Indemnity for such liability if the triggering event results from acts or omissions (i) of CMS Energy or any of its subsidiaries (other than the Company or any of its subsidiaries) which occur after the initial sale of the Common Stock offered hereby; (ii) of the Company or any of its subsidiaries if such acts or omissions are approved by the Board of Directors of the Company, which approval includes the affirmative vote of a majority of the employees of CMS Energy or any of its subsidiaries (other than the Company or any of its subsidiaries) who serve on the Company's Board of Directors; or (iii) of any person if such acts or omissions occur prior to the initial sale of the Common Stock offered hereby. Conversely, the Company has agreed to indemnify CMS Energy (and/or CMS Enterprises) if, in fact, the triggering event results from acts or omissions of the Company or its subsidiaries which occur after the initial sale of the Common Stock offered hereby and such acts or omissions are not approved by the Board of Directors of the Company, which approval includes the affirmative vote of a majority of the employees of CMS Energy or any of its subsidiaries (other than the Company) who serve on the Company's Board of Directors. See "Business and Properties -- Tax Matters -- Dual Consolidated Losses." 73 76 CMS NOTES In August 1995, the Company issued the Terra Note to CMS Enterprises, which in turn assigned it to CMS Energy, in connection with the transfer of the common stock of Terra by CMS Energy to CMS Enterprises and then by CMS Enterprises to the Company. In July 1995, the Company issued the Walter Note to CMS Energy to evidence indebtedness originally incurred in February 1995 to fund repayment of $6.5 million of indebtedness of Walter immediately after the consummation of the Walter Acquisition. The CMS Notes bear interest at the rate of LIBOR plus 2.0% per annum and have a maturity date of November 1, 1999. Amounts outstanding under the CMS Notes are expressly subordinate to borrowings under the Company's Credit Agreement. Certain limitations are placed on the Company's obligation to make payments on the indebtedness evidenced by the CMS Notes in the event of default under the terms of the Credit Agreement. The Company intends to use a portion of the net proceeds from the Offering to repay the CMS Notes. LETTER OF CREDIT REIMBURSEMENT AGREEMENT In December 1994, CMS Energy arranged for the issuance of a standby letter of credit, currently in the amount of $45.0 million, to secure the Company's performance under the operating services agreement relating to the Colon Unit in Venezuela. The Company has agreed to reimburse CMS Energy on demand for any draw made under the letter of credit and to pay to CMS Energy a fee of 2.125% per annum of the face amount of the letter of credit. CONTRIBUTIONS TO CAPITAL During the years 1992, 1993, 1994 and the nine months ended September 30, 1995, the Company received equity contributions from CMS Enterprises amounting to $5.8 million, $9.5 million, $56.1 million and $4.5 million, respectively. Additionally, during the nine months ended September 30, 1995, the Company received from CMS Enterprises equity contributions of $27.2 million ($3.5 million in cash and $23.7 million in stock) with respect to the Walter Acquisition and $1.0 million with respect to the Terra Acquisition. ADDITIONAL TRANSACTIONS In 1993, the Company received $2.6 million for its share of proceeds from the sale of certain northern Michigan pipelines to an affiliate of the Company, CMS Gas Transmission and Storage Company. These pipelines were constructed by the Company shortly prior to their sale for a cost of $2.2 million. DESCRIPTION OF CAPITAL STOCK Certain statements under this caption are summaries of the respective Restated Articles of Incorporation and Restated Bylaws of the Company, copies of which are filed as exhibits to the Registration Statement of which this Prospectus is a part. Summaries herein of certain provisions of such documents do not purport to be complete and are subject and qualified in their entirety by reference to all provisions of such documents. The authorized capital stock of the Company consists of 55,000,000 shares of Common Stock, no par value per share, and 5,000,000 shares of Preferred Stock, no par value per share. As of the date hereof, there are 24,000,000 shares of Common Stock outstanding, all of which are owned by CMS Enterprises, and no shares of Preferred Stock outstanding. Upon completion of the Offering, there will be shares of Common Stock outstanding, 24,000,000 shares of which will be owned by CMS Enterprises. COMMON STOCK OF THE COMPANY The holders of Common Stock are entitled to one vote per share on all matters submitted to a vote of stockholders. Holders of Common Stock do not have cumulative voting rights with respect to the election of directors. Therefore, the holders of more than 50% of the issued and outstanding shares of Common Stock may elect all of the Company's directors. After the Offering, CMS Enterprises will hold approximately % of the issued and outstanding Common Stock ( % if the over-allotment option is exercised in full) and therefore will hold the voting power to determine all matters upon which stockholders of the Company vote, 74 77 including the election of directors. See "Relationship and Certain Transactions with CMS Enterprises and CMS Energy." Holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available therefor. In the event of a liquidation, dissolution or winding up of the Company, holders of Common Stock are entitled to share ratably in all net assets available for distribution to common stockholders. Holders of Common Stock have no preemptive, subscription, redemption or conversion rights. All outstanding shares of Common Stock are, and the shares of Common Stock to be sold by the Company in this Offering when issued will be, fully paid and nonassessable. Application will be made to list the shares of Common Stock to be issued in the Offering on the New York Stock Exchange upon official notice of issuance. PREFERRED STOCK OF THE COMPANY The authorized capital stock of the Company includes 5,000,000 shares of Preferred Stock. Such Preferred Stock may be issued in series, the terms of which may be determined by the Company's Board of Directors without further action by stockholders, which terms may include, among others, dividend rights, voting rights, redemption and sinking fund provisions, liquidation preferences and conversion rights. The issuance of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could adversely affect the voting power of holders of Common Stock and could have the effect of delaying, deferring or preventing a change in control of the Company. CERTAIN PROVISIONS OF MICHIGAN CORPORATE LAW Chapter 7A of the Michigan Business Corporation Act (the "MBCA"), M.C.L. sec.450.1775 et seq., is applicable to corporations organized under the laws of Michigan which have at least 100 beneficial owners of their stock. Subject to certain exceptions set forth therein, Chapter 7A provides that a corporation shall not engage in any business combination with any "interested stockholder" unless an advisory statement is given by the Board of Directors and the combination is approved by a vote of at least 90% of the votes of each class of stock entitled to vote, and at least two-thirds of the votes of each class of stock entitled to vote other than the voting shares owned by the interested stockholder. However, these statutory requirements do not apply if, prior to the date that an interested stockholder first becomes an interested stockholder, the Board of Directors by resolution approves or exempts such business combinations generally or a particular combination from the requirements of the MBCA. Furthermore, the voting requirement does not apply to a business combination if: (a) specified fair price criteria are met, as described below; (b) the consideration to be given to the stockholders is in cash or in the form the interested stockholder paid for shares of the same class or series; and (c) between the time the interested stockholder becomes an interested stockholder and before the consummation of a business combination the following conditions are met: (1) any preferred stock dividends are declared and paid on their regular date; (2) the annual dividend rate of stock other than preferred stock is not reduced and is raised if necessary to reflect any transaction which reduces the number of outstanding shares; (3) the interested stockholder does not receive any financial assistance or tax advantage from the corporation other than proportionally as a stockholder; (4) the interested stockholder does not become the beneficial owner of any additional shares of the corporation; and (5) at least five years elapse. Except as specified therein, an "interested stockholder" is defined to mean any person that: (a) is the owner of 10% or more of the outstanding voting stock of the corporation, or (b) is an affiliate of the corporation and was the owner of 10% or more of the outstanding voting stock of the corporation at any time within two years immediately prior to the relevant date. Under certain circumstances, Chapter 7A makes it more difficult for an "interested stockholder" to effect various business combinations with a corporation for a five-year period, although the stockholders may elect not to be governed by this section, upon approval of 90% of the outstanding voting shares and two thirds of the shares not owned by the interested stockholder. The Company's stockholders have not excluded the Company from the restrictions imposed under Chapter 7A of the MBCA. It is anticipated that the provisions of Chapter 7A may encourage companies interested in acquiring the Company to negotiate in advance with the Board of Directors. 75 78 Fair price criteria include the following: (a) the aggregate amount of the cash and market value of noncash consideration to be received by the holders of common stock is at least as much as the highest of (1) the highest price the interested stockholder paid for stock of the same class or series within the two-year period immediately prior to the announcement date of the combination proposal, and (2) the market value of stock of the same class or series on the announcement date or on the determination date; and (b) the aggregate amount of the cash and market value of noncash consideration to be received by holders of stock other than common stock is at least as much as the highest of (1) the highest price the interested stockholder paid for stock of the same class or series within the two-year period immediately prior to the announcement date of the combination proposal, (2) the highest preferential amount per share to which the holders of such stock are entitled in the event of any liquidation, dissolution, or winding up of the corporation, and (3) the market value of stock of the same class or series on the announcement date or on the determination date. Chapter 7B of the MBCA, M.C.L. sec.450.1790 et seq., is applicable to corporations organized under the laws of Michigan which have (a) at least 100 beneficial owners of their stock; (b) their principal place of business, principal office or substantial assets in Michigan; and (c) at least one of the following: (1) more than 10% of their stockholders reside in Michigan, (2) more than 10% of their shares are owned by Michigan residents, or (3) at least 10,000 stockholders reside in Michigan. Subject to certain exceptions set forth therein, Chapter 7B provides that once a person proposes to make or makes a "control share acquisition" and delivers an acquiring person statement to the corporation, the stockholders must vote on whether the control shares may exercise voting rights. Such rights are granted only by resolution approved by both (a) a majority of the votes cast by holders entitled to vote and a majority of any class entitled to vote, and (b) a majority of the votes cast and a majority of any class entitled to vote excluding the interested shares. Further, a corporation's articles of incorporation or bylaws may authorize, under certain circumstances, redemption at fair value of the control shares acquired in a control share acquisition if no acquiring person statement is filed with the corporation. "Control shares" means shares which, if voted, would have voting power when added together with all other shares a person either owns or directs their exercise, within the following ranges: (a) at least 20% but less than 33 1/3% of all voting power; (b) at least 33 1/3% but less than a majority of all voting power; or (c) a majority of all voting power. An acquisition of shares is not considered a control share acquisition under certain circumstances, including where the acquisition is part of a merger or share exchange if the corporation is a party to the agreement of merger or share exchange. Under certain circumstances, Chapter 7B makes it more difficult for an "acquiring person" to exercise control over a corporation due to the limitations placed on that person's ability to vote the control shares, although the corporation may, before any such control share acquisition, elect not to be governed by this chapter by adopting an amendment to the corporation's articles of incorporation or bylaws. The Company's Restated Articles of Incorporation and Restated By-laws do not exclude the Company from the restrictions imposed under Chapter 7B of the MBCA. It is anticipated that the provisions of Chapter 7B may encourage acquiring persons interested in obtaining control over the Company to negotiate in advance with the Board of Directors. Section 450.1368 of the MBCA is applicable to corporations organized under the laws of Michigan. This section prohibits a corporation from purchasing, either directly or indirectly, any of its shares that are listed on a national securities exchange from any person who holds at least 3% of its shares unless one of the following conditions is met: (a) the corporation makes an equivalent offer to all other holders of the same shares; (b) the purchase is authorized in advance by the stockholders entitled to vote thereon; (c) the purchase meets the requirements of the articles of incorporation for such a purchase; (d) the shares are beneficially owned by the person for at least two years prior to the purchase date; (e) the purchase is made on the open market; (f) the purchase price is not more than the average market price of the shares during the 30 business days prior to the purchase date; or (g) the purchase is otherwise authorized by the MBCA. Under certain circumstances, sec.450.1368 prevents a stockholder from selling his shares back to the corporation at a premium within two years of that stockholder's purchase of the shares unless one of the other conditions is met. However, the stockholders may approve such a purchase by the corporation or the corporation may include in its articles of incorporation lesser requirements for such a transaction. The Company's Restated Articles of Incorporation do not contain any provisions regarding the purchase of the Company's shares from any stockholder who beneficially owns at least 3% of its stock. It is anticipated that the provisions of sec.450.1368 may discourage persons from obtaining quantities of the Company's stock for the sole purpose of eliciting a premium from the Company in a resale of those shares. 76 79 LIMITATION ON PERSONAL LIABILITY OF DIRECTORS; INDEMNIFICATION PROVISIONS The Company's Restated Articles of Incorporation contains a provision, authorized by the MBCA, designed to eliminate the personal liability of directors for monetary damages to the Company or its stockholders for breach of their fiduciary duty as directors. This provision, however, does not limit the liability of any director who breached his duty of loyalty to the Company or its stockholders, failed to act in good faith, obtained an improper personal benefit, or paid a dividend or approved a stock repurchase or redemption that was prohibited under Michigan law. This provision will not limit or eliminate the rights of the Company or any stockholder to seek an injunction or any other nonmonetary relief in the event of a breach of a directors' duty of care. In addition, this provision applies only to claims against a director arising out of his role as a director and does not relieve a director from liability unrelated to his fiduciary duty of care or from a violation of statutory law such as certain liabilities imposed on a director under the federal securities laws. The Company's Restated Articles of Incorporation and Restated Bylaws provide that the Company shall indemnify all directors and officers of the Company to the full extent permitted by the MBCA. Under the provisions of the MBCA, any director or officer who, in his capacity as such, is made or threatened to be made a party to any suit or proceeding, may be indemnified if the Board determines such director or officer acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company or its stockholders. Officers and directors are covered within specified monetary limits by insurance against certain losses arising from claims made by reason of their being directors or officers of the Company or of the Company's subsidiaries and the Company's officers and directors are indemnified against such losses by reason of their being or having been directors of officers of another corporation, partnership, joint venture, trust or other enterprise at the Company's request. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is the Company. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offering, the Company will have shares of Common Stock outstanding. All of the shares sold in the Offering will be freely tradeable by persons other than "affiliates" of the Company, as such term is defined under Rule 144 of the Securities Act (each, an "Affiliate"), without restriction under the Securities Act. The 24,000,000 shares of Common Stock that will continue to be beneficially owned by CMS Energy after the Offering constitute "restricted securities" within the meaning of Rule 144, and will be eligible for sale in the open market commencing , 199 subject to the provisions of Rule 144. Pursuant to the Registration Rights Agreement, CMS Enterprises may cause the Company at any time following , 199 to register under the Securities Act all or a portion of the Common Stock owned by it, in which event CMS Enterprises would be able to sell such shares upon the effectiveness of any such registration without regard to the provisions of Rule 144. In general, under Rule 144 as currently in effect, beginning 90 days after the effective date of this Prospectus, any person, including an Affiliate, who has beneficially owned shares for at least two years, will be entitled to sell in "brokers' transactions" or to market makers, within any three-month period, a number of shares that does not exceed the greater of (i) 1% of the then outstanding shares of Common Stock (approximately shares immediately after the completion of the Offering) or (ii) the average weekly trading volume in the Common Stock during the four calendar weeks immediately preceding the date on which notice of the sale is filed with the Securities and Exchange Commission (the "Commission"). Sales under Rule 144 are also subject to certain manner of sale provisions, notice requirements and the availability of current public information about the Company. Further, a person who is not an Affiliate, and has not been an Affiliate at any time during the three months immediately preceding the sale, and who has beneficially owned the shares proposed to be sold for at least three years, is entitled to sell such shares under Rule 144(k) without regard to the limitations described above. The Commission has proposed amendments to Rule 144 77 80 that, if adopted, would reduce the two-year and three-year holding periods described above to one-year and two-year holding periods, respectively. No assurances can be given as to when or if these proposed amendments will be adopted or that the proposed amendments will not be significantly revised prior to their adoption. Prior to the Offering, there has been no market for the Common Stock of the Company and no predictions can be made as to the effect, if any, that market sales of shares of Common Stock, or the availability of such shares for sale, will have on the market price prevailing from time to time. Nevertheless, sales of substantial amounts of Common Stock of the Company in the public market, or the perception that such sales could occur, could adversely affect prevailing market prices and could impair the Company's future ability to raise capital through the sale of its equity securities. The Company, CMS Enterprises and CMS Energy have agreed that during the period beginning from the date of this Prospectus and continuing to and including the date days after the date of this Prospectus, not to offer, sell, contract to sell or otherwise dispose of any securities of the Company (other than pursuant to employee stock option plans existing or contemplated on the date of this Prospectus and for certain other purposes) which are substantially similar to the shares of Common Stock or which are convertible or exchangeable into securities which are substantially similar to the shares of Common Stock, without the prior written consent of . UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the Company has agreed to sell to each of the Underwriters named below, and each of such Underwriters, for whom and and are acting as representatives, has severally agreed to purchase from the Company, the respective number of shares of Common Stock set forth opposite its name below:
NUMBER OF SHARES OF COMMON UNDERWRITER STOCK ---------- Total........................................................ ==========
Under the terms and conditions of the Underwriting Agreement, the Underwriters are committed to take and pay for all of the shares offered hereby, if any are taken. The Underwriters propose to offer the shares of Common Stock in part directly to the public at the initial public offering price set forth on the cover page of this Prospectus, and in part to certain securities dealers at such price less a concession of $ per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain brokers and dealers. After the shares of Common Stock 78 81 are released for sale to the public, the offering price and other selling terms may from time to time be varied by the representatives. The Company has granted the Underwriters an option exercisable for 30 days after the date of this Prospectus to purchase up to an aggregate of additional shares of Common Stock solely to cover over-allotments, if any. If the Underwriters exercise their over-allotment option, the Underwriters have severally agreed, subject to certain conditions, to purchase approximately the same percentage thereof that the number of shares to be purchased by each of them, as shown in the foregoing table, bears to the shares of Common Stock offered. The Company, CMS Enterprises and CMS Energy have agreed that during the period beginning from the date of this Prospectus and continuing to and including the date days after the date of this Prospectus, not to offer, sell, contract to sell or otherwise dispose of any securities of the Company (other than pursuant to employee stock option plans existing or contemplated on the date of this Prospectus and for certain other purposes) which are substantially similar to the shares of Common Stock or which are convertible or exchangeable into securities which are substantially similar to the shares of Common Stock, without the prior written consent of . The representatives of the Underwriters have informed the Company that they do not expect sales to accounts over which the Underwriters exercise discretionary authority to exceed five percent of the total number of shares of Common Stock offered by them. Prior to this offering, there has been no public market for the Shares. The initial public offering price will be negotiated among the Company and the representatives. Among the factors to be considered in determining the initial public offering price of the Common Stock, in addition to prevailing market conditions, will be current and historical oil and natural gas prices, current and prospective conditions in the supply and demand for oil and natural gas, reserve and production quantities for the Company's oil and natural gas properties, the history of and prospects for the industry in which the Company operates, the earnings multiples of publicly traded common stocks of comparable companies, the cash flow and earnings of the Company and comparable companies in recent periods and the Company's business potential and cash flow and earnings prospects. Application will be made to list the Common Stock on the New York Stock Exchange. In order to meet one of the requirements for listing the Common Stock on the New York Stock Exchange, the Underwriters will undertake to sell lots of 100 or more shares to a minimum of 2,000 beneficial holders. The Company has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. and have from time to time performed various investment banking and financial advisory services for CMS Energy and CMS Enterprises, for which they have received customary fees and reimbursement of their out-of-pocket expenses. Such services include serving as underwriter or private placement agent in connection with various securities offerings. Such firms have also performed various investment banking services for CMS Energy for which they received customary fees and reimbursement of their out-of-pocket expenses. LEGAL MATTERS The validity of the shares of Common Stock offered hereby is being passed upon for the Company by William H. Stephens, III, Executive Vice President and General Counsel of the Company, and certain other legal matters in connection with the Offering are being passed upon for the Company by Sidley & Austin and William H. Stephens, III. Certain legal matters in connection with the Offering will be passed upon for the Underwriters by Baker & Botts, L.L.P. As to all matters of Michigan law, Sidley & Austin and Baker & Botts, L.L.P. will rely on the opinion of William H. Stephens, III. 79 82 EXPERTS The Consolidated Financial Statements of the Company as of December 31, 1993 and 1994 and for each of the three years in the period ended December 31, 1994, the Consolidated Financial Statements of CMS NOMECO International, Inc. (formerly Walter) as of and for the year ended December 31, 1994, and the Consolidated Financial Statements of Terra as of and for the year ended December 31, 1994, all included in this Prospectus have been audited and the Pro Forma Consolidated Statement of Income, of the Company for the year ended December 31, 1994, included in this Prospectus, has been examined by Arthur Andersen LLP (formerly Arthur Andersen & Co.), independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of such firm as experts in accounting and auditing in giving said reports. Reference is made to said report on the audited Consolidated Financial Statements of the Company, which includes an explanatory paragraph with respect to the change in the method of accounting for postretirement benefits other than pensions in 1992 as discussed in Note 1.i to the Consolidated Financial Statements of the Company. With respect to the unaudited interim consolidated financial information relating to the Company as of and for the nine month period ended September 30, 1995, Arthur Andersen LLP has applied limited procedures in accordance with professional standards for a review of such information. However, their separate report included herein states that they did not audit and they did not express an opinion on that interim consolidated financial information. Accordingly, the degree of reliance on their report on that information should be restricted in light of the limited nature of the review procedures applied. In addition, the accountants are not subject to the liability provisions of Section 11 of the Securities Act for their report on the unaudited interim consolidated financial information because that report is not a "report" or "part" of the Registration Statement prepared or certified by the accountants within the meaning of Sections 7 and 11 of the Securities Act. The Consolidated Financial Statements of Walter as of December 31, 1992 and 1993 and for each of the two years in the period ended December 31, 1993 included in this Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as set forth in their report thereon (which report expresses an unqualified opinion and includes an explanatory paragraph referring to substantial doubt about Walter's ability to continue as a going concern), appearing elsewhere herein and in the Registration Statement, and are included herein in reliance upon the authority of said firm as experts in auditing and accounting. The Combined Balance Sheets of the Amoco Congo Companies as of December 31, 1993 and 1994, and the related Combined Statements of Operations, Stockholder's Equity, and Cash Flows for each of the three years in the period ended December 31, 1994 have been included herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. With respect to the unaudited combined interim financial information of the Amoco Congo Companies as of and for the one-month period ended January 31, 1995, included herein the independent certified public accountants have reported that they applied limited procedures in accordance with professional standards for a review of such information. However, their separate report included herein, states that they did not audit and they do not express an opinion on that interim financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. The accountants are not subject to the liability provisions of Section 11 of the Securities Act for their report on the unaudited combined interim financial information because that report is not a "report" or a "part" of the Registration Statement prepared or certified by the accountants within the meaning of Sections 7 and 11 of the Securities Act. Information relating to the estimated proved reserves of oil and natural gas at June 30, 1995 included herein have been prepared by Ryder Scott, independent petroleum engineer consultants, as stated in their reserve report dated October 2, 1995, and is included herein in reliance upon the authority of such firm as an expert in such matters. Information relating to the estimated proved reserves of oil and natural gas and the related estimates of future net cash flows and standardized measure data as of January 1, 1993, 1994 and 1995 80 83 included herein were based upon engineering studies prepared by the Company's internal engineers. Set forth as Appendix A is a letter of Ryder Scott relating to their reserve report. AVAILABLE INFORMATION The Company has not previously been subject to the reporting requirements of the Securities Exchange Act of 1934, as amended. The Company has filed with the Commission a Registration Statement on Form S-1 (the "Registration Statement", which term shall include all amendments, exhibits and schedules thereto) under the Securities Act with respect to the offer and sale of Common Stock pursuant to this Prospectus. This Prospectus, filed as a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement or the exhibits and schedules thereto and reference is hereby made to such omitted information. Statements made in this Prospectus concerning the contents of any contract, agreement or other document filed as an exhibit to the Registration Statement are summaries of the terms of such contracts, agreements or documents and are not necessarily complete. Reference is made to each such exhibit for a more complete description of the matters involved and such statements shall be deemed qualified in their entirety by such reference. The Registration Statement and the exhibits and schedules thereto filed with the Commission may be inspected, without charge, and copies may be obtained at prescribed rates, at the public reference facility maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the Commission located at 7 World Trade Center, Suite 1300, New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60621. The Company intends to furnish its stockholders with annual reports containing audited financial statements and the report of independent auditors and quarterly reports for the first three quarters of each fiscal year containing unaudited financial statements. 81 84 CERTAIN DEFINITIONS The terms defined below are used throughout this Prospectus. Acreage held by production. Acreage covered by an oil and gas lease which has a producing well on it, or which is pooled or unitized with a lease or leases having one or more producing wells on them, so the lease is maintained in effect for the duration of such production. API. American Petroleum Institute. Bbl. One stock tank Bbl, or 42 U.S. gallons liquid volume, used herein in reference to oil or other liquid hydrocarbons. Bcf. One billion cubic feet. Boe or net equivalent barrels. Barrels of oil equivalent with natural gas volumes converted to barrels of oil equivalents using the ratio of 6.0 Mcf of natural gas to 1.0 barrel of crude oil. Bopd. Barrels of oil per day. Bcpd. Barrels of condensate per day. Btu. British thermal unit; the amount of heat required to raise the temperature of one pound of water one degree Fahrenheit. There are approximately 1,050 Btus in each standard cubic foot of natural gas. Completion. The installation of permanent equipment for the production of oil or gas, or in the case of a dry hole, the reporting of abandonment to the appropriate agency. Condensate. A hydrocarbon mixture that becomes liquid and separates from natural gas when the gas is produced; similar to crude oil. Development well. A well drilled within the proved area of an oil and gas reservoir to the depth of a stratigraphic horizon known to be productive in an attempt to recover proved undeveloped reserves or to economically accelerate production of reserves classified as proved developed. Discounted estimated future net cash flows. Estimated future net cash flows discounted at a rate of ten percent per annum. Dry hole or well. A well found to be incapable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production exceed production expenses and taxes. Exploratory well. A well drilled to find and produce oil or gas in an unproved area or to find a new reservoir in a field previously found to be productive of oil or gas in another reservoir. Farmin or Farmout. An agreement whereunder the owner of a working interest in an oil and gas lease assigns the working interest or a portion thereof to another party who desires to drill on the leased acreage. Generally, the assignee is required to drill one or more wells in order to earn its interest in the acreage. The assignor usually retains a royalty or reversionary interest in the lease. The interest received by an assignee is a "farmin" while the interest transferred by the assignor is a "farmout." Field. An area consisting of single reservoir or multiple reservoirs all grouped on or related to the same individual geological structural feature and/or stratigraphic condition. Gross. "Gross" oil and gas wells or "gross" acres are the total number of wells or acres in which the Company has an interest, without regard to the size of that interest. Horizontal drilling. A drilling technique that permits the operator to contact and intersect a larger portion of the producing horizon than conventional vertical drilling techniques and can result in both increased production rates and greater ultimate recoveries of hydrocarbons. LPG. Liquified petroleum gas. MBbl. One thousand barrels of oil or other liquid hydrocarbons. 82 85 MBoe. One thousand Boe. Mcf. One thousand cubic feet. MMBbl. One million barrels of oil or other liquid hydrocarbons. MMBoe. One million Boe. MMBtu. One million Btus. MMcf. One million cubic feet. MMcfe. One million cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids. Natural gas liquids (NGL) or plant products. Butane, propane, ethane, natural gasoline and other liquid hydrocarbons that are extracted from natural gas. Net. "Net" oil and gas wells or "net" acres are determined by multiplying gross wells or acres by the Company's working interest in those wells or acres. Net revenue interest. The percentage of production to which the owner of a working interest is entitled. For example, the owner of a 100% working interest in a well burdened only by a landowner's royalty of 12.5% would have an 87.5% net revenue interest in that well. Oil. Crude oil and condensate. Operator. The individual or company responsible for conducting oil and gas exploration, development and production activities on an oil and gas lease or concession on its own behalf and, if applicable, for other working interest owners, generally pursuant to the terms of a joint operating agreement or comparable agreement. Overriding royalty interest. An interest in an oil and gas property entitling the owner to a share of oil and natural gas production free of certain costs of production. Present value. When used with respect to oil and gas reserves, the estimated future gross revenue to be generated from the production of proved reserves, net of estimated production and future development costs, using prices and costs in effect as of the date indicated, without giving effect to non-property related expenses such as general and administrative expenses, debt service and future income tax expenses or to depreciation, depletion and amortization, discounted using an annual discount rate of 10%. Producing well. A well that is producing oil or gas or that is capable of production. Proved (or proven) developed reserves. Reserves that can be expected to be recovered through existing wells with existing equipment and operating methods under existing economic and operating conditions. Proved (or proven) reserves. The estimated quantities of oil, natural gas, natural gas liquids and oil which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved (or proven) undeveloped reserves. Reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. Recompletion. Recompletion refers to the completion of an existing well for production from a formation that exists behind the casing of the well. Reserve life. The proved reserves divided by the average annualized production volumes. Reservoir. A porous and permeable underground formation containing a natural accumulation of producible oil and/or gas that is confined by impermeable rock or water barriers and is individual and separate from other reservoirs. 83 86 Royalty interest. An interest in an oil and gas property entitling the owner to a share of oil or gas production free of costs of production. Seismic. The use of shock waves generated by controlled explosions of dynamite or other means to ascertain the nature and contour of underground geological structures. 3-D Seismic Survey. Seismic that is run, acquired and processed to yield a three-dimensional picture of the subsurface. Three dimensional seismic is relatively expensive because it takes a considerable amount of computer time to process the data. Undeveloped acreage. Lease acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and gas regardless of whether such acreage contains proved reserves. Working interest. The operating interest that gives the owner the right to drill, produce and conduct operating activities on the property and a share of production, subject to all royalties, overriding royalties and other burdens and to all costs of exploration, development and operations and all risks in connection therewith. Workover. Operations on a producing well to restore or increase production. 84 87 INDEX TO FINANCIAL STATEMENTS
PAGE CONSOLIDATED FINANCIAL STATEMENTS OF CMS NOMECO OIL & GAS CO.: Report of Independent Public Accountants.............................................. F-3 Consolidated Balance Sheets as of December 31, 1993 and 1994 and September 30, 1995 (unaudited)......................................................................... F-4 Consolidated Statements of Income for the years ended December 31, 1992, 1993 and 1994 and for the nine months ended September 30, 1994 (unaudited) and 1995 (unaudited)... F-5 Consolidated Statements of Stockholder's Equity for the years ended December 31, 1992, 1993 and 1994 and for the nine months ended September 30, 1995 (unaudited).......... F-6 Consolidated Statements of Cash Flows for the years ended December 31, 1992, 1993 and 1994 and for the nine months ended September 30, 1994 (unaudited) and 1995 (unaudited)......................................................................... F-7 Notes to Consolidated Financial Statements............................................ F-8 Supplemental Information -- Oil and Gas Producing Activities (unaudited).............. F-24 CONSOLIDATED FINANCIAL STATEMENTS OF CMS NOMECO INTERNATIONAL, INC. (FORMERLY WALTER INTERNATIONAL, INC.): Report of Independent Public Accountants.............................................. F-30 Consolidated Balance Sheets as of December 31, 1994 and January 31, 1995 (unaudited)......................................................................... F-31 Consolidated Statements of Operations and Accumulated Deficit for the year ended December 31, 1994 and for the one month ended January 31, 1995 (unaudited).......... F-32 Consolidated Statements of Cash Flows for the year ended December 31, 1994 and for the one month ended January 31, 1995 (unaudited)........................................ F-33 Notes to Consolidated Financial Statements............................................ F-34 Supplemental Information -- Oil Producing Activities (unaudited)...................... F-40 CONSOLIDATED FINANCIAL STATEMENTS OF WALTER INTERNATIONAL, INC.: Report of Independent Auditors........................................................ F-42 Consolidated Balance Sheets as of December 31, 1992 and 1993.......................... F-43 Consolidated Statements of Operations and Accumulated Deficit for the years ended December 31, 1992 and 1993.......................................................... F-44 Consolidated Statements of Cash Flows for the years ended December 31, 1992 and 1993................................................................................ F-45 Notes to Consolidated Financial Statements............................................ F-46 COMBINED FINANCIAL STATEMENTS OF AMOCO CONGO EXPLORATION AND PETROLEUM COMPANIES: Report of Independent Auditors........................................................ F-53 Combined Balance Sheets as of December 31, 1993 and 1994.............................. F-54 Combined Statements of Operations for the years ended December 31, 1992, 1993 and 1994................................................................................ F-55 Combined Statements of Stockholder's Equity for the years ended December 31, 1992, 1993 and 1994....................................................................... F-56 Combined Statements of Cash Flows for the years ended December 31, 1992, 1993 and 1994................................................................................ F-57 Notes to Combined Financial Statements................................................ F-58 Supplemental Information -- Oil Producing Activities (unaudited)...................... F-61 Combined Balance Sheet as of January 31, 1995 (unaudited)............................. F-63 Combined Statement of Operations for the one month ended January 31, 1995 (unaudited) and Combined Statement of Stockholder's Equity for the one month ended January 31, 1995 (unaudited).................................................................... F-64 Combined Statement of Cash Flows for the one month ended January 31, 1995 (unaudited)......................................................................... F-65 Notes to Combined Financial Statements (unaudited).................................... F-66 CONSOLIDATED FINANCIAL STATEMENTS OF TERRA ENERGY LTD.: Report of Independent Public Accountants.............................................. F-67 Consolidated Balance Sheets as of December 31, 1994 and July 31, 1995 (unaudited)..... F-68 Consolidated Statements of Earnings for the year ended December 31, 1994 and for the seven months ended July 31, 1994 (unaudited) and 1995 (unaudited)................... F-69
F-1 88
PAGE Consolidated Statements of Shareholders' Equity for the year ended December 31, 1994 and for the seven months ended July 31, 1995 (unaudited)............................ F-70 Consolidated Statements of Cash Flows for the year ended December 31, 1994 and for the seven months ended July 31, 1994 (unaudited) and 1995 (unaudited)................... F-71 Notes to Consolidated Financial Statements............................................ F-72 Supplemental Information -- Oil and Gas Producing Activities (unaudited).............. F-81 PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF WALTER INTERNATIONAL, INC. (UNAUDITED): Pro Forma Statement of Operations for the one month ended January 31, 1995 and the nine months ended September 30, 1995................................................ F-84 Pro Forma Balance Sheet as of September 30, 1995...................................... F-85 Pro Forma Statement of Operations for the year ended December 31, 1994................ F-86
F-2 89 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors, CMS NOMECO Oil & Gas Co.: We have audited the accompanying consolidated balance sheets of CMS NOMECO Oil & Gas Co. (a Michigan corporation and wholly owned subsidiary of CMS Enterprises Company) and subsidiaries as of December 31, 1993 and 1994, and the related consolidated statements of income, stockholder's equity, and cash flows for each of the three years in the period ended December 31, 1994. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CMS NOMECO Oil & Gas Co. and subsidiaries as of December 31, 1993 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. As explained in note 1.i to the consolidated financial statements, the Company, effective January 1, 1992, changed its method of accounting for postretirement benefits other than pension costs. Arthur Andersen LLP Detroit, Michigan, January 27, 1995. F-3 90 CMS NOMECO OIL & GAS CO. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------- SEPTEMBER 30, 1993 1994 1995 (UNAUDITED) (DOLLARS IN THOUSANDS) ASSETS Current Assets: Cash.................................................... $ 932 $ 1,117 $ 5,255 Temporary cash investments.............................. -- 4,969 3,813 Accounts Receivable: Revenues and other, less allowances of $226 in 1993, 1994 and 1995...................................... 9,680 10,973 55,893 Income tax benefits................................... 5,442 3,527 11,516 Affiliates............................................ 2,170 83 1,665 Other................................................... 1,059 1,435 13,200 -------- -------- ----------- 19,283 22,104 91,342 Investments and other assets................................. 7,088 12,539 23,121 Property, Plant and Equipment, at cost (full cost method).... 841,524 934,460 1,073,981 Less accumulated depreciation, depletion and amortization.......................................... 465,534 496,403 526,038 -------- -------- ----------- 375,990 438,057 547,943 -------- -------- ----------- Total assets....................................... $402,361 $472,700 $ 662,406 ======== ======== =========== LIABILITIES AND STOCKHOLDER'S EQUITY Current Liabilities: Current maturities of long-term debt.................... $ 9,579 $ 9,579 $ 6,677 Accounts payable........................................ 5,558 3,611 49,308 Accrued interest........................................ 1,561 1,349 1,171 Accrued taxes and other................................. 2,317 1,955 9,215 -------- -------- ----------- 19,015 16,494 66,371 Long-term debt............................................... 109,141 119,462 192,371 Deferred Credits: Deferred income taxes................................... 47,343 43,349 54,590 Other................................................... 3,873 4,509 7,985 -------- -------- ----------- 51,216 47,858 62,575 Stockholder's Equity: Common stock, no par value, authorized 55.0 million shares, issued and outstanding 24.0 million shares.... 80,900 137,000 169,726 Retained earnings....................................... 142,089 151,886 171,363 -------- -------- ----------- 222,989 288,886 341,089 -------- -------- ----------- Total liabilities and stockholder's equity......... $402,361 $472,700 $ 662,406 ======== ======== ===========
The accompanying notes are an integral part of these statements. F-4 91 CMS NOMECO OIL & GAS CO. CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, --------------------------- ----------------- 1992 1993 1994 1994 1995 (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Operating Revenues: Oil and condensate.......................... $26,553 $26,635 $26,831 $18,479 $45,423 Natural gas................................. 34,391 40,995 39,904 30,550 32,927 Other operating............................. 8,408 6,275 12,333 10,107 17,738 ------- ------- ------- ------- ------- 69,352 73,905 79,068 59,136 96,088 Operating Expenses: Depreciation, depletion and amortization.... 32,566 35,605 34,919 25,358 34,072 Cost center write-offs...................... 5,744 9,648 5,612 452 2,184 Operating and maintenance................... 13,476 15,005 19,323 14,050 23,204 General and administrative.................. 4,489 5,599 6,345 4,346 5,609 Production and other taxes.................. 3,997 4,221 3,838 3,010 3,463 Cost of products sold....................... 1,427 1,127 973 682 773 ------- ------- ------- ------- ------- 61,699 71,205 71,010 47,898 69,305 Pretax operating income.......................... 7,653 2,700 8,058 11,238 26,783 Other income..................................... 163 382 239 152 522 Interest expense, net............................ 4,954 3,844 4,023 2,624 6,455 ------- ------- ------- ------- ------- Income (loss) before income taxes................ 2,862 (762) 4,274 8,766 20,850 Income tax provision (benefit)................... (2,100) (5,900) (5,523) (2,148) 386 Income before accounting change and extraordinary item............................. 4,962 5,138 9,797 10,914 20,464 ------- ------- ------- ------- ------- Extraordinary item, early retirement of debt, net of income taxes................................ -- -- -- -- (987) Cumulative effect of accounting change, net of income taxes................................... (1,124) -- -- -- -- ------- ------- ------- ------- ------- Net income....................................... $ 3,838 $ 5,138 $ 9,797 $10,914 $19,477 ======= ======= ======= ======= ======= Net income per common share before extraordinary item and accounting change..................... $ 0.21 $ 0.21 $ 0.41 $ 0.45 $ 0.85 Cumulative effect of accounting change and extraordinary item, net of income taxes........ (.05) -- -- -- (.04) ------- ------- ------- ------- ------- Net income per common share...................... $ 0.16 $ 0.21 $ 0.41 $ 0.45 $ 0.81 ======= ======= ======= ======= ======= Average common shares outstanding (000's)........ 24,000 24,000 24,000 24,000 24,000 ======= ======= ======= ======= =======
The accompanying notes are an integral part of these statements. F-5 92 CMS NOMECO OIL & GAS CO. CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
COMMON RETAINED STOCK EARNINGS (DOLLARS IN THOUSANDS) Balance at December 31, 1991............................................. $ 65,600 $133,113 Net income.......................................................... -- 3,838 Contributions from parent........................................... 5,800 -- -------- -------- Balance at December 31, 1992............................................. 71,400 136,951 Net income.......................................................... -- 5,138 Contributions from parent........................................... 9,500 -- -------- -------- Balance at December 31, 1993............................................. 80,900 142,089 Net income.......................................................... -- 9,797 Contributions from parent........................................... 56,100 -- -------- -------- Balance at December 31, 1994............................................. 137,000 151,886 Net income (unaudited).............................................. -- 19,477 Contributions from parent (unaudited)............................... 32,726 -- -------- -------- Balance at September 30, 1995 (unaudited)................................ $169,726 $171,363 ======== ========
The accompanying notes are an integral part of these statements. F-6 93 CMS NOMECO OIL & GAS CO. CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------- ------------------- 1992 1993 1994 1994 1995 (UNAUDITED) (DOLLARS IN THOUSANDS) Cash Flow from Operating Activities: Net income.......................... $ 3,838 $ 5,138 $ 9,797 $ 10,914 $ 19,477 Principal noncash items: Depreciation, depletion and amortization................... 32,566 35,605 34,919 25,358 34,072 Cost center write-offs............ 5,744 9,648 5,612 452 2,184 Deferred income taxes, net........ (1,307) (6,588) (4,331) (3,547) 1,641 Investment tax credit, net........ (200) (132) (55) (43) -- -------- -------- --------- -------- -------- 40,641 43,671 45,942 33,134 57,374 Net Change In: Accounts receivable................. 4,790 1,134 4,368 (1,845) (17,955) Other current assets................ 342 (489) (376) (301) (3,078) Accounts payable.................... (3,823) 1,309 (1,947) 1,054 14,900 Accrued interest.................... 137 (146) (212) (1,056) (230) Accrued taxes and other liabilities....................... 978 69 (1,686) 1,969 389 Accrued postretirement benefits..... 1,704 176 346 -- -- Other, net.......................... (38) 247 486 671 1,807 -------- -------- --------- -------- -------- 44,731 45,971 46,921 33,626 53,207 Cash Flow from Financing Activities: Revolving credit additions (retirements), net.................. 12,600 26,900 19,900 21,200 24,300 Equity contributions from parent....... 5,800 9,500 56,100 52,000 9,000 Proceeds from bank loans............... 4,182 857 -- -- -- Repayment of bank loans................ -- (418) (1,008) (756) (972) Repayment of notes..................... -- (5,000) (8,571) (8,571) (36,428) -------- -------- --------- -------- -------- 22,582 31,839 66,421 63,873 (4,100) Cash Flow from Investing Activities: Exploration and development expenditures...................... (53,287) (75,678) (71,185) (56,063) (46,881) Purchases of oil and gas properties........................ (13,600) (865) (33,528) (33,192) (143) Proceeds from sale of properties.... 991 5,024 7,278 3,101 5,256 Investments in Yemen................ -- (2,720) (5,489) (3,739) (2,304) Interest capitalized................ (2,163) (3,511) (5,264) (3,961) (2,053) -------- -------- --------- -------- -------- (68,059) (77,750) (108,188) (93,854) (46,125) Net increase (decrease) in cash and temporary cash investments............. (746) 60 5,154 3,645 2,982 -------- -------- --------- -------- -------- Cash And Temporary Cash Investments: Beginning of period................. 1,618 872 932 932 6,086 -------- -------- --------- -------- -------- End of period....................... $ 872 $ 932 $ 6,086 $ 4,577 $ 9,068 ======== ======== ========= ======== ======== Supplementary Information: Interest payments net of amounts capitalized....................... $ 4,666 $ 3,904 $ 3,860 $ 1,698 $ 7,892 Income tax payments (refunds)....... (7,643) 518 2,177 2,082 5,550
The accompanying notes are an integral part of these statements. F-7 94 CMS NOMECO OIL & GAS CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES CMS NOMECO Oil & Gas Co. (the "Company") is a wholly owned subsidiary of CMS Enterprises Company (the "Parent") and a second-tier subsidiary of CMS Energy Corporation ("CMS Energy"). The Company and its subsidiaries are engaged in the exploration, development, acquisition and production of oil and natural gas, including the extraction and sale of natural gas liquids. Certain reclassifications have been reflected in the prior years' amounts to conform with the 1994 presentation. Beginning in June 1995, transportation expense, which had been shown as an operating expense, has been deducted from operating revenues and prior periods have been reclassified. The consolidated financial statements and related information as of and for the nine months ended September 30, 1994 and 1995 included herein are unaudited and, in the opinion of management, reflect all adjustments (consisting of only recurring adjustments) necessary for a fair presentation of financial position, results of operations and cash flows. These unaudited consolidated financial statements should be read in conjunction with the Company's consolidated financial statements as of and for the year ended December 31, 1994. The consolidated results of operations for the nine months ended September 30, 1994 and 1995 are not necessarily indicative of operating results for a full year. Additionally, all other financial statement information contained in the Notes to Consolidated Financial Statements, which occurred subsequent to December 31, 1994, is unaudited. A summary of significant accounting policies is set forth below: A. BASIS OF PRESENTATION The consolidated financial statements include the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. B. REVENUE RECOGNITION Oil and gas revenues are recognized as production takes place and the sale is completed and the risk of loss transfers to a third party purchaser. C. TEMPORARY CASH INVESTMENTS All highly liquid investments with an original maturity of three months or less are considered temporary cash investments. D. OIL AND GAS PROPERTIES The Company follows the full cost method of accounting and capitalizes all costs related to its exploration and development program, including the cost of nonproductive drilling and surrendered acreage, in cost centers on a country-by-country basis. Such capitalized costs include lease acquisition, geological and geophysical work, delay rentals, drilling, completing and equipping oil and gas wells, together with internal costs directly attributable to property acquisition, exploration and development activities. The capitalized costs in each cost center are amortized on an overall unit-of-production method based on total estimated proved oil and gas reserves. Additionally, certain costs associated with major development projects and all costs of unevaluated leases are excluded from the depletion base until reserves associated with the projects are proved or until impairment occurs. Costs associated with exploration and development activities in non-producing cost centers are not amortized until proved reserves are discovered and produced or a determination is made that the value of the property is less than the costs incurred. To the extent that capitalized costs (net of accumulated depletion and amortization) less deferred taxes exceed the sum of discounted estimated future net cash flows from proved oil and natural gas reserves (using F-8 95 CMS NOMECO OIL & GAS CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) unescalated prices and costs and a 10% per annum discount rate) and the lower of cost or market value of unproved properties after income tax effects, such excess costs are charged against earnings. Accordingly, the Company has written off $0.5 million ($0.3 million after taxes) and $0.2 million ($0.1 million after taxes) for the nine months ended September 30, 1994 and 1995, respectively, $1.9 million ($1.2 million after taxes) in 1992, $7.7 million ($5.0 million after taxes) in 1993 and $4.9 million ($3.2 million after taxes) in 1994 for prediscovery non-U.S. expenditures. Also, the Company wrote down the value of Colombia ($3.1 million in 1992 and $1.9 million in 1993), Papua New Guinea ($0.7 million in 1994) and U.S. ($2.0 million in third quarter 1995) properties in excess of the cost center ceiling. These charges are included in cost center write-offs on the Consolidated Statements of Income. E. INCOME TAXES The Company follows Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. Accordingly, the Company uses an asset and liability method to record the deferred tax consequences of its temporary differences. Provision is made for deferred income taxes resulting from temporary differences arising from the capitalization of certain exploration and development costs for book purposes which are deducted currently for income tax purposes, and for other temporary differences between book income and taxable income. As these temporary differences reverse, the related deferrals are credited to income. The Company does not provide deferred taxes on the undistributed earnings of its non-U.S. subsidiaries as such earnings are intended to be permanently reinvested. The deferred investment tax credit was being amortized to income over a ten-year period; none remains at December 31, 1994. SFAS No. 109 requires classifying any deferred tax liability and asset as current or non-current based on the classification of the related asset or liability and expanding the disclosure requirements related to deferred tax assets and liabilities. Additionally, a deferred tax asset is recognized only if it is apparent that the temporary difference will reverse in the foreseeable future. F. PENSION PLAN The Company participates in an affiliate's trusteed noncontributory defined benefit plan (the "Plan") covering full-time regular employees within specified age limits and periods of service. Pension expenses amounted to approximately $46,000, $83,000 and $59,000 for the years ended December 31, 1992, 1993 and 1994. respectively. Company employees are not segregated in the Plan and it is not possible to determine the vested benefit obligation and related Plan assets with respect to Company employees. The affiliate has indicated that assets available for Plan benefits are in excess of the accumulated benefit obligation. G. ACCOUNTING FOR INVESTMENTS The Company's ownership share of Command Petroleum Holdings N.L. ("Command") stock (3.3% as of December 31, 1993 and 2.7% as of December 31, 1994, respectively) requires the Company to follow the cost method of accounting for its investment in Command. The book value of this investment as of December 31, 1994 was $2.2 million and the fair market value was $2.8 million. The investment was written down to the lower of cost or fair market value which was $2.0 million as of December 31, 1992. The 1992 charge against income of $0.8 million is included in cost center write-offs on the Consolidated Statements of Income. In 1993 and 1994, the Company invested $2.7 million and $5.5 million, respectively, in Comeco Petroleum Inc. ("Comeco"). The Company currently owns 50% of Comeco, and accounts for this investment F-9 96 CMS NOMECO OIL & GAS CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) under the equity method of accounting. Comeco owns a 28.57% working interest in the East Shabwa Block in Yemen. H. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN The Company participates in CMS Energy's Supplemental Executive Retirement Plan ("SERP") for certain management employees. Benefits are based on the employees' service and earnings as defined in the SERP. In 1988, a trust was established and partially funded. Because the SERP is a nonqualified plan under the Internal Revenue Code, earnings of the trust are taxable and trust assets are included in the consolidated assets of the Company. SERP expenses amounted to $320,000 in 1992, $190,000 in 1993 and $263,000 in 1994. As of December 31, 1993 and 1994, the Company's share of trust assets was approximately $1.9 million at cost and the projected benefit obligation was $1.4 million and $1.7 million, respectively. I. HEALTH CARE AND LIFE INSURANCE BENEFITS The Company provides health care and life insurance benefit plans for its employees and retirees through insurance companies. The postretirement plans are noncontributory and currently unfunded. In 1992, the Company changed its method of accounting for the cost of these plans from a pay-as-you-go (cash) method to an accrual method as required by SFAS No. 106, Employers' Accounting for Postretirement Benefits Other than Pensions, and recognized the December 31, 1992 unfunded transition obligation as a one-time cumulative accounting adjustment. The funded status of the postretirement benefit plans is reconciled with the liability recorded as follows:
DECEMBER 31, --------------- 1993 1994 (DOLLARS IN THOUSANDS) Accumulated Postretirement Benefit Obligation: Retirees............................................................. $ 162 $ 388 Fully eligible active plan participants.............................. 261 377 Other active plan participants....................................... 1,542 1,551 ------ ------ 1,965 2,316 Plan assets and unrecorded losses.................................... 15 (209) ------ ------ Recorded liability................................................... $1,980 $2,107 ====== ======
The 1992, 1993 and 1994 cost was comprised of $199,000, $132,000 and $194,000, respectively, for service plus $143,000, $144,000 and $152,000, respectively, for interest. For measurement purposes, a 10% annual rate of increase was assumed in the per capita cost of covered health care benefits for 1995. The rate was assumed to gradually decrease to 6.0% per annum by the year 2004 and thereafter. The health care cost trend rate assumption has an impact on the accumulated postretirement benefit obligation and on future amounts accrued. A one percentage point increase each year in the assumed health care cost would increase the accumulated postretirement benefit obligation as of December 31, 1994 by $283,000 and increase the 1994 cost by $27,000. For the years ended December 31, 1993 and 1994, the weighted average discount rate was 7.25% and 8.0% per annum, respectively, and the expected long term rate of return on plan assets was 8.5% and 7.0% per annum, respectively. J. NET INCOME PER COMMON SHARE Net income per common share is based upon the number of common shares outstanding during each period. F-10 97 CMS NOMECO OIL & GAS CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) K. NEW ACCOUNTING STANDARDS In December 1994, the American Institute of Certified Public Accountants issued Statement of Position 94-6, Disclosure of Certain Significant Risks and Uncertainties, effective for 1995 year-end financial statements. The Company does not believe that it will be significantly affected by the Statement, which requires disclosures about the nature of a company's operations and the use of estimates in the financial statements. L. COMMON STOCK SPLIT These financial statements and Notes thereto reflect retroactively (i) the increase in the authorized shares of Common Stock to 55.0 million, and (ii) the issuance of 9.4 million shares of Common Stock, which increased the Common Stock outstanding from 14.6 million shares to 24.0 million shares, based on a stock split of approximately 1.644 for 1.0 effected on October 25, 1995. All per share amounts in the financial statements reflect this split. M. SUPPLEMENTAL NONCASH ACTIVITIES During 1995, CMS Energy acquired all of the outstanding capital stock of both Walter International, Inc. and subsidiaries ("Walter") and Terra Energy, Ltd. and subsidiaries ("Terra"), as discussed further in Notes 2 and 3, payable in Common Stock of CMS Energy. Upon consummating the acquisitions, the stock of Walter and Terra were transferred from CMS Energy to the Company, and the Company has recorded in the consolidated balance sheet as of September 30, 1995 the fair value of the Walter and Terra assets and liabilities, a noncash contribution from CMS Energy of $23.8 million, cash contributions from CMS Energy of $4.5 million and $67.8 million for notes payable to CMS Energy. These acquisitions were recorded under the purchase method of accounting. The fair value of Walter's and Terra's assets and liabilities at the date of the respective acquisitions are presented in Note 2. 2. PURCHASES OF OIL AND GAS PROPERTIES During 1994, the Company purchased 9.1 MMBbls of estimated proved oil reserves and 9.4 billion cubic feet ("Bcf") of estimated proved gas reserves in three separate acquisitions totaling $33.5 million. The Company participated in four separate reserve acquisitions in 1992. These purchases added approximately 2.7 million barrels of oil equivalent ("MMBoe") of estimated proved reserves at an aggregate net cost of $13.6 million. F-11 98 CMS NOMECO OIL & GAS CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1995 PURCHASES OF OIL AND GAS PROPERTIES (UNAUDITED) In February 1995, the Company acquired Walter (through contributions from CMS Energy, "the Walter Acquisition"). This acquisition increased certain line items on the Consolidated Balance Sheet as follows:
(DOLLARS IN THOUSANDS) Cash and temporary cash investments....................................... $ 7,411 Accounts receivable....................................................... 9,488 Other current assets...................................................... 3,654 Property, plant and equipment............................................. 37,457 Current maturities of long-term debt...................................... 1,968 Accounts payable.......................................................... 7,615 Accrued interest.......................................................... 52 Accrued taxes and other................................................... 1,621 Long-term debt............................................................ 16,280 Deferred income taxes and other credits................................... 3,248 Additional paid-in capital................................................ 27,226
In August 1995, the Company acquired Terra (through contributions from CMS Energy, "the Terra Acquisition"). This acquisition increased certain line items on the Consolidated Balance Sheet as follows:
(DOLLARS IN THOUSANDS) Cash and temporary cash investments....................................... $ 8,745 Accounts receivable....................................................... 27,048 Other current assets...................................................... 5,033 Investments and other assets.............................................. 7,940 Property, plant and equipment............................................. 55,100 Current maturities of long-term debt...................................... 2,600 Accounts payable.......................................................... 23,182 Accrued taxes and other................................................... 5,250 Long-term debt............................................................ 62,476 Deferred income taxes and other credits................................... 9,358 Additional paid-in capital................................................ 1,000
The assets purchased have been included in property, plant and equipment at cost. Results of operations include income from the purchased properties beginning with the month of closing. PRO FORMA INFORMATION (UNAUDITED) The following pro forma statement of income information has been prepared to give effect to the acquisition of Walter and Terra as if such transactions had occurred at January 1, 1994. The other property acquisitions in 1994, noted above, are deemed to be insignificant for inclusion in the pro forma information. The historical results of operations have been adjusted to reflect (i) revenues and expenses attributable to the properties, (ii) the difference between the acquired properties' historical depreciation, depletion and amortization and such expense calculated based on the value allocated to the acquired assets, and (iii) adjustment of income tax expense to reflect the combined results of operations. Management does not believe the pro forma amounts purport to be indicative of the results of operations that would have been reported had the acquisitions occurred as of the dates indicated below, or that may be reported in the future. F-12 99 CMS NOMECO OIL & GAS CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PRO FORMA ------------------------------ NINE MONTHS YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 30, 1994 1995 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Operating revenues................................................. $110,512 $ 105,455 Pretax operating income............................................ 18,731 33,753 Income before extraordinary item................................... 20,084 26,671 Net income......................................................... 20,084 25,684 Net income per share............................................... $ 0.84 $ 1.07
3. LONG-TERM DEBT Long-term debt consisted of the following:
DECEMBER 31, --------------------- SEPTEMBER 30, 1993 1994 1995 (UNAUDITED) (DOLLARS IN THOUSANDS) $130,000,000 revolving credit agreement ("Credit Agreement") payable in 36 monthly principal installments beginning November 1, 1996, variable interest rate, 7.3% average rate per annum for the year ended December 31, 1994..... $ 69,100 $ 89,000 $ 113,300 Senior serial notes, Series A, payable in annual principal installments of $5.0 million on each March 1 through 1997, interest at 9.3% per annum payable semi- annually on each March 1 and September 1*............................... 20,000 15,000 -- Senior serial notes, Series B, payable in annual principal installments of approximately $3.6 million on each March 1 through 2000, interest at 9.45% per annum payable semi-annually on each March 1 and September 1*.................. 25,000 21,428 -- Notes payable to CMS Energy, interest at LIBOR plus 2.0% per annum, maturity dates of November 1, 1999........................................ -- -- 67,840 OPIC guaranteed loans............................ 4,620 3,613 14,172 Terra debt assumed............................... -- -- 3,736 -------- -------- --------- Total long-term debt................... 118,720 129,041 199,048 Less current maturities of long-term debt........ 9,579 9,579 6,677 -------- -------- --------- $109,141 $119,462 $ 192,371 ======== ======== =========
- ------------------------------ * Repaid in full August 10, 1995 with additional bank borrowings under the Credit Agreement. F-13 100 CMS NOMECO OIL & GAS CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As of December 31, 1994, principal maturities of long-term debt over the next five years are as follows:
(DOLLARS IN THOUSANDS) 1995...................................................................... $ 9,579 1996...................................................................... 14,523 1997...................................................................... 39,243 1998...................................................................... 33,824 1999...................................................................... 28,291 Thereafter................................................................ 3,581 --------- $ 129,041 =========
In November 1993, the Company amended the terms of its Credit Agreement and increased the amount of the commitment to $110.0 million. In March 1995, the commitment was increased to $130.0 million. Borrowings under the agreement are revolving credit loans for three years which convert to term loans on November 1, 1996. The term loans are payable in 36 monthly installments through November 1, 1999. The Credit Agreement provides various options to the Company relative to interest rates. As of December 31, 1994 and September 30, 1995, the average rate in effect was 7.3% per annum and 7.2% per annum, respectively, and amounts outstanding were $89.0 million and $113.3 million, respectively. The Credit Agreement requires a commitment fee. The Company also had a series of note agreements dated as of March 1, 1990 pursuant to which $36.4 million of senior serial notes were outstanding as of December 31, 1994. The $27.9 million of notes outstanding were repaid in full August 10, 1995, at a premium of $1.5 million resulting in an after-tax extraordinary item of $987,000 being reflected on the Statements of Income. In 1992, the Company utilized an additional borrowing alternative through Overseas Private Investment Corporation ("OPIC") project financing in Equatorial Guinea ($3.6 million outstanding as of December 31, 1994). As of September 30, 1995, $14.2 million of project financing debt is outstanding under agreements with OPIC. These OPIC guaranteed loans funded development drilling for the Alba Field in Equatorial Guinea ($5.4 million) and acquisition financing for the Yombo Filed in the Congo ($8.8 million). At December 31, 1994, the Company also had a $4.4 million stand-by letter of credit in support of the Ecuador project. This letter of credit expired in 1995 and has not been renewed. The aggregate borrowing base under the Credit Facility is limited to the estimated loan value of the Company's oil and gas reserves, subject to certain exclusions, based upon forecast rates of production and current commodity pricing assessments, as periodically redetermined by the Banks which are parties to the Credit Agreement. The Banks have broad discretion in determining which of the Company's reserves to include in the borrowing base. The Company is in early stages of negotiations to, among other things, increase commitment levels and expand the borrowing base under the Credit Facility. The total borrowing base at December 31, 1994, was $134.7 million. Because of adjustments to the borrowing base for outstanding letters of credit and project financing debt in Equatorial Guinea, the total amount available for borrowing from all sources as of December 31, 1994 was $133.7 million. Of the total amount available, $129.0 million in borrowings were outstanding as of December 31, 1994. Under the terms of the Credit Agreement, the Company must (i) maintain a ratio of current assets to current liabilities at least equal to 0.75 to 1.0, (ii) maintain a ratio of total liabilities to tangible net worth of no more than 0.75 to 1.0, (iii) maintain a minimum tangible net worth of $150.0 million, and (iv) maintain a ratio of cash flow after dividends to fixed charges for the most recent four quarters of 2.0 to 1.0. Restrictive covenants under the Credit Agreement include certain limitations on indebtedness and contingent obligations, as well as certain restrictions on liens, investments, affiliate transactions and sales of assets. In addition, the F-14 101 CMS NOMECO OIL & GAS CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Banks have the right to require the Company to repay all advances under the Credit Agreement within 90 days after notification to the banks that (i) CMS Energy no longer beneficially owns a majority of the outstanding voting stock of the Company or (ii) all or substantially all of the assets of the Company are sold. As of September 30, 1995, the Company's current ratio was 1.60 to 1.0, its total liabilities to tangible net worth ratio was 0.72 to 1.0, its tangible net worth was $302.0 million and its ratio of cash flow after dividends to fixed charges was 4.9 to 1.0. The fair value of these facilities, because of prepayment premiums on the senior notes, is estimated to exceed the recorded amounts by approximately $2.5 million at December 31, 1993 and $2.1 million at December 31, 1994. In August 1995, the Company issued a note in the principal amount of approximately $61.3 million (the "Terra Note") to the Parent, which in turn assigned it to CMS Energy, in connection with the transfer by CMS Energy of the common stock of Terra to the Parent and then by the Parent to the Company, and in May, 1995 the Company issued another note in the principal amount of approximately $6.5 million (the "Walter Note") to CMS Energy in connection with borrowings made to repay $6.6 million of indebtedness of Walter immediately upon the closing of the Walter acquisition (the Terra Note and the Walter Note together referred to herein as the "CMS Notes"). The CMS Notes bear interest at the rate of London Interbank Offered Rate ("LIBOR") plus 2.0% per annum and have a maturity date of November 1, 1999. Amounts outstanding under the CMS Notes are expressly subordinate to the Company's Credit Agreement. Certain limitations are placed on the Company's obligation to make payments on the loans under the CMS Notes in the event of default under the terms of the Credit Agreement. In connection with the Terra Acquisition, the Company assumed $3.7 million of long-term debt comprised of $1.9 million of capitalized leases and $1.8 million outstanding under a term loan for financing of a processing plant under construction. In December 1994, CMS Energy arranged for the issuance of a standby letter of credit, currently in the amount of $45.0 million, to secure the Company's performance under the operating services agreement with respect to the Colon Unit in Venezuela. The Company has agreed to reimburse CMS Energy on demand for any draw made under the letter of credit and to pay to CMS Energy a fee of 2.125% per annum of the face amount of the letter of credit. The Company has entered into an interest rate swap agreement with a bank which effectively fixed the interest rate on $20.0 million of floating rate debt. Under the agreement, the Company will pay the bank interest at the rate of 5.81% per annum over the term of the agreement and the bank will pay the Company the three-month LIBOR rate. The swap agreement, which will terminate March 24, 1997, requires quarterly settlement payments. As of December 31, 1994, the bank owed the Company $24,000 for the first quarter 1995 settlement. 4. INCOME TAXES The Company and its consolidated subsidiaries join with CMS Energy in filing a consolidated U.S. tax return. Taxable income or loss are determined for the Company and its subsidiaries as if they were filing separate income tax returns. Tax benefits for losses and nonconventional fuel tax credits (Section 29 Credits) are recognized by the Company to the extent utilized in the consolidated return. Because the Company has been (and is expected to continue to be) included in the consolidated federal income tax return filed by CMS Energy, these Section 29 Credits have either been used currently to reduce the tax liability of the CMS Energy consolidated group or have created a minimum tax credit carryforward for use in future years. If the taxable income of the CMS Energy consolidated group in future years were to be less than projected, the Section 29 Credits would be deferred or eliminated. Moreover, if the Company were deconsolidated from the CMS Energy consolidated group, the Company's ability to realize any benefit from past or future Section 29 F-15 102 CMS NOMECO OIL & GAS CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Credits would be materially restricted. The Company has no plans, and has been advised by CMS Energy that CMS Energy has no plans, to effect any transaction in the foreseeable future that would cause a deconsolidation of the Company from the CMS Energy consolidated group. To the extent required by local law, the Company and certain of its subsidiaries file income and other tax returns in those non-U.S. countries in which the Company does business. Significant components of income tax expense were as follows:
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, --------------------------- ----------------- 1992 1993 1994 1994 1995 (UNAUDITED) (DOLLARS IN THOUSANDS) Current tax (benefit).................... $(1,173) $ 820 $(1,137) $ 1,442 $(1,788) Deferred tax (benefit)................... (1,307) (8,474) (4,331) (3,547) 1,642 Tax rate change.......................... -- 1,886 -- -- -- Amortization of investment tax credit.... (200) (132) (55) (43) -- ------- ------- ------- ------- ------- $(2,680) $(5,900) $(5,523) $(2,148) $ (146) ======= ======= ======= ======= ======= Operating................................ $(2,100) $(5,900) $(5,523) $(2,148) $ 386 Other.................................... (580) -- -- -- (532) ------- ------- ------- ------- ------- $(2,680) $(5,900) $(5,523) $(2,148) $ (146) ======= ======= ======= ======= =======
Income taxes shown above for the nine months ended September 30, 1995 include a $532,000 benefit which has been deducted from the "extraordinary item" on the Consolidated Statements of Income. Income tax expense for 1993 includes $1.9 million to increase prior years' deferred taxes to the revised statutory rate of 35.0% per annum. Income taxes shown above for 1992 include $580,000 which has been deducted from the "cumulative effect of accounting change" on the Consolidated Statements of Income. Total income tax provision (benefit) was as follows:
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, --------------------------- ----------------- 1992 1993 1994 1994 1995 (UNAUDITED) (DOLLARS IN THOUSANDS) U.S.: Current............................. $(2,418) $ 59 $(1,777) $ 600 $(1,291) Deferred............................ (2,121) (7,137) (5,103) (3,849) (376) Non-U.S.: Current............................. 1,245 761 640 842 (497) Deferred............................ 614 417 717 259 2,018 ------- ------- ------- ------- ------- Total.......................... $(2,680) $(5,900) $(5,523) $(2,148) $ (146) ======= ======= ======= ======= =======
The Company's wholly owned subsidiaries have approximately $132.9 million of net operating loss carryforwards generated in foreign taxing jurisdictions. These foreign net operating loss carryforwards are available to offset income taxable only in the jurisdictions in which the corresponding losses occurred. The losses carry forward until utilized, until they lapse under the respective taxation regime or the wholly-owned subsidiaries which generated the losses withdraw from business activities within the respective taxing jurisdictions. F-16 103 CMS NOMECO OIL & GAS CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The principal components of the Company's deferred tax assets (liabilities) recognized in the balance sheet are as follows:
DECEMBER 31, --------------------- SEPTEMBER 30, 1993 1994 1995 (UNAUDITED) (DOLLARS IN THOUSANDS) Unsuccessful well and lease costs.................. $(132,248) $(144,669) $(152,180) Intangible drilling costs.......................... (37,881) (38,204) (38,492) Capitalized general and administrative costs....... (10,194) (15,423) (15,359) Other.............................................. (10,878) (9,425) (10,440) --------- --------- --------- Gross deferred tax liabilities..................... (191,201) (207,721) (216,471) Accumulated depreciation, depletion and amortization..................................... 124,898 135,696 130,148 Alternative minimum tax credit carryforward........ 18,120 27,229 28,260 Other.............................................. 742 1,684 3,710 --------- --------- --------- Gross deferred tax assets.......................... 143,760 164,609 162,118 --------- --------- --------- Net deferred tax liability (includes current)...... $ (47,441) $ (43,112) $ (54,353) ========= ========= =========
The actual income tax expense (benefits) differs from the amount computed by applying the statutory U.S. Federal tax rate to income before income taxes as follows:
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ----------------------------- ------------------ 1992 1993 1994 1994 1995 (UNAUDITED) (DOLLARS IN THOUSANDS) Net income........................... $ 3,838 $ 5,138 $ 9,797 $10,914 $19,477 Income tax provision (benefit)....... (2,680) (5,900) (5,523) (2,148) (146) ------- ------- ------- ------- ------- 1,158 (762) 4,274 8,766 19,331 Statutory U.S. income tax rate....... 34% 35% 35% 35% 35% ------- ------- ------- ------- ------- Expected income tax provision (benefit).......................... 394 (267) 1,496 3,068 6,766 Increase (Decrease) In Taxes From: Nonconventional fuels tax credit........................ (4,425) (5,605) (8,460) (6,000) (8,950) Intercompany interest income.... -- 130 1,185 824 1,180 Effect of tax rate change....... -- 1,886 -- -- -- Command stock transactions...... 328 (2,147) -- -- -- Foreign taxes, net of U.S. benefit....................... 1,247 318 533 263 955 Permanent differences........... 53 (435) (268) (103) 113 Other, net...................... (277) 220 (9) (200) (210) ------- ------- ------- ------- ------- Income tax provision (benefit)....... $(2,680) $(5,900) $(5,523) $(2,148) $ (146) ======= ======= ======= ======= =======
5. RELATED PARTY TRANSACTIONS Accounts receivable -- affiliates as of December 31, 1993 includes a $2.0 million equity infusion from CMS Energy which was paid to the Company in January 1994. The Company sells natural gas to affiliates at rates approximating the average price of gas paid to other area producers. Total sales to an affiliate, Consumers Power Company, were approximately $3.4 million in 1992, $2.6 million in 1993, $0.7 million in 1994 and $14.1 million for the nine months ended September 30, 1995. Other intercompany transactions, principally services, are billed at cost. Gas sales to the Midland Cogeneration Venture amounted to approximately $6.4 million in 1992, $12.2 million in 1993 and $9.2 million in 1994. F-17 104 CMS NOMECO OIL & GAS CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In 1993, the Company received $2.6 million for its share of proceeds from the sale of certain northern Michigan pipelines to an affiliate, CMS Gas Transmission and Storage Company. 6. SIGNIFICANT CUSTOMERS Revenues from sales to the Company's largest customers as a percent of total Company revenues were:
1992 1993 1994 Midland Cogeneration Venture........................................ 9% 15% 11% Total Petroleum Company............................................. 11% 8% 5%
7. COMMITMENTS AND CONTINGENCIES The Company estimates its capital expenditures for 1995 will be $193.6 million and certain commitments have been made in connection therewith. A. HERITAGE RESOURCES, INC. On December 18, 1987, Tribal Drilling Company ("Tribal") and certain other plaintiffs, including J. Stuart Hunt, an affiliate of Tribal and a director of the Company, filed a lawsuit in Dallas County, Texas (the "Dallas County Lawsuit") seeking, among other things, a declaratory judgment against Heritage Resources, Inc. ("Heritage") to the effect that Heritage was not qualified to serve as the operator of Sections 21, 22 and 23 of the Crittendon Field located in Winkler County, Texas, that Heritage had been properly removed as operator pursuant to a vote of non-operator working interest owners and that Tribal is the duly elected replacement operator. The Company, which was not originally a plaintiff in the Dallas County Lawsuit, has non-operating working interests in Sections 21 and 23 of the Crittendon Field. Pursuant to the court's order to join all indispensable parties, on April 20, 1988 plaintiffs filed an amended petition for declaratory relief which included the Company as one of the plaintiffs. Heritage and certain related parties subsequently filed counterclaims against all of the approximately 20 plaintiffs in the Dallas County Lawsuit, including the Company, alleging various causes of action, including without limitation claims for breach of contract, slander of title, tortious interference with contract, tortious interference with business relations, fraud, conspiracy and intentional infliction of emotional distress. In the Dallas County Lawsuit, Heritage seeks approximately $100 million in actual damages, exemplary damages not to exceed $1 billion, attorneys' fees and declaratory relief. Trial of the Dallas County lawsuit, including counterclaims, is currently scheduled for May 1996. On December 18, 1987, Heritage and certain related parties filed two separate lawsuits, since consolidated, in Winkler County, Texas (the "Winkler County Lawsuit") against certain but not all non-operator working interest owners of Sections 21 and 22 of the Crittendon Field. The Company was not a party to the Winkler County Lawsuit. In the Winkler County Lawsuit, the plaintiffs in many respects alleged the same course of conduct that is the subject of the Dallas County Lawsuit, including Heritage's counterclaims. In October 1992, a jury in the Winkler County lawsuit returned a verdict in favor of plaintiffs and against the defendants in that litigation in an aggregate amount in excess of $80 million plus attorneys' fees in excess of $20 million. Certain defendants subsequently entered into a settlement with the plaintiffs and the non-settling plaintiffs have appealed the judgments in the Winkler County Lawsuit to the Texas Court of Appeals in El Paso, Texas. The Court of Appeals has indicated that it may rule on the appeal by late 1995 or early 1996. The Company believes that it has meritorious defenses to the counterclaims in the Dallas County lawsuit and intends to defend itself vigorously in such lawsuit. Management believes it is unlikely that the ultimate outcome of this matter will have a material adverse effect on the Company's financial condition or results of operations. However, the outcome of a jury trial is difficult to predict, and there can be no assurance that the resolution of Heritage's counterclaims against the Company will not have such a material adverse effect. F-18 105 CMS NOMECO OIL & GAS CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) B. ECUADOR The Company has a 14% working interest in a consortium which is conducting oil development and production activities in several fields within the Oriente Block 16 in the Republic of Ecuador and Tivacuno Area in Eastern Ecuador, from which production began in 1994. This project is operated by Maxus Energy Corporation, a recently-acquired subsidiary of YPF Sociedad Anonima ("YPF"). Production from Block 16 and related fields in the Oriente Basin of the Ecuadorian Amazon region has steadily increased since start-up in mid-1994, with new wells and fields continuing to be brought on stream. As of June 30, 1995, these fields represented approximately 14.1% of the Company's estimated total proved reserves of oil and natural gas on a Boe basis. With lower worldwide oil prices and increases in total project costs reducing the overall economic benefit of these fields to the Ecuadorian government, the Ministry of Energy and Mines in Ecuador has notified the members of the consortium with interests in such fields that they should investigate alternatives for improving project economics to the Ecuadorian government, including the renegotiation of the service contract governing the Company's interest in these fields. The Ecuadorian government has significant leverage to force changes due to its broad governmental and regulatory powers. Authorizations have been and may in the future be withheld and/or delayed to the economic detriment of the consortium unless the discussions are productive. Discussions with the Ecuadorian government concerning various alternatives began in late September 1995 and will likely continue for the next several months. Although the Company cannot currently predict what impact, if any, these discussions will have on the project's economics, and there can be no assurance that these discussions or their outcome will not have a material adverse effect on the Company's estimated reserves, financial condition or results of operations; in management's opinion the ultimate outcome will not have a material adverse impact on the Company's financial condition or results of operations. C. DUAL CONSOLIDATED LOSSES As a result of the Walter Acquisition and related transactions, the Company acquired certain assets located in the Congo which, prior to such transactions, were owned by affiliates of Amoco Corporation ("Amoco"). As a result of certain agreements entered into in connection with the Walter Acquisition, CMS Energy and the Company could become jointly and severally liable to Amoco or to the Internal Revenue Service for the recapture of "dual consolidated losses" utilized by Amoco in prior years if a "triggering event" were to occur with respect to such assets or with respect to the stock of Walter or certain of its subsidiaries. The amount of such potential liability could be up to $78.2 million, plus an interest factor thereon. However, CMS Energy has agreed to indemnify the Company for such liability if the triggering event results from acts or omissions (i) of CMS Energy or any of its subsidiaries (other than the Company) which occur after the initial public sale of the Company's Common Stock; (ii) of the Company or any of its subsidiaries if such acts or omissions are approved by the Board of Directors of the Company, which approval includes the affirmative vote of a majority of the employees of CMS Energy or any of its subsidiaries (other than the Company or any of its subsidiaries) who serve on the Company's Board of Directors; or (iii) of any person if such acts or omissions occur prior to the initial public sale of the Company's Common Stock. In return, the Company has agreed to indemnify CMS Energy for any such dual consolidated loss tax liability if the triggering event results from acts or omissions of the Company on or after the date of the initial public sale of the Company's Common Stock which have not been approved by the Board of Directors of the Company in the manner described in the preceding sentence. The Company's subsidiary, Walter (now named CMS NOMECO International, Inc.), could also be secondarily liable to Amoco for up to $59.0 million in potential recapture tax, plus an interest factor thereon, if Nuevo Energy Company ("Nuevo"), an unaffiliated company, were to fail to satisfy its potential liability to Amoco with respect to the recapture of dual consolidated losses relating to certain other assets located in the Congo acquired by Nuevo's affiliate from an affiliate of Amoco simultaneously with Walter's acquisition of its Congolese assets. Because the net assets of Nuevo currently appear to be adequate to satisfy any obligation which Nuevo may have with respect to such other assets, the F-19 106 CMS NOMECO OIL & GAS CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company believes that it is unlikely that Walter would have to make a payment to satisfy its secondary liability, although there can be no assurance that this will be the case. However, if Walter were required to make such a payment, it would have a claim against Nuevo, but would not be able to recover such payment from CMS Energy under the above-described indemnity. As a result of the Company's November 1993 acquisition (the "Yemen Acquisition") of its ownership interest in Pecten Yemen Company ("PYC"), a predecessor of Comeco Petroleum, Inc. from a member of the Shell Petroleum Inc. consolidated group (the "SPI Group"), the Company agreed to become jointly and severally liable for tax liabilities incurred by the SPI Group as a result of the recapture of dual consolidated losses generated by PYC and utilized by the SPI Group for tax purposes in prior years, if a "triggering event" were to occur with respect to the stock or assets of PYC after such acquisition. It is estimated that the Company's potential joint and several liability for dual consolidated loss recapture tax liability incurred by the SPI Group would be approximately $15.8 million plus an interest factor thereon. CMS Energy has not agreed to indemnify the Company for this potential tax claim. However, if the Company were required to make a payment in satisfaction of such liability due to a triggering event that it did not solely cause, it would have a claim against the other stockholders of Comeco for at least the amount by which such payment exceeded $7.9 million, plus an interest factor thereon. In addition to the potential recapture of the dual consolidated losses arising from the Walter Acquisition, the Yemen Acquisition and related transactions, the Company and its other domestic affiliates have incurred losses in certain other foreign countries. The additional tax liability that could be recaptured upon a triggering event (including the Company's obligations to other parties under agreements similar to the indemnification agreement with Amoco and the SPI Group described in the preceding paragraphs) would be approximately $10.0 million as of December 31, 1994, plus an interest factor thereon. D. HEDGING ARRANGEMENTS The Company periodically enters into oil and gas price hedge arrangements to mitigate its exposure to price fluctuations on the sale of oil and natural gas. As of December 31, 1994, the Company was party to gas price collar contracts on 7.3 Bcf of gas for the delivery months of January through December 1995 at prices ranging from $2.05 to $2.35 per MMBtu. The Company also had an oil collar contract for 1,000 barrels ("Bbls") per day with a floor of $18.00 per Bbl and a ceiling of $19.95 per Bbl. The contracts are accounted for as hedges; accordingly, any gains or losses are deferred and recognized on the settlement dates. The Company received $241,000 in 1994 for settlement of January 1995 contracts on 0.6 Bcf of gas. At December 31, 1994, the fair value of these hedge arrangements was not materially different than the book value. The Company has also hedged certain of its gas supply obligations to the Midland Cogeneration Venture in the years 2001 through 2006 by entering into an agreement with Louis Dreyfus on May 1, 1989 to purchase the economic equivalent of 10,000 MMBtu per day at a fixed, escalated price starting at $2.82 per MMBtu in 2001. The settlement periods are each one year period ending December 31, 2001 through 2006 on 3.65 MMBtu. If the "floating price", essentially the then current Gulf Coast spot price, for a period is higher than the "fixed price", the seller pays the Company the difference, and vice versa. If a party's exposure at any time exceeds $2.0 million, that party is required to obtain a letter of credit in favor of the other party for the excess over $2.0 million, to a maximum of $10.0 million. At December 31, 1994, the seller had arranged a letter of credit in the Company's favor for $3.0 million. E. OTHER The Company is party to certain other lawsuits and administrative proceedings arising in the ordinary course of business before various courts and governmental agencies involving, for example, claims for personal injury and property damages, contractual matters, environmental issues and other matters. Management F-20 107 CMS NOMECO OIL & GAS CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) cannot predict the ultimate resolution of these matters but it believes resulting liabilities, if any, will not have a material adverse effect upon the Company's financial position or results of operations. 8. FINANCIAL INSTRUMENTS The carrying amounts of cash, temporary cash investments and current liabilities approximate their fair values due to their short-term nature. The estimated fair values of long-term investments are based on quoted market prices or, in the absence of specific market prices, on quoted market prices of similar investments or other valuation techniques. The carrying amounts of all long-term investments in financial instruments approximate fair value. The carrying amount of long-term debt was $118.7 million and $129.0 million and the fair value of long-term debt was $121.2 million and $131.1 million as of December 31, 1993 and 1994, respectively. Although the current fair value of the long-term debt may differ from the current carrying amount, settlement of the reported debt is generally not expected until maturity. The fair values of the Company's off-balance-sheet financial instruments are based on the amounts estimated to terminate or settle the instruments. The fair value of interest rate swap agreements was $24,000 as of December 31, 1994. Effective January 1, 1994, the Company adopted SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, which did not materially impact the Company's financial position or results of operations. 9. LEASES The Company and its subsidiaries lease various assets, including vehicles, office equipment and office space under leases expiring on various dates through 1999. Rental expense under these leases was $527,000 and $541,000 for the years ended December 31, 1993 and 1994, respectively. Minimum rental commitments under the Company's non-cancelable leases at December 31, 1994, were:
(DOLLARS IN THOUSANDS) 1995...................................................................... $ 467 1996...................................................................... 431 1997...................................................................... 442 1998...................................................................... 442 1999...................................................................... 416 ------- $ 2,198 =======
F-21 108 CMS NOMECO OIL & GAS CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. PROPERTY, PLANT AND EQUIPMENT Investments in property, plant and equipment were as follows at December 31, 1993 and 1994:
1993 1994 (DOLLARS IN THOUSANDS) Oil and Gas Properties: Proved.................................................... $ 770,532 $ 866,156 Unproved.................................................. 47,591 48,401 --------- --------- 818,123 914,557 Other properties............................................... 23,401 19,903 Less accumulated depreciation, depletion and amortization...... (465,534) (496,403) --------- --------- Net property, plant and equipment.............................. $ 375,990 $ 438,057 ========= =========
Depreciation, depletion and amortization for oil and gas properties for the years ended December 31, 1992, 1993 and 1994 were $32.4 million, $35.4 million and $34.6 million, respectively. 11. GEOGRAPHIC AREA INFORMATION Pertinent information with respect to the Company's business is presented in the following table:
OIL AND GAS ------------------------------------------------------ UNITED SOUTH AFRICA & STATES AMERICA MIDDLE EAST OTHER TOTAL OTHER TOTAL (DOLLARS IN THOUSANDS) 1992: Revenues............... $ 54,105 $ -- $ 2,879 $ 4,634 $ 61,618 $ 7,734 $ 69,352 Pretax operating income............... 9,351 (3,070) 1,377 356 8,014 (361) 7,653 Depreciation, depletion and amortization..... 30,703 -- 510 1,161 32,374 192 32,566 Capital expenditures... 39,291 12,774 3,232 8,771 64,068 3,991 68,059 Identifiable assets at December 31.......... 295,824 34,286 12,376 22,168 364,654 5,620 370,274 1993: Revenues............... $ 55,939 $ 1,816 $ 4,971 $ 5,659 $ 68,385 $ 5,520 $ 73,905 Pretax operating income............... 9,198 (1,805) 2,736 (4,254) 5,875 (3,175) 2,700 Depreciation, depletion and amortization..... 31,699 947 1,075 1,690 35,411 194 35,605 Capital expenditures... 24,208 42,188 4,257 1,766 72,419 5,331 77,750 Identifiable assets at December 31.......... 299,039 66,481 12,258 17,859 395,637 6,724 402,361 1994: Revenues............... $ 58,292 $ 7,719 $ 4,520 $ 4,345 $ 74,876 $ 4,192 $ 79,068 Pretax operating income............... 13,475 1,512 1,962 (3,839) 13,110 (5,052) 8,058 Depreciation, depletion and amortization..... 28,751 3,002 852 2,034 34,639 280 34,919 Capital expenditures... 25,940 69,530 6,436 2,478 104,384 3,804 108,188 Identifiable assets at December 31.......... 300,374 138,095 11,749 15,746 465,964 6,736 472,700
F-22 109 CMS NOMECO OIL & GAS CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 12. OTHER OPERATING REVENUES Other operating revenues for the periods indicated were as follows:
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------- ------------------- 1992 1993 1994 1994 1995 (UNAUDITED) (DOLLARS IN THOUSANDS) Plant and refinery sales................. $7,734 $5,520 $ 4,192 $ 3,403 $ 3,442 Gas contract dispositions................ -- -- 4,800 4,800 9,858 Hedging: Gas................................. (963) (889) 2,285 1,113 2,826 Oil................................. -- -- 95 -- (224) Other.................................... 1,637 1,644 961 791 1,836 ------ ------ ------- ------- ------- $8,408 $6,275 $12,333 $10,107 $17,738 ====== ====== ======= ======= =======
During 1994 and 1995, the Company disposed of two long-term gas contracts to unrelated third parties for aggregate consideration of $4.8 million and $9.9 million, respectively. Upon disposing of these contracts, the Company has no future obligations under either contract. F-23 110 CMS NOMECO OIL & GAS CO. SUPPLEMENTAL INFORMATION -- OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) The following information was prepared in accordance with the Supplemental Disclosure Requirements of SFAS No. 69, Disclosures About Oil and Gas Producing Activities. Refer to the Consolidated Statements of Income for the Company's results of operations from exploration and production activities provided elsewhere in this Prospectus. Data relating to U.S. processing plants and an Australian refinery are excluded. Data related to the Company's equity investment in Yemen is shown separately. The following estimates, which were prepared by the Company's petroleum engineers, of proved developed and proved undeveloped reserve quantities and related standardized measure of discounted estimated future net cash flows do not purport to reflect realizable values or fair market values of the Company's reserves. The Company emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise than those of currently producing oil and gas properties. Accordingly, these estimates are expected to change as future information becomes available. Proved reserves are estimated quantities of oil and natural gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. 1. ESTIMATED PROVED RESERVES OF OIL AND GAS
TOTAL U.S. SOUTH AFRICA & OTHER ------------ ------------ AMERICA MIDDLE EAST ----------- OIL GAS OIL GAS OIL OIL OIL GAS (OIL IN MMBBLS AND GAS IN BCF) Estimated Proved Developed and Undeveloped Reserves: December 31, 1991................. 28.5 191.2 5.3 187.1 19.2 1.8 2.2 4.1 Revisions and other changes..... 0.8 (20.4) 0.2 (20.1) (0.1) 0.8 (0.1) (0.3) Extensions and discoveries...... 7.4 45.4 0.1 44.7 5.4 0.5 1.4 0.7 Purchases of reserves........... 1.0 9.9 0.2 6.8 0.8 -- -- 3.1 Production...................... (1.6) (17.6) (1.1) (17.4) -- (0.1) (0.4) (0.2) ---- ----- ---- ----- ---- ---- ---- ---- December 31, 1992................. 36.1 208.5 4.7 201.1 25.3 3.0 3.1 7.4 Revisions and other changes..... 0.4 7.2 (0.4) 7.1 -- 0.2 0.6 0.1 Extensions and discoveries...... 0.1 2.9 0.1 2.9 -- -- -- -- Purchases of reserves........... -- 1.7 -- 1.7 -- -- -- -- Production...................... (1.9) (18.5) (1.0) (18.2) (0.2) (0.3) (0.4) (0.3) ---- ----- ---- ----- ---- ---- ---- ---- December 31, 1993................. 34.7 201.8 3.4 194.6 25.1 2.9 3.3 7.2 Revisions and other changes..... (1.3) (9.7) (0.3) (9.4) (2.0) 0.6 0.4 (0.3) Extensions and discoveries...... 0.4 50.2 0.4 50.2 -- -- -- -- Acquisitions of reserves........ 20.2 9.4 -- 9.4 20.2 -- -- -- Production...................... (2.1) (20.5) (0.8) (20.3) (0.7) (0.3) (0.3) (0.2) ---- ----- ---- ----- ---- ---- ---- ---- December 31, 1994................. 51.9 231.2 2.7 224.5 42.6 3.2 3.4 6.7 ==== ===== ==== ===== ==== ==== ==== ==== Estimated Proved Developed Reserves: December 31, 1991................. 25.9 188.0 5.1 183.9 19.2 0.6 1.0 4.1 December 31, 1992................. 31.7 205.0 4.5 198.8 25.3 0.9 1.0 6.2 December 31, 1993................. 31.2 200.0 3.3 193.4 25.1 1.5 1.3 6.6 December 31, 1994................. 37.4 211.7 2.5 205.9 31.5 2.6 0.8 5.8 Equity Interest in Estimated Proved Reserves of Pecten Yemen: December 31, 1993................. 1.5 -- -- -- -- 1.5 -- -- December 31, 1994................. 2.9 -- -- -- -- 2.9 -- --
F-24 111 2. STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS FROM ESTIMATED PROVED RESERVES
SOUTH AFRICA & TOTAL U.S. AMERICA MIDDLE EAST(4) OTHER (DOLLARS IN THOUSANDS) December 31, 1992: Future Cash Flows: Revenues(1)...................... $1,017,443 $493,846 $395,380 $ 59,298 $68,919 Less: Production costs(2)........... 405,723 191,206 188,458 14,932 11,127 Development costs(2).......... 100,316 4,690 84,997 3,593 7,036 ---------- -------- -------- --------- ------- Future cash flows before taxes..... 511,404 297,950 121,925 40,773 50,756 Income tax expense(3)............ 29,573 2,263 5,866 16,258 5,186 ---------- -------- -------- --------- ------- Future net cash flows.............. 481,831 295,687 116,059 24,515 45,570 Less discount to present value at a 10% annual rate.................. 164,489 61,018 77,785 7,513 18,173 ---------- -------- -------- --------- ------- Standardized measure of discounted future net cash flows............ $ 317,342 $234,669 $ 38,274 $ 17,002 $27,397 ========== ======== ======== ========= ======= December 31, 1993: Future Cash Flows: Revenues(1)...................... $1,036,387 $542,747 $378,467 $ 51,052 $64,121 Less: Production costs(2)........... 332,517 135,679 180,145 13,013 3,680 Development costs(2).......... 81,274 8,947 57,639 3,393 11,295 ---------- -------- -------- --------- ------- Future cash flows before taxes..... 622,596 398,121 140,683 34,646 49,146 Income tax expense(3)............ 58,500 21,341 22,185 13,174 1,800 ---------- -------- -------- --------- ------- Future net cash flows.............. 564,096 376,780 118,498 21,472 47,346 Less discount to present value at a 10% annual rate.................. 247,900 161,737 62,182 6,069 17,912 ---------- -------- -------- --------- ------- Standardized measure of discounted future net cash flows............ $ 316,196 $215,043 $ 56,316 $ 15,403 $29,434 ========== ======== ======== ========= ======= December 31, 1994: Future Cash Flows: Revenues(1)...................... $1,235,512 $539,409 $580,927 $ 58,948 $56,228 Less: Production costs(2)........... 376,550 191,130 158,708 15,603 11,109 Development costs(2).......... 103,611 11,507 80,496 3,253 8,355 ---------- -------- -------- --------- ------- Future cash flows before taxes..... 755,351 336,772 341,723 40,092 36,764 Income tax expenses (benefit)(3).................. 67,073 (16,015) 64,905 16,462 1,721 ---------- -------- -------- --------- ------- Future net cash flows.............. 688,278 352,787 276,818 23,630 35,043 Less discount to present value at a 10% annual rate.................. 278,046 138,293 115,926 8,532 15,295 ---------- -------- -------- --------- ------- Standardized measure of discounted future net cash flows............ $ 410,232 $214,494 $160,892 $ 15,098 $19,748 ========== ======== ======== ========= =======
- ------------------------------ (1) Oil, gas and condensate revenues are based on year-end prices with adjustments for changes reflected in existing contracts. There is no consideration for future discoveries or risks associated with future production of estimated proved reserves. Beginning in June 1995, transportation expense, which had been shown as a production cost, has been deducted from operating revenues and prior periods have been reclassified. (2) Based on economic conditions at year-end. Does not include general, administrative or financing costs. Does not consider future changes in development or production costs. F-25 112 (3) Based on current statutory rates applied to future cash inflows reduced by future production and development costs, tax deductions and credits. Income tax expense has been reduced by $71.8 million, $83.2 million and $97.4 million of U.S. income tax credits for Antrim gas production at December 31, 1992, 1993 and 1994, respectively. (4) Does not include $2.2 million and $3.0 million at December 31, 1993 and 1994, respectively, of discounted future net cash flows attributable to the Company's interest in the East Shabwa Block in Yemen, which is accounted for using the equity method. 3. RECONCILIATION OF THE CHANGE IN THE STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------- 1993 1994 (DOLLARS IN THOUSANDS) New discoveries.......................................................... $ 3,698 $ 42,148 Acquisitions of reserves in place........................................ 1,829 118,492 Revisions to reserves.................................................... 11,707 (12,882) Sales and transfers...................................................... (50,067) (45,428) Changes in prices........................................................ 50,343 (57,483) Changes in lifting costs................................................. (28,979) (2,012) Accretion of discount.................................................... 33,427 34,868 Net change in income taxes............................................... (13,361) (970) Changes in timing of production and other................................ (9,743) 17,303 -------- -------- Net change during year.............................................. $ (1,146) $ 94,036 ======== ========
4. NET INVESTMENT IN PROVED AREAS(1)
DECEMBER 31, ------------------- 1993 1994 (DOLLARS IN THOUSANDS) Developed properties..................................................... $770,532 $866,156 Undeveloped properties Subject to depletion................................................ 20,192 10,800 Not subject to depletion............................................ 27,399 37,601 -------- -------- 818,123 914,557 Less accumulated depletion and amortization.............................. 445,587 480,226 -------- -------- $372,536 $434,331 ======== ========
- ------------------------------ (1) Excluded are approximately $1.1 million of consolidated non-U.S. investments at December 31, 1993. These investments, which are in areas under exploration by the Company, are not subject to depletion. As of December 31, 1994, the Company's non-U.S. investments in Australia, Colombia, Ecuador, Equatorial Guinea and New Zealand are subject to depletion. Additionally, the Company's net investments attributable to its investment in East Shabwa Block reserves in Yemen, which are accounted for using the equity method, were $2.7 million and $8.2 million as of December 31, 1993 and 1994, respectively. F-26 113 5. EXPLORATION, DEVELOPMENT AND ACQUISITION EXPENDITURES IN PROVED AREAS
SOUTH AFRICA & TOTAL(1) U.S. AMERICA MIDDLE EAST OTHER (DOLLARS IN THOUSANDS) Year Ended December 31, 1992: Exploration................................ $ 5,115 $ 4,178 $ 63 $ 321 $ 553 Development................................ 44,634 26,484 12,710 2,910 2,530 Property acquisitions...................... 14,317 8,630 -- -- 5,687 -------- ------- ------- ------- ------ $ 64,066 $39,292 $12,773 $ 3,231 $8,770 ======== ======= ======= ======= ====== Year Ended December 31, 1993: Exploration................................ $ 2,360 $ 1,579 $ 211 $ 296 $ 274 Development................................ 60,218 15,533 42,222 1,267 1,196 Property acquisitions...................... 7,146 7,096 -- -- 50 -------- ------- ------- ------- ------ $ 69,724 $24,208 $42,433 $ 1,563 $1,520 ======== ======= ======= ======= ====== Year Ended December 31, 1994: Exploration................................ $ 7,333 $ 5,722 $ 568 $ 68 $ 975 Development................................ 58,300 11,860 44,682 371 1,387 Property acquisitions...................... 33,075 8,288 24,781 -- 6 -------- ------- ------- ------- ------ $ 98,708 $25,870 $70,031 $ 439 $2,368 ======== ======= ======= ======= ======
- ------------------------------ (1) Excluded are approximately $3.9 million in 1992, $5.4 million in 1993 and $4.0 million in 1994 invested in unproved areas and non-oil and gas producing properties. Included are $13.6 million in 1992, $0.9 million in 1993 and $33.5 million in 1994 for investments in and purchases of estimated proved reserves. The Company's share of exploration, development and property acquisition expenditures for 1993 and 1994 in its East Shabwa Block reserves in Yemen which is accounted for using the equity method are as follows:
1993 1994 (DOLLARS IN THOUSANDS) Exploration......................................................... $ -- $2,425 Development......................................................... -- 59 Property acquisitions............................................... 2,720 3,004 ------ ------ $2,720 $5,488 ====== ======
F-27 114 6. RESULTS OF OPERATIONS FROM OIL AND GAS PRODUCING ACTIVITIES The following tables set forth the Company's results of operations from oil and gas producing activities for the years ended December 31, 1992, 1993 and 1994. Income taxes are computed by applying the appropriate statutory rate to the results of operations before income taxes. Applicable tax credits and allowances related to oil and gas producing activities have been taken into account in computing income tax expenses. The results of operations below do not include general and administrative expenses, general taxes and net interest expense. Beginning in June 1995, transportation expense, which had been shown as an operating expense, has been deducted from operating revenues and prior periods have been reclassified.
YEAR ENDED DECEMBER 31, 1992 -------------------------------------------------- SOUTH AFRICA & TOTAL U.S. AMERICA MIDDLE EAST OTHER (DOLLARS IN THOUSANDS) Operating Revenues: Oil and condensate......................... $26,553 $19,139 $ -- $ 2,879 $4,535 Natural gas................................ 34,391 34,292 -- -- 99 Other operating............................ 674 674 -- -- -- ------- ------- ------- --------- ------ 61,618 54,105 -- 2,879 4,634 Operating Expenses: Depreciation, depletion and amortization... 32,374 30,703 -- 510 1,161 Cost center write-offs..................... 5,744 -- 3,050 -- 2,694 Operating and maintenance.................. 12,279 10,844 20 992 423 Production taxes........................... 3,207 3,207 -- -- -- ------- ------- ------- --------- ------ 53,604 44,754 3,070 1,502 4,278 Pretax operating income......................... 8,014 9,351 (3,070) 1,377 356 Income tax benefit.............................. (2,100) ------- Income before accounting change................. 10,114 Cumulative effect accounting change............. (1,124) ------- Net income...................................... $ 8,990 =======
YEAR ENDED DECEMBER 31, 1993 --------------------------------------------------- SOUTH AFRICA & TOTAL U.S. AMERICA MIDDLE EAST OTHER (DOLLARS IN THOUSANDS) Operating Revenues: Oil and condensate........................ $26,635 $14,427 $ 1,816 $ 4,971 $ 5,421 Natural gas............................... 40,995 40,757 -- -- 238 Other operating........................... 755 755 -- -- -- ------- ------- ------- --------- ------- 68,385 55,939 1,816 4,971 5,659 Operating Expenses: Depreciation, depletion and amortization............................ 35,411 31,699 947 1,075 1,690 Cost center write-offs.................... 9,648 -- 1,900 -- 7,748 Operating and maintenance................. 14,191 11,936 620 1,160 475 Production taxes.......................... 3,260 3,106 154 -- -- ------- ------- ------- --------- ------- 62,510 46,741 3,621 2,235 9,913 Pretax operating income........................ 5,875 9,198 (1,805) 2,736 (4,254) Income tax benefit............................. (5,900) ------- Net income..................................... $11,775 =======
F-28 115
YEAR ENDED DECEMBER 31, 1994 --------------------------------------------------- SOUTH AFRICA & TOTAL U.S. AMERICA MIDDLE EAST OTHER (DOLLARS IN THOUSANDS) Operating Revenues: Oil and condensate......................... $26,831 $10,502 $7,719 $ 4,520 $ 4,090 Natural gas................................ 39,904 39,649 -- -- 255 Other operating............................ 8,141 8,141 -- -- -- ------- ------- ------- ------- ------- 74,876 58,292 7,719 4,520 4,345 Operating Expenses: Depreciation, depletion and amortization... 34,639 28,751 3,002 852 2,034 Cost center write-offs..................... 5,612 -- -- -- 5,612 Operating and maintenance.................. 18,705 13,627 2,834 1,706 538 Production taxes........................... 2,810 2,439 371 -- -- ------- ------- ------- ------- ------- 61,766 44,817 6,207 2,558 8,184 Pretax operating income......................... 13,110 13,475 1,512 1,962 (3,839) Income tax benefit.............................. (5,523) ------- Net Income...................................... $18,633 =======
There is no income or expense from oil and gas producing activities attributable to the Company's investment in Yemen for the years 1992 to 1994 which is accounted for using the equity method. Exploratory activities continue in 1995. F-29 116 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To CMS NOMECO International, Inc.: We have audited the accompanying consolidated balance sheet of CMS NOMECO International, Inc. and subsidiaries (formerly Walter International, Inc. and subsidiaries) as of December 31, 1994, and the related consolidated statements of operations and accumulated deficit and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CMS NOMECO International, Inc. and subsidiaries as of December 31, 1994, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. Arthur Andersen LLP Houston, Texas, July 17, 1995. F-30 117 CMS NOMECO INTERNATIONAL, INC. AND SUBSIDIARIES (FORMERLY WALTER INTERNATIONAL, INC. AND SUBSIDIARIES) CONSOLIDATED BALANCE SHEETS
JANUARY 31, DECEMBER 31, 1995 1994 (UNAUDITED) ASSETS Current Assets: Cash and cash equivalents...................................... $ 541,247 $ 2,018,000 Accounts receivable............................................ 1,149,995 1,471,588 Inventory...................................................... 188,323 271,140 Other current assets........................................... 1,612 1,612 ------------ ----------- Total current assets...................................... 1,881,177 3,762,340 Property, Plant and Equipment, at Cost: Oil and gas properties, full-cost basis Proved properties being amortized............................ 15,472,534 15,423,511 Unproved properties and properties under development not being amortized............................................. 1,117,221 1,117,221 Furniture and office equipment................................. 69,245 74,581 ------------ ----------- 16,659,000 16,615,313 Less-accumulated depreciation, depletion and amortization...... (9,265,792) (9,368,971) ------------ ----------- Net property, plant and equipment......................... 7,393,208 7,246,342 ------------ ----------- Restricted cash (Note 1)............................................ 466,461 718,323 Other assets, net of amortization of $41,576 and $43,079, respectively...................................................... 58,729 57,226 ------------ ----------- Total assets.............................................. $ 9,799,575 $11,784,231 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued liabilities....................... $ 1,739,767 $ 3,206,650 Advances from joint venture participants....................... 27,321 363,720 Current maturities of long-term debt (Note 7).................. 2,266,110 2,266,110 ------------ ----------- Total current liabilities................................. 4,033,198 5,836,480 Long-term debt (Note 7)............................................. 5,219,390 5,219,390 Commitments And Contingencies (Notes 4 and 8) Redeemable Preferred Stock (Note 3): 14% Senior cumulative preferred stock, $1.00 par value, 3,000 shares authorized and issued (aggregate liquidation preference of $5.1 million).............................................. 3,000 3,000 Stockholders' Equity (Note 3): Common stock, $0.01 par value, 1,000,000 shares authorized and 100,000 shares issued......................................... 1,000 1,000 Additional paid-in capital..................................... 5,934,910 5,934,910 Accumulated deficit............................................ (5,391,923) (5,210,549) ------------ ----------- Total stockholders' equity................................ 543,987 725,361 ------------ ----------- Total liabilities and stockholders' equity................ $ 9,799,575 $11,784,231 ============ ===========
The accompanying notes are an integral part of these consolidated financial statements. F-31 118 CMS NOMECO INTERNATIONAL, INC. AND SUBSIDIARIES (FORMERLY WALTER INTERNATIONAL, INC. AND SUBSIDIARIES) CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
ONE MONTH ENDED YEAR ENDED JANUARY 31, DECEMBER 31, 1995 1994 (UNAUDITED) Revenues: Oil sales........................................................... $ 3,957,697 $ 426,287 Interest and other income........................................... 53,338 5,056 ------------ ----------- 4,011,035 431,343 Expenses: Lease operating expense............................................. 1,574,781 46,190 General and administrative expense.................................. 405,018 22,568 Interest expense.................................................... 820,631 78,032 Depreciation, depletion and amortization............................ 587,695 103,179 ------------ ----------- 3,388,125 249,969 Income before income taxes.......................................... 622,910 181,374 Income taxes (Note 2)............................................... 14,000 -- ------------ ----------- Net income.......................................................... 608,910 181,374 Accumulated deficit, beginning of period............................ (6,000,833) (5,391,923) ------------ ----------- Accumulated deficit, end of period.................................. $ (5,391,923) $(5,210,549) ============ ===========
The accompanying notes are an integral part of these consolidated financial statements. F-32 119 CMS NOMECO INTERNATIONAL, INC. AND SUBSIDIARIES (FORMERLY WALTER INTERNATIONAL, INC. AND SUBSIDIARIES) CONSOLIDATED STATEMENTS OF CASH FLOWS
ONE MONTH ENDED YEAR ENDED JANUARY 31, DECEMBER 31, 1995 1994 (UNAUDITED) Cash Flows from Operating Activities: Net income...................................................... $ 608,910 $ 181,374 Adjustments to reconcile net income to net cash provided by operating activities -- Depreciation, depletion and amortization...................... 587,695 103,179 Increase in accounts receivable............................... (426,016) (321,593) Decrease (Increase) in inventory and other current assets..... 93,385 (81,314) Increase in accounts payable and accrued liabilities.......... 755,996 1,466,883 Increase (Decrease) in advances from joint venture participants................................................. (511,935) 336,399 ------------ ----------- Net cash provided by operating activities.................. 1,108,035 1,684,928 Cash Flows from Investing Activities: Additions to property, plant and equipment...................... (871,805) -- Other........................................................... -- 43,687 ------------ ----------- Net cash provided by (used in) investing activities........ (871,805) 43,687 Cash Flows from Financing Activities: Proceeds from long-term debt.................................... 610,774 -- Repayment of long-term debt..................................... (1,316,111) -- Cash restricted for payment of financial obligation............. 59,224 (251,862) ------------ ----------- Net cash used in financing activities...................... (646,113) (251,862) Net increase (decrease) in cash and cash equivalents................. (409,883) 1,476,753 Cash and cash equivalents, beginning of period....................... 951,130 541,247 ------------ ----------- Cash and cash equivalents, end of period............................. $ 541,247 $ 2,018,000 ============ ===========
The accompanying notes are an integral part of these consolidated financial statements. F-33 120 CMS NOMECO INTERNATIONAL, INC. AND SUBSIDIARIES (FORMERLY WALTER INTERNATIONAL, INC. AND SUBSIDIARIES) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. ORGANIZATION Walter International, Inc. ("Walter"), a Texas corporation, was organized on May 22, 1987. Walter was organized for the acquisition of oil and gas properties and the exploration, development and production of oil and gas reserves in areas outside the continental United States. In June 1994, Walter entered into a letter of intent with CMS Energy Corporation ("CMS") to exchange all of the common shares of Walter for shares of CMS (the "Merger"). This acquisition was finalized in February 1995. In connection with the Merger, Walter changed its name to CMS NOMECO International, Inc. ("CII" or the "Company"). Under the terms of the Merger, CMS assumed the obligations under the Finance Agreement with Overseas Private Investment Corporation (see Note 7) and discharged all other obligations of the Company including (a) all the outstanding principal and interest on the revolving line of credit (see Note 7), (b) all the outstanding principal and interest on the term loan from a financial institution (see Note 7) and (c) the obligations to redeem the 14% Senior Cumulative Preferred Stock (see Note 3). CII's principal asset is an interest in the petroleum reserves associated with a Production Sharing Contract covering approximately 500,000 acres offshore Equatorial Guinea, West Africa (the "Alba Field"). CII's wholly owned subsidiary, CMS NOMECO International Equatorial Guinea ("CIEG"), formerly Walter International Equatorial Guinea, Inc., is the operator of the Alba Field. During 1992, commercial production from the Alba Field commenced. B. UNAUDITED FINANCIAL STATEMENTS The financial statements and related information as of and for the one month ended January 31, 1995 included herein are unaudited and, in the opinion of management, reflect all adjustments (consisting of only recurring adjustments) necessary for a fair presentation of financial position and the results of operations and cash flows. These unaudited consolidated financial statements should be read in conjunction with the Company's consolidated financial statements as of and for the year ended December 31, 1994. The consolidated results of operations for the one month ended January 31, 1995, are not necessarily indicative of operating results for a full year. These financial statements and related information are reflected for the purpose of presenting information prior to the Merger with CMS. C. CONSOLIDATION AND PRESENTATION The accompanying financial statements consolidate the statements of CII and its wholly owned subsidiaries (collectively referred to as the "Company") as of and for the year ended December 31, 1994. All significant intercompany accounts and transactions have been eliminated. D. OIL AND GAS PROPERTIES The Company follows the full-cost method of accounting for its oil and gas properties. Under this method of accounting, all productive and nonproductive costs incurred in the acquisition of oil and gas properties and the exploration for and the development of oil and gas reserves are capitalized in separate cost centers for each country. No gains or losses are recognized upon the sale or disposition of oil and gas properties unless the sale or disposition represents a significant portion of the individual cost center's oil and gas reserves. Instead, the proceeds from the sale of oil and gas properties are treated as a reduction of oil and gas property costs. F-34 121 CMS NOMECO INTERNATIONAL, INC. AND SUBSIDIARIES (FORMERLY WALTER INTERNATIONAL, INC. AND SUBSIDIARIES) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) If the Company's net investment in oil and gas properties in a cost center exceeds the present value of estimated future net revenues from proved reserves discounted at 10% and the cost of properties not being amortized, both adjusted for tax effects, the excess will be charged to expense as additional depreciation, depletion and amortization. Evaluated property costs, plus estimated future development costs, in each cost center are amortized on a composite unit-of-production method, based on quantities of proved reserves, over the life of the producing properties. The costs of individual unevaluated properties are excluded from the amortization calculation until the properties are evaluated. E. REVENUE RECOGNITION Oil revenues from producing wells are recognized when the oil is sold. At December 31, 1994, inventory includes December production valued at market. F. FURNITURE AND EQUIPMENT Furniture and equipment is recorded at cost and is depreciated using the straight-line method based on the estimated useful lives (five to seven years) of the related assets. G. MANAGEMENT SERVICE FEES Fees received by the Company, as operator, for reimbursement of overhead expenses attributable to exploration, development and production activities are recorded as a reduction of general and administrative expenses. The Company received approximately $400,000 in 1994 in reimbursed overhead charges relating to the Alba Field. H. STATEMENT OF CASH FLOWS For purposes of the consolidated statement of cash flows, all highly liquid investments with an original maturity of three months or less are considered to be cash equivalents. Cash used in operating activities includes cash payments for interest by the Company of approximately $1,000,000 during 1994. I. RESTRICTED CASH At December 31, 1994, the Company had $466,461 held in escrow to secure certain payments of CIEG's financing obligations. J. CONCENTRATION OF CREDIT RISK The Company is, as operator, principally engaged in the development and production of the Alba Field and, in 1994, all production was sold to one customer under a term contract (see Note 4). The Company's accounts receivable at December 31, 1994, primarily result from oil sales to this one customer and joint interest billings to other participants in the Alba Field, all of whom are companies in the oil and gas industry. This concentration of credit risk may impact the Company's overall credit risk in that these entities may be similarly affected by industrywide changes in economic or other conditions. However, no credit losses were experienced during 1994. The Company does not require collateral for these receivables. 2. INCOME TAXES The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. SFAS No. 109 requires an asset and liability approach for accounting for income taxes. Under this approach, deferred tax assets and liabilities are F-35 122 CMS NOMECO INTERNATIONAL, INC. AND SUBSIDIARIES (FORMERLY WALTER INTERNATIONAL, INC. AND SUBSIDIARIES) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) recognized based on anticipated future tax consequences attributable to differences between financial carrying amounts of assets and liabilities and their respective tax bases. Total income tax provision (benefit) for the year ended December 31, 1994, was as follows: U.S.: Current (alternative minimum tax)..................................... $14,000 Deferred.............................................................. -- Non-U.S.: Current............................................................... -- ------- Total............................................................ $14,000 =======
At December 31, 1994, deferred tax assets and liabilities computed at the statutory rate related to temporary differences were as follows:
(DOLLARS IN THOUSANDS) Deferred tax assets..................................................... $ 2,144 Less-valuation allowance................................................ (1,686) ------- Deferred tax assets, net........................................... 458 Deferred tax liabilities........................................... (458) ------- Total deferred taxes, net..................................... $ -- =======
Deferred tax assets are related to tax loss carryforwards. Deferred tax liabilities are related primarily to the difference between the book and tax bases of property, plant and equipment. The Company has a valuation allowance of $1,686,000 at December 31, 1994, relating to the uncertainty of the utilization of the net operating loss carryforwards to reduce future taxes. As of December 31, 1994, the Company had approximately $6.1 million of net operating loss carryforwards remaining for U.S. tax purposes that will expire between the years 2004 and 2007. CIEG, the Company's wholly owned subsidiary, has approximately $2.5 million of net operating loss carryforwards generated in a foreign taxing jurisdiction which is available to offset income taxable in that foreign jurisdiction. These foreign net operating loss carryforwards will expire during 1995 if not utilized. However, the Company anticipates that future payments of income taxes in the foreign jurisdiction will generate foreign tax credits available to offset future payments of U.S. federal income taxes. The full realization of any tax benefits resulting from any foreign tax credits generated would depend upon the Company's taxable income during the carryforward period. 3. REDEEMABLE PREFERRED STOCK On December 15, 1989, certain institutional investors purchased from the Company 3,000 shares of its 14% Senior Cumulative Preferred Stock ("Senior Preferred") for total cash consideration of $3,000,000 ($2,925,000 net of stock issuance expenses). Annual dividends of $140 per share are payable quarterly out of Dedicated Net Cash Flow (as defined). If the dedicated net cash flow is insufficient to meet any quarterly dividend requirement, the dividends accumulate in arrears. The aggregate amount of cumulative preferred dividends in arrears at December 31, 1994, was approximately $2.1 million. The Company is required to redeem the Senior Preferred at a price of $1,000 per share by making quarterly payments out of Dedicated Net Cash Flow remaining, if any, after the payment of dividends on the Senior Preferred. Dedicated Net Cash Flows were not sufficient for the payment of dividends or the redemption of the Senior Preferred in 1994. F-36 123 CMS NOMECO INTERNATIONAL, INC. AND SUBSIDIARIES (FORMERLY WALTER INTERNATIONAL, INC. AND SUBSIDIARIES) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Currently, the Company has dedicated to the Senior Preferred the net cash flows of its interest in the El Franig field in the Medinine concession in Tunisia. The agreement provides that if, as of January 1 of any year beginning January 1, 1991, 80% of the future El Franig net cash flow estimated to be received on or prior to December 31, 1994, is less than the product of the then outstanding shares of Senior Preferred and the Liquidation Value (as defined), the Company shall dedicate such additional net cash flows from other properties as is necessary so that, after such additional dedication, the future dedicated net cash flow is equal to at least 125% of the then outstanding shares of Senior Preferred and the Liquidation Value (as defined). As a result, if the Company relinquishes its right to further develop El Franig (see Note 4) or the reserves in El Franig cease to be classified by outside petroleum engineers as proved reserves, the Company will be required to dedicate to the Senior Preferred cash flows from other proved reserves. Presently, the Company's only other proved reserves are in the Alba Field. El Franig was not developed by December 31, 1994, and, as a result, dedication of the reserves associated with the Alba Field was required. Dedication to the Senior Preferred of the net cash flows from the Alba Field requires the Company to use such net cash flows to pay dividends on the Senior Preferred (including amounts in arrears) and redeem the Senior Preferred with any net cash flows remaining. The Company has the option to redeem additional Senior Preferred shares at a price of $1,180 per share (plus accrued and unpaid dividends). No such optional redemption will reduce the obligation of the Company to make any mandatory redemption. If at any time any shares of the Senior Preferred are outstanding and (a) both of the Principal Shareholders (as defined) die; (b) both of the Principal Shareholders cease to serve as executive officers of the Company or a Change of Control (as defined) shall occur; (c) the Company directly, or indirectly, were to create, incur, assume or permit to exist any Lien (as defined) on or with respect to Dedicated Properties (as defined), except for certain instances as specified in the agreement such as liens entered into in the ordinary course of business or in favor of Development Financing (as defined); or (d) the Company were to sell, assign, lease, convey or otherwise dispose of its assets, including the sale, assignment or transfer of any royalties, overriding royalties or other interest in its assets, except for certain instances as specified in the agreement, the holder of the Senior Preferred shall have the right to immediately require the Company to repurchase the shares of Senior Preferred at $1,000 per share (plus accrued and unpaid dividends). On June 24, 1994, the Company entered into a letter agreement with the holders of the Senior Preferred to purchase all of the outstanding shares of the Senior Preferred, all rights to accrued and unpaid dividends and all warrants granted to the holders for cash consideration of $3.4 million. In February 1995, in connection with the Merger, CMS purchased all of the outstanding shares of the Senior Preferred for $3.4 million. 4. COMMITMENTS During 1990, CIEG, along with other participants, entered into a Production Sharing Contract ("PSC") with the Republic of Equatorial Guinea to conduct exploration and development activities in that country. The PSC requires that CIEG carry out a certain Minimum Work Program (as defined) and meet certain minimum expenditure obligations. During 1992, CIEG drilled and completed a development well in the Alba Field and drilled a dry exploratory well in the PSC area. In April 1992, the date of the first sales of commercial production, CIEG paid $235,000, its share of a production bonus, to the Republic of Equatorial Guinea. The PSC further requires CIEG to drill an additional exploratory well by April 1995. However, CIEG received an extension from the Republic of Equatorial Guinea for the drilling of the exploratory well until January 1996. In 1992, CIEG, along with other participants in the Alba Field, entered into a purchase and sales contract with a European-based petroleum products trader for the majority of production. The sales price under the contract is based on an adjusted market price. F-37 124 CMS NOMECO INTERNATIONAL, INC. AND SUBSIDIARIES (FORMERLY WALTER INTERNATIONAL, INC. AND SUBSIDIARIES) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) During 1990, the Company and its joint venture partners obtained from a major oil company an interest in two concessions (Douz and Medinine) in Tunisia for consideration consisting of $5,000,000 cash ($1,250,000 net to the Company), which was paid in 1990, and a production payment of $20,000,000 payable solely out of future revenues (excluding government royalty and transportation fees) from the two concessions. The Company drilled two wells and subsequently suspended further development operations in the Douz concession due to low productivity and recorded an impairment provision. At the end of 1994, the Company decided to proceed with the development of the El Franig field and is currently negotiating a development program with the Tunisia Government. The Company has the right to discontinue these activities at any time without further financial obligation. The Company's office rent expense was $80,644 in 1994. The Company has lease commitments for office space of $100,000 in 1995 and $88,000 in 1996. 5. RELATED-PARTY TRANSACTIONS An affiliated corporation owned by certain stockholders of the Company (prior to the Merger) has provided the Company with certain administrative and other staff services. The Company reimbursed the affiliate approximately $1,200,000 for such services for the year ended December 31, 1994, and payables due to the affiliated corporation were $295,000 at December 31, 1994. At December 31, 1994, receivables due from the affiliated corporation were $30,000 and primarily related to the affiliate's share of joint interest billings relating to the Alba Field. 6. PHANTOM STOCK PLAN The Company terminated its phantom stock plan in 1993. The Company incurred compensation expense in 1992 pursuant to the plan, for which approximately $43,000 remains payable to a past participant in the plan, and is included in accounts payable and accrued liabilities at December 31, 1994. 7. LONG-TERM DEBT Long-term debt and current maturities at December 31, 1994: OPIC guaranteed loans.................................................... $2,935,500 Borrowing on revolving line of credit.................................... 1,000,000 Term Loan................................................................ 3,550,000 ---------- 7,485,500 Less -- Current maturities............................................... 2,266,110 ---------- $5,219,390 ==========
At December 31, 1994, the Company had a $1,000,000 revolving line of credit with a third-party bank, with interest based on such bank's prime rate. This line of credit was secured by guarantees from two principal shareholders of the Company. The interest rate at December 31, 1994, for amounts outstanding under the credit agreement was 8.78%. In consideration for the guarantees, CII caused CIEG to deliver, to the two principal shareholders, overriding royalty interests in the Alba Field equal to a fixed percentage of CIEG's net interest, respectively. The line of credit matures on January 8, 1996, if not extended by the lender. In June 1992, CIEG, along with other consortium members, entered into a Finance Agreement (the "Agreement") with the Overseas Private Investment Corporation (OPIC), an agency of the United States government, whereby OPIC guaranteed loans for development drilling in the Alba Field. CIEG's participation in the OPIC guarantee was approximately $4.3 million with approximately $3.0 million outstanding as of F-38 125 CMS NOMECO INTERNATIONAL, INC. AND SUBSIDIARIES (FORMERLY WALTER INTERNATIONAL, INC. AND SUBSIDIARIES) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) December 31, 1994. The Agreement requires the Company maintain an escrow account for debt service requirements (see Note 1). The principal amount of each disbursement is to be repaid in 20 equal quarterly installments. The disbursements bear interest, payable quarterly, based on the three-month London Interbank Offered Rate ("LIBOR") plus 0.375%, adjusted quarterly. The interest rate as of December 31, 1994, was 5.8%. For the year 1994, CIEG paid OPIC guarantee fees of approximately $70,000. CIEG has pledged all of its interests in the Alba Field and has agreed not to place any other liens on its interest in the PSC. In February 1993, the Company obtained a $4.6 million term loan from a financial institution (the Term Loan) for the purpose of repaying outstanding indebtedness, overdue trade obligations and joint interest billing obligations. In accordance with the Term Loan, the Company caused CIEG to deliver an overriding royalty interest to the lender calculated as a percentage of gross proceeds, as defined in the Term Loan, received by CIEG from the Alba Field. During 1994, CIEG paid approximately $168,000 to the lender, relating to the overriding royalty interest. The interest on the Term Loan is fixed at 10% per annum on the outstanding principal balance, payable quarterly. Required principal repayments commenced on June 30, 1993, and are payable in 16 quarterly installments, as provided in the Term Loan. As of December 31, 1994, the outstanding balance of the Term Loan was approximately $3.6 million. The Company has pledged all the outstanding common stock of CIEG as collateral. The Term Loan and the overriding royalty interest are subordinate to the amounts guaranteed by OPIC. On June 24, 1994, in anticipation of the Merger, the Company entered into an agreement to restructure the Term Loan. The restructuring provided for additional funding in July 1994 of $525,000, a waiver of any event of default for the failure to pay the March 1994, June 1994 and September 1994 scheduled principal payments, and an increase in the fixed rate of interest to 12% per annum effective June 30, 1994. The restructuring also provided for (a) a one-time payment to the financial institution of $30,000, (b) a prepayment premium of $50,000 if any portion of the additional funding or any other principal amount of the Term Loan is prepaid prior to the maturity date, (c) the scheduled principal repayments be amended to commence in December 1994 and be paid in 13 quarterly installments and (d) CIEG to increase the overriding royalty interest to the financial institution. On October 8, 1992, CIEG entered into an interest rate and currency exchange agreement which has effectively fixed the interest rate on approximately $2.2 million of floating rate debt. Under the agreement, CIEG will pay the counterparties interest at a fixed rate of 5.91% over the term of the agreement and the counterparties will pay CIEG the three-month LIBOR. The swap agreement, which will terminate April 1, 1998, requires quarterly interest settlement payments and a cash collateral account. CIEG has entered into this interest rate swap with a bank to eliminate the impact of interest rate fluctuations with respect to this portion of its floating rate debt. CIEG is exposed to loss if the counterparty defaults. Such counterparty is a major international financial institution, and the Company believes the risk of default is minimal. Interest rate swap transactions generally involve exchanges of fixed and floating interest payment obligations without exchanges of underlying principal amounts; therefore, CIEG's exposure to credit loss is significantly less than the contracted amounts. Subsequent to year-end, in connection with the Merger, CMS repaid the outstanding principal and interest on the line of credit and outstanding principal and interest on the Term Loan. Current maturities in connection with the remaining OPIC debt are $866,110 in 1995, $866,110 in 1996, $866,100 in 1997 and $337,110 in 1998. 8. SUBSEQUENT EVENT The Company together with an unaffiliated entity, entered into a stock purchase agreement with an international oil company to purchase the common stock of that company's U.S. subsidiaries which are involved in the production of oil in the Republic of Congo, Africa ("Congo Acquisition") for approximately $21.5 million, $3.9 million in cash and $17.6 million of debt, of which the Company's share was $1.9 million in cash and $8.8 million of debt. This Congo Acquisition was closed in February 1995. F-39 126 CMS NOMECO INTERNATIONAL, INC. AND SUBSIDIARIES (FORMERLY WALTER INTERNATIONAL, INC. AND SUBSIDIARIES) SUPPLEMENTAL DISCLOSURES OF OIL EXPLORATION AND PRODUCTION ACTIVITIES (UNAUDITED) The following information was prepared in accordance with the Supplemental Disclosure Requirements of SFAS No. 69, Disclosures About Oil and Gas Producing Activities. Refer to the Consolidated Statements of Operations and Accumulated Deficit for the Company's results of operations from exploration and production activities. The following estimates, which were prepared by the Company's petroleum engineers, of proved developed and proved undeveloped reserve quantities and related standardized measure of discounted estimated future net cash flows do not purport to reflect realizable values or fair market values of the Company's reserves. The Company emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise than those of currently producing oil and gas properties. Accordingly, these estimates are expected to change as future information becomes available. Proved reserves are estimated quantities of oil which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. 1. ESTIMATED PROVED RESERVES OF OIL
(OIL IN MBBLS) Estimated Proved Developed and Undeveloped Reserves: December 31, 1993......................................................... 3,925 Revisions and other changes............................................. 15 Production.............................................................. (249) ----- December 31, 1994......................................................... 3,691 ===== Estimated Proved Developed Reserves: December 31, 1994......................................................... 2,849 =====
2. STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS FROM ESTIMATED PROVED RESERVES
YEAR ENDED DECEMBER 31, 1994 (DOLLARS IN THOUSANDS) Future cash flows: Revenues(1)........................................................ $ 60,090 Less: Production costs(2)............................................. 21,383 Development costs(2)............................................ 4,736 -------- Future cash flows before taxes....................................... 33,971 Income tax expense (benefit)(3).................................... 13,485 -------- Future net cash flows..................................................... 20,486 Less discount to present value at a 10% annual rate....................... (6,217) -------- Standardized measure of discounted future net cash flows.................. $ 14,269 ========
- ------------------------------ (1) Oil revenues are based on year-end prices. There is no consideration for future discoveries or risks associated with future production of proved reserves. (2) Based on economic conditions at year-end. Does not include administrative, general or financing costs. Does not consider future changes in development or production costs. (3) Based on current statutory rates applied to future cash inflows reduced by future production and development costs, tax deductions and credits. F-40 127 3. RECONCILIATION OF THE CHANGE IN THE STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
YEAR ENDED DECEMBER 31, 1994 (DOLLARS IN THOUSANDS) Sales and transfers........................................................ $ (2,383) Changes in prices.......................................................... 5,440 Accretion of discount...................................................... 1,739 Net change in income taxes................................................. (3,346) Change in timing and other................................................. (909) --------- Net change during the year....................................... $ 541 =========
4. EXPLORATION, DEVELOPMENT AND ACQUISITION EXPENDITURES
YEAR ENDED DECEMBER 31, 1994 (DOLLARS IN THOUSANDS) Unproved property acquisition......................................... $988 Development........................................................... 88
F-41 128 INDEPENDENT AUDITORS' REPORT To the Stockholders of Walter International, Inc. We have audited the accompanying consolidated balance sheets of Walter International, Inc. and subsidiaries (the "Company") as of December 31, 1992 and 1993, and the related consolidated statements of operations and accumulated deficit, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 1992 and 1993, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 7, the Company is experiencing difficulty in generating sufficient cash flow to meet its obligations and sustain its operations, which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are described in Notes 7 and 8. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. As discussed in Note 8 to the consolidated financial statements, the Company has agreed to merge with CMS Energy Corporation. The merger is contingent upon certain events. Deloitte & Touche LLP June 24, 1994 (July 31, 1994, as to Note 8) F-42 129 WALTER INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------------- 1992 1993 ASSETS Current Assets: Cash and cash equivalents...................................... $ 107,370 $ 951,130 Restricted cash (Note 1)....................................... 128,589 525,685 Accounts receivable: Joint venture participants................................... 2,097,890 605,770 Trade........................................................ 409,930 9,789 Related parties.............................................. 361,766 50,249 Other........................................................ 518,790 58,171 Inventory...................................................... 24,236 259,873 Other current assets (net of amortization of $25,484 in 1993)......................................................... 4,097 82,176 ----------- ----------- Total current assets...................................... 3,652,668 2,542,843 Property, Plant and Equipment, at Cost: Oil and gas properties -- full cost basis...................... 14,362,022 15,723,697 Furniture and office equipment................................. 59,689 63,497 ----------- ----------- 14,421,711 15,787,194 Accumulated depreciation, depletion and amortization........... (7,858,430) (8,678,096) ----------- ----------- Net Property, plant and equipment.............................. 6,563,281 7,109,098 Other assets (net of amortization of $9,387 in 1992)................ 90,923 -- ----------- ----------- Total assets.............................................. $10,306,872 $ 9,651,941 =========== =========== LIABILITIES & STOCKHOLDERS' EQUITY (ACCUMULATED DEFICIT) Current Liabilities: Accounts payable and accrued liabilities....................... $ 3,935,293 $ 942,372 Advances from joint venture participants....................... 81,115 539,256 Accounts payable to related parties............................ 235,373 41,399 Current maturities of long-term debt (Note 7).................. 1,593,618 7,276,611 ----------- ----------- Total current liabilities................................. 5,845,399 8,799,638 Long-term notes payable (Note 7).................................... 5,432,576 914,226 Commitments And Contingencies (Notes 4 and 7) Mandatory Redeemable Stock (Note 3): 14% Senior cumulative preferred stock, $1.00 par value, 3,000 shares authorized and issued (mandatory redemption, aggregate liquidation preference of $4.7 million)....................... 3,000 3,000 Stockholders' Equity (Accumulated Deficit) (Note 3): Common stock, $0.01 par value; 1,000,000 shares authorized and 100,000 shares issued......................................... 1,000 1,000 Additional paid-in capital..................................... 5,934,910 5,934,910 Accumulated deficit............................................ (6,910,013) (6,000,833) ----------- ----------- (974,103) (64,923) ----------- ----------- Total liabilities & stockholders' equity (accumulated deficit)................................................ $10,306,872 $ 9,651,941 =========== ===========
See notes to consolidated financial statements. F-43 130 WALTER INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
DECEMBER 31, ------------------------- 1992 1993 Revenues: Oil sales...................................................... $ 2,175,812 $ 4,197,148 Management service fees........................................ 313,228 504,052 Interest and other income (Note 1)............................. 318,629 41,156 ----------- ----------- 2,807,669 4,742,356 Expenses: Lease operating expense........................................ 826,730 1,168,902 General and administrative expense............................. 845,818 932,536 Interest expense............................................... 327,336 895,975 Depreciation, depletion and amortization....................... 315,892 835,763 ----------- ----------- 2,315,776 3,833,176 Income before income taxes and extraordinary credit................. 491,893 909,180 Income taxes (Note 2)............................................... (167,244) -- ----------- ----------- Income before extraordinary credit.................................. 324,649 909,180 Extraordinary credit from utilization of tax loss carryforward...... 167,244 -- ----------- ----------- Net income.......................................................... 491,893 909,180 Beginning accumulated deficit....................................... (7,401,906) (6,910,013) ----------- ----------- Ending accumulated deficit.......................................... $(6,910,013) $(6,000,833) =========== ===========
See notes to consolidated financial statements. F-44 131 WALTER INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
DECEMBER 31, ------------------------- 1992 1993 Cash Flows From Operating Activities: Net income..................................................... $ 491,893 $ 909,180 Adjustments To Reconcile Net Income To Net Cash Provided By (Used In) Operating Activities: Depreciation, depletion and amortization..................... 315,892 835,763 (Increase) decrease in accounts receivable................... (1,667,402) 2,664,397 Increase in inventory........................................ (24,236) (235,637) Increase (decrease) in accounts payable and accrued liabilities................................................. 1,011,929 (3,186,895) Other........................................................ (516,302) (3,253) ----------- ----------- Net cash provided by (used in) operating activities....... (388,226) 983,555 Cash Flows From Investing Activities: Additions to property, plant and equipment..................... (4,922,787) (1,365,483) Restricted cash for property addition.......................... 484,316 -- Increase (decrease) in advances from joint venture participants.................................................. (667,006) 458,141 ----------- ----------- Net cash used in investing activities..................... (5,105,477) (907,342) Cash Flows From Financing Activities: Proceeds from notes payable.................................... 6,987,391 5,806,429 Repayment of notes payable..................................... (1,345,000) (4,641,786) Cash restricted for payment of financial obligation............ (128,589) (397,096) ----------- ----------- Net cash provided by financing activities................. 5,513,802 767,547 Net increase in cash and cash equivalents........................... 20,099 843,760 Cash and cash equivalents at beginning of year...................... 87,271 107,370 ----------- ----------- Cash and cash equivalents at end of year............................ $ 107,370 $ 951,130 =========== ===========
See notes to consolidated financial statements. F-45 132 WALTER INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. ORGANIZATION Walter International, Inc. ("WII"), a Texas corporation, was organized on May 22, 1987. WII was organized for the acquisition of oil and gas properties and the exploration, development and production of oil and gas reserves in areas outside the continental United States. WII's principal asset is an interest in the petroleum reserves associated with the Alba Production Sharing Contract covering approximately 500,000 acres offshore Equatorial Guinea, West Africa (the "Alba Field"). WII's wholly-owned subsidiary, Walter International Equatorial Guinea, Inc. ("WIEG"), is the operator of the Alba Field. During 1992, commercial production from the Alba Field commenced. B. FINANCIAL STATEMENT PRESENTATION The accompanying financial statements consolidate the statements of WII and its wholly-owned subsidiaries (collectively referred to as the "Company") at December 31, 1992 and 1993. All significant intercompany accounts and transactions have been eliminated. C. OIL AND GAS PROPERTIES The Company follows the full-cost method of accounting for its oil and gas properties. Under this method of accounting, all costs incurred in the acquisition of oil and gas properties and the exploration for and the development of oil and gas reserves are capitalized in separate cost centers for each country. No gains or losses are recognized upon the sale or disposition of oil and gas properties unless the sale or disposition represents a significant portion of the individual cost center's oil and gas reserves. If the Company's net investment in oil and gas properties in a cost center exceeds the present value of estimated future net revenues from proved reserves discounted at 10%, adjusted for tax effects, the excess will be charged to expense as additional depreciation, depletion and amortization. The costs of proven properties, including the estimated cost to complete proven undeveloped properties in each cost center, are amortized on a composite unit-of-production method based on the proved reserves as determined by an outside petroleum engineer. D. REVENUE RECOGNITION Revenue, net of the overriding royalty interests paid to a third-party investor and the two principal shareholders (see Note 7), is recognized by the Company based on monthly production. At December 31, 1993, inventory includes December production of condensate valued at the contracted sales amount. All condensate sold during the years ended December 31, 1992 and 1993 was sold to a single purchaser on the spot market (see Note 4). E. FURNITURE AND EQUIPMENT Furniture and equipment is recorded at cost and is depreciated using the straight-line method based on the estimated useful lives of the related assets. F. MANAGEMENT SERVICE FEES Fees received by the Company, as operator, for reimbursement of overhead expenses attributable to exploration, development and production activities are included in revenue. The Company received approximately $504,000 and $313,000 in 1993 and 1992, respectively, in reimbursed overhead charges relating to the Alba Field. F-46 133 WALTER INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) G. STATEMENT OF CASH FLOWS For purposes of the consolidated statements of cash flows, all highly liquid investments with an original maturity of three months or less are considered to be cash equivalents. Cash used in operating activities includes cash payments for interest by the Company of approximately $175,000 and $814,000 during 1992 and 1993, respectively. H. RESTRICTED CASH At December 31, 1992 and 1993, the Company had approximately $129,000 and $526,000, respectively, held in escrow to secure certain payments of WIEG's financing obligations. I. CONCENTRATION OF CREDIT RISK The Company is, as operator, principally engaged in the development and production of the Alba Field. Currently, all production is sold to one customer in accordance with a term contract (see Note 4). J. INTEREST AND OTHER INCOME Other income in 1992 includes approximately $317,000 resulting from the Company's reversal of interest accrued in prior periods on past due trade obligations. K. RECLASSIFICATIONS Certain minor reclassifications have been made to prior year's amounts to conform with current reporting practices. 2. INCOME TAXES Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"), Accounting for Income Taxes. SFAS No. 109 requires application of an asset and liability approach for financial accounting and reporting for income taxes. The effect of adopting SFAS No. 109 was not material to the Company's consolidated financial statements. The Company had U.S. taxable income of approximately $0.9 million for the year ended December 31, 1993 before the utilization of net operating loss carryforwards. As of December 31, 1993, the Company had approximately $6.8 million of net operating loss carryforwards remaining for U.S. tax purposes that will expire between the years 2004 and 2007. WIEG, the Company's wholly-owned subsidiary, has approximately $6.0 million of net operating loss carryforwards generated in a foreign taxing jurisdiction which is available to offset income taxable in that foreign jurisdiction. These foreign net operating loss carryforwards will expire between the years 1994 and 1995, if not utilized. However, the Company anticipates that future payments of income taxes in the foreign jurisdiction will generate foreign tax credits available to offset future payments of U.S. federal income taxes. The full realization of any tax benefits resulting from any foreign tax credits generated would depend upon the Company's taxable income during the carryforward period. At December 31, 1993, the Company had no provision for income taxes because of a reduction in the valuation allowance during 1993. The Company recognized an extraordinary credit in the 1992 "Consolidated Statement of Operations and Accumulated Deficit" from utilizing a portion of such operating loss carryforward. Provision for income taxes is obtained by applying the statutory U.S. federal income tax rate of 34% of the income before income taxes and extraordinary credit. F-47 134 WALTER INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) At December 31, 1993, deferred tax assets and liabilities computed at the statutory rate related to temporary differences as follows:
(DOLLARS IN THOUSANDS) Deferred tax assets................................................. $ 2,312 Valuation allowance................................................. (1,926) -------- Deferred tax assets -- net.......................................... 386 Deferred tax liabilities............................................ (386) -------- Total deferred taxes -- net......................................... $ -- ========
Deferred tax assets are related to tax loss carryforwards. Deferred tax liabilities are related primarily to the difference between the book and the tax basis of property, plant and equipment. The Company has a valuation allowance of $1,926,000 at December 31, 1993 relating to the uncertainty of the utilization of the net operating loss carryforwards to reduce future taxes. 3. STOCK TRANSACTIONS On December 15, 1989, certain institutional investors purchased from the Company 3,000 shares of its 14% Senior Cumulative Preferred Stock ("Senior Preferred") for total cash consideration of $3,000,000 ($2,925,000 net of stock issuance expenses). Annual dividends of $140 per share are payable quarterly out of dedicated net cash flow (as defined). If the dedicated net cash flow is insufficient to meet any quarterly dividend requirement, the dividends accumulate in arrears. The aggregate amount of cumulative preferred dividends in arrears at December 31, 1993 was approximately $1,697,000. The Company is required to redeem the Senior Preferred at a price of $1,000 per share by making quarterly payments out of dedicated net cash flow remaining, if any, after the payment of dividends on the Senior Preferred. Dedicated cash flows were not sufficient for the payment of dividends or the redemption of the Senior Preferred in 1992 or 1993. Currently, the Company has dedicated to the Senior Preferred the net cash flows of its interest in El Franig concession in Tunisia. The agreement provides that if, as of January 1 of any year, beginning January 1, 1991, 80% of the future Franig net cash flow estimated to be received on or prior to December 31, 1994 is less than the product of the then outstanding shares of Senior Preferred and the liquidation value, the Company shall dedicate such additional net cash flows from other properties as is necessary so that after such additional dedication, the future dedicated net cash flow is equal to at least 125% of the then outstanding shares of Senior Preferred and the liquidation value. As a result, if the Company relinquishes its right to further develop El Franig (see Note 4) or the reserves in El Franig cease to be classified by outside petroleum engineers as proved reserves, the Company will be required to dedicate to the Senior Preferred cash flows from other proven reserves. Presently, the Company's only other proven reserves are in the Alba Field. The Company estimates that El Franig will not be developed by December 31, 1994, and as a result, dedication of the reserves associated with the Alba Field may be required. Dedication to the Senior Preferred of the net cash flows from the Alba Field would require the Company to use such net cash flows to pay dividends on the Senior Preferred (including amounts in arrears) and redeem the Senior Preferred with any net cash flows remaining. The Company has the option to redeem additional Senior Preferred shares at a price of $1,180 per share (plus accrued and unpaid dividends). No such optional redemption will reduce the obligation of the Company to make any mandatory redemption. If at any time any shares of the Senior Preferred are outstanding: (a) both of the Principal Shareholders (as defined) die; (b) both of the Principal Shareholders cease to serve as executive officers of the Company or a change of control (as defined) shall occur; (c) the Company directly, or indirectly, were to create, incur, F-48 135 WALTER INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) assume or permit to exist any Lien (as defined) on or with respect to dedicated properties (as defined), except for certain instances as specified in the agreement such as liens entered into in the ordinary course of business or in favor of development financing (as defined); or (d) the Company were to sell, assign, lease, convey or otherwise dispose of its assets, including the sale, assignment or transfer of any royalties, overriding royalties or other interest in its assets, except for certain instances as specified in the agreement and as set forth in Notes 1, 4 and 7, the holder of the Senior Preferred shall have the right to immediately require the Company to repurchase the shares of Senior Preferred at $1,000 per share (plus accrued and unpaid dividends). 4. COMMITMENTS During 1990, WIEG, along with other participants, entered into a Production Sharing Contract (the "PSC") with the Republic of Equatorial Guinea to conduct exploration and development activities in that country. The PSC requires that WIEG carry out a certain minimum Work Program (as defined) and meet certain minimum expenditure obligations. During 1992, WIEG drilled and completed a development well in the Alba Field and drilled a dry exploratory well in the PSC area. In April 1992, the date of the first sales of commercial production, WIEG paid $235,000, its share of a production bonus, to the Republic of Equatorial Guinea. The PSC further requires WIEG to drill an additional exploratory well by April 1995 (see Note 7). In 1992, WIEG, along with other participants in the Alba Field, entered into a purchase and sales contract with a European-based petroleum products trader for the majority of 1993 production. The sales price under the contract is based on an adjusted market price. During 1990, the Company and its joint venture partners obtained from a major oil company an interest in two concessions (Douz and Medinine) in Tunisia for consideration consisting of $5,000,000 cash ($1,250,000 net to the Company), which was paid in March 1990, and a production payment of $20,000,000 payable solely out of future revenues (excluding government royalty and transportation fees) from the two concessions. The Company drilled two wells and subsequently suspended further development operations in the Douz concession due to low productivity and recorded an impairment provision. The concession agreement, as modified, requires that the Company undertake to decide whether or not to proceed with the development of El Franig field in the Medinine concession by December 1994, if not extended. The Company has the right to discontinue these activities at any time without further financial obligation. 5. RELATED PARTY TRANSACTIONS An affiliated corporation owned by certain stockholders of the Company has provided the Company with certain administrative and other staff services. The Company was charged approximately $167,000 and $180,000 for such services for the years ended December 31, 1992 and 1993, respectively. Receivables from related parties primarily relate to the affiliate's share of joint interest billings relating to the Alba Field. 6. PHANTOM STOCK PLAN The Company terminated its phantom stock plan in 1993. The Company incurred approximately $111,000 of compensation expense in 1992 pursuant to the Plan, for which approximately $52,000 remains payable to a past participant in the plan, and is included in accounts payable and accrued liabilities at December 31, 1993. 7. FINANCING In February 1992, the Company received $3,000,000 from a revolving line of credit with a third-party bank based on such bank's prime rate. This line of credit was secured by guarantees from a third-party investor (letter of credit) and the two principal shareholders (personal assets) of the Company of $2,000,000 and F-49 136 WALTER INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) $1,000,000, respectively. During 1993, a repayment on the line of credit reduced the amount available to $1,000,000, of which $914,226 was outstanding at December 31, 1993, and the third-party investor's guaranty was released. The interest rate at December 31, 1993 for amounts outstanding under the credit agreement was 6.28%. In consideration for the guaranties, WII caused WIEG to deliver, to the third-party investor and the two principal shareholders, overriding royalty interests in the Alba Field equal to a fixed percentage of WIEG's net interest, respectively. The line of credit matures on January 6, 1995, if not extended by the lender. In June 1992, WIEG, along with other consortium members, entered into a Finance Agreement (the "Agreement") with the Overseas Private Investment Corporation ("OPIC"), an agency of the United States government, whereby OPIC guaranteed loans for development drilling in the Alba Field. WIEG's participation in the OPIC guarantee was approximately $4.3 million. Approximately $1.2 million and $3.1 million was distributed to WIEG during 1993 and 1992, respectively, under the Agreement. The Agreement requires the Company maintain an escrow account for debt service requirements (see Note 1). The disbursements bear interest, payable quarterly, based on the three-month London Interbank Offered Rate ("LIBOR") plus three-eighths percent, adjusted quarterly. The interest rate as of December 31, 1993 and 1992 was 3.75% and 3.81%, respectively. For the years 1993 and 1992, WIEG paid OPIC guarantee and commitment fees of approximately $76,000 and $40,000 in the aggregate, respectively. The principal amount of each disbursement is to be repaid in 20 equal quarterly installments. The amount outstanding as of December 31, 1993 and 1992 was approximately $3.8 million and $3.1 million, respectively. WIEG has pledged all of its interests in the Alba Field and the PSC and has agreed not to place any other liens on its interest in the PSC. In February 1993, the Company obtained a $4.6 million term loan from a financial institution (the "Term Loan") for the purpose of repaying outstanding indebtedness, including a portion of the revolving line of credit, overdue trade obligations and joint interest billing obligations. In accordance with the Term Loan, the Company caused WIEG to deliver an overriding royalty interest to the lender calculated as a percentage of Gross Proceeds, as defined in the Term Loan, received by WIEG from the Alba Field. During 1993, WIEG paid approximately $91,000 to the lender, relating to the overriding royalty interest, and is recorded as additional interest expense in the 1993 consolidated statement of operations and accumulated deficit. The interest on the Term Loan is fixed at 10% on the outstanding principal balance outstanding, payable quarterly. Required principal repayments commenced on June 30, 1993 and are payable in 16 quarterly installments, as provided in the Term Loan. As of December 31, 1993, the outstanding balance of the Term Loan was approximately $3.5 million. The Company has pledged all the outstanding common stock of WIEG as collateral. The Term Loan and the overriding royalty interest are subordinate to the amounts guaranteed by OPIC. On October 8, 1992, WIEG entered into an Interest Rate and Currency Exchange Agreement which has effectively fixed the interest rate on approximately $3.1 million of floating rate debt. Under the agreement, WIEG will pay the counterparties interest at a fixed rate of 5.91% over the term of the loan and the counterparties will pay WIEG the three-month LIBOR. The swap agreement, which will terminate April 1, 1998, requires quarterly interest settlement payments and a cash collateral account. WIEG has entered into this interest rate swap with a bank to eliminate the impact of interest rate fluctuations with respect to this portion of its floating rate debt. WIEG is exposed to loss if the counterparty defaults. Such counterparty is a major international financial institution, and the Company believes the risk of default is minimal. Interest rate swap transactions generally involve exchanges of fixed and floating interest payment obligations without exchanges of underlying principal amounts; therefore, WIEG's exposure to credit loss is significantly less than the contracted amounts. F-50 137 WALTER INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Notes Payable Consist of the Following at December 31:
1992 1993 OPIC guaranteed loans......................................... $3,124,122 $3,801,611 Borrowing on revolving line of credit......................... 2,564,226 914,226 Term Loan..................................................... -- 3,475,000 Current liabilities refinanced (subsequent to December 31, 1992) on a long-term basis.................................. 1,337,846 -- ---------- ---------- 7,026,194 8,190,837 Less current maturities....................................... 1,593,618 7,276,611 ---------- ---------- $5,432,576 $ 914,226 ========= =========
The Company was granted a waiver dated June 24, 1994, from the lender, for any event of default resulting from its inability to meet the scheduled March 31, 1994 and June 30, 1994 principal payments under the Term Loan. The Company's ability to meet its financial obligations under the restructured Term Loan (if not repaid commensurate with a proposed merger by the Company with an unaffiliated entity -- see Note 8), and the Company's ability to finance future exploratory and development drilling requirements under existing concession agreements, is dependent on the successful consummation of the aforementioned proposed merger or management's ability to seek other long-term financing alternatives. The Company has experienced difficulty in generating sufficient cash flow to meet its debt obligations and sustain its operations, which raises substantial doubt about its ability to continue as a going concern. As a result, the entire balance of the Company's OPIC guaranteed loans and the Term Loan at December 31, 1993, have been classified as current liabilities in the 1993 consolidated balance sheet. The line of credit, which matures on January 6, 1995 and secured by the personal assets of the two principal shareholders, remains classified as a long-term note payable in the 1993 consolidated balance sheet. 8. SUBSEQUENT EVENTS In June 1994, the Company, together with an unaffiliated entity, entered into a Stock Purchase Agreement ("SPA") with an international oil company to purchase the common stock of that company's United States subsidiaries which are involved in the production of oil in the Republic of Congo, Africa ("Congo Acquisition"). In June 1994, the Company entered into a Letter of Intent with CMS Energy Corporation ("CMS") to exchange all of the common shares of the Company for shares of CMS (the "Merger"). Under the terms of the Merger, CMS will assume the obligations under the OPIC Agreement (see Note 7) and discharge all other obligations of the Company including (a) all the outstanding principal and interest on the line of credit (see Note 7), (b) all the outstanding principal and interest on the Term Loan (see Note 7), and (c) the obligations to redeem the Senior Preferred (see Note 3) pursuant to the terms of a proposed offer dated June 24, 1994 discussed below. The Merger is contingent upon, among other things, the following: (a) the successful completion of the Congo Acquisition, (b) receipt of the necessary approvals, from the limited partners of the partnerships that own the Senior Preferred, to redeem the Senior Preferred, and (c) completion of due diligence by CMS. On June 24, 1994, in anticipation of the Merger, the Company entered into an agreement to restructure the Term Loan (see Note 7). The restructuring provided for additional funding in July 1994 of $525,000, a waiver of any event of default for the failure to pay the March 1994 and June 1994 scheduled principal payments, and an increase in the fixed rate of interest to 12% per annum effective June 30, 1994. The restructuring also provides for a one-time payment to the financial institution of $30,000 and a prepayment premium of $50,000 if any portion of the additional funding or any other principal amount of the Term Loan is prepaid prior to the maturity date. If the restructured Term Loan is not repaid by September 15, 1994, the F-51 138 WALTER INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) restructuring further provides that (a) the September 1994 scheduled principal repayment be waived, (b) the scheduled principal repayments be amended to commence in December 1994 and to be paid in 13 quarterly installments, and (c) the Company will cause WIEG to increase the overriding royalty interest to the financial institution. On June 24, 1994, the Company entered into a letter agreement with the holder of the Senior Preferred (see Note 3) to purchase all of the outstanding shares of the Senior Preferred, all rights to accrued and unpaid interest, and all warrants granted to the holders for cash consideration of $3.4 million (liquidation preference of $4.7 million). This agreement is contingent on the consummation of the Merger referenced above, as well as the approval of the proposed terms of the letter agreement by the limited partners of the partnerships that own the Senior Preferred. F-52 139 INDEPENDENT AUDITORS' REPORT The Board of Directors The Nuevo Congo Company and Walter International Congo, Inc. (formerly Amoco Congo Exploration and Petroleum Companies): We have audited the accompanying combined balance sheets of Amoco Congo Exploration and Petroleum Companies as of December 31, 1993 and 1994, and the related combined statements of operations, stockholder's equity, and cash flows for each of the years in the three-year period ended December 31, 1994. These combined financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Amoco Congo Exploration and Petroleum Companies at December 31, 1993 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Houston, Texas April 18, 1995 F-53 140 AMOCO CONGO EXPLORATION AND PETROLEUM COMPANIES COMBINED BALANCE SHEETS DECEMBER 31, 1993 AND 1994
1993 1994 (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Current Assets: Cash and cash equivalents..................................... $ 13,221 $ 10,703 Accounts receivable........................................... 7,170 1,221 Allowance for doubtful accounts............................... -- (429) Inventories: Crude oil................................................... 1,753 6,144 Supplies.................................................... 8,099 8,720 --------- --------- Total inventories........................................ 9,852 14,864 Prepaid expenses.............................................. 755 800 --------- --------- Total current assets..................................... 30,998 27,159 Property, Plant and Equipment: Proved properties (Successful efforts method)................. 32,544 32,658 Office furniture and equipment................................ 5,818 5,784 --------- --------- 38,362 38,442 Less accumulated depreciation, depletion and amortization.......... (29,743) (32,285) --------- --------- Net property plant and equipment......................... 8,619 6,157 Deferred charges................................................... 695 393 --------- --------- $ 40,312 $ 33,709 ========= ========= LIABILITIES AND STOCKHOLDER'S EQUITY Current Liabilities: Accounts payable.............................................. $ 5,901 $ 6,927 Due to affiliates............................................. 2,955 26 --------- --------- Total current liabilities................................ 8,856 6,953 Stockholder's Equity: Common stock, $100 par value. Authorized and issued 10 shares Amoco Congo Exploration Company and 10 shares Amoco Congo Petroleum Company............................................ 2 2 Additional paid-in capital.................................... 455,892 433,820 Accumulated deficit........................................... (424,438) (407,066) --------- --------- Total stockholder's equity............................... 31,456 26,756 --------- --------- $ 40,312 $ 33,709 ========= =========
See accompanying notes to combined financial statements. F-54 141 AMOCO CONGO EXPLORATION AND PETROLEUM COMPANIES COMBINED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
1992 1993 1994 (DOLLARS IN THOUSANDS) Revenues: Oil revenues............................................ $ 45,082 $49,480 $37,249 Other income............................................ 929 292 296 -------- ------- ------- Total revenues..................................... 46,011 49,772 37,545 Operating Expenses: Lease operating expense................................. 21,735 15,103 10,557 Write-down of proved properties......................... 19,688 6,038 -- Depreciation, depletion and amortization................ 14,940 4,397 2,664 General and administrative.............................. 19,747 12,096 6,952 Interest expense........................................ 13,933 739 -- -------- ------- ------- Total expenses..................................... 90,043 38,373 20,173 Income (loss) before income taxes.................. (44,032) 11,399 17,372 Income taxes................................................. -- -- -- -------- ------- ------- Net income (loss).................................. $(44,032) $11,399 $17,372 ======== ======= =======
See accompanying notes to combined financial statements. F-55 142 AMOCO CONGO EXPLORATION AND PETROLEUM COMPANIES COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
TOTAL ADDITIONAL STOCKHOLDER'S COMMON PAID-IN ACCUMULATED (DEFICIT) STOCK CAPITAL DEFICIT EQUITY (DOLLARS IN THOUSANDS) Balances at December 31, 1991................. $ 2 $ 130,266 $(391,805) $(261,537) Net loss...................................... -- -- (44,032) (44,032) Cash contributions............................ -- 61,767 -- 61,767 ------ ---------- ----------- ------------- Balances at December 31, 1992................. 2 192,033 (435,837) (243,802) ------ ---------- ----------- ------------- Net income.................................... -- -- 11,399 11,399 Cash contributions............................ -- 275,214 -- 275,214 Dividends..................................... -- (11,355) -- (11,355) ------ ---------- ----------- ------------- Balances at December 31, 1993................. 2 455,892 (424,438) 31,456 ------ ---------- ----------- ------------- Net income.................................... -- -- 17,372 17,372 Cash contributions............................ -- 6,883 -- 6,883 Dividends..................................... -- (28,955) -- (28,955) ------ ---------- ----------- ------------- Balances at December 31, 1994................. $ 2 $ 433,820 $(407,066) $ 26,756 ====== ======== ========= =========
See accompanying notes to combined financial statements. F-56 143 AMOCO CONGO EXPLORATION AND PETROLEUM COMPANIES COMBINED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
1992 1993 1994 (DOLLARS IN THOUSANDS) Cash Flows from Operating Activities: Net income (loss).............................................. $(44,032) $ 11,399 $17,372 Adjustments to Reconcile Net Income (Loss) to Net Cash Provided By (Used In) Operating Activities: Depreciation, depletion, amortization and write-down of proved properties....................................... 34,628 10,435 2,664 Change in oil inventory................................... (4,113) 6,800 (4,381) Net change in assets and liabilities: Decrease (increase) in accounts receivable.............. 2,010 (4,402) 5,949 Decrease (increase) in due to/from affiliates........... (2,993) 3,775 (2,929) Decrease (increase) in supply inventories............... 7,339 1,681 (631) Increase (decrease) in accounts payable and accrued expenses............................................. 2,668 (13,834) 1,025 Decrease in other assets................................ 484 307 686 -------- --------- ------- Net cash provided by (used in) operating activities......................................... (4,009) 16,161 19,755 Cash Flows from Investing Activities: Capital expenditures...................................... (43,819) (2,469) (238) Sale of property, plant and equipment..................... -- 700 37 -------- --------- ------- Net cash used in investing activities................ (43,819) (1,769) (201) Cash Flows from Financing Activities: Principal payments on notes payable....................... (12,000) (273,000) -- Dividends................................................. -- (11,355) (28,955) Capital contributions..................................... 61,767 275,214 6,883 -------- --------- ------- Net cash provided by (used in) financing activities......................................... 49,767 (9,141) (22,072) Net increase (decrease) in cash and cash equivalents........... 1,939 5,251 (2,518) Cash and cash equivalents at beginning of year................. 6,031 7,970 13,221 -------- --------- ------- Cash and cash equivalents at end of year....................... $ 7,970 $ 13,221 $10,703 ======== ========= ======= Supplemental cash flow disclosures: Interest paid............................................. $ 13,983 $ 739 $ -- ======== ========= =======
See accompanying notes to combined financial statements. F-57 144 AMOCO CONGO EXPLORATION AND PETROLEUM COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1992, 1993 AND 1994 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION Amoco Congo Exploration Company and Amoco Congo Petroleum Company (collectively referred to as "Amoco Congo Exploration and Petroleum Companies" or the "Company") are wholly-owned subsidiaries of Amoco Production Company (the "Parent"). The Company's combined financial statements include the accounts of Amoco Congo Exploration and Petroleum Companies. All significant intercompany transfers have been eliminated. The primary business of the Company is the exploration and production of hydrocarbons from the Yombo-Masseko-Youbi exploration permit located approximately fifty miles offshore of the People's Republic of Congo. Amoco Congo Exploration and Petroleum Companies have a total combined working interest of 87.5% and total combined net revenue interest of 63.47% in the permit. Of the combined working interest, 43.75% represents a carried interest associated with another interest owner which converts to a working interest at payout of the property. The net revenue interest is burdened by a 15.04% royalty interest payable to the Congo government and by a 12.5% interest associated with the carried interest owner. B. REVENUE RECOGNITION The Company recognizes revenue when the sale is completed and risk of loss transfers to a third party purchaser. Crude oil in inventory is stated at year end market prices less transportation costs; the Company recognizes changes in the market value of inventory from one period to the next as oil revenues. C. CASH EQUIVALENTS Cash equivalents consist of overnight repurchase agreements and certificates of deposit with an initial term of less than three months. For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. D. SUPPLY INVENTORIES Material and supply inventories are stated at the lower of current market value or cost. Cost is determined using the first-in, first-out method or average cost. E. PROPERTY, PLANT AND EQUIPMENT The Company uses the successful efforts method of accounting for its oil operations. The costs of unproved leaseholds are capitalized pending the results of exploration efforts. Unproved leaseholds with significant acquisition costs are assessed periodically, on a property-by-property basis, and a loss is recognized to the extent, if any, the cost of the property has been impaired. Unproved leaseholds whose acquisition costs are not individually significant are aggregated, and the portion of such costs estimated to ultimately prove nonproductive, based on experience, are amortized over an average holding period. As unproved leaseholds are determined to be productive, the related costs are transferred to proved leaseholds. Exploratory dry holes and geological and geophysical charges are expensed. Depletion of proved leaseholds and amortization and depreciation of the costs of all development and successful exploratory drilling are provided by the unit-of-production method based upon estimates of proved oil reserves on a field-by-field basis. Estimated costs (net of salvage value) of dismantling and abandoning oil production facilities are computed and included in depreciation and depletion using the unit-of-production method. The total estimated future dismantlement and abandonment cost being amortized as of December 31, 1994 was approximately $9.0 million. Should the net capitalized costs exceed the estimated future undiscounted after tax net cash flows from proved oil F-58 145 AMOCO CONGO EXPLORATION AND PETROLEUM COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) reserves, such excess costs would be charged to expense. In 1993 and 1992, write-downs of proved oil properties of approximately $6.0 million and $19.7 million, respectively, were charged to operating expenses. In March 1995, Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, was issued and is effective for years beginning after December 15, 1995. The statement will change the Company's method of recognition and measurement of impairments for long-lived assets. The Company has not determined the impact of adoption; however, it is not believed the impact will have a material effect on the Company's financial condition. Other property, plant and equipment are depreciated on a straight-line basis over their estimated useful lives. Leasehold improvements, which are recorded at cost, are amortized on a straight-line basis over their estimated useful lives or the life of the lease, whichever is shorter. F. INCOME TAXES The Company follows the asset and liability method of accounting for income taxes under the provisions of Statement of Financial Accounting Standards No. 109 ("SFAS 109"), Accounting for Income Taxes. Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company files a consolidated income tax return with its Parent. The Company recognizes income tax expense under the separate company method which applies SFAS 109 as though the Company was filing a separate income tax return. Accordingly, deferred income tax assets are recognized when it is more likely than not that the Company will realize the benefits as a reduction of future taxable income.
1993 1994 (DOLLARS IN THOUSANDS) Deductible temporary differences resulting from proved properties...... $ 66,452 $ 61,500 Net operating loss utilized by parent.................................. 48,921 47,966 Valuation allowance on deferred tax assets............................. (115,373) (109,466) --------- --------- Total deferred income tax.................................... $ -- $ -- ========= =========
The Company generated substantial net operating losses for federal income tax purposes which were utilized by the Parent. Under the Parent's tax sharing agreement, the Company received no benefit from the Parent's utilization of these net operating losses until utilized on the separate company method to reduce the Company's taxable income. On a separate company basis, the Company has approximately $141.0 million of net operating loss carryforwards available to offset the Company's taxable income in future years which begin to expire in 2006. The significant components of deferred income tax expense attributable to income from continuing operations for the years ended December 31, 1992, 1993 and 1994 are as follows:
1992 1993 1994 (DOLLARS IN THOUSANDS) Deferred tax expense (benefit)........................... $(14,930) $ 3,996 $ 5,907 Increase (decrease) in beginning-of-the-year balance of the valuation allowance for deferred tax assets........ 14,930 (3,996) (5,907) -------- ------- ------- $ -- $ -- $ -- ======== ======= =======
F-59 146 AMOCO CONGO EXPLORATION AND PETROLEUM COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 2. LEASES The Company has several noncancellable operating leases, primarily for housing and office space, that expire at various times over the next nine years. The operating base lease becomes cancelable as of March 19, 1995 upon twelve months notice and payment of an early termination fee. As management does not currently intend to cancel the operating base lease, the future minimum lease payments are included in all years presented below. The office facility is leased based on two year terms. As management currently intends to continually renew the lease upon expiration, the future minimum lease payments are included in the presentation below. Rental expense for operating leases was $1,878,692, $1,700,349, and $1,336,510 for the years ended December 31, 1992, 1993, and 1994, respectively. Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) are:
YEAR ENDING DECEMBER 31, 1995............................................................ $ 771,854 1996............................................................ 739,512 1997............................................................ 739,512 1998............................................................ 739,512 1999............................................................ 739,512 Later years, through 2001....................................... 800,154 ---------- Total minimum lease payments.......................... $4,530,056 ==========
3. BUSINESS CONCENTRATIONS The Company operates outside of the United States in the exploration and production of oil reserves. The Company's major customers include domestic and foreign companies. Accrued revenues and accounts receivable relate to oil producing activities and are deemed by management to be collectible. During the year ended December 31, 1994, the Company settled a matter with the Congo government regarding the calculation of royalties due to the Congo government. The settlement of this matter resulted in an approximate $2.9 million reduction in oil revenues in 1994. The following sales customers accounted for 10% or more of revenues of the Company:
YEAR ENDED DECEMBER 31, ------------------ 1992 1993 1994 Exxon............................................................... 29% -- -- J. Aron............................................................. 18 -- -- Stinnes............................................................. -- 70% 98% Vitol............................................................... -- 17 --
4. SUBSEQUENT EVENTS On June 30, 1994, Amoco Production Company, the sole owner of all of the Company's issued and outstanding stock, entered into an agreement to sell all issued and outstanding shares of the Company, effective as of December 1, 1993, to Walter International, Inc. and Nuevo Energy Company, for a sales price of $31,500,000. The sales price is payable in cash of $21,500,000 and a promissory note of $10,000,000. Additionally, a production payment in an amount to be agreed upon at a later date, is payable to the seller in quarterly installments, based upon production beginning as of the effective date of the sale. The sale to Walter F-60 147 AMOCO CONGO EXPLORATION AND PETROLEUM COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) International, Inc. and Nuevo Energy Company closed on February 24, 1995 and the names of the companies were changed to The Nuevo Congo Company and Walter International Congo, Inc. 5. SUPPLEMENTAL OIL PRODUCING ACTIVITIES (UNAUDITED) Capitalized costs relating to oil producing activities are as follows:
DECEMBER 31, ------------------- 1993 1994 (DOLLARS IN THOUSANDS) Proved properties................................................ $ 32,544 $ 32,658 Accumulated depreciation, depletion and amortization............. (27,414) (28,907) -------- -------- $ 5,130 $ 3,751 ======== ========
Costs incurred in oil property acquisition, exploration and development activities are as follows:
YEAR ENDED DECEMBER 31, ----------------------- 1992 1993 1994 (DOLLARS IN THOUSANDS) Development costs............................................. $43,262 $2,032 $114 ======= ====== ====
Results of operations for oil producing activities are as follows:
YEAR ENDED DECEMBER 31, ---------------------------- 1992 1993 1994 (DOLLARS IN THOUSANDS) Revenues................................................. $ 45,082 $49,480 $37,249 Lifting costs: Lease operating expense................................ 21,735 15,103 10,557 -------- ------- ------- 23,347 34,377 26,692 Depreciation, depletion and amortization and write-down of oil properties...................................... 34,628 10,435 2,664 -------- ------- ------- Results of operations from producing activities.......... $(11,281) $23,942 $24,028 ======== ======= =======
The Company's standardized measure of discounted future net cash flows and changes therein as of December 31, 1992, 1993 and 1994 are provided based on the present value of future net revenues from proved oil reserves estimated by Amoco Production Company in-house petroleum engineers in accordance with guidelines established by the Securities and Exchange Commission. These estimates were computed by applying appropriate current prices for oil to estimated future production of proved oil reserves over the economic lives of the reserves and assuming continuation of existing economic conditions. Year end 1994 calculations were made utilizing average prices for oil that existed at December 31, 1994 of $13.00 per barrel ("Bbl"). Income taxes are computed by applying the statutory federal income tax rate of the net cash inflows relating to proved oil reserves less the tax bases of the properties involved and giving effect to any net operating loss carryforwards, tax credits and allowances relating to such properties. As a result of the net operating losses, no income tax expense is included in the Company's standardized measure of discounted future net cash flows. The reserve volumes provided by the in-house petroleum engineers are estimates only and should not be construed as being exact quantities. These reserves may or may not be recovered and may increase or decrease as a result of future operations of the Company and changes in market conditions. F-61 148 AMOCO CONGO EXPLORATION AND PETROLEUM COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Reserve quantity information is as follows:
DECEMBER 31, ------------------------- 1992 1993 1994 OIL OIL OIL (MBBL) (MBBL) (MBBL) Proved Developed Reserves: Beginning of year.............................................. 21,973 8,306 15,359 Revisions of previous estimates................................ (10,748) 10,424 (154) Production..................................................... (2,919) (3,371) (3,080) ------- ------ ------ End of year.................................................... 8,306 15,359 12,125 ======= ====== ======
Standardized measure of discounted future net cash flows is as follows:
DECEMBER 31, --------------------- 1993 1994 (DOLLARS IN THOUSANDS) Future cash in flows.............................................. $ 149,600 $ 157,628 Future development costs.......................................... (13,900) (13,000) Future production costs........................................... (130,570) (103,120) --------- --------- Future net cash flows before discounting.......................... 5,130 41,508 10% annual discount............................................... (1,258) (10,955) --------- --------- Standardized measure of discounted future net cash flows.......... $ 3,872 $ 30,553 ========= =========
Principal sources of change in the standardized measure of discounted future net cash flows is as follows:
YEAR ENDED DECEMBER 31, ------------------------------ 1992 1993 1994 (DOLLARS IN THOUSANDS) Standardized measure of discounted future net cash flows, beginning of year............................. $ 2,451 $ 10,965 $ 3,872 Revisions of previous quantity estimates less related costs................................... (21,587) 10,819 (523) Net changes in prices, net of production costs.... 37,236 728 47,533 Development costs incurred during period and changes in estimated future development costs... (8,167) (4,665) 579 Sales of oil produced during period, net of lifting costs................................... (24,790) (34,432) (26,692) Accretion of discount............................. 245 1,097 387 Changes of production rates (timing) and other.... 25,577 19,360 5,397 -------- -------- -------- 8,514 (7,093) 26,681 -------- -------- -------- Standardized measure of discounted future net cash flows, end of year................................... $ 10,965 $ 3,872 $ 30,553 ======== ======== ========
F-62 149 AMOCO CONGO EXPLORATION AND PETROLEUM COMPANIES COMBINED BALANCE SHEET JANUARY 31, 1995
UNAUDITED (DOLLARS IN THOUSANDS) ASSETS Current Assets: Cash and cash equivalents............................................ $ 9,359 Accounts receivable.................................................. 15,855 Allowance for doubtful accounts...................................... (429) Inventories: Crude oil.......................................................... 1,144 Supplies........................................................... 8,875 --------- Total inventories............................................... 10,019 Prepaid expenses.......................................................... 1,015 --------- Total current assets............................................ 35,819 Property, Plant and Equipment: Proved properties (Successful efforts method)........................ 32,752 Office furniture and equipment....................................... 5,691 --------- 38,443 Less accumulated depreciation, depletion and amortization................. (32,460) --------- Net property plant and equipment................................ 5,983 Other assets.............................................................. 131 --------- $ 41,933 ========= LIABILITIES AND STOCKHOLDER'S EQUITY Current Liabilities: Accounts payable..................................................... $ 12,251 Due to affiliates.................................................... 137 --------- Total current liabilities....................................... 12,388 Stockholder's Equity (Deficit): Common stock, $100 par value. Authorized and issued 10 shares Amoco Congo Exploration Company and 10 shares Amoco Congo Petroleum Company............................................................. 2 Additional paid-in capital........................................... 434,006 Accumulated deficit.................................................. (404,463) --------- Total stockholder's equity...................................... 29,545 --------- $ 41,933 =========
See accompanying notes to unaudited combined financial statements. F-63 150 AMOCO CONGO EXPLORATION AND PETROLEUM COMPANIES COMBINED STATEMENT OF OPERATIONS ONE MONTH ENDED JANUARY 31, 1995
UNAUDITED (DOLLARS IN THOUSANDS) Revenues: Oil revenues......................................................... $4,333 ------ Total revenues.................................................. 4,333 Operating Expenses: Lease operating expense.............................................. 977 Depreciation, depletion and amortization............................. 175 General and administrative........................................... 567 Other expense........................................................ 11 ------ Total expenses.................................................. 1,730 Income before income taxes...................................... 2,603 Income taxes.............................................................. -- ------ Net income...................................................... $2,603 ======
COMBINED STATEMENT OF STOCKHOLDER'S EQUITY
ADDITIONAL TOTAL COMMON PAID-IN ACCUMULATED STOCKHOLDER'S STOCK CAPITAL DEFICIT EQUITY UNAUDITED (DOLLARS IN THOUSANDS) Balances at December 31, 1994....................... $2 $ 433,820 $(407,066) $26,756 -- -------- --------- ------- Net income.......................................... -- -- 2,603 2,603 Cash contributions.................................. -- 186 -- 186 -- -------- --------- ------- Balances at January 31, 1995........................ $2 $ 434,006 $(404,463) $29,545 == ======== ========= =======
See accompanying notes to unaudited combined financial statements. F-64 151 AMOCO CONGO EXPLORATION AND PETROLEUM COMPANIES COMBINED STATEMENT OF CASH FLOWS ONE MONTH ENDED JANUARY 31, 1995
UNAUDITED (DOLLARS IN THOUSANDS) Cash Flows from Operating Activities: Net income........................................................... $ 2,603 Adjustments to Reconcile Net Income to Net Cash (Used In) Operating Activities: Depreciation, depletion and amortization of proved properties........ 175 Change in oil inventory.............................................. 4,845 Net Change In Assets and Liabilities: Increase in accounts receivable.................................... (14,634) Increase due to affiliates......................................... 111 Increase in prepaid expenses....................................... (215) Increase in accounts payable....................................... 5,324 Decrease in other assets........................................... 262 -------- Net cash used in operating activities........................... (1,529) Cash Flows from Investing Activities: Capital expenditures................................................. (94) Sale of property, plant and equipment................................ 93 -------- Net cash used in investing activities........................... (1) Cash Flows from Financing Activities: Capital contributions................................................ 186 -------- Net cash provided by financing activities.......................... 186 Net decrease in cash and cash equivalents................................. (1,344) Cash and cash equivalents at beginning of period.......................... 10,703 -------- Cash and cash equivalents at end of period................................ $ 9,359 ======== Supplemental Cash Flow Disclosures: Interest paid........................................................ $ -- ========
See accompanying notes to unaudited combined financial statements. F-65 152 AMOCO CONGO EXPLORATION AND PETROLEUM COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS JANUARY 31, 1995 (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying unaudited combined financial statements include, in the opinion of management, all adjustments of a normal recurring nature necessary to present fairly the combined financial position of Amoco Congo Exploration and Petroleum Companies (Amoco Congo) at January 31, 1995 and the related combined results of operations and changes in cash flows for the month then ended. These financial statements are reflected for the purpose of presenting information prior to the sale of all of the issued and outstanding stock of Amoco Congo Exploration Company and Amoco Congo Petroleum Company. 2. SUBSEQUENT EVENTS On June 30, 1994, Amoco Production Company, the sole owner of all of the Company's issued and outstanding stock, entered into an agreement to sell all issued and outstanding shares of the Company, effective as of December 1, 1993, to Walter International, Inc. and Nuevo Energy Company, for a sales price of $31,500,000. The sales price is payable in cash of $21,500,000 and a promissory note of $10,000,000. Additionally, a production payment, in an amount to be agreed upon at a later date, is payable to the seller in quarterly installments, based upon production beginning as of the effective date of the sale. The sale with Walter International, Inc. and Nuevo Energy Company closed on February 24, 1995 and the names of the companies were changed to The Nuevo Congo Company and Walter International Congo, Inc. The $10,000,000 promissory note was settled through net cash proceeds generated by the properties for the period between the effective and closing dates. F-66 153 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders, Terra Energy Ltd. and Subsidiaries We have audited the accompanying consolidated balance sheet of Terra Energy Ltd. (a Michigan corporation) and subsidiaries as of December 31, 1994, and the related consolidated statements of earnings, shareholders' equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Terra Energy Ltd. and subsidiaries as of December 31, 1994, and the results of their operations and cash flows for the year then ended in conformity with generally accepted accounting principles. Arthur Andersen LLP Detroit, Michigan, July 14, 1995. F-67 154 TERRA ENERGY LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
JULY 31, DECEMBER 31, 1995 1994 (UNAUDITED) ASSETS Current Assets: Cash and cash equivalents...................................... $ 15,690,255 $ 7,002,390 Investments -- marketable securities........................... 27,100 27,100 Accounts receivable............................................ 31,136,407 43,155,706 Notes and land contract receivable............................. 147,946 134,864 Inventory and other current assets............................. 1,280,976 1,623,436 Assets held for sale........................................... -- 4,369,571 Deferred income taxes.......................................... 144,000 149,400 ------------ ----------- Total current assets...................................... 48,426,684 56,462,467 Oil And Gas Properties -- At Cost (Successful Efforts Method): Proved oil and gas properties.................................. 22,541,253 24,424,692 Unproved oil and gas leases.................................... 4,110,811 3,021,789 Accumulated depreciation, depletion, amortization and valuation allowance..................................................... (5,561,276) (5,510,855) ------------ ----------- Net oil and gas properties................................ 21,090,788 21,935,626 Other Assets: Property and equipment, net.................................... 1,131,743 1,046,614 Lease financing receivable..................................... 1,127,556 756,105 Unconsolidated long-term investments........................... 195,361 243,891 Notes and land contract receivable............................. 1,667,905 1,612,087 Intangibles resulting from business acquisition, net of accumulated amortization...................................... 284,375 225,827 Other.......................................................... 2,024 1,648 ------------ ----------- Total other assets........................................ 4,408,964 3,886,172 ------------ ----------- Total assets.............................................. $ 73,926,436 $82,284,265 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable............................................... $ 15,109,086 $14,590,308 Joint interest advances........................................ 7,046,030 6,674,268 Oil and gas distributions payable.............................. 10,831,028 9,553,220 Current maturities of long-term debt........................... 776,016 4,078,338 Taxes -- other than income taxes............................... 101,387 5,612,205 Other accrued expenses......................................... 4,548,559 4,185,232 Accrued income taxes........................................... 1,434,936 50,136 Deferred income taxes.......................................... -- -- ------------ ----------- Total current liabilities................................. 39,847,042 44,743,707 Deferred income taxes............................................... 1,755,000 1,755,200 Deferred gain on sale of oil and gas properties..................... 165,000 119,500 Long-term debt...................................................... 1,702,085 1,185,137 Commitments and Contingencies Shareholders' Equity: Common Stock, $.00026 par value; 20,000,000 shares authorized; 9,519,500 shares issued and outstanding at December 31, 1994, and 12,065,422 shares issued and outstanding at July 31, 1995.......................................................... 2,475 3,137 Additional paid-in capital..................................... 193,665 12,333,269 Retained earnings.............................................. 30,261,169 22,144,315 ------------ ----------- Total shareholders' equity................................ 30,457,309 34,480,721 ------------ ----------- Total liabilities and shareholders' equity................ $ 73,926,436 $82,284,265 ========== ==========
The accompanying notes are an integral part of these statements. F-68 155 TERRA ENERGY LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS
SEVEN MONTHS ENDED YEAR ENDED JULY 31, DECEMBER 31, ------------------------ 1994 1994 1995 (UNAUDITED) Revenues: Oil and gas sales................................... $8,072,286 $3,883,310 $10,226,871 Promotional, buy-in and turnkey income.............. 2,194,491 1,359,583 1,736,585 Management and operator fees........................ 2,722,566 1,396,938 1,963,869 Gain on sales of assets............................. 12,423,491 3,340,342 2,355,547 Interest and dividends.............................. 695,835 337,325 540,889 Equity in gain of affiliated partnerships........... 673,631 168,744 34,343 Other............................................... 768,132 94,821 580,827 ------------ ---------- ----------- Total revenues................................. 27,550,432 10,581,063 17,438,931 Operating Costs and Expenses: Cost of products sold............................... 2,994,786 525,877 5,802,848 General and administrative.......................... 6,467,427 2,802,994 17,621,120 Depreciation, depletion and amortization............ 2,166,921 1,207,753 1,171,745 Lease operating..................................... 1,005,327 624,533 377,646 Production and other state taxes.................... 279,419 214,303 267,216 Dry holes and abandonments.......................... 684,658 66,156 52,369 Guaranteed contract payments........................ 354,667 206,258 216,808 Interest............................................ 64,301 46,692 36,033 Equity in loss of affiliated partnerships........... 46,318 -- -- ------------ ---------- ----------- Total operating costs and expenses............. 14,063,824 5,694,566 25,545,785 Write down of notes receivable, net of notes payable..... (1,450,992) -- -- Earnings (losses) before income taxes and minority interest in subsidiary................................. 12,035,616 4,886,497 (8,106,854) Minority interest in subsidiary.......................... 216,512 142,912 -- Income taxes............................................. 2,411,000 949,000 10,000 ------------ ---------- ----------- Net earnings (losses).......................... $9,408,104 $3,794,585 $(8,116,854) ========== ========= ==========
The accompanying notes are an integral part of these statements. F-69 156 TERRA ENERGY LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ADDITIONAL OUTSTANDING COMMON PAID-IN RETAINED SHARES STOCK CAPITAL EARNINGS TOTAL Balance: January 1, 1994................. 9,519,500 $2,475 $ 193,665 $20,853,065 $21,049,205 Net Earnings......................... -- -- -- 9,408,104 9,408,104 ----------- ------ ----------- ----------- ----------- Balance: December 31, 1994............... 9,519,500 2,475 193,665 30,261,169 30,457,309 Stock issuances: Stock option (unaudited)........ 2,545,922 662 12,139,604 -- 12,140,266 Net earnings (unaudited)............. -- -- -- (8,116,854) (8,116,854) ----------- ------ ----------- ----------- ----------- Balance: July 31, 1995 (unaudited)....... 12,065,422 $3,137 $12,333,269 $22,144,315 $34,480,721 ========= ====== ========== ========== ==========
The accompanying notes are an integral part of these statements. F-70 157 TERRA ENERGY LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
SEVEN MONTHS ENDED YEAR ENDED JULY 31, DECEMBER 31, -------------------------- 1994 1994(UNAUDITED)1995 Cash Flows from Operating Activities: Net earnings (loss).............................. $ 9,408,104 $ 3,794,585 $ (8,116,854) Adjustments To Reconcile Net Earnings To Net Cash Provided By (Used In) Operations: Depreciation, depletion and amortization....... 2,166,921 1,207,753 1,171,745 Decrease in deferred income taxes.............. (42,000) (544,064) (5,200) Dry holes and abandonments of previously capitalized oil and gas properties.......... 684,658 66,156 52,369 Recognition of deferred gain on sale of properties.................................. (78,000) (45,500) (45,500) Gain on sale of assets......................... (12,441,492) (3,272,092) (2,287,296) Write down of notes receivable................. 1,450,992 -- -- Changes In Assets And Liabilities That Provided (Used) Cash: Accounts receivable......................... (15,403,917) (14,554,724) (11,822,874) Inventory and other current assets.......... (662,822) (1,230,813) (342,460) Accounts payable............................ 4,774,271 9,292,830 (518,778) Joint interest advances..................... 6,633,664 378,098 (371,762) Oil and gas distributions payable........... 2,566,349 2,107,666 (1,277,808) Accrued income taxes........................ 1,273,936 843,064 (1,384,800) Taxes and other accrued expenses............ 3,811,199 (395,439) 5,147,491 Minority interest in subsidiary............. (6,813) (6,813) -- Equity in net income of affiliated partnerships................................ (627,313) (168,744) (34,343) Equity in net income of affiliate.............. (42,426) -- (46,422) ------------ ----------- ------------ Net cash flows provided by (used in) operating activities...................... 3,465,311 (2,528,037) (19,882,492) Cash Flows from Investing Activities: Purchases of oil and gas properties.............. (12,705,648) (6,211,988) (5,701,285) Purchases of property and equipment.............. (670,888) (205,513) (442,199) Proceeds from sale of assets..................... 15,883,828 4,825,516 6,505,881 (Increase) decrease in long-term investments..... 1,035,160 (234,142) 32,235 (Increase) decrease in lease financing receivable..................................... 82,652 (123,879) 175,026 (Increase) decrease in notes receivable.......... (82,779) 21,154 68,900 Increase in other assets......................... (1,000) -- -- Increase in assets held for sale................. -- -- (4,369,571) ------------ ----------- ------------ Net cash flows provided by (used in) investing activities...................... 3,541,325 (1,928,852) (3,731,013) Cash Flows from Financing Activities: Proceeds from long-term debt..................... 46,678 -- 3,044,201 Payments of long-term debt....................... (1,092,720) (977,570) (258,827) Stock options exercised.......................... -- -- 12,140,266 ------------ ----------- ------------ Net cash flows provided by (used in) financing activities...................... (1,046,042) (977,570) 14,925,640 Net increase (decrease) in cash and cash equivalents......................................... 5,960,594 (5,434,459) (8,687,865) Cash and cash equivalents at beginning of period...... 9,729,661 9,729,661 15,690,255 ------------ ----------- ------------ Cash and cash equivalents at end of period............ $ 15,690,255 $ 4,295,202 $ 7,002,390 =========== ========== =========== Supplemental Cash Flow Information: Cash Paid During The Year For: Interest....................................... $ 117,342 $ 77,156 $ 43,506 Income taxes................................... $ 1,253,064 $ 650,000 $ 1,400,000
The accompanying notes are an integral part of these statements. F-71 158 TERRA ENERGY LTD. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND BUSINESS Terra Energy Ltd. (the "Company"), a Michigan corporation, is a domestic, independent oil and gas exploration and production company. The Company has the following subsidiaries that have been consolidated into these financial statements: Terra Pipeline Company ("TPC") is a 100% owned Michigan corporation. TPC is engaged in the collection of oil and gas revenues from oil and gas purchasers on behalf of other interest owners and the distribution of such revenues to these owners. In addition, TPC handles the joint interest billing responsibilities associated with the Company's producing oil and gas properties. Energy Acquisition Operating Corp. ("EAOC") is a 100% owned Michigan corporation. EAOC provides natural gas transportation services in the Michigan natural gas market. Effective April 1, 1994 the Company purchased the remaining 5% ownership in EAOC. Kristen Corporation ("Kristen") is a 100% owned Michigan corporation engaged in natural gas marketing in the Michigan natural gas market. Cronus Development Corp. ("Cronus") is a 100% owned Michigan corporation. Cronus is engaged in the acquisition of oil and gas leasehold interests for future exploration and development. Wellcorps, L.L.C. ("Wellcorp") is a 55% owned Michigan limited liability company. Wellcorp is engaged in the oil and gas service segment providing workover rig services to producers with Michigan operations. The Company also serves as managing partner of a general partnership which owns and operates a pipeline located in Antrim and Otsego counties of Michigan. TPC also serves as the managing partner of a limited partnership which owns and operates a pipeline and gas processing plant located in Newaygo and Oceana counties of Michigan. These partnerships are discussed more fully in Note 7. 2. SIGNIFICANT ACCOUNTING POLICIES A. UNAUDITED FINANCIAL STATEMENTS The financial statements and related information as of and for the seven months ended July 31, 1994 and 1995 included herein are unaudited and, in the opinion of management, reflect all adjustments (consisting of only recurring adjustments) necessary for a fair presentation of financial position and the results of operations and cash flows. Additionally, all other financial statement information contained in the Notes to Financial Statements, which occurred subsequent to December 31, 1994, is unaudited. These unaudited consolidated financial statements should be read in conjunction with the Company's consolidated financial statements as of and for the year ended December 31, 1994. The consolidated results of operations for the seven months ended July 31, 1995 and 1994 are not necessarily indicative of operating results for a full year. These financial statements are reflected for the purpose of presenting information prior to the sale of all of the issued and outstanding stock of the Company to an unrelated third party. B. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company, TPC, EAOC, Kristen, Cronus and Wellcorp. All significant intercompany accounts and transactions have been eliminated in consolidation. F-72 159 C. CASH AND CASH EQUIVALENTS Cash and cash equivalents are comprised of cash, certificates of deposit and U.S. Government Securities with original maturities of three months or less. D. MARKETABLE SECURITIES Marketable securities are carried at the lower of cost or market value. E. ACCOUNTS RECEIVABLE Accounts receivable -- trade consist primarily of amounts due to the Company by co-owners of oil and gas properties for which the Company serves as operator and has responsibility for payment to vendors for goods and services related to joint operations. The Company provides an allowance for doubtful accounts for those balances considered to be uncollectible. F. INVENTORY Inventory was valued at the lower of cost (first-in, first-out method) or market. G. OIL AND GAS PROPERTIES The Company follows the successful efforts method of accounting for its oil and gas producing activities. Acquisition costs for proved and unproved properties are capitalized when incurred. Costs of unproved properties are transferred to proved properties when proved reserves are discovered. Exploration costs, including geological and geophysical costs and costs of carrying and retaining unproved properties, are charged against income as incurred. Exploratory drilling costs are capitalized initially; however, if it is determined that an exploratory well does not contain proved reserves, such capitalized costs are charged to expense, as dry hole costs, at that time. Development costs are capitalized. Costs incurred to operate and maintain wells and equipment and to lift oil and gas to the surface are generally expensed. The net cost of proved oil and gas properties are annually subjected to a test of recoverability on a property by property basis by comparison to their estimated present value of future net cash flows from proved reserves. Unproved oil and gas properties are also subjected to an impairment test. Any excess capitalized costs are expensed in the year in which such an excess occurs. Gain or loss on the sale of oil and gas properties is recognized when the Company's entire interest in a property is sold or when the proceeds from a partial sale exceed the Company's book value for such property. Depreciation, depletion and amortization of oil and gas properties is computed on a units-of-production method based on proven reserves. The provision for depreciation, depletion and amortization is calculated by applying the ratio to capitalized property costs. H. OTHER ASSETS -- PROPERTY AND EQUIPMENT Property and equipment is recorded at cost and depreciation is calculated using the straight-line and declining balance methods over the respective estimated useful life of the related asset. I. INCOME TAXES The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes, in 1993. The standard prescribes a liability method for calculating the provision for income taxes, replacing the deferred method previously used by the Company. J. NEW ACCOUNTING STANDARDS In March 1995, the Financial Accounting Standards Board issued SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, effective for 1996 year-end F-73 160 financial statements. The Company does not believe that it will be significantly affected by the statement, which establishes accounting standards for the impairment of long-lived assets. K. REVENUE RECOGNITION Oil and gas revenues are recognized as production takes place and the sale is completed and the risk of loss transfers to a third party purchaser. 3. ACCOUNTS RECEIVABLE Accounts receivable consisted of the following components as of December 31, 1994: Trade................................................................... $21,905,528 Oil and gas sales....................................................... 8,535,122 Related parties......................................................... 70,913 Lease financing......................................................... 624,844 ----------- Total accounts receivable..................................... $31,136,407 ===========
4. NOTES AND LAND CONTRACT RECEIVABLE Notes and land contract receivable consisted of the following components as of December 31, 1994: Producing property sale.................................................. $1,720,016 Other.................................................................... 95,835 ---------- Total.......................................................... 1,815,851 Less current portion..................................................... 147,946 ---------- Total long-term notes and land contract receivable............. $1,667,905 ==========
The Company recorded a valuation allowance at December 31, 1994 in the amount of $1,612,000 to reduce the outstanding balance of the notes receivable, resulting from the producing property sale, to the estimated fair market value of the producing properties securing these notes receivable. This valuation was recorded net of a note payable valuation allowance on the same property of approximately $161,000. 5. INVENTORY Inventory consists primarily of casing and tubular goods utilized in the Company's exploration activities. The Company realized a gain of approximately $158,000 for 1994, from the disposition of certain inventory items. This gain on sale of inventory is reported as other income on the Company's Consolidated Statement of Earnings. 6. PROPERTY AND EQUIPMENT Property and equipment consist of the following as of December 31, 1994: Land..................................................................... $ 497,168 Building and improvements................................................ 399,482 Office and transportation equipment...................................... 545,208 Field equipment.......................................................... 263,912 ---------- Total.......................................................... 1,705,770 Less accumulated depreciation and amortization........................... 574,027 ---------- Net property and equipment..................................... $1,131,743 ==========
F-74 161 7. UNCONSOLIDATED LONG-TERM INVESTMENTS The Company's investment in unconsolidated subsidiaries is as follows as of December 31, 1994: Partnerships using the equity method of accounting........................ $154,188 Corporation using the equity method of accounting......................... 32,235 Corporations using the cost method of accounting.......................... 8,938 -------- Total........................................................... $195,361 ========
Net earnings of the above investments which are included in the earnings of the Company are as follows for the year ended December 31, 1994: Partnerships using the equity method of accounting........................ $627,313 -------- Corporation using the equity method of accounting......................... $ 42,426 ========
The Company has a consolidated net interest of 44.768% in Newaygo/Oceana Pipeline Limited Partnership ("NOPLP"). The Company's 100% owned subsidiary, TPC, is the general partner of this limited partnership. NOPLP owns and operates a gas pipeline in Newaygo and Oceana counties of Michigan. The Company provides administrative and accounting services to NOPLP for an agreed-upon fee. Due to the shut-in status of the properties connected to the gas pipeline, the partnership is currently inactive. The Company's consolidated net interest in Terra-Hayes Pipeline Company ("THPC") was 26.58% at December 31, 1994. The Company is the managing partner in this general partnership. THPC owns and operates a gas pipeline in Antrim and Otsego counties of Michigan. The Company provides administrative and accounting services to THPC and, pursuant to the terms of the partnership agreement, received reimbursements for such services. The Company has a net interest of 40% in an oil and gas drilling and completion consulting firm, which provides supervisory and management services for substantially all of the Company's drilling, completion and facility construction operations. The Company has a net interest of 10% in Nepenthe Corp. ("Nepenthe"), a corporation owning outside operated oil and gas interests and real estate. In January 1995, Nepenthe acquired this interest from the Company for $120,000. The Company is a shareholder in four corporations that provide pumping and other related services to the Company for substantially all of the Company's producing oil and gas properties. The Company also provides these corporations with financial, accounting, tax administration, engineering, consulting and advisory services including full access and use of the Company's extensive field communications system, under the terms of a general services contract. Fees charged to the Company by these partnerships and corporations are approximately as follows for the year ended December 31, 1994: Corporation using the equity method of accounting........................ $ 870,000 Corporations using the cost method of accounting......................... $2,498,000
Fees charged by the Company to these partnerships and corporations are approximately as follows for the year ended December 31, 1994: Partnerships using the equity method of accounting........................ $ 51,000 Corporations using the cost method of accounting.......................... $514,000
8. INTANGIBLES RESULTING FROM BUSINESS ACQUISITION Effective December 1, 1991 the Company exercised an option obtained upon the formation of EAOC to acquire an additional 50% ownership in EAOC from a third party in exchange for $830,000. The Company is amortizing its basis in this acquisition on a pro-rata basis over the expected life of the asset acquired in this F-75 162 purchase. The Company has not modified its amortization of this asset as a result of the sale of the gas purchase contract discussed in Note 16 due to the retention of all firm transportation rights provided for in said gas purchase contract. 9. LONG-TERM DEBT Long-term debt consisted of the following components as of December 31, 1994: Land contracts........................................................... $ 117,254 Capitalized leases....................................................... 2,188,845 Property sale financing.................................................. 172,002 ---------- 2,478,101 Less current maturities of long-term debt and capitalized leases......... 776,016 ---------- Total long-term debt........................................... $1,702,085 =========
A schedule of the combined amount of all debt subject to mandatory redemption during the years ended December 31 may be summarized as follows: 1995..................................................................... $ 776,016 1996..................................................................... 836,475 1997..................................................................... 427,099 1998..................................................................... 190,461 1999..................................................................... 99,764 2000 and after........................................................... 148,286 ---------- Total.......................................................... $2,478,101 =========
Land contracts included above are payable monthly at varied interest rates through April 2003. Installments loans are secured by vehicles and payable monthly at varied interest rates through November 1996. The present value of future capital lease payments associated with capital leases for gas compression equipment includes $736,129 classified as a current liability and $1,452,716 classified as long-term debt. Lease payments under these capital leases are due through September 1999. In August 1993, the Company entered into an unsecured term loan agreement with its bank providing for a term loan in the amount of $1,300,000. The loan bears interest at 0.5% over the bank's prime rate and is repayable over 30 equal monthly installments commencing on October 1, 1993. The loan was repaid in full in April 1994. At December 31, 1994, the Company also had a $2,000,000 unused short-term line of credit with a bank secured by a general lien on all of the Company's assets. Borrowings under this agreement bear interest at the bank's prime rate. 10. DEFERRED GAIN ON SALE OF OIL AND GAS PROPERTIES In 1989 the Company sold a carved out overriding royalty interest in certain proved properties to several purchasers for an aggregate consideration of $585,000. The purchase and sales agreement provides that the purchasers are entitled to a guaranteed minimum monthly return on the purchase price of 1.67% until the purchasers recover the purchase price plus an additional 50% of the purchase price. At such time, the Company's guarantee shall terminate and the purchasers are entitled only to their respective share of gas revenues from these properties. Under the terms of such guarantee, the Company made payments of $52,335 in 1994, in addition to the purchaser's share of net proceeds realized from the sale of gas production. The Company is including a pro-rata portion of the deferred gain resulting from the sale of these assets in income each year based upon the repayments made to the purchasers in each respective year until termination of the Company's guarantee. Aggregate payments made in 1994 amounted to $117,000 which have been reported as gains on sale of property and equipment. F-76 163 11. INCOME TAXES The provision for income taxes is as follows for the year ended December 31, 1994: Current income taxes payable............................................. $2,526,600 Decrease in deferred income taxes payable................................ (42,000) Tax attributable to minority interest in subsidiary...................... (73,600) ---------- Income taxes........................................................ $2,411,000 ==========
Deferred income taxes on the consolidated balance sheet reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for federal and state income tax purposes. Significant components of the Company's deferred tax assets as of December 31, 1994 are as follows: Intangible drilling and other costs deducted for income tax purposes and capitalized for financial statement purposes.......................... $ 4,266,000 Excess of financial statement depletion over depletion computed for income tax purposes................................................... (960,000) Gain from the sale of oil and gas properties recognized for income tax purposes but not for financial statement purposes..................... (70,000) Gain from the sale of oil and gas properties recognized for financial statement purposes but recognized for income tax purposes in a different accounting period........................................... 199,000 Excess of accrual basis net income for financial statement purposes over cash basis net income reported for income tax purposes and other...... (700,000) Alternative minimum tax credit utilized................................. (1,124,000) ----------- Total differences............................................. $ 1,611,000 ===========
The differences between the Company's income tax expense and amount calculated utilizing the federal statutory rate are as follows for the year ended December 31, 1994: Amount computed using the statutory rate................................ $ 4,188,000 Benefit of the percentage depletion allowance deducted for income tax purposes.............................................................. (97,000) Alternative minimum tax credit utilized................................. (1,675,000) Other................................................................... (5,000) ----------- Income taxes.................................................. $ 2,411,000 ===========
As of December 31, 1994 approximately $2,266,000 of alternative minimum tax credit is available to be applied against future regular income taxes. For financial statement purposes, $1,124,000 of this balance has been used to reduce deferred income taxes as of December 31, 1994. 12. COMMITMENTS AND CONTINGENCIES Irrevocable Letters of Credit The Company has obtained several irrevocable letters of credit in the aggregate amount of approximately $825,000 which serve as performance bonds required by state oil and gas regulations. These letters of credit are generally renewed annually upon their anniversary dates, and they are collaterized by the Company's office facilities and related real estate. Leasing Arrangements The Company has entered into certain noncancellable leasing agreements for gas compression equipment used on gas wells. These capital and operating leases are generally for three to five year terms, which are renewable. For capital leases the Company records an asset and a liability at the inception of the lease equal to the present value of future minimum lease payments. A portion of the asset, which is recorded in oil and gas F-77 164 properties, represents the Company's ownership interest in each well where the equipment is located. These leased assets amounts to $608,586 at December 31, 1994. The remaining portion of the asset is recorded as a receivable for lease payments due from working interest owners in various producing properties where the leased equipment is in service. The current and long-term portions of this lease financing receivable at December 31, 1994 were $624,844 and $1,127,556, respectively, and were recorded in accounts receivable and other assets, respectively. The capital lease liability is included in long-term debt and is more fully described in Note 9. The following is a schedule by year of future minimum rental payments required under operating leases that have initial or remaining noncancellable lease terms in excess of one year as of December 31, 1994:
OPERATING YEAR ENDING DECEMBER 31, LEASES 1995........................................................... $181,389 1996........................................................... 122,087 1997........................................................... 50,698 1998........................................................... 14,639 1999........................................................... -- -------- Total minimum rentals................................ $368,813 ========
The above rental payments represent the Company's portion of the total rental payments due under the leases based on the Company's net working interest in each producing property on which the equipment was being used as of December 31, 1994. The Company, as operator, charges the remaining working interest owners participating in each producing property for their proportionate share of such monthly equipment rental payments. The Company's total rental expense for all operating leases for the year ended December 31, 1994 was approximately $247,000. 13. TRANSACTIONS WITH RELATED PARTIES The Company and certain officers and directors are joint owners in various unproved and producing properties. Transactions with related parties investing in oil and gas exploration activities are carried out in the same manner as transactions with unrelated working interest partners. Estimated costs are usually billed prior to commencement of a project and cost incurred are netted against the advances as the project progresses. 14. SHAREHOLDERS' EQUITY COMMON STOCK Effective April 1, 1988, the Company signed a stock option agreement with an officer of the Company, wherein the officer will earn an option to purchase up to 503,132 shares of the Company's common stock over a period of five years. The option price is $162,500 for all the shares or $0.32298 per share, and the option will expire if not exercised before March 31, 2003. Effective January 1, 1991, the Company entered into a stock option agreement with the same officer, wherein the officer will earn an option to purchase up to 1,437,519 additional shares of the Company's common stock vesting on a pro-rata basis between January 1, 1991 and March 12, 1994. Also effective January 1, 1991, the Company entered into a stock option agreement with another officer, wherein the officer will earn an option to purchase up to 605,271 shares of the Company's common stock vesting on a pro-rata basis between January 1, 1991 and December 31, 1995. Both of these stock option agreements provide for an option price of $0.50 per share, and the options covered by these two agreements will expire if not exercised on or before January 1, 2001. F-78 165 15. DEFINED CONTRIBUTION PLAN The Company has a 401(K) profit sharing plan covering substantially all employees. Company contributions to the plan are discretionary and are allocated based on employee compensation. The Company has contributed approximately $120,000 to the plan for the 1994 plan year. 16. SALE OF OIL AND GAS PROPERTIES In two transactions during 1991 and 1992 the Company sold producing properties with a book value of approximately $967,000 for a total sales price of $2,300,000. The purchase and sales agreement provided that the Company guarantee certain minimum annual cash flow distributions aggregating $2,400,000 cumulatively through December 31, 1995. Payments of $263,331 were due under the guarantee provisions and were included in other accrued expenses at December 31, 1994. During 1994, the Company sold to several purchasing parties producing and unproved oil and gas leases with a book value of $1,395,000 and $1,983,000, respectively. The aggregate sales consideration was $1,811,000 and $11,110,000, respectively. Effective April 1, 1994 the Company also sold its interest in a gas purchase contract owned by its subsidiary, EAOC, for a cash consideration of $2,900,000. As discussed in Note 8, EAOC did not sell the firm transportation rights provided to the seller under said contract. EAOC continues to provide transportation services to the Company for the delivery of gas to market for purchase by a third party purchaser. 17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK OFF-BALANCE SHEET RISK The Company does not consider itself to have any material financial instruments with off-balance sheet risks other than those disclosed in Note 12. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the Company to credit risk include cash on deposit with one financial institution in which these deposits exceed the Federally insured amount. The Company places its temporary cash investment with high credit quality financial institutions. At December 31, 1994 the majority of the cash is either insured by the U.S. Federal Deposit Insurance Corporation or has pledged securities by the financial institution in which the cash is deposited. The Company extends credit to various companies in the oil and gas industry in the normal course of business. Within this industry, certain concentrations of credit risk exist. The Company, in its role as operator of co-owned properties, assumes responsibility for payment to vendors for goods and services related to joint operations and extends credit to co-owners of these properties. This concentration of credit risk may be similarly affected by changes in economic or other conditions and may, accordingly, impact the Company's overall credit risk. However, management believes that its accounts receivable are well diversified, thereby reducing potential credit risk to the Company. At December 31, 1994 accounts and notes receivable relating to these co-owners were approximately $7,983,000 and $1,676,000, respectively. The notes receivable are secured by certain producing property interests as discussed in Note 16. F-79 166 18. SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
YEAR ENDED DECEMBER 31, 1994 INVESTMENT Write-down to fair market value......................................... $ 135,000 NOTES RECEIVABLE Exchange for oil and gas property....................................... $ 800,000 Valuation write-down.................................................... $ 1,450,992
19. SUBSEQUENT EVENTS (UNAUDITED) The Company has entered into two sales agreements providing for the sale of a natural gas transmission pipeline and a CO2 processing plant currently under construction. The book value of these assets approximating $4,370,000 has been reclassified to Assets Held for Sale as of July 31, 1995. The Company has also obtained bank financing in the amount of $5,130,000 covering construction costs of the CO2 processing plant. The loan agreement provides that interest is payable monthly at the banks prime rate and that the loan would be repaid in full on October 1, 1995. As of July 31, 1995, the outstanding balance under this loan agreement was $3,000,000. On August 31, 1995, the Company's shareholders exchanged 100% of the outstanding common stock of the Company for common stock in a publicly traded international energy company. The Company will operate as a separate business unit conducting domestic oil and gas exploration, development and production activities. Prior to the above transaction, certain oil and gas properties and property and equipment were sold to some of the Company's shareholders for $5,000,000, which resulted in a gain on sale of assets of $1,897,971. Also prior to the above transaction, stock options were exercised, resulting in an increase in the number of outstanding shares of stock of 2,545,922, and additional paid-in capital of $12,139,604. F-80 167 TERRA ENERGY LTD. AND SUBSIDIARIES SUPPLEMENTAL OIL AND GAS DISCLOSURES OF EXPLORATION AND PRODUCTION ACTIVITIES (UNAUDITED) The following information was prepared in accordance with the Supplemental Disclosure Requirements of SFAS No. 69, Disclosures About Oil and Gas Producing Activities. Refer to the Consolidated Statements of Earnings for the Company's results of operations from exploration and production activities. The following estimates, which were prepared by the Company's petroleum engineers, of proved developed and proved undeveloped reserve quantities and related standardized measure of discounted estimated future net cash flows do not purport to reflect realizable values or fair market values of the Company's reserves. The Company emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise than those of currently producing oil and gas properties. Accordingly, these estimates are expected to change as future information becomes available. All of the Company's reserves are located in the United States. Proved reserves are estimated quantities of oil and natural gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. 1. ESTIMATED PROVED RESERVES OF OIL AND GAS
TOTAL --------------- OIL GAS (OIL IN MBBLS AND GAS IN BCF) Estimated Proved Developed and Undeveloped Reserves: December 31, 1993...................................................... 81 70 Extensions and discoveries........................................... -- 7 Production........................................................... 27 (2) --- --- December 31, 1994...................................................... 54 75 === === Estimated Proved Developed Reserves: December 31, 1994...................................................... 54 71 === ===
2. STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS FROM ESTIMATED PROVED RESERVES
(DOLLARS IN THOUSANDS) December 31, 1994: Future Cash Flows, Net of Transportation: Revenues(1)........................................................ $123,409 Less: Production costs(2)................................................ 59,288 Development costs(2)............................................... 752 -------- Future cash flows before taxes....................................... 63,369 Income tax expense (benefit)(3).................................... -- -------- Future net cash flows................................................ 63,369 Less discount to present value at a 10% annual rate.................. 25,824 -------- Standardized measure of discounted future net cash flows............. $ 37,545 ========
- ------------------------------ (1) Oil, gas and condensate revenues are based on year-end prices with adjustments for changes reflected in existing contracts. There is no consideration for future discoveries or risks associated with future production of proved reserves. (2) Based on economic conditions at year-end. Does not include administrative, general or financing costs. Does not consider future changes in development or production costs. (3) Based on current statutory rates applied to future cash inflows reduced by future production and development costs, tax deductions and credits. Income tax expense has been reduced by $20.0 million of U.S. income tax credits for Antrim gas production at December 31, 1994. F-81 168 3. RECONCILIATION OF THE CHANGE IN THE STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
YEAR ENDED DECEMBER 31, 1994 (DOLLARS IN THOUSANDS) New discoveries........................................................... $ 3,646 Sales and transfers....................................................... (2,469) Changes in prices......................................................... (1,379) Accretion of discount..................................................... 3,520 Net change in income taxes................................................ (821) Change in timing of production and other.................................. (150) -------- Net change during the year...................................... $ 2,347 ========
4. NET INVESTMENT IN PROVED AREAS
YEAR ENDED DECEMBER 31, 1994 (DOLLARS IN THOUSANDS) Developed properties...................................................... $ 22,541 Undeveloped properties Subject to depletion................................................. -- Not subject to depletion............................................. 4,111 -------- 26,652 Less accumulated depletion and amortization............................... (5,561) -------- $ 21,091 ========
5. EXPLORATION, DEVELOPMENT AND ACQUISITION EXPENDITURES IN PROVED AREAS
YEAR ENDED DECEMBER 31, 1994(1) (DOLLARS IN THOUSANDS) Exploration............................................................... $ 115 Development............................................................... 5,884 Property acquisitions..................................................... 6,818
- ------------------------------ (1) Excluded is approximately $218,000 invested in unproved areas and non-oil and gas producing properties. Included are $2,366,000 for investment and purchases of estimated proved reserves. F-82 169 PRO FORMA CONSOLIDATED FINANCIAL INFORMATION OF WALTER On February 24, 1995, Walter acquired certain oil and gas properties of the Amoco Congo Companies ("Congo Acquisition"). The acquisition has been accounted for using the purchase method of accounting. The following unaudited Pro Forma Consolidated Statements of Operations for the year ended December 31, 1994, for the one month ended January 31, 1995, and for the nine months ended September 30, 1995, assume the Congo Acquisition was consummated as of January 1, 1994, and January 1, 1995, respectively. As the Congo Acquisition was consummated on February 24, 1995, the unaudited Pro Forma Consolidated Balance Sheet as of September 30, 1995, is identical to the historical consolidated balance sheet as of September 30, 1995. The unaudited Pro Forma Consolidated Financial Statements do not purport to be indicative of the results of operations or financial position of Walter had the Congo Acquisition occurred on the dates assumed, nor are the Pro Forma Consolidated Financial Statements necessarily indicative of the future results of operations of Walter. The Pro Forma Consolidated Financial Statements should be read in conjunction with the historical Consolidated Financial Statements of Walter and the Amoco Congo Companies contained elsewhere herein. F-83 170 PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE ONE MONTH ENDED JANUARY 31, 1995 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED)
WALTER AND WALTER WALTER AMOCO PRO FORMA PRO FORMA WALTER CONGO PRO FORMA (JANUARY 31, (SEPTEMBER 30, HISTORICAL(1) HISTORICAL(2) ADJUSTMENTS 1995) 1995) (DOLLARS IN THOUSANDS) Operating Revenues: Oil and condensate............. $15,126 $ 2,592 $2,592 $ 17,718 Other operating................ 363 -- -- 363 ------- ------- ------ -------- 15,489 2,592 2,592 18,081 Operating Expenses: Depreciation, depletion and amortization................. 3,238 191 $ 241(3) 432 3,670 Operating and maintenance...... 5,712 534 534 6,246 General and administrative..... 531 306 306 837 Production and other taxes..... 71 5 5 76 ------- ------- ----- ------ -------- 9,552 1,036 241 1,277 10,829 Pretax operating income............. 5,937 1,556 (241) 1,315 7,252 Other income................... 109 5 -- 5 114 Interest expense, net.......... 757 78 (51)(4) 27 784 ------- ------- ----- ------ -------- Income before income taxes.......... 5,289 1,483 (190) 1,293 6,582 Income tax provision (benefit).................... 1,987 -- --(5) -- 1,987 ------- ------- ----- ------ -------- Net income................ $ 3,302 $ 1,483 $(190) $1,293 $ 4,595 ======= ======= ===== ====== ========
- ------------------------------ Notes to Pro Forma Consolidated Statement of Operations For the One Month Ended January 31, 1995 and the Nine Months Ended September 30, 1995: (1) The Company acquired Walter on February 27, 1995. Walter (along with an unrelated company) acquired Amoco Congo Companies on February 24, 1995. This column reflects the historical results of operations of Walter (including Walter's proportionate share of Amoco Congo Companies) for the eight months ended September 30, 1995. (2) This column represents the combined historical results of operations of Walter and Amoco Congo Companies (based on Walter's proportionate share of Amoco Congo Companies) for the one month ended January 31, 1995. (3) Adjustment to reflect the depreciation, depletion and amortization of oil and gas properties for the month ending January 31, 1995, using the full cost method, based on the purchase prices assigned by the Company to Walter and to Walter's proportionate share of Amoco Congo Companies. (4) Adjustment to reflect the repayment of approximately $10.0 million of debt and preferred stock (and the corresponding interest expense for the one month ended January 31, 1995), with funds provided to the Company by CMS Energy as part of the Walter Acquisition. (5) Adjustment to income tax expense to reflect the combined results of operations. F-84 171 PRO FORMA CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1995 (UNAUDITED)
WALTER WALTER HISTORICAL(1) PRO FORMA (DOLLARS IN THOUSANDS) ASSETS Current Assets: Cash.............................................................. $ 1,757 $ 1,757 Temporary cash investments........................................ 3,752 3,752 Accounts receivable............................................... 12,716 12,716 Other............................................................. 5,582 5,582 ------- ------- 23,807 23,807 Property, plant and equipment, at cost................................. 51,381 51,381 Less accumulated depreciation, depletion and amortization......... (3,270) (3,270) ------- ------- 48,111 48,111 ------- ------- Total assets................................................. $71,918 $71,918 ======= ======= LIABILITIES AND STOCKHOLDER'S EQUITY Current Liabilities: Current maturities of long-term debt.............................. $ 3,069 $ 3,069 Accounts payable.................................................. 20,239 20,239 Accrued interest.................................................. 130 130 Accrued taxes and other........................................... 945 945 ------- ------- 24,383 24,383 Long-term debt......................................................... 8,246 8,246 Deferred income taxes and other credits................................ 991 991 Stockholder's Equity: Common and preferred stock........................................ 1 1 Additional paid-in capital........................................ 34,995 34,995 Retained deficit.................................................. 3,302 3,302 ------- ------- 38,298 38,298 ------- ------- Total liabilities and stockholder's equity................... $71,918 $71,918 ======= =======
- ------------------------------ Notes to Pro Forma Consolidated Balance Sheet as of September 30, 1995: (1) The Company acquired Walter on February 27, 1995. Walter (along with an unrelated company) acquired Amoco Congo Companies on February 24, 1995. Therefore, Walter's historical balance sheet as of September 30, 1995 includes the balances of Amoco Congo Companies (based on Walter's proportionate share of Amoco Congo Companies). F-85 172 PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1994 (UNAUDITED)
AMOCO WALTER CONGO PRO FORMA WALTER HISTORICAL(1) HISTORICAL(2) ADJUSTMENTS PRO FORMA (DOLLARS IN THOUSANDS) Operating Revenues: Oil and condensate........................ $ 3,958 $18,625 $22,583 Other operating........................... -- 148 ------- ------- ------- 3,958 18,773 22,731 Operating Expenses: Depreciation, depletion and amortization............................ 588 1,332 $ 3,024(3) 4,944 Operating and maintenance................. 1,575 5,279 6,854 General and administrative................ 405 3,476 3,881 ------- ------- ------- ------- 2,568 10,087 3,024 15,679 Pretax operating income........................ 1,390 8,686 (3,024) 7,052 Other income.............................. 53 -- 53 Interest expense, net..................... 820 -- (610)(4) 210 ------- ------- ------- ------- Income before income taxes..................... 623 8,686 (2,414) 6,895 Income tax provision (benefit)............ 14 -- --(5) 14 ------- ------- ------- ------- Net income........................... $ 609 $ 8,686 $(2,414) $ 6,881 ======= ======= ======= =======
- ------------------------------ Notes to Pro Forma Consolidated Statement of Operations for the Year Ended December 31, 1994: (1) The Company acquired Walter on February 27, 1995. This column reflects the historical results of operations of Walter for the twelve months ended December 31, 1994. (2) Walter (along with an unrelated company) acquired Amoco Congo Companies on February 24, 1995. This column reflects the historical results of operations of Amoco Congo Companies (based on Walter's proportionate share of Amoco Congo Companies) for the twelve months ended December 31, 1994. (3) Adjustment to reflect the depreciation, depletion and amortization of oil and gas properties, using the full cost method, based on the purchase prices assigned by the Company to Walter and to Walter's proportionate share of Amoco Congo Companies. (4) Adjustment to reflect the repayment of approximately $10.0 million in debt and preferred stock (and the corresponding interest expense), with funds provided to the Company by CMS Energy as part of the Walter Acquisition. (5) Adjustment to income tax expense to reflect the combined results of operations. F-86 173 APPENDIX A October 2, 1995 CMS NOMECO Oil & Gas Co. One Jackson Square Post Office Box 1150 Jackson, Michigan 49204 Gentlemen: At your request, we have prepared an estimate of the reserves, future production, and income attributable to certain leasehold and royalty interests of CMS NOMECO Oil & Gas Co. (NOMECO) as of June 30, 1995. The income data were estimated using the Securities and Exchange Commission (SEC) guidelines for future cost and price parameters. The estimated reserves and future income amounts presented in this report are related to hydrocarbon prices. June 1995 hydrocarbon prices were used in the preparation of this report as required by SEC guidelines; however, actual future prices may vary significantly from June 1995 prices. Therefore, volumes of reserves actually recovered and amounts of income actually received may differ significantly from the estimated quantities presented in this report. An EXECUTIVE SUMMARY of the results of this study is shown below. SEC PARAMETERS ESTIMATED NET RESERVES AND INCOME DATA CERTAIN LEASEHOLD AND ROYALTY INTERESTS OF CMS NOMECO OIL & GAS CO. AS OF JUNE 30, 1995 EXECUTIVE SUMMARY
PROVED --------------------------------------------------------------- DEVELOPED ----------------------------- TOTAL PRODUCING NON-PRODUCING UNDEVELOPED PROVED ------------ ------------- ------------ -------------- NET REMAINING RESERVES Oil/Condensate -- Barrels.......... 27,491,431 6,606,754 31,580,462 65,678,647 Plant Products -- Barrels.......... 243,771 0 3,019,775 3,263,546 Gas -- MMCF........................ 226,327 28,180 43,543 298,050 INCOME DATA Future Gross Revenue............... $997,236,494 $ 144,420,217 $545,734,325 $1,687,391,036 Deductions......................... 359,568,519 55,667,267 209,915,951 691,593,808(1) ------------ ------------ ------------ -------------- Future Net Income (FNI)............ $637,667,975 $ 88,752,950 $335,818,374 $ 995,797,230 Discounted FNI @ 10%................. $436,063,136 $ 51,749,958 $191,721,994 $ 629,027,227
- ------------------------- (1) Total proved net income includes operating and development costs of -$66,442,069 and 10 percent discounted costs of -$50,507,861 which are not allocated back to the producing, non-producing, and undeveloped categories. These costs are total project costs required for the NOMECO concessions in Ecuador and Venezuela. Liquid hydrocarbons are expressed in standard 42 gallon barrels. All gas volumes are sales gas expressed in millions of cubic feet (MMCF) at the official temperature and pressure bases of the areas in which the gas reserves are located. A-1 174 The proved developed non-producing reserves included herein are comprised of the shut-in and behind pipe categories. The various producing status categories are defined in the attached "Definitions of Producing Status Categories". The future gross revenue is after the deduction of production taxes. The deductions are comprised of the normal direct costs of operating the wells, ad valorem taxes, recompletion costs, development costs, transportation and marketing charges. The future net income is before the deduction of state and federal income taxes and general administrative overhead, and has not been adjusted for outstanding loans that may exist nor does it include any adjustment for cash on hand or undistributed income. No attempt was made to quantify or otherwise account for any accumulated gas production imbalances that may exist. Liquid hydrocarbon reserves account for approximately 57 percent and gas reserves account for 35 percent of total future gross revenue from proved reserves. The remaining 8 percent of future gross revenue which is shown as "Other Income" is comprised of Section 29 Tax Credits and post-production cost credit in the Antrim shale, and from secondary gas contracts in Michigan. The cash flows prepared relative to the Terra Energy, Ltd. properties which were acquired in August, 1995 do not take into account gas purchase contracts held by Terra providing for gas sales prices exceeding the "spot" prices used in the cash flows; nor do the cash flows take into account transportation arrangements to which Terra is a party providing for cost-free transportation of gas on the wet header system. These contract agreements will have additional value to NOMECO and an estimate of the value may be determined based on our estimated future production rates and the estimated future gas prices. The discounted future net income shown above was calculated using a discount rate of 10 percent per annum compounded monthly. The results shown above are presented for your information and should not be construed as our estimate of fair market value. RESERVES INCLUDED IN THIS REPORT The proved reserves included herein conform to the definition as set forth in the Securities and Exchange Commission's Regulation S-X Part 210.4-10(a) as clarified by subsequent Commission Staff Accounting Bulletins. Our definition of proved reserves is included in the attached "Definitions of Reserves". ESTIMATES OF RESERVES In general, the reserves included herein were estimated by performance methods or the volumetric method; however, other methods were used in certain cases where characteristics of the data indicated such other methods were more appropriate in our opinion. The reserves estimated by the performance method utilized extrapolations of various historical data in those cases where such data were definitive in our opinion. Reserves were estimated by the volumetric method in those cases where there were inadequate historical performance data to establish a definitive trend or where the use of production performance data as a basis for the reserve estimates was considered to be inappropriate. The reserves included in this report are estimates only and should not be construed as being exact quantities. They may or may not be actually recovered, and if recovered, the revenues therefrom and the actual costs related thereto could be more or less than the estimated amounts. Moreover, estimates of reserves may increase or decrease as a result of future operations. FUTURE PRODUCTION RATES Initial production rates are based on the current producing rates for those wells now on production. Test data and other related information were used to estimate the anticipated initial production rates for those wells or locations which are not currently producing. If no production decline trend has been established, future production rates were held constant, or adjusted for the effects of curtailment where appropriate, until a decline in ability to produce was anticipated. An estimated rate of decline was then applied to depletion of the reserves. If a decline trend has been established, this trend was used as the basis for estimating future A-2 175 production rates. For reserves not yet on production, sales were estimated to commence at an anticipated date furnished by NOMECO. In general, we estimate that future gas production rates will continue to be the same as the average rate for the latest available 12 months of actual production until such time that the well or wells are incapable of producing at this rate. The well or wells were then projected to decline at their decreasing delivery capacity rate. Our general policy on estimates of future gas production rates is adjusted when necessary to reflect actual gas market conditions in specific cases. The future production rates from wells now on production may be more or less than estimated because of changes in market demand or allowables set by regulatory bodies. Wells or locations which are not currently producing may start producing earlier or later than anticipated in our estimates of their future production rates. HYDROCARBON PRICES NOMECO furnished us with prices in effect at June 30, 1995 and these prices were held constant except for known and determinable escalations. In accordance with Securities and Exchange Commission guidelines, changes in liquid and gas prices subsequent to June 30, 1995 were not taken into account in this report. Future prices used in this report are discussed in more detail in the attached "Hydrocarbon Pricing Parameters". COSTS Operating costs for the projects, leases, and wells in this report are based on the operating expense reports of NOMECO and include only those costs directly applicable to the leases or wells. When applicable, the operating costs include a portion of general and administrative costs allocated directly to the leases and wells under terms of operating agreements. Operating costs include ad valorem taxes where applicable. Development costs were furnished to us by NOMECO and are based on authorizations for expenditure for the proposed work or actual costs for similar projects. The current operating and development costs were held constant throughout the life of the properties. The estimated net cost of abandonment after salvage was considered by NOMECO to be insignificant and not included for the properties in this report. No deduction was made for indirect costs such as general administration and overhead expenses, loan repayments, interest expenses, and exploration and development prepayments that are not charged directly to the leases or wells. GENERAL While it may reasonably be anticipated that the future prices received for the sale of production and the operating costs and other costs relating to such production may also increase or decrease from existing levels, such changes were, in accordance with rules adopted by the SEC, omitted from consideration in making this evaluation. The estimates of reserves presented herein were based upon a detailed study of the properties in which NOMECO owns an interest; however, we have not made any field examination of the properties. No consideration was given in this report to potential environmental liabilities which may exist nor were any costs included for potential liability to restore and clean up damages, if any, caused by past operating practices. NOMECO has informed us that they have furnished us all of the accounts, records, geological and engineering data, and reports and other data required for this investigation. The ownership interests, prices, and other factual data furnished by NOMECO were accepted without independent verification. The estimates presented in this report are based on data available through August 1995. Neither we nor any of our employees have any interest in the subject properties and neither the employment to make this study nor the compensation is contingent on our estimates of reserves and future income for the subject properties. A-3 176 This report was prepared for the exclusive use of CMS NOMECO Oil & Gas Co. The data, work papers, and maps used in this report are available for examination by authorized parties in our offices. Please contact us if we can be of further service. Very truly yours, RYDER SCOTT COMPANY PETROLEUM ENGINEERS /s/ JOHN R. WARNER, P.E. -------------------------------------- John R. Warner, P.E. Group Vice President JRW/sw A-4 177 DEFINITIONS OF RESERVES SEC PARAMETERS SEC DEFINITIONS Proved reserves of crude oil, condensate, natural gas, and natural gas liquids are estimated quantities that geological and engineering data demonstrate with reasonable certainty to be recoverable in the future from known reservoirs under existing operating conditions using the cost and price parameters discussed in other sections of this report. Reservoirs are considered proved if economic producibility is supported by actual production or formation tests. In certain instances, proved reserves are assigned on the basis of a combination of core analysis and electrical and other type logs which indicate the reservoirs are analogous to reservoirs in the same field which are producing or have demonstrated the ability to produce on a formation test. The area of a reservoir considered proved includes (1) that portion delineated by drilling and defined by fluid contacts, if any, and (2) the adjoining portions not yet drilled that can be reasonably judged as economically productive on the basis of available geological and engineering data. In the absence of data on fluid contacts, the lowest known structural occurrence of hydrocarbons controls the lower proved limit of the reservoir. Proved reserves are estimates of hydrocarbons to be recovered from a given date forward. They may be revised as hydrocarbons are produced and additional data become available. Proved natural gas reserves are comprised of non-associated, associated and dissolved gas. An appropriate reduction in gas reserves has been made for the expected removal of natural gas liquids, for lease and plant fuel, and for the exclusion of non-hydrocarbon gases if they occur in significant quantities and are removed prior to sale. Reserves that can be produced economically through the application of improved recovery techniques are included in the proved classification when these qualifications are met: (1) 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, and (2) it is reasonably certain the project will proceed. Improved recovery includes all methods for supplementing natural reservoir forces and energy, or otherwise increasing ultimate recovery from a reservoir, including (1) pressure maintenance, (2) cycling, and (3) secondary recovery in its original sense. Improved recovery also includes the enhanced recovery methods of thermal, chemical flooding, and the use of miscible and immiscible displacement fluids. Estimates of proved reserves do not include crude oil, natural gas, or natural gas liquids being held in underground or surface storage. A-5 178 DEFINITIONS OF PRODUCING STATUS CATEGORIES DEVELOPED PRODUCING Producing reserves are recoverable from completion intervals currently open and producing to market. Improved recovery reserves are considered to be producing only after an improved recovery project has been installed and is in operation. DEVELOPED NON-PRODUCING Shut-in reserves are recoverable from completion intervals now open, but which had not started producing as of the date of our estimate. Behind pipe reserves are recoverable from zones behind casing in existing wells, which will require additional completion work or a future recompletion prior to the start of production. UNDEVELOPED Undeveloped reserves are recoverable by new wells on undrilled acreage, from existing wells where a relatively large expenditure is required for recompletion and from acreage where the application of an improved recovery project is planned and the costs required to place the project in operation are relatively large. Reserves on undrilled acreage are limited to those drilling units offsetting productive units that are reasonably certain of production when drilled. Proved reserves for other undrilled units are included only where it can be demonstrated with certainty that there is continuity of production from the existing productive formation. A-6 179 HYDROCARBON PRICING PARAMETERS SECURITIES AND EXCHANGE COMMISSION PARAMETERS OIL AND CONDENSATE NOMECO furnished us with oil and condensate prices in effect at June 30, 1995 and these prices were held constant to depletion of the properties. In accordance with Securities and Exchange Commission guidelines, changes in liquid prices subsequent to June 30, 1995 were not considered in this report. PLANT PRODUCTS NOMECO furnished us with plant product prices in effect at June 30, 1995 and these prices were held constant to depletion of the properties. GAS NOMECO furnished us with gas prices in effect at June 30, 1995 and with its forecasts of future gas prices which take into account SEC guidelines, current spot market prices, contract prices, and fixed and determinable price escalations where applicable. In accordance with SEC guidelines, the future gas prices used in this report make no allowances for future gas price increases which may occur as a result of inflation nor do they make any allowance for seasonable variations in gas prices which may cause future yearly average gas prices to be somewhat lower than December gas prices. For gas sold under contract, the contract gas price including fixed and determinable escalations, exclusive of inflation adjustments, was used until the contract expires and then was adjusted to the current market price for the area and held at this adjusted price to depletion of the reserves. A-7 180 ------------------------------------------------------ ------------------------------------------------------ NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. ------------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary........................ 3 Risk Factors.............................. 9 The Company............................... 16 Use of Proceeds........................... 16 Dividend Policy........................... 17 Dilution.................................. 17 Capitalization............................ 18 Pro Forma Consolidated Financial Information............................. 19 Report of Independent Public Accountants............................. 20 Selected Historical Consolidated Financial Data.................................... 24 Management's Discussion and Analysis of Financial Condition and Results of Operations.............................. 25 Business and Properties................... 36 Management................................ 63 Ownership of Capital Stock................ 68 Relationship and Certain Transactions with CMS Energy.............................. 71 Description of Capital Stock.............. 74 Shares Eligible for Future Sale........... 77 Underwriting.............................. 78 Legal Matters............................. 79 Experts................................... 80 Available Information..................... 81 Certain Definitions....................... 82 Index to Financial Statements............. F-1 Letter of Ryder Scott Company............. A-1
------------------------ UNTIL , 1995 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ SHARES CMS NOMECO OIL & GAS CO. COMMON STOCK [LOGO] ------------------------ PROSPECTUS ------------------------ REPRESENTATIVES OF THE UNDERWRITERS ------------------------------------------------------ ------------------------------------------------------ 181 PART II. INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following is a statement of the various expenses to be paid by the Registrant in connection with the Offering. All amounts shown are estimates except for the SEC registration fee. Securities and Exchange Commission Registration Fee................. $34,483 New York Stock Exchange Listing Fee................................. * NASD Fee............................................................ 10,500 Printing and Engraving Expenses..................................... * Legal Fees and Expenses............................................. * Accounting Fees and Expenses........................................ * Blue Sky Fees and Expenses.......................................... * Transfer Agent and Registrar Fees and Expenses...................... * Miscellaneous....................................................... * ------- Total: $ * -------
- ------------------------- * To be completed by amendment. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Sections 561 through 571 of the Michigan Business Corporation Act (the "MBCA") contain detailed provisions concerning the indemnification of directors and officers against judgments, penalties, fines and amounts paid in settlement of litigation. Article VII of the Registrant's Restated Articles of Incorporation reads: A director shall not be personally liable to the corporation or its shareholders for monetary damages for breach of duty as a director except (i) for a breach of the director's duty of loyalty to the corporation or its shareholders, (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) for a violation of Section 551(1) of the MBCA, and (iv) any transaction from which the director derived an improper personal benefit. If the MBCA is amended after approval by the shareholders of this Article VII to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director shall be eliminated or limited to the fullest extent permitted by the MBCA, as so amended. No amendment to or repeal of this Article VII, and no modification to its provisions by law, shall apply to, or have any effect upon, the liability or alleged liability of any director of the corporation for or with respect to any acts or omissions of such director occurring prior to such amendment, repeal or modification. Article VIII of the Registrant's Restated Articles of Incorporation reads: Each director, officer, employee and agent of the corporation shall be indemnified by the corporation to the fullest extent permitted by law against expenses (including attorneys' fees), judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with the defense of any proceeding in which he or she was or is a party or is threatened to be made a party by reason of being or having been a director, officer, employee and agent of the corporation or by reason of the fact that he or she is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. Such right of indemnification is not exclusive of any other rights to which such director, officer, employee and agent may be entitled under any now or hereafter existing statute, any other provision of these Articles, Bylaws, agreement, vote of shareholders or otherwise. If the MBCA is amended after approval by the shareholders of this Article VIII to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the MBCA, as so amended. Any repeal or modification of this Article VIII by II-1 182 the shareholders of the corporation shall not adversely affect any right or protection of a director of the corporation existing at the time of such repeal or modification. Officers and directors are covered within specified monetary limits by insurance against certain losses arising from claims made by reason of their being directors or officers of the Registrant or of the Registrant's subsidiaries and the Registrant's officers and directors are indemnified against such losses by reason of their being or having been directors of officers of another corporation, partnership, joint venture, trust or other enterprise at the Registrant's request. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
EXHIBIT NO. 1.1 -- Form of Underwriting Agreement.* 3.1 -- Restated Articles of Incorporation of the Registrant. 3.2 -- Restated By-Laws of the Registrant. 4.1 -- Specimen Common Stock Certificate.* 5.1 -- Opinion of counsel.* 10.1 -- Consulting and Non-Compete Agreement, dated as of February 1, 1995, by and between the Registrant and Richard J. Burgess. 10.2 -- Employee Well Participation Program, Plan A and Plan B. 10.3 -- Reimbursement Agreement, dated as of December 9, 1994, between CMS Energy Corporation and Registrant. 10.4 -- Key Employee Incentive Compensation Plan. 10.5 -- Supplemental Executive Retirement Plan for Employees of Consumers Power Company ("Consumers"), filed as Exhibit 10(o) to Consumers' Form 10-K Report for the year 1993, File No. 1-5611, and incorporated herein by reference. 10.6 -- Gas Purchase Agreement, dated as of January 1, 1995, between the Registrant and Consumers. 10.7 -- Natural Gas Purchase Agreement, dated as of May 1, 1989, between the Registrant and Midland Cogeneration Venture Limited Partnership. 10.8 -- Gas Purchase Contract, dated as of December 1, 1987, between the Registrant and Consumers. 10.9(a) -- Gas Purchase Contract, dated as of December 1, 1985, between the Registrant and Consumers. 10.9(b) -- Modification and Amendment to Gas Purchase Contract, dated as of December 1, 1986, by and between Registrant and Consumers. 10.9(c) -- Modification and Amendment to Gas Purchase Contract, dated as of December 1, 1987, by and between Registrant and Consumers. 10.9(d) -- Modification and Amendment to Gas Purchase Contract, dated as of March 1, 1988, by and between Registrant and Consumers. 10.10 -- Gas Purchase Contract, dated as of November 2, 1978, between the Registrant and Consumers. 10.11 -- Services Agreement, dated as of October 1, 1989, between the Registrant and Consumers. 10.12 -- Services Agreement, dated as of October 25, 1995, between the Registrant and CMS Energy. 10.13 -- Services Agreement, dated as of October 25, 1995, between the Registrant and CMS Enterprises.
II-2 183
EXHIBIT NO. 10.14 -- Registration Rights Agreement, dated as of October 25, 1995, between the Registrant and CMS Enterprises. 10.15 -- Amended and Restated Agreement for the Allocation of Income Tax Liabilities and Benefits, dated as of January 1, 1994, among CMS Energy and its subsidiaries. 10.16 -- Indemnification Agreement, dated as of October 20, 1995, between the Registrant and CMS Energy. 10.17 -- Agreement and Plan of Merger, dated as of August 29, 1995, among CMS Energy, CMS Merging Corporation, Terra Energy Ltd., Martin G. Lagina, Craig J. Tester, Dr. Thomas James and Nancy M. James, Dr. James Lowell and Mary K. Lowell, The Revocable Living Trust of Dr. Leonard J. Scherock under Agreement dated May 1, 1990, Robert M. Boeve and Wayne Sterenberg. 10.18 -- Covenant Not to Compete, dated as of August 31, 1995, among CMS Energy Corporation, Martin G. Lagina, Craig J. Tester, Robert M. Boeve and Wayne Sterenberg. 10.19 -- Transfer Agreement, dated as of August 31, 1995, among the Registrant, CMS Energy and CMS Enterprises. 10.20 -- Promissory Note, dated as of August 31, 1995, issued by the Registrant to CMS Enterprises. 10.21 -- Agreement and Plan of Merger, dated as of January 24, 1995, among CMS Energy, CMS Merging Corporation, Walter International, Inc., J.C. Walter, Jr., J.C. Walter III, Carole Walter Looke, F. Fox Benton, Jr., Gordon A. Cain, The Cain 1988 Descendants Trust, William C. Oehmig, Prudential-Bache Energy Growth Fund, L.P. G-2, Prudential-Bache Energy Growth Fund, L.P. G-3, Prudential-Bache Energy Growth Fund, L.P. G-4, F. Fox Benton III, Howard A. Chapman, G.W. Frank, Robert D. Jolly and Arthur L. Smalley. 10.22 -- Promissory Note, dated as of July 17, 1995, issued by the Registrant to CMS Energy. 10.23 -- Tax Agreement, dated as of February 23, 1995, by and between Amoco Production Company, Amoco Corporation, Walter International, Inc., Walter Congo Holdings Company, Nuevo Energy Company, The Congo Holding Company, Walter International Congo, Inc., and the Nuevo Congo Company. 10.24 -- CMS Tax Agreement, dated as of February 24, 1995, between Amoco Corporation, Amoco Production Company, CMS Energy Corporation, CMS Enterprises, Inc., CMS-Nomeco Oil & Gas Co., Walter International, Inc. Walter Holdings, Inc. and Walter International Congo, Inc. 10.25 -- Inter-Purchaser Agreement, dated as of December 28, 1994, by and among Walter International, Inc., Walter Congo Holdings, Inc., Walter International Congo, Inc., Nuevo Energy Company, The Congo Holding Company and the Nuevo Congo Company. 10.26 -- Stock Purchase Agreement, dated as of June 30, 1994, by and between Amoco Production Company, Walter International, Inc., Nuevo Energy Company, Walter International Congo, Inc., Walter Congo Holdings, Inc., The Nuevo Congo Company and the Congo Holdings Company. 10.27 -- Swap Agreement, dated as of May 8, 1992, by and between Registrant and Louis Dreyfus Exchanges Ltd. 10.28 -- Finance Agreement, dated as of December 28, 1994, among Walter International Congo, Inc., Walter Congo Holdings, Inc., and Overseas Private Investment Corporation. 10.29(a) -- Amended and Restated Credit Agreement, dated as of November 1, 1993, as amended, among the Registrant, the Banks, all as defined therein, and NBD Bank, N.A., as Agent, and the Exhibits thereto.
II-3 184
EXHIBIT NO. 10.29(b) -- Second Amendment to Credit Agreement and Assumption Agreement, dated as of March 1, 1995, among the Registrant, the Banks, all as defined therein, and NBD Bank as Agent. 10.29(c) -- Third Amendment to Credit Agreement, dated as of August 31, 1995, among the Registrant, the Banks, all as defined therein, and NBD Bank, as Agent. 10.30 -- Long-Term Incentive Performance Plan.* 10.31 -- Executive Incentive Compensation Plan.* 15.1 -- Letters of Arthur Andersen LLP regarding unaudited financial statements. 15.2 -- Letters of KPMG Peat Marwick LLP regarding unaudited financial statements. 21.1 -- Subsidiaries of the Registrant. 23.1 -- Consent of Arthur Andersen LLP. 23.2 -- Consent of Deloitte & Touche LLP. 23.3 -- Consent of KPMG Peat Marwick LLP. 23.4 -- Consent of counsel (included in Exhibit 5.1). 23.5 -- Consent of Ryder Scott Company. 24.1 -- Powers of Attorney. 27.1 -- Financial Data Schedule.
- ------------------------- * To be filed by amendment. FINANCIAL STATEMENT SCHEDULE All financial statement schedules are omitted because they are not applicable or not required or because the required information is shown in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS. (a) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (b) The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. (c) The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 185 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Jackson, State of Michigan, on the 26th day of October, 1995. CMS NOMECO Oil & Gas Co. By: /s/ WILLIAM H. STEPHENS, III --------------------------------- William H. Stephens, III Executive Vice President and General Counsel Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities indicated on the 26th day of October, 1995.
NAME TITLE /s/ GORDON L. WRIGHT President, Chief Executive Officer and - ------------------------------------------ Director (Principal Executive Officer) (Gordon L. Wright) /s/ PAUL E. GEIGER Vice President, Secretary and Treasurer - ------------------------------------------ (Principal Financial and Accounting Officer) (Paul E. Geiger) * Director - ------------------------------------------ (Victor J. Fryling) * Director - ------------------------------------------ (Richard J. Burgess) * Director - ------------------------------------------ (Frank M. Burke, Jr.) * Director - ------------------------------------------ (J. Stuart Hunt) * Director - ------------------------------------------ (Thomas K. Matthews, II) * Director - ------------------------------------------ (William T. McCormick, Jr.) Director - ------------------------------------------ (Charles R. Owens)
II-5 186
NAME TITLE * Director - ------------------------------------------ (S. Kinnie Smith, Jr.) * Director - ------------------------------------------ (P.W.J. Wood) * Director - ------------------------------------------ (Alan M. Wright) *By: /s/ WILLIAM H. STEPHENS, III -------------------------------------- William H. Stephens, III Attorney-in-fact
II-6 187 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ----------- ------------------------------------------------------------------------------------------------------------- 1.1 - Form of Underwriting Agreement.* 3.1 - Restated Articles of Incorporation of the Registrant. 3.2 - Restated By-Laws of the Registrant. 4.1 - Specimen Common Stock Certificate.* 5.1 - Opinion of counsel.* 10.1 - Consulting and Non-Compete Agreement, dated as of February 1, 1995, by and between the Registrant and Richard J. Burgess. 10.2 - Employee Well Participation Program, Plan A and Plan B. 10.3 - Reimbursement Agreement, dated as of December 9, 1994, between CMS Energy Corporation and Registrant. 10.4 - Key Employee Incentive Compensation Plan. 10.5 - Supplemental Executive Retirement Plan for Employees of Consumers Power Company ("Consumers"), filed as Exhibit 10(o) to Consumers' Form 10-K Report for the year 1993, File No. 1-5611, and incorporated herein by reference. 10.6 - Gas Purchase Agreement, dated as of January 1, 1995, between the Registrant and Consumers. 10.7 - Natural Gas Purchase Agreement, dated as of May 1, 1989, between the Registrant and Midland Cogeneration Venture Limited Partnership. 10.8 - Gas Purchase Contract, dated as of December 1, 1987, between the Registrant and Consumers. 10.9(a) - Gas Purchase Contract, dated as of December 1, 1985, between the Registrant and Consumers. 10.9(b) - Modification and Amendment to Gas Purchase Contract, dated as of December 1, 1986, by and between Registrant and Consumers. 10.9(c) - Modification and Amendment to Gas Purchase Contract, dated as of December 1, 1987, by and between Registrant and Consumers. 10.9(d) - Modification and Amendment to Gas Purchase Contract, dated as of March 1, 1988, by and between Registrant and Consumers. 10.10 - Gas Purchase Contract, dated as of November 2, 1978, between the Registrant and Consumers. 10.11 - Services Agreement, dated as of October 1, 1989, between the Registrant and Consumers.
188 EXHIBIT INDEX (CONT.)
EXHIBIT NO. DESCRIPTION - ----------- ------------------------------------------------------------------------------------------------------------------- 10.12 - Services Agreement, dated as of October 25, 1995, between the Registrant and CMS Energy. 10.13 - Services Agreement, dated as of October 25, 1995, between the Registrant and CMS Enterprises. 10.14 - Registration Rights Agreement, dated as of October 25, 1995, between the Registrant and CMS Enterprises. 10.15 - Amended and Restated Agreement for the Allocation of Income Tax Liabilities and Benefits, dated as of Janaury 1, 1994, among CMS Energy and its subsidiaries. 10.16 - Indemnification Agreement, dated as of October 20, 1995, between the Registrant and CMS Energy. 10.17 - Agreement and Plan of Merger, dated as of August 29, 1995, among CMS Energy, CMS Merging Corporation, Terra Energy Ltd., Martin G. Lagina, Craig J. Tester, Dr. Thomas James and Nancy M. James, Dr. James Lowell and Mary K. Lowell, The Revocable Living Trust of Dr. Leonard J. Scherock under Agreement dated May 1, 1990, Robert M. Boeve and Wayne Sterenberg. 10.18 - Covenant Not to Compete, dated as of August 31, 1995, among CMS Energy Corporation, Martin G. Lagina, Craig J. Tester, Robert M. Boeve and Wayne Sterenberg. 10.19 - Transfer Agreement, dated as of August 31, 1995, among the Registrant, CMS Energy and CMS Enterprises. 10.20 - Promissory Note, dated as of August 31, 1995, issued by the Registrant to CMS Enterprises. 10.21 - Agreement and Plan of Merger, dated as of January 24, 1995, among CMS Energy, CMS Merging Corporation, Walter International, Inc., J.C. Walter, Jr., J.C. Walter III, Carole Walter Looke, F. Fox Benton, Jr., Gordon A. Cain, The Cain 1988 Descendants Trust, William C. Oehmig, Prudential-Bache Energy Growth Fund, L.P. G-2, Prudential-Bache Energy Growth Fund, L.P. G-3, Prudential-Bache Energy Growth Fund, L.P. G-4, F. Fox Benton III, Howard A. Chapman, G.W. Frank, Robert D. Jolly and Arthur L. Smalley. 10.22 - Promissory Note, dated as of July 17, 1995, issued by the Registrant to CMS Energy. 10.23 - Tax Agreement, dated as of February 23, 1995, by and between Amoco Production Company, Amoco Corporation, Walter International, Inc., Walter Congo Holdings Company, Nuevo Energy Company, The Congo Holding Company, Walter International Congo, Inc., and the Nuevo Congo Company. 10.24 - CMS Tax Agreement, dated as of February 24, 1995, between Amoco Corporation, Amoco Production Company, CMS Energy Corporation, CMS Enterprises, Inc., CMS-Nomeco Oil & Gas Co., Walter International, Inc. Walter Holdings, Inc. and Walter International Congo, Inc.
189 EXHIBIT INDEX (CONT.)
EXHIBIT NO. DESCRIPTION - ----------- ------------------------------------------------------------------------------------------------------------------ 10.25 - Inter-Purchaser Agreement, dated as of December 28, 1994, by and among Walter International, Inc., Walter Congo Holdings, Inc., Walter International Congo, Inc., Nuevo Energy Company, The Congo Holding Company and the Nuevo Congo Company. 10.26 - Stock Purchase Agreement, dated as of June 30, 1994, by and between Amoco Production Company, Walter International, Inc., Nuevo Energy Company, Walter International Congo, Inc., Walter Congo Holdings, Inc., The Nuevo Congo Company and the Congo Holdings Company. 10.27 - Swap Agreement, dated as of May 8, 1992, by and between Registrant and Louis Dreyfus Exchanges Ltd. 10.28 - Finance Agreement, dated as of December 28, 1994, among Walter International Congo, Inc., Walter Congo Holdings, Inc., and Overseas Private Investment Corporation. 10.29(a) - Amended and Restated Credit Agreement, dated as of November 1, 1993, as amended, among the Registrant, the Banks, all as defined therein, and NBD Bank, N.A., as Agent, and the Exhibits thereto. 10.29(b) - Second Amendment to Credit Agreement and Assumption Agreement, dated as of March 1, 1995, among the Registrant, the Banks, all as defined therein, and NBD Bank as Agent. 10.29(c) - Third Amendment to Credit Agreement, dated as of August 31, 1995, among the Registrant, the Banks, all as defined therein, and NBD Bank, as Agent. 10.30 - Long-Term Incentive Performance Plan.* 10.31 - Executive Incentive Compensation Plan.* 15.1 - Letters of Arthur Andersen LLP regarding unaudited financial statements. 15.2 - Letters of KPMG Peat Marwick LLP regarding unaudited financial statements. 21.1 - Subsidiaries of the Registrant. 23.1 - Consent of Arthur Andersen LLP. 23.2 - Consent of Deloitte & Touche LLP. 23.3 - Consent of KPMG Peat Marwick LLP. 23.4 - Consent of counsel (included in Exhibit 5.1). 23.5 - Consent of Ryder Scott Company. 24.1 - Powers of Attorney. 27.1 - Financial Data Schedule.
* To be filed by amendment. EX-3.1 2 EXHIBIT 3.1 1 EXHIBIT 3.1 CMS NOMECO OIL & GAS CO. RESTATED BYLAWS ARTICLE I: LOCATION OF OFFICES Section 1 - Registered Office: The registered office of CMS NOMECO Oil & Gas Co. (the "Company") shall be at such place in the City of Jackson, County of Jackson, Michigan, or elsewhere in the State of Michigan, as the Board of Directors may from time to time designate. Section 2 - Other Offices: The Company may have and maintain other offices within or without the State of Michigan. ARTICLE II: CORPORATE SEAL Section 1 - Corporate Seal: The Company shall have a corporate seal bearing the name of the Company. The form of the corporate seal may be altered by the Board of Directors. ARTICLE III: FISCAL YEAR Section 1 - Fiscal Year: The fiscal year of the Company shall begin with the first day of January and end with the thirty-first day of December of each year. ARTICLE IV: SHAREHOLDERS' MEETINGS Section 1 - Annual Meeting: An annual meeting of the shareholders for election of directors and for such other business as may come before the meeting shall be held at the registered office of the Company or at such other place within or without the State of Michigan, at 10:30 o'clock A.M., Eastern Daylight Saving Time, or at such other time on the third Thursday in April of 2 2 each year, or upon such other day within sixty days thereafter, in each case as the Board of Directors may designate. Section 2 - Special Meetings: Special meetings of the shareholders may be called by the Board of Directors, the Chairman of the Board or the President. Such meeting shall be held at the registered office of the Company or at such other place within or without the State of Michigan as the Board of Directors may designate. Section 3 - Notices: Except as otherwise provided by law, written notice of any meeting of the shareholders shall be given, either personally or by mail, to shareholders entitled to vote at such meeting, not less than ten days nor more than sixty days prior to the date of the meeting, at their last known address as the same appears on the stock records of the Company. Such notice shall specify the time and place of holding the meeting, the purpose or purposes for which such meeting is called, and the record date fixed for the determination of shareholders entitled to notice of and to vote at such meeting. The Board of Directors shall fix a record date for determining shareholders entitled to notice of and to vote at a meeting of shareholders, which record date shall not be more than sixty days nor less than ten days before the date of the meeting. When a record date has been so fixed by the Board, such record date shall apply to any adjournment of the meeting unless the Board of Directors shall fix a new record date for the purposes of the adjourned meeting. No notice of an adjourned meeting shall be necessary if the time and place to which the meeting is adjourned are announced at the meeting at which the adjournment is taken. At the adjourned meeting only such business may be transacted as might have been transacted at the original meeting. If, after an adjournment, the Board of Directors shall fix a new record date for the adjourned meeting, a notice of the adjourned meeting, in conformity with the provisions of the first paragraph of this Section 3, shall be given to each shareholder of record as of the new record date entitled to vote at the adjourned meeting. 3 3 Section 4 - Quorum: Except as otherwise provided by law or by the Articles of Incorporation, the holders of the shares of stock of the Company entitled to cast a majority of the votes at a meeting shall constitute a quorum for the transaction of business at the meeting, but a lesser number may convene any meeting and, by a majority vote of the shares present at the meeting, may adjourn the same from time to time until a quorum shall be present. Section 5 - Voting: Shareholders may vote at all meetings in person or by proxy in writing, but all proxies shall be filed with the Secretary of the meeting before being voted upon. Subject to the provisions of the Articles of Incorporation of the Company, at all meetings of the shareholders of the Company each shareholder shall be entitled on all questions to one vote for each share of stock held by such holder, and a majority of the votes cast by the holders of shares entitled to vote thereon shall be sufficient for the adoption of any question presented, unless otherwise provided by law or by the Articles of Incorporation of the Company. Section 6 - Action Without Meeting: Any action required or permitted under law to be taken at an annual or special meeting of shareholders may be taken without a meeting, without prior notice and without a vote, if consents in writing, setting forth the action so taken, are signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote on such action were present and voted. ARTICLE V: DIRECTORS Section 1 - Number of Directors: The number of directors which shall constitute the whole Board of Directors shall be determined by resolution of a majority of the Board of Directors, but in no event shall the number of directors be less than three nor more than twelve. The number of directors may be decreased at any time and from time to time by a majority of the directors then in office, but only to eliminate vacancies existing by reason of the death, resignation, removal or expiration of the term of one or more directors. 4 4 Section 2 - Election: The directors shall be elected at the annual meeting of shareholders by such shareholders as have the right to vote on such election. Directors need not be shareholders of the Company. Section 3 - Term of Office: Subject to the provisions of the Articles of Incorporation of the Company, and unless otherwise provided by law, the directors shall hold office from the date of their election until the next succeeding annual meeting and until their successors are elected and qualified, and until their resignation or removal. Section 4 - Vacancies: Any vacancy or vacancies on the Board of Directors arising from any cause may be filled by the affirmative vote of a majority of the remaining directors although less than a quorum of the Board. An increase in the number of members shall be construed as creating a vacancy. Section 5 - Fees: Except as otherwise provided by law, the Board of Directors, by affirmative vote of a majority of directors then in office, may establish reasonable compensation of directors for services to the Company as directors, and may from time to time review and adjust such compensation in an amount the Board may deem reasonable. ARTICLE VI: DIRECTORS' MEETINGS Section 1 - Organization Meeting: As soon as possible after their election, the Board of Directors shall meet and organize and they may also transact such other business as may be presented. Section 2 - Other Meetings: Meetings of the Board of Directors may be held at any time upon the call of the Secretary or Assistant Secretary made at the direction of the Chairman of the Board, the President, an Executive Vice President or two directors. 5 5 Section 3 - Place of Meeting: All meetings of the Board of Directors may be held within or without the State of Michigan. Section 4 - Notice: A reasonable notice of all meetings of the Board of Directors, in writing or otherwise, shall be given to each director or sent to the director's residence or place of business; provided that no notice shall be required for any organization meeting if held on the same day as the shareholders' meeting at which the directors were elected. No notice of the holding of an adjourned meeting shall be necessary. Notice of all meetings shall specify the time and place of holding the meeting and, unless otherwise stated, any and all business may be transacted at such meeting. Notice of the time, place and purpose of any meeting may be waived in writing, either before or after the holding thereof. Section 5 - Quorum: At all meetings of the Board of Directors a majority of the Board then in office shall constitute a quorum, but a majority of the directors present may convene and adjourn any such meeting from time to time until a quorum shall be present. Section 6 - Reliance upon Records: Every director, and every member of any committee of the Board of Directors, shall, in the performance of his or her duties, be fully protected in relying in good faith upon the records of the Company and upon such information, opinions, reports or statements presented to the Company by any of its officers or employees, or committees of the Board of Directors, or by any other person as to matters the director or member reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Company, including, but not limited to, such records, information, opinions, reports or statements as to the value and amount of the assets, liabilities and/or net profits of the Company, or any other facts pertinent to the existence 6 6 and amount of surplus or other funds from which dividends might property be declared and paid, or with which the Company's capital stock might properly be purchased or redeemed. Section 7 - Voting: All questions coming before any meeting of the Board of Directors for action shall be decided by a majority vote of the directors present at such meeting, unless otherwise provided by law or by these Bylaws. Section 8 - Participation by Communications Equipment: A director or a member of a Committee designated by the Board of Directors may participate in a meeting by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Participation in a meeting by such means shall constitute presence in person at the meeting. Section 9 - Action Without Meeting: Any action required or permitted to be taken pursuant to authorization voted at a meeting of the Board of Directors, or a Committee thereof, may be taken without a meeting if, before or after the action, all members of the Board or of the Committee consent thereto in writing. The written consents shall be filed with the minutes of the proceedings of the Board or Committee, and the consents shall have the same effect as a vote of the Board or Committee for all purposes. ARTICLE VII: EXECUTIVE AND OTHER COMMITTEES Section 1 - Number and Qualifications: By resolution passed by a majority of the Board, the Board of Directors may from time to time designate one or more of their number to constitute an Executive or any other Committee of the Board, as the Board of Directors may from time to time determine to be desirable, and may fix the number of and designate the Chairman of each such Committee. Except as otherwise provided by law, the powers of each such Committee shall be as defined in the resolution or resolutions of the Board of Directors relating to the authorization of such Committee, and may include, if such resolution or resolutions so 7 7 provide, the power and authority to declare a dividend or to authorize the issuance of shares of stock of the Company. Section 2 - Appointment: The appointment of members of each such Committee, or other action respecting any Committee, may take place at any meeting of the Board of Directors. Section 3 - Term of Office: The members of each Committee shall hold office at the pleasure of the Board of Directors. Section 4 - Vacancies: Any vacancy or vacancies in any such Committee arising from any cause shall be filled by the Board of Directors. The Board may designate one or more directors to serve as alternate members of a Committee, who may replace an absent or disqualified member at a meeting of a Committee; provided, however, in the absence or disqualification of a member of a Committee, the members of the Committee present at a meeting and not disqualified from voting, whether or not constituting a quorum, may unanimously appoint another member of the Board of Directors to act in the place of the absent or disqualified member. Section 5 - Fees: Except as otherwise provided by law, the Board of Directors, by affirmative vote of a majority of directors then in office, may establish reasonable compensation of directors for services to the Company on Committees of the Board, and may from time to time review and adjust such compensation in an amount the Board may deem reasonable. Section 6 - Minutes: Except as otherwise determined by the Board of Directors, each such committee shall make a written report or recommendation following its meetings or keep minutes of all its meetings. Section 7 - Quorum: At all meetings of any duly authorized Committee of the Board of Directors, a majority of the members of such Committee shall constitute a quorum but a majority of the members present may convene and adjourn any such meeting from time to time 8 8 until a quorum shall be present; provided, that with respect to any Committee of the Board other than the Executive Committee, if the membership of such Committee is four or less, then two members of such Committee shall constitute a quorum and one member may convene and adjourn any such meeting from time to time until a quorum shall be present. ARTICLE VIII: OFFICERS Section 1 - Election: The officers of the Company shall be elected annually at the organization meeting of the Board of Directors, provided that any officer not elected at such meeting may be elected at any succeeding meeting of the directors. The Board shall elect a Chairman of the Board, a President, a Secretary and a Treasurer, and if the Board so determines, such other officers as the Board of Directors may from time to time determine and as may be deemed necessary, who shall have such duties and authority not inconsistent herewith, as may be prescribed by resolution of the Board of Directors. Any two or more of such offices may be held by the same person but no officer shall execute, acknowledge or verify any instrument in more than one capacity, if such instrument is required by law, by the Articles of Incorporation of the Company, or by these Bylaws to be executed, acknowledged or verified by two or more officers. Section 2 - Qualifications: The Chairman of the Board, Vice Chairmen, if any, and the President shall be chosen from among the Board of Directors. Section 3 - Vacancies: Any vacancy or vacancies among the officers arising from any cause shall be filled by the Board of Directors. In case of the absence of any officer of the Company or for any other reason the Board of Directors may deem sufficient, the Board may delegate, for the time being, the powers or duties, in whole or part, of any officer to any other officer or to any director. 9 9 Section 4 - Term of Office: Each officer of the Company shall hold office until his successor is elected and qualified, or until his resignation or removal. Any officer elected by the Board of Directors may be removed by the Board with or without cause. Section 5 - Compensation: The compensation of the officers shall be fixed by the Board of Directors. ARTICLE IX: AGENTS Section 1 - Resident Agent: The Company shall have and continuously maintain a resident agent, which may be either an individual resident in the State of Michigan whose business office is identical with the Company's registered office or a Michigan corporation or a foreign corporation authorized to transact business in Michigan and having a business office identical with the Company's registered office. The Board of Directors shall appoint the resident agent. Section 2 - Other Agents: The Board of Directors may appoint such other agents as may in their judgment be necessary for the proper conduct of the business of the Company. ARTICLE X: POWERS AND DUTIES Section 1 - Directors: The business and affairs of the Company shall be managed by the Board of Directors and it shall have and exercise all of the powers and authority of the Company except as otherwise provided by law, by the Articles of Incorporation of the Company or by these Bylaws. Section 2 - Executive Committee: In the interim between meetings of the Board of Directors, the Executive Committee shall have and exercise all the powers and authority of the Board of Directors except as otherwise provided by law. The Executive Committee shall meet from time to time on the call of the Chairman of the Board or the Chairman of the Committee. The Secretary shall keep minutes in sufficient detail to advise fully the Board of Directors of the 10 10 actions taken by the Committee and shall submit copies of such minutes to the Board of Directors for its approval or other action at its next meeting. Section 3 - Chairman of the Board: The Chairman of the Board shall preside at all meetings of the shareholders and of the Board of Directors; shall perform and do all acts and things incident to the position of Chairman of the Board; and perform such other duties as may be assigned from time to time by the Board of Directors. Unless otherwise provided by the Board, the Chairman of the Board shall have full power and authority on behalf of the Company to execute any shareholders' consents and to attend and act and to vote in person or by proxy at any meetings of shareholders of any corporation in which the Company may own stock and at any such meeting shall possess and may exercise any and all of the rights and powers incident to the ownership of such stock and which, as the owner thereof, the Company might have possessed and exercised, if present. The Board of Directors by resolution from time to time may confer like powers upon any other person or persons. Section 4 - Vice Chairman: A Vice Chairman, if any, shall perform such of the duties of the Chairman of the Board or the President on behalf of the Company as may be respectively assigned from time to time by the Board of Directors, the Executive Committee, the Chairman of the Board or the President; and in the absence of both the Chairman of the Board and the President, shall preside at meetings of directors and at meetings of shareholders. Section 5 - President: The President of the Company shall be the chief executive officer of the Company and, subject to the supervision of the Board of Directors, shall have general charge of the business and affairs of the Company; shall perform all acts and things incident to the position of President; and perform such other duties as may be assigned from time to time by the Board of Directors. In the absence of the Chairman of the Board, the President shall preside at meetings of directors and at meetings of shareholders. 11 11 Section 6 - Vice Presidents: The Vice Presidents shall perform such of the duties of the President on behalf of the Company as may be respectively assigned to them from time to time by the Board of Directors, the Chairman of the Board or the President. In the absence or inability to act of the President, a Vice President designated by the Board of Directors or President shall have and exercise all the powers of the President. The Board of Directors or Executive Committee may designate one or more of the Vice Presidents as Executive Vice President or Senior Vice President. Section 7 - General Counsel: The General Counsel shall have charge of all matters of a legal nature involving the Company. Section 8 - Secretary: The Secretary shall act as custodian of and record the minutes of all meetings of the Board of Directors, of the shareholders and of any committees of the Board of Directors which keep formal minutes; shall attend to the giving and serving of all notices of the Company; shall prepare or cause to be prepared the list of shareholders required to be produced at any meeting; and shall attest the seal of the Company upon all contracts and instruments executed under such seal and shall affix or cause to be affixed the seal of the Company thereto and to all certificates or shares of the capital stock. The Secretary shall have charge of the stock records of the Company and such other books and papers as the Board of Directors, the Chairman of the Board or the President may direct; and in general, perform all the duties of Secretary, subject to the control of the Board of Directors, the Chairman of the Board and the President. Section 9 - Treasurer: It shall be the duty of the Treasurer to have the care and custody of all the funds and securities of the Company, including the investment thereof, which may come into the Treasurer's hands, and to endorse checks, drafts and other instruments for the payment of money for deposit or collection when necessary or proper and to deposit the same to the credit of the Company in such bank or banks or depository as the Treasurer may designate, and endorse all commercial documents requiring endorsements for or on behalf of the Company. The Treasurer shall render an account of transactions to the Board of Directors as often as the 12 12 Board shall require the same; and shall perform all acts incident to the position of Treasurer, subject to the control of the Board of Directors, the Chairman of the Board and the President. Section 10 - Controller: Subject to the control of the Board of Directors, the President and the Vice President having general charge of accounting, the Controller, if any, shall have charge of the supervision of the accounting system of the Company, including the preparation and filing of all tax returns and financial reports required by law to be made to any and all public authorities and officials; and shall perform such other duties as may be assigned, from time to time, by the Board of Directors, the President, or the Vice President having general charge of accounting. Section 11 - Assistant Secretaries and Assistant Treasurers: An Assistant Secretary or an Assistant Treasurer shall, in the absence or inability to act or at the request of the Secretary or Treasurer, respectively, perform the duties of the Secretary or Treasurer, respectively; and shall perform such other duties as may from time to time be assigned by the Board of Directors, the Chairman of the Board or the President. The performance of any such duty shall be conclusive evidence of their right to act. ARTICLE XI: STOCK Section 1 - Stock Certificates: The shares of stock of the company shall be represented by certificates which shall be numbered and shall be entered on the stock records of the Company and registered as they are issued. Each certificate shall state on its face that the Company is formed under the laws of Michigan, the name of the person or persons to whom issued, the number and class of shares and the designation of the series the certificate represents, and the par value, if any, of each share represented by the certificate; shall be signed by the Chairman of the Board, the President or one of the Vice Presidents and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary and sealed with the corporate seal of the Company or a facsimile thereof. When such certificates are countersigned by a transfer agent or registered by a registrar, the signatures of any such Chairman of the Board, President, Vice 13 13 President, Treasurer, Assistant Treasurer, Secretary or Assistant Secretary may be facsimiles. In case any officer, who shall have signed or whose facsimile signature shall have been placed on any such certificate, shall cease to be such officer of the Company before such certificate shall have been issued by the Company, such certificate may nevertheless be issued by the Company with the same effect as if the person, who signed such certificate or whose facsimile signature shall have been placed thereon, were such officer of the Company at the date of issue. Each certificate shall set forth on its face or back or state that the Company will furnish to a shareholder upon request and without charge a full statement of the designations, relative rights, preferences and limitations of the shares of stock of each class authorized to be issued and of each series so far as the same have been prescribed and the authority of the Board of Directors to designate and prescribe the relative rights, preferences and limitations of other series. Section 2 - Stock Records: The shares of stock of the Company shall be transferable only on the stock records of the Company in person or by proxy duly authorized and upon surrender and cancellation of the old certificates therefor. The Board of Directors may fix a date preceding the date fixed for any meeting of shareholders or any dividend payment date or the date for the allotment of rights or the date when any change, conversion or exchange of stock shall go into effect or the date for any other action, as the record date for the determination of the shareholders entitled to notice of and to vote at such meeting, to receive payment of such dividend or to receive such allotment of rights or to exercise such rights in respect of any such change, conversion or exchange of stock or to take such other action, as the case may be, notwithstanding any transfer of shares on the records of the Company or otherwise after any such record date fixed as aforesaid. The record date so fixed by the Board shall not be more than sixty nor less than ten days before the date of the meeting of the shareholders, nor more than sixty days before any other action. If the Board of Directors does not fix a date of record, as aforesaid, the record date shall be as provided by law. 14 14 Section 3 - Stock: The designations, relative rights, preferences, limitations and voting powers, or restrictions, or qualifications of the shares of the Company's stock shall be as set forth in the Articles of Incorporation of the Company. Section 4 - Replacing Certificates: In case of the alleged loss, theft or destruction of any certificate of shares of stock and the submission of proper proof thereof, a new certificate may be issued in lieu thereof upon delivery to the Company by the owner or legal representative of a bond of indemnity against any claim that may be made against the Company on account of such alleged lost, stolen or destroyed certificate or such issuance of a new certificate. ARTICLE XII: DIVIDENDS AND DISTRIBUTIONS Section 1 - Declaration and Payment: Subject to the provisions of applicable law and the Articles of Incorporation of the Company, the Board of Directors may from time to time declare and pay dividends, or make other distributions, on its outstanding shares of stock. ARTICLE XIII: AUTHORIZED SIGNATURES Section 1 - Authorized Signatures: All checks, drafts and other negotiable instruments issued by the Company shall be made in the name of the Company and shall be signed manually or by facsimile by such one of the officers of the Company or by such other person as the Chairman of the Board may from time to time designate. Section 2 - Contracts, Conveyances, Etc.: The Board of Directors shall have the power to designate the officers and agents who shall have authority to execute any instrument on behalf of the Company. When the execution of any contract, conveyance or other instrument has been authorized without specification of the executing officers, the Chairman of the Board, the President or any Vice President may execute the same in the name of and on behalf of this Company. 15 15 ARTICLE XIV: FIDELITY BONDS Section 1 - Officers' and Employees' Bonds: The officers and employees of the Company shall give bonds for the faithful discharge of their respective duties in such form and for such amounts as may be directed by the Board of Directors. ARTICLE XV: INDEMNIFICATION AND INSURANCE Section 1 - Indemnification: The Company shall indemnify its directors, officers and employees to the full extent permitted by law as provided in the Articles of Incorporation of the Company. Section 2 - Insurance: The Company may purchase and maintain liability insurance on behalf of its directors, officers or employees to the full extent permitted by law. ARTICLE XVI: AMENDMENTS Section 1 - Amendments, How Effected: These Bylaws may be amended or repealed, or new Bylaws may be adopted, either by the majority vote of the votes cast by the shareholders entitled to vote thereon or by the majority vote of the directors then in office at either a regular or special meeting. These Restated Bylaws have been duly adopted by the shareholders of CMS NOMECO Gas & Oil Co. on the _____ day of October, 1995. _______________________________________ Paul E. Geiger EX-3.2 3 EXHIBIT 3.2 1 EXHIBIT 3.2 STATE OF MICHIGAN DEPARTMENT OF COMMERCE CORPORATION DIVISION LANSING, MICHIGAN RESTATED ARTICLES OF INCORPORATION (Profit Corporation) CMS NOMECO OIL & GAS GO. Identification No. 129-659 (Incorporated in Michigan as Northern Michigan Exploration Company on November 17, 1967; name changed to NOMECO Oil & Gas Co. effective July 16, 1990, and name further changed to CMS NOMECO Oil & Gas Co. effective January 9, 1995) RESTATED ARTICLES OF INCORPORATION These Restated Articles of Incorporation have been duly adopted by the shareholders of CMS NOMECO Oil & Gas Co. in accordance with the provisions of Act 284, Public Acts of 1972, and Act 407 Public Acts of 1982, as follows: ARTICLE I The name of the Corporation is CMS NOMECO Oil & Gas Co. ARTICLE II The purpose or purposes for which the Corporation is organized is to engage in any activitiy within the purposes for which corporations may be organized under the Business Corporation Act of Michigan. ARTICLE III The total number of shares of all classes of stock which the Corporation shall have authority to issue is 60,000,000 of which 5,000,000 shares, no par value, are of a class designated Preferred Stock and 55,000,000 shares, no par value, are of a class designated Common Stock. The statement of the designations and the voting and other powers, preferences and rights, and the qualifications, limitations or restrictions thereof, of the Common Stock and of the Preferred Stock is as follows: 2 PREFERRED STOCK The shares of Preferred Stock may be issued from time to time in one or more series with such relative rights and preferences of the shares of any such series as may be determined by the Board of Directors. The Board of Directors is authorized to fix by resolution or resolutions adopted prior to the issuance of any shares of each of such particular series of Preferred Stock, the designation, powers, preferences and relative, participating, optional and other rights, and the qualifications, limitations and restrictions thereof, if any of such series, including, but without limiting the generality of the foregoing, the following: (a) The rate of dividend, if any; (b) The price at and the terms and conditions upon which shares may be redeemed; (c) The rights, if any, of the holders of shares of the series upon voluntary or involuntary liquidation, merger, consolidation, distribution or sale of assets, dissolution or winding up of the Corporation; (d) Sinking fund or redemption or purchase provisions, if any, to be provided for shares of the series; (e) The terms and conditions upon which shares may be converted into shares of other series or other capital stock, if issued with the privilege of conversion; and (f) The voting rights in the event of default in the payment of dividends or under such other circumstances and upon such conditions as the Board of Directors may determine. No holder of any share of any series of Preferred Stock shall be entitled to vote for the election of directors or in respect of any other matter except as may be required by the Michigan Business Corporation Act, as amended, or as is permitted by the resolution or resolutions adopted by the Board of Directors authorizing the issue of such series of Preferred Stock. COMMON STOCK The shares of Common Stock may be issued from time to time as the Board of Directors shall determine for such consideration as shall be fixed by the Board of Directors. Each share of Common Stock of the Corporation shall be equal to every other share of said stock in every respect. 2 3 The Board of Directors shall determine the rights, if any, of the holders of shares of Common Stock upon the voluntary or involuntary liquidation, merger, consolidation, distribution or sale of assets, dissolution or winding up of the Corporation. The holders of Common Stock shall be entitled to receive such dividends, if any, as may be declared from time to time by the Board of Directors. Each holder of Common Stock shall have one vote in respect of each share of Common Stock held by such holder on each matter voted upon by the shareholders and any such right to vote shall not be cumulative. PREEMPTIVE RIGHTS The holders of shares of Preferred Stock or of Common Stock shall have no preemptive rights to subscribe for or purchase any additional issues of shares of the capital stock of the Corporation of any class now or hereafter authorized or any bonds, debentures, or other obligations or rights or options convertible into or exchangeable for or entitling the holder or owner to subscribe for or purchase any shares of capital stock, or any rights to exchange shares issued for shares to be issued. CHANGE IN NUMBER OF ISSUED SHARES OF COMMON STOCK This change in the number and designation of issued shares of common stock of the Corporation is made pursuant to MCL Section 450.1602(g) and (f). Prior to the effective date of these Restated Articles of Incorporation, the number of issued and outstanding shares of common stock of the Corporation was 14.6 million. Effective on the date of filing of these Restated Articles of Incorporation, the number of issued and outstanding shares of common stock of the Corporation shall be changed from 14.6 million shares to 24 million shares, no par value, and the number of shares held by each shareholder shall be changed in accordance with the following provisions: Each shareholder of the Corporation shall surrender to the Corporation his certificates for common shares, and the Corporation shall issue to each shareholder a new certificate for common shares in an amount which equals the number of shares held prior to the effective date of these Restated Articles times a fraction, the numerator of which is 24 million and the denominator of which is 14.6 million. Each certificate issued pursuant to this provision shall be in a form which is distinguishable from the certificates which were outstanding prior to the effective date of these Restated Articles. The corporation shall revise 3 4 its stock record to reflect the change in number of shares held by each shareholder of the Corporation whether or not the shareholder surrenders his certificate as required by these provisions. ARTICLE IV Location of the registered office is: One Jackson Square, Jackson, County of Jackson, Michigan 49201. Post Office address of the registered office is: P.O. Box 1150, Jackson, Michigan 49204. The name of the resident agent is Paul E. Geiger. ARTICLE V The number of directors of the Corporation shall be as specified in, or determined in the manner provided in, the bylaws of the Corporation. Any vacancies occurring on the Corporation's Board of Directors (whether by reason of the death, resignation or removal of a director) may be filled by a majority vote of the directors then in office although less than a quorum. An increase in the number of members of the Board of Directors shall be construed as creating a vacancy. ARTICLE VI A director may be removed by the affirmative vote of a majority of the members of the Board of Directors then in office. A director also may be removed by shareholders, but only for cause, at an annual meeting of shareholders and by the affirmative vote of a majority of the shares then entitled to vote for the election of directors. For purposes of this section, cause for removal shall be construed to exist only if a director whose removal is proposed has been convicted of a felony by a court of competent jurisdicition and such conviction is no longer subject to appeal or has been adjudged by a court of competent jurisdiction to be liable for willful misconduct in the performance of his or her duty to the Corporation in a matter of substantial importance to the Corporation in a matter of substantial importance to the Corporation and such adjudiciation is no longer subject to appeal. ARTICLE VII A director shall not be personally liable to the Corporation or its shareholders for monetary damages for breach of duty as a director except (i) for a breach of the director's duty of 4 5 loyalty to the Corporation or its shareholders, (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) for a violation of Section 551(l) of the Michigan Business Corporation Act, and (iv) for any transaction from which the director derived an improper personal benefit. If the Michigan Business Corporation Act is amended after approval by the shareholders of this Article VII to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director shall be eliminated or limited to the fullest extent permitted by the Michigan Business Corporation Act, as so amended. No amendment to or repeal of this Article VII, and no modification to its provisions by law, shall apply to, of have any effect upon, the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment, repeal or modification. ARTICLE VIII Each director and each officer of the Corporation shall be indemnified by the Corporation to the fullest extent permitted by law against expenses (including attorneys' fees), judgements, penalties, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with the defense of any proceeding in which he or she was or is a party or is threatened to be made a party by reason of being or having been a director of an officer of the Corporation or by reason of the fact that he or she is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. Such right of indemnification is not exclusive of any other rights to which such director or officer may be entitled under any now of thereafter existing statute, any other provision of these Articles, bylaws, agreement, vote of shareholders or otherwise. Any repeal or modification of this Article VIII by the shareholders of the Corporation shall not adversely affect any right or protection of a director or officer of the Corporation existing at the time of such repeal or modification. ARTICLE IX The Corporation reserves the right to amend, alter, change or repeal any provision in these Restated Articles of Incorporation as permitted by law, and all rights conferred on shareholders herein are granted subject to this reservation. Notwithstanding the foregoing, in addition to the vote of the holders of any class or series of stock of the Corporation required by law or by these Restated Articles of Incorporation, 5 6 or a resolution of the Board of Directors with respect to a series of Preferred Stock, the number of authorized shares of Common Stock or the number of authorized shares of Preferred Stock set forth in Article III shall not be reduced or eliminated and the provisions of Articles V, VI, VII, VIII and this Article IX may not be amended, altered, changed or repealed unless such reduction or elimination, or amendment, alteration, change or repeal is approved by the affirmative vote of the holders of not less than 75% of the outstanding shares entitled to vote thereon. These Restated Articles of Incorporation were duly adopted on the ________ day of ___________, 1995 in accordance with the provisions of Section 642 of the Act and were duly adopted by the written consent of all the shareholders entitled to vote in accordance with section 407(2) of the Act. Signed this _________ day of _____________________, 1995. By: ------------------------------- William H. Stephens III Executive Vice President 6 EX-10.1 4 EXHIBIT 10.1 1 EXHIBIT 10.1 CONSULTING/NON-COMPETE AGREEMENT The Agreement made effective this 1st day of February, 1995 by and between NOMECO Oil & Gas Co., a Michigan corporation with offices located at One Jackson Square, Jackson, Michigan 49204 ("NOMECO") and Richard J. Burgess, an individual residing at 5380 Squire Manor Drive, Jackson, Michigan 49201 ("Consultant"). W I T N E S S E T H: WHEREAS, Consultant was employed by NOMECO for 27 years, most recently as its President and Chief Executive Officer; WHEREAS, Consultant is possessed of extensive knowledge and experience in the business of NOMECO and the industry of which NOMECO is a part; WHEREAS, Consultant is in good health and in possession of the financial resources, business skills and knowledge to start up another enterprise to compete with NOMECO; WHEREAS, NOMECO desires reasonable assurances of Consultant's continuing loyalty, non-competition with NOMECO and nondisclosure of and reasonable protection of NOMECO's confidential business information which has been and will be acquired and which has been and is being developed by NOMECO at substantial expense; and WHEREAS, NOMECO and CMS Energy desires to procure Consultant's services as a consultant and Consultant is willing to furnish such services on the terms herein contained. NOW, THEREFORE, in consideration of the premises hereof and of mutual covenants to be bound by the terms hereof, the parties agree as follows: 1. Term. This Agreement shall become effective as of the date hereof, and shall remain in effect through April 30, 1996; provided that this Agreement shall remain in effect from month to month thereafter subject to termination at any time after the initial term at the election of either party on 30 days' written notice to the other; and provided further that the provisions contained in Section 9 hereof shall survive termination of this Agreement. 2. Duties of Consultant. Consultant shall advise NOMECO or an affiliated CMS Company on issues pertaining to its business and render such other services, including, but not limited to, testimony, advocacy and public representation as the client shall from time to time require. 3. Non-Compete. During the term of this Agreement, Consultant will not, directly or indirectly, personally or as an employee, associate, partner, manager, agent, 2 owner, investor in excess of 5% of the outstanding capital stock of any corporation or partnership, operator or otherwise, or by means of any corporate or other device, engage in the business of NOMECO in any market in which NOMECO currently competes. Notwithstanding the foregoing, Consultant shall be allowed to invest in the oil industry, provided that such investment does not result in a control position for Consultant. 4. Compensation. In consideration for the covenants of Consultant contained in Sections 2 and 3 herein, Consultant shall be compensated a minimum amount of $7500 per month for each calendar month during the term hereof, whether or not Consultant actually performs any services hereunder during any such month, and at a rate of $1500 per day for services in excess of five (5) days per calendar month performed by Consultant hereunder. If during the term hereof NOMECO increases the $1500 amount paid to NOMECO's nonmanagerial directors as a meeting attendance fee, the $1500 rate to be paid Consultant hereunder shall be increased by the same amount at the same time and the $7500 monthly minimum to be paid Consultant shall be increased at the same time by an amount computed by multiplying the day rate increase by five (5). 5. Expenses. NOMECO shall reimburse Consultant for all reasonable and necessary expenses incurred by him in the performance of his duties hereunder. 6. Billing and Payment. Consultant shall periodically submit to NOMECO a statement of compensation due him and expenses incurred by him since the date of the prior statement on a form prescribed by NOMECO, together with such evidence of expenditures as NOMECO reasonably requires. Within twenty (20) days of receipt of each such statement, NOMECO shall pay Consultant for compensation due and reimburse Consultant all expenses properly incurred and reported. In the event of Consultant's demise prior to payment of all sums owing hereunder, all remaining payments shall be made to his beneficiary. 7. Office and Secretary. During the term hereof NOMECO shall make available to Consultant an appropriate office and secretarial services. Consultant may at his discretion work from other locations and use other secretarial services in the performance of this Agreement. 8. Contract Status. It is understood between the parties that Consultant is an independent contractor and that the manner of performance of his duties, which will be generally described to him by NOMECO is within his discretion. Although it is understood and agreed that Consultant shall not be required to devote more than twenty (20%) percent of his normal working time (up to fifty 2 3 (50%) at Consultant's election) to rendering such service or to follow any formal schedule of duties or assignment and that NOMECO shall not supervise the details and particulars of the manner in which he performs such services, Consultant agrees to give first priority to the business and affairs of the Company and its affiliates and not to accept other engagements which will interfere, or be inconsistent, with his services hereunder. 9. Indemnification. NOMECO hereby agrees to indemnify and hold Consultant harmless from any acts or omissions of Consultant in performing the services hereunder; provided, however, that NOMECO shall not indemnify Consultant for any gross negligence or willful misconduct of Consultant. Consultant agrees that NOMECO shall not be liable to Consultant for any personal injury or other damages to Consultant except to the extent cause by NOMECO's gross negligence or willful misconduct. 10. Confidentiality. All information, whether oral, written or otherwise, which NOMECO or an affiliate provides to the Consultant or which is generated or derived by the Consultant in or as a result of the services hereunder and which NOMECO designates, in writing or orally, as confidential to NOMECO, shall be held in strict confidence by the Consultant and shall not be disclosed by the Consultant to any third party without NOMECO's express written consent. 11. Severability. If any paragraph, sentence, clause or other provision of this Agreement or the application of such provision, is held invalid or unenforceable, such provision shall be deemed to be modified in a manner, consistent with the intent of such original provision, so as to make it valid and enforceable, and this Agreement, and the application of such provision to persons or circumstances other than those with respect to which it would be invalid or unenforceable, shall not be affected thereby. IN WITNESS WHEREOF, the parties have signed this Agreement on the 22nd day of December, 1994. CMS ENERGY NOMECO OIL & GAS CO. BY: /S/ VICTOR J. FRYLING BY: /S/ GORDON L. WRIGHT VICTOR J. FRYLING ITS: PRESIDENT ITS: EXEC VICE PRESIDENT RICHARD J. BURGESS /S/ RICHARD J. BURGESS 3 EX-10.2 5 EXHIBIT 10.2 1 NOMECO OIL & GAS COMPANY EXHIBIT 10.2 EMPLOYEE WELL PARTICIPATION PROGRAM, PLAN A AND PLAN B TABLE OF CONTENTS
Page(s) THE PROGRAM . . . . . . . . . . . . . . . . . . . . . . . . . . 1 - 4 I. GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . 1 II. PROGRAM ADMINISTRATOR . . . . . . . . . . . . . . . . . . 1 III. TERM . . . . . . . . . . . . . . . . . . . . . . . . . . 1 IV. EMPLOYEE ELECTION REGARDING PARTICIPATION . . . . . . . . 2 V. PARTICIPATION IN EXPLORATION, DEVELOPMENT AND RESERVE ACQUISITIONS . . . . . . . . . . . . . . . . . 2 - 3 A. General . . . . . . . . . . . . . . . . . . . . . . . 2 B. Indirect Ownership - General . . . . . . . . . . . . . 2 - 3 C. Indirect Ownership - Contributions and Distributions . . . . . . . . . . . . . . . . . . . . 3 VI. INTERPRETATIONS. . . . . . . . . . . . . . . . . . . . . . 3 - 4 VII. AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . 4 VIII. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . 4 PLAN A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 - 7 I. ELIGIBILITY . . . . . . . . . . . . . . . . . . . . . . . 4 II. PARTICIPATION . . . . . . . . . . . . . . . . . . . . . . 4 - 5 A. Commencement . . . . . . . . . . . . . . . . . . . . . 4 - 5 B. Termination . . . . . . . . . . . . . . . . . . . . . 5 III. PARTICIPATING EMPLOYEE BENEFITS . . . . . . . . . . . . . 5 - 7 A. The Royalty Benefit Fund . . . . . . . . . . . . . . . 5 - 6 B. Allocations and Distributions From the Fund . . . . . . . . . . . . . . . . . . . . . . 6 - 7
2 PLAN B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 - 16 I. ELIGIBILITY . . . . . . . . . . . . . . . . . . . . . . . 7 II. PARTICIPATION . . . . . . . . . . . . . . . . . . . . . . 7 - 8 A. Commencement . . . . . . . . . . . . . . . . . . . . . 7 B. Termination . . . . . . . . . . . . . . . . . . . . . 8 C. Committee on Executive Organization . . . . . . . . . 8 D. Vested Interests . . . . . . . . . . . . . . . . . . . 8 III. PARTICIPATION INTERESTS . . . . . . . . . . . . . . . . . 8 - 10 A. Description of the Interest . . . . . . . . . . . . . 8 - 9 B. Allocation of Aggregate Participation Interests Among Participating Employees. . . . . . . . 9 C. Assignments . . . . . . . . . . . . . . . . . . . . . 10 IV. RECEIPTS AND DISBURSEMENTS . . . . . . . . . . . . . . . 10 V. COMPANY'S PREEMPTIVE RIGHT TO PURCHASE . . . . . . . . . . 11 VI. COMPANY'S RIGHT TO REPURCHASE . . . . . . . . . . . . . . 12 - 13 VII. COMPANY'S RIGHT TO SELL . . . . . . . . . . . . . . . . . 13 - 15 VIII. RIGHT OF OWNER TO REDEMPTION BY THE COMPANY . . . . . . . 15 - 16
3 Dear Fellow Employee: In recognition of the contribution made by the employees of Northern Michigan Exploration Company since the Company's inception in 1967, and in order to increase the employees' interest in the daily activities of the Company and promote productivity, the Board of Directors approved an Employee Well Participation Program effective April 1, 1980. The Board has elected to extend the term of the Program for an additional period beginning April 1, 1990 and ending March 31, 1995. However, the Board has the authority to terminate the Program earlier, or to extend it beyond March 31, 1995, at its discretion. In addition to extending the Program for another five-year term, the Board has also authorized changes for wells spudded and reserves acquired after April 1, 1990. The remainder of this booklet explains in detail how the Program, as amended, affects you personally. Any questions you have pertaining to the Program should be addressed to your Supervisor, or the Plan Administrator. This booklet, which is for your own personal use, should be treated as CONFIDENTIAL. Very truly yours, /s/ R. J. Burgess R. J. Burgess President and Chief Executive Officer April 1, 1990 4 NORTHERN MICHIGAN EXPLORATION COMPANY EMPLOYEE WELL PARTICIPATION PROGRAM THE PROGRAM GENERAL TERMS AND PROVISIONS I. GENERAL In order to award Company employees who have made a significant contribution to the success of Company operations and to create meaningful incentives for continued employee performance at a high level of competence, professionalism and productivity, the Company hereby establishes this Employee Well Participation Program. The Program consists of Plan A and Plan B, the terms and conditions of which are more specifically set forth below. Participation in the Plans is determined by eligibility and participation criteria specifically set forth. II. PROGRAM ADMINISTRATOR A Program Administrator shall be appointed by the President of the Company, and it shall be his responsibility to administer this Program and, among other things to: (a) Effect the assignments contemplated in the Program; (b) Establish and oversee accounting procedures, have charge of collections and disbursements, and maintain all necessary or appropriate books and records regarding the Program; (c) Keep employees informed and respond to questions regarding the Program, its operation and its effect on any individual employee; (d) Acting in conjunction with the President of the Company, interpret and apply the provisions of the Program; (e) Report to the President and Board of Directors regarding the Program; (f) Perform such other tasks as may be delegated to him by the Board of Directors or the President of the Company. III. TERM This Program shall commence on April 1, 1980 and terminate on March 31, 1995 unless terminated earlier by action of the Board of Directors of the Company. 5 2 IV. EMPLOYEE ELECTION REGARDING PARTICIPATION Employees eligible to participate in Plan A or B may at any time elect not to participate in either Plan. The election shall be exercised by providing written notice thereof to the Program Administrator and shall be effective on the day after such notice is received by the Program Administrator. Eligible employees who have elected not to participate in a Plan may at any time revoke that election with respect to future participation by giving the Program Administrator written notice of the revocation, which shall be effective on the day after receipt by the Program Administrator. V. PARTICIPATION IN EXPLORATION, DEVELOPMENT AND RESERVE ACQUISITIONS A. General This Program is intended to give certain key Company employees a direct financial stake in the Company's oil and gas activities. For the period from April 1, 1980 through March 31, 1985, the working interests used to determine employee benefits under Plans A and B shall not include any Company working interests acquired in fully developed properties, except where by farmout or other like transaction the Company has conveyed an undeveloped property retaining the right thereafter to acquire a working interest in such property. By virtue of amendments to this Program authorized by the Company's Board of Directors, the working interests used to determine employee benefits under Plans A and B shall include Company working interests in oil and gas reserves acquired by the Company after April 1, 1985, whether acquired or held by the Company directly or indirectly. Any questions as to whether, or the extent to which the Company's working interest in any property is subject to Plan A or B shall be decided exclusively by and in the sole discretion of the Company. B. Indirect Ownership - General As to indirect ownership of oil and gas property, this Program applies to working interests held by another corporation, partnership, joint venture or other entity (hereafter referred to as "intermediate company") in which the Company owns, directly or indirectly, a significant interest. A significant interest is defined as an interest entitling the Company: (1) in the case of stock ownership, to exercise voting rights equivalent to at least 10% of voting rights possessed by all stockholders of the corporation who possess such rights; or (2) in the case of other forms of ownership, to share in at least 10% of profits and losses or revenue of the intermediate company. In cases where working interests are more than one level removed from direct Company ownership, as in the case where the Company owns an interest in another company which in turn owns an interest in the company which directly holds the properties, whether the Company has a significant interest in the intermediate company which directly owns the property shall be determined by multiplying the Company's interest in its directly owned company by that company's interest in the intermediate 6 3 company directly owning the property. The same procedure shall be followed for all levels of ownership regardless of how far removed from the Company is direct ownership of the working interests. The Company's interest shall be considered significant if the product of the multiplication is 10% or more (the product and the Company's ownership interest in the intermediate company are hereafter referred to as the Company's "deemed ownership interest"). A working interest in an oil and gas well will be subject to the Program to the extent of the Company's deemed ownership interest provided it equals or exceeds 10% in the intermediate company directly owning the working interest. The deemed ownership interest shall be determined as of the spud or acquisition date, as the case may be, of the subject well. Thus, working interests subject to the Program are determined by multiplying the Company's deemed ownership interests by the actual working interests of the intermediate companies which directly own such interests. Such working interests which are subject to the Program are hereinafter referred to as "deemed working interests." C. Indirect Ownership - Contributions and Distributions The amount to be contributed and distributed under Plans A and B in connection with deemed working interests owned indirectly by the Company shall be based upon production revenue, cash or property derived from and allocated to the Company's deemed working interests. The Company shall make contributions and distributions based upon any production revenue, cash or property accruing with respect to its deemed working interests whether or not actually distributed by the intermediate company to the Company. It is recognized that the accrual of production revenue, cash or property requiring the Company to make contributions and distributions can arise from different types of transactions including, by way of illustration and not limitation, sales of production accruing to the deemed working interests, sales of reserves associated with the deemed working interests, and sales of interests in any intermediate companies resulting in reduction in the Company's deemed ownership interests. Certain transactions engaged in by intermediate companies or the Company may result in the reduction or elimination of deemed working interests subject to Plans A and B. By way of illustration and not limitation, such transactions include sales by intermediate companies of reserves associated with deemed working interests and sales of the Company's interests in intermediate companies. Based on the consideration received by the Company or an intermediate company in connection with any such transaction the Company shall make allocations and distributions under Plans A and B as though the deemed working interests so sold or reduced were working interests subject to Plans A and B sold directly by the Company. 7 4 VI. INTERPRETATIONS All questions regarding the interpretation or application of the Employee Well Participation Program shall be resolved as determined by the Company, and such decisions shall be final and binding on Program participants provided they are made in good faith. VII. AMENDMENTS This Employee Well Participation Program may be amended or terminated, in any way or at any time, by unilateral action of the Company. The Company also reserves the right at any time with respect to any properties to reduce prospectively its contribution to the Plan A fund or to reduce prospectively the Plan B interests to be granted. No reduction of interests to be assigned or granted under Plan B shall have any effect whatsoever on interests with respect to which the entitlement to an assignment has theretofore accrued, or on disbursements thereon. VIII. GOVERNING LAW The provisions of this Employee Well Participation Program, its operations and effect shall be governed and construed under the laws of the State of Michigan. PLAN A I. ELIGIBILITY All Executive, Administrative and Professional Employees, as defined in NOMECO's General Orders, as they may be amended from time to time, shall be eligible to participate in this Plan A (hereinafter such employees shall be referred to as "Eligible Employees"), provided such employees have been employed by the Company for a six-month period immediately preceding the date of commencement of their participation in this Plan A as more specifically set forth below. Notwithstanding the foregoing, Plan B Eligible Employees shall not be Eligible Employees for purposes of this Plan A as to the Company's working interests or deemed working interests in wells spudded on or after April 1, 1990 or acquired as part of a producing property or reserve acquisition on or after such date. II. PARTICIPATION A. Commencement With respect to Eligible Employees, participation in this Plan A shall commence on the first day of the calendar month immediately following a six-month period during which entire period the Eligible Employee has been employed by the Company. With respect to Eligible Employees who have been employed by the Company for a six-month period, or more, immediately preceding the commencement of this Plan A, participation in 8 5 this Plan A shall commence on the commencement date of Plan A. Notwithstanding anything in this Plan to the contrary, an Eligible Employee may commence participation in Plan A at any time upon approval of the President of the Company. Eligible Employees whose participation in this Plan A has commenced and has not terminated are hereinafter referred to as "Participating Employees." B. Termination Participation in this Plan A shall terminate immediately upon employee's termination of his employment with the Company, employee ceasing to be an Eligible Employee, or as provided with respect to revocation by an employee of his right to participate. III. PARTICIPATING EMPLOYEE BENEFITS A. The Royalty Benefit Fund There shall be established on the books and records of the Company a Royalty Benefit Fund ("Fund") to be administered by the Program Administrator. During such times as this Plan is in effect the Company will contribute to the Fund, from time to time, but not less than quarterly. The amount to be contributed to the Fund shall be the sum of the following: (1) An amount equivalent to the proceeds that would arise during the period commencing April 1, 1990 or the last contribution date, whichever is later, and ending with the current contribution date, from an overriding royalty of .0025 (.25%) of the Company's working interests and deemed working interests in wells spudded on or after April 1, 1990 or acquired as part of a producing property or reserveacquisition on or after such date. (2) An amount equivalent to the proceeds that would arise during the period commencing April 1, 1985 or the last contribution date, whichever is later, and ending with the current contribution date, from an overriding royalty of .005 (.5%) of the Company's working interests and deemed working interests in wells spudded on or after April 1, 1985 and before April 1, 1990, or acquired during such period as part of a producing property or reserve acquisition. (3) An amount equivalent to the proceeds that would arise during the period commencing April 1, 1980 or the last contribution date, whichever is later, and ending with the current contribution date, from an overriding royalty of .01 (1%) of the Company's working interests in wells spudded on or after April 1, 1980 but before April 1, 1985. 9 6 The contribution amount shall bear the overriding royalty's share of production, severance, mineral ad valorem, windfall profits and other like taxes, but shall bear no other costs or charges. The contribution date shall be as determined by the Program Administrator. Actual cash contributions to a separately maintained cash Fund shall not be made, but rather the Program Administrator shall record, and the books and records maintained by the Program Administrator shall reflect, the asset value of the Fund and the contribution amounts allocated to the Fund from time to time. Participating Employees shall have no rights in or to the Fund, its asset value, or any Company assets used to determine such asset value. Participating Employees' sole rights shall be as set forth below with respect to distributions of the allocated asset value of the Fund. No interest shall accrue on such asset value. In the event of the sale of a working interest or deemed working interest in a well subject to this Plan A, an amount shall be contributed to the Fund as determined in good faith by the Company in accordance with the following: (1) the amount or value of consideration realized from the sale shall be multiplied by a percentage being the overriding royalty percentage, associated with the working interest sold, used to compute Fund contributions with respect to the well; and (2) the result shall be increased by such amount as determined by the Company to reflect the non-cost bearing nature of an overriding royalty interest and the correspondingly higher relative value of an overriding royalty interest compared to an equivalent working interest. If the transaction in which the sale occurs involves multiple wells and the consideration is not specifically allocated among the wells, the Company shall perform its own allocation for purposes hereof and such allocation, provided it is made in good faith, shall be final. B. Allocations and Distributions From the Fund From time to time as determined by the President of the Company, but no less than quarterly, the asset value of the Fund shall be allocated to then-Participating Employees and cash disbursements made to those employees based upon the allocated asset value. The President shall determine the allocation date, subject to the minimum quarterly allocation requirement, and on each such date the asset value of the Fund shall be allocated among Participating Employees who are such on the allocation date, based upon their base salaries determined on such date and number of years each employee has been a Participating Employee. The allocation multiplier shall be determined by multiplying each Participating Employee's base salary by his years as a Participating Employee and dividing the 10 7 product by the sum of the products of each Participating Employee's base salary multiplied by his years as a Participating Employee. As used herein "base salaries" shall mean the annualized salary of each Participating Employee determined as of December 31 of the preceding calendar year plus one-half (1/2) of the maximum bonus such employee is qualified to receive on such date pursuant to Board of Directors Resolution dated February 7, 1989 (and as may be amended by the Board of Directors) regarding maximum bonus. With respect to Participating Employees who were not employed on December 31 of the preceding calendar year, "annual salary" shall be the salary received or to be received by such employee for the first full month of employment, multiplied by twelve (12). As used herein "years as a Participating Employee" shall mean the number of full years, not to exceed 10, as a Participating Employee, determined as of December 31 of the preceding calendar year; except that a Participating Employee will in any event be assumed to have at least one (1) year as a Participating Employee for purposes of calculating allocations under this Plan. As soon as practicable after the allocation date, cash distributions shall be made to those persons to whom the Fund asset value is allocated as set forth above. The distribution to each such person shall be an amount equal to his portion of the allocated asset value (reduced in accordance with governmental withholding obligations of the Company) determined as of the allocation date. PLAN B I. ELIGIBILITY All of those Executive, Administrative and Professional Employees (as defined in NOMECO's General Orders, as they may be amended from time to time) designated by the President, from time to time, and approved as may be required under Article II, Section C, below, shall be eligible to participate in this Plan B (hereinafter such employees shall be referred to as "Plan B Eligible Employees"). Executive, Administrative and Professional Employees may acquire or lose eligibility to participate in this Plan B as the President shall in his sole discretion determine from time to time, subject to Article II, Section C, below. II. PARTICIPATION A. Commencement Plan B Eligible Employees shall commence participation in this Plan B at such time as the President of the Company shall designate, subject to Article II, Section C, below. Plan B Eligible Employees whose participation in this Plan B has commenced and has not terminated are hereinafter referred to as "Plan B Participating Employees." 11 8 B. Termination Subject to Section C below, participation in this Plan B shall terminate when and as the President of the Company so directs but in any event the participation shall terminate immediately upon employee's termination of his employment with the Company, employee ceasing to be a Plan B Eligible Employee, or as provided with respect to revocation by an employee of his right to participate. C. Committee on Executive Organization Effective April 1, 1990 as to wells spudded and working and deemed working interests in wells capable of producing acquired on and after such date, the decisions of the President of the Company with respect to eligibility of each employee to participate in this Plan B, the commencement and termination date for such participation, and allocation of the aggregate Participation Interest among Plan B Participating Employees shall be subject to review and approval of the Committee on Executive Organization of the Company's Board of Directors. Such review and approval shall occur no less frequently than annually. D. Vested Interests No termination or modification of this Plan, termination of an employee's participation hereunder or change in the allocation of the aggregate Participation Interests among Plan B Participating Employees shall reduce or impair any interests or benefits accruing prior to the action effecting such termination or change. III. PARTICIPATION INTERESTS A. Description of the Interests Subject to Section C below, during such time as this Plan B is in effect, the Company will assign to Plan B Participating Employees: (1) an overriding royalty in the aggregate amount of one percent (1%) of the Company's working interest or deemed working interest in each well (and the related drilling unit as designated by the Company) in which the Company owns, directly or indirectly, or has the right to earn, directly or indirectly, a working interest or deemed working interest provided such well is spudded after April 1, 1980 and before April 1, 1990 and, in the case of wells capable of producing at the time the Company acquires its working interest or deemed working interest, provided such acquisition occurs on or after April 1, 1985 and before April 1, 1990. 12 9 (2) an overriding royalty in the aggregate amount of one and three quarters percent (1.75%) of the Company's working interest or deemed working interest in each well (and the related drilling unit as designated by the Company) in which the Company owns, directly or indirectly, or has the right to earn, directly or indirectly, a working interest or deemed working interest, provided such well is spudded on or after April 1, 1990 or, in the case of wells capable of producing at the time the Company acquires its working interest or deemed working interest, provided such acquisition occurs on or after April 1, 1990. Each Plan B Participating Employee's allocable share (as defined in Section B, below) of the Participation Interest is referred to hereafter as "Employee Participation Interest." The overriding royalty to be assigned shall bear its proportionate share of production, severance, mineral ad valorem, windfall profits and other like taxes, but shall bear no other costs or charges. B. Allocation of Aggregate Participation Interests Among Plan B Participating Employees As to all wells spudded on or after April 1, 1980 and before April 1, 1990 and as to working interests and deemed working interests acquired on or after April 1, 1985 and before April 1, 1990 in wells capable of producing at the time of acquisition, the aggregate Participation Interest to be assigned by the Company in each well shall be allocated among Plan B Participating Employees who are such on the spud or acquisition date of the relevant well in proportion to their base salaries, as defined below. As to all wells spudded on or after April 1, 1990 and as to working interests and deemed working interests acquired on or after April 1, 1990 in wells capable of producing at the time of acquisition, the aggregate Participation Interest assigned by the Company in each well shall be allocated among Plan B Participating Employees who are such on the spud or acquisition date of the relevant well in proportion to their base salaries, or such fractional portion thereof as the President may determine separately for each Plan B Participating Employee; such allocation to be subject to review and approval by the Committee on Organization of the Company's Board of Directors. As used herein "base salaries" shall mean the annualized salary of each Plan B Participating Employee determined as of December 31 of the preceding calendar year plus one-half (1/2) of the maximum bonus such employee is qualified to receive on that date pursuant to Board of Director Resolution dated February 7, 1989 (and as may be amended by the Board of Directors) regarding maximum bonus. With respect to Plan B Participating Employees who were not employed on December 31 of the preceding calendar year, "annual salary" shall be the salary received or to be received by such employee for the first full month of employment multiplied by twelve (12). 13 10 C. Assignments Each Plan B Participating Employee's allocated share of the aggregate Participation Interest in each Company well subject to this Plan B shall be represented by an assignment, in recordable form to the extent practicable, to the Plan B Participating Employee of his Employee Participation Interest. Assignments shall occur periodically, in such form and at such times as determined by the Program Administrator, and shall be effective as of the spud date for the well or such later date as the working interest or deemed working interest is first acquired by the Company. For purposes of administrative efficiency, the Program Administrator may determine to forego preparation and delivery of assignments to Plan B Participating Employees entitled thereto provided: (i) appropriate entries in the Company's books and records are made to reflect such entitlement and (ii) actual assignments are made promptly upon written request by a person entitled thereto. All employees who are Plan B Participating Employees as of the spud date for a well or acquisition date of a working interest or deemed working interest shall be entitled to an assignment of their Employee Participation Interest in such well, whether or not they are Plan B Participating Employees on the date the assignment is actually made. Notwithstanding anything to the contrary herein, as to deemed working interests and other working interests, the governing instruments or applicable law, rule, regulation or governmental policy with respect to which prohibit or restrict the assignments contemplated hereby, the overriding royalty to which Plan B Participating Employees are entitled shall be evidenced by an instrument to be delivered to the person entitled thereto in a form considered appropriate by the Company in its sole discretion (such instruments are referred to collectively with actual assignments as "assignments"). IV. RECEIPTS AND DISBURSEMENTS The Company, through the Program Administrator, shall act as agent for purposes of receiving and disbursing proceeds on Employee Participation Interests, and each person, by accepting his Employee Participation Interests, agrees to such agency and agrees to execute any instruments necessary or appropriate to implement it. The Company shall not be obligated to recognize or distribute proceeds to a transferee of an Employee Participation Interest until adequate proof of such transfer in a form satisfactory to the Company has been provided to the Company. The Company may at any time, by giving notice to Employee Participation Interest owners, terminate the agency created hereunder and the interest owners shall execute such instruments necessary or appropriate to effect the termination. 14 11 V. COMPANY'S PREEMPTIVE RIGHT TO PURCHASE No Employee Participation Interest acquired hereunder shall be sold to any person or entity other than the Company except as provided herein. In the event an interest owner receives a bona fide offer to purchase any Employee Participation Interest, he shall give the Company written notice thereof with a copy of the offer which shall be in writing setting forth the specific terms thereof. The notice shall be addressed to the Program Administrator and shall be deemed given when received by him. Within 20 days the Company shall determine whether to exercise its preemptive right to purchase the subject Employee Participation Interest. If the Company elects to purchase the Employee Participation Interest it shall provide the selling interest owner with written notice thereof (at the address which the selling interest owner shall set forth in his notice to the Company) within such 20 day period. The purchase price and other terms of purchase by the Company shall be the same as those contained in the written offer obtained by the selling interest owner, unless the parties agree otherwise. If the Company elects not to exercise its preemptive right to purchase, the transfer of such interest pursuant to the bona fide offer shall occur within 60 days of selling interest owner's giving notice of the bona fide offer to purchase; otherwise the Company's preemptive right to purchase shall be reinvoked with respect to such Employee Participation Interest, and all provisions hereof shall apply with respect to any disposition of such interest. Nothing in this Plan B shall be deemed to authorize an interest owner or require the Company to disclose in any manner to any person or entity trade secrets or other information of a confidential nature, and disclosure of information pertaining to the value of Employee Participation Interests shall be completely within the discretion of the Company. The Company may impose such restrictions on the further communication of any such information as it may deem appropriate. In the event of a sale hereunder to a third party, the Company shall not be required to recognize such sale unless and until it is provided with satisfactory proof thereof and such other information as it may reasonably require. Employee Participation Interests shall be subject to Company's preemptive right to purchase as provided herein during the lifetime of the person first acquiring those interests hereunder and for twenty-one (21) years thereafter, but not longer. 15 12 VI. COMPANY'S RIGHT TO REPURCHASE As used herein the term "Repurchase" means a concurrent purchase by the Company of the entirety of the Employee Participation Interests of all owners of such interests in one or more wells subject to this Plan B. Subject to the terms and conditions set forth herein, the Company may in its sole discretion so Repurchase provided each Repurchase shall be for the sole purpose of reducing or restricting administrative costs incurred by the Company in connection with Plan B by eliminating from Plan B through Repurchase the less significant well interests subject to the Plan. Repurchases hereunder shall occur no more frequently than once in each twelve (12) month period. A Repurchase shall not cause a reduction of more than five percent (5%) in the future monthly distributions to owners of Employee Participation Interests considered in the aggregate from all wells subject to Plan B. For purposes of determining compliance with that limitation, aggregate distributions (actual or estimated, as the Company may elect) for the three (3) calendar months immediately preceding the month of Repurchase shall be compared to such distributions for the same period computed as if the Repurchase were in effect during that period. If the former amount does not exceed the latter by more than five percent (5%), the Repurchase shall be deemed to comply with the five percent (5%) limitation. Estimates and computations shall be performed by the Company in good faith, and the results shall be final. The amount to be paid owners of Employee Participation Interests so Repurchased shall be based upon: (a) the reserves assigned to those interests in the Company's most recent Company-wide reserve evaluation, provided such evaluation (i) has an effective date prior to the Repurchase, and (ii) is prepared by Lee Keeling & Associates, Inc. or another petroleum engineering firm of comparable standing, or is prepared by the Company and reviewed and approved by any such petroleum engineering firm; and (b) current prices for oil and gas, as determined by the Company in good faith, which shall for this purpose as nearly as practicable approximate the weighted average prices actually received by the Company for sales of its oil and gas produced from the properties in question during the third full calendar month preceding the month in which the Repurchase occurs. 16 13 The payment amount for Repurchased interests will be computed by applying the price as described in sub-paragraph b above to the reserve volumes, determined in accordance with sub-paragraph a above, assigned to the Repurchased interests. The resulting amount will then be reduced by appropriate production taxes, as determined in good faith by the Company, and discounted at a rate of 10% per annum based upon the production schedule used in the Company's reserve evaluation. The result will be the amount to be paid to owners for Repurchased interests. A Repurchase shall be deemed to occur in the month in which such payment is made. Owners will be entitled to receive production revenue associated with their Repurchased interests provided such revenue is actually received by the Company prior to the beginning of the third calendar month following the month of Repurchase. Owners shall also be charged or credited with all revenue adjustments associated with the Repurchased interests provided such adjustments are reflected on statements from the party disbursing to the Company and received by the Company prior to the beginning of the third calendar month following the month of Repurchase. From that date forward the Company will bear any negative adjustments and will receive for its own exclusive benefit any revenue distributions or positive adjustments on revenue distributions regard- less of the period to which the adjustments relate. Nothing herein shall obligate the Company at any time to exercise its Repurchase rights hereunder. If, however, the Company does exercise its right to Repurchase it shall notify owners subject to Repurchase at least fifteen (15) days prior to the month in which the Company expects the Repurchase to occur, identifying in such notification the wells the Company expects at that time to be included in the Repurchase. Employee Participation Interests shall be subject to Company's right to Repurchase as provided herein during the lifetime of the person first acquiring such interests and for twenty-one (21) years there- after, but not longer. VII. COMPANY'S RIGHT TO SELL As used herein the term "Sale" means a concurrent sale by the Company of all or a portion of its working interest in one or more wells subject to this Plan B along with a sale of the Employee Participation Interests associated with such working interests so sold. Subject to the terms and conditions set forth herein, the Company may in its sole discretion engage in such Sale transactions. The aggregate effect of all Sales occurring within any twelve month period shall not cause a reduction of more than ten percent (10%) in future monthly distributions to owners of Employee Participation Interests considered in the aggregate from all wells subject to this Plan B. (Hereinafter such limitation is referred to as "Sales Limitation.") For purposes of determining compliance with the Sales Limitation, 17 14 aggregate distributions (actual or estimated, as the Company may elect) for the twelve calendar months immediately preceding the month of the effective date of the Sale under consideration shall be compared to such distributions for the same period computed as if the subject Sale and all other Sales occurring in such period were in effect. If the former amount does not exceed the latter by more than ten percent (10%) the Sale shall be deemed to comply with the Sales Limitation. The amount to be paid each owner of an Employee Participation Interest so Sold shall be determined in good faith by the Company in accordance with the following: (i) the amount or value of consideration realized from the Sale of the working and Employee Participation Interests in a well shall be multiplied by a percentage, being that owner's Employee Participation Interest in the well associated with the working interest Sold; and (ii) the result shall be increased by such amount as determined by the Company to reflect the non-cost bearing nature of an overriding royalty interest and the correspondingly higher value of an overriding royalty interest compared to an equivalent working interest. If the transaction in which the Sale occurs involves multiple wells and the consideration is not specifically allocated among the wells, the Company shall perform its own allocation for purposes hereof and such allocation, provided it is made in good faith, shall be final. Nothing herein shall restrict the right of the Company to sell, free of the Sales Limitation, working interests subject to this Plan B provided the transferee expressly agrees, for itself, its successors and assigns, in the instrument effecting the transfer to accept such interests subject to the Employee Participation Interests pertaining thereto, and to discharge all obligations accruing thereon under this Plan B from and after the effective date of the transfer. Company shall provide at least thirty (30) days written advance notice of any such progressed transfer to all owners of Employee Participation Interests affected thereby. Subject to Article V, Section C, General Terms and Provisions, nothing herein shall, except as specifically set forth below, restrict the Company's right to reduce deemed working interests and the associated Employee Participation Interests, whether through sales of interests in intermediate companies, sales by intermediate companies of reserves associated with deemed working interests or any other transaction. If at the time of any such proposed transaction the Company has a "controlling interest," as defined below, in the entity directly owning the well(s) as to which the deemed working interest(s) will be reduced by the transaction, then the Sales Limitation set forth above shall be applicable to the transaction, taking into account Sales of 18 15 working interests and reductions of deemed working interests and associated Employee Participation Interests occurring within the preceding twelve (12) calendar months. To the extent the transaction does not comply with the Sales Limitation applicable thereto the Company shall, prior to consummation of the transaction, cause or require the entity(ies) which will directly own the subject working interests after the transaction is completed, to agree expressly in writing, for the benefit of the owners of Employee Participation Interests affected thereby, that: (i) the subject working interests are and shall remain subject to Employee Participation Interests pursuant to this Plan B; (ii) such entity(ies) will discharge all obligations in connection with such Employee Participation Interests under this Plan B from and after the effective date of the transaction, including distribution of revenue associated therewith, provided that in lieu of distributing such revenue directly to owners of such interests, the revenue may be distributed to the Company for redistribution by it among the owners entitled thereto; and (iii) such entity(ies) will cause any subsequent transferees of any such working interests to agree in writing to comply with the provisions hereof. As used herein, the term "controlling interest" means an interest, whether held directly or indirectly, in an entity entitling the Company, acting alone, effectively to control or supervise the business activities of the entity or to remove and replace those who exercise such control or supervision. VIII. RIGHT OF OWNER TO REDEMPTION BY THE COMPANY In the event an interest owner desires to sell his Employee Participa- tion Interests (or any part thereof) to the Company, he shall provide the Program Administrator with written notice thereof, and the Company shall thereupon be obligated to purchase the interests offered for sale. The offer to sell may be withdrawn at any time prior to consummation of the sale. The purchase price to be paid in full by the Company at the closing shall be the total current value of future hydrocarbon sales attributable to the Employee Participation Interests to be sold. The total current value of future hydrocarbon sales shall be based upon estimated hydrocarbon reserves established by the Company in its most recent annual reserve study and current selling prices actually being received for those reserves. Estimated hydrocarbon reserves used to determine value shall be adjusted, as the Company in its sole discretion may determine, to reflect production and other events affecting hydrocarbon reserves between the date of the annual reserve 19 16 study and the closing date for the sale of the interests. The value shall also be adjusted by discount and price escalation factors determined by the Company to be reasonable. In case of dispute as to the Company's determination of value, the matter shall be referred for resolution to a reputable firm engaged in the business of appraising oil and gas reserves selected by the Company. The decision of such firm shall be binding. The interest owner shall bear two-thirds of the cost of such appraisal. The closing date for the sale of the Employee Participation Interests shall be as the Company and the selling interest owner may determine but in no event later than sixty (60) days from the date of notice by the selling interest owner of his intention to exercise his rights hereunder, or sixty (60) days after completion of the Company's latest reserve study in those instances where the interests to be sold are not covered by a previous Company reserve study. This Right to Redemption shall be a personal obligation between the Company and the person first acquiring the Employee Participation Interests, and the benefit thereof shall not extend to the succes- sors or assigns of such person. Amended as of April 1, 1985 and April 1, 1990 EX-10.3 6 EXHIBIT 10.3 1 EXHIBIT 10.3 REIMBURSEMENT AGREEMENT AGREEMENT between CMS ENERGY CORPORATION ("CMS Energy") and CMS NOMECO OIL & GAS CO. ("CMS NOMECO") dated as of December 9, 1994 relating to the reimbursement of certain costs incurred by CMS Energy with respect to a letter of credit provided for the benefit of CMS NOMECO. 1. CMS Energy has arranged for the issuance of a Standby Letter Credit in the amount of $46,678,333 (or such lower amount as may be called for by the agreement with the beneficiary) in favor of Banco Latino Americano de Exportaciones S.A. to secure CMS NOMECO's performance under the Operating Services Agreement with respect to the Colon Unit, Venezuela (the "Letter of Credit"). 2. In consideration for arranging the issuance of the Letter of Credit, CMS NOMECO, together with its successors and assigns, hereby agrees: (i) to reimburse CMS Energy on demand on and after each date on which a draw has been made under the Letter of Credit a sum equal of the amount of any such draw plus interest on such amount from the date of such draw until repayment in full at a fluctuating interest rate per annum equal to the rate of interest announced publicly by Union Bank in Los Angeles, California as the Union Bank Reference Rate, and (ii) to pay to CMS Energy quarterly, in arrears, a fee equal to 212.5 basis points (2.125%) per annum multiplied by the average face amount of the Letter of Credit for such quarter. 3. This Agreement embodies the entire agreement and understandings between CMS Energy and CMS NOMECO (or any subsidiary to which the underlying interest may be assigned) and supersedes all prior agreements and understandings between CMS Energy and CMS NOMECO relating to the subject matter hereof. 4. This Agreement shall be governed by and construed in accordance with the laws of the State of Michigan. IN WITNESS WHEREOF, CMS Energy and CMS NOMECO have executed this Agreement as of the date first written above. CMS ENERGY CORPORATION CMS NOMECO OIL & GAS CO. By: /s/ T.A. McNish By: /s/ Paul E. Geiger -------------------------- ------------------------------ Thomas A. McNish Paul E. Geiger Title: Vice President & Secretary Title: Vice President, Secretary & Treasurer -------------------------- ------------------------------------- EX-10.4 7 EXHIBIT 10.4 1 CMS NOMECO OIL & GAS CO. EXHIBIT 10.4 Key Employee Incentive Compensation Plan INTRODUCTION The objective of the Plan is to improve the performance of the Company by: 1. Providing compensation levels that will permit the Company to attract, retain and motivate highly competent officers, key executives and other key employees, and 2. Provide an incentive to officers, key executives and other key employees based on both Company and individual performance. This Plan replaces the Key Employee Incentive Compensation Plan which was approved by the Board of Directors on December 1, 1994. TERMS OF THE PLAN 1. The employees eligible for the Plan and their standard bonus as a percentage of their year-end salary are as follows:
STANDARD EMPLOYEE BONUS --------------------------------------------------------- -------- a. President 50% b. Executive Vice President and General Counsel 45% c. Other officers and key executives as designated by the President 40% d. Other key lower level employees as designated by the President 20%
2. The amount of the standard bonus which is to be paid to each employee will be determined by the Committee on Executive Organization in early February of the year following the year in which the bonus is earned. The amount so determined will be presented to the Board of Directors for their approval. A. The calculation of bonuses will be weighted for the following goals which shall be established at the time the operating and capital budgets are approved for the applicable year: (1) 80% based on the ratio of actual pretax operating income to "Goal" pretax operating income, said ratio not to exceed 125% (2) 20% based on the ratio of reserves added per capital dollar expenditure (includes drilling and acquisitions of developed properties) to "Goal" reserves added per capital dollar expenditure, said ratio not to exceed 125%. 2 TERMS OF THE PLAN (CON'T) B. The average, stated as a percentage, of the ratios set forth in subparagraphs 2A(1) and 2A(2) above will determine the percentage of Bonus paid in accordance with the following:
% OF GOAL ACHIEVEMENT % OF STANDARD BONUS --------------------- ------------------- Less than 80% 0 80% 50% 90% 75% 100% 100% 110% 110% 120% 120% 125% or more 125%
In the event the average percentage of goal achievement falls within a percentage interval shown on the above table, the corresponding percentage of standard bonus shall be computed by interpolation. 3. The appropriate bonuses as determined by the Committee on Executive Organization and approved by the Board of Directors will be paid in the first quarter of the year following the year in which the bonus is earned. 4. Payments made under this program will be considered as earnings for the Supplemental Employee Retirement Plan but not for purposes of the Employees' Savings Plan, Pension Plan, or other employee benefit programs. 5. A participant at any time prior to the beginning of a performance year may elect to irrevocably defer payment for that year, through notice to the Company on a form approved by the Company, of all or 1/2 of any incentive compensation which would otherwise be paid to him as a result of this Employee Incentive Compensation Plan, to a time following his retirement with benefits under the Pension Plan for Employees of Consumers Power Company (hereinafter "Retirement"). As part of such election, the participant may elect that the entire amount deferred be paid in the January following his retirement or that such amount be paid in five annual installments beginning in January of the first year following his retirement with 1/5 of the balance being paid that January, 1/4 of the balance in January of the second year following his retirement, 1/3 of the balance in January of the third year following his retirement, 1/2 of the balance in January of the fourth year following his retirement and all of the remaining balance in January of the fifth year following his retirement. In the event the participant's employment is terminated through death or any other means than Retirement, the amounts deferred will be paid in January of the year following such termination of employment. At the time of electing to defer payment, the participant must also elect whether the sum so deferred shall be treated by the Company in accordance with Paragraph (1) or Paragraph (2) below. 2 3 TERMS OF THE PLAN (CON'T) (1) A sum certain to which the Company will add in lieu of interest an amount equal to the prime rate of interest set by Citibank N.A. for the sums deferred, compounded quarterly as of the first day of January, April, July and October of each year during the deferral period. The prime rate in effect on the first day of January, April, July and October shall be deemed the prime rate in effect for the preceding quarterly period. (2) A sum treated as if it were invested as an optional cash payment in CMS Energy's Dividend Reinvestment and Common Stock Purchase Plan, on the first opportunity preceding the time payment would have been made under the Employee Incentive Compensation Plan had payment not been deferred, and subsequent cash dividends on the shares of common stock automatically reinvested during the deferral period. The value of the sum so deferred, at the time of any payment, shall be equal to the number of dollars which such an investment would have been worth as measured by the purchase price of the shares of common stock under CMS Energy's Dividend Reinvestment and Common Stock Purchase Plan at the time of the most recent dividend payment preceding the month in which the deferred payment is to be made, or, if such dividend payment was more than three months prior to the month in which the deferred payment is to be made, the number of shares which would have been accumulated multiplied by the average of the closing sale price for the common stock, as published in the Wall Street Journal in its report of NYSE - Composite Transactions, for each of the first five New York Stock Exchange trading days in the month preceding the month in which payment is to be made. In the event the participant elects to have the deferred payment treated in accordance with this subparagraph, he may, prior to the last time the value of the sum would have been determined before any payment, elect to receive the payment in shares of common stock of CMS Energy Corporation, in which case the value of the fund will be considered to be equal to the number of shares of common stock which would have been accumulated prior to the time of payment, if the original sum had been invested as provided in the first sentence of this subparagraph, and the payment will be to the nearest whole share of common stock. The amounts deferred are to be satisfied from the general corporate funds which are subject to the claims of creditors. 03/01/95 3 EX-10.6 8 EXHIBIT 10.6 1 EXHIBIT 10.6 GAS PURCHASE AGREEMENT BETWEEN NOMECO OIL & GAS CO., SELLER AND CONSUMERS POWER COMPANY, BUYER JANUARY 1, 1995 2
TABLE OF CONTENTS ----------------- Page ---- I. Definitions . . . . . . . . . . . . . . . . . . . . 1 A. Btu . . . . . . . . . . . . . . . . . . . . . . 1 B. Contract Year . . . . . . . . . . . . . . . . . 1 C. Cubic Foot . . . . . . . . . . . . . . . . . . 1 D. Day . . . . . . . . . . . . . . . . . . . . . . 1 E. Delivery Point . . . . . . . . . . . . . . . . 2 F. Gas . . . . . . . . . . . . . . . . . . . . . . 2 G. Heating Value . . . . . . . . . . . . . . . . . 2 H. Mcf . . . . . . . . . . . . . . . . . . . . . . 2 I. MMBtu . . . . . . . . . . . . . . . . . . . . . 2 J. Month . . . . . . . . . . . . . . . . . . . . . 2 K. Prime Rate . . . . . . . . . . . . . . . . . . 2 L. PSIA . . . . . . . . . . . . . . . . . . . . . 3 M. PSIG . . . . . . . . . . . . . . . . . . . . . 3 II. Term of Agreement . . . . . . . . . . . . . . . . . 3 III. Area of Commitment . . . . . . . . . . . . . . . . 3 IV. Quantity . . . . . . . . . . . . . . . . . . . . . 3 V. Price . . . . . . . . . . . . . . . . . . . . . . . 4 VI. Billing and Payment . . . . . . . . . . . . . . . . 5 VII. Delivery Point - Liability and Title . . . . . . . 6 VIII. Delivery Pressure . . . . . . . . . . . . . . . . . 7 IX. Quality of Gas . . . . . . . . . . . . . . . . . . 7 X. Measurement . . . . . . . . . . . . . . . . . . . . 8 XI. Taxes . . . . . . . . . . . . . . . . . . . . . . . 8 XII. Assignment . . . . . . . . . . . . . . . . . . . . 9 XIII. Notices . . . . . . . . . . . . . . . . . . . . . . 9 XIV. Laws and Regulations . . . . . . . . . . . . . . . 10 XV. Force Majeure . . . . . . . . . . . . . . . . . . . 10 XVI. Miscellaneous . . . . . . . . . . . . . . . . . . . 11
3 1 NATURAL GAS PURCHASE AGREEMENT THIS AGREEMENT, effective as of January 1, 1995, is entered into by and between CONSUMERS POWER COMPANY, a Michigan corporation hereinafter referred to as Buyer, and NOMECO Oil & Gas Co., a Michigan corporation hereinafter referred to as Seller. W I T N E S S E T H WHEREAS, Seller, has Michigan production, which it either controls or has access to and can commit to the terms and provisions of this Agreement; and WHEREAS, Buyer is willing to purchase gas owned or controlled by Seller which Seller now has the right to sell and deliver to Buyer; and NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties agree as follows: ARTICLE I DEFINITIONS 1.1 The following terms, when used in this Agreement, shall have the following meanings: A. The term "Btu" shall mean a British thermal unit. B. The term "Contract Year" shall mean a year beginning January 1 and ending the following December 31. C. The term "cubic foot of gas" shall mean the volume of gas contained in one (1) cubic foot of space at a pressure of fifteen and twenty-five thousandths (15.025) psia, at a temperature of sixty degrees (60 degrees) Fahrenheit. D. The term "day" shall mean a period of twenty-four (24) consecutive hours beginning and ending at 7:00 AM Eastern Standard Time (EST). 4 2 E. The term "Delivery Points" or "Points of Delivery" means the Buyer's Northville interconnect with Michigan Consolidated Gas Company or any other point(s) on Buyer's pipeline system where Michigan origin gas can be delivered, provided the gas to be delivered at that point, after blending with all other gas delivered at that point, meets the quality specifications of Article IX and Buyer has sufficient capacity at such point to take the volumes nominated by Seller. F. The term "gas" shall mean and include natural gas produced from gas wells (gas well gas), gas which immediately prior to being produced from a reservoir is in solution with crude oil, or dispersed in an intimate association with crude oil, or in contact with crude oil across a gas-oil contact (casinghead gas), or residue gas resulting from the processing of either or both casinghead gas and gas well gas. G. The term "Heating Value" shall mean the quantity of heat, in Btu, produced by the complete combustion of a cubic foot of gas under standard conditions at constant pressure with air of the same temperature and pressure as the gas where the products of combustion are cooled to the initial temperature of the gas and air and where water formed by the combustion is condensed to a liquid state, all adjusted to reflect the actual water vapor content of the gas delivered. Standard conditions for the gas shall be a temperature of sixty degrees (60 degrees) Fahrenheit, and a pressure of fifteen and twenty-five thousandths (15.025) psia. H. The term "Mcf" shall mean one thousand (1,000) cubic feet of gas. I. The term "MMBtu" shall mean a quantity of gas having a Heating Value of one million (1,000,000) Btu. J. The term "month" shall mean the period beginning at 7:00 AM Eastern Standard Time (EST) on the first day of a calendar month and ending at 7:00 AM EST on the first day of the next succeeding calendar month. K. The term "Prime Rate" shall mean the fluctuating per annum lending rate of interest from time to time published by the National Bank of Detroit or its successor for creditors having a credit rating equal to or better than that required to qualify for such bank's lowest commercial rate of interest without a third party's guarantee of the debt. 5 3 L. The term "psia" shall mean pounds per square inch absolute. M. The term "psig" shall mean pounds per square inch gauge. ARTICLE II TERM OF AGREEMENT 2.1 This Agreement, subject to the provisions of Article V, shall be effective January 1, 1995 and shall continue in full force and effect through December 31, 1999. ARTICLE III AREA OF COMMITMENT 3.1 Seller agrees to commit to the performance of this Agreement, sufficient production from Michigan wells operated by Seller or to which Seller has access to meet the quantity commitments set forth in Article V hereof. ARTICLE IV QUANTITY 4.1 Buyer agrees to purchase and take from Seller, and Seller agrees to sell and deliver to Buyer, 20,000 MMBtu per day. 4.2 Buyer and Seller agree that it is the intent of both parties to meet such daily purchase and sale commitments on as level a basis as operations allow and that daily fluctuations in purchases and sales should not vary (other than for force majeure conditions) by more than 5 percent per day. 4.3 On or before the fifth (5th) working day preceding the first of each month, Seller shall submit a nomination to Buyer indicating the Point(s) of Delivery and associated volumes for the following month. If any such nominated volumes cannot be received by Buyer due to capacity constraints at any Point of Delivery, Seller shall adjust its nominations accordingly. 6 4 ARTICLE V PRICE 5.1 Subject to the other provisions hereof, the price to be paid by Buyer to Seller for gas purchased and sold hereunder shall be $2.50 per MMBtu delivered in the first Contract Year and $2.60 per MMBtu delivered in the second Contract Year. If Seller has failed to reach an annual average sales level of 20,000 MMBtu per day during the first Contract Year, then the price shall not increase but will remain at $2.50 per MMBtu for the second Contract Year. For each of the last three Contract Years, the parties shall negotiate a delivered price which will fall within the range specified as follows: third Contract Year, $2.25 - $2.75 per MMBtu; fourth Contract Year, $2.35 - $2.85 per MMBtu; fifth Contract Year, $2.45 - $2.95 per MMBtu. If the parties are unable to agree to a contract price prior to thirty days before the beginning of either the third, fourth or fifth Contract Years, then this Agreement shall terminate at the end of the then current Contract Year. 5.2 If at any time after January 1, 1995 the Michigan Public Service Commission (or any other regulatory agency exercising jurisdiction) shall disallow any portion of the price paid Seller hereunder from Buyer's purchased cost of gas in a ratemaking proceeding, then in such event Buyer may reduce the price paid Seller to the maximum price allowed effective as of the "effective date" of the aforementioned disallowance. 5.3 If at any time after January 1, 1995 the position of the Staff of the Michigan Public Service Commission (MPSC), or its successor, in a ratemaking proceeding is that a portion of the price to be paid Seller hereunder should be reduced or disallowed, then Buyer shall deposit into an escrow account the difference between the price that would otherwise be applicable hereunder and the price for such gas recommended by the MPSC Staff. Any portion of the price that is so escrowed and later disallowed by a final order of the Courts or the MPSC shall be returned, with accumulated interest thereon, to Buyer. Any portion of the price that is so escrowed and later allowed by the final order of the Courts or the MPSC shall be paid, with accumulated interest thereon, to Seller. All payments from the escrow 7 5 account shall be made within 45 days after the relevant order becomes final. For the purpose of this paragraph, an MPSC or Court order will be considered final when it is no longer subject to appeal or other challenge by Buyer or Seller. 5.4 If Sections 5.2 or 5.3 above result in a price reduction, Seller shall have the right to seek sales to third parties and upon receipt of a bona fide offer to purchase all or any portion of the gas committed hereunder at a higher price, Buyer will release such gas from this Agreement upon 90 days' written notice to Buyer. ARTICLE VI BILLING AND PAYMENT 6.1 Seller shall, on a monthly basis, furnish Buyer a detailed statement showing the total quantity of gas delivered by Seller to Buyer hereunder and a tax statement showing severance tax liability. Buyer's payment shall be due fifteen days after Buyer's receipt of Seller's statement. 6.2 Each party shall have the right at reasonable hours to examine the books, records and charts of the other party to the extent necessary to verify the accuracy of any statement, charge or computation made pursuant to the provisions hereof. If any such examination reveals any inaccuracy in any billing theretofore made, the necessary adjustment in such billing and payment shall be promptly made, provided that no adjustment for any billing or payment shall be made after the lapse of six (6) months from the rendition thereof unless challenged prior thereto. 6.3 Should Buyer fail to pay any amount due Seller under any provisions of this Agreement when same is due, interest shall accrue at the Prime Rate until all payments, including such interest, are paid and current. If a default in payment continues for sixty (60) days, Seller may, in addition to all other rights and remedies, suspend deliveries of gas hereunder and terminate this Agreement. The foregoing provision in this Section shall not apply, however, if Buyer's refusal to pay is the result of a bona fide dispute as to the accuracy of any statement and Buyer pays all amounts not in dispute. 8 6 ARTICLE VII DELIVERY POINT - LIABILITY AND TITLE 7.1 All costs incurred to produce, compress, transport or process such gas prior to its delivery to Buyer shall, as between Buyer and Seller, be for the account of Seller. 7.2 Title to gas shall pass from Seller to Buyer at the Point(s) of Delivery. Seller shall be in control and possession of the gas delivered hereunder and responsible for any damage or injury caused thereby until the same shall have been delivered to the Point(s) of Delivery, after which delivery Buyer shall be deemed to be in exclusive control and possession thereof and responsible for any injury or damage caused thereby. 7.3 Seller agrees that it will and hereby does warrant title to all gas sold under this Agreement and the right to sell the same, and that such gas is free and clear from all liens, encumbrances and adverse claims; and Seller agrees to indemnify, defend and save Buyer harmless from and against all suits, actions, debts, accounts, damages, costs, losses and expenses arising from or out of adverse claims of any and all persons or parties to said gas or to royalties, taxes, license fees or charges with respect thereto, which are a proper charge against Seller, or which may be levied or assessed upon the production of said gas, the operation of Seller's wells, or the handling of such gas prior to its delivery hereunder. 7.4 Seller undertakes and agrees to maintain and be entirely responsible for the wells, equipment and other facilities used by it up to the Point of Delivery hereinabove specified and further agrees to indemnify, defend and save Buyer harmless from and against all suits, actions, debts, accounts, damages, costs, losses and expenses arising from or in any manner connected therewith. Buyer, except as herein otherwise specifically provided, agrees to maintain and be entirely responsible for the facilities beyond the above-mentioned Point(s) of Delivery. 9 7 ARTICLE VIII DELIVERY PRESSURE 8.1 Seller shall deliver gas hereunder against the varying pressures in the pipeline at the Point(s) of Delivery, but will not be required to deliver gas at a pressure in excess of 1,150 lbs psig. ARTICLE IX QUALITY OF GAS 9.1 The gas delivered hereunder (a) shall not contain more than three percent oxygen by quantity; (b) shall be commercially free from objectionable odors, solid or liquid matter, dust, gum or gum-forming constituents which might interfere with its merchantability or cause injury to or interference with proper operation of the lines, regulators, meters or other appliances through which it flows; (c) shall not contain more than 0.3 grain of hydrogen sulphide per one hundred cubic feet; (d) shall not contain more than twenty grains of total sulfur (including hydrogen sulphide and mercaptan sulfur) per one hundred cubic feet; (e) shall not at any time have a carbon dioxide content in excess of two percent (2%) by volume; and (f) shall not contain an amount of moisture which at any time exceeds seven pounds per million cubic feet; and (g) shall be fully "interchangeable" in accordance with the provisions of AGA Research Bulletin No. 36. 9.2 The gas hereunder shall have a total Heating Value per cubic foot of not less than 960 Btu's nor more than 1,110 Btu's. 9.3 Should the gas offered for sale to Buyer fail at any time to conform to any of the specifications of this Article, Buyer shall be under no obligation to accept it. Buyer, however may notify Seller of any such failure and Seller shall make a diligent effort to correct such failure so as to deliver gas conforming to the above specifications. If Seller is unable to deliver gas conforming to the specifications hereof by treatment consistent with prudent operations and by means which are economically feasible in Seller's opinion, Buyer may, at its opinion, accept delivery of the gas, and at Buyer's sole cost, treat the gas so that it will conform to the subject 10 8 specifications or Buyer may refuse to take such gas. In the event neither Seller nor Buyer elect to treat gas that fails to meet the quality specifications hereof, that gas and that gas only shall be released from commitment under the terms hereof. ARTICLE X MEASUREMENT 10.1 Measurement of gas delivered at the Point(s) of Delivery will be based on equipment operated at the Point(s) of Delivery by Buyer. Buyer shall provide Seller with access to the measurement information. ARTICLE XI TAXES 11.1 Seller agrees to pay or cause to be paid all taxes imposed upon gas prior to its delivery to Buyer hereunder or upon any occupation or privilege relating to the production, sale or delivery of such gas to Buyer. Buyer agrees to pay or cause to be paid all taxes imposed on such gas after its receipt by Buyer, or any occupation or privilege tax relating to the transmission or sale of such gas after its receipt by Buyer. 11.2 As used in this Article XII, the term "tax" shall mean sales, transaction, occupation, service, production, severance, gathering, transmission, value added, export or excise tax, assessment or fee levied, assessed or fixed by governmental authority, and taxes of a similar nature or equivalent in effect. 11.3 Buyer agrees to deduct from the amount payable to Seller the severance and privilege taxes due from the sale of gas hereunder, and furthermore shall remit and report to the State of Michigan in accordance with the severance and privilege tax statutory filing requirements. 11.4 If either party receives written notice from the other that questions the validity of any tax, the parties will consult with each other as to the best procedure to be followed in the payment of the questioned tax and the means of testing its validity, having due regard for the protection of the 11 9 interests of both Seller and Buyer. Following such consultation, each party will pursue the course of action it deems proper. ARTICLE XII ASSIGNMENT 12.1 This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided that no conveyance, transfer of any interest, or change of ownership by either party shall be binding upon the other party until such other party has been furnished with a written notice evidencing such conveyance, transfer of interest, or change of ownership and approved it. Such approval shall in no event, however, be unreasonably withheld. The foregoing shall not, however, restrict either party from pledging, granting a security interest in or assigning as collateral all or any portion of such party's interest hereunder to secure any debt or obligation. ARTICLE XIII NOTICES 13.1 Any nomination, notice, request, demand, statement or payment provided for in this Agreement shall be sent to the parties hereto at the following addresses: BUYER: Consumers Power Company Attn: Director of Gas Supply 1945 West Parnall Road Jackson, MI 49201 FAX - (517) 788-1340 SELLER: NOMECO Oil & Gas Co. Attn: Gas Marketing One Jackson Square PO Box 1150 Jackson, MI 49204 FAX - (517) 787-0139 13.2 Either party shall have the right by prior written notice to the other to change its address or addresses given above at any time. 12 10 ARTICLE XIV LAWS AND REGULATIONS 14.1 This Agreement, insofar as it is affected thereby, shall be subject to all valid and applicable laws, orders, rules and regulations of Federal, State and any other governmental authorities having jurisdiction. Any party hereto shall have the right to contest the validity of any such law, order, rule or regulation, and the acquiescence therein or compliance therewith for any period of time shall not be construed as a waiver of such right. This Agreement shall be governed by and construed in accordance with the laws of the State of Michigan. 14.2 This Agreement is subject to the Federal Requirements set forth in Exhibit A. ARTICLE XV FORCE MAJEURE 15.1 If Buyer or Seller is rendered unable, wholly or in part, by force majeure to perform or comply with any obligations or conditions of this Agreement, such obligations or conditions shall be suspended to the same extent during the continuance of the inability so caused and such party so rendered unable shall be relieved of liability and shall suffer no prejudice for failure to perform the same during such period, it being understood that Buyer's obligation to take or pay for gas hereunder shall be reduced by the volume which Buyer was unable to take/receive during the period of time the inability exists; provided, obligations to make payment then due for gas delivered hereunder shall not be suspended, and provided further that the cause of suspension (other than strikes, lockouts or labor disputes) shall be remedied insofar as possible with reasonable dispatch. The foregoing notwithstanding, settlement of strikes, lockouts, or labor disputes shall be wholly within the discretion of the party having the difficulty. 15.2 The term "force majeure" shall include, without limitation by the following enumeration, acts of God and of the public enemy, unseasonal weather, freezing of wells or lines of pipe, repairing or altering machinery 13 11 or lines of pipe, fires, accidents, breakdowns, strikes, labor disputes, and any other industrial, civil or public disturbance, inability to obtain materials, supplies, rights-of-way, permits, or labor on customary terms, any act or omission by a third party Transmission Company, or parties not controlled by the party having the difficulty, any act or omission (including failure to take gas) of a purchaser of gas from Buyer which is excused by any event or occurrence of the character herein defined as constituting force majeure and any laws, orders, rules, regulations, acts, or restraints of any governmental body or authority, civil or military, or any other cause beyond the control of the parties claiming force majeure. ARTICLE XVI MISCELLANEOUS 16.1 No waiver by either party hereto of one or more defaults in the performance of any provision of this Agreement shall operate or be construed as a waiver, by such party, of a future default, whether of a like or a different character. 16.2 All headings appearing herein are for convenience only and shall not be considered a part of this Agreement for any purpose or as in any way interpreting, construing, varying, altering or modifying this Agreement or any of the provisions hereof. 16.3 Each party hereby agrees to grant to the other, wherever necessary or convenient for carrying out the terms of this Agreement, requisite easements and rights-of-way over, across and under any land as to which such party has the right to make such grants. 16.4 There shall be no modification of any of the terms and provisions of this Agreement except by the formal execution of supplemental written agreements. 14 12 IN WITNESS WHEREOF, the parties hereto have caused this contract to be executed and effective as of the day and year first above written.
WITNESSES: BUYER: CONSUMERS POWER COMPANY /s/ Kevin J. Daly By: /s/ R. J. Odlevak - ------------------------------- ------------------------------- R. J. Odlevak /s/ Michael J. Shore - ------------------------------- SELLER: NOMECO OIL & GAS CO. /s/ Thad R. Shumway By: /s/ Gordon L. Wright - ------------------------------- -------------------------------- Thad R. Shumway Gordon L. Wright Executive Vice President Chief Operating Officer /s/ Diane L. Ritchie - ------------------------------- Diane L. Ritchie
EX-10.7 9 EXHIBIT 10.7 1 EXHIBIT 10.7 NORTHERN MICHIGAN EXPLORATION COMPANY AND CMS ENERGY CORPORATION SELLER and MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP BUYER ------------------------------ NATURAL GAS PURCHASE AGREEMENT ------------------------------ May 1, 1989 2 TABLE OF CONTENTS
Page ---- I. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 A. Buyer's Plant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 B. Btu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 C. Contract Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 D. Contract Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 E. cubic foot of gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 F. day . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 G. gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 H. Heating Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 I. Interstate Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 J. Intrastate Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 K. lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 L. Maximum Daily Quantity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 M. Mcf . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 N. Minimum Daily Quantity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 O. MMBtu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 P. month . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Q. Northern Michigan Wet Header System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 R. Prime Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 S. psia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 T. psig . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 U. Start-Up Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 V. Transmission Company; Transmission Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 II. Warranty of Deliverability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 III. Term of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 IV. Quantity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 V. Commencement and Scheduling of Deliveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 VI. Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 VII. Billing & Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 VIII. Delivery Point(s); Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 IX. Delivery Pressure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
i 3 TABLE OF CONTENTS (Cont'd)
Page ---- X. Quality of Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 XI. Measurement and Tests of Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 XII. Warranty of Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 XIII. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 XIV. Right To Terminate Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 XV. Force Majeure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 XVI. Governmental Rules and Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 XVII. Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 XVIII. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 XIX. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Exhibit A - Point(s) of Delivery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Exhibit B - Power Purchase Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
ii 4 NATURAL GAS PURCHASE AGREEMENT THIS AGREEMENT, effective as of May 1, 1989, is entered into by and between MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP, a Michigan limited partnership ("Buyer"), with its principal place of business in Midland, Michigan, and NORTHERN MICHIGAN EXPLORATION COMPANY and CMS ENERGY CORPORATION both of which are collectively herein referred to as "Seller"; W I T N E S S E T H : WHEREAS, Buyer is constructing a cogeneration plant located in Midland, Michigan; and WHEREAS, Buyer desires to secure a long-term natural gas supply for such cogeneration plant; and WHEREAS, Seller is in the business of exploration for and production of natural gas; and WHEREAS, Seller desires to sell and deliver natural gas to Buyer for use at Buyer's cogeneration plant and Buyer desires to purchase and receive such natural gas from Seller. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties agree as follows: ARTICLE I DEFINITIONS 1.1 The following terms, when used in this Agreement, shall have the following meanings: A. The term "Buyer's Plant" shall mean Buyer's gas fueled combined cycle, steam and electric cogeneration facility located in Midland County, Michigan. B. The term "Btu" shall mean a British thermal unit. C. The term "Contract Price" shall mean the price to be paid by Buyer to Seller for all quantities of gas purchased and delivered hereunder, as determined pursuant to Article VI hereof. D. The term "Contract Year" shall mean a calendar year except that for the initial and final year it shall mean the portion thereof that occurs during the term of this Agreement. E. The term "cubic foot of gas" shall mean the volume of gas contained in one (1) cubic foot of space at a pressure of fourteen and 5 2 seventy-three hundredths (14.73) psia, at a temperature of sixty degrees (60 degrees) Fahrenheit. F. The term "day" shall mean a period of twenty-four (24) consecutive hours (23 hours when changing from Standard to Daylight time and 25 hours when changing back to Standard time), beginning and ending at 7:00 AM local time at the Point of Delivery. G. The term "gas" shall mean and include natural gas produced from gas wells (gas well gas), gas which immediately prior to being produced from a reservoir is in solution with crude oil, or dispersed in an intimate association with crude oil, or in contact with crude oil across a gas-oil contact (casinghead gas), or residue gas resulting from the processing of either or both casinghead gas and gas well gas. H. The term "Heating Value" shall mean the quantity of heat in Btu produced by the complete combustion of a cubic foot of gas under standard conditions at constant pressure with air of the same temperature and pressure as the gas where the products of combustion are cooled to the initial temperature of the gas and air and where water formed by the combustion is condensed to a liquid state, all adjusted to reflect the actual water vapor content of the gas delivered. Standard conditions for the gas shall be sixty degrees (60 degrees) Fahrenheit, fourteen and seventy-three hundredths (14.73) psia and saturated with water vapor. I. The term "Interstate Gas" shall mean gas sold and purchased hereunder which is produced from wells located outside the State of Michigan. J. The term "Intrastate Gas" shall mean gas sold and purchased hereunder which is produced from wells located within the State of Michigan. K. The term "lease" shall mean any written instrument which gives Seller the rights to drill for, produce, and dispose of gas in, under, and from the lands described therein. L. The term "Maximum Daily Quantity" (MDQ) shall mean ten thousand (10,000) MMBtu/day of gas. M. The term "Mcf" shall mean one thousand (1,000) cubic feet of gas. N. The term "Minimum Daily Quantity" shall mean seven thousand five hundred (7,500) MMBtu/day of gas. O. The term "MMBtu" shall mean a quantity of gas having a Heating Value of one million (1,000,000) Btu. P. The term "month" shall mean the period beginning at 7:00 a.m. local time at the Point of Delivery on the first day of a calendar month and 6 3 ending at 7:00 a.m. local time at Point of Delivery, as described in Article VIII, on the first day of the next succeeding calendar month. Q. The term "Northern Michigan Wet-Header System" shall mean the pipeline system-in the northern portion of Michigan's Lower Peninsula that is operated pursuant to a contract between Consumers Power Company and Michigan Consolidated Gas Company dated November 1, 1971. R. The term "Prime Rate" shall mean the fluctuating per annum lending rate of interest from time to time published by CITIBANK, NA. S. The term "psia" shall mean pounds per square inch absolute. T. The term "psig" shall mean pounds per square inch gauge. U. The term "Start-Up Date" shall mean the first day of the first month following the date on which Buyer's Plant has achieved commercial operation for the generation and sale of electricity and steam as such commercial operation is defined in the Power Purchase Agreement between Consumers Power Company and Buyer dated July 17, 1986, or as amended, but in no event shall such date be earlier than January 1, 1990 nor later than May 1, 1990. V. The term "Transmission Company" or "Transmission Companies" shall mean the pipeline company or companies with which Buyer executes agreements for the transportation of gas from or downstream of the Point of Delivery as described in Article VIII. ARTICLE II WARRANTY OF DELIVERABILITY Seller, except to the extent excused by force majeure, warrants the delivery of the Maximum Daily Quantity of gas provided for herein and failing that delivery, Seller shall indemnify Buyer for any and all costs and expenses that Buyer incurs in acquiring replacement gas elsewhere to the extent, if any, that such costs and expenses, on an MMBtu basis delivered into Buyer's facilities, are in excess of what Buyer would have incurred under this Agreement and related transportation agreements. ARTICLE III TERM OF AGREEMENT 3.1 This Agreement shall, be effective from the date hereof and shall continue in full force and effect for a primary term of twelve (12) years (the "Primary Term") commencing on the Start-Up Date and shall continue and remain in full force and effect thereafter for successive periods of one (1) year each (the 7 4 "Annual Renewal Term") unless and until terminated by either Seller or Buyer after giving written notice to the other party no later than nine (9) months prior to the expiration of the Primary Term or the then current Annual Renewal Term. 3.2 The foregoing notwithstanding, the term shall be extended for such period, not to exceed two (2) years, as may be necessary to allow for (a) delivery of gas paid for but not taken; and (b) a makeup of Seller's prior underdeliveries when such underdeliveries are caused by an event of force majeure. 3.3 Notwithstanding anything in the foregoing to the contrary, the terms of this Agreement shall not extend beyond December 31, 2005. 3.4 Termination of this Agreement shall not affect the accrued rights and liabilities of the parties hereunder. ARTICLE IV QUANTITY 4.1 Seller agrees to sell and deliver to Buyer and Buyer agrees to purchase, receive and pay Seller for, or to pay Seller for if available but not taken, during each Contract Year, a daily average quantity of gas equal to seven thousand five hundred (7,500) MMBtu of gas per day. 4.2 It is provided, however, that Buyer shall have the right to purchase, and Seller will sell and deliver to Buyer, such quantity of gas as Buyer may from day to day elect to purchase, up to ten thousand (10,000) MMBtu of gas per day. 4.3 The gas purchased hereunder shall be delivered and received, as nearly as practicable, at uniform rates of flow. The daily quantity of gas actually delivered may vary ten percent (10%) above or below the quantity requested by Buyer to be delivered hereunder, But in no event shall the total quantity delivered in any month vary more than three percent (3%) above or below the total quantity requested by Buyer for that month. 4.4 Commencing May 1, 1990, if the quantity of gas taken by Buyer hereunder during any Contract Year is less than the quantity provided for in Section 4.1 of this Article, Buyer shall within sixty (60) days thereafter, pay Seller for the deficiency at the last price in effect during such Contract Year. It is provided, however, the quantity of gas to be paid for but not taken hereunder shall be reduced by the volume of gas Buyer elects not to take for failure of such gas to meet the quality specifications hereinafter set forth and 8 5 the volume of gas Buyer shall have been prevented from taking by reason of force majeure or Seller's failure or inability to deliver the volumes requested by Buyer, up to the daily volume specified in Section 4.2 above. For purposes of computing the deficiency payment the deficiency shall be deemed to be Intrastate Gas and Interstate Gas in the same proportions as the takes of such gas by Buyer during the last Contract Year in which no deficiencies in the Buyer's takes occurred unless no such Contract Year exists, in which event such proportions shall be based on takes during the Contract Year in which the deficiency was incurred. Buyer shall have the right during the succeeding five (5) Contract Years but not beyond the term of this Agreement, as provided in Article III, to make up any gas paid for but not taken by deducting from future monthly statements all gas taken in excess of seven thousand five hundred (7,500) MMBtu per day until the full amount of such gas is recovered by Buyer. 4.5 It is recognized that Buyer will require quantities of gas for use at Buyer's Plant for as much as twelve (12) months prior to the Start-Up Date. Seller agrees that it will sell and deliver to Buyer on a best efforts basis such quantities of gas as may be requested by Buyer from time to time prior to the Start-Up Date for use in Buyer's Plant up to the Maximum Daily Quantity; provided that the price per MMBtu for all such gas delivered by Seller prior to the Start-Up Date shall be as specified in Article VI. 4.6 If Seller so elects in writing to Buyer, Buyer shall use diligent efforts to purchase hereunder or arrange for others to purchase gas from Seller under the terms hereof for the period pending the Start-Up Date. If Buyer has a comparable commitment under other contracts, this obligation shall be on a pro rata basis and need not be pursued by Buyer if it leaves Buyer economically disadvantaged. 4.7 Seller reserves the right to process or have processed, prior to or after delivery, all or a portion of the gas deliverable to Buyer hereunder for the removal of all constituents other than methane, except for such methane as is removed under normal operation of such processing facilities. In the event Seller's gas is to be processed after delivery hereunder, Buyer will, to the best of its ability, deliver or cause to be delivered to Seller or for Seller's account, volumes of gas for processing which contain, as nearly as practicable, Seller's pro rata share of all liquefiable hydrocarbons contained in the commingled gas stream. Such processing shall not lower the total heating value of the gas below that required in Article X and shall be subject to such other conditions as may be acceptable to both parties. Title to all products removed 9 6 or recovered by said processing shall remain in Seller; however, Seller agrees to reimburse Buyer for the cost of the fuel, shrinkage and plant loss volumes attributable to such processing, plus the cost of transporting such volumes to the processing plant if and to the extent the total of such transportation cost and all other transportation costs to deliver the gas to Buyer's Plant exceeds the cost of transportation Buyer is otherwise obligated to bear under this Agreement. ARTICLE V COMMENCEMENT AND SCHEDULING OF DELIVERIES 5.1 To allow Buyer to arrange for transportation, Seller shall advise Buyer where and in what quantities gas can be made available hereunder and once deliveries have begun, they shall not be shifted between or among Point(s) of Delivery without the agreement of both parties. 5.2 If Buyer desires to take gas under this Agreement for test purposes in advance of the Start-Up Date, Buyer shall give Seller written notice as far in advance as practicable, and at least one hundred and twenty (120) days prior to the date when Buyer estimates it will first require delivery of gas, stating the daily quantity of gas that it desires. Buyer will also give Seller such written notice approximately thirty (30) days in advance of the estimated Start-Up Date. Seller will commence and adjust its delivery of gas hereunder in accordance with Buyer's notice; provided that such notice conforms to the requirements of this Agreement. To the extent it is able to do so, Seller may, however, at Buyer's request, agree to waive any advance notice requirement. 5.3 In the month of the Start-Up Date and every month thereafter, Buyer shall nominate to Seller, ten (10) days before the end of each month, the quantity of gas to be purchased hereunder for the following month. Seller will commence and adjust its delivery of gas hereunder in accordance with Buyer's nomination. If Buyer desires to change the nominated volume during the month it shall give Seller no less than twenty-four (24) hours advance notice of such change. However, if the volume change is greater than ten percent (10%) of the MDQ, such notice shall be given seventy-two (72) hours in advance. To the extent it is able to do so, Seller may, however, at Buyer's request agree to waive any part of said advance notice requirement. 10 7 5.4 To the extent that the procedures set forth herein conflict with the rules and tariffs filed with and approved by those regulatory agencies exercising regulatory authority over the Transmission Companies, such rules and tariffs will control and the parties shall cooperate fully with each other in complying with such rules and tariffs. ARTICLE VI PRICE 6.1 The price to be paid by Buyer to Seller for all quantities of Interstate Gas hereunder, including those quantities that are available and not taken by Buyer, as herein otherwise required, inclusive of all taxes and other adjustments or costs not provided for herein, shall be determined separately for each month and shall be the greater of the "Fixed Escalator Price" or the "Energy Index Price" as defined below: (a) The Fixed Escalator Price per MMBtu of Interstate gas sold and delivered shall be as follows: January 1, 1988 2.15 January 1, 1989 2.21 January 1, 1990 2.30 January 1, 1991 2.39 January 1, 1992 2.49 January 1, 1993 2.59 January 1, 1994 2.69 January 1, 1995 2.80 January 1, 1996 2.91 January 1, 1997 3.03 January 1, 1998 3.15 January 1, 1999 3.27 January 1, 2000 3.40 January 1, 2001 3.54 January 1, 2002 3.68 January 1, 2003 3.83 January 1, 2004 3.98 (b) The Energy Index Price shall be $1.95 per MMBtu, effective January 1, 1988, adjusted on a monthly basis thereafter by adding or subtracting, as appropriate, an amount obtained by subtracting 11 8 $1.95 from the product of (i) $1.95 per MMBtu, multiplied by (ii) a fraction, the numerator of which is the sum of the then current month's energy charges associated with fixed expenses and variable expenses referenced in Exhibit "C" of the 1986 Power Purchase Agreement between Consumers Power Company and Buyer and the denominator of which is the sum of energy charges associated with fixed expenses and variable expenses referenced in Exhibit "C" of said Power Purchase Agreement for the month of December 1987 (which will represent data for the 12 months ending October 31, 1987). 6.2 The price to be paid by Buyer to Seller for all quantities of Intrastate Gas hereunder, including those quantities that are available and not taken by Buyer as herein otherwise required, inclusive of all taxes and other adjustments or costs not provided for herein, shall be determined separately for each month as the price prescribed pursuant to Section 6.1 above plus $.45 per MMBtu. 6.3 Buyer shall pay Seller a price per MMBtu equal to the price calculated in Section 6.1 or 6.2 above, as applicable, for all quantities of gas delivered to the Delivery Point prior to the Start-Up Date and purchased by Buyer pursuant to this Agreement. 6.4 Buyer, except to the extent excused by force majeure, agrees to provide firm transportation for the Minimum Daily Quantity. Buyer will make arrangements for and bear the cost of transportation from the Point of Delivery to Buyer's Plant of all gas delivered by Seller to Buyer hereunder; provided, however, as to all gas delivered to the Northern Michigan Wet-Header System, Buyer will be reimbursed by Seller for two-thirds (2/3) of all third party costs incurred as a transportation fee or charge to transport gas from the Point(s) of Delivery on the Northern Michigan Wet-Header System through any facilities to any of the Buyer's gas pipeline system, to the Consumers Power Company gas pipeline system, or the Michigan Gas Storage Company pipeline system for any gas transported pursuant to this contract. Subject to force majeure, failure of Buyer to arrange transportation from the Point of Delivery to Buyer's Plant of all gas available to Buyer in accordance with the terms hereof shall constitute and be deemed for purposes of this Agreement failure by Buyer to take such gas. Seller shall have no obligation to arrange for transportation, nor shall Seller bear all or any portion of the cost of transportation from the Point(s) of 12 9 Delivery to Buyer's Plant except as otherwise specifically provided with respect to transportation on the Michigan Wet Header System. ARTICLE VII BILLING AND PAYMENTS 7.1 After the delivery of gas has commenced hereunder, Seller shall, on or about the tenth (10th) day of each month, render to Buyer a statement showing the estimated quantity of gas delivered during the preceding month under this Agreement and the adjustment, if any, required to conform the prior month's estimate with actual deliveries. Payment of the amount due based on such statement shall be made by Buyer to Seller within fifteen (15) days following receipt of such a statement by wire transfer. 7.2 Should Buyer fail to pay the full amount to Seller when the same is due, interest on amount not paid thereon shall accrue at the Prime Rate, or the maximum legal rate, whichever is the lesser, compounded annually from the date such payment is due until the same is paid. If such default in payment continues for sixty (60) days after written notice sent by registered United States mail from Seller to Buyer, Seller may, at its election, to be exercised at any time while such default continues, and in addition to all other remedies, on thirty (30) days written notice to Buyer, suspend deliveries of gas hereunder and may cancel and terminate this Agreement; provided, however, that the provisions for suspending deliveries or terminating this Agreement shall not apply if Buyer's refusal to pay any amount claimed by Seller is the result of a bonafide dispute. 7.3 Each Party shall have the right at reasonable hours to examine the records of the other party to the extent necessary to verify the accuracy of any statement, charge or computation made pursuant to the provisions of any Article hereof. If any such examination reveals any inaccuracy in any billing or payment previously made, the necessary adjustment in such billing or payment shall be promptly made. No adjustment for any error in billing or payment shall be made after the lapse of two (2) years from the rendition thereof. ARTICLE VIII DELIVERY POINT(S): TITLE 8.1 For Intrastate Gas the Point(s) of Delivery shall be any point selected by Seller with Buyer's approval, which approval shall not be unreasonably withheld, on Buyer's or Consumers Power Company's gas pipeline system, the Northern Michigan Wet-Header System, or the pipeline 13 10 system of Michigan Gas Storage Company. The cost of transporting gas on the Northern Michigan Wet-Header System shall be borne as specified in Section 6.4. 8.2 For Interstate Gas the Point(s) of Delivery shall be any point selected by Seller with Buyer's approval, which approval shall not be unreasonably withheld, on the pipeline systems of the ANR Pipeline Company, Panhandle Eastern Pipe Line Company, Trunkline Gas Company, or Great Lakes Gas Transmission Company. Seller shall have the option to select a Point of Delivery for its Interstate Gas on a pipeline system other than those identified in the preceding sentence, and Buyer shall use its best efforts to arrange for all transportation of the gas to Buyer's Plant provided that Seller bears all transportation costs incurred to transport the gas that are in excess of $0.45 per MMBtu. 8.3 Title to gas delivered hereunder shall pass to Buyer when it is received by or on behalf of Buyer at such Point(s) of Delivery, subject to the provisions of Section 4.7. All costs and expenses of delivering the gas to the Point(s) of Delivery shall be borne by Seller. ARTICLE IX DELIVERY PRESSURE Seller shall be required to deliver gas hereunder against the varying pressures in the Transmission companies' pipelines and shall install, maintain and operate all necessary compression equipment at no cost to Buyer. ARTICLE X QUALITY OF GAS 10.1 The gas to be delivered hereunder shall Comply with the quality requirements prescribed (without discrimination against Seller) by the pipeline system or Transmission Company taking the gas at the Point of Delivery. 10.2 Buyer shall have the right to terminate this Agreement in the event that Seller fails to correct any deficiency in quality within thirty (30) days following written notice to Seller of any such deficiency. ARTICLE XI MEASUREMENT AND TESTS OF GAS 11.1 Seller or Seller's designee shall, at Seller's expense, install, maintain and operate near the Point of Delivery orifice meters with charts and 14 11 any other auxiliary measuring equipment necessary in order to accomplish accurate measurement and testing of the gas; such measurement equipment to be installed and operated in accordance with the standards approved by the American National Standards Institute (ANSI) Report 2530 dated June 28, 1977, and prescribed in the Gas Measurement Committee of the American Gas Association (AGA) Report Number 3 (herein called "ANSI/API 2530, First Edition"), as it is now and from time to time may be revised, amended, supplemented and/or superseded, or by any other method commonly used in the industry and mutually acceptable to Seller and Buyer. It shall be the responsibility of Seller to place its measuring equipment on a site to be determined by mutual agreement between Seller and the Transmission Companies. Any disputes about the quantity of gas delivered to the Transmission Companies for Buyer's account shall be resolved by Seller and the Transmission Companies. Until such dispute is settled, the quantity of gas received for Buyer's account shall be deemed to be that amount which is acknowledged by such Transmission Companies. 11.2 The specific gravity of the gas shall be determined by Seller or Seller's designee at Seller's expense with accuracy to the nearest one thousandth (1/1000) by having specific gravity determined, when the subject gas is flowing, by the use of a recording gravitometer of an approved type commonly used and accepted in the industry, or, at Seller's election, the specific gravity of the gas may be determined monthly, at Seller's expense, by an independent laboratory approved by Buyer which approval shall not be unreasonably withheld on the basis of samples of gas delivered during the month taken, while the subject gas is flowing, by a continuous sampling device of a type, quality and design approved by Buyer (which approval will not be unreasonably withheld). 11.3 The Heating Value per cubic foot of gas shall be determined by Seller or Seller's designee at Seller's expense by the arithmetical average of the records, established while the subject gas is flowing, of a recording calorimeter of an approved type commonly used and accepted in the industry, or, at Seller's election, the Heating Value per cubic foot of the gas may be determined, monthly, at Seller's expense, by an independent laboratory approved by Buyer which approval shall not be unreasonably withheld on the basis of samples of gas delivered hereunder during the month, taken by a continuous sampling device of a type, quality and design approved by Buyer (which approval will not be unreasonably withheld). 15 12 11.4 The temperature of the gas shall be determined by Seller or Seller's designee at Seller's expense by use of a recording thermometer of an approved type commonly used and accepted in the industry. 11.5 Deviation from the Ideal Gas Law at the pressures, specific gravities and temperatures of the gas upon delivery shall be determined as often as found necessary. Correction of volumes for deviation from the Ideal Gas Law shall be made by use of factors obtained from the table entitled "Supercompressibility Factors for Natural Gas," published in ANSI/API 2530, First Edition, as it is now and from time to time may be revised, amended, supplemented and/or superseded. Each test shall determine the corrections to be used in computing volume until the next test is made. 11.6 Buyer may, at its option and expense, install and operate check measuring equipment to check the accuracy of Seller's measurements. Buyer shall install and operate such check measuring equipment so that it will not interfere with the operation of Seller's facilities. 11.7 Each party shall give reasonable notice to the other of tests so that each party may (at its own expense) have its representative present at the tests. If such notice has been given, the party giving the notice may proceed as though the other party were present and such test results shall be used until the next regularly scheduled test or requested test. 11.8 Tests for sulfur and hydrogen sulfide content of the gas shall be made by Seller or Seller's designee, at Seller's expense, by approved standard methods from time to time as requested by either party hereto, but not more often than quarterly. 11.9 The accuracy of Seller's measuring and testing equipment shall be verified monthly at approximately the same date in each month, and at such other times as requested by either party. All tests shall be made at Seller's expense, except that Buyer shall bear the expense of tests made at its request if the inaccuracy found is two percent (2%) or less. If upon any test, any of Seller's meters is found to be inaccurate: (a) By two percent (2%) or less, previous readings thereof shall be considered correct, but such meter shall be adjusted at once to read correctly. (b) By more than two percent (2%), the registration of such meter shall be corrected for any period which is definitely known or agreed upon, but in case the period is not definitely known or 16 13 agreed upon, then for a period extending back one-half (1/2)-of the time elapsed since the date of the last calibration. Following any test, metering equipment found inaccurate shall be immediately corrected by Seller to a condition of accuracy. If, for any reason, any meter is out of the above-stated range of tolerance, the amount of gas delivered through the period such meter is out of tolerance shall be estimated and agreed upon by the parties hereto upon the basis of the best data available, using the first of the following methods which is feasible: (1) By using the registration of a check meter if installed and accurately registering; or (2) By correcting the error if the percentage of error is ascertainable by calibration test or mathematical calculation; or (3) By estimating the quantity of deliveries by deliveries during preceding periods under similar conditions when the meter was registering accurately. 11.10 The reading, calibration and adjustment of such equipment and the changing of charts shall be done only by the party responsible for the operation of such equipment or said party's authorized representative. ARTICLE XII WARRANTY OF TITLE Seller hereby warrants (i) title to all gas sold hereunder, (ii) that it has the right to sell same to Buyer and (iii) that all such gas shall be free from any and all lions and adverse claims of any nature; and Seller agrees to indemnify and save and hold harmless Buyer from and against any loss, cost, claim, expense or liability whatsoever with respect to or resulting from any adverse claim by any party with respect to any gas delivered to Buyer under this Agreement. 17 14 ARTICLE XIII TAXES Seller shall pay or cause to be paid all taxes and assessments imposed on Seller with respect to the gas delivered hereunder prior to or on a concurrent basis with its delivery to Buyer (including, but without limitation, all severance and sales taxes), and Buyer shall pay or cause to be paid all taxes and assessments imposed upon Buyer with respect to gas delivered hereunder after its receipt by Buyer. Neither party shall be responsible or liable for any taxes or other statutory charges levied or assessed against any of the facilities of the other party used for the purpose of carrying out the provisions of this Agreement. ARTICLE XIV RIGHT TO TERMINATE AGREEMENT 14.1 In addition to and without limiting any other lawful right or remedy of Buyer for any default by Seller provided by law or under any other Section of this Agreement, Buyer shall have the right at its election to terminate this Agreement upon twenty (20) days' written notice to Seller if Seller, for any reason, other than force majeure, fails to provide an average of ninety percent (90%) of the requested quantity of gas (provided the request is for a volume not in excess of the Maximum Daily Quantity) averaged over a period of at least one hundred twenty (120) consecutive days which occurred within a period of one hundred forty (140) days immediately preceding the giving of such notice of termination. 14.2 In addition to and without limiting any other lawful right or remedy of Seller for any default by Buyer provided by law or under any other Section of this Agreement, Seller shall have the right at its election to terminate this Agreement upon twenty (20) days' written notice to Buyer if Buyer, for any reason other than force majeure, fails to take at least fifty percent (50%) of the MDQ averaged over a period of at least one hundred eighty (180) consecutive days occurring within not more than two hundred (200) days immediately preceding the giving of such notice of termination. ARTICLE XV FORCE MAJEURE 15.1 Neither party hereto shall be liable for any failure to perform the terms of this Agreement when such failure is due to "force majeure" as 18 15 hereinafter defined. The term "force majeure," as employed herein and for all purposes relating hereto, shall mean acts of God, strikes, lockouts or other industrial disturbances, acts of public enemy, wars, blockades, insurrections, riots, epidemics, landslides, lightning, earthquakes, explosions fires, arrests and restraints of governments and people, civil disturbance, repairs to remedy breakage or accident affecting Buyer's Plant or pipeline facilities used to transport gas to Buyer's Plant, mechanical breakdowns of Buyer's Plant or pipeline facilities used to transport gas to Buyer's Plant, inability to obtain adequate transportation, inability of any party hereto to obtain necessary materials, supplies or permits due to existing or future rules, regulations, orders, laws or proclamations of governmental authorities (federal, state or local), including both civil and military, the failure of a customer to take contracted levels of steam or electricity from Buyer and any other causes whether of the kind herein enumerated or otherwise, not within the control of the party claiming suspension and which by the exercise of due diligence such party is unable to prevent or overcome; provided that the settlement of strikes and other labor disputes shall be at the sole discretion of the party experiencing such difficulty. 15.2 Without limitation of the foregoing, force majeure shall also include failure of Seller to deliver gas it is otherwise obligated to make available hereunder when such failure is due to circumstances beyond Seller's reasonable control relating to the leases and wells from which gas is being produced for delivery by Seller hereunder, including, without limitation: mechanical or operational disruptions; declines in production rates or reserves not reasonably anticipated by Seller; any action or failure to act on the part of the operator (except where Seller is the operator) of any such wells; sales by Seller to other buyers as a result of Buyer's failure to take hereunder, regardless of force majeure; provided that with respect to all force majeure events Seller shall exercise due diligence to restore gas deliveries hereunder as soon as reasonably possible when the force majeure is abated and with respect to any force majeure experienced by Seller, Seller shall make up delivery deficiencies as soon as practicable during the term of this Agreement through gas deliveries in excess of contracted volumes and at the price in effect for gas at the time of delivery. 19 16 ARTICLE XVI RULES AND REGULATIONS 16.1 This Agreement shall be subject to all valid laws, orders, directives, rules and regulations of any governmental body or official having jurisdiction. Seller shall in any event endeavor to maintain this Agreement and shall not unilaterally petition to amend it. ARTICLE XVII ASSIGNMENT 17.1 The terms, covenants and conditions hereof shall be binding on the parties hereto and on their successors and assigns. 17.2 Either party may assign its interest under this Agreement, without the consent of the other party, to an affiliate or any company which shall succeed, by purchase, merger, consolidation, or other transfer, to substantially all of its assets. In the event of any such assignment, such successor shall be entitled to the rights and shall be subject to the obligations of its predecessor. Seller acknowledges that pursuant to a certain Gas Backup Agreement among Consumers Power Company, The Dow Chemical Company (Dow) and the Midland Cogeneration Venture Limited Partnership dated January 27, 1987, Buyer may be required to make an assignment to Dow of certain rights under this Agreement. Seller specifically agrees to accept such assignments, if any, made by Buyer to Dow in accordance with the aforementioned Gas Backup Agreement. Except as provided above and in Section 17.3 below, neither party shall assign this Agreement without the prior consent of the other party, which consent shall not be unreasonably withheld; and in any event, the party assigning its interest shall not, without a specific written agreement with the other party to this contract, be released from any of its obligations by-the other party. Nothing herein contained shall prevent or restrict either party from pledging, granting a security interest in, or assigning as collateral all or any portion of such party's interest to secure any debt or obligation of such party under any mortgage, deed of trust, security agreement or similar instrument. 17.3 Seller's rights, duties and obligations under this Agreement shall be freely assignable and delegable, in whole or in part, from time to time during the term of this Agreement. In the event Seller proposes to so assign and/or delegate its rights, duties and/or obligations, it shall provide Buyer with fifteen (15) days advance notice of such proposed assignment and/or delegation. No such assignment and/or delegation shall relieve the Seller of any 20 17 obligations hereunder, but rather Seller and its assignee shall be jointly and severally liable to Buyer therefor, unless Buyer determines in good faith that the person or entity to which any delegation of obligations has been made has the financial or other capability to discharge such obligations. If Buyer in good faith makes such determination, Seller shall be released of all liabilities to Buyer to the extent of such obligations, with such release to be evidenced by a writing in mutually agreeable form signed by the parties hereto. ARTICLE XVIII NOTICES Except as otherwise herein provided, any notice, request, demand or statement given in writing or required to be given in writing by the terms of this Agreement shall be deemed given when deposited in the government mail, postage prepaid, as first-class mail, directed to the post office address of the parties as follows: TO SELLER: Northern Michigan Exploration Company One Jackson Square Jackson, MI 49202 Attention: Mr. G. L. Wright TO BUYER: Midland Cogeneration Venture Limited Partnership 100 Progress Place Midland, MI 48640 or at such other address as either party may from time to time specify as its address for such purposes by registered or certified letter addressed to the other party. Notices, requests, demands or statements made in person, by telephone, Telecopier, Telex or wire shall be deemed given when received. ARTICLE XIX MISCELLANEOUS 19.1 As between the parties hereto, Seller shall, subject to the provisions of Section 4.7, be or shall be deemed to be, in exclusive control and possession of the gas sold hereunder and responsible for any damage or injury caused thereby until such gas is delivered at the Point of Delivery, at which 21 18 time Buyer shall be or shall be deemed to be in exclusive control and possession of such gas. 19.2 If, in any month during the term of this Agreement, Seller is unable, for reasons other than force majeure, to deliver to Buyer a quantity requested by Buyer of gas equal to the Maximum Daily Quantity times the number of days in such month, Buyer shall have the right, in addition to any other right or remedy provided by law or under any other Section of this Agreement, to require Seller to pay for any unutilized pipeline demand charges incurred by Buyer as a result thereof during such month. 19.3 No waiver by either Seller or Buyer of any default by the other under this Agreement shall operate as a waiver of any future default, whether of like or different character or nature. 19.4 The numbering and descriptive headings of particular provisions of this Agreement are for the purpose of facilitating administration and shall not be construed as having any substantive effect on the terms of this Agreement. 19.5 THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED ACCORDING TO THE LAWS OF THE STATE OF MICHIGAN. 19.6 Each of the parties agrees to proceed with due diligence in a good faith effort to obtain such governmental authorizations as may be necessary to enable performance of this Agreement. 19.7 This Agreement is subject to the January 27, 1987 Gas Supply Option between Buyer and Dow and to Dow's rights under a certain Gas Backup Agreement with Buyer and Consumers Power Company dated January 27, 1987. 19.8 If any provision of this Agreement is determined to be invalid, void or unenforceable by any court having jurisdiction, such determination shall not invalidate, void or make unenforceable any other provision of this Agreement. 19.9 Notwithstanding anything to the contrary contained in this Agreement, the liabilities and obligations of Buyer arising out of, or in connection with, this Agreement or any other agreements entered into pursuant hereto shall not be enforced by any action or proceeding wherein damages or any money judgment or specific performance of any covenant in any such document and whether based upon contract, warranty, negligence, indemnity, strict liability or otherwise, shall be sought against the assets of the partners of Buyer. By entering into this Agreement, Seller waives any and all right to sue for, seek or demand any judgment against such partners and their affiliates, other than Buyer, by reason of the nonperformance by Buyer of its obligations under this Agreement or any other agreements entered into pursuant hereto, except to the 22 19 extent such partners are legally required to be named in any action to be brought against Buyer. 19.10 This Agreement may be amended only by a written instrument executed by the parties hereto. This Agreement contains the entire understanding of the parties with respect to the matter contained herein. There are no promises, covenants or undertakings other than those expressly set forth herein. 19.11 Buyer shall reimburse Seller for all "Excess Royalty Payments" which Seller may be required to pay with respect to any "Royalty Volume" of gas delivered under this Agreement. The term "Excess Royalty Payments", as used herein, is the amount Seller is required to pay in excess of the Contract Price paid to Seller hereunder with respect to lessor's royalty, overriding royalty, net profits or other interests in production or proceeds thereof from the leases from which gas is delivered by Seller to Buyer hereunder. "Royalty Volume", as used herein, shall mean the volume of gas attributable to any such royalty, overriding royalty, net profits or other burden on such production or proceeds thereof, not to exceed twenty percent (20%) of the total volume of gas delivered by Seller to Buyer under this Agreement during the period for which such Excess Royalty Payments are due. 19.12 The warranty of deliverability given by seller under this Agreement may be converted to a dedication of Seller's reserves, at the option of Buyer, if Seller: (a) provides another reserve dedication to a subsequent purchaser of its natural gas production for a project or use which is similar to Buyer's Plant, upon terms and conditions substantially similar to those contained herein (and for this purpose substantially similar terms shall be deemed to exist where the contract entered into between the Seller and the third party is for a duration of greater than five (5) years, contains prices which are defined or readily ascertainable at the commencement of the contract, and pertains to dedicated reserves which are located in Seller's producing areas); or (b) dedicates more than fifty percent (50%) of its proved reserves that are in the United States and not 23 20 dedicated under a contract executed prior to April 1988. Buyer's right to request that Seller provide a dedication of reserves, and Seller's obligation to provide such dedication, shall terminate at the end of the eighth (8th) Contract Year. 19.13 This agreement supersedes the agreement between the parties dated April 1, 1988 and as of the date hereof such agreement of April 1, 1988 shall no longer be binding upon the parties. IN WITNESS WHEREOF, this Agreement is executed in multiple originals effective as of the day and year first hereinabove written. BUYER MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP By: /s/ Rodney E. Boulanger Name: Rodney E. Boulanger Title: President and CEO SELLER NORTHERN MICHIGAN EXPLORATION COMPANY By: /s/ Gordon L. Wright Name: Gordon L. Wright Title: Vice President Operations SELLER CMS ENERGY CORPORATION By: /s/ S. Kinnie Smith, Jr. Name: S. Kinnie Smith, Jr. Title: President 24 21 EXHIBIT A POINT(S) OF DELIVERY 25 22 EXHIBIT B POWER PURCHASE AGREEMENT 26 23 IN WITNESS WHEREOF, this Agreement is executed in multiple originals effective as of the day and year first hereinabove written. BUYER MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP By: /s/ Rodney E. Boulanger Name: Rodney E. Boulanger Title: President and CEO SELLER NORTHERN MICHIGAN EXPLORATION COMPANY By: /s/ Gordon L. Wright Name: Gordon L. Wright Title: Vice President Operations SELLER CMS ENERGY CORPORATION By: /s/ S. Kinnie Smith, Jr. Name: S. Kinnie Smith, Jr. Title: President EX-10.8 10 EXHIBIT 10.8 1 EXHIBIT 10.8 GAS PURCHASE CONTRACT Between CONSUMERS POWER COMPANY As Buyer and NORTHERN MICHIGAN EXPLORATION COMPANY As Seller December 1, 1987 2 TABLE OF CONTENTS
ARTICLE PAGE - ------- ------ I. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 II. Seller's Reservations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 III. Commitment of Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 IV. Determination of Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 V. Quantity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 VI. Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 VII. Delivery Point - Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 VIII. Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 IX. Quality of Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 X. Delivery Pressure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 XI. Measurement and Testing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 XII. Warranty of Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 XIII. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 XIV. Billing and Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 XV. Conditions of Connection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 XVI. Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 XVII. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 XVIII. Laws and Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 XIX. Force Majeure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 XX. Processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 XXI. Transportation of Liquids . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 XXII. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
3 GAS PURCHASE CONTRACT THIS CONTRACT made and entered into as of, and effective the first day of December 1987 by and between NORTHERN MICHIGAN EXPLORATION COMPANY, a Michigan corporation, hereinafter referred to as Seller, and CONSUMERS POWER COMPANY, a Michigan corporation, hereinafter referred to as Buyer: W I T N E S S E T H : WHEREAS, Seller owns certain oil and gas leases on property situated in the northern portion of the Southern Peninsula of Michigan within the Contract Area as described on Exhibit "A" hereto and desires to sell certain gas which has been or may be developed thereon, in accordance with the terms and conditions hereof; and WHEREAS, Buyer, a public utility engaged in the distribution and sale of gas within the State of Michigan, desires to purchase gas that may be produced from Seller's leases within said Contract Area; NOW, THEREFORE, in consideration of the covenants and promises of each as set forth herein, the parties agree as follows: ARTICLE I Definitions 1. The term "lease" shall mean any written instrument which gives Seller the rights to drill for, produce, and dispose of gas in, under, and from the lands described therein. 2. The term "gas" means all elements, compounds, and mixtures thereof which are contained in the effluent produced from a well and which remain in the vapor phase when produced at the mouth of the well or from a lease separator. 3. The term "gas well gas" shall mean gas produced from a well classified as a gas well by the regulatory agency having jurisdiction. 4 2 4. The term "oil well gas" shall mean gas produced from a well classified as an oil well by the regulatory agency having jurisdiction. 5. The term "reserves," unless the context makes evident another intended meaning, shall mean that quantity of gas underlying the acreage attributable to each well, which may reasonably be expected to be recovered and delivered under the terms of this Agreement plus the volume of gas which has theretofore been delivered by Seller from such well to Buyer. 6. The term "Contract Area" shall mean that area encompassed by the description set forth on Exhibit "A", as it may be revised from time to time as hereinafter provided. 7. The term "contract year" shall mean the calendar year; except that the first contract year shall commence on the date of this Agreement and shall end on December 31 of the year in which this Agreement is dated. 8. The term "Winter Purchase Period" shall mean a period of six (6) months from October 1 of one Contract Year through March 31 of the next Contract Year. 9. The term "Contract Area Purchase Commitment" shall mean the daily quantity of gas which Buyer commits to purchase from the Contract Area under this Agreement and other agreements. During the Winter Purchase Period the Contract Area Purchase Commitment shall be equal to the lesser of (a) the daily average production allowable authorized by the State for all wells selling gas from the Contract Area to Buyer, (b) 15 MMcf per day or (c) 3 MMcf per day per well. For the remainder of each year the Contract Area Purchase Commitment shall be equal to the simple average of Buyer's daily purchases from the Contract Area for the preceding Winter Purchase Period multiplied by thirty-three percent (33%), but in no event less than the lesser of (a) 15 MMcf per day or (b) the aggregate at the daily well production capabilities which shall, for purposes of this provision, never exceed 1 MMcf per day for any single well. 5 3 10. The term "annual contract quantity" shall, subject to Article XIX, mean Buyer's minimum annual purchase obligation hereunder. Said quantity to be the sum in Mcf of Buyer's share of the daily Contract Area Purchase Commitments during the contract year. Said share, as a percentage of the total may vary from day to day but shall be equal to Seller's daily average production allowable authorized by the State for gas produced hereunder divided by the combined daily average production allowable authorized by the State for all Sellers with regard to the gas committed to Buyer from the Contract Area pursuant to this and other agreements. Notwithstanding the above, the annual contract quantity hereunder shall not exceed eighty-five percent (85%) of the daily average production allowable authorized by the State for the gas committed hereunder. 11. The term "month" shall mean the period of time beginning at 7:00 a.m. Eastern Standard Time on the first day of a calendar month and ending at 7:00 a.m. Eastern Standard Time on the first day of the next succeeding calendar month. 12. The term "day" shall mean a period of twenty-four (24) hours beginning at 7:00 a.m. Eastern Standard Time of one calendar day and ending at 7:00 a.m. Eastern Standard Time on the next succeeding calendar day. 13. The term "cubic foot of gas" shall denote the unit of gas measurement hereunder and shall mean a cubic foot of gas at an absolute pressure of fifteen and twenty-five thousandths (15.025) pounds per square inch at a temperature of sixty degrees Fahrenheit (60 degrees F). 14. The term "deliverability" is used as a measure of a well's productivity and shall mean the average quantity of gas, per twenty-four-hour period, which a well being tested for deliverability at a time agreed to by both parties, produced during a seventy-two-hour period of continuous delivery into Buyer's pipeline operating at the then existing pipeline pressure not to exceed one thousand four hundred forty (1440) psig. 15. The term "Mcf" shall mean one thousand (1,000) cubic feet. 6 4 16. The term "Btu" shall mean British thermal unit. 17. The term "MMBtu" shall mean 1,000,000 British Thermal Units (Btu's). 18. The term "Kalkaska Plant" shall mean the gas processing plant located in Section 31, Township 27 North, Range 7 West, Kalkaska County, Michigan, and operated by Amoco Production Company as of the date of this Agreement. 19. The term "Plant Owner" means an owner of the "Kalkaska Plant" as described in the Kalkaska Plant Processing and Operating Agreement dated November 15, 1974. 20. The term "tender of gas" or like expression shall be understood to mean the notice by Seller to Buyer that Seller has gas available for delivery at the point of delivery specified in the notice. A notice of completion and request for connection, for instance, would constitute a "tender." Such one-time notice to Buyer shall constitute a continuous tender of such gas unless and until Seller shall give Buyer written notice to the contrary. 21. The term "Common Line" means that certain wet header gas transmission line (beginning at the tap valve used to deliver the gas entering said line) and any extensions thereof jointly used by Buyer and Michigan Consolidated Gas Company. 22. The term "Common Delivery Point" means the terminus of the Common Line situated in Section 31, Township 27 North, Range 7 West, Kalkaska Township, Kalkaska County, Michigan. 23. The term "psig" shall mean pounds per square inch gauge. 24. The term "psia" shall mean pounds per square inch absolute. 7 5 ARTICLE II Seller's Reservations 1. Seller reserves and excepts from the terms of this Agreement the following: (a) All oil and condensate separated and saved by Seller. (b) Liquefiable hydrocarbons subject to Seller's extracting or arranging for the extraction thereof as herein provided. (c) Nonhydrocarbon substances subject to Seller's contracting or arranging for the extracting thereof as herein provided. (d) Gas for development and field operations on any of Seller's acreage, including fuel for the operation of compression facilities by Seller or fuel which Seller may elect to furnish or sell to drilling contractors for fuel in drilling on Seller's acreage. (e) Gas for repressuring, pressure maintenance, cycling, gas lift in a closed system, and the use of gas as a drilling fluid. (f) Gas which Seller is obligated to furnish lessors under leases covering acreage committed hereto. (g) Gas attributable to any acreage acquired by Seller and which is subject to any obligation or reservation made by a third party for the purchase and sale of such gas. 2. Seller also reserves to itself the following: (a) The right to operate its property free from any control by Buyer in such manner as Seller, in its sole discretion, may deem advisable, including, without limitation by enumeration the right to drill new wells, to test wells, to repair and rework wells, and to abandon any well and the right to renew, extend, release, assign, surrender or permit to expire any lease as Seller deems best in its sole and exclusive discretion. 8 6 (b) The right to unitize any of its leases with other properties of Seller and of others in such manner as to protect Buyer's rights hereunder, in which event this Agreement will cover Seller's interest in the unit and gas attributable thereto, to the extent that such interest is derived from leases committed hereunder. The term "unit" as used in this subparagraph shall mean any unit recognized by the state regulatory agency having jurisdiction or other pooling of acreage not requiring recognition by a regulatory agency in which two (2) or more producers contribute acreage and each producer owns an undivided interest in the total acreage contributed, such as working interest units, areas of mutual interest, and joint exploration and development areas. (c) The right to sell gas well gas Buyer is not then taking to other purchasers when Buyer is not taking gas at rates at least equal to the daily production rate allowed by the government agency having jurisdiction; however, Buyer may increase Buyer's daily production takes at any time upon notice to Seller provided there is gas available which is not then committed to other purchasers. ARTICLE III Commitment of Gas 1. Seller commits to the performance of this Agreement all gas reserves hereafter produced from or attributable to the reservoir penetrated by well unit(s) from the lands described on Exhibit "A", attributable to any interest in such gas reserves now or hereafter owned by Seller. 2. Seller, with Buyer's written concurrence, may add well units to this Agreement provided that such units lie within Alpena, Cheboygan, Montmorency or Presque Isle Counties, Michigan and outside the lands described on Exhibit "A". If Seller elects to so add well units to this Agreement, Seller shall prepare and submit to Buyer a description of the additional units and the written acceptance by Buyer of the document containing such description shall constitute 9 7 Buyer's written concurrence, and thereupon Exhibit "A" to this Agreement shall be deemed to have been amended to reflect the additional units. 3. The gas reserves discovered in well units from lands described on Exhibit "A", or any well units added to this Agreement pursuant to Section 2 above, shall be determined in accordance with the provisions of Article IV hereof. ARTICLE IV Determination of Reserves 1. Seller shall, upon request from Buyer, and from time to time, make available to Buyer all factual information and data (excluding interpretation) in Seller's possession that may reasonably be needed by Buyer for the purpose of estimating the amount of reserves in any reservoir or pool in the Contract Area in which Seller may own an interest. Buyer recognizes that all information furnished by Seller to Buyer pursuant to this Section is confidential and constitutes the proprietary information of Seller, and Buyer shall not disclose or in any manner whatsoever divulge any such information to others without Seller's written permission, except as is required by the Michigan Public Service Commission or any other regulatory agency having jurisdiction to approve facilities construction. 2. Following execution of this Agreement, Seller shall promptly make available to Buyer such information an provided for in the preceding Section. 3. After the date of initial deliveries hereunder, Buyer may request and Seller shall make, at reasonable intervals, a redetermination of reserves in any one or more of the reservoirs or pools covered by this Agreement. When a new gas well is committed hereunder, either Seller or Buyer shall have the right to cause a redetermination of reserves to be made for the purpose of calculating reserves attributable to such new well; otherwise, neither Seller nor Buyer may 10 8 require that the reserves in any particular reservoir or pool be redetermined more frequently than once each year. ARTICLE V Quantity 1. After deliveries of gas have commenced under this Agreement, Seller shall sell and deliver to Buyer and Buyer shall purchase and take from Seller hereunder, or pay Seller for, whether taken or not, the annual contract quantity of gas, as that term is defined in Article I Section 10 hereof, with adjustments where appropriate as follows: (a) In the event of Seller's inability to perform its delivery obligation in accordance with a specific request from Buyer because of a valid force majeure (on the part of either Seller or Buyer), then Buyer's take-or-pay obligation for the time of the force majeure shall be the volume, if any, which Seller was capable of delivering and Buyer of taking during the period of such force majeure. (b) If for any reason other than force majeure Seller shall fail to make available for delivery a specific volume requested by Buyer for a given month, Buyer's take-or-pay obligation for such month shall be the volume so made available. 2. If the total volume of gas well gas actually purchased and taken by Buyer during any contract year is less than the annual contract quantity adjusted as provided for above, then (a) Seller shall have the option of terminating this Agreement following ninety (90) days written notice to Buyer (such option shall be waived, however, if not exercised within fifty (50) days following the end of the contract year in which Buyer's purchases are deficient); or if not terminated by Seller, then (b) Buyer, on or before the 25th day of the second month following the end of such contract year, shall pay Seller for any such deficiency volume assuming that the deficiency volume would contain 1,000 11 9 Btu per cubic foot. As to gas so paid for but not taken, Buyer shall have the right to take such gas in order of accrual during the remaining term of the contract, free of additional cost to Buyer. The right to take such gas shall not accrue in each ensuing contract year until the annual contract quantity for said year has been taken. Upon the expiration of the term hereof, or upon termination as otherwise provided for herein, Seller shall refund to Buyer for the payments if any made to Seller hereunder that was never taken by Buyer. 3. In the event Seller's deliverability on a daily basis hereunder should exceed the annual contract quantity x 117.6% divided by the number of days in said contract year, Buyer shall either elect to purchase the excess, or give Seller the option to have such excess released from this Agreement. ARTICLE VI Term This Contract, subject to the right of cancellation herein provided, shall be effective as of the day hereof through December 31, 1995 and shall continue from year to year thereafter subject to cancellation by either party on three (3) months' written notice given prior to December 31, 1995 or any anniversary date thereof. If Seller uses gas committed hereunder for repressuring or secondary recovery operations as provided for under Article II, Paragraph 1, Subparagraph (e), the term of this Agreement shall, at Buyer's option, be extended, for the properties involved in such repressuring or secondary recovery operations, for a period of time equal to the time such operations were actually conducted. 12 10 ARTICLE VII Delivery Point - Liability 1. The point of delivery for each well for gas sold hereunder shall, at Seller's option, be at the inlet of Buyer's tap valve which tap valve shall be at a mutually agreeable location on the Common Line. 2. Title to gas shall pass from Seller to Buyer at the inlet of Buyer's facilities at said point of delivery. Seller shall be in control and possession of the gas delivered hereunder and responsible for any damage or injury caused thereby until the same shall have been delivered to Buyer, after which delivery Buyer shall be deemed to be in exclusive control and possession thereof and responsible for any injury or damage caused thereby, except as otherwise provided for under Article XX. 3. Buyer agrees to reimburse Seller for gathering the gas to the point of delivery in an amount equal to 7 cents/MMBtu for the first mile or fraction of a mile of gathering line installed by Seller and 2 cents/MMBtu for each additional mile thereafter, such reimbursement to be paid in addition to the price paid pursuant to Article VIII hereof. ARTICLE VIII Price 1. Subject to the other provisions hereof the price to be paid by Buyer to Seller for gas purchased and sold, or paid for when not taken as provided in Article V hereof, shall be $2.10 per MMBtu effective January 1, 1988 and said price shall thereafter be escalated at a rate of 1.8% semiannually with such escalations to take effect on January 1 and July 1 of each year. 2. Seller or Buyer shall have the option to request a price redetermination effective July 1, 1989 and annually thereafter with the redetermined price to be equal to the average commodity gas cost (ACGC) charged by ANR Pipeline (ANR), Panhandle Eastern Pipe Line Company (Panhandle), Northern 13 11 Natural Gas Company (Northern Natural), Northern Gas Pipeline Company of America (Natural) and Trunkline Gas Company (Trunkline). The ACGC charge shall be based on rate schedules in effect on April lst of each redetermined year. The escalation provided for in Paragraph 1 of this Article VIII shall also apply to any redetermined price. 3. If one year after Seller's first delivery of gas hereunder or at any time thereafter it is determined that the marketability of the subject gas is hampered in that the price on an MMBtu basis, payable under the provisions of this Article, exceeds 95% of the weighted average cost of Buyer's interstate gas, calculated using the gas component in the commodity charge of the rate charged by all of Buyer's interstate pipeline company suppliers (e.g., Trunkline Gas Company and Panhandle Eastern Pipe Line Company) pursuant to a government approved tariff, then Buyer shall have the option to limit the price paid hereunder to a level equal to 95% of such weighted average cost. When in effect, such a limited price shall be increased by the same escalation factor and as of the same effective dates as provided in Section 1 of this Article. If Buyer chooses to limit the price as herein provided, Seller shall have the right to solicit offers from others to purchase the gas at a higher price and, if Seller notifies Buyer of a bonafide third party offer to purchase such gas at a higher price, Buyer shall, within thirty (30) days thereafter, either agree to purchase the gas at a price equivalent to that contained in the third party offer or release its contractual claim to the gas and transport or exchange such gas under Buyer's transportation or exchange tariff existing at such time which is applicable to for the class of third party purchaser of such gas. 4. Notwithstanding any of the above, in no event shall the total remuneration per MMBtu provided for in this Agreement exceed 80% of the equivalent average price (rounded to the nearest $.001) of one million (1,000,000) Btu of No. 6 Oil, using the daily prices reported by "Platt's Oilgram Price Report," U.S. Tank Car Transport Lots, Midcontinent, for Detroit for the 14 12 preceding six (6) months. For the purposes hereof, a gallon of No. 6 Oil shall be considered to contain one hundred fifty thousand (150,000) Btu. Should "Platt's Oilgram Price Report" be discontinued, it is agreed that any other similar service may be used in its place. 5. Furthermore, the price shall in no event fall below $2.00 per MMBtu and such price will escalate at the rate of one and one-half percent (1.5%) annually effective on January 1, 1989 and each January 1st thereafter. 6. All prices pursuant to this Article VII shall be calculated to the nearest one thousandth of one cent (.001 cent). 7. Any price increase provided for in this Article requiring approval of the Michigan Public Service Commission or any successor state regulatory agency shall not be effective until approved by such regulatory agency. 8. If at any time the Michigan Public Service Commission (or any successor state regulatory agency) shall disallow any portion of the price paid Seller hereunder from Buyer's purchased cost of gas then in such event Buyer shall reduce the price paid Seller to the maximum price from time to time allowed; provided, however, Buyer shall always prosecute diligently to pay Seller at the full contract price and to obtain inclusion of the full contract price hereunder in Buyer's purchased cost of gas. 9. If at anytime during the term hereof, the price is reduced pursuant to the preceding paragraph, Seller shall have an ongoing option to: (a) terminate this Agreement upon thirty (30) days written notice to Buyer for as long as Seller is not being paid the full price for gas otherwise payable herein; or (b) exercise the rights specified under Section 3 above to sell such gas to a third party and have Buyer transport or exchange such gas. 15 13 ARTICLE IX Quality of Gas 1. All gas delivered by Seller under the terms of this Contract shall conform to the following specifications: (a) The gas shall be commercially free from dust, gum, gum forming constituents, condensate and solids when delivered to Buyer. (b) The gas shall not at any time have an oxygen content in excess of one percent (1%) by volume and Seller shall make every reasonable effort to keep the gas free of oxygen. (c) The gas shall not contain more than one (1) grain of hydrogen sulphide per one hundred (100) cubic feet. The hydrogen sulphide content shall be determined by a Cadmium Sulphate, Barton Titrator and/or a Tutwiler quantitative test, or any other mutually agreeable method. (d) The gas shall not contain more than twenty (20) grains of total sulphur per one hundred (100) cubic feet. (e) The total gross heating value per cubic foot of gas shall be not less than nine hundred fifty (950) Btu, however, it is agreed that Buyer shall accept gas from individual wells having a heating value of less than nine hundred fifty (950) Btu per cubic foot if the composite stream of gas in the Common Line immediately downstream from the point of delivery, contains gas with a heating value of at least nine hundred fifty (950) Btu per cubic foot. It is also agreed that in similar manner Buyer will accept gas from individual wells having a hydrogen sulphide content in excess of one (1) grain per one hundred (100) cubic feet or in excess of twenty (20) grains total sulphur per one hundred (100) cubic feet if said composite stream at the point above described on the Common Line does not contain more than one-fourth (1/4) grain of hydrogen sulphide or ten (10) grains of total sulphur; provided, however, that in no event shall any gas sold hereunder and delivered into a lateral owned by any third party exceed one 16 14 (1) grain hydrogen sulphide per one hundred (100) cubic feet at the point of connection with said lateral. It is agreed that if because of such relaxation of quality specifications as to individual wells, the gas in Seller's composite stream does not meet the specifications hereinabove set forth for such composite stream, then Buyer shall have the right to refuse to take such substandard gas from any individual well or wells so long as such composite stream would fail to meet the specified standards. (f) The term "total gross heating value per cubic foot" shall mean the number of British thermal units, produced by the combustion at constant pressure, of the amount of gas on a water-free basis which would occupy a volume of one (1) cubic foot at a temperature of sixty degrees Fahrenheit (60 degreesF) and at a pressure of fifteen and twenty-five thousandths (15.025) psia, when the products of combustion are cooled to the initial temperature of gas in air and when the water formed by combustion is condensed to a liquid stage. (g) The water content of the gas shall not exceed seven (7) pounds per million cubic feet measured at fifteen and twenty-five thousandths (15.025) psia and sixty degrees Fahrenheit (60 degrees F). (h) The gas should not contain by volume more than two percent (2%) carbon dioxide. 2. Should the gas offered for sale to Buyer from any well or other delivery point fail at any time to conform to any of the specifications of this Article, Buyer subject to Paragraph 1, Subparagraph (e) of this Article IX may notify Seller of any such failure and Seller shall make a diligent effort to correct such failure in Seller's wells so as to deliver gas conforming to the above specifications. If Seller is unable to deliver gas conforming to the above specifications by treatment consistent with prudent operations and by means which are economically feasible in Seller's opinion, Buyer may at its option, accept delivery of the gas and treat the gas so that it will conform to the above 17 15 specifications or Buyer may refuse to take such gas and in the event of such refusal Buyer shall not be obligated to attribute volumes to such well or other delivery point for take-or-pay purposes. In the event Buyer elects to accept delivery of gas not conforming to the specifications herein and to treat said gas so it will conform to the specifications herein, Seller shall reimburse Buyer for the cost, including equipment, for treating said gas, but not to exceed seventy-five percent (75%) of the sum received by Seller for such gas. In the event both Seller and Buyer elect not to treat gas not meeting the quality specifications herein, that gas and that gas only, shall be released from commitment under the terms hereof. 3. It is agreed that if Seller should elect (subject to Article XX hereof) to process or have processed gas sold hereunder, the residue gas delivered from Seller's or other processing facility shall not contain more than one-fourth (1/4) grain of hydrogen sulphide per one hundred (100) cubic feet. ARTICLE X Delivery Pressure 1. Seller shall deliver gas well gas at a pressure sufficient to allow the gas to enter Buyer's facilities at the delivery points hereunder, provided Seller shall not be obligated to deliver gas well gas to Buyer at a pressure in excess of one thousand four hundred forty (1440) psig. If the wells completed hereunder are unable to produce the annual contract quantity against the pressure prevailing in Buyer's pipelines and Seller elects to install compression facilities, then, except as herein otherwise provided, Buyer agrees to reimburse Seller: (a) six cents (6.00 cents) per MMBtu for gas from a well that is compressed, such reimbursement will not, however, be made with respect to monthly deliveries hereunder that are in excess of the annual contract quantity unless the parties hereafter agree in writing to the contrary. 18 16 2. Should Seller elect not to install compression facilities in any well or wells completed in any gas well gas reservoir when the pressure in the reservoir is inadequate to allow delivery of the gas into Buyer's facilities, then the Buyer shall have the right to install the necessary compression facilities. If neither the Seller nor the Buyer makes such election, then such well or wells shall be released from this Agreement. 3. Seller shall deliver the oil well gas at a pressure sufficient to enter Buyer's facilities but not to exceed one thousand four hundred forty (1440) psig. If Seller is required to compresses oil well gas or flash vapors to effect deliveries thereof to Buyer, Buyer agrees to reimburse Seller six cents (6.00 cents) per MMBtu on volumes for such compressed gas, which rate shall be increased by two-tenths cent (.20 cents) on January 1, 1989, and each January 1 thereafter. Seller agrees to furnish fuel for such compression at no cost or expense to Buyer. 4. If only a portion of the gas sold to Buyer by Seller from any given well is compressed pursuant to this Article, Seller shall measure the gas from said well actually compressed and shall, consistent with the foregoing, invoice Buyer therefor on or before the twentieth (20th) day of the month following the month in which such gas was actually compressed. If all gas sold to Buyer by Seller from any given well is compressed pursuant to this Article, Seller shall furnish Buyer with the name of the well on or before the twentieth (20th) day of the month following the mouth in which such compression actually begins. Under no circumstances shall the Buyer be obligated to reimburse the Seller for compression prior to the written notification and the actual commencement of compression. 5. Buyer, when operating its gathering system in conformance with the pressure conditions herein specified, shall not be obligated to attribute volumes for take-or-pay purposes in excess of the volumes made available at sufficient pressures to enter Buyer's lines at the point of delivery. 19 17 6. If at any time the Michigan Public Service Commission (or any successor state regulatory agency) shall disallow any of the reimbursement paid Seller hereunder from Buyer's purchase cost of gas in a ratemaking proceeding, then in such event Buyer shall reduce the reimbursement paid to Seller to the maximum rate from time to time allowed. ARTICLE XI Measurement and Testing 1. Buyer shall install, maintain, and operate, at no expense to Seller, at or near the location of Seller's wellhead(s) equipment of a character and design acceptable to Seller and perform all tests required to accomplish the measurement of volumes, temperatures, specific gravity and heating values. Such volume measuring equipment shall be installed, maintained, and operated in accordance with ANSI/API Standard 2530, dated 1978, of the American National Standards Institute, as amended from time to time, and the volume of gas delivered hereunder and measured by such orifice meters shall be computed in accordance with said report. 2. The temperature of the gas passing through each orifice meter shall be determined by means of a recording thermometer installed by Buyer so that it will properly record the temperature of the gas through the meter. The arithmetical average of temperature recorded during the time gas was flowing on any day shall be used in computing gas volumes for that day. 3. The specific gravity of the gas at the points of delivery shall be determined by Buyer at least once each six (6) calendar months, or as often as may be found necessary in practice, by a method of test generally acceptable to the industry. Whenever a recording gravitometer is used, the arithmetical average of the gravity recorded during the time gas was flowing on any day shall be used in computing gas volumes for that day. 20 18 4. Correction shall be made by Buyer for deviation from Boyle's Law, and the factors for making such correction shall be obtained from procedures contained in the aforesaid Standard 2530, or from such other source as may be agreed upon by the parties hereto. 5. Unless otherwise agreed upon by the parties hereto, the atmospheric pressure shall be assumed to be fourteen and four-tenths (14.4) psia for the purpose of calculating the volumes of gas delivered hereunder. 6. Buyer shall test and calibrate all of Buyer's meters and instruments used in measuring or testing the gas delivered hereunder at least once each calendar month, or at less frequent intervals agreed to by the parties on meters at specific delivery points. Any measurement equipment found by calibration test to be registering inaccurately shall be immediately restored to accurate operation. No correction shall be made for past deliveries where inaccuracies are two percent (2%) or less, but if such equipment is found to be out of service or registering inaccurately by more than two percent (2%), the registrations of such equipment shall be disregarded for any period known or agreed upon, or, if such period is not known or agreed upon, for a period extending back one-half (1/2) of the time elapsed since the last calibration test, or sixteen (16) days, whichever is shorter. The volume of gas delivered during such period shall be estimated by using the first of the following methods which is feasible: (a) by using the registration of check measuring equipment if installed and registering accurately; (b) by correcting the error, if the extent of the error is ascertainable by calibration test or mathematical calculation; or (c) by estimation, based on deliveries under similar conditions when the equipment was registering accurately. 7. Buyer shall determine the gross heating value in Btu per cubic foot of gas, at each delivery point hereunder at such intervals as in Buyer's 21 19 opinion are required to determine the heating value hereunder but such intervals shall be of such duration as is necessary to determine accurate values to be used in Article VIII, Paragraph 1. 8. Buyer shall make such test for determining hydrogen sulphide content, total sulphur content, oxygen content, and carbon dioxide content at such intervals as in Buyer's opinion are required to determine that the gas meets the applicable quality specifications hereunder. 9. Seller may, at its option and expense, install and operate measurement and testing equipment to check Buyer's equipment, but measurement and testing of gas for the purpose of this Contract shall be by Buyer's equipment, except as hereinabove specifically provided to the contrary. Any such check measurement or testing equipment installed by Seller shall be so installed and operated as not to interfere with the operation of Buyer's equipment. 10. Seller shall have the right to inspect, at all reasonable times, the measurement and testing equipment, charts, and other measurement data of Buyer, and Buyer shall have a similar right with respect to Seller's equipment, charts, and data, but the reading, calibration and adjustment of such equipment shall be performed only by the owner thereof. Buyer shall give Seller at least ten (10) days' notice of any test of Buyer's measuring or testing equipment in order that Seller may have a representative present to witness the tests, and Buyer shall have the right to be present at the time Seller's check measuring or testing equipment is adjusted or calibrated. 11. If Seller shall request a special test of any of Buyer's measurement equipment or equipment for testing the quality of gas sold hereunder, Buyer shall make such test, and if the equipment in question is registering correctly, the actual expenses of such test shall be borne by Seller; otherwise, the actual expenses shall be borne by Buyer. 12. All test data, charts, and similar records shall be preserved by the owners thereof for a period of at least two (2) years. 22 20 ARTICLE XII Warranty of Title 1. Seller hereby warrants title to the gas sold by it hereunder and its right to sell the same, and warrants that all such gas is owned by it free from all liens, encumbrances and adverse claims. Seller shall indemnify, save and hold Buyer free and harmless from all suits, actions, debts, accounts, damages, costs, losses and expenses arising from or out of adverse claims of any and all persons to the gas sold by Seller hereunder. 2. With respect to each lease covered by this Contract, it is agreed, notwithstanding anything herein contained to the contrary, that, in the event it shall be determined that Seller owns less than the interest in such lease described in this Agreement as being owned by Seller and thereby Seller shall be deemed to have breached any of the warranty provisions of this Agreement then from and after such determination, this Agreement shall be deemed to have been amended so as to cover and include the interest in such lease which is, in fact, owned by Seller. ARTICLE XIII Taxes 1. Seller agrees to pay or cause to be paid all taxes imposed upon gas prior to its delivery to Buyer hereunder or upon any occupation or privilege relating to the production, sale or delivery of such gas to Buyer. Buyer agrees to pay or cause to be paid all taxes imposed on such gas after its receipt by Buyer, (except those, if any covered in Section 5 below) or any occupation or privilege relating to the transmission or sale of such gas after its receipt by Buyer. 2. As used in this Article XIII, the term "tax" shall mean sales, transaction, occupation, service, production, severance, gathering, transmission, value added, export or excise tax, assessment or fee levied, assessed or fixed 23 21 by governmental authority, and taxes of similar nature or equivalent in effect. Any present or future tax levied on any liquid product which Seller is entitled to retain shall be borne wholly by Seller. 3. Buyer agrees to deduct from the amount payable to Seller the severance and privilege taxes due from the sale of gas hereunder and shall remit and report to the State of Michigan in accordance with the severance and privilege tax filing requirements. 4. If Seller receives written notice from Buyer that questions the validity of any tax, Seller will consult with Buyer as to the best procedure to be followed in the payment of the questioned tax and the means of testing its validity, having due regard for the protection of the interests of both Seller and Buyer. Following such consultation, each party will pursue the course of action it deems proper. 5. Nevertheless, Buyer shall never be liable for and shall never be obligated to reimburse Seller for any tax levied or assessed upon or with respect to oil, condensate, liquefiable hydrocarbons or other liquids, helium or nonhydrocarbon substances which may be extracted or separated by Seller from gas delivered to Buyer hereunder, prior to such delivery, or upon or with respect to the process of extracting or separating any such products or substances from such gas or of handling, selling, transporting or otherwise dealing in or with any of such products or substances, all of which taxes shall be borne and paid solely by Seller and if paid by Buyer shall be reimbursed by Seller to Buyer. ARTICLE XIV Billing and Payment 1. Buyer, not later than the twenty-fifth (25th) day of each calendar month, shall furnish Seller a detailed statement showing the total quantity of gas delivered by Seller to Buyer hereunder during the preceding calendar month and the amount due and payable by Buyer therefor, and simultaneously shall make 24 22 payment to Seller in such amount. Upon request, Buyer shall furnish Seller charts and measurement data supporting such statement. 2. For gas not taken by Buyer as provided for in Article V hereof, Seller shall bill Buyer for said gas by rendering a statement on or before the tenth (10th) day of the second month following the end of each contract year. Buyer shall pay Seller for the gas so billed no later than the twenty-fifth (25th) day of the second month following the end of each contract year. 3. Should Buyer fail to pay any amount due Seller under the provision of this Agreement when same is due, interest shall accrue at the prime interest rate, as established by the First National Bank of Chicago in effect at the time of such deficiency, per annum, from the date payment is due until paid. If such default in payment continues for sixty (60) days, Seller may, in addition to all other rights and remedies, suspend deliveries of gas hereunder and terminate this Agreement. The foregoing provision in this Section 3 shall not apply, however, if Buyer's refusal to pay is the result of a bona fide dispute as to the accuracy of any statement and Buyer pays all amounts not in dispute. 4. On or before the 15th of each calendar month, Seller shall render a statement to Buyer of the gathering costs (as the same are defined in Article VII) for the preceding calendar month. 5. On or before the last day of each month, Buyer shall pay Seller for the gathering costs of the Seller during the preceding month. This payment obligation shall be extended to the extent, if any that Seller's statement for such gathering costs is not received by the 15th of the month. 6. Each party shall have the right at reasonable hours to examine the books, records and charts of the other party to the extent necessary to verify the accuracy of any statement, charge, or computation made pursuant to the provisions of any article hereof. If any such examination reveals any inaccuracy in any billing theretofore made, the necessary adjustment in such billing and payment shall be promptly made, provided that no adjustment for any billing or 25 23 payment shall be made after the lapse of two (2) years from the rendition thereof unless challenged prior thereto. ARTICLE XV Conditions of Connection 1. Buyer and Seller agree to attempt to apply for all permits and authorizations within ten (10) working days of executing this contract and further agree to secure with due diligence any necessary permits or authorizations allowing Seller to connect each well hereunder to Buyer's facilities where Buyer will commence purchasing. As to all wells subject hereto, in the event that any such permit or authorization to allow such connection has not been issued within ninety (90) days after Seller has notified Buyer of the completion of each such well, either party may cancel this Agreement as to any such well by giving, after the expiration of said ninety (90) days, thirty (30) days' written notice to the other. Acceptance of such permits or authorizations containing burdensome conditions shall be within the sole discretion of the party to whom issued; except that such party agrees that the other party shall promptly be furnished a copy of all such permits or authorizations and that the applicant party shall not accept such permits or authorizations that the other party deems to contain conditions which would deny such other party rights or impose on it burdens not provided for herein. 2. Upon issuance of the permits or authorizations provided for in Paragraph 1 above, Seller shall connect all wells completed as producers in the following manner: Seller shall use its best efforts to complete connections as soon as possible, but in no event later than seventy-five (75) days after the granting of said permit or authorization. If any well or wells are not connected within this period of time, either party may cancel 26 24 this Agreement as to any such well after giving thirty (30) days' written notice to the other party. ARTICLE XVI Assignment This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided that no conveyance, transfer of any interest, or change of ownership by either party shall be binding upon the other party until such other party has been furnished with a written notice evidencing such conveyance, transfer of interest, or change of ownership and approved such assignment, approval of which will not be unreasonably withheld, it being understood that this provision in no way restricts the rights of Seller as to the transfer or assignment of Seller's leases or property thereon as provided in Paragraph 2, Subparagraph (a) of Article II hereof. ARTICLE XVII Notices 1. Any notice, request, demand, statement, or payment provided for in this Contract shall be sent to the parties hereto at the following addresses: BUYER: Consumers Power Company Attn: Director of Gas & Oil Supply 212 West Michigan Avenue Jackson, Michigan 49201 SELLER: Northern Michigan Exploration Company One Jackson Square PO Box 1150 Jackson, Michigan 49204 2. Either party shall have the right by prior written notice to the other to change the address or addresses given above at any time. 27 25 ARTICLE XVIII Laws and Regulations This Agreement insofar as it in affected thereby, shall be subject to all valid and applicable laws, orders, rules and regulations of Federal and any other governmental authorities having jurisdiction. Any party hereto shall have the right to contest the validity of any such law, order, rule or regulation, and the acquiescence therein or compliance therewith for any period of time shall not be construed as a waiver of such right. This Agreement shall be governed by and construed in accordance with the laws of the State of Michigan. ARTICLE XIX Force Majeure 1. If either Buyer or Seller is rendered unable, wholly or in part, by force majeure or any other cause of any kind not reasonably within its control, to perform or comply with any obligations or conditions of this Agreement such obligations or conditions shall be suspended during the continuance of the inability so caused and such party so rendered unable shall be relieved of liability and shall suffer no prejudice for failure to perform the same during such period, it being understood that Buyer's minimum annual obligation to take or pay for gas hereunder shall be reduced by the volume which Buyer, under normal circumstances, would have taken from the well during the period of time the inability exists; provided, obligations to make payments then due for gas delivered hereunder shall not be suspended, and in other cases, the cause of suspension (other than strikes, lockouts, or labor disputes) shall be remedied insofar as possible with reasonable dispatch. Settlement of strikes, lockouts, or labor disputes shall be wholly within the discretion of the party having the difficulty. 2. The term "force majeure" shall include, without limitation by the following enumeration, acts of God and of the public enemy, unseasonal weather, 28 26 freezing of wells or lines of pipe, repairing or altering machinery or lines of pipe, fires, accidents, breakdowns, strikes, labor disputes, and any other industrial, civil or public disturbance, inability to obtain materials, supplies, rights-of-way on customary terms, permits, or labor, any act or omission by parties not controlled by the party having the difficulty, any act or omission (including failure to take gas) of a material purchaser of gas from Buyer which is excused by any event or occurrence of the character herein defined as constituting force majeure, failure of gas supply or markets, and any laws, orders, rules, regulations, acts, or restraints of any governmental body or authority, civil or military, or any other causes beyond the control of the parties hereto. ARTICLE XX Processing 1. Seller shall not process gas covered hereunder (other than in standard field separation facilities) prior to delivery of such gas to Buyer at the delivery points provided herein. 2. If Seller is not now a Plant Owner in the Kalkaska Plant, as described in the Plant Processing and Operating Agreement dated November 15, 1974, between Consumers Power Company and Amoco Production Company, et al, Buyer hereby grants Seller an option to participate as a Plant Owner with respect to the gas covered by this Agreement, subject to the following conditions: (a) Seller may exercise such option by giving written notice to Buyer and Amoco Production Company not earlier than the date of initial delivery of gas under this Agreement. (b) Seller's option shall not be exercised later than one (1) year from the date of initial delivery of gas under this Agreement. 29 27 (c) The acceptance and ratification by Seller of the Plant Processing and Operating Agreement dated November 15, 1974, between Buyer and Amoco Production Company, et al. (d) Seller's acceptance of and consent to be bound by the Allocation Agreement by and between Buyer, Michigan Consolidated Gas Company, and the principal producers of gas sold to each covering the division of components at the Common Delivery Point of the gas and liquids transported in the Common Line, insofar as the provisions thereof affect Seller's rights hereunder. (e) Seller's acceptance of and consent to be bound by the Transportation Agreement by and between Buyer and Michigan Consolidated Gas Company, insofar as the provisions thereof affect Seller's rights hereunder; provided, however, if there is any conflict between said Transportation Agreement and this Agreement, the terms and provisions of this Agreement shall prevail. 3. If Seller is now a Plant Owner or if Seller subsequently becomes a Plant Owner in the Kalkaska Plant in accordance with Paragraph 2 of this Article, Buyer and Seller agree to the following: (a) Seller agrees and consents to the Allocation Agreement and the Transportation Agreement, referred to in Paragraph 2, Subparagraph (d) and (e) of this Article, insofar as Seller's rights are affected by such agreements with respect to the gas covered by this Agreement. (b) Seller shall have the exclusive right to process all gas sold to Buyer hereunder and Seller shall process such gas in accordance with the Plant Processing and Operating Agreement referred to in Paragraph 2, Subparagraph (c) of this Article subject to the following: (i) If at any time there is insufficient processing capacity of a sustained nature in the Kalkaska Plant to process any or all of Seller's gas covered by this Agreement and the Plant Owners of such plant have elected not to increase 30 28 the capacity thereof sufficiently to cover all or part of the gas covered by this Agreement. Seller shall have the right to process or have processed such gas in any other gas processing plant near the Common Delivery Point. Seller shall use its best efforts to limit the duration of such processing arrangements, if possible, such that the gas covered thereby will be available for processing in the Kalkaska Plant when there is again adequate capacity therein. Seller shall promptly notify Buyer and the operator of the Kalkaska Plant with respect to such processing arrangements and advise of all necessary details thereof. (ii) If at any time after the Plant Owners of the Kalkaska Plant have elected to increase the capacity of such plant, Seller may temporarily process or have processed gas covered by this Agreement in any other gas processing plant near the Common Delivery Point until there is capacity available in the Kalkaska Plant. (iii) The rights granted to Seller in Paragraph 3, Subparagraph (b)(i) and (b)(ii) above in this Article are subject to Seller receiving express written approval of the Plant Committee, as defined in the Plant Processing and Operating Agreement dated November 15, 1974 of the Kalkaska Plant to do so, subject to necessary authorization, if any, from Plant Owners. (iv) The provisions of the Plant Processing and Operating Agreement shall apply at all times to the gas covered by this Agreement with respect to insufficient capacity in the Kalkaska Plant except with respect to volumes of gas for which processing arrangements have been made in another plant as above provided. (c) During any periods when Paragraph 3 of Article IX of the Plant Processing and Operating Agreement is applicable and Buyer elects not to bypass any or all of the gas well gas volumes covered hereby which are in excess of the capacity of the Kalkaska Plant, Buyer's take-or-pay obligation covered by Article V of this Agreement shall be limited to the 31 29 gas well gas volumes hereunder actually processed in such plant for Seller plus the volumes bypassed by Buyer, if any. Buyer's takes of gas from Seller and all other producers from whom Buyer purchases gas in the Contract Area shall be ratably apportioned with respect to volumes processed and bypassed. Seller shall not have any right to process or any interest in the liquefiable hydrocarbons or other constituents contained in any gas volumes bypassed by Buyer. (d) Seller shall have the right to process gas as above provided and use gas for fuel for processing gas and other purposes incident thereto; provided, however, that Seller shall reimburse Buyer for fuel and shrinkage due to product extraction, and other losses or uses of gas on the same basis (including taxes) which Buyer purchases such gas hereunder, and provided further that Seller shall be deemed to be in control and possession of the gas while it is in the processing facilities and responsible for any damage or injury caused thereby. ARTICLE XXI Transportation of Liquids 1. Arrangements and procedures acceptable to Buyer, Seller, Michigan Consolidated Gas Company, and any other interested producers have been agreed upon in the Allocation Agreement so as to provide for calculation and allocation at the Common Delivery Point of line gain or loss and shrinkage of various constituents of gas and liquid and liquefiable hydrocarbons injected into the Common Line by such respective parties. Buyer, insofar as it has the right to do so, agrees that as long as this Agreement, a Transportation Agreement and an Allocation Agreement are in effect, and one or more processing plants are in operation so as to permit continued processing of all the gas transported in the Common Line, Seller shall have the right to introduce into the Common Line the following liquids (herein called "Seller's Liquids") belonging to the Seller: 32 30 (i) condensate or distillate produced from gas wells from which gas is sold to Buyer hereunder, provided that it is separated from such gas by normal field separation facilities prior to delivery of such gas to Buyer; (ii) natural gasoline produced as a result of compression of natural gas to be sold to Buyer hereunder, provided that the compression facilities in which it is produced are situated upstream of the delivery points hereunder; and (iii) such other liquids produced from wells from which gas is sold to Buyer hereunder (and which are separated from such gas prior to delivery of the gas to Buyer), other than crude oil, and which will not interfere with any other gas operations in the Common Line. 2. All Seller's Liquids shall be introduced at mutually agreeable points downstream from gas purchase meters at rates which will not impair any pipeline operations. Title to Seller's Liquids so introduced shall remain in Seller, and Seller shall be responsible therefor, except that Buyer shall be responsible and liable for any damages caused by said liquids when said damages are the result of Buyer's or Michigan Consolidated Gas Company's negligence. Seller's Liquids shall be transported to the Common Delivery point at no cost to Seller; provided, however, that Seller shall reimburse Buyer promptly after billing, for all operating expenses incurred by Buyer as a result of the introduction of Seller's Liquids into the Common Line. 3. If, in the opinion of Buyer, any liquids are introduced into the Common Line by Seller, at rates that will interfere with any gas operations or cause any operating problems, Seller shall (upon written request made at any time and from time to time by Buyer) immediately reduce the rates of introduction of such Seller's Liquids as directed by Buyer. Such reduced rates shall continue until Seller has submitted evidence satisfactory to Buyer that increased rates of introduction of such Seller's Liquids will not interfere with any gas operations or cause any operating problems. The consent by Buyer to any such 33 31 increased rates of introduction of Seller's Liquids shall not be deemed a waiver by Buyer of its right, as above provided, to demand further reduction of the rates of introduction of such Seller's Liquids. If any party or parties is obligated by the Michigan Public Service Commission to levy any charge or fee for the transportation of liquids so introduced into the Common Line or laterals serving same, then Seller agrees it will either cease the introduction of Seller's Liquids into such facilities or will pay such charge or fee to the party or parties entitled thereto. It is expressly understood that Seller shall bear the allocated share of line gain or loss and shrinkage occurring in the Common Line attributable to Seller's Liquids as determined under the provision of the Allocation Agreement. It is further understood that if the liquids delivered to or for Seller's account at the Common Delivery Point attributable to Seller's Liquids have a greater aggregate heating value than the aggregate heating value actually attributable to Seller's Liquids at the Common Delivery Point, thereby resulting in a loss of heating value to Buyer for which adequate compensation is not provided in the Allocation Agreement (considering that Buyer's purchases of gas are to be made on a Btu basis rather than on an Mcf basis), then Seller and Buyer agree to make whatever reasonable change in the method of accounting as between Seller and Buyer which is required to eliminate such inequity to Buyer to such extent as is practical and feasible. 4. Stabilization or processing of liquids or other hydrocarbon constituents belonging to Seller or other producers who may have injected same into the Common Line under this Article shall be handled on such basis as shall be mutually agreed between the Plant Owners and the respective owners of such liquids and other hydrocarbon constituents. 34 32 ARTICLE XXII Miscellaneous 1. No waiver by either party hereto of one or more defaults in the performance of any provision of this Agreement shall operate or be construed as a waiver, by such party, of a future default, whether of a like or a different character. 2. All headings appearing herein are for convenience only and shall not be considered a part of this Agreement for any purpose or as in any way interpreting, construing, varying, altering, or modifying this Agreement or any of the provisions hereof. 3. Each party hereby grants to the other wherever necessary or convenient for carrying out the terms of this Agreement requisite easements and rights of way over, across and under any land as to which such party has the right to make such grants. 4. Buyer agrees that if it enters into any contracts with parties other than Seller hereunder who will deliver to Buyer gas that will ultimately enter the Common Line upstream from the Kalkaska Plant, then such contracts with such other parties will contain the same restrictions regarding recovery of liquids or liquefiable hydrocarbons as are contained in Paragraph 1 of Article XX and will not contain provisions which mitigate against any of the provisions of Article XX and Article XXI. 35 33 IN WITNESS WHEREOF, the parties hereto have caused this Contract to be executed as of the day and year first above written. BUYER: CONSUMERS POWER COMPANY WITNESSES: _____________________________ By /s/ R. J. Odlevak --------------------------------- R. J. Odlevak, Vice President _____________________________ SELLER: NORTHERN MICHIGAN EXPLORATION WITNESSES: COMPANY /s/ Barbara J. Strause - ----------------------------- Barbara J. Strause BY /s/ Paul E. Geiger ----------------------------- Paul E. Geiger /s/ Diane L. Ritchie Vice President, Secretary - ----------------------------- and Treasurer Diane L. Ritchie 36 34 EXHIBIT "A" for GAS PURCHASE CONTRACT Dated December 1, 1987 Between CONSUMERS POWER COMPANY and NORTHERN MICHIGAN EXPLORATION COMPANY Contract Area Acreage which is included in the Production Unit(s) described below or in any other Production Unit which drains gas from a reservoir common to same. Production Unit Common Line Tap - --------------- --------------- PetroStar #2-24 Tennant & State Allis SE SW SE Section 24, T34N-R2E Allis Township, Presque Isle County EX-10.9A 11 EXHIBIT 10.9(A) 1 EXHIBIT 10.9(a) GAS PURCHASE CONTRACT Between CONSUMERS POWER COMPANY As Buyer and NORTHERN MICHIGAN EXPLORATION COMPANY As Seller December 1, 1985 PI-216-AT 2 TABLE OF CONTENTS
ARTICLE PAGE - ------- ---- I. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 II. Seller's Reservations . . . . . . . . . . . . . . . . . . . . . . . . . . 4 III. Commitment of Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 IV. Determination of Reserves . . . . . . . . . . . . . . . . . . . . . . . . 6 V. Quantity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 VI. Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 VII. Delivery Point - Liability . . . . . . . . . . . . . . . . . . . . . . . . 14 VIII. Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 IX. Quality of Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 X. Delivery Pressure . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 XI. Measurement and Testing . . . . . . . . . . . . . . . . . . . . . . . . . 21 XII. Warranty of Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 XIII. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 XIV. Billing and Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 XV. Conditions of Connection . . . . . . . . . . . . . . . . . . . . . . . . . 27 XVI. Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 XVII. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 XVIII. Laws and Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 XIX. Force Majeure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 XX. Processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 XXI. Transportation of Liquids . . . . . . . . . . . . . . . . . . . . . . . . 34 XXII. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Exhibit "A" 3 GAS PURCHASE CONTRACT THIS CONTRACT made and entered into as of, and effective the first day of December 1985 by and between NORTHERN MICHIGAN EXPLORATION COMPANY, a Michigan corporation, hereinafter referred to as Seller, and CONSUMERS POWER COMPANY, a Michigan corporation, hereinafter referred to as Buyer: W I T N E S S E T H : WHEREAS, Seller owns certain oil and gas leases on property situated in the northern portion of the Southern Peninsula of Michigan within the Contract Area as described on Exhibit "A" hereto and desires to sell certain gas which has been or may be developed thereon, in accordance with the terms and conditions hereof; and WHEREAS, Buyer, a public utility engaged in the distribution and sale of gas within the State of Michigan, desires to purchase gas that may be produced from Seller's leases within said Contract Area; NOW, THEREFORE, in consideration of the covenants and promises of each as set forth herein, the parties agree as follows: ARTICLE I Definitions 1. The term "lease" shall mean any written instrument which gives Seller the rights to drill for, produce, and dispose of gas in, under, and from the lands described therein. 2. The term "gas" means all elements, compounds, and mixtures thereof which are contained in the effluent produced from a well and which remain in the vapor phase when produced at the mouth of the well or from a lease separator. 3. The term "gas well gas" shall mean gas produced from a well classified as a gas well by the regulatory agency having jurisdiction. 4 2 4. The term "oil well gas" shall mean gas produced from a well classified as an oil well by the regulatory agency having jurisdiction. 5. The term "reserves," unless the context makes evident another intended meaning, shall mean that quantity of gas underlying the acreage attributable to each well, which may reasonably be expected to be recovered and delivered under the terms of this Contract plus the volume of gas which has theretofore been delivered by Seller from such well to Buyer. 6. The term "Contract Area" shall mean that area encompassed by the description set forth on Exhibit "A", as it may be revised from time to time as hereinafter provided. 7. The term "contract year" shall mean the calendar year; except that the first contract year shall commence on the date of this Contract and shall end on December 31 of the year in which this Contract is dated. 8. The term "month" shall mean the period of time beginning at 7:00 a.m. Eastern Standard Time on the first day of a calendar month and ending at 7:00 a.m. Eastern Standard Time on the first day of the next succeeding calendar month. 9. The term "day" shall mean a period of twenty-four (24) hours beginning at 7:00 a.m. Eastern Standard Time of one calendar day and ending at 7:00 a.m. Eastern Standard Time on the next succeeding calendar day. 10. The term "cubic foot of gas" shall denote the unit of gas measurement hereunder and shall mean a cubic foot of gas at an absolute pressure of fifteen and twenty-five thousandths (15.025) pounds per square inch at a temperature of sixty degrees Fahrenheit (60 degrees F). 11. The term "deliverability" is used as a measure of a well's productivity and shall mean the average quantity of gas, per twenty-four-hour 5 3 period, which a well being tested for deliverability at a time agreed to by both parties, produced during a seventy-two-hour period of continuous delivery into Buyer's pipeline operating at the then existing pipeline pressure not to exceed one thousand four hundred forty (1440) psig. 12. The term "Mcf" shall mean one thousand (1,000) cubic feet. 13. The term "Btu" shall mean British thermal unit. 14. The term "Kalkaska Plant" shall mean the gas processing plant located in Section 31, Township 27 North, Range 7 West, Kalkaska County, Michigan, and operated by Amoco Production Company as of the date of this Contract. 15. The term "Plant Owner" means an owner of the "Kalkaska Plant" as described in the Kalkaska Plant Processing and Operating Agreement dated November 15, 1974. 16. The term "tender of gas" or like expression shall be understood to mean the notice by Seller to Buyer that Seller has gas available for delivery at the point of delivery specified in the notice. A notice of completion and request for connection, for instance, would constitute a "tender." Such one-time notice to Buyer shall constitute a continuous tender of such gas unless and until Seller shall give Buyer written notice to the contrary. 17. The term "Common Line" means that certain wet header gas transmission line (beginning at the outlet side of the purchase meters used to measure the gas entering said line) and any extensions thereof jointly used by Buyer and Michigan Consolidated Gas Company. 18. The term "Common Delivery Point" means the terminus of the Common Line situated in Section 31, Township 27 North, Range 7 West, Kalkaska Township, Kalkaska County, Michigan. 6 4 19. The term "psig" shall mean pounds per square inch gauge. 20. The term "psia" shall mean pounds per square inch absolute. ARTICLE II Seller's Reservations 1. Seller reserves and excepts from the terms of this Contract the following: (a) All oil and condensate separated and saved by Seller. (b) Liquefiable hydrocarbons subject to Seller's extracting or arranging for the extraction thereof. (c) Nonhydrocarbon substances subject to Seller's contracting or arranging for the extracting thereof. (d) Gas for development and field operations on any of Seller's acreage, including fuel for the operation of compression facilities by Seller or fuel which Seller may elect to furnish or sell to drilling contractors for fuel in drilling on Seller's acreage. (e) Gas for repressuring, pressure maintenance, cycling, gas lift in a closed system, and the use of gas as a drilling fluid. (f) Gas which Seller is obligated to furnish lessors under leases covering acreage committed hereto. (g) Gas attributable to any acreage acquired by Seller and which is subject to any obligation or reservation made by a third party for the purchase and sale of such gas. Seller's right to separate and extract liquefiable hydrocarbons and nonhydrocarbon substances is subject to the provisions of Article XX hereof. 2. Seller also reserves to itself the following: 7 5 (a) The right to operate its property free from any control by Buyer in such manner as Seller, in its sole discretion, may deem advisable, including, without limitation by enumeration the right to drill new wells, to test wells, to repair and rework wells, and to abandon any well and the right to renew, extend, release, assign, surrender or permit to expire any lease as Seller deems best in its sole and exclusive discretion. (b) The right to unitize any of its leases with other properties of Seller and of others in such manner as to protect Buyer's rights hereunder, in which event this Contract will cover Seller's interest in the unit and gas attributable thereto, to the extent that such interest is derived from leases committed hereunder. The term "unit" as used in this subparagraph shall mean any unit recognized by the state regulatory agency having jurisdiction or other pooling of acreage not requiring recognition by a regulatory agency in which two (2) or more producers contribute acreage and each producer owns an undivided interest in the total acreage contributed, such as working interest units, areas of mutual interest, and joint exploration and development areas. ARTICLE III Commitment of Gas 1. Seller commits to the performance of this Contract all gas reserves hereafter produced from or attributable to the well unit(s) described on Exhibit "A", as said Exhibit may be amended from time to time, attributable to any interest in such gas reserves now or hereafter owned by Seller. 2. Seller, with Buyer's written concurrence, may add well units to this Contract, provided that such units lie within Alpena, Cheboygan, Montmorency 8 6 or Presque Isle Counties, Michigan. If Seller elects to so add well units to this Contract, Seller shall prepare and submit to Buyer a description of the additional units and the written acceptance by Buyer of the document containing such description shall constitute Buyer's written concurrence, and thereupon Exhibit "A" to this Contract shall be deemed to have been amended to reflect the additional units. 3. The gas reserves discovered in well units described on Exhibit "A", or any well units added to this Contract pursuant to Section 2 above, shall be determined in accordance with the provisions of Article IV hereof. ARTICLE IV Determination of Reserves 1. Seller shall, promptly after the execution hereof, make available to Buyer such basic noninterpretive information and data in Seller's possession as may reasonably be required by Buyer for the purpose of estimating the amount of Seller's reserves attributable to each well unit then subject to this Contract. Upon receipt of such information and data, Buyer shall promptly estimate the amount of such reserves attributable to each such well unit and shall furnish to Seller within thirty (30) days after receipt of said basic data a written statement thereof which, after agreement by Seller, shall constitute the original determination of reserves for such well unit for the purpose of computing the takes therefrom under this Contract. Seller shall also make available, upon request from Buyer, such information and data in Seller's possession as may reasonably be required by Buyer to estimate the amount of oil well gas available hereunder in each oil reservoir or pool covered by this 9 7 Contract. All information furnished by Seller to Buyer pursuant to this paragraph shall be treated and held as confidential by Buyer and shall not be disclosed to others without Seller's written permission. 2. After the date of initial deliveries hereunder, Buyer may make, or Seller may request Buyer to make, at reasonable intervals, but not more often than once every two (2) years, a redetermination of reserves attributable to any or all of the gas well units covered by this Contract. When a new gas well has been completed, Seller within thirty (30) days after the completion thereof shall furnish basic data as hereinbefore provided for other wells and Buyer shall calculate reserves attributable to such new well unit and shall furnish Seller within thirty (30) days after the receipt of such data a written statement of Buyer's estimate of reserves for such well unit. Whenever a redetermination of reserves is made, such redetermination shall supersede the previous determination for the well unit(s) affected and, beginning with the first month after the date of such redetermination, shall be used in computing the takes of gas well gas hereunder. 3. A written statement of each determination of reserves made by Buyer (including also each redetermination made pursuant to Paragraph 2 above) shall be furnished by Buyer to Seller after the same is made, and, if Seller fails to give Buyer written notice that Seller does not agree with such determination within thirty (30) days after Seller's receipt thereof, it shall be conclusively presumed that Seller concurs therein. If, within this period of time, Seller notified Buyer in writing that it does not agree with such determination, Buyer and Seller together shall estimate the amount of reserves for the purpose of a determination hereunder. If, within thirty (30) days after Buyer's receipt of such notice, Buyer and Seller are unable to agree upon the 10 8 amount of reserves for the purpose of determination hereunder, such amount shall be determined by arbitration in the following manner: Upon either party's giving notice in writing to the other of election to arbitrate, Buyer shall appoint one arbitrator and Seller shall appoint one arbitrator, and the two arbitrators so appointed shall select a third arbitrator. If either Buyer or Seller shall fail to appoint an arbitrator within thirty (30) days after a request for such appointment is made by the other party in writing, or if the two arbitrators so appointed fail within thirty (30) days after the appointment of the second of them to agree on a third arbitrator, the arbitrator or arbitrators necessary to complete a board of three arbitrators shall be appointed upon application by either party therefor, by the United States District Judge, senior in point of service, of the Federal Judicial District in which the property covered by this Contract is situated. In the event such Judge should fail or refuse to act, then either party hereto may request the American Arbitration Association to select the arbitrator or arbitrators to complete the board of three. After three arbitrators are appointed pursuant to the foregoing provisions of the Section, they shall meet, hear the parties with respect to the matter of the said reserves, and arrive at a determination thereof. Any determination agreed to in writing by at least two of the said arbitrators shall be final and binding on the parties hereto. All arbitrators appointed pursuant to this Section shall be qualified independent consultants experienced in the oil and gas industry and competent to pass on the matter of recoverable reserves. Buyer and Seller shall each bear its own costs of arbitration hereunder, including the cost of appointing its own arbitrator, provided, however, that the fees and expenses of the third arbitrator shall be borne equally by Buyer and Seller. 11 9 ARTICLE V Quantity 1. Beginning seventy-five (75) days after Seller has received all necessary governmental authority to connect its gas well(s) covered hereunder to Buyer's purchase meter(s), or on such earlier date as actual deliveries may commence, and during such contract year and each contract year thereafter Seller agrees to sell and deliver, and Buyer agrees to purchase and receive from Seller, or nevertheless to pay for if available in accordance with the terms hereof but not taken, a quantity of gas referred to herein as the Annual Contract Quantity, attributable to Seller's interest in each such well. Although Buyer's obligation to take or pay for gas, if available, is on an annual basis, it is desirable for administrative purposes to speak of a Monthly Contract Quantity. The term "Monthly Contract Quantity" shall be adjusted where appropriate as set out in Paragraph 5 hereof for the purpose of computing said Annual Contract Quantity. 2. Subject to the deliverability qualification herein, Buyer shall take from each gas well hereunder a Monthly Contract Quantity equal to the number of days in the month times one million (1,000,000) cubic feet for each four billion (4,000,000,000) cubic feet of reserves committed to Buyer hereunder. 3. If, pursuant to a deliverability test made after proper notice from one party hereunder to the other and agreed upon by the parties as to the results thereof, the monthly deliverability of any gas well is established as less than one hundred eleven percent (111%) of the Monthly Contract Quantity, then effective with the first of the next accounting month, the Monthly Contract Quantity shall be ninety percent (90%) of the deliverability established by such test or by a later test for so long as such well's deliverability remains less than one hundred eleven percent (111%) of its Monthly Contract Quantity as 12 10 established by Paragraph 2 hereof. Either party shall have the right upon request to secure deliverability tests at reasonable intervals, but not more than three (3) times in any one year for any one gas well. 4. In the event regulatory authorities having jurisdiction of any of the wells subject hereto should provide for proration of the wells by field rules, then Buyer's Monthly Contract Quantity for take-or-pay purposes shall be determined as follows: (a) In the event the sum of the individual well allowables of all of Seller's wells in the prorated field for a given month is less than the total of the Monthly Contract Quantity of the same wells would have been for such month in the absence of field rules, then the allowable of each well shall become the Monthly Contract Quantity for that month. (b) In the event the sum of the individual well allowables of all of Seller's wells in the prorated field for a given month is greater than the total of the Monthly Contract Quantities of the same wells, then the Monthly Contract Quantity for each such well for that month shall be increased to the well's ratable share (based on allowables) of the total of the Monthly Contract Quantity of all such wells that would have applied in the absence of field rules. 5. As hereinbefore stated, Buyer's annual take-or-pay obligation is the sum of the Monthly Contract Quantities with adjustments where appropriate as follows: (a) In the event of Seller's inability to perform its delivery obligation in accordance with a specific request from Buyer because of a valid force majeure (on the part of either Seller or Buyer), then Buyer's take-or-pay obligation for the time of the force majeure shall be the 13 11 volume, if any, which Seller was capable of delivering or Buyer of taking, as the case may be, during the period of such force majeure. (b) If for any reason other than force majeure Seller shall fail to make available for delivery from any well the volume requested therefrom by Buyer for a given month, the Buyer's take-or-pay obligation for such month shall be ninety percent (90%) of the volume so made available; provided that for take-or-pay purposes Seller's obligation to deliver shall never be more than one hundred eleven percent (111%) of the well's currently Monthly Contract Quantity, even though Buyer may have requested a larger volume. (c) If Buyer in any month makes a change in the previously established Monthly Contract Quantity which would otherwise by applicable to such well for such month, then Buyer as to any and all such wells shall furnish to Seller a statement not later than the fifteenth (15th) day of the following month by which it notifies Seller of such change and the reasons therefor. 6. In the event regulatory authorities having jurisdiction of any of the wells subject hereto should provide for proration from the wells by field rules, Buyer agrees that it is required to make nominations based on market demand and it shall nominate for any twelve (12) month period volumes for all of the prorated wells connected to its system from the prorated field which in the aggregate will be at least equal to the total Annual Contract Quantity which would have applied to such wells in the absence of such field rules. Furthermore, Buyer agrees to make a "best efforts" attempt to secure allowables under which the share allocated to wells committed to it will in the aggregate 14 12 be at least equal to the total Annual Contract Quantity which would have applied to such wells in the absence of such field rules. 7. As to each well subject hereto, Buyer shall have the right to purchase and Seller shall have the obligation to deliver therefrom upon request by Buyer any quantity of gas, subject to Seller's ability to so deliver, up to one hundred eleven percent (111%) of such well's Monthly Contract Quantity. Buyer shall have the additional right to purchase gas in excess of said one hundred eleven percent (111%) to the extent that Seller is ready, willing, and able to deliver such additional quantities. 8. (a) Buyer agrees to take gas from Seller's well in the same ratable manner that it takes gas from wells owned by others from whom Buyer purchases or may purchase gas in the gas reservoirs in which Seller's wells are completed. (b) Buyer shall increase takes beyond the Monthly Contract Quantity, for which provisions are made herein, if necessary, in order to maintain ratable production with takes by others from the same reservoir. 9. If the total volume of gas well gas actually purchased and taken by Buyer during any contract year is less than the Annual Contract Quantity, then within ninety (90) days following the end of such contract year, Buyer shall pay Seller for any such deficiency. Interest shall accrue at the prime interest rate, as established by the First National Bank of Chicago in effect at the time of such deficiency, per annum from the date such deficiency payment is due until paid. As to gas from any gas well paid for by Buyer but not taken, Buyer shall have the right during the five (5) years immediately following the year in which the deficiency was incurred to recoup the value thereof by taking gas from such well, as makeup gas, from volumes in excess of the Annual Contract Quantities. 15 13 Any gas well gas taken as makeup gas shall be free of additional cost to Buyer, except that Buyer shall pay Seller any tax reimbursement due under Article XIII. 10. As to gas from oil wells, Buyer agrees to purchase and take from Seller, all of the oil well gas produced from each such well and tendered to Buyer hereunder. ARTICLE VI Term This Contract, subject to the right of cancellation herein provided, shall be effective as of the day hereof through December 31, 1995 and shall continue from year to year thereafter subject to cancellation by either party on three (3) months' written notice given prior to December 31, 1995 or any anniversary date thereof. If Seller uses gas committed hereunder for repressuring or secondary recovery operations as provided for under Article II, Paragraph 1, Subparagraph (e), the term of this Contract shall be extended, for the properties involved in such repressuring or secondary recovery operations, for a period of time equal to the time such operations were actually conducted. ARTICLE VII Delivery Point - Liability 1. The point of delivery for each well for gas sold hereunder shall, at Seller's option, be at the inlet of Buyer's purchase meter which meter shall be at a mutually agreeable location on the Common Line. 2. Title to gas shall pass from Seller to Buyer at the inlet of Buyer's facilities at said point of delivery. Seller shall be in control and possession of the gas delivered hereunder and responsible for any damage or 16 14 injury caused thereby until the same shall have been delivered to Buyer, after which delivery Buyer shall be deemed to be in exclusive control and possession thereof and responsible for any injury or damage caused thereby, except as otherwise provided for under Article XX. ARTICLE VIII Price 1. Subject to the other provisions hereof, the price to be paid by Buyer to Seller for gas purchased and sold, or paid for when not taken as provided in Article V hereof, shall be $2.85 per MMBtu, effective January 1, 1986 and said price shall thereafter be escalated at a rate of 2.5% semiannually with such escalations to take effect on July 1 and January 1 of each year. 2. Seller or Buyer shall have the option to request a price redetermination effective July 1, 1988 and biennially thereafter with the redetermined price to be equal to the lower of: a) seventy-five percent (75%) of the average price of one million (1,000,000) Btu of No. 6 Residual Oil for the preceding six (6) month period ending with the prior April 30th, using the daily prices reported by "Platt's Oilgram Price Report," U.S. Tank Car Truck Transport Lots, Midcontinent, for both Detroit and Chicago; b) the highest price paid by a public utility for Niagaran gas in the Northern Michigan Trend for gas of like quality that is produced and sold on a Btu basis from a well pursuant to a gas purchase Contract dated after January 1, 1986, having a term of at least three (3) years that is on file with the Michigan Public Service Commission pursuant to the requirements of MCLA 483.111; or c) the lowest delivered cost to Consumers Power Company of gas acquired from outside the State of Michigan pursuant to the terms of a tariff or order approved by the FERC or its successor. The escalation 17 15 provided for in Paragraph 1 of this Article VIII shall also apply to any redetermined price. 3. If at any time it is determined that the marketability of the subject gas is hampered in that the price on an MMBtu basis, payable under the provisions of this Article VIII exceeds the cost of the gas component in the commodity charge of the rate charged by any of Buyer's interstate pipeline company suppliers (e.g., Trunkline Gas Company and Panhandle Eastern Pipe Line Company) pursuant to a government approved tariff, then Buyer shall have the option to limit the price paid hereunder to a level equal to such cost of gas component. Such a limitation shall become effective provided that Buyer notifies Seller in writing of such a marketing problem and furnishes Seller with documentation to support same. If Buyer chooses to limit the price as herein provided, Seller shall have the right to solicit offers from other pipeline or distribution companies to purchase the gas at a higher price and, if Seller notifies Buyer of a bonafide third party offer to purchase such gas at a higher price, Buyer shall, within thirty (30) days thereafter. either agree to purchase the gas at a price equal to that contained in the third party offer or release its contractual claim to the gas. 4. Notwithstanding any of the above, in no event shall the total remuneration per MMBtu herein provided exceed eighty percent (80%) of the equivalent average price (rounded to the nearest $.001) of one million (1,000,000) Btu of No. 6 Residual Oil, using the daily prices reported by "Platt's Oilgram Price Report," U.S. Tank Car Transport Lots, Midcontinent, for both Chicago and Detroit for the preceding six (6) months. For the purposes hereof, a gallon of No. 6 Residual Oil shall be considered to contain one hundred fifty thousand (150,000) Btu. Should "Platt's Oilgram Price Report" be 18 16 discontinued, it is agreed that any other similar service may be used in its place. Furthermore, the price shall in no event fall below $2.75 per MMBtu. ARTICLE IX Quality of Gas 1. All gas delivered by Seller under the terms of this Contract shall conform to the following specifications: (a) The gas shall be commercially free from dust, gum, gum forming constituents, condensate and solids when delivered to Buyer. (b) The gas shall not at any time have an oxygen content in excess of one percent (1%) by volume and Seller shall make every reasonable effort to keep the gas free of oxygen. (c) The gas shall not contain more than one (1) grain of hydrogen sulphide per one hundred (100) cubic feet. The hydrogen sulphide content shall be determined by a Cadmium Sulphate, Barton Titrator and/or a Tutwiler quantitative test, or any other mutually agreeable method. (d) The gas shall not contain more than twenty (20) grains of total sulphur per one hundred (100) cubic feet. (e) The total gross heating value per cubic foot of gas shall be not less than nine hundred fifty (950) Btu, however, it is agreed that Buyer shall accept gas from individual wells having a heating value of less than nine hundred fifty (950) Btu per cubic foot if the composite stream of gas in the Common Line immediately downstream from the point of delivery, contains gas with a heating value of at least nine hundred fifty (950) Btu per cubic foot. It is also agreed that in similar manner Buyer will accept gas from individual wells having a hydrogen sulphide content in excess of 19 17 one (1) grain per one hundred (100) cubic feet or in excess of twenty (20) grains total sulphur per one hundred (100) cubic feet if said composite stream at the point above described on the Common Line does not contain more than one-fourth (1/4) grain of hydrogen sulphide or ten (10) grains of total sulphur; provided, however, that in no event shall any gas sold hereunder and delivered into a lateral owned by any third party exceed one (1) grain hydrogen sulphide per one hundred (100) cubic feet at the point of connection with said lateral. It is agreed that if because of such relaxation of quality specifications as to individual wells, the gas in Seller's composite stream does not meet the specifications hereinabove set forth for such composite stream, then Buyer shall have the right to refuse to take such substandard gas from any individual well or wells so long as such composite stream would fail to meet the specified standards. (f) The term "total gross heating value per cubic foot" shall mean the number of British thermal units, produced by the combustion at constant pressure, of the amount of gas on a water-free basis which would occupy a volume of one (1) cubic foot at a temperature of sixty degrees Fahrenheit (60 degrees F) and at a pressure of fifteen and twenty-five thousandths (15.025) psia, when the products of combustion are cooled to the initial temperature of gas in air and when the water formed by combustion is condensed to a liquid stage. (g) The water content of the gas shall not exceed seven (7) pounds per million cubic feet measured at fifteen and twenty-five thousandths (15.025) psia and sixty degrees Fahrenheit (60 degrees F). 2. Should the gas offered for sale to Buyer from any well or other delivery point fail at any time to conform to any of the specifications of this 20 18 Article, Buyer subject to Paragraph 1, Subparagraph (e) of this Article IX may notify Seller of any such failure and Seller shall make a diligent effort to correct such failure in Seller's wells so as to deliver gas conforming to the above specifications. If Seller is unable to deliver gas conforming to the above specifications by treatment consistent with prudent operations and by means which are economically feasible in Seller's opinion, Buyer may at its option, accept delivery of the gas and treat the gas so that it will conform to the above specifications or Buyer may refuse to take such gas and in the event of such refusal Buyer shall not be obligated to attribute volumes to such well or other delivery point for take-or-pay purposes. In the event Buyer elects to accept delivery of gas not conforming to the specifications herein and to treat said gas so it will conform to the specifications herein, Seller shall reimburse Buyer for the cost, including equipment, for treating said gas, but not to exceed seventy-five percent (75%) of the sum received by Seller for such gas. In the event both Seller and Buyer elect not to treat gas not meeting the quality specifications herein, that gas and that gas only, shall be released from commitment under the terms hereof. 3. It is agreed that if Seller should elect (subject to Article XX hereof) to process or have processed gas sold hereunder, the residue gas delivered from Seller's or other processing facility shall not contain more than one-fourth (1/4) grain of hydrogen sulphide per one hundred (100) cubic feet. 21 19 ARTICLE X Delivery Pressure 1. Seller shall deliver gas well gas at a pressure sufficient to allow the gas to enter Buyer's facilities at the delivery points hereunder, provided Seller shall not be obligated to deliver gas well gas to Buyer at a pressure in excess of one thousand four hundred forty (1440) psig. If the well or wells completed in any gas well gas reservoir are unable to produce the Monthly Contract Quantity applicable to such reservoir against the pressure prevailing in Buyer's pipelines and Seller elects to install compression facilities, then, except as herein otherwise provided, Buyer agrees to reimburse Seller: (a) six cents (6.00 cents) per MMBtu per stage of compression for gas from a well that is compressed, such reimbursement will not, however, be made with respect to monthly deliveries hereunder that are in excess of the monthly contract quantity for the well unless the parties hereafter agree in writing to the contrary. 2. Should Seller elect not to install compression facilities in any well or wells completed in any gas well gas reservoir when the pressure in the reservoir is inadequate to allow delivery of the gas into Buyer's facilities, then the Buyer shall have the right to install the necessary compression facilities. If neither the Seller nor the Buyer makes such election, then such well or wells shall be released from this Contract. 3. Seller shall deliver the oil well gas at a pressure sufficient to enter Buyer's facilities but not to exceed one thousand four hundred forty (1440) psig. If Seller compresses oil well gas or flash vapors to effect deliveries thereof to Buyer, Buyer agrees to reimburse Seller six cents (6.00 cents) per MMBtu on volumes for such compressed gas, which rate shall be increased by two-tenths 22 20 cent (.20 cent) on January 1, 1986, and each January 1 thereafter. Seller agrees to furnish fuel for such compression at no cost or expense to Buyer. 4. If only a portion of the gas sold to Buyer by Seller from any given well is compressed pursuant to this Article X, Seller shall measure the gas from said well actually compressed and shall, consistent with the foregoing, invoice Buyer therefor on or before the twentieth (20th) day of the month following the month in which such gas was actually compressed. If all gas sold to Buyer by Seller from any given well is compressed pursuant to this Article X, Seller shall furnish Buyer with the name of the well on or before the twentieth (20th) day of the month following the month in which such compression actually begins, and insofar as gas wells are concerned, Seller shall at the same time advise Buyer of the number of stages of compression used. If additional stages of compression later become necessary, Seller shall advise Buyer in writing of such. Under no circumstances shall the Buyer be obligated to reimburse the Seller for compression prior to the written notification and the actual commencement of compression. 5. Buyer, when operating its gathering system in conformance with the pressure conditions herein specified, shall not be obligated to attribute volumes for take-or-pay purposes to any well or other delivery point in excess of the volumes made available at sufficient pressures to enter Buyer's lines at the point of delivery. 23 21 ARTICLE XI Measurement and Testing 1. Buyer shall install, maintain, and operate, at no expense to Seller, at or near each point of delivery hereunder, equipment of a character and design acceptable to Seller and perform all tests required to accomplish the measurement of volumes, temperatures, specific gravity and heating values. Such volume measuring equipment shall be installed, maintained, and operated in accordance with ANSI/API Standard 2530, dated 1978, of the American National Standards Institute, as amended from time to time, and the volume of gas delivered hereunder and measured by such orifice meters shall be computed in accordance with said report. 2. The temperature of the gas passing through each orifice meter shall be determined by means of a recording thermometer installed by Buyer so that it will properly record the temperature of the gas through the meter. The arithmetical average of temperature recorded during the time gas was flowing on any day shall be used in computing gas volumes for that day. 3. The specific gravity of the gas at the points of delivery shall be determined by Buyer at least once each six (6) calendar months, or as often as may be found necessary in practice, by a method of test generally acceptable to the industry. Whenever a recording gravitometer is used, the arithmetical average of the gravity recorded during the time gas was flowing on any day shall be used in computing gas volumes for that day. 4. Correction shall be made by Buyer for deviation from Boyle's Law, and the factors for making such correction shall be obtained from procedures contained in the aforesaid Standard 2530, or from such other source as may be agreed upon by the parties hereto. 24 22 5. Unless otherwise agreed upon by the parties hereto, the atmospheric pressure shall be assumed to be fourteen and four-tenths (14.4) psia for the purpose of calculating the volumes of gas delivered hereunder. 6. Buyer shall test and calibrate all of Buyer's meters and instruments used in measuring or testing the gas delivered hereunder at least once each calendar month, or at less frequent intervals agreed to by the parties on meters at specific delivery points. Any measurement equipment found by calibration test to be registering inaccurately shall be immediately restored to accurate operation. No correction shall be made for past deliveries where inaccuracies are two percent (2%) or less, but if such equipment is found to be out of service or registering inaccurately by more than two percent (2%), the registrations of such equipment shall be disregarded for any period known or agreed upon, or, if such period is not known or agreed upon, for a period extending back one-half (1/2) of the time elapsed since the last calibration test, or sixteen (16) days, whichever is shorter. The volume of gas delivered during such period shall be estimated by using the first of the following methods which is feasible: (a) by using the registration of check measuring equipment if installed and registering accurately; (b) by correcting the error, if the extent of the error is ascertainable by calibration test or mathematical calculation; or (c) by estimation, based on deliveries under similar conditions when the equipment was registering accurately. 7. Buyer shall determine the gross heating value in Btu per cubic foot of gas, at each delivery point hereunder at such intervals as in Buyer's opinion are required to determine the heating value hereunder but such intervals 25 23 shall be of such duration as is necessary to determine accurate values to be used in Article VIII, Paragraph 1. 8. Buyer shall make such test for determining hydrogen sulphide content, total sulphur content, oxygen content, and carbon dioxide content at such intervals as in Buyer's opinion are required to determine that the gas meets the applicable quality specifications hereunder. 9. Seller may, at its option and expense, install and operate measurement and testing equipment to check Buyer's equipment, but measurement and testing of gas for the purpose of this Contract shall be by Buyer's equipment, except as hereinabove specifically provided to the contrary. Any such check measurement or testing equipment installed by Seller shall be so installed and operated as not to interfere with the operation of Buyer's equipment. 10. Seller shall have the right to inspect, at all reasonable times, the measurement and testing equipment, charts, and other measurement data of Buyer, and Buyer shall have a similar right with respect to Seller's equipment, charts, and data, but the reading, calibration and adjustment of such equipment shall be performed only by the owner thereof. Buyer shall give Seller at least ten (10) days' notice of any test of Buyer's measuring or testing equipment in order that Seller may have a representative present to witness the tests, and Buyer shall have the right to be present at the time Seller's check measuring or testing equipment is adjusted or calibrated. 11. If Seller shall request a special test of any of Buyer's measurement equipment or equipment for testing the quality of gas sold hereunder, Buyer shall make such test, and if the equipment in question is registering correctly, the actual expenses of such test shall be borne by Seller; otherwise, the actual expenses shall be borne by Buyer. 26 24 12. All test data, charts, and similar records shall be preserved by the owners thereof for a period of at least two (2) years. ARTICLE XII Warranty of Title 1. Seller hereby warrants title to the gas sold by it hereunder and its right to sell the same, and warrants that all such gas is owned by it free from all liens, encumbrances and adverse claims. Seller shall indemnify, save and hold Buyer free and harmless from all suits, actions, debts, accounts, damages, costs, losses and expenses arising from or out of adverse claims of any and all persons to the gas sold by Seller hereunder. 2. With respect to each lease covered by this Contract, it is agreed, notwithstanding anything herein contained to the contrary, that, in the event it shall be determined that Seller owns less than the interest in such lease described in this Contract as being owned by Seller and thereby Seller shall be deemed to have breached any of the warranty provisions of this Contract, then from and after such determination, this Contract shall be deemed to have been amended so as to cover and include the interest in such lease which is, in fact, owned by Seller. ARTICLE XIII Taxes 1. Seller shall bear the economic burden of all taxes and assessments imposed on the date hereof with respect to the gas delivered hereunder prior to its delivery to Buyer at the point of delivery specified herein as well as those imposed incident to the sale or delivery of such gas to Buyer at the point of 27 25 delivery, and Buyer shall bear the economic burden of all taxes and assessments imposed upon Buyer with respect to the gas delivered hereunder after its receipt by Buyer. Neither party shall be responsible or liable for any taxes or other statutory charges levied or assessed against any of the equipment of the other party used for the purpose of carrying out the provisions of this Contract. As to taxes to be borne by Seller as above set out, but for which Buyer makes payment on Seller's behalf, Buyer may deduct such payment from amounts due Seller hereunder. 2. Any sales, transactions, occupation, service, production, severance, gathering, transmission, ecological or environmental, export or excise tax, assessment or fees (other than franchise, capital stock, ad valorem, excess profits or income taxes or transfer or sales taxes levied incident to the sale of the leases or gas in place), levied, assessed, fixed or collected, by the United States or any state or other governmental authority and assessments or taxes which are of a similar nature or equivalent in effect, in addition to or greater than those, if any, being levied, assessed, fixed or collected on the date of this Contract in respect of or applicable to the gas to be delivered by Seller to Buyer hereunder and which Seller may pay or be liable for in its own account or that of a royalty owner, overriding royalty, production payment or similar interest owners during any month, either directly or indirectly through any obligations to reimburse others, are hereinafter collectively referred to as "additional tax," to the extent (and only to the extent) that the aggregate amount of all such taxes per Mcf of gas exceeds the aggregate amount of all such taxes per Mcf of gas being levied, assessed, fixed or collected on the date of this Contract in respect of or applicable to the gas to be delivered by Seller to Buyer hereunder. Buyer shall, except as herein otherwise provided, reimburse 28 26 Seller for one hundred percent (100%) of every additional tax paid by Seller attributable to the gas sold by Seller to Buyer hereunder; such reimbursement will not, however, be made with respect to monthly deliveries from any well hereunder that are in excess of the monthly contract quantity for the well unless the parties hereafter agree in writing to the contrary. 3. Anything hereinabove to the contrary notwithstanding, Buyer shall never be liable for and shall never be obligated to reimburse Seller for any tax levied or assessed upon or with respect to oil, condensate, liquefiable hydrocarbons or other liquids, helium or nonhydrocarbon substances which may be extracted or separated by Seller from gas delivered to Buyer hereunder, prior to such delivery, or upon or with respect to the process of extracting or separating any such products or substances from such gas or of handling, selling, transporting or otherwise dealing in or with any of such products or substances, all of which taxes shall be borne and paid solely by Seller and if paid by Buyer shall be reimbursed by Seller to Buyer. ARTICLE XIV Billing and Payment 1. Buyer, not later than the twenty-fifth (25th) day of each calendar month, shall furnish Seller a detailed statement showing the total quantity of gas delivered by Seller to Buyer hereunder during the preceding calendar month and the amount due and payable by Buyer therefor, and simultaneously shall make payment to Seller in such amount. Upon request, Buyer shall furnish Seller charts and measurement data supporting such statement. 2. Should Buyer fail to pay any amount due Seller under the provisions of this Contract when same is due, interest shall accrue at the prime 29 27 interest rate, as established by the First National Bank of Chicago in effect at the time of any such deficiency, per annum from the date payment is due until paid. If such default in payment continues for sixty (60) days, Seller may, in addition to all other rights and remedies, suspend deliveries of gas hereunder and terminate this Contract. The foregoing provisions in this Paragraph 2 shall not apply if Buyer's refusal to pay is the result of a bonafide dispute as to the accuracy of any statement and Buyer pays all amounts not in dispute until final determination of the dispute. 3. Each party shall have the right at reasonable hours to examine the books, records and charts of the other party to the extent necessary to verify the accuracy of any statement, charge, or computation made pursuant to the provisions of any article hereof. If any such examination reveals any inaccuracy in any billing theretofore made, the necessary adjustment in such billing and payment shall be promptly made, provided that no adjustment for any billing or payment shall be made after the lapse of two (2) years from the rendition thereof unless challenged prior thereto. ARTICLE XV Conditions of Connection 1. Buyer and Seller agree to attempt to secure with due diligence any necessary permits or authorizations allowing Seller to connect each well hereunder to Buyer's facilities where Buyer will commence purchasing. As to all wells subject hereto, in the event that any such permit or authorization to allow such connection has not been issued within ninety (90) days after Seller has notified Buyer of the completion of each such well, either party may cancel this Contract as to any such well by giving, after the expiration of said ninety (90) 30 28 days, thirty (30) days' written notice to the other. Acceptance of such permits or authorizations containing burdensome conditions shall be within the sole discretion of the party to whom issued; except that such party agrees that the other party shall promptly be furnished a copy of all such permits or authorizations and that the applicant party shall not accept such permits or authorizations that the other party deems to contain conditions which would deny such other party rights or impose on it burdens not provided for herein. 2. Upon issuance of the permits or authorizations provided for in Paragraph 1 above, Seller shall connect all wells completed as producers in the following manner: Seller shall use its best efforts to complete connections as soon as possible, but in no event later than seventy-five (75) days after the granting of said permit or authorization. If any well or wells are not connected within this period of time, either party may cancel this Contract as to any such well after giving thirty (30) days' written notice to the other party. ARTICLE XVI Assignment This Contract shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided that no conveyance, transfer of any interest, or change of ownership by either party shall be binding upon the other party until such other party has been furnished with a written notice evidencing such conveyance, transfer of interest, or change of ownership and approved such assignment, approval of which will not be unreasonably withheld, it being understood that this provision in no way 31 29 restricts the rights of Seller as to the transfer or assignment of Seller's leases or property thereon as provided in Paragraph 2, Subparagraph (a) of Article II hereof. ARTICLE XVII Notices 1. Any notice, request, demand, statement, or payment provided for in this Contract shall be sent to the parties hereto at the following addresses: BUYER: Consumers Power Company Att: Director of Gas & Oil Supply 212 West Michigan Avenue Jackson, Michigan 49201 SELLER: Northern Michigan Exploration Company P. O. Box 1150 One Jackson Square Jackson, Michigan 49204 2. Either party shall have the right by prior written notice to the other to change the address or addresses given above at any time. ARTICLE XVIII Laws and Regulations This contract, insofar as it is affected thereby, shall be subject to all valid and applicable laws, orders, rules and regulations of Federal and any other governmental authorities having jurisdiction. Any party hereto shall have the right to contest the validity of any such law, order, rule or regulation, and the acquiescence therein or compliance therewith for any period of time shall not be construed as a waiver of such right. This agreement shall be governed by and construed in accordance with the laws of the State of Michigan. 32 30 ARTICLE XIX Force Majeure 1. If either Buyer or Seller is rendered unable, wholly or in part, by force majeure or any other cause of any kind not reasonably within its control, to perform or comply with any obligations or conditions of this contract, such obligations or conditions shall be suspended during the continuance of the inability so caused and such party so rendered unable shall be relieved of liability and shall suffer no prejudice for failure to perform the same during such period, it being understood that Buyer's minimum annual obligation to take or pay for gas hereunder shall be reduced by the volume which Buyer, under normal circumstances, would have taken from the well during the period of time the inability exists; provided, obligations to make payments then due for gas delivered hereunder shall not be suspended, and in other cases, the cause of suspension (other than strikes, lockouts, or labor disputes) shall be remedied insofar as possible with reasonable dispatch. Settlement of strikes, lockouts, or labor disputes shall be wholly within the discretion of the party having the difficulty. 2. The term "force majeure" shall include, without limitation by the following enumeration, acts of God and of the public enemy, unseasonal weather, freezing of wells or lines of pipe, repairing or altering machinery or lines of pipe, fires, accidents, breakdowns, strikes, labor disputes, and any other industrial, civil or public disturbance, inability to obtain materials, supplies, rights-of-way on customary terms, permits, or labor, any act or omission by parties not controlled by the party having the difficulty, any act or omission (including failure to take gas) of a purchaser of gas from Buyer which is excused 33 31 by any event or occurrence of the character herein defined as constituting force majeure, failure of gas supply or markets, and any laws, orders, rules regulations acts, or restraints of any governmental body or authority, civil or military, or any other causes beyond the control of the parties hereto. ARTICLE XX Processing 1. Seller shall not process gas covered hereunder (other than in standard field separation facilities) prior to delivery of such gas to Buyer at the delivery points provided herein. 2. If Seller is not now a Plant Owner in the Kalkaska Plant, as described in the Plant Processing and Operating Agreement dated November 15, 1974, between Consumers Power Company and Amoco Production Company, et al, Buyer hereby grants Seller an option to participate as a Plant Owner with respect to the gas covered by this agreement, subject to the following conditions: (a) Seller may exercise such option by giving written notice to Buyer and Amoco Production Company not earlier than the date of initial delivery of gas under this Gas Purchase Contract with Buyer. (b) Seller's option shall not be exercised later than one (1) year from the date of initial delivery of gas under this Gas Purchase Contract with Buyer. (c) The acceptance and ratification by Seller of the Plant Processing and Operating Agreement dated November 15, 1974, between Buyer and Amoco Production Company, et al. (d) Seller's acceptance of and consent to be bound by the Allocation Agreement by and between Buyer, Michigan Consolidated Gas 34 32 Company, and the principal producers of gas sold to each covering the division of components at the Common Delivery Point of the gas and liquids transported in the Common Line, insofar as the provisions thereof affect Seller's rights hereunder. (e) Seller's acceptance of and consent to be bound by the Transportation Agreement by and between Buyer and Michigan Consolidated Gas Company, insofar as the provisions thereof affect Seller's rights hereunder; provided, however, if there is any conflict between said Transportation Agreement and this Contract, the terms and provisions of this Contract shall prevail. 3. If Seller is now a Plant Owner or if Seller subsequently becomes a Plant Owner in the Kalkaska Plant in accordance with Paragraph 2 of this Article, Buyer and Seller agree to the following: (a) Seller agrees and consents to the Allocation Agreement and the Transportation Agreement, referred to in Paragraph 2, Subparagraph (d) and (e) of this Article, insofar as Seller's rights are affected by such agreements with respect to the gas covered by this Contract. (b) Seller shall have the exclusive right to process all gas sold to Buyer hereunder and Seller shall process such gas in accordance with the Plant Processing and Operating Agreement referred to in Paragraph 2, Subparagraph (c) of this Article subject to the following: (i) If at any time there is insufficient processing capacity of a sustained nature in the Kalkaska Plant to process any or all of Seller's gas covered by this Contract and the Plant Owners of such plant have elected not to increase the capacity thereof sufficiently to cover all or part of the gas covered by this Contract, 35 33 Seller shall have the right to process or have processed such gas in any other gas processing plant near the Common Delivery Point. Seller shall use its best efforts to limit the duration of such processing arrangements, if possible, such that the gas covered thereby will be available for processing in the Kalkaska Plant when there is again adequate capacity therein. Seller shall promptly notify Buyer and the operator of the Kalkaska Plant with respect to such processing arrangements and advise of all necessary details thereof. (ii) If at any time after the Plant Owners of the Kalkaska Plant have elected to increase the capacity of such plant, Seller may temporarily process or have processed gas covered by this Contract in any other gas processing plant near the Common Delivery Point until there is capacity available in the Kalkaska Plant. (iii) The rights granted to Seller in Paragraph 3, Subparagraph (b)(i) and (b)(ii) above in this Article are subject to Seller receiving express written approval of the Plant Committee, as defined in the Plant Processing and Operating Agreement dated November 15, 1974 of the Kalkaska Plant to do so, subject to necessary authorization, if any, from Plant Owners. (iv) The provisions of the Plant Processing and Operating Agreement shall apply at all times to the gas covered by this Contract with respect to insufficient capacity in the Kalkaska Plant except with respect to volumes of gas for which processing arrangements have been made in another plant as above provided. (c) During any periods when Paragraph 3 of Article IX of the Plant Processing and Operating Agreement is applicable and Buyer elects not 36 34 to bypass any or all of the gas well gas volumes covered hereby which are in excess of the capacity of the Kalkaska Plant, Buyer's take-or-pay obligation covered by Article V of this Contract shall be limited to the gas well gas volumes hereunder actually processed in such plant for Seller plus the volumes bypassed by Buyer, if any. Buyer's takes of gas from Seller and all other producers from whom Buyer purchases gas in the Contract Area shall be ratably apportioned with respect to volumes processed and bypassed. Seller shall not have any right to process or any interest in the liquefiable hydrocarbons or other constituents contained in any gas volumes bypassed by Buyer. (d) Seller shall have the right to process gas as above provided and use gas for fuel for processing gas and other purposes incident thereto; provided, however, that Seller shall reimburse Buyer for fuel and shrinkage due to product extraction, and other losses or uses of gas on the same basis (including taxes) which Buyer purchases such gas hereunder, and provided further that Seller shall be deemed to be in control and possession of the gas while it is in the processing facilities and responsible for any damage or injury caused thereby. ARTICLE XXI Transportation of Liquids 1. Arrangements and procedures acceptable to Buyer, Seller, Michigan Consolidated Gas Company, and any other interested producers have been agreed upon in the Allocation Agreement so as to provide for calculation and allocation at the Common Delivery Point of line gain or loss and shrinkage of various constituents of gas and liquid and liquefiable hydrocarbons injected into the 37 35 Common Line by such respective parties. Buyer, insofar as it has the right to do so, agrees that as long as this Contract, a Transportation Agreement and an Allocation Agreement are in effect, and one or more processing plants are in operation so as to permit continued processing of all the gas transported in the Common Line, Seller shall have the right to introduce into the Common Line the following liquids (herein called "Seller's Liquids") belonging to the Seller: (i) condensate or distillate produced from gas wells from which gas is sold to Buyer hereunder, provided that it is separated from such gas by normal field separation facilities prior to delivery of such gas to Buyer; (ii) natural gasoline produced as a result of compression of natural gas to be sold to Buyer hereunder, provided that the compression facilities in which it is produced are situated upstream of the delivery points hereunder; and (iii) such other liquids produced from wells from which gas is sold to Buyer hereunder (and which are separated from such gas prior to delivery of the gas to Buyer), other than crude oil, and which will not interfere with any other gas operations in the Common Line. 2. All Seller's Liquids shall be introduced at mutually agreeable points downstream from gas purchase meters at rates which will not impair any pipeline operations. Title to Seller's Liquids so introduced shall remain in Seller, and Seller shall be responsible therefor, except that Buyer shall be responsible and liable for any damages caused by said liquids when said damages are the result of Buyer's or Michigan Consolidated Gas Company's negligence. Seller's Liquids shall be transported to the Common Delivery Point at no cost to 38 36 Seller; provided, however, that Seller shall reimburse Buyer promptly after billing, for all operating expenses incurred by Buyer as a result of the introduction of Seller's Liquids into the Common Line. 3. If, in the opinion of Buyer, any liquids are introduced into the Common Line by Seller, at rates that will interfere with any gas operations or cause any operating problems, Seller shall (upon written request made at any time and from time to time by Buyer) immediately reduce the rates of introduction of such Seller's Liquids as directed by Buyer. Such reduced rates shall continue until Seller has submitted evidence satisfactory to Buyer that increased rates of introduction of such Seller's Liquids will not interfere with any gas operations or cause any operating problems. The consent by Buyer to any such increased rates of introduction of Seller's Liquids shall not be deemed a waiver by Buyer of its right, as above provided, to demand further reduction of the rates of introduction of such Sellers Liquids. If any party or parties is obligated by the Michigan Public Service Commission to levy any charge or fee for the transportation of liquids so introduced into the Common Line or laterals serving same, then Seller agrees it will either cease the introduction of Seller's Liquids into such facilities or will pay such charge or fee to the party or parties entitled thereto. It is expressly understood that Seller shall bear the allocated share of line gain or loss and shrinkage occurring in the Common Line attributable to Seller's Liquids as determined under the provision of the Allocation Agreement. It is further understood that if the liquids delivered to or for Seller's account at the Common Delivery Point attributable to Seller's Liquids have a greater aggregate heating value than the aggregate heating value actually attributable to Seller's Liquids at the Common Delivery Point, thereby resulting in a loss of heating value to Buyer for which adequate compensation is 39 37 not provided in the Allocation Agreement (considering that Buyer's purchases of gas are to be made on a Btu basis rather than on an Mcf basis), then Seller and Buyer agree to make whatever reasonable change in the method of accounting as between Seller and Buyer which is required to eliminate such inequity to Buyer to such extent as is practical and feasible. 4. Stabilization or processing of liquids or other hydrocarbon constituents belonging to Seller or other producers who may have injected same into the Common Line under this Article XXI shall be handled on such basis as shall be mutually agreed between the Plant Owners and the respective owners of such liquids and other hydrocarbon constituents. ARTICLE XXII Miscellaneous 1. No waiver by either party hereto of one or more defaults in the performance of any provision of this Contract shall operate or be construed as a waiver, by such party, of a future default, whether of a like or a different character. 2. All headings appearing herein are for convenience only and shall not be considered a part of this Contract for any purpose or as in any way interpreting, construing, varying, altering, or modifying this Contract or any of the provisions hereof. 3. Each party hereby grants to the other wherever necessary or convenient for carrying out the terms of this Contract requisite easements and rights of way over, across and under any land as to which such party has the right to make such grants. 40 38 4. Buyer agrees that if it enters into any contracts with parties other than Seller hereunder who will deliver to Buyer gas that will ultimately enter the Common Line upstream from the Kalkaska Plant, then such contracts with such other parties will contain the same restrictions regarding recovery of liquids or liquefiable hydrocarbons as are contained in Paragraph 1 of Article XX and will not contain provisions which mitigate against any of the provisions of Article XX and Article XXI. 5. Any price increase provided in Article VIII hereof requiring approval of the Michigan Public Service Commission or any successor state regulatory agency pursuant to Section 10 of PA 9 of 1929 shall not be effective until approved by such regulatory agency. 6. If at any time the Michigan Public Service Commission (or any successor state regulatory agency) shall disallow any portion of the price paid Seller hereunder from Buyer's purchased cost of gas in a ratemaking proceeding, then in such event Buyer shall thereafter reduce the price paid Seller to the maximum price from time to time allowed; provided, however, Buyer shall always prosecute diligently to pay Seller at the full contract price and to obtain inclusion of the full contract price hereunder in Buyer's purchased cost of gas. IN WITNESS WHEREOF, the parties hereto have caused this Contract to be executed as of the day and year first above written. BUYER: CONSUMERS POWER COMPANY WITNESSES: - ----------------------------- By /s/ R. J. Odlevak --------------------------------- R. J. Odlevak, Vice President /s/ G. F. Beaudoin - ------------------------------------ 41 SELLER: NORTHERN MICHIGAN EXPLORATION CO. WITNESSES: /s/ Richard Rulewicz - ------------------------------------ By /s/ Gordon L. Wright --------------------------------- /s/ Cynthia M. Marienfeld - ------------------------------------ 42 EXHIBIT "A" for GAS PURCHASE CONTRACT Dated December 1, 1985 Between CONSUMERS POWER COMPANY and NORTHERN MICHIGAN EXPLORATION COMPANY Township County ------------------------- -------------- Allis North, T34N-R2E Presque Isle Allis South, T33N-R2E Presque Isle Case North, T34N-R3E Presque Isle Case South, T33N-R3E Presque Isle Bismarck North, T34N-R4E Presque Isle Bismarck South, T33N-R4E Presque Isle Belknap, T34N-R5E Presque Isle Metz, T33N-R5E Presque Isle Pulawski, T34N-R6E Presque Isle Shell #1-30 Sylvania Savings SE NW SW Section 30, T34N-3E Case Township, Presque Isle County NOMECO #1-30 Parr NW NE NW Section 30, T34N-3E Case Township, Presque Isle County EX-10.9B 12 EXHIBIT 10.9(B) 1 EXHIBIT 10.9(b) MODIFICATION AND AMENDMENT TO GAS PURCHASE CONTRACT THIS AGREEMENT, made and entered into as of the 1st day of December, 1986, by and between CONSUMERS POWER COMPANY, a Michigan corporation, hereinafter referred to as "Buyer", and NORTHERN MICHIGAN EXPLORATION COMPANY, hereinafter referred to as "Seller"; WITNESSETH: WHEREAS, By Gas Purchase Contract dated December 1, 1985, Buyer and Seller entered into an agreement upon the terms, conditions and provisions therein contained and covering the well units set forth on Exhibit A attached thereto; and WHEREAS, Buyer and Seller desire to modify and amend said Gas Purchase Contract to cover and include, in addition to the well(s) now covered and included therein, the Amoco #2-26 Sorgett located in the NW-1/4 of the NE-1/4 of the SW-1/4 of Section 26, T34N-R4E, Bismark Township, Presque Isle County, Michigan; NOW THEREFORE, for and in consideration of the premises, Buyer and Seller mutually agree as follows: 1. Effective as of December 1, 1986, Original Exhibit A attached to said Gas Purchase Contract is of no further force and effect and there is hereby substituted therefore, effective as of December 1, 1986, the First Amended Exhibit A which is attached hereto and made a part hereof. 2. Except as specifically herein modified and amended, all of the other terms, conditions and provisions of said Gas Purchase Contract are and shall remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have executed or caused this agreement to be executed as of the day and year first above written. WITNESSES: BUYER CONSUMERS POWER COMPANY /s/ Beverly A. Avery By /s/ R. J. Odlevak - ------------------------------- ------------------------------- R. J. Odlevak, Vice President - ------------------------------- SELLER NORTHERN MICHIGAN EXPLORATION COMPANY By /s/ Gordon L. Wright - ------------------------------- ------------------------------- - ------------------------------- 2 FIRST AMENDED EXHIBIT "A" for GAS PURCHASE CONTRACT Dated December 1, 1985 Between CONSUMERS POWER COMPANY and NORTHERN MICHIGAN EXPLORATION COMPANY
Township County ------------------------ ------------ Allis North, T34N-R2E Presque Isle Allis South, T33N-R2E Presque Isle Case North, T34N-R3E Presque Isle Case South, T33N-R3E Presque Isle Bismarck North, T34N-R4E Presque Isle Bismarck South, T33N-R4E Presque Isle Belknap, T34N-R5E Presque Isle Metz, T33N-R5E Presque Isle Pulawski, T34N-R6E Presque Isle
Shell #1-30 Sylvania Savings SE NW SW Section 30, T34N-R3E Case Township, Presque Isle County NOMECO #1-30 Parr NW NE NW Section 30, T34N-R3E Case Township, Presque Isle County Amoco #2-26 Sorgett NW NE SW Section 26, T34N-R4E Bismark Township, Presque Isle County EX-10.9C 13 EXHIBIT 10.9(C) 1 EXHIBIT 10.9(c) MODIFICATION AND AMENDMENT TO GAS PURCHASE CONTRACT THIS AGREEMENT, made and entered into as of the 1st day of December, 1987, by and between CONSUMERS POWER COMPANY, a Michigan corporation, hereinafter referred to as "Buyer", and NORTHERN MICHIGAN EXPLORATION COMPANY, hereinafter referred to as "Seller"; WITNESSETH: WHEREAS, By Gas Purchase Contract dated December 1, 1985, Buyer and Seller entered into an agreement upon the terms, conditions and provisions therein contained and covering the well units set forth on Exhibit A attached thereto; and WHEREAS, Exhibit A was previously amended to include one or more wells not covered by the original contract; and WHEREAS, Buyer and Seller desire to modify and amend said Gas Purchase Contract to cover and include, in addition to the well(s) now covered and included therein, the Shell #2-27 Kanka-State Case located in the NW-1/4 of the NW-1/4 of the NW-1/4 of Section 27, T34N-R3E, Case Township, Presque Isle County, Michigan; NOW THEREFORE, for and in consideration of the premises, Buyer and Seller mutually agree as follows: 1. Effective as of December 1, 1987, the First Amended Exhibit A attached to said Gas Purchase Contract is of no further force and effect and there is hereby substituted therefore, effective as of December 1, 1987, the Second Amended Exhibit A which is attached hereto and made a part hereof. 2. Except as specifically herein modified and amended, all of the other terms, conditions and provisions of said Gas Purchase Contract (as previously amended) are and shall remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have executed or caused this agreement to be executed as of the day and year first above written. WITNESSES: BUYER ----- CONSUMERS POWER COMPANY /s/ Beverly A. Avery By /s/ R. J. Odlevak - ------------------------------ ------------------------------ R. J. Odlevak, Vice President /s/ Michael J. Ryan - ------------------------------ SELLER ------ NORTHERN MICHIGAN EXPLORATION COMPANY /s/ Richard Rulewicz By /s/ Gordon L. Wright - ------------------------------ ------------------------------ /s/ Cynthia M. Marienfeld - ------------------------------ 2 SECOND AMENDED EXHIBIT "A" for GAS PURCHASE CONTRACT Dated December 1, 1985 Between CONSUMERS POWER COMPANY and NORTHERN MICHIGAN EXPLORATION COMPANY
Township County ------------------------ ------------ Allis North, T34N-R2E Presque Isle Allis South, T33N-R2E Presque Isle Case North, T34N-R3E Presque Isle Case South, T33N-R3E Presque Isle Bismarck North, T34N-R4E Presque Isle Bismarck South, T33N-R4E Presque Isle Belknap, T34N-R5E Presque Isle Metz, T33N-R5E Presque Isle Pulawski, T34N-R6E Presque Isle
Shell #1-30 Sylvania Savings SE NW SW Section 30, T34N-R3E Case Township, Presque Isle County NOMECO #1-30 Parr NW NE NW Section 30, T34N-R3E Case Township, Presque Isle County Amoco #2-26 Sorgett NW NE SW Section 26, T34N-R4E Bismark Township, Presque Isle County Shell #2-27 Kanka-State Case NW NW NW Section 27, T34N-R3E Case Township, Presque Isle County EX-10.9D 14 EXHIBIT 10.9(D) 1 EXHIBIT 10.9(d) MODIFICATION AND AMENDMENT TO GAS PURCHASE CONTRACT THIS AMENDMENT, made and entered into as of the 1st day of March, 1988, by and between CONSUMERS POWER COMPANY, a Michigan corporation, hereinafter referred to as "Buyer", and NORTHERN MICHIGAN EXPLORATION COMPANY, hereinafter referred to as "Seller"; WITNESSETH: WHEREAS, By Gas Purchase Contract dated December 1, 1985, Buyer and Seller entered into an agreement upon the terms, conditions and provisions therein contained and covering the well units set forth on Exhibit A attached thereto; and WHEREAS, Exhibit A was previously amended to include one or more wells not covered by the original contract; and WHEREAS, Buyer and Seller desire to modify and amend said Gas Purchase Contract to cover and include, in addition to the well(s) now covered and included therein, the Shell #2-30 Sylvania Savings located in the NW-1/4 of the SE-1/4 of the NW-1/4 of Section 30, T34N-R3E, Case Township, Presque Isle County, Michigan; NOW THEREFORE, for and in consideration of the premises, Buyer and Seller mutually agree as follows: 1. Effective as of March 1, 1988, the Second Amended Exhibit A attached to said Gas Purchase Contract is of no further force and effect and there is hereby substituted therefore, effective as of March 1, 1988, the Third Amended Exhibit A which is attached hereto and made a part hereof. 2. Except as specifically herein modified and amended, all of the other terms, conditions and provisions of said Gas Purchase Contract as previously amended are and shall remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have executed or caused this Amendment to be executed as of the day and year first above written. WITNESSES: BUYER ----- CONSUMERS POWER COMPANY By /s/ R. J. Odlevak - ------------------------------ ------------------------------ - ------------------------------ SELLER ------ NORTHERN MICHIGAN EXPLORATION COMPANY /s/ Barbara J. Strause By /s/ W. H. Stephens, III - ------------------------------ ------------------------------ /s/ Tami A. Opalik - ------------------------------ 2 THIRD AMENDED EXHIBIT "A" for GAS PURCHASE CONTRACT Dated December 1, 1985 Between CONSUMERS POWER COMPANY and NORTHERN MICHIGAN EXPLORATION COMPANY
Township County ------------------------ ------------ Allis North, T34N-R2E Presque Isle Allis South, T33N-R2E Presque Isle Case North, T34N-R3E Presque Isle Case South, T33N-R3E Presque Isle Bismarck North, T34N-R4E Presque Isle Bismarck South, T33N-R4E Presque Isle Belknap, T34N-R5E Presque Isle Metz, T33N-R5E Presque Isle Pulawski, T34N-R6E Presque Isle
Shell #1-30 Sylvania Savings SE NW SW Section 30, T34N-R3E Case Township, Presque Isle County NOMECO #1-30 Parr NW NE NW Section 30, T34N-R3E Case Township, Presque Isle County Amoco #2-26 Sorgett NW NE SW Section 26, T34N-R4E Bismark Township, Presque Isle County Shell #2-27 Kanka-State Case NW NW NW Section 27, T34N-R3E Case Township, Presque Isle County Shell #2-30 Sylvania Savings NW SE NW Section 30, T34N-R3E Case Township, Presque Isle County EX-10.10 15 EXHIBIT 10.10 1 EXHIBIT 10.10 G A S P U R C H A S E C O N T R A C T Between CONSUMERS POWER COMPANY As Buyer - and - NORTHERN MICHIGAN EXPLORATION COMPANY As Seller Dated: November 2, 1978 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * 2
TABLE OF CONTENTS ----------------- ARTICLE PAGE - ------- ---- I Definitions 2 II Initial Procedure 4 III Commitment of Gas 5 IV Determination of Reserves 6 V Reservations 9 VI Quantity 11 VII Price 15 VIII Billing and Payment 18 IX Delivery Point or Points 19 X Term 20 XI Quality of Gas 20 XII Delivery Pressure 23 XIII Measurements and Tests 23 XIV Force Majeure 28 XV Laws, Orders, Rules and Regulations 29 XVI Taxes 29 XVII Assignment 30 XVIII Notices 31 XIX General 31 XX Option 32
3 GAS PURCHASE CONTRACT THIS AGREEMENT, made and entered into as of this 2nd day of November 1978, by and between NORTHERN MICHIGAN EXPLORATION COMPANY, (hereinafter referred to as "Seller") and CONSUMERS POWER COMPANY, a Michigan corporation, (hereinafter referred to as "Buyer"); W I T N E S S E T H : WHEREAS, Seller presently owns or controls or has contractual rights in certain oil and gas leases that cover or relate to portions of the lands embraced within the area described on Exhibit "A", attached hereto and made a part hereof; and WHEREAS, Seller desires to sell all gas attributable to its interest which may be produced from said well; and WHEREAS, Buyer, a public utility, engaged in the distribution and sale of gas in numerous cities, villages and townships within the State of Michigan, is willing, subject to the terms and conditions hereinafter contained, to purchase the gas that may be produced by Seller from the area described on Exhibit "A"; NOW, THEREFORE, in consideration of the mutual promises, agreements and undertakings hereinafter set forth, it is hereby agreed by and between Seller and Buyer as follows: 4 ARTICLE I DEFINITIONS 1. The term "gas well gas", unless the context otherwise requires, shall mean that part of the effluent produced from a well classified as a gas well by the regulatory agency having jurisdiction in such matters which remains in the vapor phase after passing such well effluent through a conventional mechanical separator or separators for the separation of liquids and gas. 2. The term "oil well gas", unless the context otherwise requires, shall mean that part of the effluent produced from a well classified as an oil well by the regulatory agency having jurisdiction in such matters which remains in the vapor phase after passing such well effluent through a conventional mechanical separator or separators for the separation of liquids and gas. 3. The term "gas", unless the context otherwise requires, shall mean gas well gas or oil well gas or the combination of both. 4. The term "reserves", unless the context otherwise requires, shall mean the estimated quantities of producible gas in place that remain as of November 2, 1978, in the following types of reservoirs. For gas reservoirs, defined as those subsurface accumulations in which all hydrocarbons are initially in the vapor phase, producible reserves shall be calculated using a recovery factor of 92 percent of hydrocarbon gas in place with no further adjustment for shrinkage due to surface condensation of liquids. For oil reservoirs, defined as those subsurface accumulations in which all hydrocarbons are initially in the liquid phase, producible reserves shall be - 2 - 5 calculated using a recovery factor of 80 percent of the vaporizable hydrocarbons ("solution gas") in place with no further adjustment for shrinkage due to surface condensation. For associated reservoirs, defined as those subsurface accumulations in which a hydrocarbon vapor phase (gas cap) and a hydrocarbon liquid phase (oil column) co-exist at initial conditions, producible reserves shall be calculated using recovery factors of 92 percent of the hydrocarbon vapor phase (gas cap gas) initially in place and 80 percent of the vaporizable liquid phase ("solution gas') initially in place with no further adjustments for shrinkage due to surface condensation. All reserves shall be estimated using engineering principles generally accepted in the gas industry. 5. The term "contract year" shall mean a period of twelve (12) consecutive months commencing on January 1st of each year; provided, however, that the first contract year will commence on the date of first delivery of gas hereunder and end on January 1 next following the date of such first delivery. 6. The term "annual contract quantity" shall mean a quantity of gas well gas equal to the sum of the products obtained by multiplying the contract quantity in effect during a contract year by the number of days for which it was in effect. 7. The term "well" shall mean an individual completion in an oil or gas reservoir. 8. The term "Deliverability" shall mean the maximum daily volume of legally producible gas well gas which, in the course of prudent operations (as determined in the sole discretion of Seller), can be delivered to Buyer from the properties covered hereunder. - 3 - 6 9. The term "month" shall mean the period of time beginning at 12:00 noon on the first day of a calendar month and ending at 12:00 noon on the first day of the next succeeding calendar month. 10. The term "day" shall mean a period of twenty-four (24) consecutive hours beginning at 12:00 noon. 11. The term "Mcf" shall mean one thousand cubic feet. 12. The term "Bcf" shall mean one billion cubic feet. 13. The term "tendered" shall mean Seller's commitment of reserves hereunder. ARTICLE II INITIAL PROCEDURE 1. Seller agrees that it shall, in the exercise of due diligence, file for all governmental consents and authorizations, if any, necessary for Seller to produce, sell and deliver gas to Buyer in accordance with the terms and provisions hereof. Seller further agrees that it will install or cause to be installed the facilities necessary for Seller to perform its obligations hereunder. 2. Buyer agrees that it shall, in the exercise of due diligence file for all governmental consents and authorizations, if any, necessary for Buyer to purchase and receive gas hereunder. Buyer agrees to make any required Petitions to the Michigan Public Service Commission within thirty (30) days after the date on which this Agreement has been executed by the parties hereto. If any such necessary governmental consents and authorizations have not been issued to Buyer within one hundred eighty (180) days after application therefor, then Seller may, acting in good faith and not capriciously, by notice to Buyer during the time such condition continues, cancel this Agreement insofar as it pertains to the reserves affected by the lack of such consents and authorizations Buyer further agrees that, - 4 - 7 subsequent to the receipt of all necessary governmental consents and authorizations, it will proceed with due diligence to install the facilities necessary for Buyer to perform its obligations hereunder. ARTICLE III COMMITMENT OF GAS 1. Subject to all of the provisions hereof, Seller commits to the performance of this Agreement all gas reserves in the formations and strata in and under the area described on Exhibit "A" which are above the base of the Niagaran Formation and which are attributable to any interest in such gas now or hereafter owned by Seller. Said commitment shall continue in effect until December 31, 1981 and from month to month thereafter unless cancelled by written notice by Seller to Buyer given at least thirty (30) days prior to the time Seller desires to cancel the commitment provided for hereunder. Said cancellation shall apply only to acreage outside of drilling or production units in the area described on Exhibit "A" on the effective date of said cancellation. 2. Seller, with Buyer's written concurrence, may add acreage to the performance of the foregoing commitment. If Seller elects to so add additional acreage to this Agreement, Seller shall prepare and submit to Buyer a description of the additional acreage and the written acceptance by Buyer of the document containing such description shall constitute Buyer's written concurrence and thereupon Exhibit "A" to this Agreement shall be deemed to have been amended to reflect the additional acreage. 3. The gas reserves discovered in wells drilled within the area described on Exhibit "A", or on acreage added to this Agreement pursuant to Section 2 above, shall be determined in accordance with the provisions of Article IV hereof. - 5 - 8 ARTICLE IV DETERMINATION OF RESERVES 1. Seller shall forthwith furnish Buyer all information and data in Seller's possession which Seller deems nonconfidential that may be required by Buyer for the purpose of estimating the initial amount of reserves, and shortly after furnishing such information Seller shall also submit to Buyer a statement showing Seller's estimate of the initial amount of reserves and the amount of reserves in each gas well gas reservoir then covered hereunder. If Buyer does not object to all or any part of such statement within forty-five (45) days after receipt thereof, Seller's said statement shall be deemed correct for all purposes hereof. If Buyer objects to all or any part of such statement within said forty-five day period, the parties shall promptly meet to attempt to resolve their difference over those portions of such statement to which Buyer has objected. If the parties have not resolved all such portions within thirty (30) days after Buyer's said objection, then the parties shall submit those portions of the statement still in disagreement to arbitration as provided in Section 4 of this Article IV. The effective date of the initial determination of reserves pursuant to this Section 1 shall be the date of initial deliveries of gas hereunder or within one hundred twenty (120) days following the tender by Seller of gas reserves to Buyer, whichever is earlier. 2. From time to time after execution hereof, Seller may discover additional reserves on acreage committed to Buyer pursuant to the provisions hereof. Promptly after the time of each such discovery Seller shall furnish Buyer all available basic data required to estimate the gas reserves discovered and a statement showing the amount of such reserves and the amount of reserves in - 6 - 9 each gas well gas reservoir as committed. If Buyer does not object to all or any part of such statement within thirty (30) days after receipt thereof, the amount of reserves shown on Seller's said statement shall be added to the then-current amount of reserves, and the total shall be the reserves for all purposes hereunder. If Buyer objects to all or any part of such statement within said thirty-day period, the parties shall promptly meet to attempt to resolve their differences over those portions of such statement to which Buyer has objected. If the parties have not resolved all such portions within thirty (30) days after Buyer's said objection, then the parties shall submit those portions of the statement still in disagreement to arbitration as provided in Section 4 of this Article IV. The effective date that such committed reserves, as determined by agreement or arbitration, shall be added to the previously-committed reserves hereunder shall be the first day of the month next following the date of connection of such reserves to Buyer's facilities. 3. After the initial determination of reserves hereunder, Buyer may make, or Seller may request Buyer to make, at reasonable intervals, a redetermination of the amount of reserves. Upon Buyer's making a redetermination or within thirty (30) days after a request for a redetermination, Buyer shall furnish Seller a statement showing Buyer's estimate of the amount of reserves and the amount of reserves in each gas well gas reservoir then covered hereby. If Seller does not object to all or any part of such statement within thirty (30) days after receipt thereof, Buyer's said statement shall be deemed correct for all purposes hereof. If Seller objects to all or any part of such statement within said thirty-day period, the parties shall promptly meet to attempt to resolve their differences over those portions of such statement to which Seller - 7 - 10 has objected. If the parties have not resolved all such portions within thirty (30) days after Seller's said objection, then the parties shall submit those portions of the statement still in disagreement to arbitration as provided in Section 4 of this Article IV. The effective date of any redetermination of reserves pursuant to this Section 3 shall be the first day of the month following the date of request therefor. 4. If arbitration is required to resolve any differences over reserves, such dispute shall be submitted to three qualified arbitrators for arbitration, one to be selected by Seller, one to be selected by Buyer and the third arbitrator to be selected by the first two arbitrators. If either Seller or Buyer shall fail to select an arbitrator within ten (10) days after said dispute is provided to be submitted to arbitration hereunder, or if the two arbitrators first selected shall fail to select a third arbitrator within ten (10) days after the selection of the second of them, then either Seller or Buyer may request the American Arbitration Association to select the arbitrator or arbitrators to complete the board of three. After three arbitrators are selected in accordance with the foregoing, they shall meet, hear the parties with respect to the dispute and arrive at a decision all in accordance with the Rules of the American Arbitration Association. Any decision regarding such dispute which has been agreed in writing by at least two of the said arbitrators shall be final and conclusive and all costs of arbitration hereunder shall be borne equally by Seller and Buyer. All arbitrators appointed pursuant to this section shall be qualified independent engineers experienced in the oil and gas industry and competent to pass on the matter of reserves. A judgment upon the award or decision rendered by the arbitrators may be entered in any Circuit Court having - 8 - 11 Jurisdiction; and this arbitration agreement shall be governed by the laws of the State of Michigan. 5. If, upon the conclusion of any redetermination, Buyer does not have sufficient capacity in its facilities to take the total quantities of gas which it is required to take or pay for under this Agreement, Buyer shall diligently proceed to obtain the governmental consents and authorizations, if any, required to expand the capacity of such facilities. If Buyer has not received all such consents and authorizations within one hundred eighty (180) days after conclusion of the redetermination, then either party, acting in good faith and not capriciously, by notice to the other party given prior to Buyer's receipt of all such consents and authorizations, may cancel this Agreement insofar as it covers gas in excess of Buyer's capacity. 6. Seller agrees to furnish to Buyer, as it becomes available, all information and data in Seller's possession which Seller deems nonconfidential that may be required by Buyer for the purpose of estimating reserves pursuant to the provisions of this Article IV. ARTICLE V RESERVATIONS 1. Notwithstanding anything to the contrary which may be contained or implied herein, Seller hereby reserves unto itself the following rights with respect to the gas produced from the lands and leaseholds subject to this Agreement: (a) To operate Seller's leaseholds, lands and/or interests therein free from any control by Buyer in such manner as Seller, at Seller's sole discretion, may deem advisable, including without limitation the right, but never the obligation, to drill new wells, to repair and - 9 - 12 rework old wells, renew and extend, in whole or in part, any leases subject hereto and to abandon any well or surrender any lease, in whole or in part, when no longer deemed by Seller to be capable of producing gas in paying quantities. (b) To deliver to Seller's lessors sufficient gas to meet Seller's obligations under its leases. (c) To use all gas that Seller may need or require for the development and operation ofSeller's leases subject hereto and other leases in the vicinity thereof, including, but not limited to, the use of gas for fuel, drilling, deepening, reworking, compression, gas lifting, processing, cycling, repressuring, or other secondary recovery operations. (d) To sell gas to others for drilling fuel in the vicinity of the leases subject hereto. (e) To process gas prior to delivery to Buyer for the extraction of any substance contained therein other than methane (except such methane necessarily removed in such processing); provided, however, that such processing shall not render the residue gas remaining after processing incapable of meeting the quality standards required herein. (f) To form or participate in the formation of any unit or units, including, but not limited to, field wide unit or units, which may include all or part of the lands and leaseholds subject hereto; provided that this Agreement shall apply to the interest of Seller in such unit or units to the extent such interest is attributable to the lands and leaseholds subject hereto. 2. The obligations of Seller hereunder are subject to the ability of Seller's well to produce without waste and in accordance with prudent oil and gas field practice, and Seller shall not be required to produce any well in excess of the maximum rate of flow fixed by law or regulatory body or in - 10 - 13 excess of maximum efficient rate of flow of such well, at Seller's sole discretion. ARTICLE VI QUANTITY 1. Commencing on the date of first delivery of gas hereunder and continuing throughout the term hereof, Seller shall sell and deliver to Buyer, and Buyer shall purchase and take from Seller hereunder, during each day, all of the oil well gas made available for sale by Seller from the properties covered hereby. 2. Commencing on the date of first delivery of gas well gas hereunder and continuing throughout the term of this Agreement, Seller shall sell and deliver to Buyer, and Buyer shall purchase and take from Seller hereunder, or pay Seller for whether taken or not, during each contract year, a daily contract quantity of gas well gas equal to the sum of the following: (a) One million (1,000,000) cubic feet for each two billion, five hundred million (2,500,000,000) cubic feet of gas well gas reserves from gas well gas reservoirs from which less than fifty percent (50%) of the reserves have been produced; and (b) One million (1,000,000) cubic feet for each three billion, six hundred and fifty million (3,650,000,000) cubic feet of gas well gas reserves from gas well gas reservoirs other than those described in subsection (a) above. 3. Buyer agrees, in the absence of force majeure, to purchase and take from Seller, on each day, a quantity of gas well gas sufficient to keep Seller's leases in effect, but not less than one million (1,000,000) cubic - 11 - 14 feet for each five billion (5,000,000,000) cubic feet of gas well gas reserves as established from time to time pursuant to Article IV hereof. 4. If Seller fails on any day for any reason other than force majeure to deliver the daily volume of gas well gas requested by Buyer hereunder up to one hundred eleven percent (111%) of the daily contract quantity, then the daily contract quantity for that day shall be reduced to ninety percent (90%) of the volume of gas well gas which Seller delivered on such day. 5. If Seller fails for any reason other than force majeure to deliver the volumes of gas well gas requested by Buyer up to one hundred eleven percent (111%) of the daily contract quantity for five (5) consecutive days, then, commencing on the first day of the month following the end of the fifth (5th) day of such failure to deliver, and continuing thereafter until adjusted as hereinafter provided, the daily contract quantity of gas well gas shall be reduced to ninety percent (90%) of the average daily volume of gas well gas delivered during such five (5) day period. 6. If the daily contract quantity is adjusted downwards as provided in Section 5 of this Article VI, then Seller shall have the opportunity to restore all or a portion of the daily contract quantity determinable under Section 2 or Section 3, as the case may be, of this Article VI in the following manner: Not later than three (3) days after Seller has notified Buyer in writing that its inability to deliver gas well gas hereunder has been remedied, Buyer shall, upon twenty-four (24) hours' notice by Buyer to Seller, commence a five (5) day test period, during which time Seller will deliver and Buyer will purchase the Deliverability, but not to exceed one hundred eleven percent (111%) of the daily contract quantity determinable under Section 2 or Section 3, as the case may be, of this Article VI. Commencing on the day following the last day of such test period, the daily contract quantity under Section 2 or Section 3, as the case may be, of this Article VI shall be deemed to be ninety - 12 - 15 percent (90%) of the average daily volume of gas well gas delivered by Seller during such five (5) day test period. If, as a result of such test, the daily contract quantity is not restored to the daily contract quantity determinable under Section 2 or Section 3, as the case may be, of this Article VI, Seller shall not be permitted until three (3) months following the completion of such test to again request Buyer to conduct a subsequent test unless a reasonable amount of additional development or remedial work has been performed by Seller since the last test, in which case evidence of such work shall be sufficient to permit a request for a subsequent test. Upon receipt of notice from Seller that the inability to deliver has been remedied, Buyer may, in lieu of conducting such test, notify Seller that, commencing with the first day following receipt of said notice from Seller, the downward adjustment in daily contract quantity shall no longer be effective. 7. If the total volume of gas well gas actually purchased and taken by Buyer during any contract year is less than the annual contract quantity for such year, then, within fifteen (15) days following the end of such contract year, Buyer shall pay Seller for any such deficiency at the then-effective price per Mcf hereunder. Buyer shall have the right, during the next five (5) contract years following the contract year in which a deficiency occurred, to take gas well gas paid for but not taken by Buyer hereunder by taking gas well gas in volumes in excess of the annual contract quantities for such years. Any such gas well gas so taken as makeup for gas well gas shall be free of additional cost to Buyer, except that Buyer shall pay Seller the difference between the price paid for gas not taken and the price in effect at the end of the contract year during which gas well gas was made up, plus the tax reimbursement, if any, due under Article XVI. - 13 - 16 8. If withdrawals by other producers from a reservoir or common source of supply containing gas well gas reserves committed hereunder cause drainage of Seller's reserves, Buyer shall be obligated, upon written notice from Seller to Buyer accompanied by sufficient proof of such drainage, to equalize, within the limits of the physical capacity of its facilities, withdrawals of gas well gas from such reservoir and shall thereafter take volumes of gas, well gas from such reservoir so that, during the remaining term of this Agreement, Seller's reserves will be delivered hereunder as if such drainage had not occurred. If the capacity of Buyer's facilities is not sufficient to prevent such drainage, Buyer shall, within thirty (30) days after Seller's said notice, file an application with the governmental authority having jurisdiction for such authorization as may be necessary to accept and transport the quantities of gas well gas necessary to prevent such drainage. Promptly after receipt of such authorization, Buyer shall enlarge its said facilities and thereafter take volumes of gas well gas from such reservoir so that, during the remaining term of this Agreement, Seller's reserves will be delivered hereunder as if such drainage had not occurred. Buyer shall release from this Agreement an amount of gas equal to the volumes which have been drained and which, without such release, would be drained prior to the completion of Buyer's facilities if approval to construct the facilities is not obtained within ninety (90) days after application therefor. 9. Notwithstanding anything to the contrary contained or implied herein, on any day when deliveries or takes are affected by force majeure and as a result thereof volumes delivered are less than the applicable daily contract quantity, the daily contract quantity hereunder shall be deemed to be the actual volume delivered and purchased on such day. - 14 - 17 10. Notwithstanding the provisions of Section 2 and 3 of this Article VI, Buyer shall not be obligated to take, or pay for if not taken, gas which does not meet the quality specifications set forth in Article XI hereafter. ARTICLE VII PRICE 1. The price to be paid by Buyer to Seller for gas to be sold and purchased under this Agreement, or for which payment is due hereunder, shall be 230.049 cents per Mcf, which price shall remain in effect until January 1, 1979. On January 1, 1979 and thereafter, at the beginning of each subsequent three-month period the price then in effect shall be increased by the following percentage rates:
Years Quarterly Escalation ----- -------------------- 1979 1.50% 1980-1981 1.75% 1982-1983 2.00% 1984-1985 2.25% 1986 and thereafter 2.50%
All increases in price shall be calculated to the nearest one thousandth of one cent. The price provided to be paid under the provisions of this Section 1 shall constitute the Contract Price. 2. Commencing in January, 1986, and in each month thereafter in which the Contract Price exceeds the equivalent value of 1,000,000 BTU's of Number 2 Fuel Oil based on the arithmetic average of the daily price quotations for Number 2 Fuel Oil as reported by "Platts Oilgram Price Service, US Tank Car-Truck Transport Lots, Midcontinent, Detroit," Seller shall refund to Buyer an amount calculated by multiplying the difference between the Contract Price and the equivalent value of 1,000,000 BTU's of Number 2 Fuel Oil, as herein defined, by the volume of gas taken or paid for by Buyer hereunder during the month. For the purpose hereof, a gallon of Number 2 Fuel Oil shall be considered to - 15 - 18 contain 140,640 BTU's. Notwithstanding the foregoing provisions of this Section 2, it is understood and agreed that there is hereby established a base price of 390.000 cents per Mcf for the period commencing January 1, 1986, and ending March 31, 1986, which shall increase at the rate of six and one-quarter cents (6.25c.) at the beginning of each three-month period thereafter, commencing April 1, 1986. If the base price so established for any month is in excess of the equivalent value of 1,000,000 BTU's of Number 2 Fuel Oil (calculated as provided above), the base price shall be utilized in lieu of the price equivalent value of 1,000,000 BTU's of Number 2 Fuel Oil for the purpose of determining the amount of refund to be made by Seller to Buyer hereunder. 3. If, at any time and from time to time, the Federal Energy Regulatory Commission (or any other governmental authority, whether Federal or State, having jurisdiction over the rates to be charged or paid for the sale or purchase of natural gas) shall authorize by order, by settlement, or by other authorization of general applicability (except with regard to (i) emergency sales, (ii) sales of gas made in accordance with optional certificate procedures pursuant to Federal Power Commission Order Nos. 455 and 455-A, including any modification, amendment or replacement of similar import of said Orders, and (iii) sales of gas made by any producer at a price prescribed pursuant to a petition for special relief filed by any such producer), or if any statute shall authorize, a higher rate (whether or not subject to refund) than the rate herein provided to be paid for all or a portion of the gas hereunder, which higher rate is applicable to the geographical area of gas sales under this contract and to other sales or purchases of gas produced in the Lower Peninsula of the State of Michigan (including the adjacent waters of Lakes Michigan and Huron), then the price to be paid by Buyer to Seller for gas delivered or for which payment is due hereunder shall be increased to equal such higher rate, effective as of the date such higher rate is authorized. If any such higher rate is subject to refund pursuant to applicable law, such increased rate under this - 16 - 19 Agreement shall also be subject to refund, and if refunds are required with respect to such higher rate, Seller shall make refunds hereunder in the same manner as are applicable to such higher rate; provided, Seller shall not be required to make any refunds hereunder based on rates less than the prices set forth in the foregoing provisions of this Article. If, pursuant to this Paragraph, the price to be paid hereunder is increased, such increased price shall be in effect until a higher price shall become effective hereunder pursuant to this Agreement. 4. Notwithstanding the foregoing provisions of this Article VII, Buyer shall pay Seller, in lieu of any other price herein provided the greater of the following prices for the gas attributable to royalty and overriding royalty shares, if any, owned by the United States, the State of Michigan, or a political subdivision thereof (hereinafter called "government lease gas"): (a) The price provided from time to time by Buyer for gas delivered or for which payment is due hereunder; or (b) The price at which Seller is required to account to the United States, the State of Michigan, or a political subdivision thereof, for royalties on the sale of government lease gas. 5. Buyer and Seller acknowledge that the price per Mcf is related to both the temperature base and the pressure base used for measurement of gas. Therefore, if either the temperature base or the pressure base of this Agreement is, for any reason, modified from the base temperature of sixty degrees (60 degrees) Fahrenheit and/or from the base pressure of 14.73 pounds per square inch absolute, the price provisions of all sections of this Article VII will be adjusted proportionately. 6. It is the intent of the parties that Buyer shall be permitted to pay and Seller shall be permitted to collect each of the prices provided in - 17 - 20 this Agreement from time to time. Therefore, each party covenants and agrees it will not, by act or omission, conduct itself in a manner calculated to nullify, cancel, circumvent or minimize the operation of any of the pricing provisions hereof. These covenants and agreements shall extend to and be binding upon each of the parties, their successors, assigns, subsidiaries, parent corporations and affiliated corporations and the directors, officers, employees, agents and attorneys of each of same. ARTICLE VIII BILLING AND PAYMENT 1. After deliveries of gas have commenced under this Agreement, Buyer shall, on or before the tenth (10th) day of each month, render to Seller a statement showing the quantity of gas delivered hereunder to Buyer during the preceding month. Not later than the twenty-fifth (25th) day of each month, Buyer shall pay Seller for the gas taken by Buyer during the preceding month. 2. Each party hereto shall have the right at reasonable hours to examine books, records and charts of the other party to the extent necessary to verify the accuracy of any statement, charge, or computation made pursuant to the provisions of this Agreement. If any such examination reveals an inaccuracy resulting in an error in any billing theretofore made, the necessary adjustments in such billing and payments shall be promptly made. 3. In the event any adverse claim of any character whatsoever is asserted in respect to any of the gas committed hereunder, Buyer may retain, as security for the performance of Seller's obligations with respect to such claim, the entire purchase price of said gas until Buyer has been satisfied as to the amount of such claim and thereafter up to the amount of such claim, both without interest, until such claim has been finally determined or until Seller shall have furnished bond to Buyer in the amount and with sureties satisfactory to Buyer, conditioned for the protection of Buyer with respect to such claim. - 18 - 21 ARTICLE IX DELIVERY POINT OR POINTS 1. The delivery point or points of all gas provided to be sold and purchased hereunder shall be as follows: Oil Well Gas - - - At the entrance of a meter station to be installed by Buyer at a mutually agreeable location in each field. Gas Well Gas - - - At the entrance of a meter station to be installed by Buyer at or near each well in each field. Title to all gas sold hereunder shall pass from Seller to Buyer at said point or points of delivery. 2. Seller hereby warrants title to all gas sold under this Agreement and the right to sell the same, and that such gas is free and clear from all liens and adverse claims, and that Seller will indemnify, defend and save Buyer harmless from and against all suits, actions, debts, accounts, damages, costs, losses and expenses arising from or out of adverse claims of any or all persons or parties to said gas or to royalties, taxes, license fees or charges with respect thereto, which are a proper charge against Seller, or which may be levied or assessed upon the production of the said gas, the sale thereof to Buyer or upon the operation of Seller's wells. 3. Seller undertakes and agrees to maintain and be entirely responsible for its ownership in said well, equipment and other facilities up to the point of delivery hereinabove specified and further agrees to hold harmless, indemnify and defend Buyer from and against all expense and liability in any manner connected therewith. Buyer agrees to maintain and be entirely responsible for its meter stations and transmission facilities beyond the above-mentioned point of delivery and that it will hold harmless, indemnify and defend Seller from and against all loss, damage, expense and liability resulting therefrom. - 19 - 22 As between the parties hereto, Seller shall be in control and possession of the gas delivered hereunder and shall be responsible therefor and for any damage or injury caused thereby, in whole or in part, until the same is delivered to Buyer at the said point of delivery, after which delivery Buyer shall be in exclusive control and possession thereof and shall be responsible therefor any injury or damage caused thereby in whole or in part. ARTICLE X TERM 1. This Agreement shall become effective as of the date hereof and unless cancelled earlier pursuant to the other provisions of this Agreement shall remain effective for a period of twenty (20) years from the date of this Agreement. ARTICLE XI QUALITY OF GAS 1. All gas delivered by Seller under the terms of this Agreement shall conform to the following specifications: (a) The gas shall be commercially free from dust, gum, gum-forming constituents and liquids and solids which may become separated from gas. (b) The water content of the gas shall not exceed five (5) pounds per million cubic feet; provided, however, water content in excess of five (5) pounds per million cubic feet will be accepted, if said water content will not occasion any adverse effect on the operation of Buyer's facilities, but in no event shall the water exceed seven (7) pounds per million cubic feet. (c) The gas shall not at any time have an oxygen content in excess - 20 - 23 of one percent (1%) by volume, and Seller shall make every reasonable effort to keep the gas free of oxygen. (d) The partial pressure of carbon dioxide shall not exceed 4 psi at a total gas pressure of 100 psig. (e) The gas shall not contain more than one quarter (1/4) grain of hydrogen sulphide per one hundred (100) cubic feet. The purity requirement shall be considered as satisfied if a strip of white filter paper, freshly moistened with a solution of one hundred (100) grains of lead acetate in one hundred (100) cubic centimeters' of water is exposed to the gas for one and one-half (1-1/2) minutes in a previously purged apparatus through which gas is flowing at a rate of approximately five (5) cubic feet per hour, the gas not impinging from a jet upon the test paper, and after this exposure the test paper is not found distinctly darker than a second paper freshly moistened with the solution and not exposed to the gas. If the gas does not meet the purity requirements determined in the above test, the hydrogen sulphide content shall be determined by a cadmium sulphate quantitative test. The gas shall not contain more than one-half (1/2) grain of mercaptan sulfur per one hundred (100) cubic feet, provided that if the mercaptan sulfur level of Seller's gas causes intolerable odorant conditions, Buyer, after making every reasonable effort to correct said conditions, will notify Seller, which in turn agrees to use its best efforts to alleviate said condition. Failing to alleviate the intolerable condition, the volume of gas causing the intolerable condition - 21 - 24 which cannot be reasonably treated by Seller nor utilized by Buyer through mixing with other gases will be excluded from those volumes of gas which Buyer is obligated to purchase and take from Seller hereunder or pay Seller for whether taken or not. In no event, however, shall Seller be required to reduce the mercaptan sulfur level below one-fifth (1/5th) grain per one hundred (100) cubic feet. (f) The gas shall not contain more than five (5) grains of total sulfur (including the sulfur in any hydrogen sulphide and mercaptans) per one hundred (100) cubic feet. (g) The gas shall have a total heating value per cubic foot of not less than one thousand (1,000) British thermal units. The gas shall have a maximum total heating value per cubic foot sufficiently low that the quotient of the total heating value per cubic foot of gas divided by the square root of the specific gravity of the gas does not exceed 1375. The phrase "total heating value per cubic foot" shall mean the number of British thermal units, produced by combustion at constant pressure, of that amount of gas, saturated with water vapor, which would occupy a volume of one (1) cubic foot at a temperature of sixty degrees (60 degrees) Fahrenheit and under a pressure equivalent to that of thirty (30) inches of mercury at thirty-two degrees (32 degrees) Fahrenheit and under the standard gravitational force with air of the same temperature and pressure as the gas, when the products of combustion are cooled to the initial temperature of gas in air and when the water formed by combustion is condensed to a liquid state. (h) The gas shall be interchangeable as defined in American Gas Association Research Bulletin 36, published in 1946, entitled "Interchangeability of Other Fuel Gases with Natural Gases." - 22 - 25 2. If the gas offered for sale to Buyer fails at any time to conform to any of the specifications of this Article XI, Buyer may notify Seller of any such failure in writing and Seller shall make a diligent effort to correct such failure so as to deliver gas conforming to the above specifications. If after receiving such notice, Seller is unable to deliver gas conforming to the above specifications by treatment consistent with prudent operations and by means which are economically feasible, in Seller's opinion, Buyer may at its option either accept or reject deliveries thereof. If Buyer rejects the gas, such gas shall be released from this Agreement. ARTICLE XII DELIVERY PRESSURE 1. Seller shall deliver gas well gas at a pressure sufficient to allow the gas well gas to enter Buyer's facilities at the delivery points hereunder, provided Seller shall not be obligated to deliver gas well gas to Buyer at a pressure in excess of one thousand and fifty (1,050) pounds per square inch gauge. If the well is unable to produce the daily contract quantity applicable to such reservoir against the pressure prevailing in Buyer's pipelines, then Buyer shall promptly reduce such pressures to the extent required to permit the delivery of such quantity from such well; provided, that Buyer shall never be obligated to reduce such pressure below 200 pounds per square inch gauge. If Buyer is required to install compression facilities to effectuate such reduction in pressure, the provision of Article XIV hereof shall excuse Buyer's failure to take such daily contract quantity during the period prior to the completion of the installation of such compression facilities. ARTICLE XIII MEASUREMENTS AND TESTS 1. Standards of measurements and tests: (a) The volume of gas delivered hereunder shall be computed in - 23 - 26 accordance with the methods prescribed in the Gas Measurement Committee Report #3, Natural Gas Department, American Gas Association, as revised and reprinted September, 1969, and any subsequent amendments thereof which are mutually acceptable to the parties hereto. The unit of volume for all purposes hereunder shall be one cubic foot of gas at a base temperature of sixty degrees (60o) Fahrenheit and a base pressure of 14.73 pounds per square inch absolute. (b) The deviation of the gas from the Ideal Gas Laws at the pressures and temperatures under which gas is delivered hereunder, shall be determined at the beginning of deliveries hereunder and at intervals of six (6) months thereafter or at such other intervals as may be mutually agreed upon or found necessary in practice. Results of each such determination shall be used in computing the volumes of gas delivered hereunder until the next such determination is made. Such determination shall be made by reference to the Tables on Super Compressibility Factors for Natural Gas, American Gas Association. (c) The specific gravity of the gas shall be determined every six (6) months by joint tests or as much oftener as is found necessary in practice. The method of test used shall be by gravity balance or by such other methods as shall be agreed upon by the parties. The regular tests at the first of each six-month period shall determine the specific gravity to be used in the computation for the measurement of gas deliveries during such period or until changed by special tests, the special tests to be applicable from the date made to and including the last day of such period or until further special tests are made. - 24 - 27 (d) The flowing temperature of the gas at the points of delivery shall be determined by means of a recording thermometer of standard make acceptable to both parties, and the arithmetical average of hourly readings during the time gas is flowing each day shall be deemed the gas temperature and used in computing the volumes of gas delivered during such day. (e) The heating value of the gas delivered hereunder shall be determined by means of a recording calorimeter using the Thomas Principle of calorimetry or its equal. If neither party elects to install a recording calorimeter so located as to record the heating value of said gas, then the heating value shall be determined by test from samples taken under delivery conditions in one of Buyer's recording calorimeters at Buyer's expense. 2. Measurements: (a) For the purpose of calculating the volume of gas delivered hereunder and for other purposes of establishing a volume where applicable and in the compilation of such volumes, the atmospheric pressure shall be assumed to be fourteen and four-tenths (14.4) pounds per square inch absolute regardless of the actual atmospheric pressure at which the gas is delivered and measured, unless otherwise established by governmental authority. (b) Buyer shall install, maintain and operate at its own expense, equipment of a character and design acceptable to Seller and perform all tests required to accomplish the measurement of volumes, temperatures, specific gravity and heating values, except as provided in Section 1(e), of this Article XIII, of the gas delivered hereunder. Such volume measuring equipment shall conform to the specifications contained in the Report designated in - 25 - 28 Section l(a) of this Article XIII. Seller shall have access to such measuring equipment at all reasonable hours, but the calibrating and adjusting thereof and changing of charts shall be the responsibility of Buyer. Upon request of Seller, all volume, specific gravity, and temperature charts used in the measurement of gas hereunder shall be mailed or delivered to Seller for checking and calculating. Such charts shall be mailed or returned to Buyer within thirty (30) days after receipt thereof by Seller. (c) Seller may install, maintain and operate such check measurement equipment as it may desire, but same shall not interfere in any way with the operation of Buyer's measurement equipment hereunder. All calibrating and adjusting of Seller's meters and changing of charts shall be done by Seller. (d) Buyer and Seller shall each have the right to be present at the time of installing, testing, cleaning, changing, repairing, inspecting, calibrating or adjusting done in connection with the measuring equipment of the other which is used in measuring deliveries hereunder; and the party which is planning to conduct such operations shall give the other party at least ten (10) days' prior notice thereof in order that it may be present. (e) If, for any reason, Buyer's measuring equipment is out of service or out of repair so that the quantity of gas is not correctly indicated by the reading thereof, the gas delivered during the period such measuring equipment is out of service or repair shall be estimated and agreed upon on the basis of the best data available, using the first of the following methods which is feasible: - 26 - 29 i. By using the registration of any check measuring equipment if installed and accurately registering; or ii. By correcting the error if the percentage of error is ascertainable by calibration, tests or mathematical calculations; or iii. By estimating the quantity of deliveries by comparison with deliveries during preceding periods under similar conditions when the meter was registering accurately. (f) The accuracy of the measuring equipment at the point of delivery shall be tested at reasonable intervals of not less than once a month and whenever requested by Buyer or Seller. If any such test shall be requested by Seller and, upon such test, the measuring equipment in question shall be found to be registering correctly, the cost of such test shall be charged to and borne by Seller; otherwise, the cost of all such tests shall be borne by Buyer. (g) If, upon any test, the measuring equipment in the aggregate is found to be inaccurate by two percent (2%) or less, previous readings of such equipment shall be considered correct in computing the deliveries of gas hereunder, but such equipment shall be immediately adjusted to record accurately. If, upon any test, the measuring equipment shall be found to be inaccurate by more than two percent (2%), then and in that event any previous readings of such equipment and any payments based on such previous readings of such equipment and any payments based on such previous readings, shall be corrected to zero error for any period is not definitely known or agreed upon, but, if the period is not definitely known and agreed upon, such - 27 - 30 corrections shall be for a period covering the last half of the time elapsed since the last test. (h) Buyer shall preserve or cause to be preserved for a period of at least six (6) years all test data, charts, or other similar records for the mutual use of both parties. ARTICLE XIV FORCE MAJEURE 1. If either Buyer or Seller is rendered unable, wholly or in part, by force majeure or any other cause of any kind not reasonably within such party's control to perform or comply with any obligation or condition of this Agreement, upon giving notice and reasonably full particulars to the other party such obligation or condition shall be suspended during the continuance of the inability so caused and such party shall be relieved of liability and shall suffer no prejudice for failure to perform the same during such period; provided, obligations to make payments then due for gas delivered hereunder shall not be suspended and the cause of suspension (other than strikes or lockouts) shall be remedied so far as possible with reasonable dispatch. Settlement of strikes and lockouts shall be wholly within the discretion of the party having the difficulty. The term "force majeure" shall include, without limitation by the following enumeration, acts of God and the public enemy, the elements, fire, flood, accidents, breakdowns, permits (including any necessary authorizations from the Michigan Public Service Commission), strikes and any other industrial, civil or public disturbances, and any laws, orders, rules, regulations, acts or restraints of any government or governmental body or authority, civil or military. - 28 - 31 ARTICLE XV LAWS, ORDERS, RULES AND REGULATIONS 1. The performance by either party of any and all of the obligations set forth in the Agreement shall be subject to all valid and applicable laws, orders, rules and regulations of any duly constituted authority having jurisdiction. Either party shall have the right to contest the validity of any such law, order, rule or regulation and the acquiescence or compliance therewith for any period of time shall not be construed as a waiver of such right. ARTICLE XVI TAXES 1. Except as hereinafter provided, Seller agrees to pay or cause to be paid all taxes imposed upon gas prior to its delivery to Buyer hereunder or upon any occupation or privilege relating to the production, sale or delivery of such gas to Buyer. Buyer agrees to pay or cause to be paid all taxes imposed on such gas after its receipt by Buyer, or upon any occupation or privilege relating to the transmission or sale of such gas after its receipt by Buyer. 2. If at any time after the date of this Agreement, there is imposed upon Seller any new tax or increased rate of existing taxes, then, from and after the date of imposition of such new or additional taxes, Buyer shall reimburse Seller one hundred percent (100%) of the calculated amount of such new or increased tax or taxes imposed on Seller. As used herein the term "tax" shall mean sales, transaction, occupation, service, production, severance, gathering, transmission, value added, export or excise tax, assessment or fee levied, assessed or fixed by governmental authority, and taxes of similar nature or equivalent in effect (not including income, payroll, excess profits, capital stock, franchise or general property taxes). Such reimbursement shall apply to the royalty interest as well as the working interest - 29 - 32 provided that Seller passes such reimbursement on to such royalty interest. Any present or future tax levied on any liquid product which Seller is entitled to retain shall be borne wholly by Seller. 3. If Seller receives written notice from Buyer that questions the validity of any additional or supplemental tax, Seller will consult with Buyer as to the best procedure to be followed in the payment of the questioned tax and the means of testing its validity, having due regard for the protection of the interests of both Seller and Buyer. Following such consultation, each party will pursue the course of action it deems proper. 4. If Seller fails, refuses or neglects to pay any excise tax imposed by governmental authority upon or by reason of any of Seller's operations in connection with the gas provided to be sold and purchased hereunder and a lien shall be filed by such governmental authority as a result thereof, then Buyer shall have, and Seller hereby expressly gives it, the right to withhold the amount of money necessary to discharge such lien from the amounts payable to Seller by Buyer until final judicial determination. ARTICLE XVII ASSIGNMENT 1. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided that no assignment of interest under this Agreement, conveyance, transfer of any interest or change of ownership by either party shall be binding upon the other party until such other party has been furnished with a written notice evidencing such assignment, conveyance, transfer of interest or change of ownership. - 30 - 33 ARTICLE XVIII NOTICES 1. Any notice, request, demand, statement or payment provided for in this Agreement shall be sent to the parties hereto at the following: BUYER: Consumers Power Company 212 West Michigan Avenue Jackson, Michigan 49201 Att: Director of Oil and Gas Supply SELLER: Northern Michigan Exploration Company One Jackson Square P.O. Box 1150 Jackson, Michigan 49204 to such other address which may be designated by either party. ARTICLE XIX GENERAL 1. Seller represents that the gas committed by it hereunder has not been previously, nor is it now dedicated in interstate commerce, and Seller specifically agrees that it will not commingle gas covered hereby with any gas to be used or consumed in or transported into any state other than the State of Michigan prior to delivery of such gas to Buyer hereunder. Buyer agrees it will only transport, or cause to be transported, gas purchased from Seller hereunder to markets located in the State of Michigan and that none of the gas purchased from Seller will be used or consumed in or transported into any state other than the State of Michigan, and that none of the gas purchased from Seller hereunder will be commingled with any gas to be used or consumed in, or transported out of or into, any state other than the State of Michigan. Buyer's and Seller's agreements expressed in the preceding sentences of this Section 1 constitute a large measure of the consideration for each party's entering into this Agreement. Therefore, violation of these agreements will constitute an irreparable injury to the other party, and such other party - 31 - 34 shall be entitled to injunctive relief and all other relief, in law and in equity, to which it may be entitled including, but not limited to, cancellation of this Agreement and, further, notwithstanding assignment by a party of its rights under this Agreement, the party in default shall nevertheless remain liable to the other party for any injury, damage or expense such other party may sustain by reason of a breach of such agreement even by an assignee hereof, immediate or remote. The provisions of this Section 1 shall not be waived by Seller except by written notice to Buyer. 2. Seller grants to Buyer, so far as Seller has the right so to do, rights-of-way on the lands described on Exhibit "A" acquired by Seller as lessee for Buyer's pipelines and other equipment, as may be necessary, with full right of ingress and egress to and from said premises, and the further right to do thereon acts necessary or convenient for the carrying out of the terms of this Agreement. All pipelines and equipment placed on the lands described in this Section 2 by Buyer shall be and remain its property and be subject to removal by it at any time. Buyer agrees to indemnify and hold Seller harmless from any cost, injury, claim or damage caused by or arising out of the installation, operation or presence of Buyer's facilities on said lands. 3. The failure of any party hereto to exercise any right granted hereunder shall not impair nor be deemed as a waiver of such party's privilege of exercising such right at any subsequent time or times. 4. All headings appearing herein are for convenience only, and shall not be considered a part of this Agreement for any purpose or as in any way interpreting, construing, varying, altering, or modifying this Agreement or any of the provisions hereof. ARTICLE XX OPTION 1. It is expressly understood and agreed that, commencing with the date - 32 - 35 on which it is determined that at least seventy-five percent (75%) of the gas reserves attributable to any gas well gas field subject to this Agreement has been produced and extending throughout the remaining term of this Agreement, Buyer shall have the exclusive right and option, with respect to each such field, to purchase from Seller, all of Seller's right, title and interest to the extent that same are assignable, in and to: (a) any and all oil and gas leases owned or controlled by Seller which cover those lands embraced within the boundaries of such gas well gas field insofar as such leases cover or relate to the Niagaran formation; (b) all rights and interests heretofore or hereafter acquired by Seller for the storage of gas in such formation within the drilling unit; (c) all interests of Seller in and to the wells located on the above-mentioned lands which are drilled and completed in the Niagaran formation and which Seller elects to assign to Buyer. If Seller elects not to sell a well or wells in said field and if said well or wells have been completed in the Niagaran formation, then Seller agrees to isolate said well or wells at Seller's expense, from the Niagaran formation. 2. For the purpose of this Article XX, the determination of the remaining gas reserves attributable to each gas well gas field subject to this Agreement shall be as follows: (a) Prior to production from each such field and on an annual basis thereafter for three years, Seller shall measure in each well therein the stabilized static reservoir pressure or determine the extrapolated reservoir pressure from a conventional Horner type pressure build-up analysis. Following the third year, measurements shall be made at mutually acceptable time intervals; however, at no time shall well off-line times resulting from abovesaid pressure measurements be counted as force majeure and result in a reduction in the - 33 - 36 annual contract quantity to be purchased by Buyer. Measurements, whenever possible, shall be conducted at times when wells are shut-in for reasons so as not to reduce production. Seller shall give Buyer sufficient advance notice each time that Seller determines the reservoir pressure of said wells as aforesaid, and Buyer shall, at its election, have the right to be present each time such pressures are being recorded. Within thirty (30) days after Buyer exercises its option hereunder Seller shall make the final pressure recording as to each gas well and Buyer and Seller shall determine the total original gas reserves in place in each separate gas field where an option has been exercised by Buyer, by plotting reservoir pressures divided by compressibility factor (P/Z) versus production and extending a straight line down to a reservoir pressure of zero psia. Such straight line will be drawn through P/Z-production points as of the respective dates during the period commencing prior to production and the time that the above-mentioned test has been made after Buyer exercises its option hereunder. The date on which the above stated determination of original gas reserves is made shall, for purposes of this Agreement, be known as the "Determination Date". The production figure to be utilized as the abscissa for each of the said P/Z-production points for each separate gas field will be the total volume of gas produced from each separate gas field during the period immediately prior to production and the end of each of said dates respectively. The pressure (P) to be utilized as the ordinate for each of the said P/Z-production points for each separate gas field shall be either the arithmetical average - 34 - 37 or volumetric average, as mutually agreed upon, of the bottomhole pressure of each well in the gas field. The bottomhole pressure to be taken under the aforesaid conditions and utilized in the manner prescribed above shall be obtained in each separate gas field at a subsea depth which is at or near the midpoint of the gas pay section in each separate gas field, such depth to be agreed upon by both parties. (b) The compressibility factors (Z) to be utilized in determining each such ordinate shall be the compressibility factors of natural gas produced from each of the separate gas fields at the pressures (P) utilized in determining each such ordinate with temperature conditions of each separate gas field measured at the subsea depths mentioned above and taken immediately prior to production from each separate gas field, as read from the Table on page 710 of Handbook of Natural Gas, written by D. L. Katz, et al, using critical temperature (Tc) and critical pressure (Pc) to be determined as follows: i. A gas sample shall be taken from each separate gas field. The chemical analysis of the said gas sample shall be applied in the manner described in Table 4-8 on page 108 with the critical constants from Table A-1 on page 708 of the aforementioned Handbook. Notwithstanding the foregoing, if any of the separate gas fields enters and passes through a period of production known as "retrograde condensation" all P/Z-production points during the period shall be ignored. If the P/Z-production points actually used in the reserve determinations do not - 35 - 38 form a straight line, the line to be drawn through said points shall be determined by the application of the least squares method. It is understood, however, that another engineering reserve determination method may be used if more appropriate and accurate than the method set forth above. (c) The gas reserves remaining in the gas well gas field as of the Determination Date will then be calculated by subtracting the actual cumulative production from the field as of such date from the total original gas reserves therein. The remaining gas reserves as calculated are hereinafter called the "remaining reserves". (d) A portion of the remaining reserves will then be allocated to each producing unit embraced in whole or in part within the boundaries of said gas field which, on the Determination Date, has a well thereon that is entitled to a Field Rating Percentage by the Michigan Public Service Commission. This portion will be determined by multiplying the remaining reserves by the Field Rating Percentage for each such well as established by the Proration Schedule of the Michigan Public Service Commission in effect on the Determination Date or, if such Proration Schedule does not reflect all reworking and additional drilling completed in said gas field prior to the Determination Date, by the first Proration Schedule thereafter issued by the Michigan Public Service Commission which does reflect such reworking and drilling, provided, however, that in the event a new well or wells to test the field are commenced to be drilled, but not completed, prior to the Determination Date, and such well or wells when completed are - 36 - 39 capable of producing gas from the said field in such quantities as to entitle the same to have a Field Rating Percentage established therefor by the Michigan Public Service Commission, the remaining reserves will be allocated to each producing unit on which such new well or wells are drilled, by multiplying the said remaining reserves by the Field Rating Percentage for each well on such units as established by the first Proration Schedule of the Michigan Public Service Commission which reflects all reworking and additional drilling in said gas well gas field completed prior to the Determination Date and the said new well or wells completed after the Determination Date. Notwithstanding the foregoing, if, prior to the Determination Date, any well in said gas field loses its eligibility for a Field Rating Percentage by the Michigan Public Service Commission as a result of being reworked, and a new well to replace the well which has lost its eligibility has not been commenced prior to the Determination Date on the producing unit on which the well losing its eligibility is located, the Proration Schedule which is provided to be used under the foregoing provisions of this Section 2(d) shall be recomputed to include a Field Rating Percentage for the well which has lost its eligibility, said recomputation to be made as though such well had not been reworked in accordance with the formula upon which such Proration Schedule is predicated. The Proration schedule, as so modified, will be used for the allocation of remaining reserves hereunder, including an allocation to the producing unit on which the well which has lost its eligibility is located. In the event any well in said gas well gas field loses its eligibility for a Field Rating Percen- - 37 - 40 tage as aforesaid, and a new well is commenced prior to the Determination Date on the producing unit on which the well losing its eligibility is located, the drilling of such new well shall have the same effect under the foregoing provisions of this Section 2(d) as the drilling of any other well prior to the Determination Date. In addition, if the Proration Schedule provided to be used under the provisions of this Section 2(d) for the allocation of the said remaining reserves reflects wells reworked or commenced after the Determination Date, such Proration Schedule, recomputed in accordance with the foregoing, if such be the case, shall be recomputed as though such reworking had not occurred or such wells had not been drilled in accordance with the formula upon which said Proration Schedule is predicated. The Field Rating Percentage contained in such Proration Schedules, recomputed as aforesaid shall be used for the allocation of remaining reserves hereunder in lieu of the percentages contained therein prior to any recomputation provided to be made in accordance with the foregoing provisions of this Section 2(d). (e) The respective portions of the remaining reserves allocated to the above mentioned producing units which, computed on the basis of surface acreage, are attributable to interests of Seller therein will then be totaled. The resultant gas reserve figure shall then be adjusted either upward or downward, as the case may be, by the total underage or overage in gas production which is attributable to Seller's interest as of the Determination Date, shown by the records of the Michigan Public Service Commission - 38 - 41 which will be brought up to date by the use of Buyer's daily meter charts, if necessary. (f) Buyer shall calculate the remaining reserves referred to in this Section 2, in accordance with the terms and provisions thereof as soon after the Determination Date as practicable, and shall furnish Seller with a written statement of such reserves promptly after it is made. If Seller fails to give Buyer written notice that Seller questions such reserves within thirty (30) days after Seller's receipt thereof, it shall be conclusively presumed that Seller agrees therewith. If, within such thirty-day period, Seller notifies Buyer that it questions said determination, Buyer and Seller together shall calculate the same in the manner set forth in this Section 2. If, within thirty (30) days after Seller notifies Buyer that Seller questions such determination, Buyer and Seller are unable to a agree thereon, said determination shall be determined by arbitration as provided in Section 4 of Article IV. All arbitrators appointed pursuant to Section 4 of Article IV shall be qualified independent engineers, experienced in the oil and gas industry and competent to pass upon the matter of gas reserves. All costs of arbitration pursuant to the terms and provisions hereof shall be borne equally by Buyer and Seller. 3. If, for any gas well gas field or fields, Buyer desires to exercise the option herein granted, Buyer shall do so by giving written notice thereof to Seller designating such field or fields and thereafter, in accordance with the terms and provisions of Section 1 and Section 4 of this Article XX, Seller shall assign to Buyer, by instrument or instruments satisfactory to Buyer, all of Seller's right, title and interest in and to all oil and gas leases, storage - 39 - 42 right and interests, and wells. The assignments, except for the oil and gas leases and the storage rights assigned thereunder, shall be with warranty of title and all wells assigned thereby shall be free and clear of all claims, liens and encumbrances. Such written notice shall include a statement of Buyer's plan to convert such field or fields to gas storage reservoir use. In full consideration of such assignments, Buyer shall, simultaneously with the execution and delivery thereof to Buyer, pay to Seller an amount equal to the value attributable to Seller's interest in (1) the estimated quantities of the original gas in place less the cumulative production from such reservoir at the price then in effect under Sections 1 or 2 as the case may be, of Article VII of this Agreement, and (2) fifty percent (50%) of Seller's actual original cost for drilling and equipping each well sold, as shown in Seller's accounting records, which is producing or is capable of producing at the time of Buyer's exercise of its option. As further consideration for the transfer and conveyance by Seller to Buyer of all of Seller's properties, rights and interests in said gas field, Buyer shall pay Seller for the remaining commercially recoverable crude oil and/or lease condensate reserves, if any, at a price equal to Seller's lease tank revenue per barrel less Seller's average cost for the previous six months to produce a barrel of crude oil and/or lease condensate from such field. If the parties are unable to agree on such average cost, Seller shall either provide Buyer such records to indicate such average cost or shall accept payment of fifty-five percent (55%) of the then current lease tank revenue per barrel for each barrel of said reserves. Buyer and Seller shall determine, by establishing standards and procedures which are acceptable to both parties, the amount of such remaining commercially recoverable crude oil and/or lease condensate reserves. If, for any reason, Buyer or Seller are unable to agree upon the remaining commercially recoverable crude oil and/or lease condensate reserves, then such reserves shall be determined by arbitration as provided - 40 - 43 in Section 4 of Article IV. All arbitrators appointed pursuant to Section 4 of Article IV shall be qualified independent engineers, experienced in the oil and gas industry and competent to pass on the matters of crude oil and/or condensate reserves. All costs of arbitration pursuant to the terms and provisions hereof shall be borne equally by Buyer and Seller. The payments provided to be made by Buyer to Seller under this Article XX shall be made simultaneously with the assignments by Seller to Buyer of the properties, rights and interests referred to herein. 4. Within twenty (20) days after exercise of the option referred to in this Article XX, Seller shall deliver to Buyer all abstracts and other documents that Seller has which evidence Seller's title to, and extent of ownership of, the property and interests referred to in the notice exercising said option. Buyer shall have one hundred twenty (120) days after receipt of such abstracts and documents to examine the same or cause the same to be examined and to notify Seller in writing of Buyer's approval or disapproval of the extent of Seller's ownership of the property and interests involved and Seller's title thereto. In the event Buyer approves Seller's title and extent of ownership, the assignment provided to be made in this Article XX shall be made by Seller to Buyer within fifteen (15) days after receipt of said approval notice. In the event Buyer does not approve of Seller's title and extent of ownership, Buyer shall specify its objections in the disapproval notice and shall, within thirty (30) days after the date of such disapproval notice, give Seller written notice of those of the above mentioned oil and gas leases, wells and other property, rights and interests Buyer desires to have assigned to it by Seller and Seller shall, within fifteen (15) days thereafter, make the necessary assignment in accordance with the provisions of this Article XX. It is expressly understood and agreed that Buyer shall return all abstracts to Seller within a reasonable time and shall retain all other documents fur- - 41 - 44 nished by Seller to Buyer hereunder covering any oil and gas leases, wells and other properties and interests assigned by Seller to Buyer hereunder. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in duplicate counterparts, each of which is an original and all of which are identical, as of the day and year first above written.
WITNESS: NORTHERN MICHIGAN EXPLORATION COMPANY /s/ John T. McDonald By /s/ R. J. Burgess - --------------------------------- ----------------------------------- R. J. Burgess Vice President Executed at Jackson, Michigan /s/ Gerald F. Beaudoin November 2, 1978 at 12:55 p.m. EST - --------------------------------- CONSUMERS POWER COMPANY /s/ J. R. Biek By /s/ R. J. Odlevak - --------------------------------- ----------------------------------- R. J. Odlevak Vice President Executed at Jackson, Michigan /s/ Gerald F. Beaudoin November 2, 1978 at 11.34 a.m. EST - ---------------------------------
- 42 - 45 ACKNOWLEDGEMENT STATE OF MICHIGAN ) ) ss COUNTY OF JACKSON ) Before me, the undersigned, a Notary Public within and for said County and State, on this 2nd day of November, 1978, personally appeared R. J. Burgess, to me known to be the identical person who executed the within and foregoing instrument as Vice President for NORTHERN MICHIGAN EXPLORATION COMPANY, a corporation, and acknowledged to me that he executed the same as his free and voluntary act and deed and as the free and voluntary act and deed of NORTHERN MICHIGAN EXPLORATION COMPANY, a corporation, for the uses and purposes therein set forth. In testimony whereof, I have hereunto set my hand and official seal the day and year last above written. /s/ Gerald L Williams ------------------------------------- Notary Public, Jackson County, Michigan My commission expires: 11/7/79 STATE OF MICHIGAN ) ) ss COUNTY OF JACKSON ) Before me, the undersigned, a Notary Public within and for said County and State, on this 2nd day of November, 1978, personally appeared R. J. Odlevak, to me known to be the identical person who executed the within and foregoing instrument as Vice President for CONSUMERS POWER COMPANY, a corporation, and acknowledged to me that he executed the same as his free and voluntary act and deed and as the free and voluntary act and deed of CONSUMERS POWER COMPANY, a corporation, for the uses and purposes therein set forth. In testimony whereof, I have hereunto set my hand and official seal the day and year last above written. /s/ Winifred G. Mills ------------------------------------- Notary Public, Jackson County, Michigan My commission expires: 10/20/81 46 Exhibit "A" Attached to and made apart of Gas Purchase Contract dated as of November 2, 1978 between NORTHERN MICHIGAN EXPLORATION COMPANY (Seller) and CONSUMERS POWER COMPANY (Buyer). Area of Dedication 1. Belknap Township - T34N-R5E Presque Isle County, Michigan 2. Bismark Township - T34N-R4E Presque Isle County, Michigan EX-10.11 16 EXHIBIT 10.11 1 EXHIBIT 10.11 SERVICES AGREEMENT This Agreement is made as of this 1st day of October, 1989 between Northern Michigan Exploration Company, a Michigan corporation ("NOMECO") and Consumers Power Company, a Michigan corporation ("Consumers"). R E C I T A L S Whereas, Consumers is a majority owned subsidiary of CMS Energy Corporation, a Michigan corporation ("CMS Energy"), and NOMECO is a wholly owned subsidiary of CMS Energy; Whereas, NOMECO desires, from time to time, to purchase Services from Consumers; and Whereas, Consumers is willing to perform such service as NOMECO may from time to time request on the terms and conditions contained herein. Now, Therefore, in consideration of the mutual covenants and agreements contained herein, the parties agree as follows: 1. Scope of Services. Consumers shall perform for NOMECO, under the terms of this Agreement, such administrative, clerical, managerial, professional and technical services as the parties may from time to time agree by executing an intercompany service request(s) as hereinafter provided ("ISR"). In the event NOMECO desires Consumers to perform any such services, then the services desired, the time for their performance, and any other specific requirement (not inconsistent with this Agreement) relating thereto, shall be more particularly described in ISRs signed by an officer or other authorized person of NOMECO and issued to Consumers. Upon receipt of such ISR, Consumers shall make all of the necessary cost estimates and supply all other information required by the ISR. ISRs shall not become effective and binding until a copy thereof is signed by an officer 2 or other authorized employee of Consumers and returned to NOMECO, at which time the ISR shall be deemed to become part of this Agreement; provided, however, that NOMECO shall have the right to reject any ISR within ten (10) days after it has been returned to NOMECO by Consumers; provided further, however, that in case of discrepancy between any provision in the ISR and any provision of this Agreement, the latter shall prevail. If at any time Consumers becomes aware of any reason which it believes may cause the estimated monthly cost in any ISR to become inaccurate, Consumers shall promptly notify the officer or other authorized person of NOMECO who issued the ISR of such reason. Unless otherwise provided in this Agreement or such ISR, Consumers shall provide everything necessary to perform the services requested thereunder, including, but not limited to, all supervision, personnel, supplies, services and transportation. This Agreement is not exclusive. NOMECO reserves the right to have similar or like services performed by others or through its own employees and to any extent deemed desirable by NOMECO. 2. Term of Agreement. This Agreement shall become effective as of the date hereof and continue until terminated by either party, at the terminating party's convenience, by at least thirty (30) days' written notice to the non-terminating party. The terms of this Agreement shall remain in effect as to each such uncompleted ISR until the services thereunder are completed or it is terminated by NOMECO under Section 12, "Termination." The terms of Section 14, "Ownership and Confidentiality" shall survive termination of this Agreement for a period of five (5) years after all other terms hereof expire. 3. Price of Services. NOMECO will pay to Consumers and Consumers will accept as full compensation, satisfaction and payment for said service the rates and charges set forth in the schedule attached hereto and made a part hereof as Exhibit A. 4. Payments. Within twenty (20) days after the end of each calendar month, Consumers shall submit to NOMECO an invoice respecting all ISRs, itemized to NOMECO's reasonable satisfaction, for the services performed under such ISRs during the prior month, together with the amount due. Contemporaneously with the issuance of its monthly invoice, Consumers shall also send to NOMECO written 3 3 explanation(s) for any variance in excess of 10% (positive or negative) between the monthly cost estimate from the relevant ISR and the actual amount being billed to NOMECO that month for such ISR. Within thirty (30) days after receipt of each properly-itemized and supported invoice and explanation(s) of cost variances, if any, payment of such invoice shall be made to Consumers. Payment of such invoice by NOMECO shall not constitute acceptance of the services and shall be subject to correction in the payment of any subsequent invoice. With each invoice, Consumers shall submit copies of all vendors' and subcontractors' invoices for amounts greater than $10,000 for which reimbursement is sought. Credit shall be given to NOMECO for any discounts received by Consumers on all reimbursable invoices. 5. Changes in the Services. No changes to any ISR hereunder shall be made except in writing, signed by an officer, authorized employee or other authorized person of each party. Except as provided below, no claims for compensation for additional services shall be valid unless authorized by such written change; provided, however, that whenever it is necessary to immediately authorize extra work to restore service, to avoid breakdowns, to avoid work stoppages or to respond to other emergency conditions, Consumers shall be entitled to perform services in reliance on an oral or written authorization by one of NOMECO's officers or other authorized representative of NOMECO theretofore identified to Consumers by notice, and a written change to the ISR shall be made covering such services as soon thereafter as is reasonably practicable. 6. Independent Contractor. In the performances of services hereunder, Consumers shall be an independent contractor with the sole authority to control and direct the performance of the details of the services, NOMECO being interested only in the results obtained. 7. Permits and Laws. Consumers shall secure all licenses or permits required by law and shall comply with all applicable ordinances, laws, orders, rules and regulations, pertaining to its performance of services hereunder. 4 4 8. Warranty and Remedy. Services performed directly by Consumers shall be performed in a careful and competent manner by properly trained and skilled personnel. CONSUMERS HAS NOT MADE AND DOES NOT HEREBY MAKE ANY OTHER WARRANTIES, EXPRESSED, IMPLIED OR STATUTORY AS TO THE SERVICES PERFORMED, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR ANY PURPOSE. In the event any service performed directly by Consumers fails to conform to the above warranty, Consumers will reperform said service at its expense if NOMECO gives Consumers notice of such nonconformance within one year after performance of the nonconforming service. As to services performed by subcontractors and vendors, Consumers shall on the written request of NOMECO assign to NOMECO any assignable warranties obtained by Consumers. The foregoing states NOMECO's sole and exclusive remedies and Consumers' sole and exclusive liabilities, whether in contract, tort or otherwise, for any defects in the services performed hereunder. 9. Limitation on Liability. Notwithstanding any other provision of this Agreement, in no event shall Consumers' liability to NOMECO under this Agreement exceed the compensation paid by NOMECO to Consumers for that portion of the services giving rise to the claim and in no event shall the total of all such liabilities of Consumers exceed the total dollar amount paid to Consumers under this Agreement. Further, in no event shall Consumers be liable for any special, indirect, incidental or consequential damages of any nature on account of this Agreement or the performance or nonperformance thereof, including but not limited to any loss of use of property, equipment or systems, loss by reason of equipment shutdowns or service interruptions, loss of profits or revenue or of use thereof, cost of purchased or replacement power, or claims of NOMECO's customers. 10. Changes to Agreement; Assignment and Subcontracting. The terms of this Agreement shall not be changed, superseded or supplemented except in writing signed by an officer of each party. This Agreement shall not be assigned or any part thereof subcontracted by Consumers without NOMECO's previous written consent; provided, however, that NOMECO hereby consents to any assignment or subcontracting to any affiliate or affiliates of Consumers. Any 5 5 attempted assignment without such written consent shall be void and NOMECO may refuse to permit the performance of any unauthorized subcontract. In case any such subcontracting is approved, the subcontract shall be in writing and shall be fully executed prior to the commencement of the services involved. If required by NOMECO to do so, Consumers shall promptly furnish NOMECO with copies of each executed subcontract. Any professional engineering services to be provided under this Agreement shall be performed by an entity or individual qualified to practice professional engineering in any jurisdiction or jurisdictions in which such qualification is required in order for the services to be provided. 11. Auditing of Consumers' Accounts and Refunds. Consumers shall make and keep, as the same accrue, full and complete records and books of account of its costs, expenses, man-hours and equipment hours relating to the services hereunder in accordance with generally accepted accounting practices and Consumers, record retention policy in effect for such records whenever, by the terms of this Agreement, Consumers' compensation shall be based wholly or partially on such costs, expenses, man-hours or equipment hours. When relevant to determining Consumers' compensation hereunder, said records and books of accounts shall be open to examination during regular business hours by NOMECO or its agents for the purpose of inspecting, auditing, verifying or copying the same or making extracts therefrom. NOMECO's payment of invoices hereunder shall not constitute acceptance of the accuracy thereof. Amounts paid with respect to any ISR shall be subject to audit in accordance with this section for one (1) year after the making of the last payment under the ISR. Whenever an audit of Consumers' records shows that NOMECO is entitled to a refund or Consumers is entitled to additional payment, Consumers or NOMECO, as the case may be, shall promptly make said refund or additional payment with interest, compounded annually, at the prime rate established by the National Bank of Detroit from time to time or at the highest rate permitted by law, whichever is less, from the date the erroneous payment was made to Consumers. Each party shall bear its own costs in connection with any such audit and billing error correction. 12. Termination. Notwithstanding anything in this Agreement to the contrary should NOMECO for any reason desire to suspend or stop the services under any ISR hereunder at any time before the services have been completed, Consumers shall stop-performing the services upon notice from NOMECO. Any such termination shall be without prejudice to any other rights or remedies of NOMECO for any breach 6 6 of this Agreement by Consumers. Consumers shall, upon the effective date of such notice of termination, if requested by NOMECO, immediately cease performance of the services and remove its employees, representatives, tools, equipment and other property from NOMECO's premises. If Consumers fails to effect such removal within a reasonable time, NOMECO may do so at Consumers' expense. In the event of such termination, payment for all services properly performed under the applicable ISR shall be made in accordance with the rates and charges set forth in Exhibit A, subject to proper deductions for defective services, damages or costs recoverable under this Agreement by NOMECO by reason of any default, breach or failure to perform by Consumers. Upon any termination pursuant to this section, NOMECO shall be released from all further obligations under any ISR so terminated except for payment as provided for in this section and such liability or other obligations as have accrued as of the time of termination. 13. NOTICES AND OTHER COMMUNICATIONS. Whenever notices, invoices, payments, or other communications are required or permitted hereunder, the same may be given, made or delivered by mail addressed as follows: Consumers Power Company Northern Michigan Exploration 212 W. Michigan Avenue Company Jackson, Michigan 49201 One Jackson Square Attention: Treasury Dept. PO Box 1150 (for payments) Jackson, MI 49204 General Accounting Attention: Treasurer (for all other notices)
or to such other address as the addressee shall have specified in writing. 14. OWNERSHIP AND CONFIDENTIALITY. "Confidential Information" shall mean (i) all documents, records, data and other information furnished to Consumers in any form in connection with the performance of the services contemplated hereunder and any copies thereof and (ii) all documents, records, data and other work product produced by Consumers for NOMECO in performance of the services contemplated hereunder and copies thereof. Confidential Information shall not include the records and books of account made and kept by Consumers pursuant to Section 11, "Auditing of Consumers' Accounts and Refunds." 7 7 Confidential Information is, and shall continue to be the property of NOMECO. Consumers shall, to the extent permitted by law, upon written request from NOMECO, immediately deliver to NOMECO or destroy, at NOMECO's option, all Confidential Information. Consumers shall not disclose any confidential Information or the content thereof to any party except those Consumers' employees who need to have access to such Confidential Information unless ordered by court, administrative agency or other governmental body having jurisdiction. If Consumers becomes aware that any party is attempting to obtain any such order, Consumers shall immediately notify the following person: General Counsel CMS Enterprises Company Fairlane Plaza South 330 Town Center Drive, Suite 1100 Dearborn, Michigan 48126 or such other person as NOMECO may have designated in writing. Consumers acknowledges that disclosure of Confidential Information in violation of this Agreement may cause NOMECO irreparable damage and hereby consents to the issuance of an injunction by any court of competent jurisdiction prohibiting any disclosure of Confidential Information in violation of this Agreement. Such right to injunctive relief is in addition to all other remedies available to NOMECO at law or in equity. Consumers shall inform all of its employees who have access to Confidential Information of the obligations referred to above and require their compliance with the provisions of this Agreement. 15. Governing Law. This Agreement shall be deemed to be a Michigan contract and shall be construed in accordance with and governed by the laws of the State of Michigan. 16. Headings. The section headings in this Agreement are included for reference only. They shall not affect the interpretation and construction of this Agreement. 8 8 17. Entire Agreement. With respect to the subject matter hereof, this Agreement supersedes all previous agreements, representations, understandings and negotiations, either written or oral, between the parties hereto or their representatives, and constitutes the entire agreement between the parties. IN WITNESS WHEREOF, the parties hereto have entered into this Agreement as of the day and year first written above. NORTHERN MICHIGAN EXPLORATION CONSUMERS POWER COMPANY COMPANY By: /s/ P. E. Geiger By: /s/ F. W. Buckman P. E. Geiger Title: Vice President, Secretary Title: President and COO and Treasurer 9 EXHIBIT A Page 1 of 3 EXHIBIT A Pricing Recoverable Costs payable under this Agreement are those costs reasonably incurred by Consumers in the performance of the services hereunder and are generally described below. Such costs shall be accumulated in accordance with Consumers' standard practices and policies in affect at the time and in accordance with generally accepted accounting principles. Recoverable Costs shall not include any costs incurred in contesting, whether informally, by arbitration, or otherwise, any matter or issue under this Agreement. A. DIRECT LABOR COSTS Salary and wage costs of Consumers' employees directly engaged in the performance of the services hereunder. Such salary and wage costs shall be billed an accrual basis, including a loading for paid absences. This paid absence loading shall cover vacation, sick leave, holidays, workers' compensation supplemental pay, and other paid absences, as recorded on Consumers' books of account. B. DIRECT AND DISTRIBUTABLE COSTS AND EXPENSES Costs and expenses, other than direct labor costs, directly attributable to the performance of Consumers' obligations hereunder shall be charged at actual costs or so an allocated charge based on the portion of the resources devoted to the performance of this Contract. Such costs, to be charged on an accrual basis, include materials, contract payments, internal service chargebacks (labor and non-labor portions separately identified) and non-A&G support costs (supervision, Energy Supply Services and/or Region support services, identified separately between labor and non-labor), if applicable. 10 EXHIBIT A Page 2 of 3 C. ADMINISTRATIVE AND GENERAL OVERHEAD RATES Administrative and General (A&G) overheads will be charged as a percentaged of the labor components billed pursuant to Items A and B above. A&G overheads include administrative and general expenses, payroll taxes, Michigan Single Business Tax (and similar taxes present or future), return on utility used investment, and employee pensions and other benefits except paid absence included elsewhere. Primarily A&C expenses shall include all applicable costs and expenses properly chargeable to the following current FERC Accounts, their replacements or applicable new accounts as described below: 1. FERC Account 920, Administrative and General Salaries 2. FERC Account 921, Office Supplies and Expenses 3. FERC Account 923, Outside Services Employed 4. FERC Account 924, Property Insurance 5. FERC Account 925, Injuries and Damages 6. FERC Account 926, Employee Pensions and Benefits 7. FERC Account 928, Regulatory Commission Expenses 8. FERC Account 930.2, Miscellaneous General Expenses 9. FERC Account 931, Rents 10. FERC Account 935, Maintenance of General Plant 11. FERC Accounts 403-407, Depreciation and Amortization 12. FERC Account 408, Payroll Taxes, Michigan Single Business Tax and Property Taxes The overhead percentages will cover administration costs for Consumers of furnishing all services for the benefit of CMS. As soon as practicable after the close of each calendar year, the accuracy of the rates shall be reviewed by Consumers. After such review Consumers shall issue any credit or additional charge to adjust the billings for said year from an estimated rate to an actual rate, if material (if the differential in total overhead rate is greater than + or -3%). 11 EXHIBIT A Page 3 of 3 D. COST OF MONEY A Cost of Money or carrying charge will be added to all costs incurred by Consumers in connection with this Agreement from the 25th of the month such costs were incurred until the invoice due date. This Cost of Money charge will be calculated at the average short-term borrowing rate at Citibank and will continue on all past due invoices until paid. EX-10.12 17 EXHIBIT 10.12 1 Exhibit 10.12 SERVICES AGREEMENT This Agreement is made as of this 25th day of October 1995 between CMS NOMECO Oil & Gas Co., a Michigan corporation ("CMS NOMECO") and CMS Energy Corporation, a Michigan corporation ("CMS Energy"). R E C I T A L S WHEREAS, CMS NOMECO is a subsidiary of CMS Enterprises Company, a Michigan corporation, which in turn is a subsidiary of CMS Energy; WHEREAS, CMS Energy desires, from time to time, to provide services to CMS NOMECO; WHEREAS, CMS NOMECO desires, from time to time, to purchase services from CMS Energy; and WHEREAS, CMS Energy is willing to perform such services as CMS NOMECO may from time to time request on the terms and conditions contained herein. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, the parties agree as follows: 1. SCOPE OF SERVICES. CMS Energy shall perform for CMS NOMECO, under the terms of this Agreement, such administrative, clerical, managerial, professional and/or technical services as the parties may from time to time agree by executing an intercompany service request ("ISR") as hereinafter provided (a copy of an ISR is attached hereto as Exhibit I). In the event CMS NOMECO desires CMS Energy to perform any such services, then the services desired, the time for their performance, and any other specific requirement (not inconsistent with the Agreement) relating thereto, shall be described in an ISR signed by an officer or other authorized person of CMS NOMECO and delivered to CMS Energy. Upon receipt of such ISR, CMS Energy shall make all of the necessary cost estimates and supply all other information required by the ISR. ISRs shall not become effective and binding until a completed copy thereof is signed by an officer or other authorized employee of both CMS NOMECO and CMS Energy, at which time the ISR shall be deemed to become part of this Agreement; provided, however, that in case of a discrepancy between any provision in the ISR and any provision of this Agreement, this Agreement shall prevail. Unless otherwise provided in this Agreement or such ISR, CMS Energy shall provide everything necessary to perform the services requested thereunder, including, but not limited to, all supervision, personnel, supplies, services and transportation. CMS NOMECO reserves the right to have similar or like services performed by others or through its own employees. 2. TERM OF AGREEMENT. This Agreement shall become effective as of the date hereof and continue until terminated by either party, at the terminating party's convenience, by at least thirty (30) days' written notice to the non-terminating party. The terms of this Agreement shall remain in effect as to each such uncompleted ISR until the services thereunder are completed or it is terminated by CMS NOMECO under Section 12, "Termination." The terms of Section 14, "Ownership and Confidentiality" shall survive termination of this Agreement for a period of five (5) years after all other terms hereof expire. 2 3. PRICE OF SERVICES. CMS NOMECO will pay to CMS Energy and CMS Energy will accept as full compensation, satisfaction and payment for said services the rates and charges set forth in the applicable ISR. 4. PAYMENTS. Within twenty (20) days after the end of each calendar month, CMS Energy shall submit to CMS NOMECO an invoice respecting all ISRs, itemized to CMS NOMECO's reasonable satisfaction, for the services performed under such ISRs during the prior month, together with the amount due. Within thirty (30) days after receipt of each properly-itemized and supported invoice payment of such invoice shall be made to CMS Energy. Payment of such invoice by CMS NOMECO shall not constitute acceptance of the services and shall be subject to correction in the payment of any subsequent invoice. With each invoice, CMS Energy shall submit copies of all vendors' and subcontractors' invoices for amounts greater than $10,000 for which reimbursement is sought. Credit shall be given to CMS NOMECO for any discounts received by CMS Energy on all reimbursable invoices. 5. CHANGES IN SERVICES. Changes to any ISR issued hereunder may only be made pursuant to a written change order signed by an officer or authorized person of each party. Except as provided below, no claims for compensation for additional services shall be valid unless authorized by such written change order; provided, however, that whenever it is necessary to immediately authorize extra work to respond to emergency conditions, CMS Energy shall be entitled to perform services in reliance on an oral or written authorization by one of CMS NOMECO's officers or other authorized representatives previously identified to CMS Energy, and a written change to the ISR shall be made covering such services as soon thereafter as is reasonably practicable. 6. INDEPENDENT CONTRACTOR. In the performances of services hereunder, CMS Energy shall be an independent contractor with the sole authority to control and direct such performance. 7. PERMITS AND LAWS. CMS Energy shall secure all licenses or permits required by law and shall comply with all applicable ordinances, laws, orders, rules and regulations, pertaining to its performance of services hereunder. 8. WARRANTY AND REMEDY. Services performed directly by CMS Energy shall be performed in a careful and competent manner by properly trained and skilled personnel. CMS Energy HAS NOT MADE AND DOES NOT HEREBY MAKE ANY OTHER WARRANTIES, EXPRESS, IMPLIED OR STATUTORY AS TO THE SERVICES PERFORMED, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR ANY PURPOSE. In the event any service performed directly by CMS Energy fails to conform to the above warranty, CMS Energy will re-perform said service at its expense if CMS NOMECO gives CMS Energy notice of such non-conformance within one (1) year after performance of the non-conforming service. As to services performed by subcontractors and vendors, CMS Energy shall on the request of CMS NOMECO assign to CMS NOMECO any assignable warranties obtained by CMS Energy. The foregoing states CMS NOMECO's sole and exclusive remedies hereunder. 2 3 9. LIMITATION ON LIABILITY. Notwithstanding any other provision of this Agreement, in no event shall CMS Energy's liability to CMS NOMECO under this Agreement exceed the compensation paid by CMS NOMECO to CMS Energy for that portion of the services giving rise to the claim and in no event shall the total of all such liabilities of CMS Energy exceed the total dollar amount paid to CMS Energy under this Agreement. Further, in no event shall CMS Energy be liable for any special, indirect, incidental or consequential damages of any nature on account of this Agreement. 10. CHANGES TO AGREEMENT; ASSIGNMENT AND SUBCONTRACTING. The terms of this Agreement shall not be changed, superseded or supplemented except in writing signed by an officer of each party. This Agreement shall not be assigned or any part thereof subcontracted by CMS Energy without CMS NOMECO's previous written consent. Any attempted assignment without such written consent shall be void and CMS NOMECO may refuse to permit the performance of any unauthorized subcontract. In case any such subcontracting is approved, the subcontract shall be in writing and shall be fully executed prior to the commencement of the services involved. If required by CMS NOMECO to do so, CMS Energy shall promptly furnish CMS NOMECO with copies of each executed subcontract. Any professional engineering services to be provided under this Agreement shall be performed by an entity or individual qualified to practice professional engineering in any jurisdiction or jurisdictions in which such qualification is required in order for the services to be provided. 11. AUDITING OF CMS ENERGY'S ACCOUNT AND REFUNDS. CMS Energy shall make and keep, as the same accrue, full and complete records and books of account of its costs, expenses, man-hours and equipment hours relating to the services hereunder in accordance with generally accepted accounting practices and CMS Energy's record retention policy in effect for such records whenever, by the terms of this Agreement, CMS Energy's compensation shall be based wholly or partially on such costs, expenses, man-hours or equipment hours. When relevant to determining CMS Energy's compensation hereunder, said records and books of accounts shall be open to examination during regular business hours by CMS NOMECO or its agents for the purpose of inspecting, auditing, verifying or copying the same or making extracts therefrom. CMS NOMECO's payment of invoices hereunder shall not constitute acceptance of the accuracy thereof. Amounts paid with respect to any ISR shall be subject to audit in accordance with this section for one (1) year after the making of the last payment under the ISR. Whenever an audit of CMS Energy's records shows that CMS NOMECO is entitled to a refund or CMS Energy is entitled to additional payment, CMS Energy or CMS NOMECO, as the case may be, shall promptly make said refund or additional payment with interest, compounded annually, at the prime rate established by the National Bank of Detroit from time to time or at the highest rate permitted by law, whichever is less, from the date the erroneous payment was made to CMS Energy. Each party shall bear its own costs in connection with any such audit and billing error correction. 12. TERMINATION. Notwithstanding anything in this Agreement to the contrary, should CMS NOMECO for any reason desire to suspend or stop the services under any ISR hereunder at any time before the services have been completed, CMS Energy shall stop performing the services upon notice from CMS NOMECO. Any such termination shall be without prejudice to any other rights or remedies of CMS NOMECO for any breach of this Agreement by CMS 3 4 Energy. CMS Energy shall, upon the effective date of such notice of termination, if requested by CMS NOMECO, immediately cease performance of the services and remove its employees, representatives, tools, equipment and other property from CMS NOMECO's premises. If CMS Energy fails to effect such removal within a reasonable time, CMS NOMECO may do so at CMS Energy's expense. In the event of such termination, payment for all services properly performed through the date of such termination shall be made in accordance with the rates and charges set forth in the applicable ISR, subject to proper deductions for defective services, damages or costs recoverable under this Agreement by CMS NOMECO by reason of any default, breach or failure to perform by CMS Energy. Upon any termination pursuant to this section, CMS NOMECO shall be released from all further obligations under any ISR so terminated except for payment as provided for in this section and such liability or other obligations as have accrued as of the time of termination. 13. NOTICES AND OTHER COMMUNICATIONS. Whenever notices, invoices, payments, or other communications are required or permitted hereunder, the same may be given, made or delivered by mail address as follows: CMS NOMECO Oil & Gas Co. CMS Energy Corporation One Jackson Square Fairlane Plaza South, Suite 1000 P. O. Box 1150 330 Town Center Drive Jackson, Michigan 49204 Dearborn, MI 48126 Attention: Corporate Secretary Attention: Treasury Dept. (for payments) General Accounting (for all other notices) or to such other address as the addressee shall have specified in writing. 14. OWNERSHIP AND CONFIDENTIALITY. "Confidential Information" shall mean (i) all documents, records, data and other information furnished to CMS Energy in any form in connection with the performance of the services contemplated hereunder and any copies thereof, and (ii) all documents, records, data and other work product produced by CMS Energy for CMS NOMECO in performance of the services contemplated hereunder and copies thereof. Confidential Information is, and shall continue to be, the property of CMS NOMECO. CMS Energy shall, to the extent permitted by law, upon written request from CMS NOMECO, immediately deliver to CMS NOMECO or destroy, at CMS NOMECO's option, all Confidential Information. CMS Energy shall not disclose any Confidential Information or the content thereof to any party except those CMS Energy employees or agents who need to have access to such Confidential Information unless ordered by court, administrative agency or other governmental body having jurisdiction. If CMS Energy becomes aware that any party is attempting to obtain any such order, CMS Energy shall immediately notify the following person: General Counsel CMS NOMECO Oil & Gas. Co. One Jackson Square P. O. Box 1150 Jackson, Michigan 49204 4 5 or such other person as CMS NOMECO may have designated in writing. CMS Energy acknowledges that disclosure of Confidential Information in violation of this Agreement may cause CMS NOMECO irreparable damage and hereby consents to the issuance of an injunction by any court of competent jurisdiction prohibiting any disclosure of Confidential Information in violation of this Agreement. Such right to injunctive relief is in addition to all other remedies available to CMS NOMECO at law or in equity. CMS Energy shall inform all employees who have access to Confidential Information of the obligations referred to above and require their compliance with the provisions of this Agreement. 15. GOVERNING LAW. This Agreement shall be deemed to be a Michigan contract and shall be construed in accordance with and governed by the laws of the State of Michigan. 16. HEADINGS. The section headings in the Agreement are included for reference only. They shall not affect the interpretation and construction of this Agreement. 17. ENTIRE AGREEMENT. With respect to the subject matter hereof, this Agreement supersedes all previous agreements, representations, understandings and negotiations, either written or oral, between the parties hereto or their representatives, and constitutes the entire agreement between the parties. IN WITNESS WHEREOF, the parties hereto have entered into this Agreement as of the day and year first written above. CMS NOMECO OIL & GAS CO. CMS ENERGY CORPORATION By:_________________________ By:______________________ Title:______________________ Title:___________________ 5 EX-10.13 18 EXHIBIT 10.13 1 Exhibit 10.13 SERVICES AGREEMENT This Agreement is made as of this 25th day of October 1995 between CMS NOMECO Oil & Gas Co., a Michigan corporation ("CMS NOMECO") and CMS Enterprises Company, a Michigan corporation ("CMS Enterprises"). R E C I T A L S WHEREAS, CMS NOMECO is a subsidiary of CMS Enterprises, which in turn is a subsidiary of CMS Energy Corporation, a Michigan corporation; WHEREAS, CMS Enterprises desires, from time to time, to provide services to CMS NOMECO; WHEREAS, CMS NOMECO desires, from time to time, to purchase services from CMS Enterprises; and WHEREAS, CMS Enterprises is willing to perform such services as CMS NOMECO may from time to time request on the terms and conditions contained herein. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, the parties agree as follows: 1. SCOPE OF SERVICES. CMS Enterprises shall perform for CMS NOMECO, under the terms of this Agreement, such administrative, clerical, managerial, professional and/or technical services as the parties may from time to time agree by executing an intercompany service request ("ISR") as hereinafter provided (a copy of an ISR is attached hereto as Exhibit I). In the event CMS NOMECO desires CMS Enterprises to perform any such services, then the services desired, the time for their performance, and any other specific requirement (not inconsistent with the Agreement) relating thereto, shall be described in an ISR signed by an officer or other authorized person of CMS NOMECO and delivered to CMS Enterprises. Upon receipt of such ISR, CMS Enterprises shall make all of the necessary cost estimates and supply all other information required by the ISR. ISRs shall not become effective and binding until a completed copy thereof is signed by an officer or other authorized employee of both CMS NOMECO and CMS Enterprises, at which time the ISR shall be deemed to become part of this Agreement; provided, however, that in case of a discrepancy between any provision in the ISR and any provision of this Agreement, this Agreement shall prevail. Unless otherwise provided in this Agreement or such ISR, CMS Enterprises shall provide everything necessary to perform the services requested thereunder, including, but not limited to, all supervision, personnel, supplies, services and transportation. CMS NOMECO reserves the right to have similar or like services performed by others or through its own employees. 2. TERM OF AGREEMENT. This Agreement shall become effective as of the date hereof and continue until terminated by either party, at the terminating party's convenience, 2 by at least thirty (30) days' written notice to the non-terminating party. The terms of this Agreement shall remain in effect as to each such uncompleted ISR until the services thereunder are completed or it is terminated by CMS NOMECO under Section 12, "Termination." The terms of Section 14, "Ownership and Confidentiality" shall survive termination of this Agreement for a period of five (5) years after all other terms hereof expire. 3. PRICE OF SERVICES. CMS NOMECO will pay to CMS Enterprises and CMS Enterprises will accept as full compensation, satisfaction and payment for said services the rates and charges set forth in the applicable ISR. 4. PAYMENTS. Within twenty (20) days after the end of each calendar month, CMS Enterprises shall submit to CMS NOMECO an invoice respecting all ISRs, itemized to CMS NOMECO's reasonable satisfaction, for the services performed under such ISRs during the prior month, together with the amount due. Within thirty (30) days after receipt of each properly-itemized and supported invoice payment of such invoice shall be made to CMS Enterprises. Payment of such invoice by CMS NOMECO shall not constitute acceptance of the services and shall be subject to correction in the payment of any subsequent invoice. With each invoice, CMS Enterprises shall submit copies of all vendors' and subcontractors' invoices for amounts greater than $10,000 for which reimbursement is sought. Credit shall be given to CMS NOMECO for any discounts received by CMS Enterprises on all reimbursable invoices. 5. CHANGES IN THE SERVICES. Changes to any ISR issued hereunder may only be made pursuant to a written change order signed by an officer or authorized person of each party. Except as provided below, no claims for compensation for additional services shall be valid unless authorized by such written change order; provided, however, that whenever it is necessary to immediately authorize extra work to respond to emergency conditions, CMS Enterprises shall be entitled to perform services in reliance on an oral or written authorization by one of CMS NOMECO's officers or other authorized representatives previously identified to CMS Enterprises, and a written change to the ISR shall be made covering such services as soon thereafter as is reasonably practicable. 6. INDEPENDENT CONTRACTOR. In the performances of services hereunder, CMS Enterprises shall be an independent contractor with the sole authority to control and direct such performance. 7. PERMITS AND LAWS. CMS Enterprises shall secure all licenses or permits required by law and shall comply with all applicable ordinances, laws, orders, rules and regulations, pertaining to its performance of services hereunder. 8. WARRANTY AND REMEDY. Services performed directly by CMS Enterprises shall be performed in a careful and competent manner by properly trained and skilled personnel. CMS Enterprises HAS NOT MADE AND DOES NOT HEREBY MAKE ANY OTHER WARRANTIES, EXPRESS, IMPLIED OR STATUTORY AS TO THE SERVICES PERFORMED, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR ANY PURPOSE. In the event any service 2 3 performed directly by CMS Enterprises fails to conform to the above warranty, CMS Enterprises will re-perform said service at its expense if CMS NOMECO gives CMS Enterprises notice of such non-conformance within one (1) year after performance of the non-conforming service. As to services performed by subcontractors and vendors, CMS Enterprises shall on the request of CMS NOMECO assign to CMS NOMECO any assignable warranties obtained by CMS Enterprises. The foregoing states CMS NOMECO's sole and exclusive remedies hereunder. 9. LIMITATION ON LIABILITY. Notwithstanding any other provision of this Agreement, in no event shall CMS Enterprises' liability to CMS NOMECO under this Agreement exceed the compensation paid by CMS NOMECO to CMS Enterprises for that portion of the services giving rise to the claim and in no event shall the total of all such liabilities of CMS Enterprises exceed the total dollar amount paid to CMS Enterprises under this Agreement. Further, in no event shall CMS Enterprises be liable for any special, indirect, incidental or consequential damages of any nature on account of this Agreement. 10. CHANGES TO AGREEMENT; ASSIGNMENT AND SUBCONTRACTING. The terms of this Agreement shall not be changed, superseded or supplemented except in writing signed by an officer of each party. This Agreement shall not be assigned or any part thereof subcontracted by CMS Enterprises without CMS NOMECO's previous written consent. Any attempted assignment without such written consent shall be void and CMS NOMECO may refuse to permit the performance of any unauthorized subcontract. In case any such subcontracting is approved, the subcontract shall be in writing and shall be fully executed prior to the commencement of the services involved. If required by CMS NOMECO to do so, CMS Enterprises shall promptly furnish CMS NOMECO with copies of each executed subcontract. Any professional engineering services to be provided under this Agreement shall be performed by an entity or individual qualified to practice professional engineering in any jurisdiction or jurisdictions in which such qualification is required in order for the services to be provided. 11. AUDITING OF CMS ENTERPRISES' ACCOUNT AND REFUNDS. CMS Enterprises shall make and keep, as the same accrue, full and complete records and books of account of its costs, expenses, man-hours and equipment hours relating to the services hereunder in accordance with generally accepted accounting practices and CMS Enterprises' record retention policy in effect for such records whenever, by the terms of this Agreement, CMS Enterprises' compensation shall be based wholly or partially on such costs, expenses, man-hours or equipment hours. When relevant to determining CMS Enterprises' compensation hereunder, said records and books of accounts shall be open to examination during regular business hours by CMS NOMECO or its agents for the purpose of inspecting, auditing, verifying or copying the same or making extracts therefrom. CMS NOMECO's payment of invoices hereunder shall not constitute acceptance of the accuracy thereof. Amounts paid with respect to any ISR shall be subject to audit in accordance with this section for one (1) year after the making of the last payment under the ISR. Whenever an audit of CMS Enterprises' records shows that CMS NOMECO is entitled to a refund or CMS Enterprises is entitled to additional payment, CMS Enterprises or CMS NOMECO, as the case may be, shall promptly make said refund or additional payment with interest, compounded annually, at the prime rate established by the National Bank of Detroit from time to time or at the highest rate permitted by law, whichever 3 4 is less, from the date the erroneous payment was made to CMS Enterprises. Each party shall bear its own costs in connection with any such audit and billing error correction. 12. TERMINATION. Notwithstanding anything in this Agreement to the contrary, should CMS NOMECO for any reason desire to suspend or stop the services under any ISR hereunder at any time before the services have been completed, CMS Enterprises shall stop performing the services upon notice from CMS NOMECO. Any such termination shall be without prejudice to any other rights or remedies of CMS NOMECO for any breach of this Agreement by CMS Enterprises. CMS Enterprises shall, upon the effective date of such notice of termination, if requested by CMS NOMECO, immediately cease performance of the services and remove its employees, representatives, tools, equipment and other property from CMS NOMECO's premises. If CMS Enterprises fails to effect such removal within a reasonable time, CMS NOMECO may do so at CMS Enterprises' expense. In the event of such termination, payment for all services properly performed through the date of such termination shall be made in accordance with the rates and charges set forth in the applicable ISR, subject to proper deductions for defective services, damages or costs recoverable under this Agreement by CMS NOMECO by reason of any default, breach or failure to perform by CMS Enterprises. Upon any termination pursuant to this section, CMS NOMECO shall be released from all further obligations under any ISR so terminated except for payment as provided for in this section and such liability or other obligations as have accrued as of the time of termination. 13. NOTICES AND OTHER COMMUNICATIONS. Whenever notices, invoices, payments, or other communications are required or permitted hereunder, the same may be given, made or delivered by mail address as follows: CMS NOMECO Oil & Gas Co. CMS Enterprises Company One Jackson Square Fairlane Plaza South, Suite 1000 P. O. Box 1150 330 Town Center Drive Jackson, Michigan 49204 Dearborn, MI 48126 Attention: Corporate Secretary Attention: Treasury Dept. (for payments) General Accounting (for all other notices) or to such other address as the addressee shall have specified in writing. 14. OWNERSHIP AND CONFIDENTIALITY. "Confidential Information" shall mean (i) all documents, records, data and other information furnished to CMS Enterprises in any form in connection with the performance of the services contemplated hereunder and any copies thereof, and (ii) all documents, records, data and other work product produced by CMS Enterprises for CMS NOMECO in performance of the services contemplated hereunder and copies thereof. Confidential Information is, and shall continue to be, the property of CMS NOMECO. CMS Enterprises shall, to the extent permitted by law, upon written request from CMS NOMECO, immediately deliver to CMS NOMECO or destroy, at CMS NOMECO's option, all Confidential Information. CMS Enterprises shall not disclose any Confidential Information or the content thereof to any party except those CMS Enterprises' employees or agents who need to have access to such Confidential Information unless ordered by court, 4 5 administrative agency or other governmental body having jurisdiction. If CMS Enterprises becomes aware that any party is attempting to obtain any such order, CMS Enterprises shall immediately notify the following person: General Counsel CMS NOMECO Oil & Gas. Co. One Jackson Square P. O. Box 1150 Jackson, Michigan 49204 or such other person as CMS NOMECO may have designated in writing. CMS Enterprises acknowledges that disclosure of Confidential Information in violation of this Agreement may cause CMS NOMECO irreparable damage and hereby consents to the issuance of an injunction by any court of competent jurisdiction prohibiting any disclosure of Confidential Information in violation of this Agreement. Such right to injunctive relief is in addition to all other remedies available to CMS NOMECO at law or in equity. CMS Enterprises shall inform all employees who have access to Confidential Information of the obligations referred to above and require their compliance with the provisions of this Agreement. 15. GOVERNING LAW. This Agreement shall be deemed to be a Michigan contract and shall be construed in accordance with and governed by the laws of the State of Michigan. 16. HEADINGS. The section headings in the Agreement are included for reference only. They shall not affect the interpretation and construction of this Agreement. 17. ENTIRE AGREEMENT. With respect to the subject matter hereof, this Agreement supersedes all previous agreements, representations, understandings and negotiations, either written or oral, between the parties hereto or their representatives, and constitutes the entire agreement between the parties. IN WITNESS WHEREOF, the parties hereto have entered into this Agreement as of the day and year first written above. CMS NOMECO OIL & GAS CO. CMS ENTERPRISES COMPANY By:__________________________ By:__________________________ Title:_______________________ Title:_______________________ 5 EX-10.14 19 EXHIBIT 10.14 1 EXHIBIT 10.14 REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement, dated as of October 25, 1995, is entered into between CMS Enterprises Company, a Michigan corporation (herein called "CMS Enterprises"), and CMS NOMECO Oil & Gas Co., a Michigan corporation (herein called "CMS NOMECO"). WHEREAS, CMS Enterprises owns all of the issued and outstanding shares of the common stock of CMS NOMECO ("Common Stock"), which have been or will be converted into Common Stock, no par (such Common Stock being herein collectively called the "Securities", which term shall also have the meaning assigned thereto in Section 8(c) hereof); NOW, THEREFORE, in consideration of the foregoing and in order to specify certain provisions relating to the sale by means of domestic or foreign public offerings of Securities owned by CMS Enterprises, the parties hereto agree as follows: Section 1. Registration and Listing Rights. (a) Registration. If CMS Enterprises shall, at any time and from time to time, request CMS NOMECO in writing to register under the Securities Act of 1933 (the "Act") any Securities held by it (whether for purposes of a public offering, an exchange offer or otherwise), CMS NOMECO shall use reasonable efforts to cause the prompt registration of all Securities specified in such request, and in connection therewith shall prepare and file on such appropriate form as CMS NOMECO, in its reasonable discretion, shall determine, a registration statement 2 under the Act to effect such registration. If CMS Enterprises shall so request, CMS NOMECO will register such Securities for offering on a delayed or continuous basis pursuant to Rule 415 (or any successor rule or rules to similar effect) under the Act. Notwithstanding the foregoing, CMS NOMECO shall be entitled to postpone for a reasonable period of time, but not in excess of 90 calendar days, the filing of any registration statement otherwise required to be prepared and filed by it if (i) CMS NOMECO is at such time conducting or about to conduct an underwritten public offering of Securities for sale for its account and determines that such offering would be materially adversely affected by the registration so required and (ii) CMS NOMECO so notifies CMS Enterprises within five days after CMS Enterprises so requests. (b) Other Offer and Sale. If CMS Enterprises shall, at any time and from time to time, request CMS NOMECO in writing to take such actions as shall be necessary or appropriate to permit any Securities held by CMS Enterprises to be publicly or privately offered and sold in compliance with the securities laws or other relevant laws or regulations of any foreign jurisdiction in which a principal securities market outside the United States is located, CMS NOMECO shall use reasonable efforts to take such actions in any such foreign jurisdiction (including listing such Securities on any foreign securities exchange on which such listing is requested by CMS Enterprises) and shall otherwise cooperate in a timely manner in such offering. Any request under this paragraph (b) may be made separately or in conjunction with any request under paragraph (a). Notwithstanding the foregoing, CMS NOMECO shall be entitled to postpone for a reasonable period of time, but not in excess of 90 calendar days, the taking of any actions otherwise required under this paragraph (b) if (i) CMS NOMECO is at - 2 - 3 such time conducting or about to conduct an underwritten public offering of Securities for sale for its account and determines that such offering would be materially adversely affected by the registration so required and (ii) CMS NOMECO so notifies CMS Enterprises within 5 days after CMS Enterprises so requests. (c) Written Notice. Any request by CMS Enterprises pursuant to paragraph (a) or (b) of this Section 1, shall (i) specify the number and class of shares of Securities which CMS Enterprises intends to offer and sell, (ii) express the intention of CMS Enterprises to offer or cause the offering of such Securities, (iii) describe the nature or method of the proposed offer and sale thereof and state whether such offer is intended to be made domestically or abroad, or both, and, if abroad, the country or countries in which such offer is intended to be made, (iv) specify any securities exchange (including any foreign securities exchange in any principal securities market outside the United States) or quotation system on which CMS Enterprises requests that such Securities be listed, (v) contain the undertaking of CMS Enterprises to provide all such information regarding its holdings and the proposed manner of distribution thereof as may be required in order to permit CMS NOMECO to (A) comply with all applicable laws and regulations, foreign or domestic, and all requirements of the Securities and Exchange Commission (the "SEC"), any other applicable United States or foreign regulatory or self-regulatory body and any other body having jurisdiction and any securities exchange (including any foreign securities exchange in any principal securities market outside the United States) on which the Securities are to be listed, and (B) use reasonable efforts to obtain acceleration of the effective date of any registration statement filed in connection therewith, and (vi) in the case of an underwritten public offering made domestically or abroad, or both, specify the managing - 3 - 4 underwriter or underwriters of such Securities, which shall be selected by CMS Enterprises; provided, however, that CMS Enterprises may, upon delivery of written notice to CMS NOMECO, at any time prior to the effectiveness of any such registration statement or commencement of any such offering not pursuant to a registration statement, in its sole discretion and without the consent of CMS NOMECO, abandon the proposed offering. (d) Condition to Exercise of Rights. The obligations of CMS NOMECO under paragraphs (a) and (b) of this Section 1 shall be subject to the limitation that CMS NOMECO shall not be obligated to register, take other specified actions with respect to, or cooperate in the offering of, Securities upon the request of CMS Enterprises, unless the number of shares specified in such request pursuant to Section 1(c)(i) shall be greater than the lesser of (A) one million shares or (B) one percent of the total number of shares at the time issued and outstanding. Notwithstanding the foregoing, the failure of CMS Enterprises to own the minimum number of Securities referred to in the preceding sentence at any time shall not affect the ability of CMS Enterprises to exercise its rights under this Agreement at any subsequent time when CMS Enterprises again owns such minimum number or percent. (e) Incidental Registration. If CMS NOMECO shall, at any time and from time to time, propose an underwritten offering for cash of any Securities, whether pursuant to a registration statement under the Act or otherwise, CMS NOMECO shall give written notice as promptly as practicable of such proposed registration or offering to CMS Enterprises and shall use reasonable efforts to include in such offering and, if such offering is pursuant to a registration statement under the Act, in such registration, any of the same class of such - 4 - 5 Securities held by CMS Enterprises as CMS Enterprises shall request within 20 calendar days after the giving of such notice, upon the same terms (including the method of distribution) as such offering; provided, however, that (i) CMS NOMECO shall not be required to give such notice or include any such Securities in any offering pursuant to a registration statement filed on Form S-8 or Form S-4 (or such other form or forms as shall be prescribed under the Act for the same purposes), and (ii) CMS NOMECO may at any time prior to the effectiveness of any such registration statement or commencement of any such offering not pursuant to a registration statement, in its sole discretion and without the consent of CMS Enterprises, abandon the proposed offering in which CMS Enterprises had requested to participate. Notwithstanding the foregoing, CMS NOMECO shall not be obligated to include such Securities in such offering if CMS NOMECO is advised in writing by its managing underwriter or underwriters (with a copy to CMS Enterprises within ten days after CMS Enterprises delivers its request pursuant to this paragraph (e)) that such offering would in its or their opinion be materially adversely affected by such inclusion; provided, however, that CMS NOMECO shall in any case be obligated to include up to, at CMS Enterprises' discretion, such number or amount of Securities in such offering as such managing underwriter or underwriters shall determine will not materially adversely affect such offering. (f) Conversion of Other Securities. Should CMS Enterprises offer any rights, warrants or other securities issued by it or any other person that are convertible into or exercisable or exchangeable for any Securities, CMS NOMECO's obligations under this Section 1 shall be applicable to such Securities to be purchased upon such conversion, exercise or exchange. - 5 - 6 Section 2. Covenants of CMS NOMECO. In connection with any offering of Securities pursuant to this Agreement, CMS NOMECO shall: (a) furnish to CMS Enterprises such number of copies of any prospectus (including any preliminary prospectus), registration statement, offering memorandum or other offering document (including any exhibits thereto or documents referred to therein) as CMS Enterprises may reasonably request and a copy of any and all transmittal letters or other correspondence with the SEC or any other governmental agency or self-regulatory body or other body having jurisdiction (including any domestic or foreign securities exchange) relating to such offering of Securities; (b) take such reasonable action as may be necessary to qualify such Securities for offer and sale under such securities, "blue sky" or similar laws of such jurisdictions (including any foreign country or political subdivision thereof) as CMS Enterprises or any underwriter shall request; (c) enter into an underwriting agreement (or equivalent document in any foreign jurisdiction) containing representations, warranties, indemnities, contribution provisions and agreements then customarily included by an issuer in underwriting agreements (or such equivalent documents) in the form customarily used by the managing underwriter and reasonably acceptable to CMS NOMECO and CMS Enterprises with respect to secondary distributions; - 6 - 7 (d) at the closing, furnish unlegended certificates representing ownership of the Securities being sold in such denominations as shall be requested by CMS Enterprises or the managing underwriter; (e) instruct the transfer agent and registrar to release any stop transfer orders with respect to the equity securities being sold; (f) promptly inform CMS Enterprises (i) in the case of any domestic offering of Securities in respect of which a registration statement is filed under the Act, of the date on which such registration statement or any post-effective amendment thereto becomes effective (and, in the case of any offering abroad of Securities, of the date when any required filing under the securities and other laws of such foreign jurisdiction shall have been made and when the offering may be commenced in accordance with such laws) and (ii) of any request by the SEC, any securities exchange, government agency, self-regulatory body or other body having jurisdiction for any amendment of or supplement to any registration statement or preliminary prospectus or prospectus included therein or any offering memorandum or other offering document relating to such offering; (g) upon any registration statement becoming effective pursuant to any registration under the Act pursuant to this Agreement, file any necessary amendments or supplements to such registration statement and otherwise use reasonable efforts to keep such registration statement effective for such period as CMS Enterprises shall request; - 7 - 8 (h) take such reasonable actions as may be necessary to have such Securities listed on any securities exchange or quotation system on which CMS Enterprises shall request such listing pursuant to the notice delivered by CMS Enterprises under Section 1(c) hereof; (i) promptly notify CMS Enterprises of the happening of any event as a result of which any registration statement or any preliminary prospectus or prospectus included therein or any offering memorandum or other offering document includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing, and prepare and furnish to CMS Enterprises as many copies of a supplement to or amendment of such offering document which shall correct such untrue statement or eliminate such omission, as CMS Enterprises shall request; (j) appoint any transfer agent, registrar, depository, authentication agent or other agent as may be necessary or desirable or as may be requested by CMS Enterprises; and (k) take such actions as may be reasonably necessary and execute and deliver such other documents as may be necessary to give full effect to the rights of CMS Enterprises under this Agreement. - 8 - 9 Section 3. Expenses. (a) All expenses incurred in complying with Section 1(a) or (b) hereof, including, without limitation, all registration and filing fees (including all expenses incident to any filing with the National Association of Securities Dealers, Inc., or listing on any domestic or foreign securities exchange), fees and expenses of complying with securities and blue sky laws (including those of counsel satisfactory to CMS Enterprises retained to effect such compliance) and printing expenses (collectively "Registration Expenses") and any stamp, duty or transfer tax, incurred in connection with such compliance, shall be paid by CMS Enterprises. Notwithstanding the foregoing, (i) CMS Enterprises shall pay all underwriting discounts and commissions relating to such compliance, and (ii) CMS NOMECO shall pay (x) the fees and disbursements of its independent public accountants (including any such fees and expenses incurred in performing any special audits required in connection with any such offering and incurred in connection with the preparation of pro forma financial statements and comfort letters for any such offering), (y) transfer agents', trustees', fiscal agents', depositaries', and registrars' fees and the fees of any other agent appointed in connection with such offering, and (z) all security engraving and printing expenses, and (iii) CMS Enterprises shall pay the fees and expenses of counsel for both CMS Enterprises and CMS NOMECO relating to such compliance. (b) All expenses incurred in complying with Section 1(e) hereof, including, without limitation, any Registration Expenses, shall be paid by CMS NOMECO, except that (i) CMS Enterprises shall pay all underwriting discounts, commissions and expenses specifically - 9 - 10 attributable to the inclusion in the offering under said Section 1(e) of the Securities being sold by CMS Enterprises and (ii) each party shall pay the fees and expenses of its counsel. Section 4. Indemnification. (a) CMS NOMECO Indemnity. In the case of each offering contemplated by this Agreement, CMS NOMECO shall indemnify and hold harmless CMS Enterprises, its officers and directors, each underwriter of Securities so offered and each person, if any, who controls CMS Enterprises or any such underwriter within the meaning of Section 15 of the Act, and each person affiliated with or retained by CMS Enterprises and who may be subject to liability under any applicable securities laws, against any and all losses, claims, damages or liabilities to which they or any of them may become subject under the Act or any other statute or common law of the United States of America or any other country, or otherwise, including any amount paid in settlement of any litigation commenced or threatened, and shall promptly reimburse them, as and when incurred, for any reasonable legal or other expenses incurred by them in connection with defending any actions, insofar as any such losses, claims, damages, liabilities or actions shall arise out of or shall be based upon any untrue statement or alleged untrue statement of a material fact contained in the registration statement (or in any preliminary or final prospectus included therein) or in any offering memorandum or other offering document relating to the offering and sale of such Securities, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading or any violation or alleged violation by CMS NOMECO of the Act, any blue sky laws, securities laws or other applicable laws of any state or country in which Securities are offered and relating to - 10 - 11 action or inaction required of CMS NOMECO in connection with such offering; provided, however, that the indemnification agreement contained in this Section 4(a) shall not apply to such losses, claims, damages, liabilities or actions if such losses, claims, damages, liabilities or actions shall arise out of or shall be based upon any such untrue statement or alleged untrue statement, or any such omission or alleged omission, made in reliance upon and in conformity with information concerning CMS Enterprises supplied or approved by CMS Enterprises in writing for use in connection with the preparation of the registration statement or any preliminary prospectus or final prospectus contained in the registration statement, any offering memorandum or other offering document, or any amendment thereof or supplement thereto. (b) CMS Enterprises Indemnity. In the case of each offering made pursuant to this Agreement, CMS Enterprises shall, in the same manner and to the same extent as set forth in paragraph (a) of this Section 4, indemnify and hold harmless CMS NOMECO and each person, if any, who controls CMS NOMECO within the meaning of Section 15 of the Act, and each person affiliated with or retained by CMS NOMECO and who may be subject to liability under any applicable securities laws, its directors and those officers of CMS NOMECO who shall have signed any registration statement, offering memorandum or other offering document with respect to any statement in or omission from such registration statement, any preliminary prospectus or final prospectus contained in such registration statement, any offering memorandum or other offering document, or any amendment thereof or supplement thereto, if such statement or omission shall have been made in reliance upon and in conformity with information concerning CMS Enterprises supplied or approved by CMS Enterprises in writing for use in connection with the preparation of such registration statement, any preliminary - 11 - 12 prospectus or final prospectus contained in such registration statement, any offering memorandum or other offering document, or any amendment thereof or supplement thereto. (c) Procedure for Indemnification. Each party indemnified under paragraph (a) or (b) of this Section 4, or under Section 8(f) hereof, shall, promptly after receipt of notice of the commencement of any action against such indemnified party in respect of which indemnity may be sought, notify the indemnifying party in writing of the commencement thereof. The omission of any indemnified party so to notify an indemnifying party of any such action shall not relieve the indemnifying party from any liability in respect of such action which it may have to such indemnified party on account of the indemnity agreement contained in paragraph (a) or (b) of this Section 4, or under Section 8(f) hereof, unless the indemnifying party was materially prejudiced by such omission, and in no event shall relieve the indemnifying party from any other liability which it may have to such indemnified party. In case any such action shall be brought against any indemnified party and such indemnified party shall notify an indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory in any case to CMS Enterprises. If the indemnifying party so assumes the defense thereof, it may not agree to any settlement of any such action as the result of which any remedy or relief shall be applied to or against the indemnified party, without the prior written consent of the indemnified party. If the indemnifying party does not assume the defense thereof, it shall be bound by any settlement to which the indemnified party agrees, irrespective of whether the indemnifying party consents thereto. If any settlement of any claim is effected by the indemnified party prior to - 12 - 13 commencement of any action relating thereto, the indemnifying party shall be bound thereby only if it has consented in writing thereto. In any action hereunder, the indemnified party shall continue to be entitled to participate in the defense thereof, with counsel reasonably satisfactory to CMS Enterprises, even if the indemnifying party has assumed the defense thereof, and the indemnifying party shall be relieved of the obligation hereunder to reimburse the indemnified party for the legal expenses and other costs thereof. Section 5. Transfer of Rights. (a) Subject to paragraph (b) below, the rights of CMS Enterprises under this Agreement with respect to any Security may be transferred to any one or more transferees of such Security. Any transfer of registration rights pursuant to this Section 5 shall be effective only upon receipt by CMS NOMECO of written notice from CMS Enterprises stating the name and address of any transferee and identifying the Securities with respect to which the rights under this Agreement are being transferred. (b) The rights of a transferee under paragraph (a) above shall be the same rights granted to CMS Enterprises under this Agreement, except such transferee shall (i) only have the right to make one request under paragraph (a) or (b) of Section 1, which may be a simultaneous request under paragraphs (a) and (b) , and two requests under paragraph (e) of Section 1 and (ii) in the case of a request under paragraph (a) or (b) of Section 1, be required to pay all expenses that, under Section 3, would be required to be paid by CMS Enterprises and in the case - 13 - 14 of a request under paragraph (e) of Section 1, be required to pay all expenses that, under Section 3(b), would be required to be paid by CMS Enterprises. Section 6. Termination of Obligations. Section 1 of this Agreement shall terminate and cease to be of any force and effect in respect of CMS Enterprises at such time as CMS Enterprises, and in respect of any assignee of CMS Enterprises under Section 9(c) at such time as such assignee, shall cease beneficially to own any Securities; provided, however, that such termination shall not affect the rights of any transferee under Section 5. Section 7. Representation and Warranties. As an inducement to enter into this Agreement, each party represents to and agrees with the other that: (a) it is a corporation duly organized, validly existing in good standing under the laws of the State of Michigan and has all requisite corporate power to own, lease and operate its material properties, to carry on its business as presently conducted and to carry out the transactions contemplated by this Agreement; (b) it has duly and validly taken all corporate action necessary to authorize the execution, delivery.and performance of this Agreement and the consummation of the transactions contemplated hereby; (c) this Agreement has been duly executed and delivered by it and constitutes its legal, valid and binding obligation enforceable in accordance with its terms (subject, as - 14 - 15 to the enforcement of remedies, to applicable bankruptcy, reorganization, insolvency, moratorium or other similar laws affecting the enforcement of creditors' rights generally from time to time in effect, and subject to application of general principles of equity); and (d) none of the execution and delivery of this Agreement, the consummation of the transactions contemplated hereby or the compliance with any of the provisions of this Agreement will (i) conflict with or result in a breach of any provision of its corporate charter or bylaws, (ii) breach, violate or result in a default under any of the terms of any material agreement or other material instrument or obligation to which it is a party or by which it or any of its properties or assets may be bound, or (iii) violate any order, writ, injunction, decree, statute, rule or regulation applicable to it or any of its properties or assets. Section 8. Certain Agreements and Definitions. (a) Calculation of Amounts. For purposes of this Agreement, the amount of any Securities outstanding at any time (and the amount of any Securities then beneficially owned by CMS Enterprises or any other person) shall be calculated on the basis of the information contained in CMS NOMECO's most recent report filed with the SEC. For purposes of calculating the amount of Securities outstanding at any time (and the amount of Securities then beneficially owned by CMS Enterprises or any other person) all outstanding securities convertible into or exchangeable for such Securities, including outstanding securities that in the - 15 - 16 future will become so convertible or exchangeable, shall be deemed to have been fully converted at such time. (b) "Person"; "Affiliate". As used in this Agreement, the term "person" shall mean any individual, partnership, corporation, trust or other entity. As used in this Agreement, the term "affiliate" shall mean, with respect to any specified person, any other person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such specified person. (c) "Securities". As used in this Agreement, the term "Securities" shall include any capital stock of CMS NOMECO now owned or hereafter acquired by CMS Enterprises, whether acquired in any transaction with CMS NOMECO or another person, in any recapitalization of CMS NOMECO, as a dividend or other distribution, as a result of any "split" or "reverse split", upon conversion or exercise of another security of CMS NOMECO or any other person, or otherwise. (d) No Legend. No Security held or to be transferred by CMS Enterprises shall bear any legend, nor shall CMS NOMECO cause or permit any transfer agent or registrar appointed by CMS NOMECO with respect to such Security to refuse or fail to effect a transfer or registration with respect to such Security, provided that CMS Enterprises provides to CMS NOMECO a certificate of an officer to CMS Enterprises in connection with such transfer or registration to the effect that such transfer or registration is not in violation of any applicable - 16 - 17 securities or other laws and that the security so transferred or registered is thereafter free of securities law transfer restrictions. (e) Stock Books. Except as otherwise provided by law for all holders of securities, CMS NOMECO will not close its stock books or other registries against the transfer of any Security held by CMS Enterprises. (f) Securities Exchange Act of 1934. After the initial public offering of the Common Stock, CMS NOMECO shall at all times timely file such information, documents and reports as the SEC may require or prescribe under the Securities Exchange Act of 1934 (the "Exchange Act") and shall provide CMS Enterprises with two copies of each thereof. CMS NOMECO shall, whenever requested by CMS Enterprises, notify CMS Enterprises in writing whether CMS NOMECO has, as of the date specified by CMS Enterprises, complied with the Exchange Act reporting requirements to which it is subject for such period to such date as shall be specified by CMS Enterprises. CMS NOMECO acknowledges and agrees that one of the purposes of the requirements contained in this Section 8(f) is to enable CMS Enterprises to comply with the current public information requirements contained in Paragraph (c) of Rule 144 under the Act (or any corresponding rule hereafter in effect) should CMS Enterprises ever wish to dispose of any Securities without registration under the Act in reliance upon Rule 144. In addition, CMS NOMECO shall take such other measures and file such other information, documents and reports as shall hereafter be required by the SEC as a condition to the availability of Rule 144. CMS NOMECO covenants, represents and warrants that all such information, documents and reports filed with the SEC shall not contain any untrue statement - 17 - 18 of a material fact or fail to state therein a material fact required to be stated therein or necessary to make the statements contained therein not misleading, and CMS NOMECO shall indemnify and hold CMS Enterprises, its officers and directors and each broker, dealer, underwriter or other person acting for CMS Enterprises (and any controlling person of any of the foregoing) harmless from and against any and all claims, liabilities, losses, damages, expenses and judgments and shall promptly reimburse them, as and when incurred, for any legal or other expenses incurred by them in connection with investigating any claims and defending any actions insofar as such claims, liabilities, losses, damages expenses and judgments arise out of or based upon any breach of the foregoing covenants, representations or warranties. The procedure for indemnification set forth in Section 4(c) hereof shall apply to the indemnification provided under this Section 8(f). (g) Listing. Once initially listed, CMS NOMECO shall maintain in effect any listing of Securities on any securities exchange (domestic or foreign) or quotation system, shall make all filings and take all other actions required under the rules of such exchange or quotation system and any applicable listing agreement, shall provide CMS Enterprises with two copies of each such filing at the time at which such filing is made, and shall notify CMS Enterprises of any proceeding or other action taken by such exchange, quotation system or any other person which might have the effect of terminating or otherwise changing the status of such listing, forthwith upon the occurrence thereof. (h) Limitation on Other Securities To Be Registered. In case of any registration, offering or sale contemplated by paragraph (a) or (b) of Section 1, CMS NOMECO shall not - 18 - 19 include in such registration, offering or sale any Securities other than those beneficially owned by CMS Enterprises, and in case of any registration, offering or sale contemplated by paragraph (e) of Section 1, CMS NOMECO shall not include in such registration, offering or sale any Securities other than those being offered by CMS NOMECO and CMS Enterprises. (i) Filings; Press Releases. As far in advance as is practicable of (but in any event no later than two business days before) (i) the publication of any press release containing information material to CMS NOMECO's stockholders or (ii) the filing of any document or report with the SEC or with any securities exchange or quotation system, CMS NOMECO shall send a reasonably final draft of such press release, document or report to CMS Enterprises at the address set forth in Section 9(m) hereof. CMS Enterprises shall have the right to request amendments, modifications or supplements to any such release, document or report and CMS NOMECO shall not unreasonably withhold its consent thereto. The obligations of CMS NOMECO under this Section 8(i) shall terminate and cease to be of any force and effect at such time as CMS Enterprises shall cease to beneficially own any Securities. (j) Counsel. In any case where legal counsel is to be employed to represent the parties for any purpose under this Agreement, CMS Enterprises shall have the right to select such counsel. If in the judgment of CMS Enterprises it would be appropriate to do so, CMS Enterprises may select the same counsel to represent both parties in connection with any matter, and CMS NOMECO hereby consents in advance to any such joint representation; provided, however, that if any counsel selected for such joint representation is of the opinion at any time that, in light of the circumstances then existing, it would not be able to discharge - 19 - 20 its professional responsibilities properly in undertaking or in continuing such joint representation, then CMS NOMECO shall select separate counsel to represent itself, which counsel shall be reasonably satisfactory to CMS Enterprises, in the matter. Except as otherwise specifically provided in Section 4(b) hereof, CMS NOMECO shall be solely responsible for the fees and expenses of any separate counsel so selected, and CMS Enterprises shall have no responsibility or liability whatsoever with respect thereto. If the parties use the same counsel, each of the parties shall be responsible for the portion of the fees and expenses of such counsel determined by such counsel to be allocable to each of the parties. Section 9. Miscellaneous. (a) Injunctions. Irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. Therefore, the parties hereto shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Agreement and to enforce specifically the terms and provisions hereof in any court having jurisdiction, such remedy being in addition to any other remedy to which they may be entitled at law or in equity. (b) Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, - 20 - 21 provisions, covenants and restrictions without including any of such which may be hereafter declared invalid, void or enforceable. In the event that any such term, provision, covenant or restriction is so held to be invalid, void or unenforceable, the parties hereto shall use their best efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. (c) Assignment. Except in the case of a transaction as a result of which CMS NOMECO ceases to be an affiliate of CMS Enterprises or except as provided otherwise in Section 5 hereof, and except by operation of law or in connection with the sale of all or substantially all the assets of a party hereto, this Agreement shall not be assignable, in whole or in part, directly or indirectly, by either party hereto without the prior written consent of the other, and any attempt to assign any rights or obligations arising under this Agreement without such consent shall be void ab initio; provided, however, that the provisions of this Agreement shall be binding upon, inure to the benefit of and be enforceable by the parties hereto (including, solely for purposes of Sections 4 and 8(g) hereof, their officers and directors) and their respective successors and permitted assigns. This Agreement and all of CMS Enterprises' rights and obligations hereunder shall be deemed to be automatically assigned to any person who acquires Securities in connection with the transaction and who CMS NOMECO and CMS Enterprises are affiliates of both before and after the transaction. (d) Further Assurances. Subject to the provisions hereof, the parties hereto shall make, execute, acknowledge and deliver such other instruments and documents, and take all such other actions as may be reasonably required in order to effectuate the purposes of this - 21 - 22 Agreement and to consummate the transactions contemplated hereby. Subject to the provisions hereof, each of the parties shall, in connection with entering into this Agreement, performing its obligations hereunder and taking any and all actions relating hereto, comply with all applicable laws, regulations, orders and decrees, obtain all required consents and approvals and make all required filings with any governmental agency, other regulatory or administrative agency, commission or similar authority and promptly provide the other with all such information as the other may reasonably request in order to be able to comply with the provisions of this sentence. (e) Parties in Interest. Except as otherwise expressly set forth herein, nothing in this Agreement expressed or implied is intended or shall be construed to confer any right or benefit upon any person, firm or corporation other than the parties and their respective permitted successors and assigns. (f) Waivers, Etc. No failure or delay on the part of the parties in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. No amendment, modification or waiver of any provision of this Agreement nor consent to any departure by the parties therefrom shall in any event be effective unless the same shall be in writing and signed by the chief executive officer or the chief financial officer of each party in the case of amendments or modifications, or by the chief executive officer or the chief - 22 - 23 financial officer of the waiving or consenting party, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. (g) Setoff. All payments to be made by either party under this Agreement shall be made without setoff, counterclaim or withholding, all of which are expressly waived. (h) Changes of Law. If, due to any change in applicable law or regulations or the interpretation thereof by any court of law or other governing body having jurisdiction subsequent to the date of this Agreement, performance of any provision of this Agreement or any transaction contemplated hereby shall become impracticable or impossible, the parties hereto shall use reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such provision. (i) Confidentiality. Subject to any contrary requirement of law and the right of each party to enforce its rights hereunder in any legal action, each party shall keep strictly confidential and shall cause its employees and agents to keep strictly confidential, any information which it or any of its agents or employees may acquire pursuant to, or in the course of performing its obligations under, any provision of this Agreement; provided, however, that such obligation to maintain confidentiality shall not apply to information which (x) at the time of disclosure was in the public domain not as a result of acts by the receiving party, (y) was in the possession of the receiving party at the time of disclosure, or (z) was required to be disclosed by law. - 23 - 24 (j) Entire Agreement. This Agreement contains the entire understanding of the parties with respect to the transactions contemplated hereby. (k) Headings. Descriptive headings are for convenience only and shall not control or affect the meaning or construction of any provision of this Agreement. (l) Counterparts. For the convenience of the parties, any number of counterparts of this Agreement may be executed by the parties hereto, and each such executed counterpart shall be, and shall be deemed to be, an original instrument. (m) Notices. All notices, consents, requests, instructions, approvals and other communications provided for herein shall be validly given, made or served, if in writing and delivered personally, by telegram or sent by registered mail, postage prepaid to: CMS Enterprises at: Fairlane Plaza South, Suite 1100 330 Town Center Drive Dearborn, MI 48126 with separate copies at such address to the attention of the Chief Financial Officer and the Corporate Secretary CMS NOMECO at: One Jackson Square P. O. Box 1150 Jackson, MI 49204 with separate copies at such address to the attention of the Chief Financial Officer and the Corporate Secretary - 24 - 25 or to such other address as any party may, from time to time, designate in a written notice given in a like manner. Any notice given under this Agreement shall be deemed delivered when received at the appropriate address. (m) Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Michigan applicable to contracts made and to be performed therein. - 25 - 26 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed by their respective officers, each of whom is duly authorized, all as of the date and year first above written. CMS Enterprises Company By:_____________________________________ Name:___________________________________ Title:__________________________________ CMS NOMECO Oil & Gas Co. By:_____________________________________ Name:___________________________________ Title:__________________________________ Signature Page of Registration Rights Agreement dated as of September __, 1995. - 26 - EX-10.15 20 EXHIBIT 10.15 1 EXHIBIT 10.15 AMENDED AND RESTATED AGREEMENT FOR THE ALLOCATION OF INCOME TAX LIABILITIES AND BENEFITS This tax allocation agreement ("Agreement"), amended and restated as of January 1, 1994, is made by and among CMS Energy Corporation, a Michigan corporation ("CMS"), each of the corporations that are members of the Consolidated Group (as defined in Section 1) as of the date hereof, and each of the corporations that become members of the Consolidated Group from time to time thereafter, (each such corporation being referred to herein as "Subsidiary" and together as "Subsidiaries"). RECITALS Each of the parties hereto are members of the Consolidated Group. Consumers Power Company ("Consumers") was the common parent of the Consolidated Group prior to May 26, 1987. CMS became the common parent of the Consolidated Group on May 26, 1987, pursuant to a reorganization that continued the existence of the Consolidated Group and replaced Consumers with CMS as common parent. The Consolidated Group elected to file consolidated Federal income tax returns for all tax years beginning with 1973 and CMS intends to continue to file a consolidated Federal income tax return for each taxable year for which the Consolidated Group is required or permitted to file a consolidated Federal income tax return. The Consolidated Group filed an election with the Internal Revenue Service, beginning with tax year 1973, to allocate its tax liabilities and benefits for all Consolidated Years in accordance with certain methods permitted by Treasury Regulations (the "Separate Taxable Income Method") and has applied such methods both for Federal income tax purposes and for financial reporting purposes. A copy of that election is attached as Exhibit A hereto. The parties desire that the income tax liabilities and benefits of each member of the Consolidated Group, resulting from the filing of consolidated Federal income tax returns, continue to be allocated for Federal income tax purposes using the Separate Taxable Income Method. However, for financial reporting purposes, for all Consolidated Years after December 31, 1993, the parties intend to use the method of allocation described herein. The parties believe that the method described herein conforms generally to the Separate Taxable Income Method, but to the extent of any conflict, the parties intend that the method described herein shall prevail believing that it best furthers their desire that no cross-subsidies arise between the utility and nonutility activities of the Consolidated Group. 2 2 AGREEMENT NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows: 1. Definitions. The following terms as used herein shall have the meaning set forth below: 1.1 "Applicable Quarterly Percentage" means the quarterly percentage determined by the CMS Corporate Tax Department for each estimated payment, necessary to comply with and avoid underpayment penalty under Code Section 6655. 1.2 "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any predecessor or successor thereto, and "Treas. Reg." means the regulations issued under the Code. 1.3 "Consolidated Group" means the affiliated group of corporations, as defined in Section 1504(a) of the Code, of which CMS is the common parent, and which has duly elected to file a Consolidated Return. 1.4 "Consolidated AMT Liability" means the alternative minimum tax imposed on the Consolidated Group for the Consolidated Year under Section 55(a) of the Code, calculated without regard to credits available to reduce such liability. 1.5 "Consolidated Return" means a consolidated Federal income tax return filed with respect to the Consolidated Group pursuant to Section 1501 of the Code. 1.6 "Consolidated Regular Tax Liability" means the regular Federal income tax liability of the Consolidated Group for the Consolidated Year, determined under Treas. Reg. Section 1.1502-2, applying the actual credits allowable on the Consolidated Return (whether applied to reduce regular tax or AMT tax). 1.7 "Consolidated Tax Liability" means the Consolidated Regular Tax Liability plus the Consolidated AMT Liability. 1.8 "Consolidated Year" means a taxable period for which a Consolidated Return is filed. 1.9 "Excess Credits" has the meaning assigned to that term in Section 5, below. 1.10 "Excess FTC" has the meaning assigned to that term in Section 5, below. 3 3 1.11 "Member" means, with respect to all or a portion of each Consolidated Year, each member of the Consolidated Group. 1.12 "OFL" means an overall foreign loss as defined in Section 904(f)(2) of the Code, a separate limitation loss as defined in Section 904(f)(5)(E) of the Code, or a foreign oil extraction loss as defined in Section 907(c)(4)(B) of the Code, as the context requires, and in each case determined on an aggregate basis for all taxable years (net of recapture). 1.13 "Positive AMT Liability" has the meaning assigned to that term in Section 4, hereof. 1.14 "Separate Credits" has the meaning assigned to that term in Section 5, below. 1.15 "Separate Losses" has the meaning assigned to that term in Section 5 below. 1.16 "Separate Taxable Income" means, with respect to any Member, the positive separate taxable income of such member, if any, for the Consolidated Year determined under Treas. Reg. Section 1.1502-12 and adjusted under Treas. Reg. Section 1.1552-1(a)(1)(ii). 1.17 "Separate Tax Benefits" of any Member with respect to a Consolidated Year means the amount determined under Section 5, hereof. 1.18 "Separate Return Tax Liability" means, with respect to any Member, the separate return tax liability of such member for the Consolidated Year determined under Treas. Reg. Section 1.1552-1(a)(2)(ii), without regard to Positive AMT liability and applying the actual credits that would have been allowable had such Member filed on a separate company basis. 1.19 "Separate Tax Liability" of a Member means, with respect to a Consolidated Year, the sum of the amounts determined under Sections 3 and 4, hereof. 1.20 "Stand Alone Tax Liability" means the tax liability of a Member based on the member's separate items of income, deductions and credits, computed as if the Member had filed a separate return for the year, without giving effect to any items of consolidation, and without regard to the graduated rates imposed under Section 11(b) of the Code. 2. Consolidated Tax Returns. CMS and each Subsidiary acknowledge that a consolidated Federal income tax return has been, and shall continue to be, filed by CMS for the Consolidated Group for each taxable year. CMS and each Subsidiary agree to allocate the Federal income tax liabilities and benefits reported by the Consolidated Group in the manner provided in this Agreement and to make the payments required by this Agreement at such time and in such manner as set forth in this Agreement. 4 4 3. Regular Tax Liability Allocation. The Consolidated Regular Tax Liability for each Consolidated Year shall be allocated among the Members with Separate Taxable Income pro rata with the ratio that each such Member's Separate Taxable Income bears to the sum of the Separate Taxable Incomes of all Members. An additional amount shall be allocated to each Member equal to 100% of the excess, if any, of (i) the Separate Return Tax Liability of such Member for the Consolidated Year over (ii) the Consolidated Regular Tax Liability allocated to such Member in accordance with the first sentence of this section. 4. Alternative Minimum Tax Liability Allocation. For each Consolidated Year for which the Consolidated Group has a Consolidated AMT Liability, the Consolidated AMT Liability shall be allocated among the Members with a Positive AMT Liability pro rata with the ratio that each such Member's Positive AMT Liability bears to the sum of the Positive AMT Liability of all Members. For purposes of this computation, Positive AMT Liability exists for any Member for whom the tentative minimum tax exceeds the regular tax of such Member for the Consolidated Year. In making this computation, the tentative minimum tax and the regular tax of such Member shall be calculated, on a separate company basis, in the manner prescribed by Section 55 of the Code, except that a negative amount of tentative minimum tax or regular tax shall be deemed to exist for any Member for which negative alternative minimum taxable income or negative taxable income, respectively, exists for the Consolidated Year. 5. Separate Tax Benefits. For each Consolidated Year, CMS shall determine, with respect to each Member, (a) the amount of losses or deductions which do not reduce such Member's Separate Return Tax Liability, if any, including carryovers ("Separate Losses") but which reduce the Consolidated Tax Liability and (b) the amount of credits, if any, including carryovers ("Separate Credits") which reduce the Consolidated Tax Liability whether or not they reduce the Separate Return Tax Liability of the Member (the amount of such Separate Losses and Separate Credits as adjusted in this Section 5 and Sections 8 and 9 being called herein, with respect to any Member, "Separate Tax Benefits"). In making the determination of Separate Tax Benefits, the following rules shall apply: (a) CMS shall be deemed to have utilized such Separate Losses and Separate Credits in the order and priority as permitted or required under the Code. (b) Separate Losses or Separate Credits of equal priority that cannot be fully utilized will be allocated among the Members which generated such Separate Losses or Separate Credits proportionately to such Separate Losses or Separate Credits. (c) If, after application of paragraphs (a) and (b) above (except as to foreign tax credits limited by the foreign tax credit limitation under Code Section 904 separately provided for under paragraph (d) below), there are Members with credits that would have been utilized on a separate company basis in the aggregate in excess of the amount utilized on the Consolidated Return ("Excess Credits"), then such Members shall have their Separate Tax Benefits increased, and the Members generating the Separate Losses, tax preference items, or other tax attributes responsible for the reduction in the Separate Credits shall 5 5 have their Separate Tax Benefits decreased, so as to equitably shift such Separate Tax Benefits. If any Member's Separate Tax Benefits are decreased under this paragraph (c), then, in subsequent allocations, for all purposes of this Agreement, including this paragraph (c), such Member shall be assigned such Excess Credits to the extent it has had a decrease in its Separate Tax Benefits. (d) If, by reason of application of the foreign tax credit limitations under Code Section 904, the sum of the foreign tax credits utilized by the Members in computing their Separate Return Tax Liabilities is greater than the foreign tax credits utilized to reduce the Consolidated Tax Liability, then the Separate Tax Benefits of such Members shall be increased by such excess ("Excess FTC") and the Separate Tax Benefits of those Members with OFLs shall be decreased (if necessary, below zero) in proportion to each such Member's OFL computed on a separate company basis. In computing the OFL on a separate company basis of any Member for this purpose, the foreign source income of one Member from the current year can offset the foreign source loss of a second Member, but only after the foreign source income of the first Member is first applied to offset any existing OFL of such first Member. If a Member leaves the Consolidated Group, and, as a result, there is a difference between the aggregate OFL of the remaining Members as determined under this Agreement and under the Treasury Regulations, then such difference shall be eliminated by equitably distributing such difference among the remaining Members. If any Member's Separate Tax Benefits are decreased under this paragraph (d), then, in subsequent allocations and for all other purposes of this Agreement, including this paragraph (d), such Member shall be assigned such Excess FTC to the extent it has had a decrease in its Separate Tax Benefits. The computation of foreign tax credits on a separate company basis, solely for the purpose of this paragraph (d), shall be made without regard to an election on the Consolidated Return to take a deduction for foreign taxes in lieu of a credit, but in that event the Separate Tax Benefits credited and charged under this paragraph (d) shall be reduced to reflect the mitigating effect of the deduction. (e) If the net of the positive and negative Separate Tax Benefits allocated under this Section 5 exceeds the aggregate of the additional amounts allocated under the second sentence of Section 3, then the Separate Tax Benefits allocated to Members with positive Separate Tax Benefits (after application of paragraphs (a) through (d) above) shall be reduced in an equitable manner (first taking into account the extent to which a Member has effectively benefited from its Separate Tax Benefits in calculating its Separate Return Tax Liability) so that the net of the positive and negative Separate Tax Benefits allocated under this Section 5 equals the aggregate of the additional amounts allocated under the second sentence of Section 3. 6 6 (f) AMT Credits for regular tax purposes shall be allocated to the Members in a manner consistent with the allocation of the Consolidated AMT Liability under Section 4 hereof. 6. Payments. Each Subsidiary shall provide CMS, thirty days before the day on which a periodic consolidated Federal income tax installment (including the estimated tax installments and the installment required on the due date before extension of the return) is due for any Consolidated Year, all information requested by CMS to calculate such installment. Each Subsidiary shall pay to CMS its estimated Stand Alone Tax Liability multiplied by the Applicable Quarterly Percentage, less previous payments made for such tax year. CMS shall invoice each Subsidiary for any such amount five business days prior to the date CMS is obligated to make any such payment. The amounts due may be paid either by the actual remittance of cash or via inter-company accounts, as determined by CMS. 7. Reconciliation of Tax Liability. After the close of each Consolidated Year, CMS shall reconcile payments made by each Subsidiary under Section 6 hereof with the Separate Tax Liability and the Separate Tax Benefits attributable to each Subsidiary that results or is expected to result from the filing of the Consolidated Return. A tentative reconciliation shall be made by April 30 and a final reconciliation shall be made by November 15 of the year following the Consolidated Year. CMS shall invoice each Subsidiary and each Subsidiary shall pay to CMS any additional amount due, or receive payment from CMS for any overpayment or Separate Tax Benefit, based upon such reconciliation, within 15 days. The amounts due may be paid either by the actual remittance of cash or via inter-company accounts, as determined by CMS. 8. Adjustments to Tax Liability. If any adjustments are made to the income, gains, losses, deductions, or credits pertaining to any Member with respect to any Consolidated Year, as reported in a Consolidated Return, by reason of the filing of an amended return or claim for refund, or arising out of an audit of such Consolidated Return by the Internal Revenue Service, then the Separate Tax Liabilities or Separate Tax Benefits, as the case may be, of each Member shall be redetermined to give effect to any such adjustments as if it had been made as part of the filed Consolidated Return. If any interest or penalty is to be paid or interest received as a result of a tax deficiency or refund, such interest or penalty shall be allocated in accordance with the item(s) giving rise to such interest or penalty. Either CMS or the Subsidiary affected may contest or cause to be contested any adjustments to income, gains, losses, deductions, credits or interest or penalty assessments and the reasonable costs incurred in contesting such adjustments or assessments shall be allocated upon such basis as is mutually agreed to by CMS and the Subsidiary affected in advance of such contest. If, as a result of such redetermination, any amounts due to CMS or any of the Subsidiaries under this Agreement, as the case may be, shall exceed the amounts previously paid to such Member, then payment of such excess shall be made by the appropriate member, as the case may be, within 30 days after the earliest date on which (i) CMS shall pay, or be deemed to have paid, any additional taxes resulting from any such adjustment, (ii) CMS shall receive, or be deemed to have received, a refund of taxes resulting from any such adjustment or (iii) such adjustment shall become final; provided, 7 7 however, that no payment between CMS and a Subsidiary pursuant to (i) or (ii), above, shall be considered a final determination of such amount until the adjustment with respect to which the redetermination was made becomes final. For purposes of this Section 8, an adjustment shall become final at the time of the expiration of the applicable statute of limitations with respect to the taxable period to which such adjustment relates (or, if earlier, the date on which a closing agreement with the IRS becomes binding), or, if such adjustment was made pursuant to a decision of a court, at the time such decision shall become final and the resulting tax deficiency or overpayment, including interest, has been finally determined and paid by or refunded to CMS. 9. Carryovers and Carrybacks. If, for any Consolidated Year, a Member has losses or credits which, under the Code, may be carried back to any Consolidated Year in which the Consolidated Group filed a Consolidated Return which included such Subsidiary, and such losses or credits give rise to a reduction in the tax liability of the Consolidated Group that would not have arisen if such Subsidiary were excluded from the Consolidated Group for any such Consolidated Year, then the Separate Tax Liabilities or Separate Tax Benefits, as the case may be, of each Member shall be redetermined in accordance with Section 8. If all or part of an unused loss or tax credit is allocated to a Member pursuant to Treas. Reg. Section 1.1502-79 and is carried back or forward to a year in which such Member filed a separate return or a consolidated return with another affiliated group, any refund or reduction in tax liability arising from the carryback or carryover shall be retained by such Member. Notwithstanding the above, CMS shall determine whether an election shall be made not to carry back the consolidated net operating loss for any taxable year in accordance with Section 172(b)(3)(C) of the Code. 10. Miscellaneous. 10.1 Administration. This Agreement shall be administered by the Corporate Tax Department of CMS. In administering this Agreement, the Corporate Tax Department of CMS, in its reasonable discretion, may make such determinations as it deems appropriate to effectuate the purposes of this Agreement, consistent with past practices and any changes in tax laws. 10.2 Consents, Waivers, etc. CMS and each Subsidiary agrees to execute and file such consents, waivers and other documents as may be necessary to effect the provisions of this Agreement. 10.3 Verification of Computation. CMS shall provide to each Subsidiary, upon the reasonable request of such Subsidiary, such copies of the computations of all amounts payable under this Agreement as may be necessary to verify such computations; provided, however, that CMS is satisfied that the requesting Subsidiary can maintain the confidentiality of such information. 8 8 10.4 Successors and Beneficiaries. This Agreement may not be assigned, pledged, transferred or hypothecated by any Subsidiary without the express written consent of CMS. If during any Consolidated Year, CMS or any Subsidiary acquires or organizes another corporation that is required to be included in the consolidated Federal income tax return, then such corporation shall, by such action, be deemed to have become a party to and be bound by this Agreement as of the date upon which such corporation became a member of the Consolidated Group. This Agreement shall be binding upon and inure to the benefit of any successor, whether by merger, acquisition of assets or otherwise, to any of the parties hereto, to the same extent as if the successor has been an original party to this Agreement. 10.5 Termination. This Agreement shall apply to all Consolidated Years ended on or after December 31, 1994, unless earlier terminated by written agreement of the parties. Notwithstanding termination of this Agreement, its provisions will remain in effect with respect to any period of time during the taxable year in which the termination or expiration occurs for which the income or loss of any Subsidiary must be included in the Consolidated Return of CMS. In addition, such termination or expiration shall not relieve any party of any obligation arising hereunder with respect to Consolidated Years covered by this Agreement. In Witness Whereof, the parties hereto have caused this Agreement to be executed as of the date hereof by their duly authorized officers on their own behalf, and on behalf of their Subsidiaries. CMS ENERGY CORPORATION by:_________________________________ CONSUMERS POWER COMPANY by:_________________________________ CMS ENTERPRISES COMPANY by:_________________________________ CMS ENERGY FINANCE CORPORATION by:_________________________________ CMS CAPITAL CORP. by:_________________________________ CMS LAND COMPANY by:_________________________________ CMS NOMECO OIL & GAS CO. by:_________________________________ CMS UTILITY SERVICES, INC. by:_________________________________ KJL LIMITED, INC. by:_________________________________ CMS ELECTRIC MARKETING COMPANY by:_________________________________ CMS GAS MARKETING COMPANY by:_________________________________ CMS GAS TRANSMISSION AND STORAGE CO. by:_________________________________ MONARCH MANAGEMENT COMPANY by:_________________________________ EX-10.16 21 EXHIBIT 10.16 1 Exhibit 10.16 INDEMNIFICATION AGREEMENT This Agreement is made and entered into as of the 20th day of October, 1995 by and among CMS Energy Corporation, a Michigan corporation ("CMS"), CMS Enterprises, Inc., a Michigan corporation ("Enterprises"), CMS NOMECO Oil & Gas Co., a Michigan corporation ("Nomeco"), CMS NOMECO International, Inc., f/k/a Walter International, Inc., a Texas corporation ("Walter"), Walter Congo Holdings, Inc., a Texas corporation ("Walter Holdings") and Walter International Congo, Inc., f/k/a Amoco Congo Exploration Company, a Delaware corporation ("Walter Congo"). RECITALS. 1. An agreement (the "Amoco Tax Agreement") was entered into as of the 23rd day of February, 1995 by and among Amoco Corporation, an Indiana corporation ("Amoco"), Amoco Production Company, a Delaware corporation ("APC"), Walter, Walter Holdings, Walter Congo, Nuevo Energy Company, a Delaware corporation ("Nuevo"), the Congo Holdings Company, a Texas corporation ("Nuevo Holdings"), and Nuevo Congo Company, a Texas corporation ("Nuevo Congo"). 2. Pursuant to the Amoco Tax Agreement, Walter, Walter Holdings, Walter Congo, Nuevo, Nuevo Holdings and Nuevo Congo agreed to jointly and severally indemnify and hold harmless APC, its Affiliates and their respective directors, officers and employees from and against any and all Taxes, tax credits utilized, interest, penalties, cost of enforcement, and reasonable attorneys fees incurred in defending against any claim for Taxes, interest, penalties, or additional income or enforcement of the indemnification, if any, arising out of, or based upon, or with respect to any failure by Walter, Walter Holdings, Walter Congo, Nuevo, Nuevo Holdings or Nuevo Congo to comply with each and every obligation and covenant of the Amoco Tax Agreement (generally relating to the avoidance of a "Triggering Event" within the meaning of Treasury Regulation Section 1.1503-2). 3. An agreement (the "CMS Tax Agreement") was entered into as of the 24th day of February, 1995 by and among Amoco, APC, CMS, Enterprises, Nomeco, Walter, Walter Holdings and Walter Congo. 4. Pursuant to the CMS Tax Agreement, CMS, Enterprises, Nomeco, Walter, Walter Holdings and Walter Congo agreed to jointly and severally indemnify and hold harmless APC, its Affiliates and their respective directors, officers and employees from and against any and all Taxes, tax credits utilized, interest, penalties, cost of enforcement, and reasonable attorneys fees incurred in defending against any claim for Taxes, interest, penalties, or additional income or the enforcement of the indemnification, if any, arising out of, or based upon, or with respect to any failure by CMS, Enterprises, Nomeco, Walter, Walter Holdings, or Walter Congo, to comply with each and every obligation and covenant of the CMS Tax Agreement (generally relating to the avoidance of a "Triggering Event" within the meaning of Treasury Regulation Section 1.1503-2). 2 5. An agreement (the "Guarantee Agreement") was entered into as of the 17th day of January, 1995 by and between Nomeco and APC whereby Nomeco agreed to guarantee certain of Walter's potential liabilities, including certain obligations of Walter under the Amoco Tax Agreement. 6. The Amoco Tax Agreement was entered into as part of a transaction by which Walter Congo, a Congolese affiliate of APC, was acquired by an affiliate of Walter and Nuevo Congo, a Congolese affiliate of APC, was acquired by an affiliate of Nuevo (collectively, the "Initial Acquisitions"). The CMS Tax Agreement was entered into as part of a transaction by which, among other matters, CMS acquired Walter and then contributed the stock of Walter to Enterprises, followed by a contribution by Enterprises of the Walter stock to Nomeco (collectively the "Walter Acquisition"). 7. As a part of (a) the Initial Acquisitions and (b) the Walter Acquisition, Amoco, Walter, CMS and Nuevo (and certain of their respective affiliates) requested certain private letter rulings from the Internal Revenue Service dealing, generally, with whether (i) the tax losses resulting from the operations of APC's Congolese affiliates (and utilized by Amoco to reduce its United States federal income tax liability) constituted "dual consolidated losses" within the meaning of Section 1503(d) of the Internal Revenue Code of 1986, as amended (the "Code") and Treasury Regulation Section 1.1503-2(c)(5), and (ii) the various transactions relating to the Initial Acquisitions and the Walter Acquisition constituted "Triggering Events" within the meaning of Treasury Regulation Section 1.1503-2. Pursuant to the requests for private letter rulings described in the preceding sentence, Amoco, Walter, Nuevo, CMS and certain former shareholders of Walter submitted forms of closing agreements and protective closing agreements (collectively, the "Closing Agreements") for execution by the Internal Revenue Service and the appropriate taxpayers relating to the treatment of the Congolese losses as a result of the Initial Acquisitions and the transactions entered into pursuant to the Walter Acquisition, as well as certain agreements with respect to the utilization and treatment of such losses in the future. Although the Closing Agreements have not yet been entered into by the Internal Revenue Service or the appropriate taxpayers, it is contemplated that such agreements (subject to possible modification) will be entered into in the near future. 8. The parties believe that it is appropriate for (a) CMS to indemnify Nomeco, Walter, Walter Congo and Walter Holdings against certain liabilities that such indemnified party may incur in the future under the Amoco Tax Agreement, the CMS Tax Agreement, the Guarantee Agreement or the Closing Agreements and for (b) Nomeco and Walter to indemnify CMS and Enterprises against certain liabilities that CMS or Enterprises may incur in the future under the CMS Tax Agreement or the Closing Agreements. NOW, THEREFORE, in consideration of the premises and the respective covenants, agreements and conditions contained herein, the parties hereby agree as follows: 1. INDEMNITY A. If, as a result of (1) any event that occurs prior to the effective date of the initial consummation of the Nomeco initial public offering (the "Effective Date"), (2) an act or omission of CMS or any entity that controls, is controlled by, or is under 2 3 common control with, CMS (other than Nomeco or any of its subsidiaries) taken on or after the Effective Date, or (3) an act or omission of Nomeco or any of its subsidiaries taken on or after the Effective Date with Consent (as defined below), a liability arises or is asserted to arise under the CMS Tax Agreement, the Amoco Tax Agreement or the Guarantee Agreement, then CMS agrees to indemnify and hold harmless Nomeco, Walter, Walter Holdings and/or Walter Congo, as they may be, against (1) any and all amounts which they are required to pay under the CMS Tax Agreement; (2) any amounts which Walter, Walter Holdings or Walter Congo are required to pay under the Amoco Tax Agreement not related to dual consolidated losses of Nuevo, Nuevo Holdings or Nuevo Congo; (3) any amounts which Nomeco is required to pay under the Guarantee Agreement not related to dual consolidated losses of Nuevo, Nuevo Holdings or Nuevo Congo; (4) any and all costs of enforcement of this indemnity (including reasonable attorney fees); and (5) all reasonable attorneys fees incurred in defending against any liability under the Amoco Tax Agreement, the Guarantee Agreement or the CMS Tax Agreement (including defending against any such liability by defending against any claim for taxes asserted by the Internal Revenue Service but not including defending against any liability related to dual consolidated losses of Nuevo, Nuevo Holdings or Nuevo Congo). For purposes of this Agreement, Consent means approval of an action by the Board of Directors of Nomeco, which approval includes the affirmative vote of a majority of those members of the Board of Directors of Nomeco who are employees of CMS or any of its subsidiaries (other than Nomeco or any of its subsidiaries). B. If as a result of (1) any event that occurs prior to the Effective Date or (2) an act or omission of CMS or any entity that controls, is controlled by, or is under common control with, CMS (other than Nomeco or any of its subsidiaries) taken on or after the Effective Date or (3) an act or omission of Nomeco or any of its subsidiaries taken on or after the Effective Date with Consent, a liability arises or is asserted to arise under any of the Closing Agreements, then CMS agrees to indemnify and hold harmless Nomeco, Walter, Walter Holdings and Walter Congo against (1) any and all amounts payable by such indemnified party pursuant to the terms of the Closing Agreements; (2) any and all costs of enforcement of this indemnity (including reasonable attorneys fees); and (3) all reasonable attorneys fees incurred in defending against any claim for payments pursuant to the terms of the Closing Agreements. C. If, as a result of an act or omission of Nomeco or any of its subsidiaries taken on or after the Effective Date without Consent, a liability arises or is asserted to arise under the CMS Tax Agreement, then Nomeco agrees to indemnify and hold harmless CMS and Enterprises against (1) any and all amounts which they are required to pay under the CMS Tax Agreement; (2) all costs of enforcement of this indemnity (including reasonable attorney fees); and (3) all reasonable attorneys fees incurred in defending against any liability under the CMS Tax Agreement (including defending against any such liability by defending against any claim for taxes asserted by the Internal Revenue Service). D. If, as a result of an act or omission of Nomeco or any of its subsidiaries taken on or after the Effective Date without Consent, a liability arises or is asserted to arise 3 4 under any of the Closing Agreements, then Nomeco agrees to indemnify and hold harmless CMS and Enterprises against (1) taxes and all amounts payable by CMS or Enterprises pursuant to the terms of the Closing Agreements; (2) all costs of enforcement of this indemnity (including reasonable attorneys fees); and (3) all reasonable attorneys fees incurred in defending against any claim for payments pursuant to the terms of the Closing Agreements. E. All indemnity payments hereunder shall be made on an "after-tax basis," and therefore shall be in an amount which, after subtraction of the amount of all federal, state and foreign taxes payable by the recipient thereof as a result of the receipt or accrual of such payment (the "Gross-Up Amount"), and after taking into account the reduction in federal, state and foreign taxes payable by the recipient as a result of allowable deductions for the payment or accrual of items included in the amount of the indemnity payable hereunder, shall be sufficient as of the date of payment to compensate the recipient for such indemnified event. The determination of the Gross-Up Amount payable with respect to an indemnified event shall be made by the recipient in the exercise of its reasonable judgment. Such recipient shall furnish the payor with a notice (the "Gross-Up Notice") setting forth the Gross-Up Amount so payable and, in reasonable detail, the computation of such amount. If reasonably requested by the payor in writing within 10 days of receipt of such Notice, such computation shall be subject to verification at the expense of the payor by the firm of independent certified public accountants which regularly reviews the recipient's financial statements, provided, however that the cost of such verification shall be at the cost of the recipient if such accountants determine that the Gross-Up Amount payable is less than 90% of the amount set forth in the Gross-Up Notice. Such verification which is made by such accountants in accordance herewith shall be conclusive absent manifest error. 2. RIGHTS OF INDEMNIFYING PARTY Upon the agreement to pay CMS or Enterprises in full any indemnified amounts hereunder, the indemnified party agrees to assign to Nomeco any and all rights which such party possesses as an indemnifying party (but not as an indemnified party) under the CMS Tax Agreement or as a payor under the Closing Agreements. To the extent that Amoco fails to recognize the assignment of any such rights under the CMS Tax Agreement, CMS agrees to exercise any such rights on behalf of, and as directed by, Nomeco. Upon the agreement to pay Nomeco, Walter, Walter Holdings or Walter Congo in full any indemnified amounts hereunder, the indemnified party agrees to assign to CMS any and all rights which such party possesses as an indemnifying party (but not as an indemnified party) under the Amoco Tax Agreement, the CMS Tax Agreement or the Guarantee Agreement (as the case may be) or as a payor under the Closing Agreements. 3. NOTICES A. CMS agrees to furnish to Nomeco promptly a copy of any notice received or delivered by CMS or any of its Affiliates under the CMS Tax Agreement or the Closing Agreements. Nomeco and Walter agree to furnish to CMS promptly a 4 5 copy of any notice received or delivered by Nomeco or Walter or any of their Affiliates under the Amoco Tax Agreement, the CMS Tax Agreement or the Closing Agreements. Nomeco and Walter further agree to comply with the provisions of the first paragraph of Article 7 A of the CMS Tax Agreement as if Nomeco and Walter were referenced therein together with Amoco and CMS. CMS further agrees to comply with the provisions of the first paragraph of Article 7 A of the Amoco Tax Agreement as if CMS were referenced therein together with the other parties thereto. B. All notices shall be given in writing and shall be delivered (i) by hand to the party for which intended, (ii) by registered or certified mail, return receipt requested, postage prepaid, (iii) by telex, or (iv) by facsimile, all of which addressed to the party for which it is intended at the following respective addresses or such other person or address previously furnished in writing by such party in the manner provided herein: To CMS or Enterprises: CMS Energy Corporation c/o Corporate Tax Department 212 W. Michigan Avenue Jackson, MI 49201 Telephone: (517) 788-2965 Facsimile: (517) 788-0433 Attention: Theodore J. Vogel Director of Corporate Taxes and Tax Counsel To Nomeco, Walter, CMS Nomeco Oil & Gas Co. Walter Holdings or 1 Jackson Square Walter Congo: Jackson, Michigan 49204 Telephone: (517)787-9037 Facsimile: (517)787-6360 Attention: Paul E. Geiger C. The date of service of the notice shall be the date on which notice is received. 4. CONTEST A. Upon receipt by Nomeco of a written notice from CMS or Enterprises of a claim that an amount may be payable by Nomeco to CMS or Enterprises pursuant to Sections 1.C. or 1.D. hereof (hereafter called a "Claim Notice"), Nomeco may request, in writing, that CMS or Enterprises contest (or use its best efforts to cause Amoco or Amoco's affiliates to contest) the adjustment which resulted in such Claim Notice. CMS shall (and shall use its best efforts to cause Amoco or Amoco's affiliates to) consult in good faith with Nomeco with respect to the prosecution and possible settlement of such contest, including the opportunity to be present at and participate in all conferences with the Internal Revenue Service with respect to the adjustment giving rise to the Claim Notice. In connection with any such contest, CMS shall provide (and use its best efforts to cause Amoco or Amoco's affiliates to provide) Nomeco with copies of all documents, pleadings, 5 6 briefs and other documents to be submitted to the Internal Revenue Service or any other party sufficiently prior to such submission so as to permit Nomeco and its counsel with an opportunity to comment thereon and shall consider Nomeco's comments in good faith. B. Neither CMS nor Enterprises is required to contest (or cause Amoco or Amoco's affiliate to contest) such adjustment until CMS shall have received from Nomeco, at Nomeco's expense, a written opinion of independent tax counsel reasonably satisfactory to CMS to the effect that there is substantial authority in law and fact for contesting such adjustment and Nomeco shall have agreed to pay, and shall pay, CMS on demand all reasonable out-of-pocket costs and expenses which CMS may incur in connection with contesting such adjustment, including without limitation, reasonable fees for attorneys and accountants. C. If Nomeco shall have requested CMS to contest (or cause Amoco or Amoco's affiliates to contest) such adjustment as above provided in subsections A or B and shall have duly complied with all the terms of this Section, Nomeco's liabilities for indemnification under this Agreement with respect to such adjustment (but not for the costs and expenses incurred in connection with the contest of such adjustment) shall be deferred until a Final Determination of the liability of CMS or Enterprises has occurred. (For purposes of this Agreement, the term "Final Determination" shall be (x) a decision, judgment, decree or other order has become final (i.e., when all allowable appeals conducted in accordance with this Section have been exhausted by either party to the action) or in any case where judicial review shall at the time be unavailable, a decision, judgment, decree or other order of an administrative, official or agency of competent jurisdiction, which decision, judgment, decree or other order has become final (i.e., all administrative appeals have been exhausted by either party to the action), (y) a closing agreement entered into under Section 7121 of the Code or any other settlement agreement entered into in connection with an administrative or judicial proceeding, in accordance with this Section 4 or (z) the expiration of the time for instituting a claim for refund, or if such claim were filled, the expiration of the time for instituting suit with respect thereto.) At such time, Nomeco shall become obligated for the payment of any indemnification hereunder resulting from the outcome of such contest and such amount shall be paid within 30 days after such Final Determination. Notwithstanding anything herein to the contrary, neither CMS nor Enterprises (or their representatives or affiliates) shall enter into a closing agreement under Section 7121 of the Code or any other settlement agreement in connection with an administrative or judicial proceeding with respect to any matter for which it is entitled to be indemnified hereunder, unless it first obtains the written consent of Nomeco to such closing agreement or settlement agreement or expressly waives its right to receive indemnification hereunder with respect to such matter. The failure of CMS or Enterprises to obtain the consent described in the preceding sentence shall constitute a waiver by each of CMS and Enterprises of its right to receive indemnification hereunder with respect to such matter. D. Upon receipt by CMS of a written notice from Nomeco or its subsidiaries of a claim that an amount may be payable by CMS to Nomeco or its subsidiaries 6 7 pursuant to Sections 1.A. or 1.B. hereof, CMS shall have rights reciprocal to those of Nomeco described in paragraphs A., B. and C. of this Section 4. 5. DEFINITIONS All capitalized terms in this Agreement not otherwise defined herein shall have the meanings as set forth in the CMS Tax Agreement. 6. SUCCESSORS AND ASSIGNS This Agreement shall be binding upon and inure to the benefit of the parties and their respective permitted successors and assigns. No party to this Agreement shall be relieved of its obligations hereunder, by assignment or otherwise, without the prior written consent of the other parties hereto. 7. GOVERNING LAW This Agreement shall be governed by the laws of Michigan excluding any choice of law provisions which would require the application of the law of any other jurisdiction. 8. FURTHER ASSURANCES The parties hereto hereby agree to execute all such further instruments and documents, and to take all such other actions, as may be reasonable and appropriate to further effectuate the intent of this Agreement. 9. HEADINGS Headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of the Agreement for any other purpose. 10. SEVERABILITY OF PROVISIONS, EFFECTIVENESS Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or un-enforceability of such provision in any other jurisdiction. 11. EXECUTION IN COUNTERPARTS This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. 12. ENTIRE AGREEMENT Except for the Amoco Tax Agreement, the CMS Tax Agreement, the Closing Agreements, the Guarantee Agreement and the Agreement for the Allocation of Income Tax Liabilities and Benefits dated as of January 1, 1994 among CMS and its various 7 8 direct and indirect subsidiaries, including Nomeco (the "Tax Allocation Agreement"), this Agreement represents the entire understanding of the parties with respect to the subject matter hereof. There are no other terms, conditions, representations or warranties, express or implied, written or oral, except as set forth herein or in the Amoco Tax Agreement, the CMS Tax Agreement, the Closing Agreements, the Guarantee Agreement and the Tax Allocation Agreement. In the event of a conflict between the provisions of this Agreement and the Tax Allocation Agreement, the provisions of this Agreement shall control. No amendments, modifications or additions hereto shall be binding unless executed in writing by all of the parties to this Agreement. IN WITNESS WHEREOF, the parties have negotiated and duly executed this agreement on the day and year first written above. CMS ENERGY CORPORATION CMS NOMECO INTERNATIONAL, INC. By:_____________________________________ By:________________________________ Name: Name: Title: Title: CMS ENTERPRISES COMPANY WALTER CONGO HOLDINGS, INC. By:_____________________________________ By:________________________________ Name: Name: Title: Title: CMS NOMECO OIL & GAS CO. WALTER INTERNATIONAL CONGO,INC. By:_____________________________________ By:________________________________ Name: Name: Title: Title: 8 EX-10.17 22 EXHIBIT 10.17 1 EXHIBIT 10.17 AGREEMENT AND PLAN OF MERGER AMONG CMS ENERGY CORPORATION CMS MERGING CORPORATION TERRA ENERGY LTD. MARTIN G. LAGINA CRAIG J. TESTER DR. THOMAS JAMES AND NANCY M. JAMES DR. JAMES LOWELL AND MARY K. LOWELL THE REVOCABLE LIVING TRUST OF DR. LEONARD J. SCHEROCK UNDER AGREEMENT DATED MAY 1, 1990 ROBERT M. BOEVE AND WAYNE STERENBERG _______________________________________________ Dated as of August 29, 1995 2 TABLE OF CONTENTS ARTICLE I THE MERGER....................... 2 Section 1.1. The Merger................................... 2 Section 1.2. Filing Certificate of Merger and Effectiveness.............................. 2 Section 1.3. Effects of the Merger........................ 3 Section 1.4. Articles of Incorporation, By-Laws, Directors and Officers..................... 3 Section 1.5. Further Assurances........................... 3 ARTICLE II CONVERSION OF SHARES................... 3 Section 2.1. Conversion of Securities..................... 3 Section 2.2. Aggregate Consideration; Terra Consolidated Net Working Capital; Terra Debt................................. 5 Section 2.3. Exchange of Lagina Shares by Lagina.......... 6 Section 2.4. Payment of Cash and Delivery of Certificates............................ 7 Section 2.5. Dividends and Distributions.................. 8 Section 2.6. Fractional Shares............................ 8 Section 2.7. Changes in CMS Common Stock.................. 9 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS AND THE OPTIONHOLDERS........ 9 Section 3.1. Organization of Terra........................ 9 Section 3.2. Subsidiaries and Investments................. 9 Section 3.3. Capitalization............................... 11 Section 3.4. Authority.................................... 13 Section 3.5. Financial Statements......................... 15 Section 3.6. Operations Since Balance Sheet Date.......... 15 Section 3.7. No Undisclosed Liabilities................... 17 Section 3.8. Taxes........................................ 18 Section 3.9. Condition of Tangible Assets................. 22 Section 3.10. Title to Property; Property Schedules........ 22 Section 3.11. Availability and Ownership of Assets......... 23 Section 3.12. Personal Property Leases..................... 23 Section 3.13. Accounts Receivable.......................... 23 Section 3.14. Intellectual Property........................ 24 Section 3.15. Owned Real Property.......................... 26 Section 3.16. Leased Real Property......................... 26 Section 3.17. Litigation................................... 27 Section 3.18. No Guaranties; Extensions of Credit.......... 27 Section 3.19. Compliance with Laws......................... 27 - ii - 3 Page Section 3.20. Permits...................................... 27 Section 3.21. Insurance.................................... 28 Section 3.22. Employee Benefit Plans....................... 29 Section 3.23. Employees and Agents and Related Agreements................................. 31 Section 3.24. Employee Relations and Labor Matters......... 31 Section 3.25. Absence of Certain Business Practices........ 32 Section 3.26. Territorial Restrictions..................... 32 Section 3.27. Transactions with Certain Persons............ 32 Section 3.28. No Finder.................................... 33 Section 3.29. Environmental Matters........................ 33 Section 3.30. Contracts.................................... 35 Section 3.31. Additional Drilling Obligations.............. 38 Section 3.32. Gas Imbalances; Production Rights and Obligations............................ 38 Section 3.33. Wells........................................ 38 Section 3.34. CMS Energy Common Shares; Terra Common Stock......................... 39 Section 3.35. Disclosure................................... 39 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF CMS ENERGY...... 40 Section 4.1. Organization of CMS Energy................... 40 Section 4.2. Authority.................................... 40 Section 4.3. Shares of CMS Common Stock................... 41 Section 4.4. Capitalization............................... 42 Section 4.5. Operations Since June 30, 1995............... 42 Section 4.6. Compliance with Laws......................... 43 Section 4.7. SEC Documents................................ 43 Section 4.8. No Finder.................................... 43 ARTICLE V REPRESENTATIONS AND WARRANTIES OF SUB......... 43 Section 5.1. Organization and Standing.................... 44 Section 5.2. Capital Structure............................ 44 Section 5.3. Authority.................................... 44 ARTICLE VI ACTIONS PRIOR TO THE EFFECTIVE DATE........... 44 Section 6.1. Issuance of CMS Common Shares................ 44 Section 6.2. Action by Stockholders of Terra.............. 45 Section 6.3. Subsequent Financial Statements.............. 45 Section 6.4. Investigation of Terra....................... 45 Section 6.5. Lawsuits, Proceedings, Etc................... 46 - iii - 4 Page Section 6.6. Conduct of Business by Terra Pending the Merger......................... 46 Section 6.7. Mutual Cooperation; Reasonable Best Efforts.................... 49 Section 6.8. No Public Announcement....................... 50 Section 6.9. No Solicitation.............................. 50 Section 6.10. Antitrust Law Compliance..................... 50 Section 6.11. Termination of Lagina Proxies................ 51 Section 6.12. Exercise of Options.......................... 51 Section 6.13. New Office Building.......................... 51 ARTICLE VII ADDITIONAL COVENANTS AND AGREEMENTS........... 52 Section 7.1. Tax-Free Nature; Tax Consequences............ 52 Section 7.2. Taxes........................................ 54 Section 7.3. Resale of CMS Common Shares.................. 59 Section 7.4. Access to Data............................... 59 Section 7.5. Terra Employees.............................. 59 ARTICLE VIII CONDITIONS PRECEDENT TO OBLIGATIONS OF CMS ENERGY AND SUB................ 60 Section 8.1. No Misrepresentation or Breach of Covenants and Warranties................ 60 Section 8.2. No Material Adverse Effect................... 61 Section 8.3. Opinions of Counsel for Terra, the Stockholders and the Optionholders......... 61 Section 8.4. No Injunctions or Restraints................. 61 Section 8.5. Necessary Governmental Approvals............. 61 Section 8.6. Necessary Consents........................... 61 Section 8.7. Effectiveness of Registration Statement...... 62 Section 8.8. Listing of CMS Common Shares................. 62 Section 8.9. Stockholder Action........................... 62 Section 8.10. Dissenting Stockholders...................... 62 Section 8.11. Due Diligence................................ 62 Section 8.12. Resignations of Terra Directors and Officers............................... 62 Section 8.13. Options to Acquire Terra Common Stock........ 63 Section 8.14. CMS NOMECO Lenders' Consent.................. 63 Section 8.15. Payments for Purchased Assets................ 63 Section 8.16. Guarantee.................................... 63 Section 8.17. Consulting Agreement......................... 63 Section 8.18. Employment Agreements........................ 63 Section 8.19. 1995 Antrim Program.......................... 63 Section 8.20. Minimum Aggregate Consideration.............. 63 Section 8.21. Insurance.................................... 63 - iv - 5 Page Section 8.22. Gas Delivery................................. 64 Section 8.23. Covenant Not to Compete...................... 64 ARTICLE IX CONDITIONS PRECEDENT TO OBLIGATIONS OF TERRA AND THE STOCKHOLDERS............. 64 Section 9.1. No Misrepresentation or Breach of Covenants and Warranties................ 64 Section 9.2. No Material Adverse Effect................... 65 Section 9.3. No Injunctions or Restraints................. 65 Section 9.4. Opinions of Counsel for CMS Energy and Sub and Counsel for the Stockholders... 65 Section 9.5. Necessary Governmental Approvals............. 65 Section 9.6. Effectiveness of Registration Statement...... 65 Section 9.7. Listing of CMS Common Shares................. 66 Section 9.8. Stockholder Action........................... 66 Section 9.9. Necessary Consents........................... 66 Section 9.10. Minimum Aggregate Consideration.............. 66 Section 9.11. Covenant Not to Compete...................... 66 ARTICLE X INDEMNIFICATION; SURVIVAL............... 66 Section 10.1. Indemnification by the Stockholders and Optionholders.......................... 66 Section 10.2. Indemnification by CMS Energy and the Surviving Corporation.............. 68 Section 10.3. Notice of Claims............................. 68 Section 10.4. Third Party Claims........................... 69 Section 10.5. Exclusive Remedy............................. 70 Section 10.6. Survival of Obligations...................... 70 Section 10.7. Update of the Representations and Warranties............................. 70 Section 10.8. Adjustment to Consideration.................. 72 ARTICLE XI TERMINATION....................... 72 Section 11.1. Termination.................................. 72 Section 11.2. Effect of Termination........................ 72 - v - 6 Page ARTICLE XII OTHER PROVISIONS.................... 73 Section 12.1. Confidential Nature of Information........... 73 Section 12.2. Fees and Expenses............................ 73 Section 12.3. Notices...................................... 73 Section 12.4. Definitions.................................. 74 Section 12.5. Partial Invalidity........................... 80 Section 12.6. Successors and Assigns....................... 81 Section 12.7. Execution in Counterparts.................... 81 Section 12.8. Titles and Headings.......................... 81 Section 12.9. Schedules and Exhibits....................... 81 Section 12.10. Entire Agreement; Amendments and Waivers; Assignment........................ 81 Section 12.11. Independent Investigation and Scope of Representations................... 82 Section 12.12. Governing Law; Arbitration................... 82 Section 12.13. No Third-Party Beneficiaries................. 83 Section 12.14. Interpretation............................... 83 EXHIBITS Exhibit A Certificate of Merger Exhibit B Purchased Assets transfer documents Exhibit C Section 8.1 Certificates Exhibit D Form of Opinions of Mika, Meyers, Beckett & Jones, P.L.C. Exhibit E Form of Opinion on behalf of Non-Management Stockholders Exhibit F Guarantee of Net Receipts relating to Gas Purchase Agreements and Gas Sale Agreements Exhibit G Consulting Agreement with Newco Exhibit H Employment Agreement of Tester Exhibit I Employment Agreement of Sterenberg Exhibit J Covenant Not to Compete Exhibit K Section 9.1 Certificates Exhibit L Form of Opinion of Denise Sturdy, Esq. Exhibit M Form of Opinion re: tax matters SCHEDULES Schedule 3.2 Subsidiaries, Capital Stock, State of Organization and Jurisdiction; Partnerships Schedule 3.3(a) Owners of Terra Common Stock and Options Schedule 3.3(b) Other Restrictions on Terra Common Stock Schedule 3.3(c) Liens on Shares of Capital Stock - vi - 7 Schedule 3.3(d) Liens on Partnerships, Joint Ventures and Other Interests Schedule 3.4(a) Agreements Requiring Consents Schedule 3.5 Adjustments to Balance Sheet and Statement of Income as of December 31, 1994 Schedule 3.6(a) Material Adverse Changes Since December 31, 1994 Schedule 3.6(b) Actions Not in the Ordinary Course of Business Since December 31, 1994 Schedule 3.7 Undisclosed Liabilities since December 31, 1994 Schedule 3.8(a) Tax Matters Schedule 3.9 Condition of Assets Schedule 3.10(a) Title to Property Schedule 3.10(b) Liens on Material Assets Schedule 3.10(c) Costs and Expenses Schedule 3.12 Personal Property Leases Schedule 3.14 Intellectual Property Schedule 3.15 Owned Real Property Schedule 3.16 Leased Real Property Schedule 3.17 Litigation; Disputes Schedule 3.18 Guaranties Schedule 3.19 Compliance with Laws Schedule 3.21 Insurance Schedule 3.22 Employee Plans Schedule 3.23(a) Employment/Consulting Agreements/Non-Compete Agreements Not Terminable on 30 Days Notice, Deferred Compensation Schedule 3.23(b) Consultants Schedule 3.24(b) Collective Bargaining Agreements Schedule 3.26 Third Party Restrictions on Conduct of Business Schedule 3.27 Transactions with Affiliates, Stockholders, Officers or Directors Schedule 3.29 Environmental Matters Schedule 3.30 Terra Agreements Schedule 3.31 Additional Drilling Obligations Schedule 3.32 Gas Imbalances; Take or Pay Obligations Schedule 12.4(e) Knowledge of Terra Schedule 12.4(i) Property Schedules - vii - 8 SCHEDULE OF DEFINED TERMS TERM DEFINITION SECTION ---- ------------------ AAA 12.12(b) Acquisition Expenses 12.2 Acquisition Proposal 6.9 Affiliate 12.4(a) After-Tax Basis 7.2(e) Aggregate Consideration 2.2(a) Agreement Preamble Applicable Environmental Laws 3.29(c) Associate 12.4(b) Average Price 2.1(c) Balance Sheet 3.5 Balance Sheet Date 3.5 BCA 1.1 Boeve Preamble CERCLA 3.29(a) CERCLIS 3.29(a) Certificates 2.4 CMS Common Shares 2.1(c), 2.7 CMS Common Stock First Recital CMS Energy Preamble CMS Energy SEC Documents 4.7 CMS NOMECO 8.14 Code Sixth Recital Company Group 3.8(a) Confidentiality Agreement 12.10 Constituent Corporations Preamble Conversion Number 2.1(c) Covenant Not to Compete 8.23 Daily Prices 2.1(c) Dispute 12.12(b) Effective Date 1.2 Effective Time 1.2 Enterprises 8.14 ERISA 3.22(a) ERISA Affiliate 3.22(a) Exchange Act 4.7 Exchange Closing 2.3 Exchange Closing Time 2.3 Expense 10.1 GAAP 3.5 Good and Defensible Title 12.4(c) Gordon Notes 2.2 Guardian 3.30(d) Hazardous Substance 3.29(c) HSR Act 3.4(a) Indemnified Tax Items 7.2(c) Interests 12.4(d) James Preamble - viii - 9 Knowledge of Terra 12.4(e) Lagina Preamble Lagina Proxies 6.11 Lagina Shares 2.3 Leased Real Property 3.16 Leases 3.30(a) Liens 3.10(b) Loss 10.1 Lowell Preamble Management Stockholders Preamble Material Adverse Change or Effect 12.4(f) Merger Fifth Recital Non-Wholly Owned Subsidiaries 3.2(b) Newco 6.6(b) New Office 6.13 1995 Antrim Program 8.19 Non-Management Stockholders Preamble NORM 3.7 NPL 3.29(a) NYSE 2.1(c) Operating Agreements 3.2(a) Optionholders Preamble Options 3.3(a) Owned Real Property 3.15 Participants 3.22(a) Partnership Agreements 3.2(b) Partnerships 3.2(b) Permits 3.20 Permitted Encumbrances 12.4(g) Permitted Transferee 3.3(b) Person 12.4(h) Plan 3.22(a) PPC 3.7 Property 3.29(b) Property Schedules 12.4(i) Prospectus 6.1 Proved Developed Interests 12.4(d)(i) Proved Undeveloped Interests 12.4(d)(ii) Purchased Assets 6.6(b) Registration Statement 6.1 Release 3.29(c) Remedial Action 3.29(c) Scherock Preamble SEC 4.2 Securities Act 4.2 Sterenberg Preamble Statement of Income 3.5 Stockholders Preamble Sub Preamble Subsidiaries 3.2(a) Surviving Corporation 1.1 Tax Indemnitees 7.2(a) Tax Partnership 3.8(e) - ix - 10 Tax Return 3.8(d) Tax Sharing Arrangement 3.8(d) Taxes 3.8(d) Terra Preamble Terra Agreements 3.30(b) Terra Business Fourth Recital Terra Common Stock Third Recital Terra Consolidated Net Working Capital 2.2(b) Terra Debt 2.2(c) Tester Preamble Title Defect 12.4(j) Title IV Plan 3.22(b) Unaudited Balance Sheet 3.5 Unaudited Balance Sheet Date 3.5 Unaudited Statement of Income 3.5 Unproved Interests 12.4(d)(iii) Wells 3.33(b) - x - 11 AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER, dated as of August 29, 1995 (this "Agreement"), among CMS Energy Corporation, a Michigan corporation ("CMS Energy"), CMS Merging Corporation, a Michigan corporation and a wholly-owned Subsidiary of CMS Energy ("Sub"), Terra Energy Ltd., a Michigan corporation ("Terra" and, together with Sub, the "Constituent Corporations"), Martin G. Lagina ("Lagina"), Craig J. Tester ("Tester" and, together with Lagina and each Optionholder (as hereinafter defined) from and after acquisition by such Optionholder of any shares of Terra Common Stock (as hereinafter defined), each individually a "Management Stockholder" and collectively the "Management Stockholders"), Dr. Thomas James and Nancy M. James (collectively, "James"), Dr. James Lowell and Mary K. Lowell (collectively, "Lowell"), The Revocable Living Trust of Dr. Leonard J. Scherock under Agreement dated May 1, 1990, acting by and through its sole trustee, Dr. Leonard J. Scherock ("Scherock" and, together with James and Lowell, each individually a "Non-Management Stockholder" and collectively the "Non-Management Stockholders" and, together with Lagina, Tester, James, Lowell and each Optionholder from and after acquisition by such Optionholder of any shares of Terra Common Stock, each individually a "Stockholder" and collectively the "Stockholders"), Robert M. Boeve ("Boeve") and Wayne Sterenberg ("Sterenberg", and, together with Boeve, each individually an "Optionholder" and collectively the "Optionholders"). Unless otherwise indicated, capitalized terms used herein are used as defined in Section 12.4 hereof. W I T N E S S E T H : WHEREAS, CMS Energy is a Michigan corporation having an authorized capital of (i) 250,000,000 shares of common stock, $.01 par value (the "CMS Common Stock"), of which, as of June 30, 1995, 88,174,182 shares were issued and outstanding, (ii) 10,000,000 shares of preferred stock, $.01 par value, none of which, on the date hereof, is issued and outstanding, and (iii) 60,000,000 shares of Class G common stock, no par value, of which, as of August 15, 1995, 7,520,000 shares were issued and outstanding; WHEREAS, Sub is a Michigan corporation having an authorized capital of 60,000 shares of common stock, no par value, of which, on the date hereof, 10 shares are issued and outstanding; WHEREAS, Terra is a Michigan corporation having an authorized capital of 20,000,000 shares of common stock, no par value (the "Terra Common Stock"), of which, on the date hereof, 9,519,500 shares are issued and outstanding; 12 WHEREAS, Terra, itself and through its Subsidiaries, is in the business of natural gas and oil exploration, development and production and activities related thereto (hereinafter generally referred to as the "Terra Business"); WHEREAS, the respective Boards of Directors of CMS Energy and the Constituent Corporations have approved the merger (the "Merger") of Sub into Terra pursuant to the terms and conditions of this Agreement and the related transactions contemplated by this Agreement, the Board of Directors of Terra has directed that this Agreement be submitted to its stockholders for adoption, and CMS Energy as the sole stockholder of Sub has adopted this Agreement; WHEREAS, the parties hereto intend the Merger to constitute a reorganization described in section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"); WHEREAS, CMS Energy, Sub, Terra, the Stockholders and the Optionholders desire to make certain representations, warranties and agreements in connection with the Merger and the related transactions contemplated by this Agreement and also to prescribe various conditions to the Merger and such transactions; NOW, THEREFORE, in consideration of the premises and the representations, warranties and agreements herein contained, the parties hereto agree as follows: ARTICLE I THE MERGER SECTION 1.1. THE MERGER. Upon the terms and subject to the conditions contained herein, and in accordance with the provisions of this Agreement and the Michigan Business Corporation Act (the "BCA"), at the Effective Time (as hereinafter defined), Sub shall be merged with and into Terra pursuant to the Certificate of Merger in substantially the form of Exhibit A hereto or in such other form as the parties may agree to accomplish the Merger. As the corporation surviving in the Merger (the "Surviving Corporation"), Terra shall continue unaffected and unimpaired by the Merger to exist under and be governed by the laws of the State of Michigan. Upon the effectiveness of the Merger, the separate existence of Sub shall cease except to the extent provided by law in the case of a corporation after its merger into another corporation. SECTION 1.2. FILING CERTIFICATE OF MERGER AND EFFECTIVENESS. Upon the satisfaction or waiver of the conditions to the obligations of each of the parties contained herein, the Certificate of Merger, executed in accordance with the laws of the State of Michigan, shall be filed in the office of the -2- 13 Corporation and Securities Bureau, Department of Commerce, of the State of Michigan. The Merger shall become effective upon such filing as provided in the BCA. The date and the time on such date of effectiveness of the Merger are herein called, respectively, the "Effective Date" and the "Effective Time." SECTION 1.3. EFFECTS OF THE MERGER. The Merger shall have the effects set forth in Section 724 of the BCA. SECTION 1.4. ARTICLES OF INCORPORATION, BY-LAWS, DIRECTORS AND OFFICERS. The Articles of Incorporation and By-Laws of Terra, in each case as they may be amended, as in effect immediately prior to the Effective Time, shall continue in full force and effect as the Articles of Incorporation and By-Laws of the Surviving Corporation. The initial directors of the Surviving Corporation shall consist of the directors of Sub immediately prior to the Effective Time, who shall serve until their respective successors are duly elected and qualified. The initial officers of the Surviving Corporation shall consist of the officers of Sub immediately prior to the Effective Time, who shall serve until their respective successors are duly elected and qualified. SECTION 1.5. FURTHER ASSURANCES. From time to time after the Effective Time, the officers and directors of the Surviving Corporation shall be authorized to execute and deliver, in the name and on behalf of Terra or otherwise, such deeds and other instruments and to take or cause to be taken such further or other action as shall be necessary or desirable in order to vest or perfect in or to confirm, of record or otherwise, in the Surviving Corporation title to, and possession of, all of the property, rights, privileges, powers, immunities and franchises of Terra (subject, however, to the provisions of Section 6.6(b) hereof) and otherwise carry out the purposes of this Agreement. ARTICLE II CONVERSION OF SHARES SECTION 2.1. CONVERSION OF SECURITIES. As of the Effective Time, by virtue of the Merger and without any action on the part of any stockholder of Terra or Sub: (a) Each share of common stock of Sub issued and outstanding immediately prior to the Effective Time shall be converted into and become one fully paid and nonassessable share of common stock, no par value, of the Surviving Corporation. (b) All shares of Terra Common Stock that immediately prior to the Effective Time are held in the treasury of Terra or by any wholly-owned Subsidiary of -3- 14 Terra or by CMS Energy (including the Lagina Shares, as hereinafter defined) shall be canceled and no capital stock of CMS Energy or other consideration shall be delivered in exchange therefor. (c) Subject to the provisions of Sections 2.6 and 2.7 hereof, each share of Terra Common Stock issued and outstanding immediately prior to the Effective Time (exclusive of shares of Terra Common Stock referred to in Section 2.1(b)) shall be converted into the number (the "Conversion Number") of shares of CMS Common Stock (such shares of CMS Common Stock, together with shares of CMS Common Stock issuable pursuant to Section 2.3 hereof and the Covenant Not to Compete, are collectively referred to herein as "CMS Common Shares"), rounded to the nearest millionth of a share, equal to the quotient of (i) the quotient of (A) $46,474,772 and (B) the aggregate number of shares of Terra Common Stock issued and outstanding immediately prior to the Effective Time (exclusive of shares of Terra Common Stock referred to in Section 2.1(b)) which the parties understand shall be 11,065,422 shares of Terra Common Stock; and (ii) the average of the per share Daily Prices (as hereinafter defined) on the New York Stock Exchange, Inc. (the "NYSE") of CMS Common Stock (the "Average Price") as reported in the New York Stock Exchange Composite Transactions (on the Transaction Reporting System operated by the Consolidated Tape Association) during the ten (10) consecutive trading days ending on the fifth trading day prior to the Effective Time of the Merger; provided, however, that in the event the foregoing would result in an Average Price greater than $24.625, then the Average Price shall be deemed to be $24.625; and provided, further, that in the event the foregoing would result in an Average Price less than $20.625, then the Average Price shall be deemed to be $20.625. All such shares of Terra Common Stock, when so converted, shall no longer be outstanding and shall automatically be canceled and retired and each holder of a Certificate (as hereinafter defined) theretofore representing any such shares shall cease to have any rights with respect thereto, except the right to receive, upon surrender of such Certificate in accordance with Section 2.4, shares of CMS Common Stock and cash in lieu of fractional shares as contemplated by Section 2.6. As used herein, the term Daily Price shall mean the last sale price, or the closing bid price if no sale occurred, on the day in question. -4- 15 (d) Each Option outstanding immediately prior to the Effective Time and not theretofore exercised or canceled shall no longer be outstanding and shall automatically be canceled. SECTION 2.2. AGGREGATE CONSIDERATION; TERRA CONSOLIDATED NET WORKING CAPITAL; TERRA DEBT. (a) Aggregate Consideration shall mean the difference between (A) the sum of (I) $59,274,000, (II) an amount equal to Terra Consolidated Net Working Capital (as hereinafter defined), which is estimated to be $9,183,000 and (III) an amount equal to the revenue received by Terra or its Subsidiaries for its account attributable to the Purchased Assets (as hereinafter defined) between January 1, 1995 through the Effective Date, which amount is estimated to be $250,000; and (B) the sum of (I) Terra Debt, (II) an amount equal to the royalty and Tax obligations of Terra or its affiliates incurred on or after January 1, 1995 relating to the income from the Purchased Assets, which amount is estimated to be $100,000, (III) all costs and expenses in excess of $100,000 borne or incurred by Terra or its affiliates after December 31, 1994 (including, without limitation, fees and disbursements of its counsel or counsel for the Stockholders or Optionholders, accountants and other financial, legal, accounting or other advisers, but excluding the cost of the audit of Terra's 1994 consolidated financial statements) in connection with the negotiation, execution, delivery or performance of this Agreement and each of the other documents and agreements executed in connection with or contemplated by this Agreement or the consummation of the transactions contemplated hereby, which amount is estimated to be $200,000, (IV) the amount, if any, by which the bonuses paid pursuant to Section 6.6(a)(xiii)(D) hereof exceed the aggregate amount received by Terra upon exercise of the Options (as hereinafter defined) prior to the Effective Time as contemplated by Section 6.12 hereof, (V) an amount equal to the costs and expenses (net of any Tax benefit not taken into account in calculating the amount referred to in clause (B)(II) above), and any capital costs, paid by Terra or its Subsidiaries (including amounts paid on mortgages on Purchased Assets) in connection with acquisition or operation of the Purchased Assets between January 1, 1995 through the Effective Date, which are estimated to be $475,000, (VI) fifty percent (50%) of the deferred income tax account of Terra and its Subsidiaries as shown on the Balance Sheet, which was $878,000, (VII) the amount paid by Terra or its Subsidiaries for the bonuses referred to in Section 6.6(a)(xiii)(B) and (C); (b) Terra Consolidated Net Working Capital shall mean the consolidated net working capital of Terra as of December 31, 1994 determined in accordance with GAAP (as hereinafter defined) except that (i) current maturities of long-term debt relating to periods after January 1, 1995 that arise from gas compressor financing transactions, which was $736,129, shall be added back, (ii) the current portion of the Gordon Foods Notes (the "Gordon -5- 16 Notes"), which current portion is equal to $147,946 shall be deleted as an asset, (iii) the current portion of the liability to Boeve relating to his 10% interest in the Gordon Notes shall be deleted as a liability, (iv) any amounts representing principal or interest payable to Terra on promissory notes or other indebtedness secured by workover rigs shall not be included in calculating Terra Consolidated Net Working Capital, (v) any amounts representing payments or receivables for overhead costs to be incurred in 1995 or thereafter shall be deleted as an asset except to the extent that there is included a corresponding amount as a liability for prepaid revenues and (vi) any amounts representing payments or receivables for drilling costs to be incurred in 1995 or thereafter shall be deleted as an asset except to the extent that there is included a corresponding amount as a liability for such costs. (c) Terra Debt shall mean the actual outstanding principal and all accrued but unpaid interest payable by Terra or any of its Subsidiaries under any long-term debt (excluding the current portion to the extent included in Terra Consolidated Net Working Capital) as of December 31, 1994, excluding, however, (i) the non-current portion of debt arising from gas compressor financing transactions as of December 31, 1994, which was $1,452,845, (ii) project finance debt of Terra incurred on or prior to December 31, 1994 of up to $5 million relating to the construction of the Vienna CO2 plant, but only to the extent that MCN has a firm commitment to purchase such plant upon its completion in consideration, among other things, of the discharge of such indebtedness, which was zero, (iii) the non-current portion of debt of Terra to Boeve relating to Boeve's 10% interest in the Gordon Notes, (iv) capitalized auto lease debt of Terra and (v) debt of Terra or any of its Subsidiaries to be assumed by the purchasers of the Purchased Assets pursuant to the documents referred to in Section 6.6(b). SECTION 2.3 EXCHANGE OF LAGINA SHARES BY LAGINA. (a) Subject to the terms and conditions set forth in this Agreement, Lagina agrees to exchange, assign, transfer and deliver to CMS Energy, on the Effective Date and at a time which is immediately prior to the time which is immediately prior to the Effective Time (the "Exchange Closing Time"), and CMS Energy agrees to acquire from Lagina at such time, an aggregate of one million (1,000,000) shares of Terra Common Stock (the "Lagina Shares") currently owned by Lagina. (b) In consideration of the exchange by Lagina of the Lagina Shares and subject to the satisfaction or waiver of the closing conditions described in Article VIII below, CMS Energy shall assign, transfer and deliver to Lagina, in exchange for and upon delivery of the Lagina Shares, the number of shares of CMS Common Stock, rounded to the nearest thousandth of a share, determined by dividing (i) $10,632,168 by (ii) the Average Price, provided that CMS Energy shall satisfy such obligation by -6- 17 delivering cash in lieu of fractional shares or interests pursuant to Section 2.6, by check or wire transfer of immediately available funds to the account or accounts designated by Lagina in a notice to CMS Energy, and one or more certificates representing the aggregate number of whole CMS Common Shares into which the Lagina Shares shall have been exchanged pursuant to this Section 2.3. (c) At the Exchange Closing (as hereinafter defined), subject to the satisfaction or waiver of the closing conditions described in Article IX below, Lagina will deliver to CMS Energy the certificates representing the Lagina Shares, duly endorsed in blank, or accompanied by duly authorized and executed stock powers, such transfer representing full transfer of all of Lagina's right, title and interest in the Lagina Shares, free and clear of any encumbrances, Liens, or intervening interests of any Person. (d) Subject to the terms and conditions hereof, the consummation of the transactions contemplated by this Section 2.3 (the "Exchange Closing") shall take place at the Exchange Closing Time on the Effective Date. SECTION 2.4. PAYMENT OF CASH AND DELIVERY OF CERTIFICATES. (a) At or after the Effective Time, each holder, except for any holder referred to in Section 2.1(b), of a certificate or certificates representing issued and outstanding shares of record of Terra Common Stock immediately prior to the Effective Time (collectively, the "Certificates") may surrender such Certificate or Certificates to CMS Energy, and CMS Energy shall deliver or cause to be delivered, in exchange therefor, (i) cash in lieu of fractional shares or interests pursuant to Section 2.6, by check or wire transfer of immediately available funds to the account or accounts designated by such holder in a notice to CMS Energy, and (ii) one or more certificates representing the aggregate number of whole CMS Common Shares into which the Terra Common Stock represented by the Certificate or Certificates so surrendered shall have been converted pursuant to Section 2.1. (b) Any certificates representing CMS Common Shares or cash in lieu of fractional shares deliverable pursuant to Section 2.1(c) shall be deliverable upon the surrender to CMS Energy of a Certificate or Certificates representing issued and outstanding shares of record of Terra Common Stock immediately prior to the Effective Time. Until so surrendered, each outstanding certificate representing issued and outstanding shares of record of Terra Common Stock immediately prior to the Effective Time shall not be transferable on the books of the Surviving Corporation or CMS Energy, but shall be deemed for all corporate purposes, subject to Section 2.5, to evidence the right to receive such cash and ownership of the number of whole CMS Common Shares, as the case may be, into which the shares of Terra Common -7- 18 Stock which immediately prior to the Effective Time were represented thereby shall have been converted pursuant to Section 2.1. At the close of business on the business day next preceding the Effective Date, the stock transfer books of Terra shall be closed and, except with respect to the exercise of the Options and the exchange of the Lagina Shares as contemplated by Section 2.3 hereof, no transfer of Terra Common Stock shall thereafter be made or consummated. SECTION 2.5. DIVIDENDS AND DISTRIBUTIONS. Any dividend or other distribution paid in respect of CMS Common Stock to holders of record on or after the Effective Date and otherwise payable to the holder of an outstanding Certificate which, immediately prior to the Effective Time, represented issued and outstanding shares of Terra Common Stock until the surrender of such Certificate and the issuance of a certificate or certificates for CMS Common Shares in respect thereof, shall be retained by CMS Energy pending such surrender, and no such dividend or other distribution payable in respect of CMS Common Stock shall be paid to the holder of such Certificate representing Terra Common Stock until such Certificate shall have been so surrendered to CMS Energy and a certificate or certificates for CMS Common Shares shall have been so issued. Upon surrender of each such Certificate and issuance in exchange therefor of CMS Common Shares, there shall be paid by CMS Energy to or at the direction of the holder of the certificate for such CMS Common Shares the amount of all dividends and distributions which became payable to holders of record on or after the Effective Date in respect of the number of whole CMS Common Shares represented by the certificate or certificates so issued. In no event shall any holder of any Certificate which, immediately prior to the Effective Time, represented issued and outstanding shares of Terra Common Stock be entitled to receive interest on any of the funds to be received in the Merger, or the consideration to be paid pursuant to the Covenant Not to Compete or on any such dividend or other distribution. SECTION 2.6. FRACTIONAL SHARES. No certificates for fractions of shares of CMS Common Stock and no scrip or other certificates evidencing fractional interests in such shares shall be issued pursuant to Section 2.1, 2.3 or the Covenant Not to Compete. If the exchange or conversion of a person's aggregate holdings of Terra Common Stock or other right to obtain CMS Common Shares at any time results in a fractional share of CMS Common Stock or interest therein, such person shall, in lieu thereof, be paid in cash in an amount equal to the value of such fractional share or interest based on the Average Price of CMS Common Stock. Any person otherwise entitled to a fractional share or interest shall not be entitled by reason thereof to any voting, dividend or other rights as a stockholder of CMS Energy. -8- 19 SECTION 2.7. CHANGES IN CMS COMMON STOCK. In the event that, during the period of ten (10) trading days which is used to determine the Average Price, or subsequent to such period but prior to the Effective Time, there has occurred the record date of any reclassification, stock split, stock dividend or similar change in respect of the CMS Common Stock, then appropriate adjustment shall be made in the number of shares of CMS Common Stock and/or kind of securities issued as CMS Common Shares in order to provide holders of Terra Common Stock or of any other right to obtain CMS Common Shares pursuant to the transactions contemplated by this Agreement with the same number of shares of CMS Common Stock and/or securities that they would have received after such reclassification, stock split, stock dividend or similar change if the Effective Time had occurred immediately prior to the record date of such reclassification, stock split, stock dividend or similar change (and all references herein to the "CMS Common Shares" shall refer to such adjusted number and/or kind of securities). ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS AND THE OPTIONHOLDERS As an inducement to CMS Energy and Sub to enter into this Agreement and to consummate the transactions contemplated hereby, the Management Stockholders and Optionholders jointly and severally (except as otherwise provided below) represent and warrant to CMS Energy and Sub and agree, and the Non-Management Stockholders severally and not jointly represent and warrant to CMS Energy and Sub and agree solely with respect to Section 3.3(b) (first sentence), Section 3.4(b) and Section 3.34 as follows: SECTION 3.1. ORGANIZATION OF TERRA. Terra is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Michigan. Terra is duly qualified to transact business as a foreign corporation and is in good standing in each of the jurisdictions in which the ownership or leasing of the properties used in its business or the conduct of its business requires such qualification, other than in such jurisdictions where the failure to be so qualified and in good standing would not have a Material Adverse Effect. Terra has full corporate power and authority necessary to own or lease and operate its properties and to carry on its business as now conducted. Terra has delivered to CMS Energy complete and correct copies of the articles of incorporation and by-laws of Terra, in each case as amended and in effect on the date hereof. SECTION 3.2. SUBSIDIARIES AND INVESTMENTS. (a) Terra owns beneficially and of record, or indirectly, all of the issued and outstanding shares of capital stock of each of the -9- 20 corporations listed under the heading "Subsidiaries" on Schedule 3.2 (each such corporation, together with any partnership or limited liability company (whether or not a Tax Partnership, but excluding any entity created by any Operating Agreement, as hereinafter defined) of which Terra or any such corporation is a general or managing partner or member or of which Terra or any such corporation owns at least 50% of the partnership or membership interest, each of which is identified in Schedule 3.2, but excluding Cronus Development Corp., being herein collectively referred to as "Subsidiaries"). Except as disclosed on Schedule 3.2, and excluding oil and gas joint operating agreements or other agreements providing for the joint acquisition, exploration, development or production of oil and gas properties and all amendments thereto to which Terra or any Subsidiary is a party (the "Operating Agreements"), Terra does not, directly or indirectly, (i) own, of record or beneficially, any outstanding securities or other interest in any corporation, limited liability company, partnership, joint venture or other entity (other than investments in publicly traded securities, cash equivalents and short-term investment grade debt) or (ii) control any corporation, limited liability company, partnership, joint venture or other entity. (b) Except as disclosed on Schedule 3.2, each of the Subsidiaries is duly organized, validly existing and, in the case of corporate Subsidiaries, in good standing, under the laws of its jurisdiction of organization, and each has full corporate, partnership or limited liability company power and authority, as the case may be, necessary to own or lease and operate its properties as now conducted. Each of the Subsidiaries is duly qualified to transact business as a foreign corporation, foreign partnership or foreign limited liability company, as the case may be, and is in good standing in each of the jurisdictions in which conduct of its business requires such qualification, other than in such jurisdictions where the failure to be so qualified and in good standing would not have a Material Adverse Effect. Schedule 3.2 contains a list of each jurisdiction in which each Subsidiary is duly qualified to transact business. Schedule 3.2 sets forth the authorized, and issued and outstanding shares of, capital stock of each corporate Subsidiary and a complete and accurate list of each corporation in which Terra directly or indirectly owns at least 20% but less than 100% of the issued and outstanding shares of capital stock (the "Non-Wholly Owned Subsidiaries") and a complete and accurate list of each partnership or limited liability company (whether or not a Tax Partnership, but excluding any entity created by any Operating Agreement) of which Terra or any Subsidiary is or at any time has been a managing, general or limited partner or a member or has served in a similar capacity (the "Partnerships"), together with the state and date of organization of each Partnership, the name and address of each general or limited partner or member of each Partnership as they appear in the records of Terra or such subsidiary, and the percentage interest of Terra or any of its -10- 21 Subsidiaries in each Partnership. Terra has delivered to CMS Energy true and complete copies of each partnership agreement, limited liability company agreement, regulations or similar governing instrument and all amendments thereto pursuant to which each Partnership was organized (the "Partnership Agreements"). (c) The assets of Cronus Development Corporation, the common stock of which constitutes a Purchased Asset under Section 6.6(b), consist solely of properties known as the "Crystal Prospect" leasehold; "Crystal Prospect" Teselsky & Rubert surface and minerals (T10N-R5W,SEC.3); "Vernon Prospect" leasehold; "Southern Michigan White Bear" leasehold interests; "Asiala Maidens" leasehold; "Pontisso" minerals (T30N-R1W, SEC. 15); "Elvira 11" surface and minerals 3.748 acres in Sec. 18; Hutches State Kalkaska well; Pontisso # 2-10 & #4-10 wells; and oil and gas leases in Benzie and Manistee Counties; and additional assets which do not exceed $10,000 in value in the aggregate. SECTION 3.3. CAPITALIZATION. (a) The authorized capital of Terra consists of 20,000,000 shares of common stock, no par value, of which 9,519,500 shares are duly and validly issued and outstanding and, except for 2,545,922 shares issuable upon exercise of certain Options (as hereinafter defined) granted by Terra, none of which is reserved for any purpose. All of the outstanding shares of Terra Common Stock are duly authorized, validly issued, fully paid and nonassessable. The record owners of the Terra Common Stock as of the date hereof are listed in Schedule 3.3(a) and a list of the record owners of the Terra Common Stock as of the Effective Time will be provided to CMS Energy on the Effective Date. The record owners of options, warrants or similar rights to purchase shares of Terra Common Stock from Terra or from the holders of any Terra Common Stock (collectively, the "Options") are listed in Schedule 3.3(a) hereto. Complete and correct copies of the material agreements relating to the Options have been delivered to CMS Energy. Except for the Options, there are no options, warrants or other rights to acquire, or agreements or commitments of Terra to issue, sell, purchase or redeem, or of the holders of any Terra Common Stock to sell or purchase, shares of capital stock or any other equity interest of Terra, whether on conversion of other securities or otherwise. None of the issued and outstanding shares of Terra Common Stock has been issued in violation of, or is subject to, any preemptive or subscription rights. Except as set forth in Schedule 3.3(a), there are no stockholder agreements, voting trust agreements or any other similar contracts, agreements, arrangements, commitments, plans or understandings restricting or otherwise relating to voting, dividend, ownership or transfer rights with respect to any shares of capital stock of Terra. (b) Each Stockholder severally represents and warrants as to himself that (i) he is the beneficial owner of the shares of Terra Common Stock listed in Schedule 3.3(a) opposite his name -11- 22 or he has transferred such shares to a Permitted Transferee or Permitted Transferees (as hereinafter defined) or, in the case of Lagina, that the Lagina Shares are subject to Section 2.3 hereof and (ii) all such shares are owned free from all liens, claims, encumbrances or other restrictions of any kind, other than liens, claims, encumbrances or other restrictions listed on Schedule 3.3(b), securities law restrictions applicable to restricted stock and restrictions created by this Agreement. Each Optionholder severally represents and warrants as to himself that (i) he is the beneficial owner of Options to purchase shares of Terra Common Stock listed in Schedule 3.3(a) opposite his name, (ii) all such Options are owned free from all liens, claims, encumbrances or other restrictions of any kind, other than liens, claims, encumbrances or other restrictions listed on Schedule 3.3(b), securities law restrictions applicable to restricted securities and restrictions created by this Agreement, and (iii) that such Options will be exercised prior to the Effective Time and, as of the Effective Time, no shares of Terra Common Stock will be issuable pursuant thereto. Permitted Transferee shall mean any executor of the estate of any Stockholder or any person acquiring the CMS Common Shares of such Stockholder solely pursuant to the laws of descent. (c) All outstanding shares of capital stock of each corporate Subsidiary are duly authorized, validly issued, fully paid and nonassessable. Terra or another wholly-owned Subsidiary is the record and beneficial owner of all of the issued and outstanding shares of capital stock of each such Subsidiary and, to the knowledge of Terra, is the record and beneficial owner of the shares of capital stock of each Non-Wholly Owned Subsidiary as indicated on Schedule 3.2. All such shares of capital stock are so owned free from all liens, claims, encumbrances or other restrictions of any kind, other than liens, claims, encumbrances or other restrictions listed on Schedule 3.3(c). Except as set forth on Schedule 3.3(c), there are no options, warrants or other rights to acquire, or agreements or commitments to issue, sell, purchase or redeem, shares of capital stock of any corporate Subsidiary, whether on conversion of other securities or otherwise. None of the issued and outstanding shares of common stock of any corporate Subsidiary has been issued in violation of, or is subject to, any preemptive or subscription rights. There are no voting trust agreements or any other similar contracts, agreements, arrangements, commitments, plans or understandings restricting or otherwise relating to voting, dividend, ownership or transfer rights with respect to any shares of common stock of any corporate Subsidiary. (d) All outstanding partnership or membership interests in each Partnership Subsidiary (including any limited liability company Subsidiary) are duly authorized and validly issued. Terra or another Subsidiary is the record and beneficial owner of such partnership or membership interests of each such Partnership Subsidiary to the extent set forth in Schedule 3.2. -12- 23 All such partnership or membership interests are so owned free from all liens, claims, encumbrances or other restrictions of any kind, other than liens, claims, encumbrances or other restrictions listed on Schedule 3.3(d) and other than as set forth in the relevant Partnership Agreements. There are no options, warrants or other rights to acquire, or agreements or commitments to issue, sell, purchase or redeem, any partnership or membership interests in any Partnership Subsidiary, other than as set forth in the relevant Partnership Agreements. SECTION 3.4. AUTHORITY. (a) Terra has full corporate power and authority to enter into this Agreement and, subject to adoption of this Agreement by the stockholders of Terra (which adoption shall be effected promptly after the date hereof), to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement by Terra and the consummation by Terra of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Terra, subject to such adoption of this Agreement by the stockholders of Terra. This Agreement has been duly executed and delivered by Terra and is, and each other agreement or instrument of Terra contemplated hereby when executed and delivered by or on behalf of Terra will be, the legal, valid and binding agreement of Terra, enforceable against Terra in accordance with its respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). Each Management Stockholder and Optionholder severally represents and warrants as to himself and as to Terra that neither the execution or delivery of this Agreement by Terra or such Stockholder or Optionholder, nor consummation of the transactions contemplated hereby or compliance with or fulfillment of the terms and provisions hereof by Terra or such Stockholder or Optionholder, will (a) conflict with, result in a breach of the terms, conditions or provisions of, or constitute a default, an event of default or an event creating rights of acceleration, termination or cancellation or a loss of rights, or result in the creation or imposition of any encumbrance upon any of the material assets of Terra or any Subsidiary, under the articles of incorporation or the by-laws or partnership agreement, limited liability company agreement, regulations or similar governing instrument of Terra or any Subsidiary, any instrument, agreement (including any partnership agreement), mortgage, indenture, deed of trust, permit, concession, grant, franchise, license, judgment, order, award, decree or other restriction to which Terra or any Subsidiary is a party or any of its respective properties is subject or by which it is bound or any statute, other law or regulatory provision affecting it, -13- 24 except for such conflicts, breaches, defaults, events, creations and impositions that are set forth on Schedule 3.4(a) or (b) require the approval, consent or authorization of, or the making of any declaration, filing or registration with, any third party or any foreign, federal, state or local court, governmental authority or regulatory body, by or on behalf of Terra or any Subsidiary, except for the applicable requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"), the filing of a Certificate of Merger with the Corporation and Securities Bureau, Department of Commerce, of the State of Michigan and appropriate documents with the relevant authorities of other jurisdictions in which Terra is qualified to do business, adoption of this Agreement by the stockholders of Terra and as set forth in Schedule 3.4(a). (b) Each Stockholder and Optionholder severally represents and warrants as to himself that he has full power and authority to enter into this Agreement. Scherock severally represents and warrants as to itself that (i) it is a trust duly formed and validly existing under the laws of the State of Michigan and Dr. Leonard J. Scherock serves as sole trustee thereof, (ii) such trustee has the power and authority under the agreement dated May 1, 1990 creating the trust and the laws of the State of Michigan to execute and deliver this Agreement, to consummate the transactions contemplated hereby and to cause the trust to perform its obligations hereunder and (iii) Scherock has, and will continue to have and maintain, sufficient assets to perform its obligations as set forth in this Agreement. Each Stockholder and Optionholder severally represents and warrants as to himself, and the Management Stockholders and Optionholders represent and warrant as to Terra, that neither the execution or delivery of this Agreement by Terra or such Stockholder or Optionholder, nor consummation of the transactions contemplated hereby or compliance with or fulfillment of the terms and provisions hereof by Terra or such Stockholder or Optionholder, will conflict with, result in a breach of the terms, conditions or provisions of, or constitute a default, an event of default or an event creating rights of acceleration, termination or cancellation or a loss of rights under, or result in the creation or imposition of any encumbrance upon any of the material assets of Terra or any Subsidiary under, any instrument, agreement, mortgage, indenture, deed of trust, permit, concession, grant, franchise, license, judgment, order, award, decree or other restriction to which such Stockholder or Optionholder is a party or by which such Stockholder or Optionholder is bound. Each Stockholder and Optionholder severally represents and warrants as to himself that this Agreement has been duly executed and delivered by such person and is, and each other agreement or instrument of such Stockholder or Optionholder contemplated hereby when executed and delivered by or on behalf of such person will be, the legal, valid and binding agreement of such Stockholder or Optionholder, as the case may be, enforceable against such Stockholder or Optionholder in accordance with its -14- 25 respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforceability of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). SECTION 3.5. FINANCIAL STATEMENTS. Terra has previously provided CMS Energy with: (i) the draft dated August 14, 1995 of the consolidated balance sheet (the "Balance Sheet") of Terra as of December 31, 1994 (the "Balance Sheet Date") and the related draft dated August 14, 1995 of the consolidated statements of income (the "Statement of Income"), stockholders' equity and cash flows for the year then ended, together with the notes and any schedules to such financial statements, as in the process of being audited by Arthur Andersen L.L.P., independent public accountants, and (ii) the consolidated unaudited balance sheet (the "Unaudited Balance Sheet") of Terra as of June 30, 1995 (the "Unaudited Balance Sheet Date") and the related unaudited consolidated statement of income (the "Unaudited Statement of Income") for the six months then ended. Except as set forth on Schedule 3.5 or disclosed in the notes or any schedules to the consolidated financial statements referred to in clause (i) of the preceding sentence, and disregarding the matters referred to in the proviso contained in Section 3.7, to the knowledge of Terra, the consolidated balance sheets and statements of income, stockholders' equity and cash flows referred to in such clause (i) have been prepared in conformity with generally accepted accounting principles ("GAAP") consistently applied and fairly present in all material respects the consolidated financial position of Terra and its consolidated subsidiaries at the dates of such balance sheets and the consolidated results of its operations and consolidated cash flows for the respective periods indicated. SECTION 3.6. OPERATIONS SINCE BALANCE SHEET DATE. (a) Except as set forth in Schedule 3.6(a), since the Balance Sheet Date, there has been: (i) except for changes relating to the oil and gas industry in general and not specifically relating to Terra, its Subsidiaries, or the Stockholders, no Material Adverse Change in Terra and its Subsidiaries taken as a whole, and (ii) no damage, destruction, loss or claim with respect to, whether or not covered by insurance, or condemnation or other taking of, assets having a Material Adverse Effect on Terra and its Subsidiaries taken as a whole; provided, however, that no representation or warranty is made with respect to the items described in the proviso contained in Section 3.7. (b) Except as set forth in Schedule 3.6(b), as contemplated hereby or with the prior written consent of CMS Energy after the date hereof, since the Balance Sheet Date, Terra has conducted its business only in the ordinary course and in general conformity with past practice. Without limiting the generality of the foregoing, except as set forth in -15- 26 Schedule 3.6(b), as contemplated by any provision of this Agreement or with the prior written consent of CMS Energy after the date hereof, since the Balance Sheet Date, neither Terra nor any of its Subsidiaries has: (i) issued, delivered or agreed (actually or contingently) to issue or deliver any of its capital stock, except with respect to the exercise of the Options, or granted any option, warrant or right to purchase any of its capital stock or other equity interest, or security convertible into its capital stock or other equity interest, or, other than in the ordinary course of business consistent with past practice, any of its bonds, notes or other securities, or borrowed or agreed to borrow any funds; (ii) paid any obligation or liability (absolute or contingent) other than current liabilities reflected on the balance sheets referred to in Section 3.5 and current liabilities incurred since the Balance Sheet Date in the ordinary course of business consistent with past practice; (iii) declared or made, or agreed to declare or make, any payment of dividends or distributions to stockholders or purchased or redeemed, or agreed to purchase or redeem, any of its capital stock or other equity interest, (iv) mortgaged, pledged or encumbered any assets other than in the ordinary course of business consistent with past practice; (v) except for (A) assets sold, leased or transferred in the ordinary course of business consistent with past practice and (B) the sale of the Purchased Assets as contemplated by Section 6.6(b) hereof, sold, leased or transferred or agreed to sell, lease or transfer any material assets or rights; (vi) to the knowledge of Terra, except in the ordinary course of business consistent with past practice, canceled or agreed to cancel any material debts or claims, waived or agreed to waive any rights of material value, or allowed to lapse or failed to keep in force any material franchise, permit or other material right; (vii) to the knowledge of Terra, except in the ordinary course of business consistent with past practice, made or permitted any material amendment or termination of any material contract, agreement or license; (viii) undertaken or committed to capital expenditures exceeding $100,000 for any single project or related series of projects, except for the 1995 Antrim Program and the New Office; (ix) made any increase in the compensation paid or to become payable to, or paid any bonus or incentive compensation to, any of its directors, officers or employees except for increases in base compensation in the normal course of business consistent with past practice, increases required to be made pursuant to the terms of any written employment or other agreement or employee benefit plan entered into prior to the Balance Sheet Date, any bonus or incentive compensation the payment of which has been approved in writing by CMS Energy or which is included in calculating Terra Consolidated Net Working Capital, and any bonus or incentive compensation which is referred to in Section 6.6(a)(xiii); (x) amended its articles of incorporation or by-laws; (xi) to the knowledge of Terra, undergone any material adverse change in its relationship with any material supplier, purchaser, distributor, lessor, governmental body, co-venturer under any Operating Agreement or -16- 27 consultant; (xii) made charitable donations in excess of $20,000 in the aggregate; (xiii) incurred any liability or obligation (whether absolute, accrued, contingent or otherwise and whether direct or as guarantor or otherwise with respect to obligations of others) material to the business or assets of Terra and its Subsidiaries, taken as a whole, except in the ordinary course of business consistent with past practice and except as contemplated hereunder and disregarding matters referred to in the proviso contained in Section 3.7; (xiv) instituted, settled or agreed to settle any litigation, action, or proceeding before any court or governmental body relating to the business or assets of Terra or any of its Subsidiaries and involving an amount in excess of $10,000 or materially affecting Terra or its Subsidiaries; (xv) entered into, or amended in any material respect, any employment, collective bargaining, deferred compensation, retention, change of control, termination or other material agreement or arrangement for the benefit of employees (whether or not legally binding) or entered into, adopted or amended in any material respect any Plan (as hereinafter defined); (xvi) suffered any strike or other employment related problem which would have a Material Adverse Effect on Terra and its Subsidiaries taken as a whole; (xvii) suffered the loss of any key employees, consultants or agents which would have a Material Adverse Effect on Terra and its Subsidiaries taken as a whole or, to the knowledge of Terra, had any material adverse change in its relations with its employees, consultants or agents; (xviii) received any notice of termination of any material contract or lease or other material agreement; (xix) transferred or expressly granted any rights under, or entered into any settlement regarding the breach or infringement of, any material United States or foreign license, patent, copyright, trademark, trade name, invention or other material intellectual property or modified in any material respect any existing rights with respect thereto; (xx) changed its accounting reference period; (xxi) entered into any transaction of the type described in Section 3.30 except as permitted hereunder; or (xxii) entered into or become committed to enter into any other material transaction except in the ordinary course of business consistent with past practice. SECTION 3.7. NO UNDISCLOSED LIABILITIES. Neither Terra nor any of its Subsidiaries is subject to any material liability which is required in accordance with GAAP to be shown on the Balance Sheet but which is not so shown, and, to the knowledge of Terra, neither Terra nor any of its Subsidiaries is subject to any material liability, absolute or contingent, which is not shown on the Balance Sheet or which is in excess of amounts shown or reserved for in the Balance Sheet, other than, in each case, (i) as referred to in the notes to the Balance Sheet or in the discussion of the accounting methodologies contained therein, (ii) as disclosed in Schedule 3.7 and (iii) liabilities incurred after the Balance Sheet Date in the ordinary course of its business consistent with past practice; provided, however, that no representation or warranty is made with respect -17- 28 to liabilities or obligations in connection with (A) naturally occurring radioactive material ("NORM"), (B) charges for post-production costs ("PPC") made and to be made to the owners of royalties, overriding royalties and other interests which do not bear all or a portion of production costs, (C) plugging and abandonment of Wells, (D) the amount of fees and disbursements charged and to be charged to Terra by its accountants relating to the audit of Terra's consolidated financial statements for the year ended December 31, 1994, or (E) those items referred to in Sections 3.22 or 3.29. SECTION 3.8. TAXES. (a) Except as set forth on Schedule 3.8(a): (i) each of Terra and its Subsidiaries (as hereinafter defined) has filed on or before the date hereof (or will timely file) all Tax Returns (as hereinafter defined) that are required to be filed on or before the date hereof or the Effective Date; (ii) all such Tax Returns for taxable years or periods ending on or before December 31, 1994 are (or will be) complete and accurate in all material respects and disclose all Taxes (as hereinafter defined) required to be paid by Terra and its Subsidiaries for the periods covered thereby except for Taxes for which adequate reserves have been established by Terra or its Subsidiaries and such reserves are reflected in the computation of Terra Consolidated Net Working Capital and all Taxes shown to be due on such Tax Returns have been timely paid or are reflected in the computation of Terra Consolidated Net Working Capital; (iii) none of Terra or any Subsidiary has waived or been requested to waive any statute of limitations in respect of Taxes; (iv) the Tax Returns referred to in clause (i) for taxable years or periods ending on or before December 31, 1991 have been examined by the Internal Revenue Service or the appropriate state, local or foreign taxing authority, or the period for assessment of Taxes in respect of which such Tax Returns were required to be filed has expired; (v) there is no action, suit, investigation, audit, claim or assessment pending or, to the knowledge of Terra, proposed or threatened with respect to Taxes of Terra or any Subsidiary for taxable years or periods ending on or before December 31, 1994 and, to the knowledge of Terra, no basis exists therefor for which adequate reserves have not been established and such reserves are reflected in the computation of Terra Consolidated Net Working Capital; (vi) all deficiencies asserted or assessments made as a result of any examination of the Tax Returns referred to in clause (i) for taxable years or periods ending on or before December 31, 1994 have been paid in full or are reflected in the computation of Terra Consolidated Net Working Capital; (vii) all Tax Sharing Arrangements (as hereinafter defined) will terminate prior to the Effective Date and neither Terra nor any Subsidiary will have any liability thereunder on or after the Effective Date; (viii) there are no Tax indemnity agreements to which Terra or any Subsidiary is a party or is bound; (ix) there are no liens for Taxes upon the assets of Terra or any Subsidiary except liens relating to current Taxes not yet due or which are reflected in the computation -18- 29 of Terra Consolidated Net Working Capital; (x) all Taxes which Terra or any Subsidiary is required by law to withhold or to collect for payment (including with respect to the exercise of the Options, collection of withholding from the Optionholders due with respect thereto as contemplated by Section 6.12, and with respect to the bonuses referred to in Section 6.6(a)(xiii), collection of withholding due with respect thereto) have been duly withheld and collected, and have been paid or accrued; (xi) none of Terra or any of its Subsidiaries has been a member of any consolidated group other than the Company Group of which it is a member on the date hereof; (xii) to the knowledge of Terra, the accruals for deferred Taxes reflected in the Balance Sheet are adequate to cover any deferred tax liability of Terra and its Subsidiaries determined in accordance with GAAP through the date thereof; (xiii) there are no Tax rulings, requests for private letter rulings or requests for technical advice, in each case initiated by Terra or any Subsidiary, or requests for a change in method of accounting or closing agreements relating to Terra or any Subsidiary, which in each case could affect the liability of Terra or any Subsidiary for Taxes for any period after December 31, 1994; (xiv) none of Terra or any Subsidiary has filed a consent under Section 341(f) of the Code or any comparable provision of state statutes; (xv) since January 1, 1991, none of Terra or any Subsidiary has taken any action not in accordance with past practice that would have the effect of deferring any Tax liability for Terra or any Subsidiary from any taxable period ending on or before December 31, 1994 to any taxable period ending after December 31, 1994; (xvi) no income or gain of Terra or any Subsidiary has been deferred pursuant to Treasury Regulation Section Section 1.1502-13 or -14, or Temporary Treasury Regulation Section Section 1.1502-13T or -14T; (xvii) no power of attorney has been granted with respect to any matter relating to Taxes of Terra or any Subsidiary which is currently in force; (xviii) none of the property of Terra or any Subsidiary is required to be treated as owned by another person pursuant to Section 168(f)(8) of the Code (as in effect prior to its amendment by the Tax Equity and Fiscal Responsibility Act of 1982) or is "tax exempt use property" within the meaning of Section 168(h) of the Code or is subject to a so-called TRAC lease under Section 7701(h) of the Code or any predecessor provision; (xix) Terra and each Subsidiary is the owner for income tax purposes of all property which it has leased to any other person; (xx) neither Terra nor any Subsidiary has participated in or cooperated with an international boycott, within the meaning of Section 999 of the Code, and all filing requirements imposed by Section 999 of the Code with respect to Terra and its Subsidiaries have been and will be complied with; (xxi) neither Terra nor any Subsidiary has disposed of property in a transaction being accounted for under the installment method pursuant to Section 453 or 453A of the Code; (xxii) neither Terra nor any Subsidiary has any corporate acquisition indebtedness, as described in Section 279(b) of the Code; (xxiii) no taxes with respect to any period ending on or before December 31, 1994 were paid by Terra or any Subsidiary (or charged to Terra or any -19- 30 Subsidiary through any intercompany account or payment) after December 31, 1994 which were not included in the provision for income taxes on the Statement of Income; (xxiv) to the knowledge of Terra, all of the production from intervals in production or completed for production as of the date of this Agreement and sold prior to January 1, 2003 from the Wells designated as "Section 29 Wells" in the Property Schedules will, absent a change in applicable law occurring after the Effective Date, constitute "qualified fuels" within the meaning of Section 29(c) of the Code and, absent a change in applicable law occurring after the Effective Date, none of such production will be "gas produced from a tight formation" within the meaning of Section 29(c)(2)(B) of the Code; (xxv) except as may be limited as a result of the Merger and the other transactions contemplated by this Agreement, the alternative minimum tax credit described in Note 11 to the consolidated financial statements of Terra and subsidiaries for the year ended December 31, 1994 will be available, subject to applicable limits relating to the amount of "regular" Tax that can be offset by an alternative minimum tax credit, to reduce the "regular" federal income tax of Terra and its Subsidiaries for periods beginning January 1, 1995; and (xxvi) no portion of the Interests (A) has been contributed to and is currently owned by a Tax Partnership, (B) is subject to any form of agreement (whether formal or informal, written or oral) deemed by any state or federal Tax statute, rule or regulation to be or to have created a Tax Partnership; or (C) otherwise constitutes "partnership property" (as that term is used throughout Subchapter K of Chapter 1 of Subtitle A of the Code) of a Tax Partnership. (b) No disposition by Terra or any of the Stockholders pursuant to this Agreement is subject to withholding under Section 1445 of the Code and no stock transfer taxes, real estate transfer taxes, or other similar taxes will be imposed in respect of the Merger. (c) As a result of the Merger and the transactions contemplated by this Agreement, none of Terra, any Subsidiary or the Surviving Corporation will be obligated (limited, in the case of the Surviving Corporation, to obligations to which the Surviving Corporation becomes subject as a result of any agreement or arrangement entered into by Terra or any Subsidiary prior to the Merger) to make a payment to an individual that would be an "excess parachute payment" to a "disqualified individual" as those terms are defined in Section 280G of the Code, without regard to whether such payment is reasonable compensation for personal services performed or to be performed in the future. (d) For purposes of this Section 3.8 and Section 7.2, notwithstanding any other provision hereof, the following definitions shall apply: -20- 31 (i) "Company Group" shall mean any "affiliated group" (as defined in Section 1504(a) of the Code without regard to the limitations contained in Section 1504(b) of the Code) that, at any time on or before the Effective Date, includes or has included Terra, any of its Subsidiaries or any predecessor of or successor to Terra or any of its Subsidiaries (or another such predecessor or successor), or any other group of corporations which, at any time on or before the Effective Date, files or has filed Tax Returns on a combined, consolidated or unitary basis with Terra or any of its Subsidiaries or any predecessor of or successor to Terra or any of its Subsidiaries (or another such predecessor or successor). (ii) "material" shall mean, with respect to Taxes, that the failure on a timely basis to pay all such Taxes would result in an aggregate Tax liability of not less than $25,000. (iii) "Subsidiary" shall have the meaning ascribed thereto in Section 3.2(a). (iv) "Tax" (and, with correlative meaning, "Taxes" and "Taxable") shall mean (i) any federal, state, local or foreign net income, gross income, gross receipts, windfall profits, severance, property, production, sales, use, value added, license, excise, franchise, employment, payroll, withholding, alternative or add-on minimum, ad valorem, transfer, excise, stamp, or environmental tax, or any other tax, custom, duty, governmental fee or import or export duty or other like assessment or charge of any kind whatsoever, together with any interest or penalty, addition to tax or additional amount imposed by any governmental authority, and (ii) liability of Terra or any of its Subsidiaries for the payment of amounts with respect to payments of a type described in clause (i) as a result of being a member of an affiliated, consolidated, combined or unitary group, or as a result of any obligation of Terra or any of its Subsidiaries under any Tax Sharing Arrangement or Tax indemnity arrangement. (v) "Tax Partnership" shall mean any entity, organization, agreement or group deemed to be a partnership within the meaning of Section 761 of the Code or any similar state or federal statute, rule or regulation and that is not excluded from the application of the partnership provisions of Subchapter K of Chapter 1 of Subtitle A of the Code and of all similar provisions of state tax statutes or regulations by reason of elections made, pursuant to Section 761(a) -21- 32 of the Code and all such similar state or federal statutes, rules and regulations. (vi) "Tax Return" shall mean any return, report or similar statement required to be filed with respect to any Tax (including any attached schedules), including, without limitation, any information return, claim for refund, amended return and declaration of estimated Tax. (vii) "Tax Sharing Arrangement" shall mean any written or unwritten agreement or arrangement for the allocation or payment of Tax liabilities or payment for Tax benefits with respect to a consolidated, combined or unitary Tax Return, which Tax Return includes Terra or any of its Subsidiaries. SECTION 3.9. CONDITION OF TANGIBLE ASSETS. Except as otherwise disclosed in Schedule 3.9, to the knowledge of Terra, each tangible Interest or asset owned or leased by Terra or any of its Subsidiaries and having a book or fair market value in excess of $25,000 is in good operating condition (subject to reasonable wear and tear and immaterial impairments of value and damage) and generally suitable for the uses for which intended. SECTION 3.10. TITLE TO PROPERTY; PROPERTY SCHEDULES. (a) Since June 1, 1995, except as set forth in Schedule 3.10(a) neither Terra nor any Subsidiary has made or suffered to be made any conveyance, encumbrance or burden on production with respect to the Proved Developed Interests, Proved Undeveloped Interests and Unproved Interests except for those not included in the working interests, net revenue interests or overriding royalty interests shown on the Property Schedules, nor knowingly acted or knowingly failed to act in such manner as to give rise to any Title Defect or other adverse claim against the Proved Developed Interests, Proved Undeveloped Interests or Interests relating to oil and gas gathering, transportation, processing and treating activities or, except in the ordinary course of business consistent with past practice, Unproved Interests. Except as set forth in this Section 3.10(a), no representation is made as to title to the Proved Developed Interests, the Proved Undeveloped Interests or the Unproved Interests or Interests relating to oil and gas gathering, transportation, processing or treating activities. (b) Each of Terra and its Subsidiaries has good and, with respect to real property, indefeasible title to all other Interests (excluding Proved Developed Interest, Proved Undeveloped Interests and Unproved Interests or Interests relating to oil and gas gathering, transportation, processing and treating activities) and assets reflected on the Balance Sheet as being owned by it and all such other Interests and assets thereafter acquired by it (except to the extent that such assets have thereafter been disposed of in the ordinary course of -22- 33 business consistent with past practice), subject to no liens, mortgages, pledges, security interests, encumbrances, claims or charges of any kind (collectively, "Liens") except (i) as noted in Schedule 3.10(b), (ii) for Liens for taxes not yet delinquent or the validity of which is being contested in good faith, (iii) any Liens arising by operation of law securing obligations not yet overdue, (iv) Liens that do not materially interfere with the present use or value of the applicable asset and (v) Permitted Encumbrances. (c) To the knowledge of Terra, except as set forth in Schedule 3.10(c), Terra and its Subsidiaries are currently bearing or, in the case of Interests not operated by Terra or its Subsidiaries, paying the operators of such Interests, as Terra's share of costs and expenses, no more than the working interests set forth on the Property Schedules, unless there has been a corresponding and proportionate increase in the net revenue interests. Terra and its Subsidiaries have made all such payments in a timely manner so that neither Terra nor its Subsidiaries is in default, or currently required to pay interest, under the terms of any agreements relating to such payments. SECTION 3.11. AVAILABILITY AND OWNERSHIP OF ASSETS. The Interests and assets shown on the Balance Sheet, taken as a whole, include all the material properties and assets owned or used or held by Terra or its Subsidiaries during the twelve months covered by the Balance Sheet and required, in accordance with GAAP, to be reflected on the Balance Sheet (except properties and assets sold, cash disposed of, accounts receivable collected, prepaid expenses realized, contracts fully performed, and properties or assets which had become worn out, obsolete or surplus, in each case in the ordinary course of business or as contemplated by this Agreement). There are no material Interests, assets or properties used in the Terra Business owned by any person other than Terra or its Subsidiaries which are leased or licensed pursuant to a lease or license that will terminate as a result of the consummation of the Merger and the other transactions contemplated hereby. SECTION 3.12. PERSONAL PROPERTY LEASES. Schedule 3.12 identifies each lease or other agreement or right, whether written or oral, under which Terra or any of its Subsidiaries is lessee of, or holds or operates, any machinery, equipment, vehicle or other tangible personal property owned by a third person having scheduled rental payments in excess of $10,000 per year. SECTION 3.13. ACCOUNTS RECEIVABLE. To the knowledge of Terra, all outstanding accounts receivable of Terra and its Subsidiaries have arisen from bona fide transactions, except to the extent that a reserve in respect thereof shall have been established on the Balance Sheet or the Unaudited Balance Sheet. -23- 34 To the knowledge of Terra, (i) the accounts receivable reflected in the Balance Sheet, taken as a whole, are good and collectible in all material respects in the ordinary course of business at the aggregate recorded amounts thereof, net of any applicable allowances for doubtful accounts reflected therein; and (ii) the accounts receivable to be reflected in the books and records of Terra and its Subsidiaries as of the Effective Date, taken as a whole, will be good and collectible in all material respects in the ordinary course of business at the aggregate recorded amounts thereof, net of any applicable allowances for doubtful accounts reflected thereon, which allowances will be determined on a basis consistent with the basis used in determining the allowances for doubtful accounts reflected in the Balance Sheet. The reserve established on the Balance Sheet for doubtful accounts has been deducted in calculating Terra Consolidated Net Working Capital, and the reserve to be reflected in the books and records of Terra and its Subsidiaries as of the Effective Date will not be a greater percentage of accounts receivable reflected therein than is the percentage of the reserve established on the Balance Sheet for doubtful accounts of accounts receivable reflected thereon. SECTION 3.14. INTELLECTUAL PROPERTY. (a) Schedule 3.14 contains a list of: (i) all material United States and foreign patents and patent applications, all material United States, state and foreign trademarks, service marks, trade names and copyrights for which registrations have been issued or applied for, and all other material United States, state and foreign trademarks, service marks, trade names and copyrights, owned by Terra or any of its Subsidiaries or in which Terra or any of its Subsidiaries holds any material right, license or interest, showing in each case the product, device, process, service, business or publication covered thereby, the registered or other owner, expiration date and, in the case of any such right, license or interest, a brief description thereof; (ii) all material agreements, commitments, contracts, understandings, licenses and assignments relating or pertaining to any asset, property or right described in the preceding clause to which Terra or any of its Subsidiaries is a party, showing in each case the parties thereto and, in the case of oral agreements, commitments, contracts, understandings, licenses and assignments, the material terms thereof; (iii) all material licenses or agreements pertaining to mailing lists, know-how, trade secrets, inventions or uses of ideas to which Terra or any of its Subsidiaries is a party, showing in each case the parties thereto and, in the case of oral licenses or -24- 35 agreements, a brief description of the material terms thereof; and (iv) all registered assumed or fictitious names under which Terra or any of its Subsidiaries is conducting its business as of the date hereof. (b) All patents listed in Schedule 3.14 as being owned by Terra or any of its Subsidiaries are valid and in full force, all patents listed in Schedule 3.14 as being used by Terra or any of its Subsidiaries are, to the knowledge of Terra, valid and in full force and all patent applications of Terra or any of its Subsidiaries listed therein are in good standing, all without material challenge of any kind except as otherwise disclosed in Schedule 3.14, and, except as otherwise disclosed in Schedule 3.14, Terra or a Subsidiary owns the entire right, title and interest in and to such patents and patent applications so listed as being owned by Terra or any of its Subsidiaries without limitation, burden or encumbrance of any kind, except for such limitations, burdens and encumbrances that would not have a Material Adverse Effect on Terra and its Subsidiaries taken as a whole. All of the registrations for trade names, trademarks, service marks and copyrights listed in Schedule 3.14 as being owned by Terra or any of its Subsidiaries are valid and in full force, all of the registrations for trade names, trademarks, service marks and copyrights listed in Schedule 3.14 as being used by Terra or any of its Subsidiaries are, to the knowledge of Terra, valid and in full force and all applications by Terra or any of its Subsidiaries for such registrations are pending and in good standing, all without material challenge of any kind except as otherwise disclosed in Schedule 3.14, and, except as otherwise disclosed in Schedule 3.14, Terra or its Subsidiaries owns the entire right, title and interest in and to all such trade names, trademarks, service marks and copyrights so listed as being owned by Terra or any of its Subsidiaries as well as the registrations and applications for registration therefor without qualification, limitation, burden or encumbrance of any kind, except for such qualifications, limitations, burdens and encumbrances that would not have a Material Adverse Effect on Terra and its Subsidiaries taken as a whole. Correct and complete copies of all the patents and patent applications, registered trademarks, trade names, service marks and copyrights, registrations or applications therefor and licenses listed in Schedule 3.14 have heretofore been delivered by Terra to CMS Energy. (c) To the knowledge of Terra, no infringement of any patent, patent right, trademark, service mark, trade name, or copyright or registration thereof has occurred or results in any way from the operations or business of Terra or its Subsidiaries, except for such infringements that would not have a Material Adverse Effect on Terra and its Subsidiaries taken as whole. -25- 36 SECTION 3.15. OWNED REAL PROPERTY. Schedule 3.15 contains a brief description of each parcel of real property, excluding Proved Developed Interests, Proved Undeveloped Interests and Unproved Interests and easements, rights of way and other Interests relating to oil and gas gathering, transportation, processing and treating activities, owned by Terra or any of its Subsidiaries (the "Owned Real Property") and of each option held by Terra or any of its Subsidiaries to acquire any such real property. Complete and correct copies of any title opinions, surveys and appraisals in the possession of Terra or any of its Subsidiaries or any policies of title insurance currently in force and in the possession of Terra or any of its Subsidiaries with respect to each such parcel have heretofore been made available by Terra to CMS Energy. SECTION 3.16. LEASED REAL PROPERTY. Schedule 3.16 sets forth a list of each lease or similar agreement under which (i) Terra or any of its Subsidiaries is lessee of, or holds or operates, any real property or interest therein owned by any third person, excluding Proved Developed Interests, Proved Undeveloped Interests and Unproved Interests and easements, rights of way and other Interests relating to oil and gas gathering, transportation, processing and treating activities, (ii) to the knowledge of Terra, Terra or any of its Subsidiaries has been lessee of, or has held or operated, any real property owned by any third person, excluding Proved Developed Interests, Proved Undeveloped Interests and Unproved Interests and easements, rights of way and other Interests relating to oil and gas gathering, transportation, processing and treating activities, and is as of the date hereof, or will be as of the Effective Date, subject to any actual or contingent liability (other than any liability in respect of a matter referred to in Section 3.29) in respect thereof (the real property described in clauses (i) and (ii) above being collectively referred to herein as the "Leased Real Property") or (iii) Terra or any of its Subsidiaries is lessor of any of the Owned Real Property. Except as set forth in Schedule 3.16, Terra or a Subsidiary has the right to quiet enjoyment of all the Leased Real Property described in clause (i) of the immediately preceding sentence for the full term of each such lease or similar agreement (and any renewal option) relating thereto, and the leasehold or other interest of Terra or such Subsidiary in such real property is not subject or subordinate to any encumbrance, except for any failure to have such right or the existence of any such encumbrance that would not have a Material Adverse Effect on Terra and its Subsidiaries taken as whole. Complete and correct copies of any title opinions, surveys and appraisals in the possession of Terra or any of its Subsidiaries or any policies of title insurance currently in force and in the possession of Terra or any of its Subsidiaries with respect to each such parcel of leased property have heretofore been made available by Terra to CMS Energy. -26- 37 SECTION 3.17. LITIGATION. Except as set forth in Schedule 3.17, there are no claims, actions, suits or proceedings to which Terra or any of its Subsidiaries is a party or any of their respective properties is subject or by which any of them is bound, pending or, to the knowledge of Terra, threatened before or by any court or governmental agency, which in the case of threatened claims, actions, suits or proceedings, would, if adversely determined, have a Material Adverse Effect on Terra and its Subsidiaries taken as a whole, or prevent or hinder the consummation of the transactions contemplated hereby. Notwithstanding anything contained in this Section 3.17 to the contrary, no representation or warranty is made with respect to threatened claims, actions, suits or proceedings relating to the items set forth in clauses (A) through (C) of the proviso contained in Section 3.7. SECTION 3.18. NO GUARANTIES; EXTENSIONS OF CREDIT. Except as set forth in Schedule 3.18, except for customary indemnification and guaranty provisions contained in any Operating Agreement and except for extensions of credit made in the ordinary course of business, no material obligations or liabilities of Terra or any of its Subsidiaries are guaranteed by or subject to a similar contingent obligation of any other person, nor has Terra or any of its Subsidiaries guaranteed or become subject to a similar contingent obligation in respect of the obligations or liabilities of, or extended credit to any other person. SECTION 3.19. COMPLIANCE WITH LAWS. To the knowledge of Terra, except as disclosed in Schedule 3.19, Terra and its Subsidiaries are in compliance with the provisions of all applicable existing laws and regulations (but excluding environmental laws and regulations, which are the subject of Section 3.29, and also excluding laws and regulations pertaining to employee benefits matters, which are the subject of Section 3.22) of all federal, state, local and foreign governments, except to the extent that the failure to comply therewith would not have a Material Adverse Effect on Terra and its Subsidiaries taken as whole. Except as disclosed in Schedule 3.19, to the knowledge of Terra, there are no proposed orders, judgments, decrees, governmental takings, condemnations or other proceedings, in each case binding upon the business, operations or properties of Terra or any of its Subsidiaries and which would have a Material Adverse Effect on Terra and its Subsidiaries taken as a whole. Notwithstanding anything contained in this Section 3.19 to the contrary, no representation or warranty is made with respect to the items set forth in clauses (A) through (C) of the proviso contained in Section 3.7. SECTION 3.20. PERMITS. To the knowledge of Terra, each of Terra and its Subsidiaries possesses all material federal, state, local and foreign governmental and regulatory franchises, rights, privileges, permits, grants, concessions, -27- 38 licenses, certificates, variances, authorizations, approvals, and other material authorizations (including any amendments to any thereof) necessary to own or lease and operate its Interests and other material properties and to conduct its business as now conducted (collectively, the "Permits"), excluding environmental Permits, which are the subject of Section 3.29. To the knowledge of Terra, all Permits are in full force and effect and will continue in full force and effect immediately following the consummation of the Merger without the breach of any terms or conditions thereof or the forfeiture or impairment of any rights thereunder and no consent, approval or act of, or the making of any filing with, any governmental body, regulatory commission or other party will be required to be obtained or made by Terra or any of its Subsidiaries in respect of any Permit as a result of the consummation of the Merger and the other transactions contemplated hereby. To the knowledge of Terra, neither Terra nor any of its Subsidiaries is in default in any material respect under the terms of any such Permit nor has received notice of any material default thereunder which has not been resolved. SECTION 3.21. INSURANCE. To the knowledge of Terra, Schedule 3.21 contains a list and brief description (including type of coverage, limits, deductibles, carriers and effective and termination dates) of all policies of fire and casualty, liability (general, product and other liability), well control, workers' compensation and other forms of insurance and bonds maintained by Terra or any of its Subsidiaries since December 31, 1992 up to and including the Effective Date, and except as disclosed in Schedule 3.21, each of Terra and its Subsidiaries is a named insured or is otherwise covered under each such policy, and each such policy is in full force and effect and will not in any way be affected by or terminate or lapse by reason of the transactions contemplated by this Agreement. Terra has made available to CMS Energy complete and correct copies of all policies listed on Schedule 3.21, together with all riders and amendments thereto, and, to the knowledge of Terra, no insurer under such policies has a basis to void such policies on grounds of non-disclosure on the part of the policyholder or the insured thereunder. To the knowledge of Terra, (i) Schedule 3.21 hereto includes a list of each claim and each notice of claim submitted under any such policy since December 31, 1992; (ii) except for any such claims or notices of claim, the full policy limits (subject to deductibles provided therein) are available and unimpaired under each such policy; and (iii) each of Terra and its Subsidiaries and affiliates has complied with each such policy in all material respects and has not failed to give any notice or present any claim thereunder in a due and timely manner. -28- 39 SECTION 3.22. EMPLOYEE BENEFIT PLANS. (a) Schedule 3.22) sets forth a list of, and, except as set forth in Schedule 3.22, Terra has delivered to CMS Energy copies of, any pension, profit sharing, retirement, disability, health, welfare or other "employee benefit plan", as that term is defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), bonus, stock option or other equity based, incentive, severance, termination, retention or other material employee benefit or compensation plan, policy, arrangement or agreement, whether written or unwritten, (i) under which any employee or former employee of Terra or any of its Subsidiaries or the beneficiary or dependent of any such employee or former employee (collectively, the "Participants") is eligible to participate or derive a benefit and (ii) that is established, maintained or contributed to by Terra or any of its Subsidiaries or any trade or business, whether or not incorporated, which would be treated as a single employer together with Terra and its Subsidiaries under Section 414 of the Code, as of any date of determination (each, an "ERISA Affiliate") or to which Terra or any of its Subsidiaries or any ERISA Affiliate is obligated to contribute (collectively, the "Plans"). Neither Terra nor, to the knowledge of Terra, any such Plan nor any trust created thereunder has engaged in a transaction prohibited by Section 406 of ERISA or Section 4975 of the Code that would result in any material liability to Terra or any of its Subsidiaries. Except as disclosed in Schedule 3.22, current determination letters have been received from the Internal Revenue Service with respect to each Plan which is intended to qualify under Section 401(a) of the Code to the effect that such Plan and the attendant trust are qualified and tax-exempt within the meaning of Sections 401 and 501 of the Code, respectively, and, to the knowledge of Terra, nothing has occurred either before or after the date of such letters that would result in disqualification of such Plans or the loss of such tax-exempt status and a material liability to Terra or any of its Subsidiaries as a result thereof. Each of the Plans has been operated and administered in material compliance with ERISA, the Code and all other applicable laws, regulations and rules, except where any such noncompliance would not result in a material liability to Terra or any of its Subsidiaries. There are no material pending or, to the knowledge of Terra, threatened, claims by or on behalf of any Plan, by or on behalf of any Participant or otherwise involving any Plan (other than routine claims for benefits). Each Plan which is subject to the minimum funding standards of Section 412 of the Code or Section 302 of ERISA satisfies such standards, and no such Plan has incurred an "accumulated funding deficiency," whether or not waived, within the meaning of such Sections of the Code or ERISA. All contributions required to have been made by Terra or any of its Subsidiaries and each ERISA Affiliate to each Plan under the terms of any such Plan or pursuant to applicable law or any applicable collective bargaining agreement have been made within the time prescribed by any such Plan, law or agreement, as the case may be. -29- 40 (b) Except as set forth in Schedule 3.22, neither Terra or any of its Subsidiaries nor any ERISA Affiliate would be liable for any material amount pursuant to Title IV of ERISA if any employee pension benefit plan (within the meaning of section 3(2) of ERISA) subject to such Title (a "Title IV Plan") were to terminate. Except as disclosed on Schedule 3.22 hereto, as of the last day of the 1994 plan year of each Plan which is a Title IV Plan, the "projected benefit obligations" (within the meaning of the Financial Accounting Standards Board Statement No. 87) under each such Plan did not exceed the fair market value of the assets of each such Plan, determined on the basis of actuarial assumptions each of which is reasonable. Neither Terra or any of its Subsidiaries nor any ERISA Affiliate has engaged in a transaction which could cause Terra or any such Subsidiary or such ERISA Affiliate to be subject to liability under section 4069 or 4212 of ERISA. Neither Terra nor any of its Subsidiaries nor any ERISA Affiliate has incurred any material liability under or pursuant to Title I or IV of ERISA or the penalty, excise tax or joint and several liability provisions of the Code or ERISA relating to employee benefit plans for failure to comply with such provisions with respect to the Plans and no event or condition has occurred or exists which could result in any material liability following the Effective Date to CMS Energy under or pursuant to Title I or IV of ERISA or such penalty, excise tax or liability provisions of the Code or ERISA for failure to comply with such provisions with respect to the Plans. (c) No Plan is a "multiemployer plan" or a "multiple employer plan" within the meaning of ERISA or the Code. (d) No Participant is or may become entitled to post-employment welfare benefits of any kind by reason of employment with Terra or any of its Subsidiaries, including, without limitation, death or medical benefits (whether or not insured), other than coverage mandated by section 4980B of the Code or Part 6 of Title I of ERISA. The consummation of the transactions contemplated by this Agreement will not result in an increase in the amount of compensation or benefits or accelerate the vesting or timing of payment of any compensation or benefits payable under any Plan to or in respect of any participant. (e) Terra has delivered, or made available, to CMS Energy with respect to each Plan subject to ERISA, correct and complete copies, where applicable, of (i) all Plan documents and amendments thereto, trust agreements and amendments thereto and insurance and annuity contracts and policies, (ii) the current summary plan description, (iii) the Annual Reports (Form 5500 series) and accompanying schedules, as filed, for the most recently completed three plan years for which such reports have been filed, (iv) the financial statements for the most recently completed three plan years for which such statements have been prepared, (v) the actuarial reports for the most recently begun three plan years for which such reports exist, (vi) the most -30- 41 recent determination letter issued by the Internal Revenue Service and the application submitted with respect to such letter, (vii) PBGC Form 1 for the most recently begun plan year and (viii) all correspondence with the Internal Revenue Service, Department of Labor and Pension Benefit Guaranty Corporation concerning any controversy. Each report described in clause (v) of the preceding sentence accurately describes the funded status of the Plan to which it relates and subsequent to the date of such report there has been no adverse change in the funding status or financial condition of such Plan. SECTION 3.23. EMPLOYEES AND AGENTS AND RELATED AGREEMENTS. (a) Except as set forth in Schedules 3.23(a) or 3.30, neither Terra nor any of its Subsidiaries is a party to or bound by any material oral or written employment agreement, consulting agreement (other than employment or consulting agreements under which the obligations of Terra or such Subsidiary are terminable by Terra or such Subsidiaries without premium or penalty (other than statutory severance or termination benefits) on notice of 30 days or less), deferred compensation agreement, confidentiality agreement or covenant not to compete with any officer, director, stockholder, employee, agent or attorney-in-fact of Terra or any of its Subsidiaries. Terra has delivered to CMS Energy complete and correct copies of each such agreement or instrument. (b) Schedule 3.23(b) contains a list of all independent contractors performing services for Terra or any of its Subsidiaries whose compensation from Terra and all such Subsidiaries in 1994 was in excess of $250,000. SECTION 3.24. EMPLOYEE RELATIONS AND LABOR MATTERS. (a) To the knowledge of Terra, Terra and its Subsidiaries have complied in all material respects with all applicable laws, rules and regulations which relate to wages, hours, discrimination in employment and collective bargaining and are not liable for any material arrearages of wages or any material taxes or penalties for failure to comply with any of the foregoing. Terra believes that the relations of Terra and its Subsidiaries with their employees are good. (b) Except as set forth in Schedule 3.24(b) hereto, neither Terra nor any of its Subsidiaries is a party to any collective bargaining agreement and Terra and its Subsidiaries have complied in all material respects with all such collective bargaining agreements. Neither Terra nor any of its Subsidiaries is a party to or, to the knowledge of Terra, is threatened with, any dispute or controversy with a union or with respect to unionization or collective bargaining involving its employees. To the knowledge of Terra, neither Terra nor any of its Subsidiaries is materially affected by any dispute or controversy with a union or with respect to unionization or collective bargaining involving any of its suppliers or customers. Schedule -31- 42 3.24(b) hereto sets forth a list of any union organizing or election activities involving any non-union employees of Terra or any of its Subsidiaries known to Terra which have occurred since December 31, 1991 or, to the knowledge of Terra, are threatened as of the date hereof. SECTION 3.25. ABSENCE OF CERTAIN BUSINESS PRACTICES. (a) None of Terra or any of its Subsidiaries, any officer, employee or agent of Terra or any of its Subsidiaries or any other person acting on its behalf, has, directly or indirectly, given or agreed to give any gift or similar benefit (other than with respect to bona fide payments for which adequate consideration has been given) to any customer, supplier, governmental employee or other person who is or may be in a position to help or hinder the business of Terra or any of its Subsidiaries (or assist Terra or any of its Subsidiaries in connection with any actual or proposed transaction) (a) which might subject Terra or any of its Subsidiaries to any damage or penalty in any civil, criminal or governmental litigation or proceeding, (b) which, if not continued in the future, would have a Material Adverse Effect on Terra or any of its Subsidiaries or which would subject Terra or any of its Subsidiaries to suit or penalty in any private or governmental litigation or proceeding, (c) for any of the purposes described in section 162(c) of the Code, or (d) for establishment or maintenance of any concealed fund or concealed bank account. (b) Terra and each of its Subsidiaries is in compliance with all applicable provisions of the Foreign Corrupt Practices Act of 1976, as amended. SECTION 3.26. TERRITORIAL RESTRICTIONS. Except as set forth on Schedule 3.26 and except for written agreements or understandings not listed on Schedule 3.26 unless they contain provisions which would have a Material Adverse Effect on Terra, neither Terra nor any of its Subsidiaries is restricted in any material respect by any written agreement or understanding (including area of mutual interest or similar agreements or provisions, but excluding confidentiality agreements or provisions) with third parties from carrying on its business in any geographical area. SECTION 3.27. TRANSACTIONS WITH CERTAIN PERSONS. Except as set forth in Schedule 3.27 hereto, except for the transactions contemplated by this Agreement, and except for transactions relating to the participation of an officer of Terra in oil or gas projects on properties where the transactions are documented in writing and the interests of such officers pursuant to those transactions are not included within Terra's net revenue interests, working interests or overriding royalty interests shown in the Property Schedules, since January 1, 1992 neither Terra nor any of its Subsidiaries has purchased, leased or otherwise acquired any material property or obtained any material -32- 43 services from, or sold, leased or otherwise disposed of any material property or furnished any material services to (except with respect to remuneration for services rendered as a director, officer or employee of Terra or any of its Subsidiaries), in the ordinary course of business or otherwise, (i) any Stockholder, (ii) any affiliate of Terra or any of its Subsidiaries, (iii) any person who is an officer or director of Terra or any of its Subsidiaries or (iv) any associate of any person referred to in clause (i), (ii) or (iii) above. Except as set forth in Schedule 3.27 hereto and except for the transactions contemplated by this Agreement, neither Terra nor any of its Subsidiaries owes any amount in excess of $10,000 to, or has any contract with or commitment to, any Stockholder, director, officer or employee of Terra or any of its Subsidiaries (other than for compensation for current services not yet due and payable and reimbursement of expenses arising in the ordinary course of business) and none of such persons owes any amount in excess of $10,000 to Terra or any of its Subsidiaries. SECTION 3.28. NO FINDER. Neither Terra nor any of its Subsidiaries nor any party acting on the behalf of any of them has paid or become obligated to pay any fee or commission to any broker, finder or intermediary for or on account of the transactions contemplated by this Agreement. SECTION 3.29. ENVIRONMENTAL MATTERS. (a) Except as set forth in Schedule 3.29, to the knowledge of Terra, each of Terra and its Subsidiaries and each operator of Proved Developed Interests or Proved Undeveloped Interests not operated by Terra or its Subsidiaries, with respect to such Interests: (i) is in material compliance with all Applicable Environmental Laws, including those with respect to the use, handling, transportation, discharge, release and/or disposal of any Hazardous Substance; (ii) is not the subject of any investigation, judicial or administrative proceeding, or settlement concerning (A) a Release (as hereinafter defined) or threatened Release of any Hazardous Substance or (B) the violation of any Applicable Environmental Laws; (iii) is not under a duty to file any notice under any Applicable Environmental Laws reporting the violation of any Applicable Environmental Laws or the Release or threatened Release of any Hazardous Substance; (iv) has no contingent liability in connection with any Release or threatened Release of any Hazardous Substance nor has any present Property or past Property been listed or proposed for listing on the National Priorities List ("NPL") pursuant to the federal -33- 44 Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section Section 9601 et seq., ("CERCLA") or on the Comprehensive Environmental Response Compensation Liability Information System List ("CERCLIS") or any similar state or foreign list of sites requiring Remedial Action; (v) has generated, treated, stored, recycled, transported or disposed of any Hazardous Substances in accordance with Applicable Environmental Laws; (vi) has installed underground storage tanks or surface impoundments on its Property only in connection with the exploration for, or production, treating or transportation of, oil, gas or other hydrocarbons and in accordance with Applicable Environmental Laws; (vii) is operating all Wells, pipelines, storage tanks and other storage vessels operated by it in material compliance with all secondary containment, spill prevention and financial assurance requirements of Applicable Environmental Laws; and (viii) has no outstanding Lien filed on its assets in favor of any governmental agency in connection with any Applicable Environmental Laws. (b) To the knowledge of Terra, each of Terra and its Subsidiaries possesses all material federal, state, local and foreign rights, privileges, permits and other material authorizations (including any amendments to any thereof) under Applicable Environmental Laws necessary to own or lease and operate its Interests and other material properties and to conduct its business as now conducted. (c) For purposes of this Section 3.29, the following definitions shall apply: (i) "Applicable Environmental Laws" shall mean any environmental, health, safety statutes, laws, rules, regulations, ordinances and codes, including, without limitation, those imposing liability or standards of care with respect to the handling, transport, treatment or disposal of Hazardous Substances, and any governmental agency orders, guidelines, directives and instructions, whether United States federal or state or any foreign government or political subdivision thereof, applicable to the relevant operation; (ii) "Hazardous Substance" means any hazardous or toxic waste, hazardous substance or any constituent thereof, pollutant, contaminant, including petroleum -34- 45 and its various fractions, natural gas, drilling mud or production wastes, and equipment and Property affected thereby, as defined or regulated under any Applicable Environmental Laws. (iii) "material" means any fines, penalties, natural resource damages, costs or expenses arising under Applicable Environmental Laws that would result in an aggregate liability to Terra and its Subsidiaries of not less than $25,000 per year; (iv) "Property" means any real or personal property, plant, building, facility, structure, well, pipeline, storage tank, equipment or unit, or other asset owned, leased or operated by Terra or any of its Subsidiaries or in which Terra or any of its Subsidiaries has a net revenue interest or working interest (including any surface water thereon or adjacent thereto, and soil or groundwater thereunder whether now or previously or any time); and (v) "Release" means any release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal; leaching or migration into the indoor or outdoor environment or into or out of any Property, including the movement of Hazardous Substances through or in the air, soil, surface water, groundwater or Property. (vi) "Remedial Action" shall mean any action required to (A) clean up, remove, treat or in any other way address Hazardous Substances in the indoor or outdoor environment; (B) prevent the Release or threat of Release or minimize the further Release of any Hazardous Substance; or (C) perform pre-remedial studies and investigations and post remedial care. (d) Notwithstanding anything contained in this Section 3.29 to the contrary, no representation or warranty is made with respect to the items set forth in clauses (A) through (C) of the proviso contained in Section 3.7. SECTION 3.30. CONTRACTS. (a) Except as contemplated hereby or as set forth in Schedule 3.30, any other Schedule under this Article III or, in the case of documents or instruments referred to in clause (ii) below, as are contained in the records and files of Terra or its Subsidiaries located at Terra's offices in Traverse City, Michigan and made fully available for inspection by CMS Energy, neither Terra nor any of its Subsidiaries is a party to or is bound by any written or material oral contract, agreement, commitment or instrument or amendment to any of the foregoing (excluding any of the foregoing which has been fully performed by all parties): -35- 46 (i) for the purchase, sale or lease (except if the scheduled lease payments are less than $10,000 per year) of real property; (ii) relating to oil and gas leases, licenses, permits and similar arrangements (collectively, the "Leases"), Operating Agreements, farm-out and farm-in agreements, service contracts and similar agreements, option agreements, pooling and unitization agreements, production marketing agreements, gas balancing agreements, gas purchase and sales contracts, production sales contracts, processing agreements, permits, licenses and orders, easements, rights of way, pipeline agreements, exploration agreements, participation agreements, oil sales contracts, and all agreements or amendments relating to the same, or assignments of rights or obligations under any such agreements, all relating to the exploration for or the development, production, treating, processing, transportation or marketing of hydrocarbons; (iii) which provides for, or relates to, the guarantee by Terra or any of its Subsidiaries of any obligation of any customers, suppliers, officers, directors, employees or affiliates of Terra or such Subsidiaries; (iv) which provides for, or relates to, the incurrence by Terra or any of its Subsidiaries of debt for borrowed money in excess of $10,000; (v) which provides for, or relates to, any non-competition or confidentiality arrangement with any person, including any current or former director, officer or employee of Terra or any of its Subsidiaries; (vi) for capital expenditures in excess of $25,000 for any single project or related series of projects; (vii) any partnership, joint venture or other similar arrangements or agreements involving a sharing of profits or losses; (viii) which (other than contracts, agreements, commitments and instruments of the nature described in clauses (i) through (vii) above) involve payments or receipts by Terra or any of its Subsidiaries of more than $10,000; and -36- 47 (ix) for any purpose (whether or not made in the ordinary course of the business or otherwise not required to be listed or described in Schedule 3.30) which is material to the business of Terra and its Subsidiaries taken as a whole. (b) To the knowledge of Terra, except as set forth in Schedule 3.30, (i) Terra and its Subsidiaries have fulfilled and performed their obligations in all material respects under each of the leases, contracts and other agreements listed in Schedule 3.30 or referred to in clause (ii) of Section 3.30(a) (collectively, together with other leases, contracts and other agreements listed in other Schedules under this Article III, the "Terra Agreements") and are not, and are not alleged to be, in breach or default in any material respect under, nor is there or is there alleged to be any basis for termination of, any of the Terra Agreements, and (ii) no event has occurred and no condition or state of facts exists which, with the passage of time or the giving of notice or both, would constitute such a default or breach by Terra or any of its Subsidiaries; provided, however, that no representation or warranty is made with respect to the items set forth in clauses (A) through (C) of the proviso to Section 3.7. Copies of each of the Terra Agreements have been made available to CMS Energy by Terra. Except as disclosed on Schedule 3.30, the Terra Agreements (i) have been duly authorized, executed and delivered by Terra or the Subsidiaries of Terra that are a party thereto, and (ii) are in full force and effect and constitute legal, valid, binding and enforceable obligations of Terra or such Subsidiaries and will continue in full force and effect following the consummation of the Merger without the breach of any terms or conditions thereof or the forfeiture or impairment of any rights thereunder and without the consent, approval or act of, or the making of any filing with, any other person or party. (c) Except as set forth in Schedule 3.30, to the knowledge of Terra, each operator of Proved Developed Interests or Proved Undeveloped Interests not operated by Terra or its Subsidiaries fulfilled and performed its respective obligations in all material respects under each of the leases, contracts and other agreements relating to such Interests and is not in breach or default in any material respect under nor is there alleged to be any basis for termination of any of such agreements, and no event has occurred and no condition or state of facts exists which, with the passage of time or the giving of notice or both, would constitute such a default or breach by any such operator; provided, however, that no representation or warranty is made with respect to the items set forth in clauses (A) through (C) of the proviso contained in Section 3.7. (d) Terra has disclosed to its principal co-venturers, Guardian Energy Management Corp. ("Guardian"), MCN Investment -37- 48 Corporation, Destec Fuel Resources, Inc., Chevron U.S.A. Production Company, a division of Chevron U.S.A. Inc. and Enogex Exploration Corporation, or their applicable respective affiliates, (i) Terra's ownership of an interest in certain persons performing services for the projects for which Terra serves as operator and in which any such co-venturers have respective interests, and (ii) payment, reimbursement or revenue sharing arrangements that are in place with respect to the charges assessed against such co-venturers with respect to such services. SECTION 3.31. ADDITIONAL DRILLING OBLIGATIONS. Except as disclosed on Schedule 3.31, except for the 1995 Antrim Program and except for implied covenants under Leases, as to which no violation has heretofore been asserted, no Terra Agreements applicable to the Proved Developed Interests contain provisions to the effect that the drilling of additional wells or other material development operations is a condition to earning, maintaining or continuing to hold all or any portion of such Interests, and no Terra Agreements applicable to Proved Developed Interests, the Proved Undeveloped Interests or the Unproved Interests contain provisions that unconditionally require the drilling of additional wells or other material development operations. SECTION 3.32. GAS IMBALANCES; PRODUCTION RIGHTS AND OBLIGATIONS. (a) Except as disclosed on Schedule 3.32, there are no gas imbalances pertaining to the production and marketing of gas as between Terra or any of its Subsidiaries and any third party. (b) Except as disclosed on Schedule 3.32, neither Terra nor any of its Subsidiaries has received any advance, "take-or-pay," or other similar payments under production sales contracts that entitle the purchasers to "make-up" or otherwise receive deliveries of hydrocarbons produced from the Interests without paying at such time the full contract price therefor that were not made up prior to January 1, 1995. Except as disclosed on Schedule 3.32, each of Terra and its Subsidiaries has paid to each royalty and overriding royalty owner (or such other party in interest as may be entitled to share therein) such owner's or party's full share of any royalty or other payments with respect to advance, "take-or-pay" or similar payments (including, but not limited to, payments relating to any "buy-down" or "buy-out" of any such contract or arrangement), and no such owner has proposed, demanded or threatened to demand that it is entitled to any further payments. SECTION 3.33. WELLS (a) The historical production figures for oil, gas and water, and revenue and cost and expense figures, relating to the Interests and provided by Terra to CMS Energy are, to the knowledge of Terra, accurate and complete in all material respects. -38- 49 (b) To the knowledge of Terra, all oil wells and gas wells and all fresh water wells, injection wells, salt water disposal wells and other wells of every nature and kind, and wells-in-progress to the extent applicable, whether producing or non-producing, located on any of the Leases or which constitute part of the Interests, whether or not operated by Terra (collectively, the "Wells"), have been drilled, completed and operated substantially within the limits permitted by applicable local, state, federal or foreign laws, rules or regulations (excluding Applicable Environmental Laws). To the knowledge of Terra, no Well is subject to material penalties or production restrictions because of any overproduction or any other violation of applicable laws, rules, regulations, permits or judgments, orders or decrees of any court or governmental body or agency which would have a material adverse effect on the operation of any Wells. (c) To the knowledge of Terra, Terra has, with respect to the Interests, complied in all material respects with the Natural Gas Policy Act of 1978, as amended, and the rules and regulations thereunder. SECTION 3.34. CMS ENERGY COMMON SHARES; TERRA COMMON STOCK. (a) Each Stockholder severally represents and warrants that such Stockholder has received (i) the Prospectus of CMS Energy dated June 30, 1995 relating to the CMS Common Shares on July 25, 1995, which is at least twenty (20) Business Days prior to the Effective Date; (ii) the CMS Energy SEC Documents (as hereinafter defined), with the exception of the Form 10-Q of CMS Energy for the second quarter of 1995, on July 25, 1995, (iii) the Form 10-Q of CMS Energy for the second quarter of 1995 on or about August 14, 1995; and (iv) such further information as such Stockholder reasonably requests concerning CMS Energy and its business, results of operations and financial condition. (b) Each Non-Management Stockholder severally represents and warrants that such Non-Management Stockholder has received (i) the financial statements referred to in Section 3.5 (including, without limitation, the Balance Sheet, the Statement of Income, the Unaudited Balance Sheet and the Unaudited Statement of Income) relating to Terra and its consolidated subsidiaries and (ii) such further information as such Non- Management Stockholder reasonably requests concerning Terra, the Terra Business, its properties, results of operations, financial condition and prospects. SECTION 3.35. DISCLOSURE. To the knowledge of Terra, none of the representations and warranties contained herein, the information contained in the Schedules referred to in this Article III or the other information or documents referred to in this Article III as having been furnished or to be furnished or made available to CMS Energy or any of its representatives by Terra, the Stockholders or their representatives pursuant to the -39- 50 terms of this Agreement is false or misleading in any material respect or omits to state a fact necessary to make the statements herein or therein not misleading in any material respect. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF CMS ENERGY As an inducement to Terra, the Stockholders and the Optionholders to enter into this Agreement and to consummate the transactions contemplated hereby, CMS Energy hereby warrants and represents to Terra, the Stockholders and the Optionholders and agrees as follows: SECTION 4.1. ORGANIZATION OF CMS ENERGY. CMS Energy is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Michigan. CMS Energy is duly qualified to transact business as a foreign corporation and is in good standing in each of the jurisdictions in which the ownership or leasing of the properties used in its business or the conduct of its business requires such qualification, other than in such jurisdictions where the failure to be so qualified and in good standing would not have a material adverse effect on the financial condition or results of operation of CMS Energy and its consolidated subsidiaries taken as a whole, and no other jurisdiction has demanded, requested or otherwise indicated that CMS Energy is required so to qualify. CMS Energy has full corporate power and authority to own or lease and operate its properties and to carry on its business as now conducted. SECTION 4.2. AUTHORITY. CMS Energy has full corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement by CMS Energy and the consummation by CMS Energy of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of CMS Energy, subject to the adoption of this Agreement by CMS Energy as the sole stockholder of Sub. This Agreement is, and each other agreement or instrument of CMS Energy contemplated hereby when executed and delivered by CMS Energy will be, the legal, valid and binding obligation of CMS Energy enforceable against CMS Energy in accordance with its respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). Neither the execution and delivery of this Agreement by CMS Energy nor consummation of the transactions contemplated hereby or compliance with or fulfillment of the terms and provisions hereof by CMS Energy will (a) result in a breach of -40- 51 the terms, conditions or provisions of, or constitute a default, an event of default or an event creating rights of acceleration, termination or cancellation or a loss of rights, or result in the creation or imposition of any encumbrance upon any of the material assets of CMS Energy, under (i) the articles of incorporation or the by-laws of CMS Energy, (ii) any material instrument, agreement, mortgage, indenture, deed of trust, permit, concession, grant, franchise, license, judgment, order, award, decree or other restriction to which CMS Energy is a party or any of its material properties is subject or by which it is bound or (iii) any material statute, other law or regulatory provision affecting CMS Energy other than, in the case of clauses (ii) or (iii), any such breaches, defaults, rights or encumbrances that, individually or in the aggregate, would not have a material adverse effect on the financial condition or results of operation of CMS Energy and its consolidated subsidiaries taken as a whole, materially impair the ability of CMS Energy to perform its obligations hereunder or prevent the consummation of any of the transactions contemplated hereby, or (b) require the approval, consent or authorization of, or the making of any declaration, filing or registration with, any third party or any foreign, federal, state or local court, governmental authority or regulatory body, by or on behalf of CMS Energy or Sub, except for the filing of a Form S-4 Registration Statement with the Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "Securities Act") and the declaration of effectiveness thereof by the SEC, and for the applicable requirements of the HSR Act, the filing of a Certificate of Merger in the office of the Corporation and Securities Bureau, Department of Commerce, of the State of Michigan, and appropriate documents with the relevant authorities of other jurisdictions in which Terra is qualified to do business, such filings and consents as may be required under any environmental, health or safety law or regulation pertaining to any notification, disclosure or required approval triggered by the Merger or the transactions contemplated by this Agreement, such consents, approvals, orders, authorizations, registrations, declarations and filings as may be required under the corporation, takeover or blue sky laws of various states, and such other consents, orders, authorizations, registrations, declarations and filings the failure of which to be obtained or made would not, individually or in the aggregate, have a material adverse effect on the financial condition or results of operation of CMS Energy and its consolidated subsidiaries taken as a whole, materially impair the ability of CMS Energy to perform its obligations hereunder or prevent the consummation of any of the transactions contemplated hereby. SECTION 4.3. SHARES OF CMS COMMON STOCK. The CMS Common Shares to be delivered to the Stockholders pursuant to this Agreement will, when issued and delivered in accordance with the terms hereof, be duly and validly issued and outstanding, fully paid and nonassessable shares of CMS Common Stock free and -41- 52 clear of all Liens other than those arising by or through any Stockholder, and the issuance of all shares of CMS Common Stock issuable in connection with the consummation of the transactions contemplated hereby has been duly registered with the SEC on a Form S-4 Registration Statement under the Securities Act (reg. no. 033-60007) of CMS Energy which was declared effective by the SEC on June 30, 1995, and prior to the Effective Time all CMS Common Shares issuable in connection with the consummation of the transactions contemplated hereby shall have been listed, or approved for listing upon notice of issuance, on the NYSE. No stop order suspending the effectiveness of such Registration Statement has been issued by the SEC. SECTION 4.4. CAPITALIZATION. The authorized capital of CMS Energy consists of (i) 250,000,000 shares of common stock, $.01 par value, of which, as of June 30, 1995, 88,174,182 shares were issued and outstanding, 2,829,900 shares were held by CMS Energy, 5,222,648 shares were held by subsidiaries of CMS Energy and 3,188,210 shares were reserved for issuance under certain CMS Energy compensation plans, (ii) 10,000,000 shares of preferred stock, $.01 par value, none of which is issued and outstanding or reserved for any purpose, and (iii) 60,000,000 shares of Class G common stock, no par value, of which, as of August 15, 1995, 7,526,924 shares were issued and outstanding. All of the outstanding shares of CMS Common Stock are duly authorized, validly issued, fully paid and nonassessable. Except for options granted and CMS Common Stock issuable pursuant to certain CMS Energy compensation plans, and as contemplated hereby, there are no options, warrants or other rights to acquire from CMS Energy or agreements or commitments by CMS Energy to issue or sell shares of its capital stock, whether on conversion of other securities or otherwise. None of the issued and outstanding shares of CMS Common Stock has been issued in violation of, or is subject to, any preemptive or subscription rights. There are no stockholder agreements, voting trust agreements or any other similar contracts, agreements, arrangements, commitments, plans or understandings to which CMS Energy is a party restricting or otherwise relating to voting, dividend, ownership or transfer rights with respect to any shares of capital stock of CMS Energy. SECTION 4.5. OPERATIONS SINCE JUNE 30, 1995. Except as set forth in the CMS Energy SEC Documents, since June 30, 1995, there has been: (i) no material adverse change in the financial condition or results of operation of CMS Energy and its consolidated subsidiaries taken as a whole; and (ii) no damage, destruction, loss or claim with respect to, whether or not covered by insurance, or condemnation or other taking of, assets having a material adverse effect on the financial condition or results of operation of CMS Energy and its consolidated subsidiaries taken as a whole. -42- 53 SECTION 4.6. COMPLIANCE WITH LAWS. CMS Energy is in compliance with the provisions of all applicable laws and regulations of the federal, state, local and foreign governments, except to the extent that the failure to comply therewith would not have a material adverse effect on the financial condition or results of operation of CMS Energy and its consolidated subsidiaries taken as a whole. Except as set forth in the CMS Energy SEC Documents, to the knowledge of CMS Energy, there are no proposed orders, judgments, decrees, governmental takings, condemnations or other proceedings, in each case binding upon the business, operations or properties of CMS Energy or any subsidiary thereof, which would have a material adverse effect on the financial condition or results of operation of CMS Energy and its consolidated subsidiaries taken as a whole. SECTION 4.7. SEC DOCUMENTS. CMS Energy has previously delivered to Terra and the Stockholders complete and correct copies of all reports (including annual reports on Form 10-K, current reports on Form 8-K, quarterly reports on Form 10-Q and proxy statements) filed by it with the SEC pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act") since December 31, 1994 (the "CMS Energy SEC Documents"). To the knowledge of CMS Energy, none of the information supplied by CMS Energy and included in the Registration Statement or the Prospectus (as hereinafter defined), as it may be amended or supplemented, or the documents filed under the Exchange Act which are incorporated by reference therein, as of their respective effective, issue or filing dates, does or will, as the case may be, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The Registration Statement and Prospectus comply as to form in all material respects with the applicable provisions of the Securities Act and the rules and regulations promulgated thereunder. SECTION 4.8. NO FINDER. Neither CMS Energy nor any party acting on its behalf has paid or become obligated to pay any fee or any commission to any broker, finder or intermediary for or on account of the transactions contemplated herein. ARTICLE V REPRESENTATIONS AND WARRANTIES OF SUB As an inducement to Terra, the Stockholders and the Optionholders to enter into this Agreement and to consummate the transactions contemplated hereby, CMS Energy and Sub hereby jointly and severally warrant and represent to Terra, the Stockholders and the Optionholders and agree as follows: -43- 54 SECTION 5.1. ORGANIZATION AND STANDING. Sub is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Michigan. Sub was organized solely for the purpose of engaging in the transactions contemplated by this Agreement and has not engaged in any business since it was incorporated which is not in connection with this Agreement and has no material assets or liabilities (other than the rights and obligations referred to in this Agreement). SECTION 5.2. CAPITAL STRUCTURE. The authorized capital stock of Sub consists of 60,000 shares of common stock, no par value, of which 10 shares are validly issued and outstanding, fully paid and nonassessable and are owned by CMS Energy free and clear of all liens, claims and encumbrances. SECTION 5.3. AUTHORITY. Sub has full corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement, the performance by Sub of its obligations hereunder and the consummation of the transactions contemplated hereby have been duly authorized by its Board of Directors and by CMS Energy as its sole stockholder, and, except for the corporate filings required by state law, no other corporate proceedings on the part of Sub are necessary to authorize this Agreement and the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Sub and this Agreement is, and each other agreement or instrument of Sub contemplated hereby when executed and delivered by Sub will be, the legal, valid and binding agreement of Sub enforceable against Sub in accordance with its respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). ARTICLE VI ACTIONS PRIOR TO THE EFFECTIVE DATE CMS Energy, Sub and Terra (and the Stockholders with respect to their individual obligations set forth in Sections 6.2, 6.7, 6.8, and 6.11 and the Optionholders with respect to their individual obligations set forth in Sections 6.2, 6.7, 6.8 and 6.12) covenant and agree to take the following respective actions between the date hereof and the Effective Date: SECTION 6.1. ISSUANCE OF CMS COMMON SHARES. (a) CMS Energy has filed a registration statement on Form S-4 with the SEC containing a prospectus (the "Prospectus") covering the issuance and sale of the CMS Common Shares to be delivered -44- 55 hereunder. CMS Energy will use all reasonable efforts to cause such registration statement (the "Registration Statement") to be effective at least twenty (20) Business Days prior to the Effective Date. CMS Energy shall deliver to the NYSE pursuant to Rule 153 under the Securities Act copies of the Prospectus included in the Registration Statement, as the same may be amended or supplemented from time to time. (b) CMS Energy shall use all reasonable efforts to list the CMS Common Shares to be issued hereunder on the NYSE. SECTION 6.2. ACTION BY STOCKHOLDERS OF TERRA. Terra shall duly call, give notice of, convene and hold a meeting of its stockholders for the purpose of approving the Merger and adopting this Agreement. Terra will, through its Board of Directors, recommend to its stockholders the adoption of this Agreement. In lieu of such meeting, the stockholders of Terra may take the actions described in the preceding sentence by unanimous written consent in accordance with the BCA. Each of the Stockholders and the Optionholders agrees to take all necessary action to cause this Agreement to be so adopted. SECTION 6.3. SUBSEQUENT FINANCIAL STATEMENTS. Prior to the Effective Date, Terra shall deliver to CMS Energy, not later than sixty (60) days after the end of each monthly period beginning after June 30, 1995 and in the form customarily prepared by Terra, the unaudited internal consolidated financial statements of Terra, including an income statement, for the monthly period then ended and for the period from the beginning of the fiscal year to the end of such monthly period. SECTION 6.4. INVESTIGATION OF TERRA. Terra shall afford to the officers, employees and authorized representatives of CMS Energy (including, without limitation, independent public accountants, attorneys, environmental consultants and financial advisors of CMS Energy), reasonable access during normal business hours to the offices, properties, employees and business and financial records (including, without limitation, computer files, retrieval programs and similar documentation) of Terra to the extent CMS Energy shall deem necessary or desirable, and shall furnish to CMS Energy or its authorized representatives such additional information concerning the operations, properties and businesses of Terra as may be reasonably requested in writing, to enable CMS Energy or its authorized representatives to verify the accuracy of the representations and warranties contained in this Agreement, to verify the accuracy of the financial statements referred to in Section 3.5 and to determine whether the conditions set forth in Article VIII have been satisfied. CMS Energy agrees that such investigations shall be conducted in such manner as not to interfere unreasonably with the operation of the business of Terra. Without limiting the foregoing, Terra shall permit CMS Energy, or its representatives, (i) to conduct a site inspection of any of the Interests, the Owned Real Property or -45- 56 the Leased Real Property, to witness and to conduct well tests, and to conduct an environmental audit of any such properties with respect to any environmental, health or safety issues deemed material by CMS Energy, (ii) access to all title information in the possession of Terra or its Subsidiaries, its agents or attorneys, relating to the Interests, and Terra shall use its best efforts to obtain any other such title information from third parties that is reasonably requested by CMS Energy, and (iii) access to all production and operating information in the possession of Terra or its Subsidiaries, its agents or attorneys, relating to the Interests, and Terra shall use its best efforts to obtain any other production and operation information from third parties that is reasonably requested by CMS Energy. SECTION 6.5. LAWSUITS, PROCEEDINGS, ETC. Each of CMS Energy and Terra shall notify the other promptly of any lawsuit, proceeding, claim or investigation that may be threatened, brought, asserted or commenced against any party hereto involving in any way the transactions contemplated by this Agreement or that would have been listed in Schedule 3.17 or the CMS Energy SEC Documents if such lawsuit, proceeding, claim or investigation had arisen prior to the date hereof. SECTION 6.6. CONDUCT OF BUSINESS BY TERRA PENDING THE MERGER. (a) During the period from January 1, 1995 through the Effective Time, except as set forth in any Schedules to this Agreement or as expressly contemplated by this Agreement, Terra has carried on, and will carry on, its business in, and has not entered into, and will not enter into, any material transaction other than in, the ordinary course of business consistent with past practice and, to the extent consistent therewith, has used and will use its reasonable efforts to preserve intact its current business organization, to keep available the services of its current officers and employees and to preserve its relationships with material customers, material suppliers and others having material business dealings with it (except with the written consent of CMS Energy and except as set forth in any Schedules to this Agreement or as contemplated by this Agreement). Without limiting the generality of the foregoing, and except as set forth in any Schedules to this Agreement or as expressly contemplated by this Agreement, Terra and its Subsidiaries has not since January 1, 1995 and shall not, without the prior written consent of CMS Energy, which, as to matters relating to clauses (vii), (viii) or (xii) of this Section 6.6(a), CMS Energy agrees not to unreasonably withhold or delay: (i) (A) declare, set aside or pay any dividends on, or make any other actual, constructive or deemed distributions in respect of, any of its capital stock, or otherwise make any payments to the Stockholders in their capacity as such, (B) split, combine or reclassify any of its capital stock or issue, sell or authorize the issuance of any other securities in -46- 57 respect of, in lieu of or in substitution for shares of its capital stock, or (C) purchase, redeem or otherwise acquire any shares of capital stock of Terra or any other securities thereof or any rights, warrants or options to acquire any such shares or other securities; (ii) issue, deliver, sell, pledge, dispose of or otherwise encumber any shares of its capital stock or other securities (including, without limitation, any rights, warrants or options to acquire any securities), except for issuances of its common stock upon exercise of the Options to acquire an aggregate of up to 2,545,922 shares of Terra Common Stock held by certain Optionholders; (iii) amend its articles of incorporation or by-laws; (iv) acquire or agree to acquire, by merging or consolidating with, or by purchasing a substantial portion of the assets of or equity in, or in any other manner, any business or any corporation, partnership, association or other business organization or division thereof; (v) sell, lease or otherwise dispose of or agree to sell, lease or otherwise dispose of, any of its assets, except for (A) sales of produced hydrocarbons in the ordinary course of business, (B) the sale, lease or other disposition of other assets in the ordinary course of business consistent with past practice, provided that no such sale, lease or disposition has caused or will cause the representations and warranties contained in Section 3.6(a) hereof to be untrue or incorrect in any material respect; (C) dispositions of assets as contemplated by clause (xiii) of this Section 6.6(a), or (D) the sale of the Purchased Assets as contemplated by Section 6.6(b); (vi) incur any indebtedness for borrowed money or guarantee any such indebtedness material to the business or assets of Terra and its Subsidiaries, taken as a whole, except in the ordinary course of business consistent with past practice and except as contemplated hereunder or issue or sell any debt securities or guarantee any debt securities of others, or make any loans, advances or capital contributions to, or investments in, any other person, except the incurrence and/or guarantee of indebtedness to fund working capital; -47- 58 (vii) with respect to its operations other than the 1995 Antrim Program and construction of the New Office, make or incur any new capital expenditure or capital expenditures for any single project or related series of projects which are in excess of $100,000 and, with respect to the New Office (exclusive of furnishings and equipment), make any capital or major expenditures or investments, or incur any obligations for capital or major expenditures or enter into any leases for personal or real property, in excess of $2 million. (viii) pay, discharge or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), other than such payment, discharge or satisfaction in the ordinary course of business consistent with past practice; (ix) alter through merger, liquidation, reorganization, restructuring or in any other fashion its corporate structure; (x) enter into or adopt, or amend, any existing, bonus, incentive, deferred compensation, insurance, medical, hospital, disability or severance plan, agreement or arrangement or enter into or amend any Plan or material employment, consulting or management agreement, other than any such amendment to a Plan that is made to maintain the qualified status of such Plan or its continued compliance with applicable law and except as contemplated hereunder; (xi) make any change in accounting practices or policies applied in the preparation of the financial statements referred to in Section 3.5 except as required by GAAP; (xii) except in the ordinary course of business consistent with past practice, knowingly make any material modifications to any material agreements, understandings, obligations, commitments, indebtedness or other material obligations or enter into any agreement, understanding, obligation or commitment, or incur any indebtedness or obligation, of the type that would have been required to be listed on Schedule 3.30 or that would otherwise would have been included in the Terra Agreements if in existence on the date hereof; provided that no such modifications, agreements or incurrences of indebtedness shall in any event cause the representations and warranties contained in Section 3.6(a) hereof to be untrue or incorrect in any material respect; -48- 59 (xiii) pay or commit to pay any bonus to any director, officer or employee of Terra other than (A) payment to the respective employees entitled thereto of the bonuses contemplated by Section 7.5(b) hereof, (B) payment to employees (other than the Management Stockholders) of bonuses not to exceed $1.0 million in the aggregate; (C) payment of employee bonuses to the Management Stockholders not to exceed $2.4 million in the aggregate; and (D) payment to Boeve and Sterenberg of bonuses not to exceed $881,260 and $302,636, respectively; or (xiv) enter into any other transaction materially affecting the business of Terra, other than in the ordinary course of business consistent with past practice or as expressly contemplated by this Agreement; provided that to the extent that this clause (xiv) constitutes a representation or warranty, no representation or warranty is made with respect to the items set forth in clauses (A) through (C) of the proviso contained in Section 3.7 or with respect to the matters referred to in Sections 3.22 and Section 3.29 (except to the extent specifically set forth therein). (b) Notwithstanding any other provision of this Agreement, prior to the Effective Time, Terra shall sell to one or more limited liability companies to be formed by Lagina, Boeve, Tester and/or Sterenberg ("Newco"), Lagina or Boeve, as designated, to be effected immediately prior to the Effective Time, certain assets, together with all associated liabilities and obligations relating thereto (the "Purchased Assets"), of Terra, all as designated in, and such sales to be effected pursuant to, respective asset purchase agreements with each of Newco, Lagina and Boeve and related transfer instruments and other required documentation substantially in the form of Exhibit B hereto, and Terra may take any action reasonably necessary or appropriate pursuant thereto to effect such sales. (c) Terra shall promptly advise CMS Energy orally and in writing of any change or event having a Material Adverse Effect on Terra and its Subsidiaries taken as a whole. SECTION 6.7. MUTUAL COOPERATION; REASONABLE BEST EFFORTS. The respective parties hereto shall cooperate with each other, and shall use their respective reasonable best efforts, to cause the fulfillment, to the extent within their reasonable control, of the conditions to each party's obligations hereunder which are within such reasonable control and to obtain as promptly as possible, to the extent within their reasonable control, all consents, authorizations, orders or approvals from each and every third party, whether private or governmental, required in connection with the transactions contemplated by this Agreement; provided, however, that the foregoing shall not -49- 60 require CMS Energy or Terra to make any divestiture or consent to any divestiture in order to obtain any waiver, consent or approval. SECTION 6.8. NO PUBLIC ANNOUNCEMENT. None of the parties hereto shall, without the approval of CMS Energy and Terra (which may not be unreasonably withheld), make any press release or other public announcement concerning the transactions contemplated by this Agreement, except as and to the extent that such party shall be so obligated by law, in which case each of CMS Energy and Terra shall be advised and they shall use their reasonable best efforts to cause a mutually agreeable release or announcement to be issued; provided that nothing herein shall be deemed to interfere with the filing by CMS Energy of a Form S-4 with the SEC. SECTION 6.9. NO SOLICITATION. Terra shall not, nor shall it authorize or permit any officer, director or employee of it or its Subsidiaries or affiliates or any investment banker, attorney or other adviser or representative of Terra or any of its Subsidiaries or affiliates to, (i) solicit, initiate, or encourage the submission of, any Acquisition Proposal (as hereinafter defined), (ii) enter into any agreement with respect to any Acquisition Proposal or (iii) except to the extent required by law as advised by counsel in writing, participate in any discussions or negotiations regarding, or furnish to any person any information for the purpose of facilitating the making of, or take any other action to facilitate any inquiries or the making of any proposal that constitutes, or may reasonably be expected to lead to, any Acquisition Proposal. Terra promptly shall advise CMS Energy of any Acquisition Proposal and any inquiries with respect to any Acquisition Proposal, in each case occurring on or after May 27, 1995. For purposes of this Agreement, "Acquisition Proposal" means any proposal for a merger or other business combination involving Terra or any of its Subsidiaries or affiliates or any proposal or offer to acquire in any manner, directly or indirectly, an equity interest in Terra or any of its Subsidiaries or affiliates, any voting securities of Terra or any of its Subsidiaries or affiliates or a substantial portion of the assets of Terra and its Subsidiaries taken as a whole. SECTION 6.10. ANTITRUST LAW COMPLIANCE. CMS Energy and Terra shall file and Terra shall cause to be filed with the Federal Trade Commission and the United States Department of Justice the notification and other information required to be filed with respect to the transactions contemplated hereby under the HSR Act and the rules and regulations promulgated thereunder. CMS Energy warrants that all such filings by it shall be, and Terra warrants that all such filings by it shall be, accurate as of the date filed and in accordance with the requirements of the HSR Act and all such rules and regulations. CMS Energy and Terra agree to make available, or cause to be made available, to the -50- 61 other parties such information as may reasonably be requested relative to the businesses, assets and property of CMS Energy and Terra, as the case may be, as may be required to file any additional information requested by such agencies under the HSR Act and such rules and regulations. SECTION 6.11. TERMINATION OF LAGINA PROXIES. Lagina, Boeve and Sterenberg shall cause all rights of Lagina to receive voting proxies (the "Lagina Proxies") as to shares of Terra Common Stock to be acquired by the Optionholders under the terms of the Options to be terminated, effective at or prior to the Effective Time, and each of Lagina, Boeve and Sterenberg agree that the Lagina Proxies are hereby terminated effective as of the Effective Time. SECTION 6.12. EXERCISE OF OPTIONS. Each of Terra, Tester and the Optionholders agrees that, prior to the Effective Time, the Options to acquire an aggregate of up to 2,545,922 shares of Terra Common Stock from Terra currently held by certain Optionholders shall be exercised in accordance with their terms and the options to acquire an additional 359,379 currently outstanding shares of Terra Common Stock by Boeve from Tester shall be exercised, and each such Optionholder shall, to the extent such Options are subject to Section 83 of the Code and the regulations thereunder, pay to Terra an amount equal to the income tax and employment tax withholding relating thereto assuming a fair market value of each share of Terra Common Stock received upon exercise equal to the fair market value of the consideration to be received therefor in the Merger, such amount to be payable by each such Optionholder in cash; and as of the Effective Time, no shares of Terra Common Stock shall be issuable by Terra pursuant to or shall otherwise be subject to the Options. SECTION 6.13. NEW OFFICE BUILDING. Terra shall proceed with construction of a new office building on the six acre parcel on which such office building ("New Office") is proposed to be constructed in accordance with current plans and budgets; provided that Terra shall immediately and from time to time thereafter confer with CMS Energy regarding the plans, budgets and construction process and any revisions thereto shall be subject to the written consent of CMS Energy; and provided further that Terra will not make any commitment relating to construction costs in excess of $2 million (exclusive of furnishings and equipment) in the aggregate, and will not make any commitment with respect to the $350,000 budgeted for furnishings and equipment, in each case without the prior written approval of CMS Energy, which approval will not be unreasonably withheld or delayed. -51- 62 ARTICLE VII ADDITIONAL COVENANTS AND AGREEMENTS SECTION 7.1. TAX-FREE NATURE; TAX CONSEQUENCES. (a) The Stockholders and CMS Energy intend the Merger to constitute a reorganization described in Section 368(a)(2)(E) of the Code and shall use their best efforts to cooperate in achieving such a tax-free reorganization. Notwithstanding the preceding sentence, the parties to this Agreement will rely solely on their own advisors in determining the tax consequences of the transactions contemplated by this Agreement and each party is not relying, and will not rely, on any representations or assurances of any other party regarding such consequences other than the representations and covenants set forth in writing in this Agreement or any other agreement or certificate delivered in connection herewith. In the event that the Merger does not qualify as such a tax-free reorganization, the validity of the Merger and the transactions contemplated thereby shall nevertheless be binding and final upon the parties to this Agreement. Neither the Stockholders nor CMS Energy will take any tax reporting positions or make any tax elections inconsistent with the characterization of the Merger as a reorganization described in Section 368(a)(2)(E) of the Code except as may be required upon examination (or the result of a prior determination) by the Internal Revenue Service or any other Tax authority. (b) Each Stockholder agrees that he will not sell or transfer more than one percent (1%) of the aggregate outstanding CMS Common Stock within any ninety (90) day period. The Stockholders agree that the aggregate sales and transfers by all Stockholders of CMS Common Stock (i) shall not exceed 25% of the aggregate number of shares of CMS Common Stock issued in the Merger in any ninety (90) day period and (ii) shall not exceed 20,000 shares of CMS Common Stock on any given trading day during the first ninety (90) day period after the Effective Date; provided that transfers by any Stockholder to a spouse in transactions not effected in the public markets shall be excluded from such restrictions so long as such spouse agrees to be bound by the restrictions contained in this Section 7.1(b). (c) CMS Energy hereby warrants and represents to and covenants with Terra and the Stockholders that: (i) neither CMS Energy nor the Surviving Corporation has any plan or intention to take any action following the Merger that could result in the Surviving Corporation's failing to hold at least 90 percent of the fair market value of Terra's net assets and at least 70 percent of the fair market value of Terra's gross assets and at least 90 percent of the fair market value of Sub's net assets and at least 70 -52- 63 percent of the fair market value of Sub's gross assets held immediately prior to the Merger (determined before taking into account the payment of bonuses referred to in Section 6.6(a)(xiii), and any amounts used by Terra or Sub to pay Merger expenses and assuming that the amount received with respect to the Purchased Assets was not less than the fair market value thereof). For purposes of the preceding sentence, the Merger expenses incurred by Terra or Sub shall be deemed not to exceed $500,000, and the loan by the Surviving Corporation of up to $5,000,000 to CMS NOMECO on commercially reasonable terms shall not be deemed to be a transfer or distribution; (ii) the Surviving Corporation has no plan or intention to issue additional shares of its stock that would result in CMS Energy's losing control of the Surviving Corporation within the meaning of Section 368(c) of the Code; (iii) CMS Energy has no plan or intention to reacquire any of the CMS Common Stock issued in the Merger; (iv) CMS Energy has no plan or intention to liquidate the Surviving Corporation, to merge the Surviving Corporation with or into another corporation, to sell or otherwise dispose of the stock of the Surviving Corporation (except for a transfer of stock of the Surviving Corporation by CMS Energy to CMS Enterprises (which is a corporation controlled by CMS Energy within the meaning of Section 368(a)(2)(C) of the Code and Treas. Reg. Section 1.368-2(j)(4)) in exchange for the stock and debt obligations of Enterprises, which is to be followed by a transfer of the stock of the Surviving Corporation by Enterprises to CMS NOMECO (which is a corporation controlled by Enterprises within the meaning of Section 368(c) of the Code) in exchange for the stock and debt obligation of CMS NOMECO); (v) Sub will have no liabilities assumed by the Surviving Corporation and will not transfer to the Surviving Corporation any assets subject to liabilities in the Merger; (vi) following the Merger, the Surviving Corporation will continue Terra's historic business or use a significant portion of Terra's historic business assets in a business; -53- 64 (vii) CMS Energy and Sub will pay their respective expenses, if any, incurred in connection with the Merger; (viii) there is no intercorporate indebtedness between CMS Energy and Terra or between Sub and Terra that will be settled at a discount following the Merger; (ix) CMS Energy is not an investment company as defined in Sections 368(a)(2)(F)(iii) and (iv) of the Code; (x) the total cash consideration that will be paid in the Merger in lieu of issuing fractional shares of CMS Common Stock will not exceed one percent of the total fair market value of the CMS Common Stock (as of the Effective Time) to be issued in the Merger; (xi) prior to acquisitions contemplated by this Agreement, CMS Energy did not own during the past five years any shares of the stock of Terra; and (xii) prior to the Merger, CMS Energy will be in control of Sub within the meaning of Section 368(c) of the Code. SECTION 7.2. TAXES. (a) Liability for Taxes. (i) Except as shown as a liability or reserve on the Balance Sheet, the Management Stockholders shall be liable for and indemnify CMS Energy, the Surviving Corporation and their subsidiaries (collectively, the "Tax Indemnitees") for all Taxes imposed on any Tax Indemnitee (or for which a Tax Indemnitee may otherwise be liable) arising from the assets or activities of Terra and its Subsidiaries for any taxable year or period of Terra or its Subsidiaries that ends on or before the Balance Sheet Date and, with respect to any taxable year or period beginning before and ending after the Balance Sheet Date, the portion of such taxable year ending on and including the Balance Sheet Date. (ii) The Tax Indemnitees shall be liable for and indemnify the Management Stockholders for the Taxes of Terra and its Subsidiaries for any taxable year or period that begins after the Balance Sheet Date and, with respect to any taxable year or period beginning before and ending after the Balance Sheet Date, the -54- 65 portion of such taxable year or period beginning after the Balance Sheet Date. Notwithstanding the preceding sentence, the Management Stockholders shall be liable for and indemnify the Tax Indemnitees for 63% of any Taxes imposed on any Tax Indemnitee (or for which a Tax Indemnitee may otherwise be liable) arising from the disallowance of a deduction for the payments described in Section 6.6(a)(xiii)(B), (C) or (D) or Section 7.5(b). For purposes of the preceding sentence, no effect shall be given to the use of credits allowable pursuant to Sections 29 or 53 of the Code. (iii) For purposes of paragraphs (a)(i) and (a)(ii), whenever it is necessary to determine the liability for Taxes of Terra and its Subsidiaries for a portion of a taxable year or period that begins before and ends after the Balance Sheet Date, the determination of the Taxes of Terra and its Subsidiaries for the portion of the year or period ending on, and the portion of the year or period beginning after, the Balance Sheet Date shall be determined by assuming that Terra and its Subsidiaries had a taxable year or period which ended at the close of the Balance Sheet Date, except that exemptions, allowances or deductions that are calculated on an annual basis, such as the deduction for depreciation, shall be apportioned on a daily basis. (iv) The Management Stockholders shall be liable for all transfer, sales, use or similar Taxes arising from the transactions contemplated by Section 6.6(b). (v) Within twenty (20) days after the execution of this Agreement, the Stockholders shall deliver or cause to be delivered to CMS Energy or its designee true and complete copies of: (A) all income Tax Returns of Terra and its Subsidiaries requested by CMS Energy or its Subsidiaries; (B) any other Tax Returns of Terra and its Subsidiaries requested by CMS Energy or its Subsidiaries, as may be relevant to Terra and its Subsidiaries and their assets and operations; and (C) any work papers or other supporting data requested by CMS Energy or its subsidiaries relating to "income taxes payable" or similar line item reflected in the Statement of Income or Balance Sheet relating to Tax Returns made available pursuant to (A) or (B), or relating to Tax Returns referred to in (A) or (B) not yet filed, to the extent copies of such Tax Returns, work papers or other data are in existence and in the possession of Terra at the time of such request. (vi) Surviving Corporation and Subsidiaries shall be entitled to retain any refund or credit of Taxes -55- 66 (and interest thereon) attributable to a carryback of losses, credits or other similar items from a taxable year or period that ends after the Balance Sheet Date to a taxable year or period that ends on or before the Balance Sheet Date. (b) Tax Returns. Terra shall file when due (after taking into account all extensions properly obtained) all Tax Returns that are required to be filed by or with respect to Terra and its Subsidiaries on or before the Effective Date and shall remit or cause to be remitted any Taxes shown to be due on such Tax Returns, and the Surviving Corporation shall file when due (after taking into account all extensions properly obtained) all Tax Returns that are required to be filed by Terra and its Subsidiaries after the Effective Date and shall remit or cause to be remitted any Taxes due in respect of such Tax Returns. All Tax Returns which Terra is required to file in accordance with this paragraph (b) shall be prepared and filed in a manner consistent with past practice and, on such Tax Returns, no position shall be taken or method adopted that is inconsistent with positions taken or methods used in preparing and filing similar Tax Returns in prior periods except for changes required by law or changes in facts. (c) Contest Provisions. CMS Energy or one of its subsidiaries shall notify the Stockholders in writing upon receipt by any Tax Indemnitee of notice of any pending or threatened federal, state, local or foreign Tax audit or assessment (including any revenue agent report or notice of proposed adjustment) which may materially affect the Tax liabilities of Terra or its Subsidiaries for which the Stockholders would be required to indemnify the Tax Indemnitees pursuant to Section 10.1 or this Section 7.2, provided, that failure to comply with this provision shall not affect the Tax Indemnitees' right to indemnification hereunder except to the extent that such omission results in a failure of actual knowledge of the Stockholders and the Stockholders are damaged as a result of such failure of actual knowledge. The Stockholders shall have the sole right to represent the interests of Terra and its Subsidiaries in any Tax audit or administrative or court proceeding relating to taxable periods ending on or before the Balance Sheet Date, and to employ counsel of their choice at their expense, provided that the Tax Indemnitees (and their tax counsel) may, at their own expense, be present at and participate in any such audit or proceeding. Notwithstanding the foregoing, the Stockholders shall not be entitled to settle, either administratively or after the commencement of litigation, any claim for Taxes which would adversely affect the liability for Taxes of the Tax Indemnitees for any period after the Balance Sheet Date to any extent (including, but not limited to, the imposition of income Tax deficiencies, the reduction of asset basis or cost adjustments, -56- 67 the lengthening of any amortization or depreciation periods, the denial of amortization, depreciation or depletion deductions, or the reduction of loss or credit carryforwards) without the prior written consent of the Tax Indemnitees. Such consent shall not be necessary to the extent that the Stockholders have indemnified the Tax Indemnitees in a manner reasonably acceptable to the Tax Indemnitees against the effects of any such settlement. Except to the extent that CMS Energy reasonably concludes that the presence of a representative of Management Stockholders will interfere with the contest of matters unrelated to the matters which are subject to indemnification by the Management Stockholders under this Section 7.2 ("Indemnified Tax Items"), a representative of the Management Stockholders (and their tax counsel) may, at their own expense, be present at and participate in any audit or proceeding relating to Indemnified Tax Items. CMS Energy shall not settle any dispute with respect to Indemnified Tax Items without the consent of the Management Stockholders, except that CMS may settle any such dispute without the consent of the Management Stockholders if it agrees to relieve the Management Stockholders of their indemnification obligation hereunder with respect to such transaction. (d) Assistance and Cooperation. After the Effective Date, each of the Stockholders and the Tax Indemnitees shall: (i) agree to timely sign and deliver such certificates or forms as may be necessary or appropriate to establish an exemption from (or otherwise reduce), or make a report with respect to, Taxes described in paragraph (a)(iv) of this Section 7.2; (ii) assist (and cause their respective affiliates to assist) the other parties in preparing any Tax Returns which such other parties are responsible for preparing and filing in accordance with paragraph (b) of this Section 7.2; (iii) cooperate fully in preparing for any audits of, or disputes with taxing authorities regarding, any Tax Returns of Terra and its Subsidiaries; (iv) make available to the other parties and to any taxing authority as reasonably requested all information, records, and documents relating to Taxes of Terra and its Subsidiaries; (v) provide timely notice to the other parties in writing of any pending or threatened Tax audits or assessments of Terra and its Subsidiaries for taxable periods for which the other may have a liability under this Section 7.2; and -57- 68 (vi) furnish the other with copies of all correspondence received from any taxing authority in connection with any Tax audit or information request with respect to any such taxable period. (e) Adjustment to Purchase Price. Any payment by the Stockholders under this Section 7.2 shall be considered an adjustment to the consideration paid in connection with the Merger and to the extent that it cannot be so characterized for Tax purposes, shall be made on an After-Tax Basis. (For purposes of this Agreement, the term After-Tax Basis means, with respect to any amount which is to be paid hereunder on an "After-Tax Basis," an amount which, after subtraction of the amount of all federal, state, local and foreign Taxes payable by the recipient thereof as a result of the receipt or accrual of such payment, and after taking into account (i) the increase in federal, state, local and foreign Taxes (including estimated Taxes) payable by such recipient for all affected taxable years as a result of the event or occurrence giving rise to such payment, and (ii) the reduction in federal, state, local and foreign Taxes (including estimated Taxes) payable by the recipient for all applicable taxable years, including the present value (using the applicable Federal rate as the discount rate) of all reasonably anticipated future tax reduction for taxable years ending on or after the end of the taxable year in which such payment is made, shall be sufficient as of the date of payment to compensate the recipient for such event or occurrence giving rise to such payment. (f) Survival of Obligations; No Duplication of Indemnities. Notwithstanding Article X, the obligations of the Stockholders and the Tax Indemnitees set forth in this Section 7.2 shall be unconditional and absolute and shall remain in effect until 30 days after the expiration of the applicable statute of limitations, except that if the Internal Revenue Service shall not, prior to the third anniversary of the Effective Date, have proposed (including in a revenue agent report or notice of proposed assessment) to disallow any portion of the bonus described in Section 6.6(a)(xiii)(B) or (C) (including through a reduction in a net operating loss carryover or carryback), the indemnity provided in the second sentence of Section 7.2(a)(ii) shall terminate on said third anniversary. To the extent that the provisions of this Section 7.2 conflict with the provisions of Article X, the provisions of this Section 7.2 shall control and no double payment shall be made with respect to any breach or alleged breach of any representation or warranty contained in or pertaining to the matters which are the subject of Section 3.8, it being understood that if there is a breach or alleged breach of any representation or warranty contained in or pertaining to the matters which were not taken into account in determining the Aggregate Consideration and such breach or alleged breach does not give rise to an indemnification obligation under Section 7.2, such breach or alleged breach shall give rise to an indemnification obligation under Article X. -58- 69 (g) Tax Reporting of Certain Payments. Each of the Management Stockholders agrees to report the bonus paid pursuant to Section 6.6(a)(xiii)(C) as ordinary income for federal, state and local income tax purposes in the year paid. Each of the Optionholders agrees to report the excess of the fair market value of the Terra Common Stock acquired upon the exercise of his Option (determined as provided in Section 6.12) over the amount, if any, paid upon such exercise as ordinary income for federal, state and local income tax purposes in the year of such exercise. SECTION 7.3. RESALE OF CMS COMMON SHARES. Each Shareholder who is an affiliate of Terra within the meaning of Rule 145 under the Securities Act agrees that any resale of CMS Common Shares to be received hereunder shall be made in compliance with Rule 145(d) under the Securities Act. SECTION 7.4. ACCESS TO DATA. For a period of one year after the Effective Date, Terra shall allow Lagina and/or Boeve, or a company controlled by them, access to and the right to copy (at their expense), Terra data as follows: (i) Niagaran base maps; (ii) Dundee base maps; (iii) Michigan State production data; (iv) seismic data over leaseholds located west of a north-south line demarcated by the west boundary line of Kalkaska County, Michigan; and (v) plat maps, pipeline maps, and lease ownership and data maps. SECTION 7.5. TERRA EMPLOYEES. (a) CMS Energy agrees with respect to each employee of Terra as of the Effective Date other than Messrs. Lagina, Boeve, Tester and Sterenberg that from and after the Effective Date either (i) CMS Energy shall cause Terra to continue to employ such employee for at least one year after the Effective Date at a level of compensation and benefits (considered in the aggregate for each such employee) not materially less favorable to the employee than Terra was obligated to provide such employee as of January 1, 1995 or (ii) in the event that the employment of any such employee is terminated by Terra within one year after the Effective Date for any reason other than death, disability or cause, CMS Energy shall cause Terra to pay such employee severance pay equal to the difference between (A) one year's base salary for such employee as of January 1, 1995 and (B) the actual amount of base salary paid to such employee for the period commencing on the Effective Date and ending on the effective date of such employee's termination. -59- 70 (b) CMS Energy agrees that it will cause and permit Terra to pay as a bonus to employees of Terra as of both the Effective Date and the date which is thirty (30) days after the Effective Date an aggregate amount of $803,000, such amount to be paid on or prior to December 31, 1995 and allocated to such employees as Terra and Newco shall mutually determine; provided, that CMS Energy and Terra shall have the right to make the payment of any such bonus to any or all such employees conditional upon such employees executing a release of any interest such employees might otherwise have or have had in the properties and associated rights known as the Terra employee override pool. ARTICLE VIII CONDITIONS PRECEDENT TO OBLIGATIONS OF CMS ENERGY AND SUB The obligations of CMS Energy and Sub under this Agreement to cause the Merger and the other transactions contemplated to be consummated at the Effective Time to be consummated, and the obligation of CMS Energy to complete the transactions contemplated by the Exchange Closing, shall, at the option of CMS Energy, be subject to the satisfaction, on or prior to the Effective Date, of the following conditions: SECTION 8.1. NO MISREPRESENTATION OR BREACH OF COVENANTS AND WARRANTIES. There shall have been no material breach by Terra, any Stockholder or any Optionholder in the performance of their respective covenants and agreements herein to be performed at or prior to the Effective Time; subject to Section 10.7, none of the representations and warranties of Terra, any Stockholder or any Optionholder that is qualified as to materiality shall be untrue or incorrect in any respect on the Effective Date and on the Effective Date such representations and warranties shall be true and correct as though made on the Effective Date except for changes therein specifically permitted by this Agreement or resulting from any transaction expressly consented to in writing by CMS Energy, permitted by Section 6.6 or entered into in connection with the consummation of the Merger and the other transactions contemplated hereby; subject to Section 10.7, none of the representations or warranties that is not so qualified shall be untrue or incorrect in any material respect on the Effective Date and on the Effective Date such representations and warranties shall be true and correct in all material respects as though made on the Effective Date except for changes therein specifically permitted by this Agreement or resulting from any transaction expressly consented to in writing by CMS Energy, permitted by Section 6.6 or entered into in connection with the consummation of the Merger and the other transactions contemplated hereby; and there shall have been delivered to CMS Energy and Sub a certificate or certificates to the foregoing effect in substantially the form of Exhibit C -60- 71 hereto, dated the Effective Date, signed on behalf of Terra by its Chairman and its President and signed by each of the Stockholders and the Optionholders (limited in the case of the respective Management and Non-Management Stockholders and Optionholders to the respective covenants and agreements, and representation and warranties, of such persons contained herein). SECTION 8.2. NO MATERIAL ADVERSE EFFECT. Between the date hereof and the Effective Date, there shall have been no Material Adverse Effect on Terra and its Subsidiaries, taken as a whole; and there shall have been delivered to CMS Energy and Sub a certificate or certificates to such effect, dated the Effective Date, signed on behalf of Terra and its Subsidiaries by its President and its Chief Financial Officer and signed by each of the Management Stockholders. SECTION 8.3. OPINIONS OF COUNSEL FOR TERRA, THE STOCKHOLDERS AND THE OPTIONHOLDERS. CMS Energy and Sub shall have received from (i) Mika, Meyers, Beckett & Jones, P.L.C., counsel for Terra and the Management Stockholders and the Optionholders, opinions, dated the Effective Date, in form and substance reasonably satisfactory to CMS Energy, substantially to the effect set forth in Exhibits D-1 and D-2, respectively, and (ii) Law, Weathers & Richardson, P.C., counsel to the Non-Management Stockholders, an opinion, dated the Effective Date, in form and substance reasonably satisfactory to CMS Energy, substantially to the effect set forth in Exhibit E. SECTION 8.4. NO INJUNCTIONS OR RESTRAINTS. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Merger or any other material transaction contemplated by this Agreement shall be in effect; provided, however, that each of the parties shall have used its reasonable best efforts to prevent the entry of any such injunction or other order and to appeal as promptly as possible any injunction or other order that may be entered. SECTION 8.5. NECESSARY GOVERNMENTAL APPROVALS. The parties shall have received all governmental and regulatory approvals and actions reasonably necessary to consummate the transactions contemplated hereby, which are either required to be obtained prior to the Effective Date by applicable law or regulation (including, without limitation, the expiration or early termination of the applicable waiting period under the HSR Act) or are necessary to prevent a Material Adverse Effect on Terra and its Subsidiaries taken as a whole. SECTION 8.6. NECESSARY CONSENTS. Terra shall have received consents, in form and substance reasonably satisfactory to CMS Energy, to the transactions contemplated hereby from the other parties to all material contracts, leases, agreements and -61- 72 permits to which Terra or any of its Subsidiaries is a party or by which any of them are affected and which require such consent prior to the Merger and are necessary to prevent a Material Adverse Effect with respect to Terra and its Subsidiaries taken as a whole. SECTION 8.7. EFFECTIVENESS OF REGISTRATION STATEMENT. The Registration Statement, including the Prospectus, shall be effective under the Securities Act, no stop order suspending the effectiveness of the Registration Statement shall have been entered by the SEC and no material or fundamental change shall have occurred which requires disclosure thereof to be included in an amendment to the Registration Statement or a supplement to the Prospectus included in the Registration Statement, or to be incorporated by reference therein from a filing under the Exchange Act, prior to any further use of such Registration Statement and Prospectus under the Securities Act and the rules and regulations thereunder; and further, a sufficient time period shall have lapsed following the delivery of the Prospectus to the Stockholders as is necessary to comply with the requirements of Form S-4. SECTION 8.8. LISTING OF CMS COMMON SHARES. The CMS Common Shares to be issued hereunder shall have been approved for listing upon notice of issuance by the NYSE. SECTION 8.9. STOCKHOLDER ACTION. This Agreement shall have been unanimously adopted by all holders of Terra Common Stock. The payments of the bonuses described in Section 6.6(a)(xiii) to the Management Stockholders and the payments described in the Covenant Not to Compete shall have been approved in a separate vote or written consent of all such holders who do not receive such payments. SECTION 8.10. DISSENTING STOCKHOLDERS. No stockholder of Terra shall have delivered a written demand for appraisal of its Terra Common Stock pursuant to Section 762 of the BCA; and there shall have been delivered to CMS Energy and Sub a certificate or certificates to such effect, dated the Effective Date, signed on behalf of Terra by its Chairman and its President. SECTION 8.11. DUE DILIGENCE. CMS Energy shall have conducted a legal, business and financial due diligence review of Terra and its Subsidiaries the results of which shall have been reasonably satisfactory to CMS Energy. SECTION 8.12. RESIGNATIONS OF TERRA DIRECTORS AND OFFICERS. CMS Energy shall have received the resignation of each of the directors and officers of Terra and the directors and officers of each of its Subsidiaries which are serving at the request or for the convenience of Terra. -62- 73 SECTION 8.13. OPTIONS TO ACQUIRE TERRA COMMON STOCK. All outstanding Options shall have been exercised, including, without limitation, the exercise of Options to acquire an aggregate of 2,545,922 shares of Terra Common Stock from Terra currently held by certain Optionholders in accordance with their terms. SECTION 8.14. CMS NOMECO LENDERS' CONSENT. The lenders to CMS NOMECO Oil & Gas Co., a Michigan corporation ("CMS NOMECO") and a wholly-owned subsidiary of CMS Enterprises Company, a Michigan corporation ("Enterprises") and a subsidiary of CMS Energy, under the financing arrangements of CMS NOMECO, shall have consented to the Merger and the transfer to CMS NOMECO of the capital stock of the Surviving Corporation and shall have waived any breach under such arrangement as a result of the indebtedness, guarantees or similar obligations of the Surviving Corporation, in each case on terms and conditions satisfactory to CMS Energy. SECTION 8.15. PAYMENTS FOR PURCHASED ASSETS. Terra shall have received payments for the Purchased Assets as contemplated by Section 6.6(b). SECTION 8.16. GUARANTEE. Each of Lagina, Boeve, Tester and Sterenberg shall have executed a guarantee in favor of Terra substantially in the form of Exhibit F in the amount of $3,600,000 relating to net revenue to be received by Terra from and after January 1, 1995 for gas sales under its gas sale agreements after taking into account its purchases of gas under its gas purchase agreements. SECTION 8.17. CONSULTING AGREEMENT. Terra and Newco shall have entered into a consulting agreement substantially in the form of Exhibit G. SECTION 8.18. EMPLOYMENT AGREEMENTS. Terra and each of Tester and Sterenberg shall have entered into employment agreements substantially in the respective forms of Exhibits H and I. SECTION 8.19. 1995 ANTRIM PROGRAM. Terra shall have obtained written commitments from co-venturers for the funding, drilling and operation by Terra of the wells included in the 1995 Antrim Program consisting of at least 282 wells and related pipelines and other facilities (the "1995 Antrim Program"). SECTION 8.20. MINIMUM AGGREGATE CONSIDERATION. The amount calculated pursuant to clause (A) less clause (B) of Section 2.2(a) shall be at least $59,000,000. SECTION 8.21. INSURANCE. Terra and its Subsidiaries shall have maintained policies of fire and casualty, liability (general, product and other liability), well control, workers' -63- 74 compensation and other forms of insurance and bonds in such amounts and against such risks and losses as are usually insured against in the same general areas by companies engaged in the same or a similar business. SECTION 8.22. GAS DELIVERY. Terra shall have reached an agreement with Michigan Consolidated Gas Company to the effect that any gas delivered into the Gaylord-Alpena pipeline system shall be redelivered to the Taggart interconnect at an aggregate cost not to exceed 12 cents per Mcf. SECTION 8.23. COVENANT NOT TO COMPETE. Each of the Management Stockholders shall have entered into the Covenant Not to Compete with CMS Energy substantially in the form of Exhibit J (the "Covenant Not to Compete"). ARTICLE IX CONDITIONS PRECEDENT TO OBLIGATIONS OF TERRA AND THE STOCKHOLDERS The obligations of Terra, the Stockholders and the Optionholders under this Agreement to cause the Merger and the other transactions contemplated to be consummated at the Effective Time, and the obligation of Lagina to complete the transactions contemplated by the Exchange Closing, shall, at the option of Terra, the Stockholders, and the Optionholders, be subject to the satisfaction, on or prior to the Effective Date, of the following conditions: SECTION 9.1. NO MISREPRESENTATION OR BREACH OF COVENANTS AND WARRANTIES. There shall have been no material breach by CMS Energy or Sub in the performance of any of their respective covenants and agreements herein to be performed at or prior to the Effective Time; subject to Section 10.7, none of the representations and warranties of CMS Energy or Sub that is qualified as to materiality shall be untrue or incorrect in any respect on the Effective Date and on the Effective Date such representations and warranties shall be true and correct as though made on the Effective Date except for changes therein specifically permitted by this Agreement or resulting from any transactions expressly consented to in writing by Terra, permitted by Section 6.6 or entered into in connection with the consummation of the Merger and the other transactions contemplated hereby; subject to Section 10.7, none of the representations or warranties that are not so qualified shall be untrue or incorrect in any material respect on the Effective Date and on the Effective Date such representations and warranties shall be true and correct in all material respects as though made on the Effective Date except for changes therein specifically permitted by this Agreement or resulting from any transactions expressly consented to in writing by Terra, permitted by Sections -64- 75 6.6 or entered into in connection with the consummation of the Merger and the other transactions contemplated hereby; and there shall have been delivered to Terra and the Stockholders a certificate or certificates to the foregoing effect substantially in the form of Exhibit K hereto, dated the Effective Date, signed on behalf of CMS Energy and Sub by their respective Presidents or Vice Presidents. SECTION 9.2. NO MATERIAL ADVERSE EFFECT. Between the date hereof and the Effective Date, there shall have been no Material Adverse Effect on CMS Energy and its Subsidiaries taken as a whole; and there shall have been delivered to Terra and the Stockholders a certificate or certificates to such effect, dated the Effective Date, signed on behalf of CMS Energy by its President or a Vice President. SECTION 9.3. NO INJUNCTIONS OR RESTRAINTS. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Merger or any other material transaction contemplated by this Agreement shall be in effect; provided, however, that each of the parties shall have used its reasonable best efforts to prevent the entry of any such injunction or other order and to appeal as promptly as possible any injunction or other order that may be entered. SECTION 9.4. OPINIONS OF COUNSEL FOR CMS ENERGY AND SUB AND COUNSEL FOR THE STOCKHOLDERS. Terra and the Stockholders shall have received from Denise Sturdy, Esq., Assistant General Counsel for CMS Energy and Sub, an opinion, dated the Effective Date, in form and substance satisfactory to Terra, the Stockholders, substantially to the effect set forth in Exhibit L, and the Stockholders shall have received from Dykema Gossett, special tax counsel for Terra, an opinion, dated the Effective Date, as to certain tax matters, substantially to the effect set forth in Exhibit M. SECTION 9.5. NECESSARY GOVERNMENTAL APPROVALS. The parties shall have received all governmental and regulatory approvals and actions reasonably necessary to consummate the transactions contemplated hereby, which are either required to be obtained prior to the Effective Date by applicable law or regulation (including, without limitation, the expiration or early termination of the applicable waiting period under the HSR Act) or are necessary to prevent a Material Adverse Effect on CMS Energy and its Subsidiaries taken as a whole. SECTION 9.6. EFFECTIVENESS OF REGISTRATION STATEMENT. The Registration Statement, including the Prospectus, shall be effective under the Securities Act, no stop order suspending the effectiveness of the Registration Statement shall have been entered by the SEC and no material or fundamental change shall -65- 76 have occurred which requires disclosure thereof to be included in an amendment to such Registration Statement or a supplement to the Prospectus included in such Registration Statement, or to be incorporated by reference therein from a filing under the Exchange Act, prior to any further use of such Registration Statement and Prospectus under the Securities Act and the rules and regulations thereunder. SECTION 9.7. LISTING OF CMS COMMON SHARES. The CMS Common Shares to be issued hereunder shall have been approved for listing upon notice of issuance by the NYSE. SECTION 9.8. STOCKHOLDER ACTION. This Agreement shall have been unanimously adopted by all holders of Terra Common Stock. The payments of the bonuses described in Section 6.6(a)(xiii) and the payments described in the Covenant Not to Compete shall have been approved in a separate vote or written consent of all such holders who do not receive such payments. By the execution hereof, all such holders agree to give their timely consent and agree to execute such consents and other documents necessary to evidence such approvals. SECTION 9.9. NECESSARY CONSENTS. Terra shall have received consents, in form and substance reasonably satisfactory to Terra, to the transactions contemplated hereby from the other parties to all material contracts, leases, agreements and permits to which Terra or any of its Subsidiaries is a party or by which any of them are affected and which require such consent prior to the Merger and are necessary to prevent a Material Adverse Effect with respect to Terra and its Subsidiaries taken as whole. SECTION 9.10. MINIMUM AGGREGATE CONSIDERATION. The amount calculated pursuant to clause (A) less clause (B) of Section 2.2(a) shall be at least $59,000,000. SECTION 9.11. COVENANT NOT TO COMPETE. CMS Energy shall have entered into the Covenant Not to Compete with each of the Management Stockholders substantially in the form of Exhibit J. ARTICLE X INDEMNIFICATION; SURVIVAL SECTION 10.1. INDEMNIFICATION BY THE STOCKHOLDERS AND OPTIONHOLDERS. From and after the Effective Time, each of the Stockholders and Optionholders shall jointly and severally indemnify and hold harmless CMS Energy, the Surviving Corporation and their subsidiaries, affiliates and successors from and against any and all (a) liabilities, losses, costs or damages ("Loss") and (b) reasonable attorneys', consultants' and accountants' fees and expenses, court costs and all other reason- -66- 77 able out-of-pocket expenses ("Expense") incurred by CMS Energy, the Surviving Corporation and their subsidiaries, affiliates and successors in connection with or arising from (i) any breach or failure to perform by any Stockholder or Optionholder of any of his respective agreements, covenants or obligations in this Agreement or any agreement entered into in connection with the transactions contemplated hereby, (ii) any breach or failure to perform by Terra of any of its agreements, covenants or obligations in this Agreement or any agreement entered into in connection with the transactions contemplated hereby, in each case to be performed or complied with prior to or at the Effective Time, and (iii) any breach of any warranty or the inaccuracy of any representation of Terra or any Stockholder or Optionholder contained in this Agreement, as updated in accordance with Section 10.7 hereof, or in any certificate delivered by or on behalf of Terra or any Stockholder or Optionholder pursuant hereto; provided, however, that no Stockholder or Optionholder shall have any obligation to indemnify and hold harmless any indemnified party with respect to any Loss or Expense arising from any breach of a warranty, or inaccuracy of a representation, of any other Stockholder contained in Section 3.3(b) or 3.4(b) or 3.34 or of any other Optionholder contained in Section 3.3(b) or 3.4(b); and provided, further, however, that no Non-Management Stockholder shall have any obligation to indemnify and hold harmless any indemnified party except with respect to (A) any Loss or Expense arising from any breach or failure to perform by such Non-Management Stockholder of any of his respective agreements, covenants or obligations in this Agreement or any agreement entered into in connection with the transactions contemplated hereby, or (B) any breach of a warranty, or inaccuracy of a representation, of such Non-Management Stockholder contained in Section 3.3(b) (first sentence), 3.4(b) or 3.34; and provided, further, however, that, it is understood that if there is a breach or alleged breach of any representation or warranty contained in or pertaining to the matters which were not taken into account in determining the Aggregate Consideration and such breach or alleged breach does not give rise to an indemnification obligation under Section 7.2, such breach or alleged breach shall give rise to an indemnification obligation under this Article X; and provided, further, however, that the Stockholders shall be required to indemnify and hold harmless CMS Energy and the Surviving Corporation under this Section 10.1 with respect to the breach or inaccuracy of any representations or warranties as hereinabove provided only to the extent that the aggregate amount of Loss and Expense referred to above in this Section 10.1 relating thereto exceeds $300,000, except for any Loss or Expense incurred in connection with or arising from any breach or inaccuracy of the representations and warranties contained in Section 3.3 and 3.4, as to which no such limitation shall apply; and provided further, that the obligation of the Stockholders to indemnify and hold harmless CMS Energy and the Surviving Corporation pursuant to this Section 10.1 shall be limited to the aggregate payment by -67- 78 such Stockholders of an amount equal to $30,000,000, except for any Loss or Expense incurred in connection with or arising from any breach or inaccuracy of the representations and warranties contained in Sections 3.3 and 3.4, as to which such limitation shall be the Aggregate Consideration. SECTION 10.2. INDEMNIFICATION BY CMS ENERGY AND THE SURVIVING CORPORATION. From and after the Effective Time, CMS Energy and the Surviving Corporation shall jointly and severally indemnify and hold harmless the Stockholders and Optionholders and their affiliates and successors from and against any and all Loss and Expense incurred by the Stockholders or Optionholders and their affiliates and successors in connection with or arising from (a) any breach or failure to perform by CMS Energy or the Surviving Corporation of any of their respective agreements, covenants or obligations in this Agreement or any agreement entered into in connection with the transactions contemplated hereby or thereby, and (b) any breach of any warranty or the inaccuracy of any representation of CMS Energy or Sub contained in this Agreement, as updated in accordance with Section 10.7 hereof, or in any certificate delivered by or on behalf of CMS Energy or Sub pursuant hereto or thereto, provided, however, that the obligation of CMS Energy and the Surviving Corporation to indemnify and hold harmless pursuant to this Section 10.2 shall be limited to the aggregate payment by CMS Energy and/or the Surviving Corporation of an amount equal to $30,000,000, except for any Loss or Expense in connection with or arising from any breach or inaccuracy of the representations and warranties contained in Sections 4.1, 4.2, 4.3 and 4.4, as to which such limitation shall be the Aggregate Consideration. SECTION 10.3. NOTICE OF CLAIMS. If CMS Energy (with respect to Section 10.1) or a Stockholder or Optionholder (with respect to Section 10.2) believes that any of the persons entitled to indemnification under this Article X has suffered or incurred any Loss or incurred any Expense, CMS Energy or the Stockholder or Optionholder, as the case may be, shall so notify the others promptly in writing describing such Loss or Expense, the amount thereof, if known, and the method of computation of such Loss or Expense, all with reasonable particularity and containing a reference to the provisions of this Agreement or any certificate delivered pursuant hereto in respect of which such Loss or Expense shall have occurred; provided, however, that the omission by such indemnified party to give notice as provided herein shall relieve the indemnifying party of its indemnification obligation under this Article X only if such omission results in a failure of actual notice to the indemnifying party and then only to the extent that such indemnifying party is materially damaged as a result of such failure to give notice. If any action at law or suit in equity is instituted by or against a third party with respect to which any of the persons entitled to indemnification under this Article X intends to claim any liability or expense as Loss or Expense -68- 79 under this Article X, any such person shall promptly notify the indemnifying party of such action or suit as specified in this Section 10.3 and Section 10.4. Any party entitled to indemnification hereunder shall use reasonable efforts to minimize any Loss or Expense for which indemnification is sought hereunder. SECTION 10.4. THIRD PARTY CLAIMS. In the event of any claim for indemnification hereunder resulting from or in connection with any claim or legal proceeding by a third party, the indemnified persons shall give such notice thereof to the indemnifying party not later than twenty (20) days prior to the time any response to the asserted claim is required, if possible, and in any event within fifteen (15) days following the date such indemnified person has actual knowledge thereof; provided, however, that the omission by such indemnified party to give notice as provided herein shall relieve the indemnifying party of its indemnification obligation under this Article X only if such omission results in a failure of actual notice to the indemnifying party and then only to the extent that such indemnifying party is materially damaged as a result of such failure to give notice. In the event of any such claim for indemnification resulting from or in connection with a claim or legal proceeding by a third party, the indemnifying party may, at its sole cost and expense, assume the defense thereof; provided, however, that counsel for the indemnifying party, who shall conduct the defense of such claim or legal proceeding, shall be reasonably satisfactory to the indemnified party; and provided, further, that if the defendants in any such actions include both the indemnified persons and the indemnifying party and the indemnified persons shall have reasonably concluded that there may be legal defenses or rights available to them which have not been waived and are in actual or potential conflict with those available to the indemnifying party, the indemnified persons shall have the right to select one law firm reasonably acceptable to the indemnifying party to act as separate counsel, on behalf of such indemnified persons, at the expense of the indemnifying party. Subject to the second proviso of the immediately preceding sentence, if an indemnifying party assumes the defense of any such claim or legal proceeding, such indemnifying party shall not consent to entry of any judgment, or enter into any settlement, that (a) is not subject to full indemnification hereunder, (b) provides for injunctive or other non-monetary relief affecting the indemnified persons or (c) does not include as an unconditional term thereof the giving by each claimant or plaintiff to such indemnified persons of a release from all liability with respect to such claim or legal proceeding, without the prior written consent of the indemnified persons (which consent, in the case of clauses (b) and (c), shall not be unreasonably withheld); provided, however, that subject to the second proviso of the immediately preceding sentence, the indemnified persons may, at their own expense, participate in any such proceeding with the counsel of their choice without any right of -69- 80 control thereof. So long as the indemnifying party is in good faith defending such claim or proceeding, the indemnified persons shall not compromise or settle such claim or proceeding without the prior written consent of the indemnifying party, which consent shall not be unreasonably withheld. If the indemnifying party does not assume the defense of any such claim or litigation in accordance with the terms hereof, the indemnified persons may defend against such claim or litigation in such manner as they may deem appropriate, including, without limitation, settling such claim or litigation (after giving prior written notice of the same to the indemnifying party and obtaining the prior written consent of the indemnifying party, which consent shall not be unreasonably withheld) on such terms as the indemnified persons may deem appropriate, and the indemnifying party will promptly indemnify the indemnified persons in accordance with the provisions of this Section 10.4. SECTION 10.5. EXCLUSIVE REMEDY. In the event the Merger is consummated, any claim against either the Stockholders or Optionholders or CMS Energy or the Surviving Corporation for any breach of this Agreement or in connection with any of the transactions contemplated hereby (other than a claim for breach of Section 7.2 or of any agreements or instruments entered into in connection herewith) shall, to the extent permitted by law, be made solely pursuant to this Article X. SECTION 10.6. SURVIVAL OF OBLIGATIONS. All representations, warranties, covenants and obligations contained in this Agreement shall survive the consummation of the transactions contemplated by this Agreement; provided, however, that the representations and warranties in Articles III and IV shall terminate on the third anniversary of the Effective Date except for the representations and warranties contained in Sections 3.3 and 3.4, which shall survive without termination, and the representations contained in Sections 3.8, 3.22 and 7.1(c), which shall survive until expiration of the applicable statute of limitations; and provided, further, that if any claim under this Article X for Loss or Expense in respect of any representations and warranties is asserted in writing with reasonable specificity prior to the expiration of the applicable period set forth above, the obligations of the indemnifying party with respect to such claim shall not be affected by the expiration of such period. SECTION 10.7. UPDATE OF THE REPRESENTATIONS AND WARRANTIES. (a) Not later than five days prior to the Effective Date, Terra, any Stockholder or any Optionholder may deliver a written notice to CMS Energy setting forth any and all facts, conditions, occurrences, changes and other matters, in each case, occurring after the date hereof, that has caused or may cause the representations and warranties of the Stockholders and/or the Optionholders contained herein (including the Schedules hereto) not to be true and correct in all respects (in the case of any -70- 81 representation or warranty containing any materiality qualification) or in all material respects (in the case of any representation or warranty without any materiality qualification). In the event that any of such facts, conditions, occurrences, changes and other matters shall have caused or will cause, on or prior to the Effective Date, any such representation or warranty not to be true and correct in all respects (in the case of any representation or warranty containing any materiality qualification) or in all material respects (in the case of any representation or warranty without any materiality qualification) on the Effective Date with the same effect as though made on the Effective Date, CMS Energy may elect to terminate this Agreement pursuant to Section 11.1(d) based on such facts, conditions, occurrences, changes or other matters. If CMS Energy shall nevertheless proceed to consummate the Merger, such facts, conditions, occurrences, changes and other matters so disclosed as to each such representation or warranty of the Stockholders and/or the Optionholders contained herein (including the Schedules) shall be deemed to constitute an exception to such representation or warranty reflecting the facts, conditions, occurrences, changes and other matters so disclosed with the same effect as if such exception had been made in such representation or warranty as of the date hereof in this Agreement to the extent, but only to the extent, of such disclosure. (b) Not later than five days prior to the Effective Date, CMS Energy may deliver a written notice to Terra, the Stockholders and the Optionholders setting forth any and all facts, conditions, occurrences, changes and other matters, in each case, occurring after the date hereof, that has caused or may cause the representations and warranties of CMS Energy contained herein (including the Schedules hereto) not to be true and correct in all respects (in the case of any representation or warranty containing any materiality qualification) or in all material respects (in the case of any representation or warranty without any materiality qualification). In the event that any of such facts, conditions, occurrences, changes and other matters shall have caused or will cause, on or prior to the Effective Date, any such representation or warranty not to be true and correct in all respects (in the case of any representation or warranty containing any materiality qualification) or in all material respects (in the case of any representation or warranty without any materiality qualification) on the Effective Date with the same effect as though made on the Effective Date, Terra may elect to terminate this Agreement pursuant to Section 11.1(e) based on such facts, conditions, occurrences, changes or other matters. If Terra shall nevertheless proceed to consummate the Merger, such facts, conditions, occurrences, changes or other matters so disclosed as to each such representation or warranty of CMS Energy contained herein (including the Schedules) shall be deemed to constitute an exception to such representation or warranty reflecting the facts, conditions, occurrences, changes and other matters so disclosed with the same effect as if such -71- 82 exception had been made in such representation or warranty as of the date hereof in this Agreement to the extent, but only to the extent, of such disclosure. SECTION 10.8. ADJUSTMENT TO CONSIDERATION. All indemnity payments made pursuant to this Article X shall be considered as adjustments to the consideration paid in connection with the Merger and to the extent that it cannot be so characterized for Tax purposes, shall be made on an After-Tax Basis. ARTICLE XI TERMINATION SECTION 11.1. TERMINATION. Anything contained in this Agreement to the contrary notwithstanding, this Agreement may be terminated at any time prior to the Effective Time: (a) by the mutual consent of CMS Energy and Terra; (b) by CMS Energy upon any material breach by Terra or any Stockholder or any Optionholder of any of the covenants contained in Article VI or VII or Section 12.1; (c) by Terra upon any material breach by CMS Energy or Sub of any of the covenants contained in Article VI or VII or Section 12.1; (d) by CMS Energy if any of the conditions specified in Article VIII has not been met in all material respects or waived by CMS Energy at such time as such condition can no longer be satisfied; (e) by Terra if any of the conditions specified in Article IX has not been met in all material respects or waived by Terra and the Stockholders, as applicable, at such time as such condition can no longer be satisfied; or (f) by CMS Energy or Terra if the Merger shall not have been consummated on or before September 30, 1995. SECTION 11.2. EFFECT OF TERMINATION. In the event that this Agreement shall be terminated pursuant to Section 11.1, all further obligations of the parties under this Agreement (other than Sections 12.1, 12.2 and 12.10) shall terminate without further liability of any party to the others; provided, however, that nothing herein shall relieve any party from -72- 83 liability for its breach of this Agreement during its effectiveness, provided that anything contained in this Agreement to the contrary notwithstanding, in the event of such termination after the Exchange Closing Time, Lagina shall be deemed to have continuously held the Lagina Shares and any action taken pursuant to Section 2.3 hereof or in connection with the Exchange Closing shall be deemed null and void, ab initio, and shall be reversed effective as of the Exchange Closing Time. ARTICLE XII OTHER PROVISIONS SECTION 12.1. CONFIDENTIAL NATURE OF INFORMATION. Each party agrees that it will treat in strict confidence all documents, materials and other information which it obtains regarding the other parties during the course of the negotiations leading to the consummation of the transactions provided for herein and the preparation of this Agreement; and if for any reason whatsoever the transactions contemplated by this Agreement shall not be consummated, each party shall return to each other party all copies of non-public documents and materials which have been furnished or acquired in connection therewith and shall not use or disseminate such documents, materials or other information for any purpose whatsoever. SECTION 12.2. FEES AND EXPENSES. Except as otherwise provided in this Section 12.2, each of the parties hereto shall bear its own costs and expenses (including, without limitation, fees and disbursements of its counsel, accountants and other financial, legal, accounting or other advisors), incurred by it or its affiliates in connection with the preparation, negotiation, execution, delivery and performance of this Agreement and each of the other documents and instruments executed in connection with or contemplated by this Agreement, and the consummation of the transactions contemplated hereby and thereby (collectively "Acquisition Expenses"); provided, however, that Acquisition Expenses incurred or paid by Terra in excess of $100,000 shall be included in Section 2.2(a)(B)(III). SECTION 12.3. NOTICES. All notices and other communications under this Agreement shall be in writing and shall be deemed given when delivered personally or by overnight mail, or four days after being mailed (by registered mail, return receipt requested) to a party at the following address (or to such other address as such party may have specified by notice given to the other parties pursuant to this provision): -73- 84 If to CMS Energy to: CMS Energy Corporation Fairlane Plaza South, Suite 1100 330 Town Center Drive Dearborn, Michigan 48126 Attention: Corporate Secretary with a copy to: Sidley & Austin One First National Plaza Chicago, Illinois 60603 Attention: Andrew H. Shaw, Esq. and CMS NOMECO Oil & Gas Co. One Jackson Square P.O. Box 1150 Jackson, Michigan 49201 Attention: William H. Stephens III If to Sub to: CMS Merging Corporation c/o CMS Energy Corporation Fairlane Plaza South, Suite 1100 330 Town Center Drive Dearborn, Michigan 48126 Attention: Corporate Secretary with a copy to: Sidley & Austin One First National Plaza Chicago, Illinois 60603 Attention: Andrew H. Shaw, Esq. If to Terra to: Terra Energy Ltd. 1503 North Garfield Road Traverse City, Michigan 49686 Attention: President with a copy to: Mika, Meyers, Beckett & Jones, P.L.C. Suite 700 200 Ottawa Avenue, N.W. Grand Rapids, Michigan 49503 Attention: Michael C. Haines, Esq. -74- 85 If to the Management Stockholders to the Stockholders' Representative as follows: Martin G. Lagina c/o Terra Energy Ltd. 1503 North Garfield Road Traverse City, Michigan 49686 with a copy to: Mika, Meyers, Beckett & Jones, P.L.C. Suite 700 200 Ottawa Avenue, N.W. Grand Rapids, Michigan 49503 Attention: Michael C. Haines, Esq. If to the Optionholders to the Stockholders' Representative as follows: Martin G. Lagina c/o Terra Energy Ltd. 1503 North Garfield Road Traverse City, Michigan 49686 with a copy to: Mika, Meyers, Beckett & Jones, P.L.C. Suite 700 200 Ottawa Avenue, N.W. Grand Rapids, Michigan 49503 Attention: Michael C. Haines, Esq. If to the Non-Management Stockholders to: Dr. Leonard J. Scherock 1465 S. Lincoln Road Mt. Pleasant, Michigan 48858 with a copy to: Law, Weathers & Richardson 800 Bridgewater Place 333 Bridge Street, N.W. Grand Rapids, MI 49503 Attention: John P. Schneider, Esq. SECTION 12.4. DEFINITIONS. For purposes of this Agreement: (a) an "affiliate" of any person means another person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such first person; -75- 86 (b) an "associate" of any person means (i) a corporation or organization of which such person is an officer or partner or is, directly or indirectly, the beneficial owner of 10 percent or more of a class of equity securities, (ii) any trust or other estate in which such person has substantial beneficial interest or as to which such person serves as trustee or in a similar capacity and (iii) any relative or spouse of such person, or any relative of such spouse, who has the same home as such person or who is a director or officer of the person or any of its parents or subsidiaries. (c) "Good and Defensible Title" shall mean that title, free and clear of all liens, encumbrances, burdens and claims, which entitles Terra or any Subsidiary, as the case may be, (i) with respect to Interests constituting pipelines, gathering lines, and treating and processing facilities, to the interest in all capital assets and revenues, subject to associated costs and expenses, not less than the undivided interests as held on June 1, 1995, and (ii) with respect to Proved Developed Interests, Proved Undeveloped Interests and Unproved Interests, to receive, during the remaining life of the Leases or other mineral rights or interests constituting an Interest, not less than the undivided interests set forth in the Property Schedules as net revenue interests, both before and after payout, and overriding royalty interests in all hydrocarbons produced, saved and marketed from such Leases or other mineral rights and all Wells located thereon through the plugging, abandonment and salvage of such Wells, without suspense or any indemnity other than normal division order warranty of title, and which obligates Terra or any Subsidiary, as the case may be, to bear a portion of the costs and expenses relating to the maintenance and development of, and operations relating to, the Leases or such other mineral rights or interests and all Wells located thereon through the plugging, abandonment and salvage of such Wells not greater than the working interests for such Leases or such other mineral rights or interests, both before and after payout, set forth in the Property Schedules, except in each case (A) to the extent that the Property Schedules indicate that such net revenue interest, overriding royalty interest and/or working interest is subject to change; (B) for penalty provisions and contribution requirements customarily provided for in operating and other similar agreements; (C) for increases in the working interest where there has been a corresponding and proportionate increase in the net revenue interest and (D) for Permitted Encumbrances. -76- 87 (d) "Interests" shall mean and include all of the following: (i) Proved Developed Oil and Gas Interests. The interests and rights of Terra and its Subsidiaries in and to oil and gas Leases, overriding royalty interests, mineral interests, and other interests of Terra and its Subsidiaries in producing oil and gas reserves that are expected to be recovered through existing Wells which are producing oil or gas or which are capable of production (whether or not in actual production) with existing equipment and operating methods, including, without limitation, the interests and rights of Terra and its Subsidiaries in and to the Leases, units, Wells, and other properties described as proved developed in the Property Schedules (collectively, the "Proved Developed Interests"); (ii) Proved Undeveloped Oil and Gas Interests. The interests and rights of Terra and its Subsidiaries in and to oil and gas Leases, overriding royalty interests, mineral interests, and other interests of Terra and its Subsidiaries in oil and gas reserves that are considered to be proven in accordance with commonly accepted petroleum engineering standards and are expected to be recovered from Wells that have not been drilled, completed or equipped to a point that would permit production of commercial quantities of oil and gas, including, without limitation, the interests and rights of Terra and its Subsidiaries in and to the Leases, units, Wells, and other properties described as proved undeveloped in the Property Schedules (collectively, the "Proved Undeveloped Interests"); (iii) Unproved Oil and Gas Interests. The interests and rights of Terra and its Subsidiaries in and to oil and gas Leases, overriding royalty interests, mineral interests, and other interests of Terra and its Subsidiaries in oil and gas properties that are neither Proved Developed Interests or Proved Undeveloped Interests, including, without limitation, the interests and rights of Terra and its Subsidiaries in and to the properties described as unproved in the -77- 88 Property Schedules (collectively, the "Unproved Interests"); (iv) Personal Property and Equipment. All of the personal property, equipment, inventory and supplies of Terra and its Subsidiaries of whatsoever kind or nature, wheresoever situated; (v) Agreements. All of the interests of Terra and its Subsidiaries in the entire estates and other rights created by all equipment, real estate and other leases, licenses, permits, employment contracts, pipeline easements or rights of way, and other Terra Agreements, together with all of the property and rights incident thereto; (vi) Geological and Geophysical Data. All right, title or interest of Terra and its Subsidiaries in or to any seismic, geological and geophysical data, of whatsoever kind or nature, wheresoever situated, together with all interpretive analyses; and (vii) Remaining Assets. All other assets and properties now or as of the Effective Time owned by Terra or any of its Subsidiaries, whether real or personal, tangible or intangible, wheresoever situated. (e) the "knowledge of Terra" or "the best knowledge of Terra" or "known to Terra" or "knowingly" means the knowledge of any of the Management Stockholders or the Optionholders or of any of the persons listed in Schedule 12.4(e), which Schedule includes all persons other than the Management Stockholders and the Optionholders who are directors of Terra or the chief executive officers of Terra or any of its Subsidiaries or officers of Terra. (f) "Material Adverse Change or Effect" means any change or effect (or any development that, insofar as can reasonably be foreseen, would result in any change or effect) that is materially adverse to the business, properties, operations, assets, condition (financial or otherwise) or results of operations of the applicable person or persons; (g) "Permitted Encumbrances" shall mean (i) landowners' royalties, overriding royalties, production payments, net profits interests, and other similar burdens on production in amounts that do not operate to -78- 89 reduce the net revenue interest of any Interest, either before or after payout, to less than the net revenue interest, either before or after payout, set forth on the Property Schedules for such Interest or to increase the working interest of any Interest, either before or after payout, to greater than the working interest set forth on the Property Schedules for such Interest, either before or after payout; (ii) division orders that do not operate to reduce the net revenue interest of any Interest, either before or after payout, to less than the net revenue interest, either before or after payout, set forth in the Property Schedules for such Interest and that do not increase the working interest of any Interest, either before or after payout, to greater than the working interest, either before or after payout, set forth in the Property Schedules for such Interest without a corresponding and proportionate increase in the net revenue interest; (iii) operating agreements containing terms and conditions customary in the industry for the area in which the affected Interest is located and that do not operate to reduce the net revenue interest of any Interest, either before or after payout, to less than the net revenue interest, either before or after payout, set forth in the Property Schedules for such Interest and that do not increase the working interest of any Interest, either before or after payout, to greater than the working interest, either before or after payout, set forth in the Property Schedules for such Interest without a corresponding and proportionate increase in the net revenue interest; (iv) unitization, pooling, communitization and spacing agreements and orders that contain terms and conditions customary in the industry for the area in which the affected Interest is located and that do not operate to reduce the net revenue interest, either before or after payout, of any Interest to less than the net revenue interest, either before or after payout, set forth in the Property Schedules for such Interest and that do not increase the working interest, either before or after payout, of any Interest to greater than the working interest, either before or after payout, for such Interest set forth in the Property Schedules for such Interest without a corresponding and proportionate increase in the net revenue interest; (v) farmout and farmin agreements that contain terms and conditions that are customary in the industry for the area in which the affected Interest is located and that have been taken into consideration in setting forth the net revenue interest and working interest, both before and after payout, set forth in the Property Schedules; (vi) mechanic's, materialmen's, warehousemen's and carrier's liens and other similar liens arising by operation of -79- 90 law or statute in the ordinary course of the Terra Business for obligations that are not delinquent or that will be paid or discharged in the ordinary course of the Terra Business; (vii) liens arising under joint operating agreements for obligations that are not delinquent or that will be paid or discharged in the ordinary course of business; (viii) liens for taxes, assessments and similar governmental charges incurred or payable by Terra or its Subsidiaries that are not delinquent or, if delinquent, that are being contested in good faith by Terra and for which adequate reserves have been established by Terra and reflected on the Statement of Income and/or the Balance Sheet (and taken into account in determining Terra Consolidated Net Working Capital); (ix) liens and encumbrances securing Terra Debt; (x) liens and encumbrances that shall be released at or prior to the Effective Time at no cost to Terra; (xi) easements, servitudes, rights-of-way and other similar rights relating to the Leases that do not materially interfere with the use of the Leases; (xii) rights reserved to or vested in any municipality or to governmental, statutory or public authority to control or regulate any of the Interest in any manner, and all applicable laws, rules and orders of governmental authorities; and (xiii) any defect (but not a deficiency) in title or related lien, encumbrance, encroachment or burden of a type expected to be encountered, and which is customarily acceptable to prudent oil and gas operators, in the area in which the Interest is located. (h) "person" means an individual, corporation, partnership, association, trust, unincorporated organization or other entity. (i) "Property Schedules" shall mean the Schedules of Proved Developed Interests, Proved Undeveloped Interests and Unproved Interests attached hereto as Schedule 12.4(i). (j) "Title Defect" shall mean any defect or deficiency in title, lien, encumbrance, encroachment, burden, circumstance, that renders title to any Interest identified in the Property Schedules or any portion thereof, or any Interest relating to oil and gas gathering and transportation activities, less than or deficient from Good and Defensible Title. SECTION 12.5. PARTIAL INVALIDITY. In case any one or more of the provisions contained herein shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Agreement, but this Agreement shall be -80- 91 construed as if such invalid, illegal or unenforceable provision or provisions had never been contained herein unless the deletion of such provision or provisions would result in such a material change as to cause completion of the transactions contemplated hereby to be unreasonable. SECTION 12.6. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective permitted successors or assigns. SECTION 12.7. EXECUTION IN COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be considered an original counterpart, and shall become a binding agreement when CMS Energy, Sub, Terra, the Stockholders and the Optionholders shall have each executed one counterpart. SECTION 12.8. TITLES AND HEADINGS. Titles and headings to Articles and Sections herein are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. SECTION 12.9. SCHEDULES AND EXHIBITS. The Schedules and Exhibits referred to in this Agreement shall be construed with and as an integral part of this Agreement to the same extent as if the same had been set forth verbatim herein. SECTION 12.10. ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS; ASSIGNMENT. This Agreement, including the Schedules and Exhibits, contains the entire understanding of the parties hereto with regard to the subject matter contained herein except that the confidentiality agreement, dated March 29, 1995 (the "Confidentiality Agreement"), between Terra and CMS NOMECO shall remain in full force in effect pursuant to the terms thereof after the execution of this Agreement; provided, however, that the Confidentiality Agreement shall terminate as of the Effective Time. The parties hereto, by mutual agreement in writing, may amend, modify and supplement this Agreement. The failure of any party hereto to enforce at any time any provision of this Agreement shall not be construed to be a waiver of such provision, nor in any way to affect the validity of this Agreement or any part hereof or the right of such party thereafter to enforce each and every such provision. No waiver of any breach of this Agreement shall be held to constitute a waiver of any other or subsequent breach. Except as expressly provided herein, the rights and obligations of the parties under this Agreement may not be assigned or transferred by any party hereto without the prior written consent of the other parties hereto. -81- 92 SECTION 12.11. INDEPENDENT INVESTIGATION AND SCOPE OF REPRESENTATIONS. CMS Energy acknowledges and confirms that (i) in making the decision to enter into this Agreement and to consummate the transactions contemplated hereby, it has relied on the representations, warranties, covenants and agreements of Terra, the Stockholders and the Optionholders set forth in the Agreement (including the exhibits and schedules) and on no other representations, warranties, covenants and agreements, and (ii) it has made its own independent investigation, analysis and evaluation of Terra's properties (including CMS Energy's own estimate and appraisal of the extent and value of Terra's hydrocarbon reserves, pipelines and contracts), business, financial condition, operations and prospects. Except to the extent expressly set forth in this Agreement, including Section 3.35, no party makes any representation or warranty whatsoever. Without limiting the generality of the foregoing, except as set forth in Article III, NO REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR IMPLIED, ARE MADE WITH RESPECT TO THE MERCHANTABILITY, USEFULNESS OR SUITABILITY FOR ANY PURPOSE OF ANY PERSONAL PROPERTY OF Terra OR ITS SUBSIDIARIES, INCLUDING, WITHOUT LIMITATION (a) ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, (b) ANY RIGHTS OF CMS ENERGY UNDER APPROPRIATE STATUTES TO CLAIM DIMINUTION OF CONSIDERATION AND (c) ANY CLAIM FOR DAMAGES BECAUSE OF DEFECTS, WHETHER KNOWN OR UNKNOWN, WITH RESPECT TO SUCH PERSONAL PROPERTY, IT BEING UNDERSTOOD THAT, EXCEPT AS AFORESAID, SUCH PERSONAL PROPERTY SHALL EXIST IN ITS PRESENT CONDITION AND STATE OF REPAIR, "AS IS" AND "WHERE IS," WITH ALL FAULTS. SECTION 12.12. GOVERNING LAW; ARBITRATION. (a) This Agreement, and the application or interpretation thereof, shall be governed by its terms and by the internal laws of the State of Michigan, without regard to principles of conflicts of laws as applied in the State of Michigan or any other jurisdiction which, if applied, would result in the application of any laws other than the internal laws of the State of Michigan. (b) Any action, dispute, claim or controversy arising under, out of, in connection with, or relating to, this Agreement, or any amendment hereof, or the breach hereof (a "Dispute"), shall be determined and settled by binding arbitration in Lansing, Michigan, by a person or persons mutually agreed upon, or in the event of a disagreement as to the selection of the arbitrator or arbitrators, in accordance with the rules of the American Arbitration Association ("AAA"). Any award rendered therein shall specify the findings of fact of the arbitrator or arbitrators and the reasons for such award, with the reference to and reliance on relevant law. Any such award shall be final and binding on each and all of the parties thereto and their personal representatives, and judgment may be entered thereon in any court having jurisdiction thereof. Any party may, by summary proceedings, bring an action in court to compel arbitration of any Dispute. Any arbitration hereunder shall be -82- 93 administered by the AAA in accordance with the terms of this Section 12.12, the Commercial Arbitration Rules of the AAA, and, to the maximum extent applicable, the Federal Arbitration Act. To the maximum extent practicable, an arbitration proceeding hereunder shall be concluded by December 31, 1995. Each party agrees to keep all Disputes and arbitration proceedings strictly confidential except for disclosure of information required by applicable law. SECTION 12.13. NO THIRD-PARTY BENEFICIARIES. Except for Section 7.2 and Article X, nothing in this Agreement, expressed or implied, is intended or shall be construed to confer upon any person other than the parties hereto and successors and assigns permitted by Section 12.6 any right, remedy or claim under or by reason of this Agreement (but excluding for the purpose of this provision the Exhibits and Schedules). SECTION 12.14. INTERPRETATION. Except as expressly stated otherwise, any reference herein to "he," "she" or "it", or comparable terms, with respect to any person or entity shall mean and include references to any or all of the same as applicable whether or not so stated and regardless of gender, and any reference herein to "this Agreement," "herein," "hereof," "hereby," "hereunder," or comparable terms shall mean and include references to this Agreement and the Schedules and Exhibits to this Agreement. -83- 94 IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the parties hereto or by their duly authorized officers, all as of the date first above written. CMS ENERGY CORPORATION, a Michigan corporation By: /s/ Preston D. Hopper Name: Preston D. Hopper Title: Vice President CMS MERGING CORPORATION, a Michigan corporation By: /s/ William H. Stephens III Name: William H. Stephens III Title: Vice President and General Counsel TERRA ENERGY LTD., a Michigan corporation By: /s/ Martin G. Lagina Name: Martin G. Lagina Title: Chairman and Chief Executive Officer /s/ Martin G. Lagina Martin G. Lagina /s/ Craig J. Tester Craig J. Tester /s/ Dr. Thomas James Dr. Thomas James -84- 95 /s/ Nancy H. James Nancy H. James /s/ Dr. James Lowell Dr. James Lowell /s/ Mary K. Lowell Mary K. Lowell The Revocable Living Trust of Dr. Leonard J. Scherock Under Agreement dated May 1, 1990 By: /s/ Dr. Leonard Scherock Dr. Leonard Scherock, Trustee /s/ Robert M. Boeve Robert M. Boeve /s/ Wayne Sterenberg Wayne Sterenberg -85- EX-10.18 23 EXHIBIT 10.18 1 EXHIBIT 10.18 COVENANT NOT TO COMPETE THIS COVENANT NOT TO COMPETE (this "Agreement") is made as of August 31, 1995 by and among CMS Energy Corporation, a Michigan corporation ("CMS Energy"), Martin G. Lagina ("Lagina"), Craig J. Tester ("Tester"), Robert M. Boeve ("Boeve") and Wayne Sterenberg ("Sterenberg", and, together with Lagina, Tester and Boeve, each individually a "Management Stockholder" and collectively the "Management Stockholders"). W I T N E S S E T H: WHEREAS, Terra Energy Ltd., a Michigan corporation ("Terra"), has an authorized capital of 20,000,000 shares of common stock, no par value (the "Terra Common Stock"), of which, on the date hereof, 12,065,422 shares are issued and outstanding as of the date hereof; WHEREAS, 11,065,422 shares of Terra Common Stock are owned in the aggregate by the Management Stockholders; WHEREAS, CMS Energy, Terra, the Management Stockholders and certain other persons are parties to an Agreement and Plan of Merger dated as of August 29, 1995 (the "Merger Agreement"); WHEREAS, under the Merger Agreement, CMS Energy will acquire all of the issued and outstanding shares of capital Stock of Terra, upon the terms and subject to the conditions set forth therein; WHEREAS, in order to satisfy the conditions to the obligations of various parties under the Merger Agreement, and to induce such parties to consummate the transactions contemplated by the Merger Agreement, CMS Energy and the Management Stockholders desire to enter into this Agreement, upon the terms and subject to the conditions hereinafter set forth; NOW, THEREFORE, CMS Energy and the Management Stockholders, in consideration of the agreements, covenants and conditions contained herein, hereby covenant and agree as follows: 1. DEFINITIONS Each capitalized term used herein without definition has the meaning given to it in the Merger Agreement. -1- 2 2. NONCOMPETITION AGREEMENT (a) Except as otherwise approved in advance and in writing by CMS Energy, each Management Stockholder severally agrees not to, directly or indirectly, for himself, or through, on behalf of, or in conjunction with any person, firm, corporation, business or other legal entity (whether as an employer, employee, partner, officer, director, agent, holder of a controlling interest, creditor, consultant or otherwise), (i) during the period commencing on the Effective Date and ending on the date which is three (3) years after the Effective Date, own, maintain, operate, control, be employed by, have any interest in, perform consulting services for or otherwise engage in any business or enterprise which is in competition with or similar to or the same as the Terra Business (a "Competing Business") with respect to its activities in the Michigan Devonian Antrim Shale formation within the territories designated in Exhibit A attached hereto (the "Territory"); provided, however, that nothing in this clause (i) shall prevent any Management Stockholder from continuing to engage in such business with respect to the Purchased Assets or other assets owned by such Management Stockholder continuously from June 1, 1995 through the Effective Time, and provided, further, that nothing in this clause (i) shall prevent any Management Stockholder from being employed by or performing consulting services for a Competing Business doing business within the Territory so long as the services performed by such Management Stockholder for such Competing Business relate solely and exclusively to projects or activities of such Competing Business which are located exclusively outside the Territory; and provided, further, that nothing in this clause (i) shall prevent any Management Stockholder from acquiring mineral interests within the Territory if, in the case of each such interest, it is subject to an oil and gas lease that has a remaining term of at least two (2) years or that is held by production at the time of such acquisition, or (ii) during the period commencing on the Effective Date and ending on the date which is one (1) year after the Effective Date, induce or attempt to persuade any employee, agent or customer of or co-venturer with Terra or any Subsidiary or the Terra Business to terminate his or her employment, agency or business relationship with Terra, or employ, hire or engage any such employee; and provided, however, that nothing in this clause (ii) shall prevent any Management Stockholder from inviting co-venturers with Terra to participate as co-venturers with any such Management Stockholder in projects or activities which are located exclusively outside the Territory. (b) During the period commencing on the Effective Date and ending on the date which is fifteen (15) years after the Effective Date, each Management Stockholder further severally agrees not to divulge or use, in each case to the detriment of the Terra Business in the Territory, any confidential information or trade secrets of CMS Energy, Terra or the Terra Business or any subsidiary or affiliate thereof, including personnel information, secret processes, know-how, customer lists, formulas or other technical data, except as may be required by law, provided, however, that this prohibition shall not apply to any information which, through no improper action of any Management Stockholder, is publicly available or generally known in the industry; and provided, further, that beginning with the third anniversary of the Effective Date this Section 2(b) shall apply only to geological and geophysical data in documentary form owned by Terra at the Effective Date that is not: (i) in the public domain now or hereafter, or (ii) acquired from sources other than Terra, and Terra's sole remedy for breach of the obligation set forth in this proviso after such third anniversary shall be injunctive relief. (c) To the extent necessary to satisfy the laws of any state, including the State of Michigan, each Management Stockholder agrees that any geographical, temporal or other restriction set forth in this Section 2 can and should, if necessary, be judicially modified to the extent necessary to make it enforceable and enforced as modified. (d) It is agreed between the parties that CMS Energy would be irreparably damaged by reason of any violation of the provisions of this Section 2, and that any remedy at law for a breach of such provision would be inadequate. Therefore, CMS Energy shall be entitled to seek and obtain -2- 3 injunctive or other equitable relief (including, but not limited to, a temporary restraining order, a temporary injunction or a permanent injunction) against any Management Stockholder, his agents, assigns or successors for a breach or threatened breach of such provisions and without the necessity of proving actual monetary loss. It is expressly understood among the parties that this injunctive or other equitable relief shall not be CMS Energy's exclusive remedy for any breach of this Section 2, except as otherwise provided in the last proviso of Section 2(b), and CMS Energy shall be entitled to seek any other relief or remedy which it may have by contract, statute, law or otherwise for any breach hereof, and it is agreed that CMS Energy shall also be entitled to recover its attorneys' fees and expenses in any successful action or suit against any Management Stockholder relating to any such breach. (e) Each Management Stockholder warrants and represents that he: (i) is familiar with covenants not to compete; (ii) has discussed the provisions of the covenant not to compete contained herein with his attorneys and has concluded that such provisions (including, without limitation, the right to equitable relief and the length of time and size of area provided for herein) are fair, reasonable and just under the circumstances; and (iii) is fully aware of the obligations, limitations and liabilities included in the covenant not to compete contained in this Agreement. (f) In consideration of the covenants of the Management Stockholders contained in Section 2, CMS Energy shall pay to the respective Management Stockholders an aggregate of the number of shares of CMS Common Stock, rounded to the nearest millionth of a share, determined by dividing (i) the difference between (A) the Aggregate Consideration and (B) $57,106,940 by (ii) the Average Price, and such consideration shall be allocated among the Management Stockholders as set forth in Exhibit B attached hereto; provided, however, that CMS Energy shall satisfy such obligation by delivering cash in lieu of fractional shares pursuant to Section 2.6 of the Merger Agreement, by check or wire transfer of immediately available funds to the account or accounts designated by the respective Management Stockholders in a notice to CMS Energy, and one or more certificates (to the respective Management Stockholders) representing the aggregate number of whole CMS Common Shares to which the respective Management Stockholders are entitled pursuant hereto. (g) Any certificates representing CMS Common Shares or cash in lieu of fractional shares or interests deliverable pursuant hereto shall be deliverable five (5) business days after the final determination of the difference between the amounts calculated pursuant to clauses (A) and (B) of Section 2.2(a) of the Merger Agreement, provided, however, that notwithstanding the foregoing, as respects certificates representing CMS Common Shares otherwise deliverable in accordance with this sentence pursuant to this Agreement, not less than two business days prior to the Effective Date CMS Energy will estimate, in good faith, the number of CMS Common Shares deliverable under this Agreement and the allocation thereof to each Management Stockholder and, at the Effective Time, CMS Energy shall deliver an aggregate number of CMS Common Shares (allocated to each Management Stockholder in accordance with part I of Exhibit B attached hereto) equal to eighty percent (80%) of the estimated number (rounded to the nearest whole share) of CMS Common Shares deliverable by CMS Energy or equal to such higher percentage of the estimated number of CMS Common Shares deliverable by CMS Energy as CMS Energy may elect (the aggregate of all such Shares so delivered being the "Delivered Share Number"). Following the Effective Time, CMS Energy and the Stockholders' Representative will determine the actual number of CMS Common Shares (and cash in lieu of fractional shares) deliverable under this Agreement (the "Actual Share Number") and the allocation thereof to each Management Stockholder. Disputes regarding the Actual Share Number shall be resolved as soon as -3- 4 practicable, but in any event disputes regarding the Actual Share Number that are not resolved by the parties within five (5) business days after the sixtieth (60th) day after the Effective Time shall be submitted to an arbitrator who is acceptable to both parties, and whose decision shall be final and binding with respect to the Actual Share Number. The fees and expenses of the arbitrator (if any) incurred in connection with the determination of the Actual Share Number shall be shared equally by CMS Energy on the one hand and the Management Stockholders on the other hand. If the Actual Share Number is greater than the Delivered Share Number, then CMS Energy shall deliver to the respective Management Stockholders entitled thereto an aggregate number of whole CMS Common Shares equal to such excess (allocated in accordance with the percentages set forth in part II of Exhibit B attached hereto), together with an amount equal to all dividends and distributions which became payable to holders of record on or after the Effective Date in respect of such number of CMS Common Shares. If the Actual Share Number is less than the Delivered Share Number, then the respective Management Stockholders shall deliver to CMS Energy within two business days following the determination of the Actual Share Number an aggregate number of whole CMS Common Shares equal to such deficiency (allocated in accordance with the percentages set forth in part II of Exhibit B attached hereto), together with an amount equal to all dividends and distributions which became payable to holders of record on or after the Effective Date in respect of such number of CMS Common Shares. (h) Each of the Management Stockholders agrees to report the fair market value of the CMS Common Shares delivered pursuant to this Agreement as ordinary income in his federal, state and local income tax returns for the taxable year in which the Effective Date occurs. 3. NOTICES Any notice to be given hereunder by any party to the others may be effected by delivery of written notice either in person or by mail, registered or certified, postage prepaid, with return receipt requested. Mailed notices shall be addressed to the parties at their addresses appearing in the Merger Agreement, but each party may change his or its address by written notice in accordance with this paragraph. Notices delivered personally shall be deemed communicated as of actual receipt. Mailed notices shall be deemed communicated as of three (3) days after mailing. 4. ENTIRE AGREEMENT This Agreement contains the entire agreement of the parties hereto with respect to the subject matter hereof and any prior or contemporaneous oral or written agreement between the parties shall have no effect. 5. AMENDMENTS Any modifications to this Agreement or consents or approvals hereunder shall be effective only if they are in writing, signed by the respective party against which such modification, consent or approval is to be enforced. -4- 5 6. APPLICABLE LAW The rights, duties, and obligations of the parties hereto shall be construed in accordance with the laws of the State of Michigan. 7. SUCCESSORS AND ASSIGNS The duties hereunder of the Management Stockholders may not be assigned or in any manner transferred, but rather, it is agreed by and between the parties that the duties to be performed hereunder shall be performed by the Management Stockholders only. CMS Energy may sell, assign or transfer its rights, duties and obligations under this Agreement, with the exception of those set forth in Section 2(f) and 2(g), to Terra or a company directly or indirectly owning all of the common stock of Terra or a purchaser or transferee of all or substantially all of the assets of Terra (and any such transferee may likewise sell, assign or transfer such rights, duties and obligations), subject to CMS Energy remaining secondarily liable for its duties and obligations hereunder. 8. PARTIAL INVALIDITY If any provision of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions shall nevertheless continue in full force without being impaired or invalidated in any way. 9. HEADINGS The headings of the sections and paragraphs herein are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions of this Agreement. -5- 6 10. FURTHER ASSURANCES Each party hereto agrees to do such further acts and things, and to execute and deliver such additional agreements and instruments, as any party may reasonably request of any other in order to carry out the provisions and purposes of this Agreement. 11. COUNTERPARTS This Agreement may be executed in two or more counterparts, each of which when so executed shall be deemed an original, but all such counterparts together shall constitute one and the same agreement. -6- 7 IN WITNESS WHEREOF, the parties hereto have executed this Covenant Not to Compete as of the date first above written. CMS Energy Corporation, a Michigan corporation By: /s/ Preston Hopper Preston Hopper Vice President /s/ Martin G. Lagina Martin G. Lagina, an individual /s/ Craig J. Tester Craig J. Tester, an individual /s/ Robert M. Boeve Robert M. Boeve, an individual /s/ Wayne Sterenberg Wayne Sterenberg, an individual -7- EX-10.19 24 EXHIBIT 10.19 1 EXHIBIT 10.19 TRANSFER AGREEMENT TRANSFER AGREEMENT dated as of the 31st day of August, 1995 between CMS NOMECO Oil & Gas Co. (CMS NOMECO), a Michigan corporation, CMS Enterprises Company (CMS Enterprises), a Michigan corporation and CMS Energy Corporation (CMS Energy), a Michigan Corporation. WHEREAS, CMS Energy has (i) entered into an Agreement and Plan of Merger (the "Merger Agreement") among CMS Energy, CMS Merging Corporation, a Michigan corporation and a wholly-owned subsidiary of CMS Energy, Terra Energy Ltd. ("Terra"), Martin G. Lagina, Craig J. Tester, Dr. Thomas James and Nancy M. James, Dr. James Lowell and Mary K. Lowell, The Revocable Living Trust of Dr. Leonard J. Scherock under agreement dated May 1, 1990, Robert M. Boeve and Wayne Sterenberg pursuant to which CMS Energy has acquired all of the outstanding stock (the "Terra Stock") of Terra in exchange for approximately 2,319,055 shares of the common stock of CMS Energy ("CMS Energy Stock") and an amount of cash representing the value of fractional shares of CMS Energy Stock that would otherwise be delivered pursuant to the Merger Agreement, and (ii) entered into a Covenant Not to Compete dated as of August 31, 1995 (the "Covenant Agreement") pursuant to which CMS Energy acquired undertakings by certain of the former shareholders of Terra not to compete with Terra for a specified period within the area designated in the Covenant Agreement and not to disclose certain information for a specified period in exchange for which CMS Energy is obligated to deliver approximately 265,626 shares of CMS Energy Stock and an amount of cash representing the value of fractional shares of CMS Energy Stock that would otherwise be delivered pursuant to the Covenant Agreement; WHEREAS, CMS Energy desires to transfer to its subsidiary, CMS Enterprises, for the consideration described herein, the Terra Stock and its rights under the Covenant Agreement described above; WHEREAS, CMS Enterprises desires to transfer to its subsidiary, CMS NOMECO, for the consideration described herein, the Terra Stock and the rights under the Covenant Agreement which it has received from CMS Energy; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. CMS Energy hereby transfers to CMS Enterprises the Terra Stock and its (CMS Energy's) rights under the Covenant Agreement. CMS Energy and CMS Enterprises intend $1 million of the value of the Terra Stock to be a contribution to the capital of CMS Enterprises and CMS Enterprises agrees to pay to CMS Energy the 2 remaining $62,648,000 of the anticipated Aggregate Consideration (as that term is defined in the Merger Agreement), consisting of $56,106,940 of the value of the Terra Stock and all $6,541,060 of the value of the Covenant Agreement by assignment to CMS Energy of the obligation of CMS NOMECO described in Paragraph 2 hereof. 2. CMS Enterprises, immediately following the transfer described in Paragraph 1 hereof, hereby transfers to CMS NOMECO the Terra Stock and its (CMS Enterprises') rights under the Covenant. CMS Enterprises and CMS NOMECO intend $1 million of the value of the Terra Stock to be a contribution to the capital of CMS NOMECO and CMS NOMECO agrees to pay to CMS Enterprises the remaining $62,648,000 of the Aggregate Consideration, consisting of $56,106,940 of the value of the Terra Stock and all $6,541,060 of the value of the Covenant Agreement. A copy of that certain note (the "Note") dated the date hereof, evidencing CMS NOMECO's payment obligation to CMS Enterprises, in an amount equal to the difference of the Aggregate Consideration and the $1 million of contribution to capital, is attached hereto. CMS NOMECO acknowledges that the Note will be assigned by CMS Enterprises to CMS Energy and CMS NOMECO agrees to make all payments required under the Note directly to CMS Energy. CMS Enterprises agrees that all payments by CMS NOMECO under the Note shall be made to CMS Energy. CMS Energy acknowledges that the Note is subject to a Subordination Agreement dated as of August 31, 1995 among CMS Enterprises and the Banks party to the CMS NOMECO Amended and Restated Credit Agreement dated as of November 1, 1993, as amended, and agrees to be bound by all of the Terms and Conditions of said Subordination Agreement. 3. The parties further agree that in the event that post-closing adjustments to the Aggregate Consideration (as that term is defined in the Merger Agreement), cause the Aggregate Consideration to be other than $63,648,000, the obligation of CMS NOMECO under the Note (and the consideration payable by CMS Enterprises to Energy) will be adjusted as follows: (a) if the Aggregate Consideration is more than $63,648,000, the obligation of CMS NOMECO under the Note (and the consideration payable by CMS Enterprises to CMS Energy) will be increased by such difference, and (b) if the Aggregate Consideration is less than $63,648,000, the obligation of CMS NOMECO under the Note (and the consideration payable by CMS Enterprises to CMS Energy) will be decreased by such difference. 3 In the event of any such adjustment, the parties hereto will revise the terms of the Note (and the terms of this Agreement) to reflect such adjustment. CMS ENTERPRISES COMPANY CMS ENERGY CORPORATION By: /s/ Thomas A. McNish By: /s/ Thomas A. McNish Its _____________________ Its _____________________ CMS NOMECO OIL & GAS CO. By: /s/ Paul E Geiger Paul E. Geiger Its Vice President, Secretary and Treasurer EX-10.20 25 EXHIBIT 10.20 1 EXHIBIT 10.20 PROMISSORY NOTE $65,000,000 August 31, 1995 CMS NOMECO Oil & Gas Co., formerly known as NOMECO Oil & Gas Co., a corporation duly organized and existing in good standing under the laws of the State of Michigan (the "Borrower"), for value received, hereby promises to pay to the order of CMS Enterprises Company, a Michigan corporation (the "Lender"), the principal sum of Sixty Five Million Dollars ($65,000,000) or, if less, the aggregate unpaid principal amount of all loans made by the Lender to the Borrower and endorsed by the Lender on Schedule A hereto (the "Schedule") on November 1, 1999. The Borrower promises to pay interest on the unpaid principal balance of each loan hereunder from and including the date of such loan to the maturity date of such loan (as shown on the Schedule) at a rate per annum equal to the average cost of debt of CMS Energy Corporation (on an unconsolidated basis) for the most recent quarter (the "Borrowing Rate"), payable quarterly in arrears and on such maturity date. Any principal not paid when due shall bear interest from maturity until paid in full, payable upon demand, at a rate per annum equal to 120% of the Borrowing Rate. Interest shall be calculated on the basis of a year of 360 days and actual days elapsed. All payments hereunder shall be made in lawful money of the United States and in immediately available funds. Any extension of time for the payment of the principal of this note resulting from the due date falling on a Saturday, Sunday or legal holiday shall be included in computation of interest. If (i) any sum payable on any liability of the Borrower to the Lender hereunder shall not be paid when due and such default shall continue for 30 consecutive days; or (ii) the Borrower shall default on any obligation for repayment of borrowed money and the holder of such borrowed money shall accelerate the due date thereof, the Lender may, at its option, declare the principal and interest on this note immediately due and payable, without protest, presentment, notice or demand, all of which the Borrower hereby waives. Notwithstanding the above, the Lender may terminate the unused portion of this facility in whole or in part by giving the Borrower thirty days advance written notice thereof. The Borrower agrees to pay on demand all expenses, including reasonable attorneys' fees, the Lender may incur in connection with the enforcement of this note. The indebtedness evidenced by this note (including the obligations described in the preceding paragraph) and any renewals or extension hereof, shall at all times be wholly subordinate and junior in right of payment to any and all present and future indebtedness, obligations and liabilities of the Borrower pursuant to the Amended and Restated Credit -1- 2 Agreement dated as of November 1, 1993 among the Borrower, the banks now or hereafter parties thereto and NBD Bank, N.A., as agent, as such Amended and Restated Credit Agreement is amended, modified, restated or refinanced from time to time and all renewals or increases therein and further including without limitation all reimbursement obligations pursuant to any letters of credit issued pursuant thereto and all obligations pursuant to any promissory notes issued pursuant thereto, all amounts accruing after the filing of any petition in bankruptcy or similar loss, whether or not such amount is an allowable claim, all guarantees, all guarantees for any of the foregoing and all rights and remedies of the holders of any of the foregoing (herein called "Superior Indebtedness"), in the manner and with the force and effect hereafter set forth: (1) In the event of any liquidation, dissolution, or winding up of the Borrower, or of any execution receivership, insolvency, bankruptcy, liquidation, reorganization or other similar proceeding relative to the Borrower or its property, all Superior Indebtedness shall first be paid in full in cash or cash equivalents before any payment is made upon the indebtedness evidenced by this note; and in any such event any payment or distribution of any kind or character, whether in cash, property or securities (other than in securities, including equity securities, or other evidences of indebtedness, the payment of which is subordinated to the payment of all Superior Indebtedness which may at the time be outstanding in the same manner as the subordinated notes are subordinated to the Superior Indebtedness, but only to the extent that the court awarding or permitting the distribution of such securities states that in doing so it is giving effect to the subordination of this note to the Superior Indebtedness set forth herein) which shall be made upon or in respect of this note shall be paid over the holders of such Superior Indebtedness, pro rata, for application in payment thereof unless and until such Superior Indebtedness shall have been paid or satisfied in full; (2) In the event that this note is declared or becomes due and payable because of the occurrence of any event of default hereunder or otherwise than at the option of the Borrower, under circumstances when the foregoing clause (1) shall not be applicable, the Lender shall be entitled to payments only after there shall first have been paid in full in cash or cash equivalents all Superior Indebtedness outstanding at the time this note so becomes due and payable because of any such event, or payment shall have been provided for in a manner satisfactory to the holders of such Superior Indebtedness; and (3) During the continuance of any default with respect to any Superior Indebtedness permitting the holders thereof to accelerate the maturity of such Superior Indebtedness, no payment of principal, premium or interest or other amount shall be made on this note, if either (i) notice of such default in writing or by telegram has been given to the Borrower by the holders of a majority in aggregate principal amount of the outstanding Superior Indebtedness in default, provided that judicial proceedings shall be commenced with respect to such default (x) within one hundred twenty (120) days thereafter in the case such default relates to the non-payment of principal, interest or premium on such Superior Indebtedness or (y) within 90 days after the giving of such notice in the case -2- 3 of any other event or condition causing such default, or (ii) judicial proceedings shall be pending in respect of such default. The holders of Superior Indebtedness shall not be entitled to give notice pursuant to this clause (3) more than once with respect to any default which was specified in such a notice and which has continued without interruption since the date such notice was given, nor shall such holders be entitled to give a separate notice with respect to any default not so specified which (to the knowledge of any holder giving such notice) was existing on the date notice shall have been given pursuant to this clause (3) and which has continued without interruption from the date such notice was given. Upon receipt of any notice from such holders of Superior Indebtedness pursuant to this clause (3), the Borrower shall forthwith send a copy thereof to the Lender. In the event that, notwithstanding the foregoing, any payment or distribution of assets or securities of the Borrower of any kind or character, whether in cash, property or securities, shall be received by any trustee, agent or paying agent or the holders of this note (or, if the borrower of any subsidiary or affiliate of the Borrower is acting as paying agent, money, assets or securities shall be segregated or held in trust) on account of principal of, premium on, interest on or other amounts with respect to this note contrary to the terms hereof, such payment or distribution shall be received, segregated from other funds, and held in trust by such trustee, agent, paying agent or holder for the benefit of, and shall immediately be paid over to, the holders of Superior Indebtedness or their representative, ratably according to the respective amounts of Superior Indebtedness held or represented by each. The Lender undertakes and agrees for the benefit of each holder of Superior Indebtedness to execute, verify, deliver and file any proofs of claim which any holder of Superior Indebtedness may at any time require in order to prove and realize upon any rights or claims pertaining to this note and to effectuate the full benefit of the subordination contained herein; and upon failure of the Lender so to do, any such holder of Superior Indebtedness shall be deemed to be irrevocably appointed the agent and attorney-in-fact of the Lender to execute, verify, deliver and file any such proofs of claim. No right of any holder of any Superior Indebtedness to enforce subordination as herein provided shall at any time or in any way be affected or impaired by any failure to act on the part of the Borrower or the holders of Superior Indebtedness, or by any noncompliance by the Borrower with any of the terms, provisions and covenants of this note or the agreement under which they are issued, regardless of any knowledge thereof that any holder of Superior Indebtedness may have or be otherwise charged with. The Borrower agrees, for the benefit of the holders of Superior Indebtedness, that in the event that this note is declared due and payable before its expressed maturity because of the occurrence of a default hereunder, (i) the Borrower will give prompt notice in writing of such happening to the holders of Superior Indebtedness and (ii) all Superior Indebtedness shall forthwith become immediately due and payable upon demand. regardless of the expressed maturity thereof. -3- 4 The Borrower may make optional prepayments on this note at any time, provided that no event of default under the Superior Indebtedness and no event which may become such an event of default with notice or lapse of time, or both, has occurred and is continuing at the time of such payment or would be caused by such payment, in which case the Borrower not make, and the holder of this note shall not accept, any such optional prepayment. The foregoing provisions are solely for the purpose of defining the relative rights of the holders of Superior Indebtedness on the one hand, and the Lender on the other hand, and nothing herein shall impair, as between the Borrower and the Lender, the obligation of the Borrower which is unconditional and absolute, to pay the principal, premium, if any, and interest on this note in accordance with its terms, nor shall anything herein prevent the Lender from exercising all remedies otherwise permitted by applicable law or hereunder upon default hereunder, subject to the rights of the holders of Superior Indebtedness as herein provided for. This note is subject to further terms and conditions specified in Subordination Agreement executed among the Lender and the current holders of the Superior Indebtedness. This note shall be governed by, and interpreted and construed in accordance with, the laws of the State of Michigan. CMS NOMECO OIL & GAS CO. BY: /s/ Paul E. Geiger ---------------------- Paul E. Geiger ITS: Vice President, Secretary and Treasurer -4- 5 Schedule A to $65,000,000 CMS NOMECO Oil & Gas Co. Promissory Note dated August 31, 1995 ADVANCES AND PAYMENTS OF PRINCIPAL
Amount of Principal Unpaid Amount of Paid or Principal Interest Notation Date Advance Prepaid Balance Maturity Date Rate Made By - --------------- ------------ ----------- ----------- ---------------- --------- --------- August 31, 1995 $61,340,000 $61,340,000 November 1, 1999
EX-10.21 26 EXHIBIT 10.21 1 EXHIBIT 10.21 AGREEMENT AND PLAN OF MERGER AMONG CMS ENERGY CORPORATION CMS MERGING CORPORATION WALTER INTERNATIONAL, INC. J.C. WALTER, JR. J.C. WALTER III CAROLE WALTER LOOKE F. FOX BENTON, JR. GORDON A. CAIN THE CAIN 1988 DESCENDANTS TRUST WILLIAM C. OEHMIG PRUDENTIAL-BACHE ENERGY GROWTH FUND, L.P. G-2 PRUDENTIAL-BACHE ENERGY GROWTH FUND, L.P. G-3 PRUDENTIAL-BACHE ENERGY GROWTH FUND, L.P. G-4 F. FOX BENTON III HOWARD A. CHAPMAN G.W. FRANK ROBERT D. JOLLY AND ARTHUR L. SMALLEY _______________________________________________ Dated as of January 24, 1995 2 TABLE OF CONTENTS ARTICLE I THE MERGER......................... 2 Section 1.1. The Merger.......................................... 2 Section 1.2. Filing Articles of Merger and Effectiveness..................................... 3 Section 1.3. Effects of the Merger............................... 3 Section 1.4. Articles of Incorporation, By-Laws, Directors and Officers............................ 3 Section 1.5. Further Assurances.................................. 3 ARTICLE II CONVERSION OF SHARES............... 3 Section 2.1. Conversion of Securities............................ 3 Section 2.2. Walter Consolidated Net Working Capital................................... 7 Section 2.3. Walter Debt to be Retained and Walter Debt to be Discharged...................... 7 Section 2.4. Payment of Cash and Delivery of Certificates................................... 8 Section 2.5. Dividends and Distributions......................... 9 Section 2.6. Fractional Shares................................... 10 Section 2.7. Changes in CMS Common Stock......................... 10 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS, THE PREFERRED STOCKHOLDERS AND THE WARRANTHOLDERS........... 11 Section 3.1. Organization of Walter.............................. 11 Section 3.2. Subsidiaries and Investments........................ 11 Section 3.3. Capitalization...................................... 12 Section 3.4. Authority........................................... 14 Section 3.5. Financial Statements................................ 16 Section 3.6. Operations Since Unaudited Balance Sheet Date........................................ 17 Section 3.7. No Undisclosed Liabilities.......................... 19 Section 3.8. Taxes............................................... 19 Section 3.9. Condition of Tangible Assets........................ 23 Section 3.10. Title to Property................................... 23 Section 3.11. Availability and Ownership of Assets................ 23 Section 3.12. Personal Property Leases............................ 24 Section 3.13. Accounts Receivable................................. 24 Section 3.14. Intellectual Property............................... 24 Section 3.15. Owned Real Property................................. 26 Section 3.16. Leased Real Property................................ 26 - i - 3 Page ---- Section 3.17. Obligations; Litigation............................. 27 Section 3.18. Amoco Stock Purchase Agreement...................... 27 Section 3.19. Compliance with Laws................................ 27 Section 3.20. Permits............................................. 28 Section 3.21. Insurance........................................... 28 Section 3.22. Employee Benefit Plans.............................. 29 Section 3.23. Employees and Agents and Related Agreements........................................ 30 Section 3.24. Employee Relations and Labor Matters................ 31 Section 3.25. Absence of Certain Business Practices............... 31 Section 3.26. Territorial Restrictions............................ 32 Section 3.27. Transactions with Certain Persons................... 32 Section 3.28. No Finder........................................... 33 Section 3.29. Environmental Matters............................... 33 Section 3.30. Contracts........................................... 34 Section 3.31. No Guaranties; Extensions of Credit................. 35 Section 3.32. Gas Imbalances; Production Rights and Obligations................................... 36 Section 3.33. Net Revenue Interests and Cost and Expense Bearing Interests......................... 36 Section 3.34. CMS Common Shares................................... 38 Section 3.35. Disclosure.......................................... 38 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF CMS ENERGY........ 38 Section 4.1. Organization of CMS Energy.......................... 38 Section 4.2. Authority........................................... 39 Section 4.3. Shares of CMS Common Stock.......................... 40 Section 4.4. Capitalization...................................... 40 Section 4.5. Operations Since September 30, 1994................. 41 Section 4.6. Compliance with Laws................................ 41 Section 4.7. SEC Documents....................................... 41 Section 4.8. No Finder........................................... 42 ARTICLE V REPRESENTATIONS AND WARRANTIES OF SUB........... 42 Section 5.1. Organization and Standing........................... 42 Section 5.2. Capital Structure................................... 42 Section 5.3. Authority........................................... 42 - ii - 4 Page ---- ARTICLE VI ACTIONS PRIOR TO THE EFFECTIVE DATE............. 43 Section 6.1. Issuance of CMS Common Shares....................... 43 Section 6.2. Action by Stockholders of Walter.................... 43 Section 6.3. Amoco Stock Purchase Agreement...................... 43 Section 6.4. Investigation of Walter............................. 43 Section 6.5. Lawsuits, Proceedings, Etc.......................... 44 Section 6.6. Conduct of Business by Walter Pending the Merger................................ 44 Section 6.7. Mutual Cooperation; Reasonable Best Efforts........................... 48 Section 6.8. No Public Announcement.............................. 48 Section 6.9. No Solicitation..................................... 48 Section 6.10. Antitrust Law Compliance............................ 49 Section 6.11. Termination of Stockholders' Agreement and ORR Plan............................ 49 Section 6.12. Subsequent Financial Statements..................... 49 Section 6.13. Exercise or Cancellation of Warrants................ 49 Section 6.14. Stock Purchase Agreements........................... 50 Section 6.15. Substitution on Office Lease........................ 50 ARTICLE VII ADDITIONAL COVENANTS AND AGREEMENTS............. 50 Section 7.1. Tax-Free Nature; Tax Consequences................... 50 Section 7.2. Taxes............................................... 52 Section 7.3. Repayment of Debt................................... 56 Section 7.4. Resale of CMS Common Shares......................... 56 Section 7.5. Claims of Preferred Stockholders.................... 56 Section 7.6. Claims of Walter and the Stockholders............... 57 ARTICLE VIII CONDITIONS PRECEDENT TO OBLIGATIONS OF CMS ENERGY AND SUB................ 57 Section 8.1. No Misrepresentation or Breach of Covenants and Warranties....................... 57 Section 8.2. No Material Adverse Effect.......................... 58 Section 8.3. Opinions of Counsel for Walter, the Stockholders and the Preferred Stockholders...................................... 58 Section 8.4. No Injunctions or Restraints........................ 58 Section 8.5. Necessary Governmental Approvals.................... 58 Section 8.6. Necessary Consents.................................. 58 Section 8.7. Effectiveness of Registration Statement............. 59 Section 8.8. Listing of CMS Common Shares........................ 59 - iii - 5 Page ---- Section 8.9. Stockholder Action.................................. 59 Section 8.10. Dissenting Stockholders............................. 59 Section 8.11. Inter-Purchaser Agreement........................... 59 Section 8.12. Closing of the Amoco Stock Purchase Agreement................................ 59 Section 8.13. Resignations of Certain Employees................... 60 Section 8.14. Warrants to Acquire Walter Common Stock............. 60 Section 8.15. Resignations of Walter Directors and Officers...................................... 60 Section 8.16. Amoco Consent....................................... 60 Section 8.17. OPIC Consent........................................ 60 Section 8.18. NOMECO Lenders' Consent............................. 60 Section 8.19. Walter Debt to be Discharged........................ 61 Section 8.20. Warrantholder Notes................................. 61 Section 8.21. Walter Congo Note................................... 61 Section 8.22. ORR Plan............................................ 61 ARTICLE IX CONDITIONS PRECEDENT TO OBLIGATIONS OF WALTER AND THE STOCKHOLDERS........... 61 Section 9.1. No Misrepresentation or Breach of Covenants and Warranties....................... 61 Section 9.2. No Material Adverse Effect.......................... 62 Section 9.3. No Injunctions or Restraints........................ 62 Section 9.4. Opinions of Counsel for CMS Energy and Sub........................................... 62 Section 9.5. Necessary Governmental Approvals.................... 62 Section 9.6. Effectiveness of Registration Statement............. 63 Section 9.7. Listing of CMS Common Shares........................ 63 Section 9.8. Stockholder Action.................................. 63 Section 9.9. Necessary Consents.................................. 63 Section 9.10. Office Lease Guarantor.............................. 63 ARTICLE X INDEMNIFICATION; SURVIVAL.......... 63 Section 10.1. Indemnification by the Stockholders................. 63 Section 10.2. Indemnification by CMS Energy and the Surviving Corporation..................... 65 Section 10.3. Notice of Claims.................................... 66 Section 10.4. Third Party Claims.................................. 67 Section 10.5. Exclusive Remedy.................................... 68 Section 10.6. Survival of Obligations............................. 68 Section 10.7. Update of the Representations and Warranties.................................... 68 Section 10.8. Adjustment to Consideration......................... 70 - iv - 6 Page ---- ARTICLE XI TERMINATION.............. 70 Section 11.1. Termination......................................... 70 ARTICLE XII OTHER PROVISIONS............... 71 Section 12.1. Confidential Nature of Information.................. 71 Section 12.2. Fees and Expenses................................... 71 Section 12.3. Notices............................................. 71 Section 12.4. Definitions......................................... 73 Section 12.5. Partial Invalidity.................................. 74 Section 12.6. Successors and Assigns.............................. 74 Section 12.7. Execution in Counterparts........................... 74 Section 12.8. Titles and Headings................................. 74 Section 12.9. Schedules and Exhibits.............................. 74 Section 12.10. Entire Agreement; Amendments and Waivers; Assignment............................... 75 Section 12.11. Independent Investigation and Scope of Representations................................ 75 Section 12.12. Governing Law; Arbitration.......................... 76 Section 12.13. No Third-Party Beneficiaries........................ 76 EXHIBITS Exhibit A Plan of Merger Exhibit B Alba Partnership documents Exhibit C El Franig Partnership documents Exhibit D Forms of Opinions of Vinson & Elkins, L.L.P. Exhibit E Form of Opinion of Jones, Walker, Waechter, Poitevant, Carrere & Denegre L.L.P. Exhibit F Form of Inter-Purchaser Agreement Exhibit G Form of Opinion of Denise Sturdy, Esq. SCHEDULES Schedule 3.2 Subsidiaries, Capital Stock, State of Organization and Jurisdiction Schedule 3.3(a) Owners of Walter Common and Preferred Stock and Warrants Schedule 3.3(b) Other Restrictions on Walter Common and Preferred Stock Schedule 3.3(c) Liens on Shares of Capital Stock Schedule 3.3(d) Liens on Partnerships, Joint Ventures and Other Interests - v - 7 Schedule 3.4(a) Agreements Requiring Consents Schedule 3.5 Adjustments to Unaudited Balance Sheet and Statement of Income as of June 30, 1994 Schedule 3.6(a) Material Adverse Changes Since June 30, 1994 Schedule 3.6(b) Actions Not in the Ordinary Course of Business Since June 30, 1994 Schedule 3.7 Undisclosed Liabilities since June 30, 1994 Schedule 3.8(a) Tax Returns Schedule 3.8(b) Net Operating Losses Schedule 3.8(c) Estimated Loss from January 1, 1994 through June 30, 1994 Schedule 3.9 Condition of Assets Schedule 3.10 Liens on Material Assets Schedule 3.12 Personal Property Leases Schedule 3.14 Intellectual Property Schedule 3.15 Owned Real Property Schedule 3.16 Leased Real Property Schedule 3.17 Material Obligations, Litigation Disputes Schedule 3.19 Compliance with Laws Schedule 3.20 Permits Schedule 3.21 Insurance Schedule 3.22(a) Employee Plans Schedule 3.22(d) Plans with Jurisdictions Schedule 3.22(f) Outside the United States Plans Not Covered by ERISA Schedule 3.23(a) Employment/Consulting Agreements/Non-Compete Agreements Not Terminable on 30 Days Notice, Deferred Compensation Schedule 3.23(b) Employee/Consultants with Compensation Greater than $50,000 Schedule 3.24(b) Collective Bargaining Agreement Schedule 3.26 Third Party Restrictions on Conduct of Business Schedule 3.27 Transactions with Affiliates, Stockholders, Officers or Directors Schedule 3.30 Contracts Schedule 3.31 Guaranties Schedule 3.32 Production Contracts/Product Sales Schedule 3.33 Wells Schedule 3.33(a) Cash Flow Statements Schedule 7.3 Walter Debt to be Discharged as of the Effective Time Schedule 12.4 Knowledge of Walter - vi - 8 AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER, dated as of January 24, 1995 (this "Agreement"), among CMS Energy Corporation, a Michigan corporation ("CMS Energy"), CMS Merging Corporation, a Texas corporation and a wholly-owned Subsidiary of CMS Energy ("Sub"), Walter International, Inc., a Texas corporation ("Walter" and, together with Sub, the "Constituent Corporations"), J.C. Walter, Jr., ("J.C. Walter"), J.C. Walter III ("J.C. Walter III"), Carole Walter Looke ("Looke"), F. Fox Benton, Jr. ("Benton"), Gordon A. Cain ("Cain"), the Cain 1988 Descendants Trust (the "Cain Trust"), William C. Oehmig ("Oehmig" and, together with J.C. Walter, J.C. Walter III, Looke, Benton, Cain, the Cain Trust and each Warrantholder (as hereinafter defined) from and after acquisition of any shares of Walter Common Stock (as hereinafter defined), each individually a "Stockholder" and collectively the "Stockholders"), Prudential-Bache Energy Growth Fund, L.P. G-2, a Delaware limited partnership ("Prudential-Bache G-2"), Prudential-Bache Energy Growth Fund, L.P. G-3, a Delaware limited partnership ("Prudential-Bache G-3"), Prudential-Bache Energy Growth Fund, L.P. G-4, a Delaware limited partnership ("Prudential-Bache G-4" and, together with Prudential-Bache G-2 and Prudential-Bache G-3, each individually a "Preferred Stockholder" and collectively the "Preferred Stockholders"), F. Fox Benton III ("Benton III"), Howard A. Chapman ("Chapman"), G.W. Frank ("Frank"), Robert D. Jolly ("Jolly") and Arthur L. Smalley ("Smalley", and, together with Benton III, Chapman, Frank, Jolly, Prudential Bache G-2, Prudential-Bache G-3 and Prudential-Bache G-4, each individually a "Warrantholder" and collectively the "Warrantholders"). Unless otherwise indicated, capitalized terms used herein are used as defined in Section 12.4 hereof. W I T N E S S E T H : WHEREAS, CMS Energy is a Michigan corporation having an authorized capital of (i) 250,000,000 shares of common stock, $.01 par value (the "CMS Common Stock"), of which, as of September 30, 1994, 86,246,928 shares were issued and outstanding, and (ii) 5,000,000 shares of preferred stock, $.01 par value, none of which, on the date hereof, are issued and outstanding; WHEREAS, Sub is a Texas corporation having an authorized capital of 1,000 shares of common stock, $.01 par value, of which, on the date hereof, 10 shares are issued and outstanding; WHEREAS, Walter is a Texas corporation having an authorized capital of (i) 1,000,000 shares of common stock, $.01 par value (the "Walter Common Stock"), of which, on the date hereof, 100,662 shares are issued and outstanding, and (ii) 9 100,000 shares of preferred stock, $1.00 par value, of which, on the date hereof, 3,000 shares of "14% Senior Cumulative Preferred Stock" have been authorized all of which are issued and outstanding (the "Walter Preferred Stock") and 1,000 shares of "Series A Junior Preferred Stock" have been authorized, none of which is issued or outstanding; WHEREAS, Walter, itself and through its Subsidiaries, is in the business of oil and gas exploration, development and production and activities related thereto (hereinafter generally referred to as the "Walter Business"); WHEREAS, the respective Boards of Directors of CMS Energy and the Constituent Corporations have approved the merger (the "Merger") of Sub into Walter pursuant to the terms and conditions of this Agreement, the Board of Directors of Walter has directed that this Agreement be submitted to its stockholders for adoption, and CMS Energy as the sole stockholder of Sub has adopted this Agreement; WHEREAS, the parties hereto intend the Merger to constitute a reorganization described in section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"); WHEREAS, CMS Energy, Sub, Walter, the Stockholders, the Preferred Stockholders and the Warrantholders desire to make certain representations, warranties and agreements in connection with the Merger and also to prescribe various conditions to the Merger; NOW, THEREFORE, in consideration of the premises and the representations, warranties and agreements herein contained, the parties hereto agree as follows: ARTICLE I THE MERGER SECTION 1.1. THE MERGER. Upon the terms and subject to the conditions contained herein, and in accordance with the provisions of this Agreement and the Texas Business Corporation Act (the "TBCA"), at the Effective Time (as hereinafter defined), Sub shall be merged with and into Walter pursuant to the Plan of Merger in substantially the form of Exhibit A hereto or in such other form as the parties may agree to accomplish the Merger. As the corporation surviving in the Merger (the "Surviving Corporation"), Walter shall continue unaffected and unimpaired by the Merger to exist under and be governed by the laws of the State of Texas. Upon the effectiveness of the Merger, the separate existence of Sub shall cease except to the extent provided by law in the case of a corporation after its merger into another corporation. -2- 10 SECTION 1.2. FILING ARTICLES OF MERGER AND EFFECTIVENESS. Upon the satisfaction or waiver of the conditions to the obligations of each of the parties contained herein, Articles of Merger (which shall be in form and substance reasonably satisfactory to the parties hereto), executed in accordance with the laws of the State of Texas, shall be filed in the office of the Secretary of State of the State of Texas. The Merger shall become effective upon such filing and the issuance of a Certificate of Merger by the Secretary of State of the State of Texas as provided by the TBCA. The date and the time on such date of effectiveness of the Merger are herein called, respectively, the "Effective Date" and the "Effective Time." SECTION 1.3. EFFECTS OF THE MERGER. The Merger shall have the effects set forth in Section 5.06 of the TBCA. SECTION 1.4. ARTICLES OF INCORPORATION, BY-LAWS, DIRECTORS AND OFFICERS. The Articles of Incorporation and By-Laws of Walter, in each case as they may be amended, as in effect immediately prior to the Effective Time, shall continue in full force and effect as the Articles of Incorporation and By-Laws of the Surviving Corporation. The initial directors of the Surviving Corporation shall consist of the directors of Sub immediately prior to the Effective Time, who shall serve until their respective successors are duly elected and qualified. The initial officers of the Surviving Corporation shall consist of the officers of Sub immediately prior to the Effective Time, who shall serve until their respective successors are duly elected and qualified. SECTION 1.5. FURTHER ASSURANCES. From time to time after the Effective Time, the officers and directors of the Surviving Corporation shall be authorized to execute and deliver, in the name and on behalf of Walter or otherwise, such deeds and other instruments and to take or cause to be taken such further or other action as shall be necessary or desirable in order to vest or perfect in or to confirm, of record or otherwise, in the Surviving Corporation title to, and possession of, all of the property, rights, privileges, powers, immunities and franchises of Walter (subject, however, to the provisions of Section 6.6(b) hereof) and otherwise carry out the purposes of this Agreement. ARTICLE II CONVERSION OF SHARES SECTION 2.1. CONVERSION OF SECURITIES. As of the Effective Time, by virtue of the Merger and without any action on the part of any stockholder of Walter or Sub: -3- 11 (a) Each share of common stock of Sub issued and outstanding immediately prior to the Effective Time shall be converted into and become one fully paid and nonassessable share of common stock, $.01 par value, of the Surviving Corporation. (b) All shares of Walter Common Stock that immediately prior to the Effective Time are held in the treasury of Walter or by any wholly-owned Subsidiary of Walter shall be cancelled and no capital stock of CMS Energy or other consideration shall be delivered in exchange therefor. (c) Subject to the provisions of Sections 2.6 and 2.7 hereof, each share of Walter Common Stock issued and outstanding immediately prior to the Effective Time (exclusive of shares of Walter Common Stock referred to in Section 2.1(b)) shall be converted into the number (the "Conversion Number") of shares of CMS Common Stock (such shares of CMS Common Stock, together with any shares of CMS Common Stock which may be issuable pursuant to Section 2(d), are collectively referred to herein as "CMS Common Shares") rounded to the nearest thousandth of a share, or if there shall not be a nearest thousandth of a share, to the next higher thousandth of a share, determined by solving for "X" in the formula: X = ((A-B) / C) / D where (A) is the sum of (I) $45,900,000, (II) Walter Consolidated Net Working Capital (as hereinafter defined), (III) the net cash proceeds received by Walter upon exercise of any Warrants (as hereinafter defined) prior to the Effective Time, to the extent that such proceeds are not included in calculating Walter Consolidated Net Working Capital (the "Warrant Proceeds") and (IV) to the extent credited or allocated to Walter or any Subsidiary pursuant to the Inter-Purchaser Agreement dated as of December 28, 1994 (the "Inter-Purchaser Agreement") by and among Walter, Nuevo Energy Company, a Delaware corporation ("Nuevo") and certain of their respective Affiliates and not included in calculating Walter Consolidated Net Working Capital, an amount equal to one-half (1/2) of (i) any cash transfers or capital contributions made after June 30, 1994 by Amoco (as hereinafter defined) to Amoco Congo Exploration Company, a Delaware corporation ("ACEC") and/or Amoco Congo Petroleum Company, a Delaware corporation ("ACPC"), which amount is estimated to be $2,083,500, and (ii) any payment by Amoco in final settlement of the Balancing Payment pursuant to Section -4- 12 3.B(2) of the Amoco Stock Purchase Agreement (as hereinafter defined). (B) is the sum of (I) Walter Debt to be Retained, (II) Walter Debt to be Discharged, (III) $3,400,000, (IV) the share of Walter or its affiliates of the costs incurred after June 30, 1994 (but not reflected in the books of Walter as of June 30, 1994) in connection with the rework of the Alba No. 2 well, (V) all costs and expenses of Walter or its affiliates (including any such expenses of Nuevo (as hereinafter defined) to be borne by Walter) incurred after June 30, 1994 (but not reflected in the books of Walter as of June 30, 1994) (including without limitation, fees and disbursements of counsel, accountants and other financial, legal, accounting or other advisers) in connection with the negotiation, execution, delivery or performance of the Amoco Stock Purchase Agreement (as hereinafter defined) and each of the other documents and agreements executed in connection with or contemplated by such Agreement or the consummation of the transactions contemplated thereby (but excluding OPIC commitment fees and routine recurring operating costs, including costs of operating personnel in the Republic of the Congo), (VI) all costs and expenses borne or incurred by Walter or its affiliates after June 30, 1994 (including, without limitation, fees and disbursements of its counsel or counsel for the Stockholders, Preferred Stockholders or Warrantholders, accountants and other financial, legal, accounting or other advisers) in connection with the negotiation, execution, delivery or performance of this Agreement and each of the other documents and agreements executed in connection with or contemplated by this Agreement or the consummation of the transactions contemplated hereby, and (VII) to the extent allocable to Walter or any Subsidiary (including ACEC) pursuant to the Inter-Purchaser Agreement and not included in calculating Walter Consolidated Net Working Capital, an amount equal to one-half (1/2) of any cash or cash equivalent distributions made after June 30, 1994 by ACEC and/or ACPC to Amoco, which amount is estimated to be $5,000,000. (C) is the aggregate number of shares of Walter Common Stock issued and outstanding immediately prior to the Effective Time (exclusive of shares of Walter Common Stock referred to in Section 2.1(b)); and (D) is the average of the per share Daily Prices (as hereinafter defined) on the New York Stock Exchange, Inc. (the "NYSE") of CMS Common Stock (the "Average Price") as reported in the New York Stock Exchange -5- 13 Composite Transactions (on the Transaction Reporting System operated by the Consolidated Tape Association) during the ten (10) consecutive trading days ending on the fifth trading day prior to the Effective Time of the Merger; provided, however, that in the event the foregoing would result in an Average Price greater than $23.50, then the Average Price shall be deemed to be $23.50; and provided, further, that in the event the foregoing would result in an Average Price less than $20.50, then the Average Price shall be deemed to be $20.50. All such shares of Walter Common Stock, when so converted, shall no longer be outstanding and shall automatically be cancelled and retired and each holder of a Certificate (as hereinafter defined) theretofore representing any such shares shall cease to have any rights with respect thereto, except the right to receive, upon surrender of such Certificate in accordance with Section 2.4, shares of CMS Common Stock, cash in lieu of fractional shares as contemplated by Section 2.6 and certain distributions as contemplated by Section 6.6(b). As used herein, the term Daily Price shall mean the last sale price, or the closing bid price if no sale occurred, on the day in question. (d) Each share of Walter Preferred Stock issued and outstanding immediately prior to the Effective Time, other than any such shares of Walter Preferred Stock owned by any Stockholder referred to in the next succeeding sentence, shall be converted into the right to receive from CMS Energy in cash an amount equal to $1,133.33. Subject to the provisions of Section 2.6 and 2.7 hereof, each share of Walter Preferred Stock, if any, issued and outstanding immediately prior to the Effective Time and which is then owned by any Stockholder (and as to which written notice of such ownership has been delivered to CMS Energy at least three (3) business days prior to the Effective Date) shall be converted into the number of shares of CMS Common Stock, rounded to the nearest thousandth of a share, or if there shall not be a nearest thousandth of a share, to the next higher thousandth of a share, determined by dividing (i) $1,133.33 by (ii) the Average Price as determined pursuant to Section 2.1(c). All such shares of Walter Preferred Stock, when so converted, shall no longer be outstanding and shall automatically be cancelled and retired and each holder of a Certificate theretofore representing any such shares shall cease to have any rights with respect thereto, except the right to receive, upon surrender of such Certificate in accordance with Section 2.4, such -6- 14 cash payment or shares of CMS Common Stock and cash in lieu of fractional shares as contemplated by Section 2.6. (e) Each Warrant outstanding immediately prior to the Effective Time (other than Warrants exercised pursuant to Section 6.13) shall no longer be outstanding and shall automatically be cancelled. SECTION 2.2. WALTER CONSOLIDATED NET WORKING CAPITAL. Walter Consolidated Net Working Capital shall mean the consolidated net working capital of Walter as of June 30, 1994 determined in accordance with GAAP (as hereinafter defined) except that current maturities of long-term debt shall be added back, which was $135,301, plus, to the extent allocated to Walter or any Subsidiary under the Inter-Purchaser Agreement, an amount equal to one-half (1/2) of the combined net working capital of ACEC and ACPC as of June 30, 1994 determined in accordance with GAAP, which amount is estimated to be $5,015,315. SECTION 2.3. WALTER DEBT TO BE RETAINED; WALTER DEBT TO BE DISCHARGED. (a) Walter Debt to be Retained shall mean the sum of (i) the principal and all accrued but unpaid interest payable by Walter or any of its Subsidiaries under the Finance Agreement among Walter International Equatorial Guinea, Inc., other sponsors and OPIC dated June 1, 1992 (the "OPIC Debt-Alba") as of June 30, 1994, which was $3,368,556 and (ii) the principal amount payable by Walter or any of its Subsidiaries under the Finance Agreement among Walter Congo, Walter Congo Holdings, Inc. and OPIC dated December 28, 1994 (the "OPIC Debt-Congo") as of the date incurred, which amount is estimated to be $8,812,500, determined in accordance with GAAP. (b) Walter Debt to be Discharged shall mean the sum of (i) the principal of and all accrued but unpaid interest on the $4,600,000 Term Loan among Walter, Walter International Equatorial Guinea, Inc. and Trust Company of the West dated February 1, 1993 ("TCW Debt") as of June 30, 1994, which was $3,475,000, (ii) the principal of and all accrued but unpaid interest on the $1,000,000 Promissory Note between Walter and Post Oak Bank dated January 5, 1994 and due January 8, 1996 (the "Post Oak Debt") as of June 30, 1994, which was $914,226, (iii) the principal amount as of the date incurred of the loan from Torch Energy Advisors, Inc. or an affiliate thereof to Walter made in connection with the consummation of the transactions contemplated by the Amoco Stock Purchase Agreement, which is currently estimated to be approximately $1,937,500 (the "Nuevo Carry"), and (iv) one-half (Walter's proportionate share) of the principal amount as of the date incurred of the Promissory Note referred to in Section 3.A.(2) of the Amoco Stock Purchase Agreement, which is estimated to be $0.00 (the "Amoco Note"). -7- 15 SECTION 2.4. PAYMENT OF CASH AND DELIVERY OF CERTIFICATES. (a) At or after the Effective Time, each holder of a certificate or certificates representing issued and outstanding shares of record of Walter Common Stock and each holder of a certificate or certificates representing issued and outstanding shares of record of Walter Preferred Stock, in each case immediately prior to the Effective Time (collectively, the "Certificates"), may surrender such certificate or certificates to CMS Energy, and CMS Energy shall deliver or cause to be delivered, in exchange therefor, (i) cash (constituting amounts payable pursuant to Section 2.1(d) or in lieu of fractional shares or interests pursuant to Section 2.6), by check or wire transfer (except in the case of amounts payable pursuant to Section 2.1(d), which CMS Energy agrees shall be paid by wire transfer) in immediately available funds to the account or accounts designated by such holder in a notice to CMS Energy, and/or (ii) one or more certificates representing the aggregate number of whole CMS Common Shares, into which the Walter Common Stock or the Walter Preferred Stock, as the case may be, represented by the certificate or certificates so surrendered shall have been converted pursuant to Section 2.1. (b) Any amount of cash or certificates representing CMS Common Shares deliverable pursuant to Section 2.1(d) shall be immediately deliverable upon surrender to CMS Energy of a Certificate or Certificates representing issued and outstanding shares of record of Walter Preferred Stock immediately prior to the Effective Time. Any certificates representing CMS Common Shares or cash in lieu of fractional shares or interests deliverable pursuant to Section 2.1(c) shall be deliverable upon the later to occur of (i) surrender to CMS Energy of a Certificate or Certificates representing issued and outstanding shares of record of Walter Common Stock immediately prior to the Effective Time and (ii) five (5) business days after the final determination of the purchase price (including the Balancing Payment) under the Amoco Stock Purchase Agreement, provided, however, that notwithstanding clause (ii) above, as respects certificates representing CMS Common Shares otherwise deliverable in accordance with this sentence pursuant to Section 2.1(c), not less than two business days prior to the Effective Date CMS Energy will estimate, in good faith, the number of CMS Common Shares deliverable upon the surrender to CMS Energy of all Certificates representing issued and outstanding shares of record of Walter Common Stock immediately prior to the Effective Time and the allocation thereof (on a pro rata basis) to each Certificate representing such issued and outstanding shares and, upon surrender at or after the Effective Time as contemplated by clause (i) above, CMS Energy shall deliver a number of CMS Common Shares with respect to each such Certificate (rounded to the nearest whole share) equal to ninety-five percent (95%) of the estimated number of CMS Common Shares deliverable with respect to such Certificate (the aggregate of all such Shares so delivered being the "Delivered Share Number"). Following the Effective -8- 16 Time, CMS Energy and the Stockholders will determine the actual number of CMS Common Shares (and cash in lieu of fractional shares) deliverable upon surrender of all such Certificates (the "Actual Share Number") and the allocation thereof (on a pro rata basis) to each Certificate representing such issued and outstanding shares. Disputes regarding the Actual Share Number that are not resolved by the parties within five (5) business days after the later of (A) final determination of the purchase price (including the Balancing Payment) under the Amoco Stock Purchase Agreement and (B) the ninetieth (90th) day after the Effective Time shall be submitted to an arbitrator who is acceptable to both parties, and whose decision shall be final and binding with respect to the Actual Share Number. The fees and expenses of the arbitrator (if any) incurred in connection with the determination of the Actual Share Number shall be shared equally by CMS Energy and the Stockholders. If the Actual Share Number is greater than the Delivered Share Number, then CMS Energy shall deliver to the respective stockholders entitled thereto an aggregate number of whole CMS Common Shares equal to such excess (allocated as described above), together with the amount of all dividends and distributions which became payable to holders of record on or after the Effective Date in respect of such number of CMS Common Shares. If the Actual Share Number is less than the Delivered Share Number, then the stockholders respectively shall deliver to CMS Energy within two business days following the determination of the Actual Share Number an aggregate number of whole CMS Common Shares equal to such deficiency (pro rata in accordance with the number of whole CMS Common Shares each such Stockholder was entitled to receive pursuant to the proviso in the fifth preceding sentence upon delivery of Certificates as contemplated by clause (i) above), together with the amount of all dividends and distributions which became payable to holders of record on or after the Effective Date in respect of such number of CMS Common Shares. Until so surrendered, each outstanding certificate representing issued and outstanding shares of record of Walter Common Stock or Walter Preferred Stock immediately prior to the Effective Time shall not be transferable on the books of the Surviving Corporation or CMS Energy, but shall be deemed for all corporate purposes, subject to Section 2.5, to evidence the right to receive such cash and/or ownership of the number of whole CMS Common Shares, as the case may be, into which the shares of Walter Common Stock or Walter Preferred Stock, as the case may be, which immediately prior to the Effective Time were represented thereby shall have been converted pursuant to Section 2.1. At the close of business on the business day next preceding the Effective Date, the stock transfer books of Walter shall be closed and no transfer of Walter Common Stock or Walter Preferred Stock shall thereafter be made or consummated. SECTION 2.5. DIVIDENDS AND DISTRIBUTIONS. Any dividend or other distribution paid in respect of CMS Common Stock to holders of record on or after the Effective Date and -9- 17 otherwise payable to the holder of an outstanding certificate which, immediately prior to the Effective Time, represented issued and outstanding shares of Walter Common Stock or Walter Preferred Stock shall, until the surrender of such certificate and the issuance of a certificate or certificates for CMS Common Shares in respect thereof, be retained by CMS Energy pending such surrender, and no such dividend or other distribution payable in respect of CMS Common Stock shall be paid to the holder of such certificate representing Walter Common Stock or Walter Preferred Stock until such certificate shall have been so surrendered to CMS Energy and a certificate or certificates for CMS Common Shares shall have been so issued. Upon surrender of each such certificate and issuance in exchange therefor of CMS Common Shares, there shall be paid by CMS Energy to or at the direction of the holder of the certificate for such CMS Common Shares the amount of all dividends and distributions which became payable to holders of record on or after the Effective Date in respect of the number of whole CMS Common Shares represented by the certificate or certificates so issued. In no event shall the holder of any certificate which, immediately prior to the Effective Time, represented issued and outstanding shares of Walter Common Stock or Walter Preferred Stock be entitled to receive interest on any of the funds to be received in the Merger or on any such dividend or other distribution. SECTION 2.6. FRACTIONAL SHARES. No certificates for fractions of shares of CMS Common Stock and no scrip or other certificates evidencing fractional interests in such shares shall be issued pursuant to Section 2.1. If the conversion of a person's aggregate holdings of Walter Common Stock or Walter Preferred Stock at any time results in a fractional share of CMS Common Stock or interest therein, such person shall, in lieu thereof, be paid in cash in an amount equal to the value of such fractional share or interest based on the Average Price of CMS Common Stock. Any person otherwise entitled to a fractional share or interest shall not be entitled by reason thereof to any voting, dividend or other rights as a stockholder of CMS Energy. SECTION 2.7. CHANGES IN CMS COMMON STOCK. In the event that, during the period of ten (10) trading days which is used to determine the Average Price, or subsequent to such period but prior to the Effective Time, there has occurred the record date of any reclassification, stock split, stock dividend or similar change in respect of the CMS Common Stock, then appropriate adjustment shall be made in the number of shares of CMS Common Stock and/or kind of securities issued as CMS Common Shares in order to provide holders of Walter Common Stock or Walter Preferred Stock with the same number of shares of CMS Common Stock and/or securities that they would have received after such reclassification, stock split, stock dividend or similar change if the Effective Time had occurred immediately prior to the record date of such reclassification, stock split, stock dividend or similar change (and all references herein to -10- 18 the CMS Common Shares" shall refer to such adjusted number and/or kind of securities). ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS, THE PREFERRED STOCKHOLDERS AND THE WARRANTHOLDERS As an inducement to CMS Energy and Sub to enter into this Agreement and to consummate the transactions contemplated hereby, the Stockholders (other than Cain, the Cain Trust and Oehmig) jointly and severally (except as otherwise provided below) represent and warrant to CMS Energy and Sub and agree, and Cain, the Cain Trust and Oehmig represent and warrant to CMS Energy and Sub and agree solely with respect to Section 3.3(b), Section 3.4(a) (third paragraph) and Section 3.4(b), and the Preferred Stockholders severally and not jointly or solidarily represent and warrant to CMS Energy and Sub and agree solely with respect to Section 3.3(b) (second sentence) and Section 3.4(b), and the Warrantholders severally and not jointly or solidarily represent and warrant to CMS Energy and Sub and agree solely with respect to Section 3.3(b) (third sentence) and Section 3.4(b), as follows, it being understood and agreed that any and all such representations and warranties as to ACEC are made to the knowledge of Walter and the Stockholders based on Walter having conducted due diligence on ACEC in accordance with industry practice for a transaction of the size and nature of the acquisition of ACEC by Walter as contemplated by the Amoco Stock Purchase Agreement: SECTION 3.1. ORGANIZATION OF WALTER. Walter is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Texas. Walter is duly qualified to transact business as a foreign corporation and is in good standing in each of the jurisdictions in which the ownership or leasing of the properties used in its business or the conduct of its business requires such qualification, other than in such jurisdictions where the failure to be so qualified and in good standing would not have a Material Adverse Effect. Walter has full corporate power and authority necessary to own or lease and operate its properties and to carry on its business as now conducted. Walter has made available to CMS Energy complete and correct copies of the articles of incorporation and by-laws of Walter, each as amended and in effect on the date hereof. SECTION 3.2. SUBSIDIARIES AND INVESTMENTS. (a) Walter owns beneficially and of record, or indirectly, all of the issued and outstanding shares of capital stock of each of the corporations listed on Schedule 3.2 (each such corporation, together with (i) effective as of June 30, 1994, ACEC, if not listed thereon, from and after the consummation of the transactions contemplated by the Amoco Stock Purchase Agreement, -11- 19 and (ii) any partnership of which Walter or any such corporation is a general partner or of which Walter or any such corporation owns at least 50% of the partnership interest, each of which is identified in Schedule 3.2, being herein collectively referred to as "Subsidiaries"). Except as disclosed on Schedule 3.2, Walter does not, directly or indirectly, (i) own, of record or beneficially, any outstanding securities or other interest in any corporation, partnership, joint venture or other entity (other than investments in publicly traded securities, cash equivalents and short-term investment grade debt) or (ii) control any corporation, partnership, joint venture or other entity. (b) Each of the Subsidiaries is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, and each has full corporate or partnership power and authority, as the case may be, necessary to own or lease and operate its properties now conducted. Each of the Subsidiaries is duly qualified to transact business as a foreign corporation or foreign partnership, as the case may be, and is in good standing in each of the jurisdictions in which conduct of its business requires such qualification, other than in such jurisdictions where the failure to be so qualified and in good standing would not have a Material Adverse Effect. Schedule 3.2 contains a list of each jurisdiction in which each Subsidiary is duly qualified to transact business. Schedule 3.2 sets forth the authorized, and issued and outstanding shares of, capital stock of each corporate Subsidiary and a complete and accurate list of each partnership of which Walter or any Subsidiary is a general or limited partner (the "Partnerships"), together with the state of organization of each Partnership, the name and address of each general or limited partner of each Partnership, and the percentage interest of each partner in each Partnership, and of each joint operating agreement and all amendments thereto to which Walter or any Partnership is a party (the "Operating Agreements"). Walter has made available to CMS Energy true and complete copies of each partnership agreement and all amendments thereto pursuant to which each Partnership was organized (the "Partnership Agreements") and each Operating Agreement. SECTION 3.3. CAPITALIZATION. (a) The authorized capital of Walter consists of (i) 1,000,000 shares of common stock, $.01 par value, of which 100,662 shares are duly and validly issued and outstanding and, except for 11,300 shares issuable upon exercise of the Warrants, none of which is reserved for any purpose, and (ii) 100,000 shares of preferred stock, $1.00 par value, of which 3,000 shares of "14% Senior Cumulative Preferred Stock" have been authorized and all of which are issued and outstanding, 1,000 shares of "Series A Junior Preferred Stock" have been authorized none of which is issued or outstanding and none of which is reserved for any purpose. All of the outstanding shares of Walter Common Stock and Walter Preferred Stock are duly authorized, validly issued, fully paid and nonassessable. The Walter Preferred Stock is entitled to -12- 20 voting rights in accordance with the certificate of designation relating thereto. The record owners of the Walter Common Stock and the Walter Preferred Stock as of the date hereof are listed in Schedule 3.3(a) and a list of the record owners of the Walter Common Stock and the Walter Preferred Stock as of the Effective Date will be provided to CMS Energy on the Effective Date. The record owners of warrants or similar rights (collectively, the "Warrants") to purchase shares of Walter Common Stock as of the date hereof are listed in Schedule 3.3(a) hereto. Complete and correct copies of the material agreements relating to the Warrants have been made available to CMS Energy. Except for the Warrants, there are no options, warrants or other rights to acquire, or agreements or commitments to issue, sell, purchase or redeem, shares of capital stock or any other equity interest of Walter, whether on conversion of other securities or otherwise. None of the issued and outstanding shares of Walter Common Stock has been issued in violation of, or is subject to, any preemptive or subscription rights. Except as set forth in Schedule 3.3(a), there are no stockholder agreements, voting trust agreements or any other similar contracts, agreements, arrangements, commitments, plans or understandings restricting or otherwise relating to voting, dividend, ownership or transfer rights with respect to any shares of capital stock of Walter. (b) Each Stockholder severally represents and warrants as to itself that (i) it is the beneficial owner of the shares of Walter Common Stock listed in Schedule 3.3(a) opposite its name or it has transferred such shares to a Permitted Transferee or Permitted Transferees (as hereinafter defined) and (ii) all such shares are owned free from all liens, claims, encumbrances or other restrictions of any kind, other than liens, claims, encumbrances or other restrictions listed on Schedule 3.3(b), securities law restrictions applicable to restricted stock and restrictions created by this Agreement. Each Preferred Stockholder severally represents and warrants as to itself that (i) it is the beneficial owner of the shares of Walter Preferred Stock listed in Schedule 3.3(a) opposite its name or it has transferred such shares to a Permitted Transferee or Permitted Transferees and (ii) all such shares are owned free from all liens, claims, encumbrances or other restrictions of any kind, other than liens, claims, encumbrances or other restrictions listed on Schedule 3.3(b), securities law restrictions applicable to restricted stock and restrictions created by this Agreement. Each Warrantholder severally represents and warrants as to itself that (i) it is the beneficial owner of Warrants to purchase shares of Walter Common Stock listed in Schedule 3.3(a) opposite its name, (ii) all such Warrants are owned free from all liens, claims, encumbrances or other restrictions of any kind, other than liens, claims, encumbrances or other restrictions listed on Schedule 3.3(b), securities law restrictions applicable to restricted stock and restrictions created by this Agreement, and (iii) that such Warrants will be exercised or cancelled prior to the Effective Time and, as of the Effective Time, no shares of -13- 21 Walter Common Stock will be issuable pursuant thereto. Permitted Transferee shall mean any executor of the estate of any Stockholder or any person acquiring the CMS Common Shares of such Stockholder solely pursuant to the laws of descent. (c) All outstanding shares of capital stock of each corporate Subsidiary are duly authorized, validly issued, fully paid and nonassessable. Walter or another wholly-owned Subsidiary is the record and beneficial owner of all of the issued and outstanding shares of capital stock of each such Subsidiary. All such shares of capital stock are so owned free from all liens, claims, encumbrances or other restrictions of any kind, other than liens, claims, encumbrances or other restrictions listed on Schedule 3.3(c). There are no options, warrants or other rights to acquire, or agreements or commitments to issue, sell, purchase or redeem, shares of capital stock of any corporate Subsidiary, whether on conversion of other securities or otherwise. None of the issued and outstanding shares of common stock of any corporate Subsidiary has been issued in violation of, or is subject to, any preemptive or subscription rights. There are no voting trust agreements or any other similar contracts, agreements, arrangements, commitments, plans or understandings restricting or otherwise relating to voting, dividend, ownership or transfer rights with respect to any shares of common stock of any corporate Subsidiary. (d) All outstanding equity interests in each partnership Subsidiary are duly authorized, validly issued, fully paid and nonassessable. Walter or another Subsidiary is the record and beneficial owner of such equity interests of each such partnership Subsidiary to the extent set forth in Schedule 3.2. All such equity interests are so owned free from all liens, claims, encumbrances or other restrictions of any kind, other than liens, claims, encumbrances or other restrictions listed on Schedule 3.3(d). There are no options, warrants or other rights to acquire, or agreements or commitments to issue, sell, purchase or redeem, any equity interests in any partnership Subsidiary. SECTION 3.4. AUTHORITY. (a) Walter has full corporate power and authority to enter into this Agreement and, subject to adoption of this Agreement by the stockholders of Walter (which adoption shall be effected promptly after the date hereof), to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement by Walter and the consummation by Walter of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Walter, subject to such adoption of this Agreement by the stockholders of Walter. This Agreement has been duly executed and delivered by Walter and is, and each other agreement or instrument of Walter contemplated hereby when executed and delivered will be, the legal, valid and binding agreement of Walter, enforceable against Walter in -14- 22 accordance with its respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). Neither the execution or delivery of this Agreement by Walter or any Stockholder or Preferred Stockholder or Warrantholder, nor consummation of the transactions contemplated hereby or compliance with or fulfillment of the terms and provisions hereof by Walter or such Stockholder or Preferred Stockholder or Warrantholder, will (a) conflict with, result in a breach of the terms, conditions or provisions of, or constitute a default, an event of default or an event creating rights of acceleration, termination or cancellation or a loss of rights, or result in the creation or imposition of any encumbrance upon any of the material assets of Walter, under the articles of incorporation or the by-laws of Walter, any instrument, agreement, mortgage, indenture, deed of trust, permit, concession, grant, franchise, license, judgment, order, award, decree or other restriction to which Walter is a party or any of its material properties is subject or by which it is bound or any material statute, other law or regulatory provision affecting it, except for such conflicts, breaches, defaults, events, creations and impositions that are set forth on Schedule 3.4(a) or (b) require the approval, consent or authorization of, or the making of any declaration, filing or registration with, any third party or any foreign, federal, state or local court, governmental authority or regulatory body, by or on behalf of Walter, except for the applicable requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"), the filing of Articles of Merger with the Secretary of State of the State of Texas and appropriate documents with the relevant authorities of other jurisdictions in which Walter is qualified to do business, adoption of this Agreement by the stockholders of Walter and as set forth in Schedule 3.4(a). (b) Each Stockholder, Preferred Stockholder and Warrantholder severally and not jointly or solidarily represents and warrants as to itself that it has full power and authority to enter into this Agreement. Each Stockholder severally represents and warrants as to itself and Walter, and each Preferred Stockholder and Warrantholder severally represents and warrants as to itself, that neither the execution or delivery of this Agreement by Walter or such Stockholder, or such Preferred Stockholder or Warrantholder, nor consummation of the transactions contemplated hereby or compliance with or fulfillment of the terms and provisions hereof by Walter or such Stockholder, or such Preferred Stockholder or Warrantholder, will conflict with, result in a breach of the terms, conditions or provisions of, or constitute a default, an event of default or an event creating rights of acceleration, termination or -15- 23 cancellation or a loss of rights under, or result in the creation or imposition of any encumbrance upon any of the material assets of Walter, under any instrument, agreement, mortgage, indenture, deed of trust, permit, concession, grant, franchise, license, judgment, order, award, decree or other restriction to which such Stockholder, or such Preferred Stockholder or Warrantholder, is a party or by which such Stockholder, or such Preferred Stockholder or Warrantholder, is bound. Each Stockholder, Preferred Stockholder and Warrantholder severally represents and warrants as to itself that this Agreement has been duly executed and delivered by such person and is, and each other agreement or instrument of such Stockholder or Preferred Stockholder or Warrantholder contemplated hereby when executed and delivered will be, the legal, valid and binding agreement of such Stockholder or Preferred Stockholder or Warrantholder, as the case may be, enforceable against such Stockholder or Preferred Stockholder or Warrantholder in accordance with its respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforceability of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). SECTION 3.5. FINANCIAL STATEMENTS. Walter has previously provided CMS Energy with: (i) the consolidated audited balance sheet (the "Balance Sheet") of Walter as of December 31, 1993 (the "Balance Sheet Date") and the related audited consolidated statements of income (the "Statement of Income"), stockholders' equity and cash flows for the year then ended, together with appropriate notes to such financial statements, certified by Deloitte & Touche, independent public accountants, and (ii) the consolidated unaudited balance sheet (the "Unaudited Balance Sheet") of Walter as of June 30, 1994 (the "Unaudited Balance Sheet Date") and the related unaudited consolidated statement of income (the "Unaudited Statement of Income") for the six months then ended. Except as disclosed in the notes thereto, such consolidated balance sheets and statements of income, stockholders' equity and cash flows referred to in clauses (i) and (ii) of the preceding sentence have been prepared in conformity with generally accepted accounting principles ("GAAP") consistently applied and fairly present in all material respects the consolidated financial position of Walter at the dates of such balance sheets and the consolidated results of its operations and consolidated cash flows for the respective periods indicated, except that the Unaudited Balance Sheet and the Unaudited Statement of Income are subject to normal year-end audit adjustments. The Unaudited Statement of Income does not contain any material items of special or nonrecurring income except as expressly specified therein. The Statement of Income does not contain any material items of special or nonrecurring income except as expressly specified therein. Except as set forth on Schedule 3.5 or in the Unaudited Statement of Income or the Unaudited Balance Sheet, the -16- 24 Unaudited Balance Sheet and the Unaudited Statement of Income include all adjustments, which consist only of normal recurring accruals, other than normal year-end audit adjustments, necessary for such fair representation. All costs and expenses incurred in generating the revenues reflected in the Statement of Income during the period covered thereby which are required by generally accepted accounting principles to be reflected in the Statement of Income are so reflected. SECTION 3.6. OPERATIONS SINCE UNAUDITED BALANCE SHEET DATE. (a) Except as set forth in Schedule 3.6(a), since the Unaudited Balance Sheet Date, there has been: (i) no material adverse change in the assets, liabilities, operations, profits or business or condition, financial or otherwise, of Walter and its Subsidiaries taken as a whole, and (ii) no damage, destruction, loss or claim with respect to, whether or not covered by insurance, or condemnation or other taking of, assets having a Material Adverse Effect on Walter and its Subsidiaries taken as a whole. (b) Except as set forth in Schedule 3.6(b), as contemplated hereby or with the prior written consent of CMS Energy after the date hereof, since the Unaudited Balance Sheet Date, Walter has conducted its business only in the ordinary course and in conformity with past practice. Without limiting the generality of the foregoing, except as set forth in Schedule 3.6(b) or with the prior written consent of CMS Energy after the date hereof, since the Unaudited Balance Sheet Date, neither Walter nor any of its Subsidiaries has: (i) issued, delivered or agreed (actually or contingently) to issue or deliver any of its capital stock, or granted any option, warrant or right to purchase any of its capital stock or other equity interest, or security convertible into its capital stock or other equity interest, or any of its bonds, notes or other securities, or borrowed or agreed to borrow any funds, other than in the ordinary course of business consistent with past practice; (ii) paid any obligation or liability (absolute or contingent) other than current liabilities reflected on the balance sheets referred to in Section 3.5 and current liabilities incurred since the Unaudited Balance Sheet Date in the ordinary course of business consistent with past practice; (iii) declared or made, or agreed to declare or make, any payment of dividends or distributions to stockholders or purchased or redeemed, or agreed to purchase or redeem, any of its capital stock or other equity interest, except in each case as permitted hereunder; (iv) mortgaged, pledged or encumbered any assets other than in the ordinary course of business consistent with past practice; (v) except for assets sold, leased or transferred in the ordinary course of business consistent with past practice, sold, leased or transferred or agreed to sell, lease or transfer any material assets or rights; (vi) cancelled or agreed to cancel any material debts or claims, waived or agreed to waive any rights of material value, or allowed to lapse or failed to keep in force any material -17- 25 franchise, permit or other material right; (vii) except in the ordinary course of business consistent with past practice, made or permitted any material amendment or termination of any material contract, agreement or license; (viii) undertaken or committed to capital expenditures exceeding U.S. $25,000 or its equivalent in foreign currency for any single project or related series of projects; (ix) made any increase in the compensation paid or to become payable to any of its officers or employees except for increases in the normal course of business consistent with past practice and increases required to be made pursuant to the terms of any employment or other agreement or employee benefit plan, policy, arrangement or agreement entered into prior to the Balance Sheet Date; (x) amended its articles of incorporation or by-laws; (xi) undergone any material adverse change in its relationship, taken as a whole, with suppliers, purchasers, distributors, lessors, governmental bodies, co-venturers under Operating Agreements and consultants; (xii) made charitable donations in excess of U.S. $10,000 or its equivalent in foreign currency in the aggregate; (xiii) incurred any liability or obligation (whether absolute, accrued, contingent or otherwise and whether direct or as guarantor or otherwise with respect to obligations of others) material to the business or assets of Walter and its Subsidiaries, taken as a whole, except in the ordinary course of business consistent with past practice and except as permitted hereunder; (xiv) instituted, settled or agreed to settle any litigation, action, or proceeding before any court or governmental body relating to the business or assets of Walter or any of its Subsidiaries and involving an amount in excess of U.S. $10,000 or its equivalent in foreign currency or otherwise materially affecting Walter or its Subsidiaries; (xv) entered into, or amended in any material respect, any employment, collective bargaining, deferred compensation, retention, change of control, termination or other material agreement or arrangement for the benefit of employees (whether or not legally binding) or entered into, adopted or amended in any material respect any Plan (as hereinafter defined); (xvi) suffered any strike or other employment related problem which would have a Material Adverse Effect on Walter and its Subsidiaries taken as a whole; (xvii) suffered the loss of any key employees, consultants or agents or had any material change in its relations with its employees, consultants or agents; (xviii) received any notice of termination of any material contract, lease or other material agreement; (xix) transferred or expressly granted any rights under, or entered into any settlement regarding the breach or infringement of, any material United States or foreign license, patent, copyright, trademark, trade name, invention or other material intellectual property or modified in any material respect any existing rights with respect thereto; (xx) changed its accounting reference period; (xxi) entered into any transaction of the type described in Section 3.30 except as permitted hereunder; or (xxii) entered into or become committed to enter into any other material transaction except in the ordinary course of business consistent with past practice. -18- 26 SECTION 3.7. NO UNDISCLOSED LIABILITIES. Neither Walter nor any of its Subsidiaries (other than ACEC) is subject to any material liability which is required in accordance with GAAP to be shown on the Unaudited Balance Sheet but which is not so shown, and, to the knowledge of Walter or any Stockholder, neither Walter nor any of its Subsidiaries (other than ACEC) is subject to any material liability, absolute or contingent, which is not shown on the Unaudited Balance Sheet or which is in excess of amounts shown or reserved for in the Unaudited Balance Sheet or referred to in the notes thereto, other than, in each case, (i) as disclosed in Schedule 3.7 and (ii) liabilities of a similar nature as those set forth in the Unaudited Balance Sheet and notes thereto and incurred after the Unaudited Balance Sheet Date in the ordinary course of its business consistent with past practice. SECTION 3.8. TAXES. (a) Except as set forth on Schedule 3.8(a), (i) each of Walter and its Subsidiaries (as hereinafter defined) has filed on or before the date hereof (or will timely file) all material Tax Returns (as hereinafter defined) required to be filed on or before the Effective Date; (ii) all such Tax Returns are (or will be) complete and accurate in all material respects and disclose all material Taxes (as hereinafter defined) required to be paid by Walter and each Subsidiary for the periods covered thereby except for Taxes for which adequate reserves have been established by Walter in accordance with generally accepted accounting principles and all Taxes shown to be due on such Tax Returns have been or will be timely paid; (iii) none of Walter or any Subsidiary has waived any statute of limitations in respect of Taxes; (iv) none of the Tax Returns referred to in clause (i) have been examined by the Internal Revenue Service or the appropriate state, local or foreign taxing authority, and the period for assessment of the Taxes in respect of Tax Returns for United States federal, state or local Taxes for the year 1990 and prior years has expired; (v) there is no action, suit, investigation, audit, claim or assessment pending or proposed or threatened with respect to Taxes of Walter or any Subsidiary; (vi) there are no Tax Sharing Arrangements (as defined in Section 3.8(d)(v)) to which any Person other than Walter and its Subsidiaries is a party or is bound; (vii) there are no material liens for Taxes upon the assets of Walter or any Subsidiary except liens relating to current Taxes not yet due; (viii) all material Taxes which Walter or any Subsidiary are required by law to withhold or to collect for payment have been duly withheld and collected, and have been paid or accrued, reserved against and entered upon the books of Walter or such Subsidiary; (ix) none of Walter and its Subsidiaries (other than ACEC) has been a member of any consolidated group other than the Company Group of which it is a member on the date hereof; (x) no material amount of the income of Walter and its Subsidiaries recognized, for federal, state, local or foreign income tax purposes, during the period beginning January 1, 1994 and ending on the Effective Date will (y) be derived other than -19- 27 in the ordinary course of business, or (z) arise from transactions of a type not reflected in the Tax Returns for the taxable year ending December 31, 1993; (xi) except for the Closing Agreement expected to be entered into among Amoco Corporation, ACEC, CMS Energy and the Commissioner of Internal Revenue, and the ruling requests to be submitted to the Internal Revenue Service in connection with the transactions contemplated by the Amoco Stock Purchase Agreement and this Agreement, there are no Tax rulings, requests for rulings, requests for a change in method of accounting or closing agreements relating to Walter or any Subsidiary which could affect the liability of Walter or any Subsidiary for Taxes for any period after the Effective Date; (xii) none of Walter or any Subsidiary has filed a consent under Section 341(f) of the Code or any comparable provision of state statutes; (xiii) since January 1, 1994, none of Walter or any Subsidiary has taken any action not in accordance with past practice that would have the effect of deferring any material Tax liability for Walter or any Subsidiary from any taxable period ending on or before the Effective Date to any taxable period ending after the Effective Date; (xiv) no power of attorney has been granted with respect to any matter relating to Taxes of Walter or any Subsidiary which is currently in force; (xv) none of the property of Walter or any Subsidiary is required to be treated as owned by another person pursuant to Section 168(f)(8) of the Code (as in effect prior to its amendment by the Tax Equity and Fiscal Responsibility Act of 1982) or is "tax exempt use property" within the meaning of Section 168(h) of the Code or is subject to a so-called TRAC lease under Section 7701(h) of the Code or any predecessor provision; (xvi) neither Walter nor any Subsidiary has participated in or cooperated with an international boycott, within the meaning of Section 999 of the Code, and all filing requirements imposed by Section 999 of the Code with respect to Walter and its Subsidiaries have been and will be complied with; (xvii) neither Walter nor any Subsidiary has disposed of property in a transaction being accounted for under the installment method pursuant to Section 453 or 453A of the Code; (xviii) neither Walter nor any Subsidiary has any corporate acquisition indebtedness, as described in Section 279(b) of the Code; (xix) no taxes with respect to the period January 1, 1994 through June 30, 1994 were paid by Walter (or charged to Walter through any intercompany account or payment) after June 30, 1994 which were not included in the provision for taxes on the Unaudited Statement of Income; (xx) except as may be limited as a result of the Merger and the other transactions contemplated by this Agreement, the "regular" and "alternative tax" consolidated net operating loss carryforwards set forth in Schedule 3.8(b) are each available to Walter and the Company Group of which Walter is a member for a period of fifteen taxable years from the end of the taxable year in which the applicable loss was incurred; (xxi) except as may be limited as a result of the Merger and the other transactions contemplated by this Agreement, the "regular" and "alternative tax" estimated consolidated net operating loss for the period January 1, 1994 -20- 28 through June 30, 1994 set forth in Schedule 3.8(c) will, to the extent it is not utilized to offset income for the period July 1, 1994 through and including the Effective Date, be available to CMS and members of the CMS Company Group for a period of fifteen taxable years following the Effective Date; (xxii) except as set forth in Schedule 3.8(b), Walter has elected to be bound by the provisions of Treasury Regulation Section 1.1503-2(g)(2) (and has complied with all of the requirements thereof) with respect to all of the losses incurred during the period covered by Schedule 3.8(b) which constitute "dual consolidated losses" (as defined in Section 1503 of the Code and the regulations thereunder); and (xxiii) except as set forth in Schedule 3.8(c), for the period January 1, 1994 through the Effective Date, for United States federal (and to the extent applicable, state or local) income tax purposes, neither Walter nor any Subsidiary has taken any loss, expense or deduction for any dual resident company or separate unit (as such terms are defined in Treasury Regulation Section 1.1503-2(c)) which Walter or such Subsidiary has used (or will use) to offset the income of any other Person under the laws of any foreign country. (b) No disposition by Walter or any of the Stockholders or the Preferred Stockholders pursuant to this Agreement is subject to withholding under Section 1445 of the Code and no stock transfer taxes, real estate transfer taxes, or other similar taxes will be imposed in respect of the Merger. (c) As a result of the Merger, none of Walter, any Subsidiary or the Surviving Corporation will be obligated (limited, in the case of the Surviving Corporation, to obligations to which the Surviving Corporation becomes subject as a result of any agreement or arrangement entered into by Walter or any Subsidiary prior to the Merger) to make a payment to an individual that would be an "excess parachute payment" to a "disqualified individual" as those terms are defined in Section 280G of the Code, without regard to whether such payment is reasonable compensation for personal services performed or to be performed in the future. (d) None of Walter, any Subsidiary or the Surviving Corporation will be obligated to pay to the Republic of Congo any registration or other Tax as a result of the Merger or as a result of the acquisition by Walter of ACEC. (e) For purposes of this Section 3.8 and Section 7.2, notwithstanding any other provision hereof, the following definitions shall apply: (i) "Company Group" shall mean any "affiliated group" (as defined in Section 1504(a) of the Code without regard to the limitations contained in Section 1504(b) of the Code) that, at any time on or before the Effective Date, includes or has included Walter, any of -21- 29 its Subsidiaries or any predecessor of or successor to Walter or any of its Subsidiaries (or another such predecessor or successor), or any other group of corporations which, at any time on or before the Effective Date, files or has filed Tax Returns on a combined, consolidated or unitary basis with Walter or any of its Subsidiaries or any predecessor of or successor to Walter or any of its Subsidiaries (or another such predecessor or successor). (ii) "material" shall mean, with respect to Taxes or Tax Returns, that the failure on a timely basis to pay all such Taxes, to file all such Tax Returns or pay the Taxes due in respect of such Tax Returns, as the case may be, would result in an aggregate Tax liability of not less than U.S. $50,000 or its equivalent in foreign currency. (iii) "Subsidiary" shall have the meaning ascribed thereto in Section 3.2(a) except that ACEC shall be treated as a Subsidiary only with respect to taxable periods of ACEC beginning after the closing date of the Amoco Stock Purchase Agreement. (iv) "Tax" (and, with correlative meaning, "Taxes" and "Taxable") shall mean (i) any federal, state, local or foreign income, gross receipts, windfall profit, severance, property, production, sales, use, value added, license, excise, franchise, employment, payroll, withholding, alternative or add-on minimum, ad valorem, transfer, excise, stamp, or environmental tax, or any other tax, custom, duty, governmental fee or import or export duty or other like assessment or charge of any kind whatsoever, together with any interest or penalty, addition to tax or additional amount imposed by any governmental authority, and (ii) liability of Walter or any of its Subsidiaries (other than ACEC) for the payment of amounts with respect to payments of a type described in clause (i) as a result of being a member of an affiliated, consolidated, combined or unitary group, or as a result of any obligation of Walter or any of its Subsidiaries under any Tax Sharing Arrangement. Notwithstanding the preceding sentence, the term "Tax" shall not include any royalty or income share payable to any governmental body. (v) "Tax Return" shall mean any return, report or similar statement required to be filed with respect to any Tax (including any attached schedules), including, without limitation, any information return, claim for refund, amended return and declaration of estimated Tax. -22- 30 (vi) "Tax Sharing Arrangement" shall mean any written or unwritten agreement or arrangement for the allocation or payment of Tax liabilities or payment for Tax benefits with respect to a consolidated, combined or unitary Tax Return, which Tax Return includes Walter or any of its Subsidiaries (other than ACEC). SECTION 3.9. CONDITION OF TANGIBLE ASSETS. To the knowledge of Walter and the Stockholders, except as otherwise disclosed in Schedule 3.9, each material tangible operating asset owned or leased by Walter or any of its Subsidiaries (other than ACEC) and used as of the Effective Time in the Walter Business and having a book or fair market value in excess of U.S. $50,000 or its equivalent in foreign currency is, as of the Effective Time, in good operating condition (subject to reasonable wear and tear and immaterial impairments of value and damage) and generally suitable for the uses for which intended. SECTION 3.10. TITLE TO PROPERTY. Each of Walter and its Subsidiaries has good and, with respect to real property, indefeasible title to all of the material assets reflected on the Unaudited Balance Sheet as being owned by it and all of the material assets thereafter acquired by it (except to the extent that such assets have thereafter been disposed of in the ordinary course of business consistent with past practice), subject to no liens, mortgages, pledges, security interests, encumbrances, claims or charges of any kind (collectively, "Liens") except (i) as noted in Schedule 3.10, (ii) for Liens for taxes not yet delinquent or the validity of which is being contested in good faith, (iii) any Liens arising by operation of law securing obligations not yet overdue and (iv) Liens that do not materially interfere with the present use or value of the applicable asset. SECTION 3.11. AVAILABILITY AND OWNERSHIP OF ASSETS. The assets shown on the Unaudited Balance Sheet, taken as a whole, include all the material properties and assets owned or used or held by Walter or its Subsidiaries (other than ACEC) during the past twelve months and required, in accordance with generally accepted accounting principles, to be reflected on the Unaudited Balance Sheet (except properties and assets sold, cash disposed of, accounts receivable collected, prepaid expenses realized, contracts fully performed, and properties or assets which had become worn out, obsolete or surplus, in each case in the ordinary course of business, and except for the stock of ACEC, which has been or will prior to the Effective Time be acquired pursuant to the merger contemplated by the Amoco Stock Purchase Agreement). There are no material assets or properties used in the Walter Business owned by any person other than Walter or its Subsidiaries which are leased or licensed pursuant to a lease or license that will terminate as a result of the consummation of the Merger and the other transactions contemplated hereby. -23- 31 SECTION 3.12. PERSONAL PROPERTY LEASES. Set forth in Schedule 3.12 is a brief description of each lease or other agreement or right, whether written or oral (including in each case the annual rental, the expiration date thereof and a brief description of the property covered), under which Walter or any of its Subsidiaries (other than ACEC) is lessee of, or holds or operates, any machinery, equipment, vehicle or other tangible personal property owned by a third person having scheduled rental payments in excess of U.S. $50,000 per year or its equivalent in foreign currency. SECTION 3.13. ACCOUNTS RECEIVABLE. To the knowledge of Walter and the Stockholders, all outstanding accounts receivable of Walter and its Subsidiaries have arisen from bona fide transactions, except to the extent that a reserve in respect thereof shall have been established on the Unaudited Balance Sheet. To the knowledge of Walter and the Stockholders, the accounts receivable reflected in the Unaudited Balance Sheet, (including all accounts receivable of ACEC reflected in the Unaudited Balance Sheet or otherwise included in the calculation of Walter Consolidated Net Working Capital), taken as a whole, are good and collectible in all material respects in the ordinary course of business at the aggregate recorded amounts thereof, net of any applicable allowances for doubtful accounts reflected therein. Neither Walter nor any Stockholder has any knowledge that any accounts receivable to be reflected in the books and records of Walter and its Subsidiaries as of the Effective Date, taken as a whole, will not be good and collectible in all material respects in the ordinary course of business at the aggregate recorded amounts thereof, net of any applicable allowances for doubtful accounts reflected thereon, which allowances will be determined on a basis consistent with the basis used in determining the allowances for doubtful accounts reflected in the Balance Sheet. SECTION 3.14. INTELLECTUAL PROPERTY. (a) Schedule 3.14 contains a list of: (i) all material United States and foreign patents and patent applications, all material United States, state and foreign trademarks, service marks, trade names and copyrights for which registrations have been issued or applied for, and all other material United States, state and foreign trademarks, service marks, trade names and copyrights, owned by Walter or any of its Subsidiaries or in which Walter or any of its Subsidiaries holds any material right, license or interest, showing in each case the product, device, process, service, business or publication covered thereby, the registered or other owner, expiration date and, in the case of any such right, license or interest, a brief description thereof; -24- 32 (ii) all material agreements, commitments, contracts, understandings, licenses and assignments relating or pertaining to any asset, property or right described in the preceding clause to which Walter or any of its Subsidiaries is a party, showing in each case the parties thereto and, in the case of oral agreements, commitments, contracts, understandings, licenses and assignments, the material terms thereof; (iii) all material licenses or agreements pertaining to mailing lists, know-how, trade secrets, inventions or uses of ideas to which Walter or any of its Subsidiaries is a party, showing in each case the parties thereto and, in the case of oral licenses or agreements, a brief description of the material terms thereof; and (iv) all registered assumed or fictitious names under which Walter or any of its Subsidiaries is conducting its business as of the date hereof. (b) All patents listed in Schedule 3.14 as being owned by Walter or any of its Subsidiaries are valid and in full force, all patents listed in Schedule 3.14 as being used by Walter or any of its Subsidiaries are, to the knowledge of Walter, valid and in full force and all patent applications of Walter or any of its Subsidiaries, listed therein are in good standing, all without material challenge of any kind except as otherwise disclosed in Schedule 3.14, and, except as otherwise disclosed in Schedule 3.14, Walter or a Subsidiary owns the entire right, title and interest in and to such patents and patent applications so listed as being owned by Walter or any of its Subsidiaries without limitation, burden or encumbrance of any kind, except for such limitations, burdens and encumbrances that would not have a Material Adverse Effect on Walter and its Subsidiaries taken as a whole. All of the registrations for trade names, trademarks, service marks and copyrights listed in Schedule 3.14 as being owned by Walter or any of its Subsidiaries are valid and in full force, all of the registrations for trade names, trademarks, service marks and copyrights listed in Schedule 3.14 as being used by Walter or any of its Subsidiaries are, to the knowledge of Walter, valid and in full force and all applications by Walter or any of its Subsidiaries for such registrations are pending and in good standing, all without material challenge of any kind except as otherwise disclosed in Schedule 3.14, and, except as otherwise disclosed in Schedule 3.14, Walter or its Subsidiaries owns the entire right, title and interest in and to all such trade names, trademarks, service marks and copyrights so listed as being owned by Walter or any of its Subsidiaries as well as the registrations and applications for registration therefor without qualification, limitation, burden or encumbrance of any kind, except for such qualifications, limitations, burdens and encumbrances that would not have a Material Adverse Effect on -25- 33 Walter and its Subsidiaries taken as a whole. Correct and complete copies of all the patents and patent applications, registered trademarks, trade names, service marks and copyrights, registrations or applications therefor and licenses listed in Schedule 3.14 have heretofore been delivered by Walter to CMS Energy. (c) No infringement of any patent, patent right, trademark, service mark, trade name, or copyright or registration thereof has occurred or results in any way from the operations or business of Walter or its Subsidiaries, except for such infringements that would not have a Material Adverse Effect on Walter and its Subsidiaries taken as whole. SECTION 3.15. OWNED REAL PROPERTY. Schedule 3.15 contains a brief description of each parcel of real property owned by Walter or any of its Subsidiaries (the "Owned Real Property") and of each option held by Walter or any of its Subsidiaries to acquire any real property. Complete and correct copies of any title opinions, surveys and appraisals in the possession of Walter or any of its Subsidiaries or any policies of title insurance currently in force and in the possession of Walter or any of its Subsidiaries with respect to each such parcel have heretofore been made available by Walter to CMS Energy. SECTION 3.16. LEASED REAL PROPERTY. Schedule 3.16 sets forth a list of each lease or similar agreement under which (i) Walter or any of its Subsidiaries is lessee of, or holds or operates, any real property or interest therein owned by any third person, (ii) to the knowledge of Walter and the Stockholders, Walter or any of its Subsidiaries has been lessee of, or has held or operated, any real property owned by any third person and is as of the date hereof, or will be as of the Effective Date, subject to any actual or contingent liability (other than any liability in respect of a matter referred to in Section 3.29) in respect thereof (the real property described in clauses (i) and (ii) above being collectively referred to herein as the "Leased Real Property") or (iii) Walter or any of its Subsidiaries is lessor of any of the Owned Real Property. Except as set forth in Schedule 3.16, Walter or a Subsidiary has the right to quiet enjoyment of all the Leased Real Property described in clause (i) of the immediately preceding sentence for the full term of each such lease or similar agreement (and any renewal option related thereto) relating thereto, and the leasehold or other interest of Walter or such Subsidiary in such real property is not subject or subordinate to any encumbrance, except for any failure to have such right or the existence of any such encumbrance that would not have a Material Adverse Effect on Walter and its Subsidiaries taken as whole. Complete and correct copies of any title opinions, surveys and appraisals in the possession of Walter or any of its Subsidiaries or any policies of title insurance currently in force and in the possession of -26- 34 Walter or any of its Subsidiaries with respect to each such parcel of leased property have heretofore been made available by Walter to CMS Energy. SECTION 3.17. OBLIGATIONS; LITIGATION. Except as set forth in Schedule 3.17, Walter and its Subsidiaries have performed all obligations required to be performed by them to date, and are not in default, under any agreement, lease or other document to which either is a party, or under any law or order of any court or governmental agency, except for such failures to perform or defaults that would not have a Material Adverse Effect on Walter and its Subsidiaries taken as whole. Except as set forth in Schedule 3.17, there are no claims, actions, suits or proceedings to which Walter or any of its Subsidiaries is a party or any of their respective properties is subject or by which any of them is bound, pending or, to the knowledge of Walter or any Stockholder, threatened before or by any court or governmental agency, which is reasonably expected to have a Material Adverse Effect on Walter and its Subsidiaries taken as a whole or prevent or hinder the consummation of the transactions contemplated hereby. SECTION 3.18. AMOCO STOCK PURCHASE AGREEMENT. None of Walter or any Stockholder has taken any action that would cause the Amoco Stock Purchase Agreement or any other material agreements executed in connection with the Amoco Stock Purchase Agreement not to be, and neither Amoco (as hereinafter defined) nor Nuevo has asserted to Walter that the Amoco Stock Purchase Agreement or such other material agreement does not constitute, a legal, valid and binding agreement. None of Amoco, Nuevo, Nuevo Congo (as hereinafter defined), Walter nor Walter Congo (as hereinafter defined) is, and, to the knowledge of Walter or any Stockholder, none of such parties is alleged to be, in breach or default in any material respect under the Amoco Stock Purchase Agreement or such other material agreement, and the conditions to the obligation of each party to such Agreement to consummate the transactions contemplated thereby were as of the date of consummation of such transactions, and will continue as of the Effective Date to be, satisfied. SECTION 3.19. COMPLIANCE WITH LAWS. Except as disclosed in Schedule 3.19, Walter and its Subsidiaries are in compliance with the provisions of all applicable laws and regulations of all federal, state, local and foreign governments, including but not limited to all Applicable Environmental Laws (as defined in Section 3.29(a)), except to the extent that the failure to comply therewith would not have a Material Adverse Effect on Walter and its Subsidiaries taken as whole. Except as disclosed in Schedule 3.19, to the knowledge of Walter and each Stockholder, there are no proposed orders, judgments, decrees, governmental takings, condemnations or other proceedings, in each case binding upon the business, operations or properties of -27- 35 Walter or any of its Subsidiaries and which would have a Material Adverse Effect on Walter and its Subsidiaries taken as a whole. SECTION 3.20. PERMITS. Each of Walter and its Subsidiaries possesses all material federal, state, local and foreign governmental and regulatory franchises, rights, privileges, permits, grants, concessions, licenses, certificates, variances, authorizations, approvals, production sharing arrangements, conventions, and other material authorizations (including any amendments to any thereof) necessary to own or lease and operate its material properties and to conduct its business as now conducted and all rights to explore for, develop and/or produce hydrocarbons and to conduct all operations related thereto (collectively, the "Permits"), including but not limited to environmental Permits. All Permits are set forth in Schedule 3.20, except for such Permits which would be readily obtainable by any qualified applicant without undue burden in the event of any lapse, termination, cancellation or forfeiture. Except as disclosed in Schedule 3.20, all Permits are in full force and effect and will continue in full force and effect immediately following the consummation of the Merger without the breach of any terms or conditions thereof or the forfeiture or impairment of any rights thereunder and no consent, approval or act of, or the making of any filing with, any governmental body, regulatory commission or other party will be required to be obtained or made by Walter or any of its Subsidiaries in respect of any Permit as a result of the consummation of the Merger and the other transactions contemplated hereby. Neither Walter nor any of its Subsidiaries is in default in any material respect under the terms of any such Permit nor has received notice of any material default thereunder. SECTION 3.21. INSURANCE. Walter and its Subsidiaries (except ACEC) maintain policies of fire and casualty, liability (general, product and other liability), workers' compensation and other forms of insurance and bonds with those insurers listed on Schedule 3.21. Schedule 3.21 contains a list and brief description (including type of coverage, limits, deductibles, carriers and effective and termination dates) of all policies of insurance maintained by Walter or any of its Subsidiaries (except for ACEC) since December 31, 1991, up to and including the Effective Date. Each of Walter and its Subsidiaries (except for ACEC) is a named insured or is otherwise covered under each such policy, and each such policy is in full force and effect and will not in any way be affected by or terminate or lapse by reason of the transactions contemplated by this Agreement. Walter has made available to CMS Energy complete and correct copies of all policies listed on Schedule 3.21, together with all riders and amendments thereto, and, to the knowledge of Walter and the Stockholders, no insurer under such policies has a -28- 36 basis to void such policies on grounds of non-disclosure on the part of the policyholder or the insured thereunder. Schedule 3.21 hereto includes a list of each claim and each notice of claim submitted under any such policy since December 31, 1991. Except for any such claims or notices of claim, the full policy limits (subject to deductibles provided therein) are available and unimpaired under each such policy. Each of Walter and its Subsidiaries and affiliates has complied with each such policy in all material respects and has not failed to give any notice or present any claim thereunder in a due and timely manner. SECTION 3.22. EMPLOYEE BENEFIT PLANS. (a) Schedule 3.22(a) sets forth a list of, and, except as set forth in Schedule 3.22(a), Walter has made available to CMS Energy copies of, any pension, profit sharing, retirement, disability, health, welfare or other "employee benefit plan", as that term is defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), bonus, stock option or other equity based, incentive, severance, termination, retention or other material employee benefit or compensation plan, policy, arrangement or agreement, whether written or unwritten, other than any of the same of ACEC that will terminate as of or prior to the closing of the Amoco Stock Purchase Agreement, (i) under which any employee or former employee of Walter or any of its Subsidiaries or the beneficiary or dependent of any such employee or former employee (collectively, the "Participants") is eligible to participate or derive a benefit and (ii) that is established, maintained or contributed to by Walter or any of its Subsidiaries or any trade or business, whether or not incorporated, which would be treated as a single employer together with Walter and its Subsidiaries under Section 414 of the Code, as of any date of determination (each, an "ERISA Affiliate") or to which Walter or any of its Subsidiaries or any ERISA Affiliate is obligated to contribute (collectively, the "Plans"). No Plan is an "employee pension benefit plan" within the meaning of Section 3(2) of ERISA. No Plan is intended to qualify under Section 401(a) of the Code. Each of the Plans has been operated and administered in accordance with ERISA, the Code and all other applicable laws, regulations and rules, except where any such noncompliance would not result in a material liability to Walter or any of its Subsidiaries or CMS Energy. There are no material pending or, to the knowledge of Walter or any Stockholder, threatened, claims by or on behalf of any Plan, by or on behalf of any Participant or otherwise involving any Plan (other than routine claims for benefits). (b) Neither Walter nor any of its Subsidiaries nor any ERISA Affiliate has ever maintained or contributed to, or been required to contribute to, any employee benefit plan subject to Title IV of ERISA or the minimum funding requirements of Section 302 of ERISA. -29- 37 (c) No Plan is a "multiemployer plan" or a "multiple employer plan" within the meaning of ERISA or the Code. (d) Except as disclosed on Schedule 3.22(d), no Plan is subject to the law of any jurisdiction outside of the United States of America. (e) No Participant is or may become entitled to post-employment benefits of any kind by reason of employment with Walter or any of its Subsidiaries, including, without limitation, death or medical benefits (whether or not insured), other than coverage mandated by section 4980B of the Code. The consummation of the transactions contemplated by this Agreement will not result in an increase in the amount of compensation or benefits or accelerate the vesting or timing of payment of any compensation or benefits payable to or in respect of any participant. (f) Schedule 3.22(f) sets forth a list of any Plan which is not covered by ERISA pursuant to Section 4(b)(4) of ERISA, including any Plan which may be required by local law ("Foreign Plan") and identifies which Foreign Plan, if any, is, under applicable local law, required to be funded through a trust or other funding vehicle ("Foreign Pension Plan"). Each Foreign Plan is required by applicable foreign law and is in compliance in all material respects with all laws, regulations and rules applicable thereto and the respective requirements of the governing documents for such Foreign Plan. There are no actions, suits or claims (other than routine claims for benefits) pending or threatened against Walter, any of its Subsidiaries or any ERISA Affiliate with respect to any Foreign Plan. (g) Walter has delivered, or made available, to CMS Energy with respect to each Plan subject to ERISA, correct and complete copies, where applicable, of (i) all Plan documents and amendments thereto, trust agreements and amendments thereto and insurance and annuity contracts and policies, (ii) the current summary plan description, (iii) the Annual Reports (Form 5500 series) and accompanying schedules, as filed, for the most recently completed three plan years for which such reports have been filed, (iv) all correspondence with the Internal Revenue Service, Department of Labor and Pension Benefit Guaranty Corporation concerning any controversy. (h) All amounts that have been credited, or may in the future be credited, to any participant under the Walter International, Inc. Phantom Stock Plan have been paid to such participants or fully accrued and reflected in the books of Walter as of June 30, 1994. SECTION 3.23. EMPLOYEES AND AGENTS AND RELATED AGREEMENTS. (a) Except as set forth in Schedules 3.23(a) or 3.30, and other than those of ACEC that will terminate as of or -30- 38 prior to the closing of the Amoco Stock Purchase Agreement, neither Walter nor any of its Subsidiaries is a party to or bound by any oral or written employment agreement, consulting agreement (other than employment or consulting agreements under which the obligations of Walter or such Subsidiary are terminable by Walter or such Subsidiaries without premium or penalty (other than statutory severance or termination benefits) on notice of 30 days or less), deferred compensation agreement, confidentiality agreement or covenant not to compete with any officer, director, stockholder, employee, agent or attorney-in-fact of Walter or any of its Subsidiaries. Walter has made available to CMS Energy complete and correct copies of each such agreement or instrument. (b) Schedule 3.23(b) contains a list of all employees or independent contractors of Walter or any of its Subsidiaries (except ACEC) as of or since December 31, 1993 whose rate of annual compensation from Walter and all such Subsidiaries was in excess of U.S. $50,000 or its equivalent in foreign currency on such date. SECTION 3.24. EMPLOYEE RELATIONS AND LABOR MATTERS. (a) Walter and its Subsidiaries have complied in all material respects with all applicable laws, rules and regulations which relate to wages, hours, discrimination in employment and collective bargaining and are not liable for any material arrearages of wages or any material taxes or penalties for failure to comply with any of the foregoing. Walter believes that the relations of Walter and its Subsidiaries with their employees are good. (b) Except as set forth in Schedule 3.24(b) hereto, neither Walter nor any of its Subsidiaries is a party to any collective bargaining agreement and Walter and its Subsidiaries have complied in all material respects with all such collective bargaining agreements. Neither Walter nor any of its Subsidiaries is a party to or, to the knowledge of Walter or any Stockholder, is threatened with, any dispute or controversy with a union or with respect to unionization or collective bargaining involving its employees. To the knowledge of Walter or any Stockholder, neither Walter nor any of its Subsidiaries is materially affected by any dispute or controversy with a union or with respect to unionization or collective bargaining involving any of its suppliers or customers. Schedule 3.24(b) hereto sets forth a list of any union organizing or election activities involving any non-union employees of Walter or any of its Subsidiaries known to Walter which have occurred since December 31, 1990 or, to the knowledge of Walter or any Stockholder, are threatened as of the date hereof. SECTION 3.25. ABSENCE OF CERTAIN BUSINESS PRACTICES. (a) None of Walter or any of its Subsidiaries, any officer, employee or agent of Walter or any of its Subsidiaries or any other person acting on its behalf, has, directly or indirectly, -31- 39 given or agreed to give any gift or similar benefit (other than with respect to bona fide payments for which adequate consideration has been given) to any customer, supplier, governmental employee or other person who is or may be in a position to help or hinder the business of Walter or any of its Subsidiaries (or assist Walter or any of its Subsidiaries in connection with any actual or proposed transaction) (a) which might subject Walter or any of its Subsidiaries to any damage or penalty in any civil, criminal or governmental litigation or proceeding, (b) which, if not continued in the future, would have an adverse affect on the assets, business, operations or prospects of Walter or any of its Subsidiaries or which would subject Walter or any of its Subsidiaries to suit or penalty in any private or governmental litigation or proceeding, (c) for any of the purposes described in section 162(c) of the Code, or (d) for establishment or maintenance of any concealed fund or concealed bank account. (b) Walter and each of its Subsidiaries is in compliance with all applicable provisions of the Foreign Corrupt Practices Act of 1976, as amended. SECTION 3.26. TERRITORIAL RESTRICTIONS. Except as set forth on Schedule 3.26, neither Walter nor any of its Subsidiaries is restricted in any material respect by any written agreement or understanding with third parties from carrying on its business anywhere in the world. SECTION 3.27. TRANSACTIONS WITH CERTAIN PERSONS. Except as set forth in Schedule 3.27 hereto, neither Walter nor any of its Subsidiaries has, directly or indirectly, purchased, leased or otherwise acquired any material property or obtained any material services from, or sold, leased or otherwise disposed of any material property or furnished any material services to (except with respect to remuneration for services rendered as a director, officer or employee of Walter or any of its Subsidiaries), in the ordinary course of business or otherwise, (a) any Stockholder, (b) any affiliate of Walter or any of its Subsidiaries, (c) any person who is an officer or director of Walter or any of its Subsidiaries or (d) any associate of any person referred to in clause (a), (b) or (c) above. Except as set forth in Schedule 3.27 hereto, neither Walter nor any of its Subsidiaries owes any amount in excess of U.S. $10,000 or its equivalent in foreign currency to, or has any contract with or commitment to, any Stockholder, director, officer or employee of Walter or any of its Subsidiaries (other than for compensation for current services not yet due and payable and reimbursement of expenses arising in the ordinary course of business) and none of such persons owes any amount in excess of U.S. $10,000 or its equivalent in foreign currency to Walter or any of its Subsidiaries. -32- 40 SECTION 3.28. NO FINDER. Neither Walter nor any of its Subsidiaries nor any party acting on the behalf of any of them has paid or become obligated to pay any fee or commission to any broker, finder or intermediary for or on account of the transactions contemplated by this Agreement. SECTION 3.29. ENVIRONMENTAL MATTERS. (a) Each of Walter and its Subsidiaries: (i) have complied with and are in compliance with any Applicable Environmental Laws, including those with respect to the use, handling, discharge, release and/or disposal of any Hazardous Substance; (ii) have not received and are not otherwise aware of any notice or claim alleging a violation of any Applicable Environmental Law by Walter or any of its Subsidiaries; and (iii) have no material liability, known or contingent, arising out of or related to a Release or threatened Release at any location of any Hazardous Substance into the environment, or any remedial action in response thereto. (b) For purposes of this Section 3.29, the following definitions should apply: (i) "Applicable Environmental Laws" shall mean any environmental, health, safety statutes, laws, rules, regulations, ordinances and codes, whether United States federal or state or any foreign government or political subdivision thereof, applicable to the relevant operation; (ii) "Hazardous Substance" means any hazardous or toxic waste, substance or constituent, or other hazardous substance, including petroleum or its constituents, drilling mud or production wastes, as defined or regulated under any Applicable Environmental Laws. (ii) "material" means any fines, penalties, natural resource damages, costs or expenses arising under Applicable Environmental Laws that would result in an aggregate liability to Walter or any of its subsidiaries of not less than U.S. $50,000 per year or its equivalent in foreign currency; (iv) "Release" means release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal; leaching or migration into the indoor or outdoor environment, including the movement -33- 41 of Hazardous Substances through or in the air, soil, surface water, groundwater or Property. SECTION 3.30. CONTRACTS. (a) Except as set forth in Schedule 3.30 or, in the case of clauses (ii) and (v) below, as are contained in records and files of Walter or its Subsidiaries located in Houston, Texas, Pointe Noire, Republic of the Congo and Malabo, Republic of Equatorial Guinea and made fully available for inspection by CMS Energy, neither Walter nor any of its Subsidiaries is a party to or is bound by any oral or written contract, agreement, commitment or instrument: (i) for the purchase, sale or lease (except if the scheduled lease payments are less than U.S. $25,000 per year or its equivalent in foreign currency) of real property; (ii) relating to oil, gas and mineral or other leases, joint operating agreements, farm-out and farm-in agreements, service contracts and similar agreements, option agreements, pooling and unitization agreements, production marketing agreements, gas balancing agreements, gas sales contracts, production sales contracts, processing agreements, permits, licenses and orders, oil and gas concessions, conventions, production sharing or similar agreements and all agreements relating to the same, oil sales contracts, or assignments of rights or obligations under any such agreements; (iii) which provides for, or relates to, the guarantee by Walter or any of its Subsidiaries of any obligation of any customers, suppliers, officers, directors, employees or affiliates of Walter or such Subsidiaries; (iv) which provides for, or relates to, the incurrence by Walter or any of its Subsidiaries of debt for borrowed money in excess of U.S. $10,000 or its equivalent in foreign currency; (v) which provides for, or relates to, any non-competition or confidentiality arrangement with any person, including any current or former officer or employee of Walter or any of its Subsidiaries; (vi) for capital expenditures in excess of U.S. $25,000 or its equivalent in foreign currency for any single project or related series of projects; (vii) any partnership, joint venture or other similar arrangements or agreements involving a sharing of profits or losses; -34- 42 (viii) which (other than contracts, agreements, commitments and instruments of the nature described in clauses (i) through (vii) above) involve payments or receipts by Walter or any of its Subsidiaries of more than U.S. $25,000 or its equivalent in foreign currency; and (ix) for any purpose (whether or not made in the ordinary course of the business or otherwise not required to be listed or described in Schedule 3.30) which is material to the business of Walter and its Subsidiaries taken as a whole. (b) Except as set forth in Schedule 3.30, Walter and its Subsidiaries have fulfilled and performed their obligations in all material respects under each of the leases, contracts and other agreements listed in Schedule 3.30 or referred to in clause (ii) or (v) of Section 3.30(a) (collectively, together with other material leases, contracts and other agreements listed in other Schedules under this Article III, the "Walter Agreements") and are not, or, to the knowledge of Walter, are not alleged to be, in breach or default in any material respect under, nor, to the knowledge of Walter or any Stockholder, is there or, to the knowledge of Walter, is there alleged to be any basis for termination of, any of the Walter Agreements and no event has occurred and no condition or state of facts exists which, with the passage of time or the giving of notice or both, would constitute such a default or breach by Walter or any of its Subsidiaries. Copies of each of the Walter Agreements have heretofore been made available to CMS Energy by Walter. Except as disclosed on Schedule 3.30, the Walter Agreements (i) have been duly authorized, executed and delivered by Walter or the Subsidiaries of Walter that are a party thereto, and (ii) are in full force and effect and constitute legal, valid, binding and enforceable obligations of Walter or such Subsidiaries and will continue in full force and effect following the consummation of the Merger without the breach of any terms or conditions thereof or the forfeiture or impairment of any rights thereunder and without the consent, approval or act of, or the making of any filing with, any other person or party. SECTION 3.31. NO GUARANTIES; EXTENSIONS OF CREDIT. Except as set forth in Schedule 3.31, no material obligations or liabilities of Walter or any of its Subsidiaries are guaranteed by or subject to a similar contingent obligation of any other person, nor has Walter or any of its Subsidiaries guaranteed or become subject to a similar contingent obligation in respect of the obligations or liabilities of, or extended credit to any other person. -35- 43 SECTION 3.32. GAS IMBALANCES; PRODUCTION RIGHTS AND OBLIGATIONS. (a) Except as disclosed on Schedule 3.32, there are no gas imbalances pertaining to the production and marketing of gas as between Walter or any of its Subsidiaries and any third party. (b) Except as disclosed on Schedule 3.32, neither Walter nor any of its Subsidiaries has received any advance, "take-or-pay," or other similar payments under production sales contracts that entitle the purchasers to "make-up" or otherwise receive deliveries of hydrocarbons without paying at such time the full contract price therefor. Except as disclosed on Schedule 3.32, (i) all gas marketing contracts may be terminated on not more than sixty (60) days notice without penalty, or contain pricing terms that are market sensitive, and (ii) any calls upon, options to purchase, or similar rights are exercisable at a price that is at, or near, the fair market price for such production in the general area involved. Except as disclosed on Schedule 3.32, Walter is receiving the prices stipulated in its oil and gas sales contracts, as amended through the date of this Agreement and, to the best knowledge of Walter and each Stockholder, no purchaser of oil or gas production has proposed or threatened any reduction in prices or purchases of such production under any contract or arrangement or have taken or are threatening to take unilateral action that would have a material adverse effect on the price or quantities of purchases under any such contract or arrangement or that would have a Material Adverse Effect on Walter and its Subsidiaries taken as a whole. Each of Walter and its Subsidiaries has paid to each royalty and overriding royalty owner (or such other party in interest as may be entitled to share therein) such owner's or party's full share of any royalty or other payments with respect to advance, "take-or-pay" or similar payments (including, but not limited to, payments relating to any "buy-down" or "buy-out" of any such contract or arrangement) and no such owner has proposed, demanded or threatened to demand that it is entitled to any further payments. SECTION 3.33. NET REVENUE INTERESTS AND COST AND EXPENSE BEARING INTERESTS. (a) The net revenue interests and cost and expense bearing interests utilized to calculate the net cash flow values in the cash flow statements attached as Schedule 3.33(a) (collectively, the "Cash Flow Statements") relating to the oil and gas reserves of Walter and its Subsidiaries accurately state Walter's and its Subsidiaries' net revenue interests and cost and expense bearing interests in those oil and gas reserves, given the assumptions used in the Cash Flow Statements regarding oil prices, reserve volumes, production rates, operating and capital expenditure amounts and schedules, and taxes. -36- 44 (b) The historical production figures for oil, gas and water, revenue and expense figures, and the advance account figures under the Joint Operating Agreement related to the interests of ACEC in the Republic of the Congo provided by Walter to CMS Energy are, to the knowledge of Walter and the Stockholders, accurate and complete in all material respects; and the historical production figures for oil, gas and water, revenue and cost and expense figures, related to the interests of Walter or its Subsidiaries in the Republic of Equatorial Guinea provided by Walter to CMS Energy are accurate and complete in all material respects. (c) To the knowledge of Walter, all oil wells and gas wells (collectively, the "Wells"), including without limitation, the wells specifically identified on Schedule 3.33 and all fresh water wells, injection wells, salt water disposal wells and other wells of every nature and kind, and Wells-in-progress to the extent applicable, whether producing or non-producing, located on areas covered by Permits held directly, indirectly or beneficially by Walter or its Subsidiaries, including, without limitation, the Permits specifically identified on Schedule 3.33, have been drilled and completed substantially within the limits permitted by applicable Permit and applicable local, state, federal or foreign laws, rules or regulations. To the best knowledge of Walter, no Well is subject to material penalties or production restrictions because of any overproduction or any other violation of applicable laws, rules, regulations, permits or judgments, orders or decrees of any court or governmental body or agency which would have a material adverse effect on the operation of any of the Wells. To the best knowledge of Walter, and except as identified in Schedule 3.33, there are no Wells located in areas covered by Permits that: (i) Walter or any Subsidiary is currently obligated by law or contract to plug and abandon; (ii) Walter or any Subsidiary will be obligated by law or contract to plug and abandon with the lapse of time or notice or both because the Well is not currently capable of producing in commercial quantities; (iii) are subject to temporary exceptions granted by governmental authorities to plugging and abandonment that would otherwise be required under applicable law; (iv) have been plugged and abandoned in a manner not in substantial compliance with all applicable requirements of regulatory authority having jurisdiction thereof; and (v) could be classified as "sour" wells because of the content of H2S in the oil and gas. -37- 45 SECTION 3.34. CMS COMMON SHARES. Each Stockholder severally represents and warrants that such Stockholder has received (i) the Prospectus of CMS Energy dated November 2, 1994 relating to the CMS Common Shares on November 4, 1994; (ii) the CMS Energy SEC Documents (as hereinafter defined) on November 4, 1994, and (iii) such further information as such Stockholder reasonably requests concerning CMS Energy and its business, results of operations and financial condition. SECTION 3.35. DISCLOSURE. None of the representations and warranties contained herein, the information contained in the Schedules referred to in this Article III and the other information or documents referred to in this Article III as having been furnished or to be furnished or made available to CMS Energy or any of its representatives by Walter, the Stockholders or their representatives pursuant to the terms of this Agreement is false or misleading in any material respect to the transaction taken as a whole or omits to state a fact necessary to make the statements herein or therein not misleading in any material respect to the transaction taken as a whole. To the best knowledge of Walter and each Stockholder, there is no fact (other than those relating to the industry in general and not specifically relating to Walter, its Subsidiaries, their respective assets or the Stockholders) which adversely affects the properties, business or prospects of Walter and its Subsidiaries in any material respect to the transaction taken as a whole which has not been set forth or referred to in this Agreement or the Schedules hereto. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF CMS ENERGY As an inducement to Walter, the Stockholders, the Preferred Stockholders and the Warrantholders to enter into this Agreement and to consummate the transactions contemplated herein, CMS Energy hereby warrants and represents to Walter, the Stockholders, the Preferred Stockholders and the Warrantholders and agrees as follows: SECTION 4.1. ORGANIZATION OF CMS ENERGY. CMS Energy is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Michigan. CMS Energy is duly qualified to transact business as a foreign corporation and is in good standing in each of the jurisdictions in which the ownership or leasing of the properties used in its business or the conduct of its business requires such qualification, other than in such jurisdictions where the failure to be so qualified and in good standing would not have a material adverse effect on the financial condition or results of operation of CMS Energy and its consolidated subsidiaries taken as a whole, and no other jurisdiction has demanded, requested or otherwise indicated that -38- 46 CMS Energy is required so to qualify. CMS Energy has full corporate power and authority to own or lease and operate its properties and to carry on its business as now conducted. SECTION 4.2. AUTHORITY. CMS Energy has full corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement by CMS Energy and the consummation by CMS Energy of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of CMS Energy. This Agreement is, and each other agreement or instrument of CMS Energy contemplated hereby when executed and delivered will be, the legal, valid and binding agreement of CMS Energy enforceable against CMS Energy in accordance with its respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). Neither the execution and delivery of this Agreement by CMS Energy nor consummation of the transactions contemplated hereby or compliance with or fulfillment of the terms and provisions hereof by CMS Energy will (a) result in a breach of the terms, conditions or provisions of, or constitute a default, an event of default or an event creating rights of acceleration, termination or cancellation or a loss of rights, or result in the creation or imposition of any encumbrance upon any of the material assets of CMS Energy, under (i) the articles of incorporation or the by-laws of CMS Energy, (ii) any material instrument, agreement, mortgage, indenture, deed of trust, permit, concession, grant, franchise, license, judgment, order, award, decree or other restriction to which CMS Energy is a party or any of its material properties is subject or by which any of them is bound or (iii) any material statute, other law or regulatory provision affecting CMS Energy other than, in the case of clauses (ii) or (iii), any such breaches, defaults, rights, or encumbrances that, individually or in the aggregate, would not have a material adverse effect on the financial condition or results of operation of CMS Energy and its consolidated subsidiaries taken as a whole, materially impair the ability of CMS Energy to perform its obligations hereunder or prevent the consummation of any of the transactions contemplated hereby, or (b) require the approval, consent or authorization of, or the making of any declaration, filing or registration with, any third party or any foreign, federal, state or local court, governmental authority or regulatory body, by or on behalf of, CMS Energy or Sub, except for the filing of a Form S-4 with the Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "Securities Act") and the declaration of effectiveness thereof by the SEC, and for the applicable requirements of the HSR Act, the filing of Articles of Merger -39- 47 with the Secretary of State of the State of Texas, and appropriate documents with the relevant authorities of other jurisdictions in which Walter is qualified to do business, such filings and consents as may be required under any environmental, health or safety law or regulation pertaining to any notification, disclosure or required approval triggered by the Merger or the transactions contemplated by this Agreement, such filings as may be required in connection with the Amoco Stock Purchase Agreement, such consents, approvals, orders, authorizations, registrations, declarations and filings as may be required under the laws of any foreign country in which Walter or any of its Subsidiaries conducts any business or owns any property or assets or the corporation, takeover or blue sky laws of various states, and such other consents, orders, authorizations, registrations, declarations and filings the failure of which to be obtained or made would not, individually or in the aggregate, have a material adverse effect on the financial condition or results of operation of CMS Energy and its consolidated subsidiaries taken as a whole, materially impair the ability of CMS Energy to perform its obligations hereunder or prevent the consummation of any of the transactions contemplated hereby. SECTION 4.3. SHARES OF CMS COMMON STOCK. The CMS Common Shares to be delivered to the Stockholders of Walter pursuant to this Agreement will, when issued and delivered in accordance with the terms hereof, be validly issued, fully paid and nonassessable and registered with the SEC on Form S-4 under the Securities Act and listed, or approved for listing upon notice of issuance, on the NYSE. SECTION 4.4. CAPITALIZATION. The authorized capital of CMS Energy consists of (i) 250,000,000 shares of common stock, $.01 par value, of which as of September 30, 1994, 86,246,928 shares were issued and outstanding, 2,829,900 shares were held by CMS Energy and 1,382,950 shares were reserved for issuance under certain CMS Energy compensation plans, and (ii) 5,000,000 shares of preferred stock, $.01 par value, none of which is issued and outstanding or reserved for any purpose. All of the outstanding shares of CMS Common Stock are duly authorized, validly issued, fully paid and nonassessable. Except for options granted pursuant to certain CMS Energy compensation plans and as contemplated hereby, there are no options, warrants or other rights to acquire from CMS Energy or agreements or commitments by CMS Energy to issue or sell shares of its capital stock, whether on conversion of other securities or otherwise. None of the issued and outstanding shares of CMS Common Stock has been issued in violation of, or is subject to, any preemptive or subscription rights. There are no stockholder agreements, voting trust agreements or any other similar contracts, agreements, arrangements, commitments, plans or understandings to which CMS Energy is a party restricting or otherwise relating to voting, -40- 48 dividend, ownership or transfer rights with respect to any shares of capital stock of CMS Energy. SECTION 4.5. OPERATIONS SINCE SEPTEMBER 30, 1994. Except as set forth in the CMS Energy SEC Documents, since September 30, 1994, there has been: (i) no material adverse change in the financial condition or results of operation of CMS Energy and its consolidated subsidiaries taken as a whole; and (ii) no damage, destruction, loss or claim with respect to, whether or not covered by insurance, or condemnation or other taking of, assets having a material adverse effect on the financial condition or results of operation of CMS Energy and its consolidated subsidiaries taken as a whole. SECTION 4.6. COMPLIANCE WITH LAWS. CMS Energy is in compliance with the provisions of all applicable laws and regulations of the federal, state, local and foreign governments, except to the extent that the failure to comply therewith would not have a material adverse effect on the financial condition or results of operation of CMS Energy and its consolidated subsidiaries taken as a whole. Except as set forth in the CMS Energy SEC Documents, to the knowledge of CMS Energy, there are no proposed orders, judgments, decrees, governmental takings, condemnations or other proceedings, in each case binding upon the business, operations or properties of CMS Energy or any Subsidiary thereof, which would have a material adverse effect on the financial condition or results of operation of CMS Energy and its consolidated subsidiaries taken as a whole. SECTION 4.7. SEC DOCUMENTS. CMS Energy has previously delivered to Walter complete and correct copies of all reports (including annual reports on Form 10-K, current reports on Form 8-K, quarterly reports on Form 10-Q and proxy statements) filed by it with the SEC pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act") since December 31, 1993 (the "CMS Energy SEC Documents"). None of the information supplied by CMS Energy and included in the Registration Statement or the Prospectus (as hereinafter defined), as it may be amended or supplemented, or the documents filed under the Exchange Act which are incorporated by reference therein, as of their respective effective, issue or filing dates, does or will, as the case may be, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. The Registration Statement and Prospectus comply as to form in all material respects with the applicable provisions of the Securities Act and the rules and regulations promulgated thereunder. -41- 49 SECTION 4.8. NO FINDER. Neither CMS Energy nor any party acting on its behalf has paid or become obligated to pay any fee or any commission to any broker, finder or intermediary for or on account of the transactions contemplated herein. ARTICLE V REPRESENTATIONS AND WARRANTIES OF SUB As an inducement to Walter, the Stockholders, the Preferred Stockholders and the Warrantholders to enter into this Agreement and to consummate the transactions contemplated hereby, CMS Energy and Sub hereby jointly and severally warrant and represent to Walter, the Stockholders, the Preferred Stockholders and the Warrantholders and agree as follows: SECTION 5.1. ORGANIZATION AND STANDING. Sub is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Texas. Sub was organized solely for the purpose of engaging in the transactions contemplated by this Agreement and has not engaged in any business since it was incorporated which is not in connection with this Agreement and has no material assets (other than the rights and obligations referred to in this Agreement). SECTION 5.2. CAPITAL STRUCTURE. The authorized capital stock of Sub consists of 1,000 shares of common stock, $.01 par value, of which 10 shares are validly issued and outstanding, fully paid and nonassessable and are owned by CMS Energy free and clear of all liens, claims and encumbrances. SECTION 5.3. AUTHORITY. Sub has full corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement, the performance by Sub of its obligations hereunder and the consummation of the transactions contemplated hereby have been duly authorized by its Board of Directors and by CMS Energy as its sole stockholder, and, except for the corporate filings required by state law, no other corporate proceedings on the part of Sub are necessary to authorize this Agreement and the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Sub and this Agreement is, and each other agreement or instrument of Sub contemplated hereby when executed and delivered will be, the legal, valid and binding agreement of Sub enforceable against Sub in accordance with its respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). -42- 50 ARTICLE VI ACTIONS PRIOR TO THE EFFECTIVE DATE CMS Energy, Sub and Walter (and the Stockholders with respect to Sections 6.2, 6.7, 6.8, 6.11, 6.13 and 6.14, the Preferred Stockholders only with respect to their individual obligations set forth in Sections 6.2, 6.6(b), 6.7, 6.8 and 6.14, and the Warrantholders only with respect to their individual obligations set forth in Sections 6.7, 6.8 and 6.13) covenant and agree to take the following respective actions between the date hereof and the Effective Date: SECTION 6.1. ISSUANCE OF CMS COMMON SHARES. (a) CMS Energy has filed a registration statement on Form S-4 with the SEC containing a prospectus (the "Prospectus") covering the issuance and sale of the CMS Common Shares to be delivered hereunder. CMS Energy will use all reasonable efforts to cause such registration statement (the "Registration Statement") to be effective at least twenty (20) Business Days prior to the Effective Date. CMS Energy shall deliver to the NYSE pursuant to Rule 153 under the Securities Act copies of the Prospectus included in the Registration Statement, as the same may be amended or supplemented from time to time. (b) CMS Energy shall use all reasonable efforts to list the CMS Common Shares to be issued hereunder on the NYSE. SECTION 6.2. ACTION BY STOCKHOLDERS OF WALTER. Walter shall duly call, give notice of, convene and hold a meeting of its stockholders for the purpose of approving the Merger and adopting this Agreement. Walter will, through its Board of Directors, recommend to its stockholders the adoption of this Agreement. In lieu of such meeting, the stockholders of Walter may take the actions described in the preceding sentence by unanimous written consent in accordance with the TBCA. Each of the Stockholders, the Preferred Stockholders and the Warrantholders agrees to take all necessary action to cause this Agreement to be so adopted. SECTION 6.3. AMOCO STOCK PURCHASE AGREEMENT. Walter shall use all reasonable efforts to consummate the transactions contemplated by the Amoco Stock Purchase Agreement on the terms set forth therein. SECTION 6.4. INVESTIGATION OF WALTER. Walter shall afford to the officers, employees and authorized representatives of CMS Energy (including, without limitation, independent public accountants, attorneys, environmental consultants and financial advisors of CMS Energy), reasonable access during normal business hours to the offices, properties, employees and business and financial records (including, without limitation, computer files, retrieval programs and similar documentation) of Walter to the -43- 51 extent CMS Energy shall deem necessary or desirable, and shall furnish to CMS Energy or its authorized representatives such additional information concerning the operations, properties and businesses of Walter as may be reasonably requested in writing, to enable CMS Energy or its authorized representatives to verify the accuracy of the representations and warranties contained in this Agreement, to verify the accuracy of the financial statements referred to in Section 3.5 and to determine whether the conditions set forth in Article VIII have been satisfied. CMS Energy agrees that such investigations shall be conducted in such manner as not to interfere unreasonably with the operation of the business of Walter. Without limiting the foregoing, Walter shall permit CMS Energy, or its representatives, to conduct a site inspection of any of the Owned Real Property or the Leased Real Property or any real property covered by any Permit and to conduct an environmental audit of any such properties with respect to any environmental health and safety issues deemed material by CMS Energy. SECTION 6.5. LAWSUITS, PROCEEDINGS, ETC. Each of CMS Energy and Walter shall notify the other promptly of any lawsuit, proceeding, claim or investigation that may be threatened, brought, asserted or commenced against any party hereto involving in any way the transactions contemplated by this Agreement or that would have been listed in Schedule 3.17 or the CMS Energy SEC Documents if such lawsuit, proceeding, claim or investigation had arisen prior to the date hereof. SECTION 6.6. CONDUCT OF BUSINESS BY WALTER PENDING THE MERGER. (a) During the period from July 1, 1994 through the Effective Time, except as set forth in any Schedules to this Agreement or as expressly contemplated by this Agreement, Walter has carried on, and will carry on, its business in, and has not entered into, and will not enter into, any material transaction other than in the ordinary course consistent with past practice and, to the extent consistent therewith, has used and will use its reasonable efforts to preserve intact its current business organization, keep available the services of its current officers and preserve its relationships with customers, suppliers and others having business dealings with it (except with the prior written consent of CMS Energy). Without limiting the generality of the foregoing, and except as set forth in any Schedules to this Agreement or as expressly contemplated by this Agreement, Walter and its Subsidiaries has not since June 30, 1994 and shall not, without the prior written consent of CMS Energy: (i) (x) declare, set aside or pay any dividends on, or make any other actual, constructive or deemed distributions in respect of, any of its capital stock, or otherwise make any payments to the Stockholders in their capacity as such (other than any such payments or distributions otherwise permitted to be made under this Agreement), (y) split, combine or reclassify any of its -44- 52 capital stock or issue, sell or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock, or (z) purchase, redeem or otherwise acquire any shares of capital stock of Walter or any other securities thereof or any rights, warrants or options to acquire any such shares or other securities; (ii) issue, deliver, sell, pledge, dispose of or otherwise encumber any shares of its capital stock or other securities (including, without limitation, any rights, warrants or options to acquire any securities) (other than any issuances of its common stock upon exercise of the Warrants to acquire 3,500 shares of Walter Common Stock not held by the Preferred Stockholders); (iii) amend its articles of incorporation or by-laws; (iv) acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial portion of the assets of or equity in, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof (other than as contemplated by the Amoco Stock Purchase Agreement; (v) sell, lease or otherwise dispose of or agree to sell, lease or otherwise dispose of, any of its assets, except sales in the ordinary course of business and the sale, lease or other disposition of other assets having a book or fair market value in the aggregate not exceeding U.S. $25,000 or its equivalent in foreign currency; (vi) incur any indebtedness for borrowed money or guarantee any such indebtedness or issue or sell any debt securities or guarantee any debt securities of others, or make any loans, advances or capital contributions to, or investments in, any other person, except the incurrence and/or guarantee of indebtedness to fund working capital and except as contemplated by the Amoco Stock Purchase Agreement; (vii) with respect to its operations other than ACEC, make or incur any new capital expenditure or capital expenditures which, individually, is in excess of U.S. $25,000 or its equivalent in foreign currency or, in the aggregate, are in excess of U.S. $50,000 or its equivalent in foreign currency and, with respect to ACEC, make any capital or major expenditures or investments, or incur any obligations for capital or -45- 53 major expenditures or enter into any leases for personal or real property, in excess of fifty thousand U.S. Dollars ($50,000) or its equivalent in foreign currency per transaction; (viii) pay, discharge or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), other than such payment, discharge or satisfaction in the ordinary course of business; (ix) alter through merger, liquidation, reorganization, restructuring or in any other fashion its corporate structure (other than as contemplated by the Amoco Stock Purchase Agreement); (x) enter into or adopt, or amend, any existing, bonus, incentive, deferred compensation, insurance, medical, hospital, disability or severance plan, agreement or arrangement or enter into or amend any Plan or employment, consulting or management agreement, other than any such amendment to a Plan that is made to maintain the qualified status of such Plan or its continued compliance with applicable law; (xi) make any change in accounting practices or policies applied in the preparation of the financial statements referred to in Section 3.5 except as required by GAAP; (xii) modify any of the material agreements, understandings, obligations, commitments, indebtedness or other obligations or enter into any material agreement, understanding, obligation or commitment, or incur any material indebtedness or obligation, of the type that would have been required to be listed on Schedule 3.30 if in existence on the date hereof (other than as contemplated by the Amoco Stock Purchase Agreement); (xiii) pay or commit to pay any bonus to any officer or employee of Walter other than (A) as paid or accrued on or prior to June 30, 1994 or to Jerry Livingston in accordance with and when required by the terms of the employment agreement of Walter with such Person and (B) bonuses not to exceed $80,000 in the aggregate which, notwithstanding any provision of this Agreement to the contrary, may be paid by Walter in its discretion to certain of its officers or employees prior to the Effective Time; or -46- 54 (xiv) enter into any other transaction affecting the business of Walter, other than in the ordinary course of business consistent with past practice or as expressly contemplated by this Agreement. (b) Notwithstanding any other provision of this Agreement, prior to the Effective Time, Walter: (i) shall make a pro rata distribution to the Stockholders with respect to the Walter Common Stock, to be effected immediately prior to the Effective Time, of a partnership interest representing the equivalent of an aggregate fifty percent (50%) net profits interest after the recovery of certain items (the "Alba Net Profits Interest") in net production revenue from the interest of Walter and its Subsidiaries in the liquefied petroleum gas project covered by the Heads of Agreement dated May 14, 1993 between the Republic of Equatorial Guinea and Walter International Equatorial Guinea, Inc., as project operator for a consortium (the "Alba LPG Project"), pursuant to the form of partnership agreement and transfer of partnership interest instruments and other required documentation attached hereto as Exhibit B; and (ii) shall make a pro rata distribution to the Stockholders with respect to the Walter Common Stock, to be effected immediately prior to the Effective Time, of a partnership interest representing the equivalent of an aggregate fifty percent (50%) net profits interest after the recovery of certain items (the "El Franig Net Profits Interest" and, together with the Alba Net Profits Interest, the "Net Profits Interests") in net production revenue from the El Franig natural gas field discovered by the El Franig No. 1 well spudded in April 1981, located within the boundaries of the El Franig Concession dated effective May 24, 1993 (the "El Franig Field"), pursuant to the form of partnership agreement and transfer of partnership interest instruments and other required documentation attached hereto as Exhibit C; and Walter may take any action reasonably necessary or appropriate to effect such distributions; provided, however, that no assets shall be distributable pursuant to this Section 6.6(b) unless Walter shall have determined, in its reasonable discretion, that such assets are available to it for such distribution and that such distribution may otherwise be permissibly made. To the extent that such distribution may violate the terms of the certificate of designation relating to the Walter Preferred Stock, Walter, the Stockholders and the Preferred Stockholders agree to take such action as may be -47- 55 necessary or appropriate to amend such certificate or otherwise eliminate such violation. (c) Walter shall promptly advise CMS Energy orally and in writing of any change or event having a Material Adverse Effect on Walter and its Subsidiaries taken as a whole. SECTION 6.7. MUTUAL COOPERATION; REASONABLE BEST EFFORTS. The respective parties hereto shall cooperate with each other, and shall use their respective reasonable best efforts, to cause the fulfillment, to the extent within their reasonable control, of the conditions to each other party's obligations hereunder and to obtain as promptly as possible, to the extent within their reasonable control, all consents, authorizations, orders or approvals from each and every third party, whether private or governmental, required in connection with the transactions contemplated by this Agreement; provided, however, that the foregoing shall not require CMS Energy or Walter to make any divestiture or consent to any divestiture in order to obtain any waiver, consent or approval. SECTION 6.8. NO PUBLIC ANNOUNCEMENT. None of the parties hereto shall, without the approval of CMS Energy and Walter (which may not be unreasonably withheld), make any press release or other public announcement concerning the transactions contemplated by this Agreement, except as and to the extent that such party shall be so obligated by law, in which case each of CMS Energy and Walter shall be advised and they shall use their reasonable best efforts to cause a mutually agreeable release or announcement to be issued; provided that nothing herein shall be deemed to interfere with the filing by CMS Energy of a Form S-4 with the SEC or with the filing by the Preferred Stockholders of Forms 8-K with the SEC. SECTION 6.9. NO SOLICITATION. Walter shall not, nor shall it authorize or permit any officer, director or employee of it or its Subsidiaries or affiliates or any investment banker, attorney or other adviser or representative of Walter or any of its Subsidiaries or affiliates to, (i) solicit, initiate, or encourage the submission of, any Acquisition Proposal (as hereinafter defined), (ii) enter into any agreement with respect to any Acquisition Proposal or (iii) except to the extent required by law as advised by counsel in writing, participate in any discussions or negotiations regarding, or furnish to any person any information for the purpose of facilitating the making of, or take any other action to facilitate any inquiries or the making of any proposal that constitutes, or may reasonably be expected to lead to, any Acquisition Proposal. Walter promptly shall advise CMS Energy of any Acquisition Proposal and any inquiries with respect to any Acquisition Proposal. For purposes of this Agreement, "Acquisition Proposal" means any proposal for a merger or other business combination involving Walter or any of its Subsidiaries or affiliates or any proposal or offer to -48- 56 acquire in any manner, directly or indirectly, an equity interest in Walter or any of its Subsidiaries or affiliates, any voting securities of Walter or any of its Subsidiaries or affiliates or a substantial portion of the assets of Walter and its Subsidiaries taken as a whole. SECTION 6.10. ANTITRUST LAW COMPLIANCE. CMS Energy and Walter shall file with the Federal Trade Commission and the United States Department of Justice the notification and other information required to be filed with respect to the transactions contemplated hereby under the HSR Act and the rules and regulations promulgated thereunder. CMS Energy warrants that all such filings by it shall be, and Walter warrants that all such filings by it shall be, accurate as of the date filed and in accordance with the requirements of the HSR Act and all such rules and regulations. CMS Energy and Walter agree to make available, or cause to be made available, to the other parties such information as may reasonably be requested relative to the businesses, assets and property of CMS Energy and Walter, as the case may be, as may be required to file any additional information requested by such agencies under the HSR Act and such rules and regulations. SECTION 6.11. TERMINATION OF STOCKHOLDERS' AGREEMENT AND ORR PLAN. The Stockholders shall cause the Buy-Sell and Voting Agreement dated as of November 29, 1989 to which the Stockholders are parties (the "Stockholders' Agreement") and the ORR Plan to be terminated, effective at or prior to the Effective Time, and each of the Stockholders, the Warrantholders and the Preferred Stockholders who are parties to the Stockholders Agreement agrees that the Stockholders Agreement is hereby terminated effective as of the Effective Time, and each of Walter, J.C. Walter and Benton agrees that the ORR Plan is hereby terminated effective as of the Effective Time. SECTION 6.12. SUBSEQUENT FINANCIAL STATEMENTS. Prior to the Effective Date, Walter shall deliver to CMS Energy, not later than fifteen (15) days after the end of each monthly period and in the form customarily prepared by Walter, the unaudited internal consolidated financial statements of Walter, including an income statement, for the monthly period then ended and for the period from the beginning of the fiscal year to the end of such monthly period. SECTION 6.13. EXERCISE OR CANCELLATION OF WARRANTS. Each of Walter and the Warrantholders agrees that, prior to the Effective Time, the Warrants to acquire an aggregate of 9,000 shares of Walter Common Stock currently held by the holders of Walter Preferred Stock shall be cancelled and Warrants to acquire an aggregate of 2,300 shares of Walter Common Stock currently held by Benton III, Chapman, Frank, Jolly and Smalley shall be exercised (or cancelled) and, if exercised, each such Warrantholder shall, to the extent such Warrants are subject to Section 83 of the Code, pay to Walter an amount equal to the -49- 57 income tax withholding relating thereto assuming a fair value of each share of Walter Common Stock received equal to the value of the consideration to be received therefor in the Merger, such amount to be payable at the election of each such Warrantholder either in cash or pursuant to a one-year promissory note (collectively, the "Warrantholder Notes") payable to Walter and bearing interest at the prime rate of interest per annum; and, as of the Effective Time, no shares of Walter Common Stock shall be issuable pursuant to the Warrants. SECTION 6.14. STOCK PURCHASE AGREEMENTS. Each of the Preferred Stockholders agrees that, effective as of the Effective Time, all necessary consents to the Merger and related transactions which may be required of them pursuant to the Purchase Agreement, 14% Senior Cumulative Preferred Stock with Common Stock Warrants, among Walter and the Preferred Stockholders are hereby granted and that such Agreement is hereby terminated effective as of the Effective Time (except for Section 9.2 of such Agreement, which shall survive), and each of Cain, the Cain Trust and Oehmig agrees that, effective as of the Effective Time, all necessary consents to the Merger and related transactions which may be required of them pursuant to the Stock Purchase Agreement to which each of them and Walter is a party are hereby granted and that such Agreement is hereby terminated effective as of the Effective Time. SECTION 6.15. SUBSTITUTION ON OFFICE LEASE. CMS Energy shall use reasonable efforts to cause NOMECO to become the lessee in place of Walter on the office lease between Walter and First City National Bank of Houston, as lessor, covering Walter's office space at 1021 Main Street, Houston, Texas or, if a substitution is unable to be negotiated on terms satisfactory to the parties, CMS shall cause NOMECO to indemnify and hold harmless Walter Oil & Gas Corporation against any liabilities incurred by Walter Oil & Gas Corporation with respect thereto. ARTICLE VII ADDITIONAL COVENANTS AND AGREEMENTS SECTION 7.1. TAX-FREE NATURE; TAX CONSEQUENCES. (a) The Stockholders and CMS Energy intend the Merger to constitute a reorganization described in section 368(a)(2)(E) of the Code and shall use their best efforts to cooperate in achieving such a tax-free reorganization. Notwithstanding the preceding sentence, the parties to this Agreement will rely solely on their own advisors in determining the tax consequences of the transactions contemplated by this Agreement and each party is not relying, and will not rely, on any representations or assurances of any other party regarding such consequences other than the representations and covenants set forth in writing in this Agreement or any other agreement or certificate delivered in connection herewith. In -50- 58 the event that the Merger does not qualify as such a tax-free reorganization, the validity of the Merger and the transactions contemplated thereby shall nevertheless be binding and final upon the parties to this Agreement. Neither the Stockholders nor CMS Energy will take any tax reporting positions or make any tax elections inconsistent with the characterization of the Merger as a reorganization described in section 368(a)(2)(E) of the Code except as may be required upon examination (or the result of a prior determination) by the Internal Revenue Service or any other Tax authority. (b) The Stockholders agree that the aggregate sales and transfers by all such persons in any three month period of CMS Common Stock shall not exceed 25% of the aggregate number of shares of CMS Common Stock issued in the Merger. (c) CMS Energy hereby warrants and represents to and covenants with Walter and the Stockholders that: (i) neither CMS Energy nor the Surviving Corporation has any plan or intention to take any action following the Merger that could result in the Surviving Corporation's failing to hold at least 90 percent of the fair market value of Walter's net assets and at least 70 percent of the fair market value of Walter's gross assets and at least 90 percent of the fair market value of Sub's net assets and at least 70 percent of the fair market value of Sub's gross assets held immediately prior to the Merger (determined after taking into account the payment of bonuses referred to in Section 6.6(a)(xiii)(B), the distributions referred to in Section 6.6(b)(i) and (ii), which for purposes of this representation are deemed to be valued at $38,000, and amounts used by Walter or Sub to pay Merger expenses, which CMS Energy may assume will not exceed $200,000. (ii) the Surviving Corporation has no plan or intention to issue additional shares of its stock that would result in CMS Energy's losing control of the Surviving Corporation within the meaning of section 368(c) of the Code; (iii) CMS Energy has no plan or intention to reacquire any of the CMS Common Stock issued in the Merger; (iv) CMS Energy has no plan or intention to liquidate the Surviving Corporation, to merge the Surviving Corporation with or into another corporation, to sell or otherwise dispose of the stock of the Surviving Corporation (except for a transfer of stock to a corporation controlled by CMS Energy within the -51- 59 meaning of section 368(a)(2)(C) of the Code and Treas. Reg. 1.368-2(j)(4)), or to cause the Surviving Corporation to sell or otherwise dispose of any of its assets or of any of the assets acquired from Sub except for dispositions made in the ordinary course of business (or a transfer of assets to a corporation controlled by CMS Energy within the meaning of section 368(a)(2)(C) of the Code and Treas Reg. 1.368-2(j)(4)); (v) Sub will have no liabilities assumed by the Surviving Corporation and will not transfer to the Surviving Corporation any assets subject to liabilities in the Merger; (vi) following the Merger, the Surviving Corporation will continue Walter's historic business or use a significant portion of Walter's historic business assets in a business; (vii) CMS Energy and Sub will pay their respective expenses, if any, incurred in connection with the Merger; (viii) there is no intercorporate indebtedness between CMS Energy and Walter or between Sub and Walter that will be settled at a discount following the Merger; (ix) CMS Energy is not an investment company as defined in section 368(a)(2)(F)(iii) and (iv) of the Code; and (x) the total cash consideration that will be paid in the Merger in lieu of issuing fractional shares of CMS Common Stock will not exceed one percent of the total fair market value of the CMS Common Stock (as of the Effective Time) to be issued in the Merger. SECTION 7.2. TAXES. (a) Liability for Taxes. (i) Except as shown as a liability or reserve on the Unaudited Balance Sheet, the Stockholders shall be liable for and indemnify CMS Energy, the Surviving Corporation and their subsidiaries (collectively, the "Tax Indemnitees") for all Taxes imposed on any Tax Indemnitee (or for which a Tax Indemnitee may otherwise be liable) arising from the assets or activities of Walter and its Subsidiaries for any taxable year or period of Walter or its Subsidiaries that ends on or before the Unaudited Balance Sheet Date and, with respect to any taxable year or period beginning before and ending after the Unaudited Balance Sheet Date, the portion of such taxable year ending on and including the Unaudited Balance Sheet Date (each such taxable year, period or portion thereof referred -52- 60 to herein as "Pre-June 30, 1994 Taxable Period"). Notwithstanding the preceding sentence, in the case of an adjustment which increases an item of income or gain, or decreases an item of loss, deduction or credit, of Walter or any of its Subsidiaries for any Pre-June 30, 1994 Taxable Period and which will (under the law in effect at the time of such adjustment) result in a corresponding decrease in an item of income or gain, or an increase in an item of loss, deduction or credit, of Walter, any of its Subsidiaries, or the Surviving Corporation for one or more taxable years or periods following the year or period to which the adjustment relates (a "Timing Adjustment"), the Shareholders shall not be required to pay to the Tax Indemnitees any increase in the tax liability of Walter and its Subsidiaries attributable to such Timing Adjustment, but shall be required to pay to the Tax Indemnitees the amount of any interest and penalties payable as a result of such Timing Adjustment, provided that if the representations set forth in Sections 3.8(a)(xx) through 3.8(a)(xxiii) are breached other than as a result of Timing Adjustments (including as a result of an adjustment (other than a Timing Adjustment) to the taxable income of Walter or its Subsidiaries for a taxable year or period that ends on or before the Unaudited Balance Sheet Date which is used to reduce the net operating loss carryforwards of Walter and its Subsidiaries described in such Sections), the Stockholders shall pay to the Tax Indemnitees an amount equal to the sum of (y) 20% of the amount by which the net operating loss carryovers set forth in Schedule 3.8(b) or Schedule 3.8(c) from any taxable period exceed the amount of net operating loss carryovers as finally determined from such taxable period; provided, that the aggregate amount payable by the Stockholders pursuant to this clause (y) by reason of all such breaches shall not exceed $1,000,000, plus (z) the amount of any interest and penalties payable as a result of the reduction in such net operating loss carryover. Notwithstanding the preceding sentence, the Stockholders shall not be required to indemnify the Tax Indemnitees as a result of the breach of the representations described in Sections 3.8(a)(xx) through 3.8(a)(xxiii) unless the unavailability of any of the carryovers described therein are challenged in the audit of the Tax Returns filed by CMS Energy and its Affiliates for their taxable years ending on or before December 31, 1999. (ii) The Tax Indemnitees shall be liable for and indemnify the Stockholders for the Taxes of Walter and its Subsidiaries for any taxable year or period that begins after the Unaudited Balance Sheet Date and, with respect to any taxable year or period beginning before and ending after the Unaudited Balance Sheet Date, the portion of such taxable year or period beginning after the Unaudited Balance Sheet Date. (iii) For purposes of paragraphs (a)(i) and (a)(ii), whenever it is necessary to determine the liability for Taxes of Walter and its Subsidiaries for a portion of a taxable year or -53- 61 period that begins before and ends after the Unaudited Balance Sheet Date, the determination of the Taxes of Walter and its Subsidiaries for the portion of the year or period ending on, and the portion of the year or period beginning after, the Unaudited Balance Sheet Date shall be determined by assuming that Walter and its Subsidiaries had a taxable year or period which ended at the close of the Unaudited Balance Sheet Date, except that exemptions, allowances or deductions that are calculated on an annual basis, such as the deduction for depreciation, shall be apportioned on a daily basis. (iv) The Stockholders shall be liable for all transfer, sales or similar Taxes arising from the Merger and the other transactions contemplated by this Agreement. (v) Within twenty (20) days after the execution of this Agreement, the Stockholders shall deliver or cause to be delivered to CMS Energy or its designee true and complete copies of: (A) all income Tax Returns of Walter and its Subsidiaries requested by CMS Energy or its Subsidiaries; (B) any other Tax Returns requested by CMS Energy or its Subsidiaries, as may be relevant to Walter and its Subsidiaries and their assets and operations; and (C) any workpapers or other supporting data requested by CMS Energy or its subsidiaries relating to "income taxes payable" or similar line item reflected in the Unaudited Statement of Income and Unaudited Balance Sheet relating to Tax Returns made available pursuant to (A) or (B), or relating to Tax Returns referred to in (A) or (B) not yet filed, to the extent copies of such Tax Returns, work papers or other data are in existence and in the possession of Walter at the time of such request. (b) Tax Returns. Walter shall file when due (after taking into account all extensions properly obtained) all Tax Returns that are required to be filed by or with respect to Walter and its Subsidiaries on or before the Effective Date and shall remit or cause to be remitted any Taxes shown to be due on such Tax Returns, and the Surviving Corporation shall file when due (after taking into account all extensions properly obtained) all Tax Returns that are required to be filed by Walter and its Subsidiaries after the Effective Date and shall remit or cause to be remitted any Taxes due in respect of such Tax Returns. All Tax Returns which Walter is required to file in accordance with this paragraph (b) shall be prepared and filed in a manner consistent with past practice and, on such Tax Returns, no position shall be taken or method adopted that is inconsistent with positions taken or methods used in preparing and filing similar Tax Returns in prior periods except for changes required by law or changes in facts. (c) Contest Provisions. CMS Energy or one of its subsidiaries shall notify the Stockholders in writing upon receipt by any Tax Indemnitee of notice of any pending or -54- 62 threatened federal, state, local or foreign Tax audit or assessment which may materially affect the Tax liabilities of Walter or its Subsidiaries for which the Stockholders would be required to indemnify the Tax Indemnitees pursuant to Section 10.1 or this Section 7.2, provided, that failure to comply with this provision shall not affect the Tax Indemnitees' right to indemnification hereunder except to the extent that such omission results in a failure of actual knowledge of the Stockholders and the Stockholders are damaged as a result of such failure of actual knowledge. The Stockholders shall have the sole right to represent the interests of Walter and its Subsidiaries in any Tax audit or administrative or court proceeding relating to taxable periods ending on or before the Unaudited Balance Sheet Date, and to employ counsel of their choice at their expense, provided that the Tax Indemnitees (and their tax counsel) may, at their own expense, be present at and participate in any such audit or proceeding. Notwithstanding the foregoing, the Stockholders shall not be entitled to settle, either administratively or after the commencement of litigation, any claim that would constitute a Timing Adjustment or any claim for Taxes which would adversely affect the liability for Taxes of the Tax Indemnitees for any period after the Unaudited Balance Sheet Date to any extent (including, but not limited to, the imposition of income Tax deficiencies, the reduction of asset basis or cost adjustments, the lengthening of any amortization or depreciation periods, the denial of amortization, depreciation or depletion deductions, or the reduction of loss or credit carryforwards) without the prior written consent of the Tax Indemnitees. Such consent shall not be necessary to the extent that the Stockholders have indemnified the Tax Indemnitees in a manner acceptable to the Tax Indemnitees against the effects of any such settlement. (d) Assistance and Cooperation. After the Effective Date, each of the Stockholders and the Tax Indemnitees shall: (i) agree to timely sign and deliver such certificates or forms as may be necessary or appropriate to establish an exemption from (or otherwise reduce), or make a report with respect to, Taxes described in paragraph (a)(iv) of this Section 7.2; (ii) assist (and cause their respective affiliates to assist) the other parties in preparing any Tax Returns which such other parties are responsible for preparing and filing in accordance with paragraph (b) of this Section 7.2; (iii) cooperate fully in preparing for any audits of, or disputes with taxing authorities regarding, any Tax Returns of Walter and its Subsidiaries; -55- 63 (iv) make available to the other parties and to any taxing authority as reasonably requested all information, records, and documents relating to Taxes of Walter and its Subsidiaries; (v) provide timely notice to the other parties in writing of any pending or threatened Tax audits or assessments of Walter and its Subsidiaries for taxable periods for which the other may have a liability under this Section 7.2; and (vi) furnish the other with copies of all correspondence received from any taxing authority in connection with any Tax audit or information request with respect to any such taxable period. (f) Adjustment to Purchase Price. Any payment by the Stockholders under this Section 7.2 shall be considered an adjustment to the consideration paid in connection with the Merger. (g) Survival of Obligations. Notwithstanding Article X, the obligations of the Stockholders and the Tax Indemnitees set forth in this Section 7.2 shall be unconditional and absolute and shall remain in effect without limitation as to time and the Stockholders' obligations under this Section 7.2 shall not be limited as set forth in Section 10.1. (h) No Duplication of Indemnities. To the extent that the provisions of this Section 7.2 conflict with the provisions of Article X, the provisions of this Section 7.2 shall control and no double payment shall be made with respect to any breach or alleged breach of any representation or warranty contained in Section 3.8. SECTION 7.3. REPAYMENT OF DEBT. The parties agree that the Surviving Corporation shall repay in full the Walter Debt to be Discharged immediately after the Effective Time as more fully itemized as to principal and interest then due as set forth in Schedule 7.3. SECTION 7.4. RESALE OF CMS COMMON SHARES. Each Shareholder who is an affiliate of Walter within the meaning of Rule 145 under the Securities Act agrees that any resale of CMS Common Shares to be received hereunder shall be made in compliance with Rule 145(d) under the Securities Act. SECTION 7.5. CLAIMS OF PREFERRED STOCKHOLDERS. Effective as of the Effective Time, each of the Preferred Stockholders hereby waives any claim it may have against Walter or the Surviving Corporation relating to non-payment or arrearage in the payment of dividends on the Walter Preferred Stock and -56- 64 waives any other claim it may have against Walter or the Surviving Corporation other than pursuant to this Agreement. SECTION 7.6. CLAIMS OF WALTER AND THE STOCKHOLDERS. Effective as of the Effective Time, each of Walter and the Stockholders hereby waives any claim it may have against the Preferred Stockholders relating to the Walter Preferred Stock and waives any other claim it may have against the Preferred Stockholders other than pursuant to this Agreement. ARTICLE VIII CONDITIONS PRECEDENT TO OBLIGATIONS OF CMS ENERGY AND SUB The obligations of CMS Energy and Sub under this Agreement to cause the Merger to be consummated shall, at the option of CMS Energy, be subject to the satisfaction, on or prior to the Effective Date, of the following conditions: SECTION 8.1. NO MISREPRESENTATION OR BREACH OF COVENANTS AND WARRANTIES. There shall have been no material breach by Walter, any Stockholder, any Preferred Stockholder or any Warrantholder in the performance of their respective covenants and agreements herein to be performed at or prior to the Effective Time; subject to Section 10.7, none of the representations and warranties of Walter, any Stockholder, any Preferred Stockholder or any Warrantholder that is qualified as to materiality shall be untrue or incorrect in any respect and on the Effective Date such representations and warranties shall be true and correct as though made on the Effective Date except for changes therein specifically permitted by this Agreement or resulting from any transaction expressly consented to in writing by CMS Energy, permitted by Section 6.6 or entered into in connection with the consummation of the Merger and the other transactions contemplated hereby; subject to Section 10.7, none of the representations or warranties that is not so qualified shall be untrue or incorrect in any material respect and on the Effective Date such representations and warranties shall be true and correct in all material respects as though made on the Effective Date except for changes therein specifically permitted by this Agreement or resulting from any transaction expressly consented to in writing by CMS Energy, permitted by Section 6.6 or entered into in connection with the consummation of the Merger and the other transactions contemplated hereby; and there shall have been delivered to CMS Energy and Sub a certificate or certificates to the foregoing effect, dated the Effective Date, signed on behalf of Walter by its President and its Chief Financial Officer and signed by each of the Stockholders, the Preferred Stockholders and the Warrantholders (limited in the case of Cain, the Cain Trust, Oehmig, the Preferred Stockholders and the Warrantholders to the respective covenants and -57- 65 agreements, and representation and warranties, of such persons contained herein). SECTION 8.2. NO MATERIAL ADVERSE EFFECT. Between the date hereof and the Effective Date, there shall have been no Material Adverse Effect on Walter and its Subsidiaries, taken as a whole; and there shall have been delivered to CMS Energy and Sub a certificate or certificates to such effect, dated the Effective Date, signed on behalf of Walter and its Subsidiaries by its President and its Chief Financial Officer and signed by each of the Stockholders. SECTION 8.3. OPINIONS OF COUNSEL FOR WALTER, THE STOCKHOLDERS AND THE PREFERRED STOCKHOLDERS. CMS Energy and Sub shall have received (i) from Vinson & Elkins L.L.P., counsel for Walter and the Stockholders, an opinion, dated the Effective Date, in form and substance reasonably satisfactory to CMS Energy, substantially to the effect set forth in Exhibit D and (ii) from Jones, Walker, Waechter, Poitevant, Carrere & Denegre L.L.P., counsel for the Preferred Stockholders, an opinion, dated the Effective Date, in form and substance reasonably satisfactory to CMS Energy, substantially to the effect set forth in Exhibit E. SECTION 8.4. NO INJUNCTIONS OR RESTRAINTS. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Merger shall be in effect; provided, however, that each of the parties shall have used its reasonable best efforts to prevent the entry of any such injunction or other order and to appeal as promptly as possible any injunction or other order that may be entered. SECTION 8.5. NECESSARY GOVERNMENTAL APPROVALS. The parties shall have received all governmental and regulatory approvals and actions reasonably necessary to consummate the transactions contemplated hereby, which are either required to be obtained prior to the Effective Date by applicable law or regulation (including, without limitation, the expiration or early termination of the applicable waiting period under the HSR Act, if any required governmental approvals or actions under foreign laws or regulations) or are necessary to prevent a Material Adverse Effect on Walter and its Subsidiaries taken as a whole. SECTION 8.6. NECESSARY CONSENTS. Walter shall have received consents, in form and substance reasonably satisfactory to CMS Energy, to the transactions contemplated hereby from the other parties to all material contracts, leases, agreements and permits to which Walter or any of its Subsidiaries is a party or by which they are affected and which require such consent prior to the Merger and are necessary to prevent a Material Adverse -58- 66 Effect with respect to Walter and its Subsidiaries taken as a whole. SECTION 8.7. EFFECTIVENESS OF REGISTRATION STATEMENT. The Registration Statement, including the Prospectus, shall be effective under the Securities Act, no stop order suspending the effectiveness of the Registration Statement shall have been entered by the SEC and no material or fundamental change shall have occurred which requires disclosure thereof to be included in an amendment to the Registration Statement or a supplement to the Prospectus included in the Registration Statement, or to be incorporated by reference therein from a filing under the Exchange Act, prior to any further use of such Registration Statement and Prospectus under the Securities Act and the rules and regulations thereunder; and further, a sufficient time period shall have lapsed following the delivery of the Prospectus to the Stockholders as is necessary to comply with the requirements of Form S-4. SECTION 8.8. LISTING OF CMS COMMON SHARES. The CMS Common Shares to be issued hereunder shall have been approved for listing upon notice of issuance by the NYSE. SECTION 8.9. STOCKHOLDER ACTION. This Agreement shall have been unanimously adopted by all holders of Walter Common Stock and Walter Preferred Stock. SECTION 8.10. DISSENTING STOCKHOLDERS. No stockholder of Walter shall have delivered a written demand for appraisal of its Walter Common Stock or Walter Preferred Stock pursuant to Sections 5.11 and 5.12 of the TBCA; and there shall have been delivered to CMS Energy and Sub a certificate or certificates to such effect, dated the Effective Date, signed on behalf of Walter by its President and its Chief Financial Officer. SECTION 8.11. INTER-PURCHASER AGREEMENT. Each of Walter, Nuevo, Walter Congo Holdings, Inc., Walter Congo, The Congo Holding Company and Nuevo Congo shall have each entered into the Inter-Purchaser Agreement substantially in the form of Exhibit F. SECTION 8.12. CLOSING OF THE AMOCO STOCK PURCHASE AGREEMENT. The transactions contemplated by the Stock Purchase Agreement dated as of June 30, 1994 (the "Amoco Stock Purchase Agreement") among Amoco Production Company ("Amoco"), Walter, Walter International Congo, Inc. ("Walter Congo"), Nuevo and The Nuevo Congo Company ("Nuevo Congo") shall have been consummated on the terms set forth in the Amoco Stock Purchase Agreement, all of the conditions to the consummation of such transactions by each of the parties to such Agreement shall have been satisfied in connection with such consummation, and none of the representations and warranties contained in Section 3.18 shall be untrue or incorrect in any respect and on the Effective Date such -59- 67 representations and warranties shall be true and correct as though made on the Effective Date. SECTION 8.13. RESIGNATIONS OF CERTAIN EMPLOYEES. Each of Joseph C. Walter, Jr., F. Fox Benton, Jr., F. Fox Benton III and R.D. Jolly shall have resigned, effective as of the Effective Time, his employment with Walter and any of its Subsidiaries or affiliates. SECTION 8.14. WARRANTS TO ACQUIRE WALTER COMMON STOCK. All outstanding Warrants or options to acquire Walter Common Stock shall have been exercised or cancelled or shall have expired, including, without limitation, the cancellation of Warrants to acquire an aggregate of 9,000 shares of Walter Common Stock currently held by holders of Walter Preferred Stock and the exercise (or cancellation) of Warrants to acquire an aggregate of 2,300 shares of Walter Common Stock currently held by Benton III, Chapman, Frank, Jolly and Smalley, in accordance with their terms. SECTION 8.15. RESIGNATIONS OF WALTER DIRECTORS AND OFFICERS. CMS Energy shall have received the resignation of each of the directors and officers of Walter and each of its Subsidiaries, effective as of the Effective Time. SECTION 8.16. AMOCO CONSENT. Amoco shall have (i) consented to the Merger as provided in the Tax Agreement which is Schedule D to the Amoco Stock Purchase Agreement on terms and conditions satisfactory to CMS Energy, (including that no consideration shall be required of CMS Energy or its affiliates to obtain such consent) and (ii) agreed, upon terms and conditions satisfactory to CMS Energy, that upon the Surviving Corporation paying in full to Amoco one-half (Walter's proportionate share) of the principal and accrued interest due under the Amoco Note, the Surviving Corporation shall be released from any further obligations under the Amoco Note, including without limitation from any and all liability of Nuevo or Nuevo Congo under or relating to such Note. SECTION 8.17. OPIC CONSENT. The Overseas Private Investment Corporation ("OPIC") shall have consented to the Merger on terms and conditions satisfactory to CMS Energy with respect to both the OPIC Debt-Alba and the OPIC Debt-Congo, or OPIC shall have acknowledged that its consent to the Merger is not required. SECTION 8.18. NOMECO LENDERS' CONSENT. The lenders to NOMECO Oil & Gas Co., a Michigan corporation ("NOMECO") and a wholly-owned subsidiary of CMS Enterprises Company, a Michigan corporation ("Enterprises") and a wholly-owned subsidiary of CMS Energy, under the financing arrangements of NOMECO, shall have consented to the Merger and the contribution to the capital of NOMECO of the capital stock of the Surviving Corporation and -60- 68 shall have waived any breach under such arrangement as a result of the indebtedness, guarantees or similar obligations of the Surviving Corporation, in each case on terms and conditions satisfactory to CMS Energy or the obligations or guarantees of NOMECO arising pursuant to the Inter-Purchaser Agreement. SECTION 8.19. WALTER DEBT TO BE DISCHARGED. Each of the lenders under the Walter Debt to be Discharged shall have agreed to accept repayment of such Debt immediately after the Effective Time and that, upon repayment of such Debt in accordance with Schedule 7.3, the Surviving Corporation shall be released from such Debt and all other obligations relating thereto and all security therefor returned (including, without limitation, the stock of Walter International Equatorial Guinea, Inc., which is pledged to secure the TCW Debt). SECTION 8.20. WARRANTHOLDER NOTES. Walter shall have received cash or the Warrantholder Notes executed by the respective Warrantholders as contemplated by Section 6.13. SECTION 8.21. WALTER CONGO NOTE. The Congo Holding Company shall have demanded and received payment of the Walter Congo Note (as defined in the Inter-Purchaser Agreement) by delivery of the Latent Working Interest and the Latent ORRI (each as defined in the Inter- Purchaser Agreement). SECTION 8.22. ORR PLAN. The Walter International, Inc. Exploration Participation Plan dated January 1, 1988 (the "ORR Plan") shall have been terminated. ARTICLE IX CONDITIONS PRECEDENT TO OBLIGATIONS OF WALTER AND THE STOCKHOLDERS The obligations of Walter, the Stockholders and the Preferred Stockholders under this Agreement to cause the Merger to be consummated shall, at the option of Walter, the Stockholders and the Preferred Stockholders, be subject to the satisfaction, on or prior to the Effective Date, of the following conditions: SECTION 9.1. NO MISREPRESENTATION OR BREACH OF COVENANTS AND WARRANTIES. There shall have been no material breach by CMS Energy or Sub in the performance of any of their respective covenants and agreements herein to be performed at or prior to the Effective Time; none of the representations and warranties of CMS Energy or Sub that is qualified as to materiality shall be untrue or incorrect in any respect and on the Effective Date such representations and warranties shall be true and correct as though made on the Effective Date except for changes therein specifically permitted by this Agreement or -61- 69 resulting from any transactions expressly consented to in writing by Walter, permitted by Section 6.6 or entered into in connection with the consummation of the Merger and the other transactions contemplated hereby; none of the representations or warranties that are not so qualified shall be untrue or incorrect in any material respect and on the Effective Date such representations and warranties shall be true and correct in all material respects as though made on the Effective Date except for changes therein specifically permitted by this Agreement or resulting from any transactions expressly consented to in writing by Walter, permitted by Sections 6.6 or entered into in connection with the consummation of the Merger and the other transactions contemplated hereby; and there shall have been delivered to Walter and the Stockholders a certificate or certificates to the foregoing effect, dated the Effective Date, signed on behalf of CMS Energy and Sub by their respective Presidents or Vice Presidents. SECTION 9.2. NO MATERIAL ADVERSE EFFECT. Between the date hereof and the Effective Date, there shall have been no Material Adverse Effect on CMS Energy and its Subsidiaries taken as a whole; and there shall have been delivered to Walter and the Stockholders a certificate or certificates to such effect, dated the Effective Date, signed on behalf of CMS Energy by its President or a Vice President. SECTION 9.3. NO INJUNCTIONS OR RESTRAINTS. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Merger shall be in effect; provided, however, that each of the parties shall have used its reasonable best efforts to prevent the entry of any such injunction or other order and to appeal as promptly as possible any injunction or other order that may be entered. SECTION 9.4. OPINIONS OF COUNSEL FOR CMS ENERGY AND SUB. Walter, the Stockholders and the Preferred Stockholders shall have received from Denise Sturdy, Esq., counsel for CMS Energy and Sub, an opinion, dated the Effective Date, in form and substance satisfactory to Walter, the Stockholders and the Preferred Stockholders, substantially to the effect set forth in Exhibit G. SECTION 9.5. NECESSARY GOVERNMENTAL APPROVALS. The parties shall have received all governmental and regulatory approvals and actions reasonably necessary to consummate the transactions contemplated hereby, which are either required to be obtained prior to the Effective Date by applicable law or regulation (including, without limitation, the expiration or early termination of the applicable waiting period under the HSR Act, if any) or are necessary to prevent a Material Adverse Effect on CMS Energy and its Subsidiaries taken as a whole. -62- 70 SECTION 9.6. EFFECTIVENESS OF REGISTRATION STATEMENT. The Registration Statement, including the Prospectus, shall be effective under the Securities Act, no stop order suspending the effectiveness of the Registration Statement shall have been entered by the SEC and no material or fundamental change shall have occurred which requires disclosure thereof to be included in an amendment to such Registration Statement or a supplement to the Prospectus included in such Registration Statement, or to be incorporated by reference therein from a filing under the Exchange Act, prior to any further use of such Registration Statement and Prospectus under the Securities Act and the rules and regulations thereunder. SECTION 9.7. LISTING OF CMS COMMON SHARES. The CMS Common Shares to be issued hereunder shall have been approved for listing upon notice of issuance by the NYSE. SECTION 9.8. STOCKHOLDER ACTION. This Agreement shall have been unanimously adopted by all holders of Walter Common Stock and Walter Preferred Stock. By the execution hereof, all such holders agree to give their timely consent and agree to execute such consents and other documents necessary to evidence such approvals. SECTION 9.9. NECESSARY CONSENTS. Walter shall have received consents, in form and substance reasonably satisfactory to Walter, to the transactions contemplated hereby from the other parties to all material contracts, leases, agreements and permits to which Walter is a party or by which it is affected and which require such consent prior to the Merger and are necessary to prevent a Material Adverse Effect with respect to Walter and its Subsidiaries taken as whole. SECTION 9.10. OFFICE LEASE GUARANTOR. CMS Energy shall have caused NOMECO to become substituted in the place and stead of Walter on the office lease between Walter and First City National Bank of Houston, as lessor, so that Walter Oil & Gas Corporation may be released as guarantor thereunder or, if a substitution and release are unable to be negotiated on terms satisfactory to the parties, CMS Energy shall have caused NOMECO to indemnify and hold harmless Walter Oil & Gas Corporation against any liabilities incurred by Walter Oil & Gas Corporation with respect to such lease. ARTICLE X INDEMNIFICATION; SURVIVAL SECTION 10.1. INDEMNIFICATION BY THE STOCKHOLDERS. From and after the Effective Time, each of the Stockholders shall indemnify and hold harmless CMS Energy, the Surviving Corporation and their subsidiaries, affiliates and successors from and -63- 71 against any and all (a) liabilities, losses, costs or damages ("Loss") and (b) reasonable attorneys', consultants' and accountants' fees and expenses, court costs and all other reasonable out-of-pocket expenses ("Expense") incurred by CMS Energy, the Surviving Corporation and their subsidiaries, affiliates and successors in connection with or arising from (i) any breach or failure to perform by any Stockholder of any of its respective agreements, covenants or obligations in this Agreement or any agreement entered into in connection with the transactions contemplated hereby, in each case to be performed or complied with after the Effective Time, as the case may be, (ii) any breach of any warranty or the inaccuracy of any representation of Walter or any Stockholder contained in this Agreement, as updated in accordance with Section 10.7 hereof, or in any certificate delivered by or on behalf of Walter or any Stockholder pursuant hereto, (iii) any reduction in the Discounted Present Value (as hereinafter defined) of all future net cashflows (including for periods after one year after the Effective Date) to Walter's direct or indirect interest from the Equatorial Guinea Production Sharing Contract ("PSC") arising solely from any unilateral change made to the PSC by the Government of the Republic of Equatorial Guinea or any agency or instrumentality thereof effected at any time during the period beginning June 1, 1994 and ending one year after Effective Date; and (iv) the litigation referred to in Schedule 3.17, including, but not limited to the Waldroup and the Aker/Addax litigation; provided, however, that the Stockholders shall be required to indemnify and hold harmless under this Section 10.1 with respect to the breach or inaccuracy of any representations or warranties only to the extent that the aggregate amount of Loss and Expense referred to above in this Section 10.1 relating thereto exceeds U.S. $300,000, except for any Loss or Expense incurred in connection with or arising from any breach or inaccuracy of the representations and warranties contained in Section 3.3 and 3.4, as to which no such limitation shall apply; and provided further, that each Stockholder's obligation to indemnify and hold harmless pursuant to this Section 10.1 shall be limited to the payment by such Stockholder (excluding any amounts reimbursed to such Stockholder) of cash in the aggregate in an amount equal to the product obtained by multiplying the Average Price by the number of such Stockholder's shares of Walter Common Stock immediately prior to the Effective Time; and provided further, that no Stockholder shall have any obligation to indemnify and hold harmless any indemnified party with respect to any Loss or Expense arising from any breach of a warranty, or inaccuracy of a representation, of any other Stockholder contained in Section 3.3(b) or 3.4(b) or 3.34 or of any Preferred Stockholder contained in Section 3.3(b) or 3.4(b) or of any Warrantholder contained in Section 3.3(b) or 3.4(b). Discounted Present Value of future net cashflows shall mean the future revenues from sales of condensate production under the PSC attributable to the interest of Walter and its Subsidiaries therein after deducting all associated operating costs, royalties, other burdens on production, capital expenditures, -64- 72 other applicable costs and all foreign and U.S. taxes, discounted at a 25% annual rate. Change in Discounted Present Value shall be calculated by comparing the Discounted Present Value under the Modified Economic Model to the Discounted Present Value under the Original Economic Model (as hereinafter defined). Modified Economic Model shall mean the economic model of the PSC used to compute discounted present value of the Alba field under the PSC as made available to CMS Energy by Walter in connection with the negotiation of the transactions contemplated by this Agreement, a copy of which is included in Schedule 3.33(a) attached hereto ("Original Economic Model"), modified to reflect any unilateral changes to the PSC made by the Republic of Equatorial Guinea, all other factors remaining the same. Stockholders reserve the right to assume, at their sole cost and expense, the defense against any attempted unilateral change to the PSC that would give rise to an indemnity right hereunder; provided, however, that any such defense shall be conducted in accordance with all applicable laws and agreements; and provided, further, that counsel for the Stockholders, who shall conduct the defense of such matter, shall be reasonably satisfactory to CMS Energy; and provided, further, that CMS Energy shall have the right to have separate counsel reasonably acceptable to the Stockholders act on behalf of CMS Energy, at its expense. If the Stockholders assume the defense of any such matter, the Stockholders shall not consent to entry of any judgment, or enter into any settlement, without the written consent of CMS Energy. If the Stockholders do not assume the defense of any such matter, in accordance with the terms hereof, CMS Energy may defend against such claim or litigation in such manner as it may deem appropriate, including, without limitation, settling such matter, on such terms as CMS Energy may deem appropriate, and the Stockholders will promptly indemnify CMS Energy, if required, in accordance with the provisions of this Section 10.1. Any change to the PSC as a result of bilateral negotiations or any act or omission of the Surviving Corporation in violation of the PSC or applicable law, rule or order of general applicability after the Effective Time is specifically excluded from the indemnity contained in clause (iii) above. SECTION 10.2. INDEMNIFICATION BY CMS ENERGY AND THE SURVIVING CORPORATION. From and after the Effective Time, CMS Energy and the Surviving Corporation shall jointly and severally indemnify and hold harmless the Stockholders and their subsidiaries, affiliates and successors from and against any and all Loss and Expense incurred by the Stockholders and their subsidiaries, affiliates and successors in connection with or arising from (a) any breach or failure to perform by CMS Energy or the Surviving Corporation of any of their respective agreements, covenants or obligations in this Agreement or any agreement entered into in connection with the transactions contemplated hereby or thereby, in each case to be performed or complied with after the Effective Time, and (b) any breach of any warranty or the inaccuracy of any representation of CMS Energy or -65- 73 Sub contained in this Agreement or in any certificate delivered by or on behalf of CMS Energy or Sub pursuant hereto or thereto; provided, however, that CMS Energy and the Surviving Corporation shall be required to indemnify and hold harmless under this Section 10.2 with respect to the breach or inaccuracy of any representations or warranties only to the extent that the aggregate amount of Loss and Expense referred to above in this Section 10.2 relating thereto exceeds U.S. $300,000; and provided, further, that the obligation of CMS Energy and the Surviving Corporation to indemnify and hold harmless pursuant to this Section 10.2 shall be limited to the aggregate payment by CMS Energy and/or the Surviving Corporation of an amount equal to U.S. $10,000,000. In addition, from and after the Effective Time, if any Stockholder is named as a defendant in any lawsuit by a third party for a claim against the Surviving Corporation or any affiliate thereof, for which neither Walter nor any Stockholder has any liability, CMS Energy and the Surviving Corporation shall indemnify and hold harmless each such named Stockholder, to the extent permitted by applicable law, from all Loss and Expense relating to such matter without regard to the $300,000 required minimum amount set forth in the preceding sentence. SECTION 10.3. NOTICE OF CLAIMS. If CMS Energy (with respect to Section 10.1) or the Stockholders (with respect to Section 10.2) believe that any of the persons entitled to indemnification under this Article X has suffered or incurred any Loss or incurred any Expense, whether or not the applicable dollar limitation specified by Section 10.1 or 10.2 has been exceeded, CMS Energy or such Stockholders, as the case may be, shall so notify the other promptly in writing describing such Loss or Expense, the amount thereof, if known, and the method of computation of such Loss or Expense, all with reasonable particularity and containing a reference to the provisions of this Agreement or any certificate delivered pursuant hereto in respect of which such Loss or Expense shall have occurred; provided, however, that the omission by such indemnified party to give notice as provided herein shall not relieve the indemnifying party of its indemnification obligation under this Article X except to the extent that such omission results in a failure of actual notice to the indemnifying party and such indemnifying party is materially damaged as a result of such failure to give notice. If any action at law or suit in equity is instituted by or against a third party with respect to which any of the persons entitled to indemnification under this Article X intends to claim any liability or expense as Loss or Expense under this Article X, any such person shall promptly notify the indemnifying party of such action or suit as specified in this Section 10.3 and Section 10.4. Any party entitled to indemnification hereunder shall use reasonable efforts to minimize any Loss or Expense for which indemnification is sought hereunder. -66- 74 SECTION 10.4. THIRD PARTY CLAIMS. In the event of any claim for indemnification hereunder resulting from or in connection with any claim or legal proceeding by a third party, the indemnified persons shall give such notice thereof to the indemnifying party not later than twenty (20) days prior to the time any response to the asserted claim is required, if possible, and in any event within fifteen (15) days following the date such indemnified person has actual knowledge thereof; provided, however, that the omission by such indemnified party to give notice as provided herein shall not relieve the indemnifying party of its indemnification obligation under this Article X except to the extent that such omission results in a failure of actual notice to the indemnifying party and such indemnifying party is materially damaged as a result of such failure to give notice. In the event of any such claim for indemnification resulting from or in connection with a claim or legal proceeding by a third party, the indemnifying party may, at its sole cost and expense, assume the defense thereof; provided, however, that counsel for the indemnifying party, who shall conduct the defense of such claim or legal proceeding, shall be reasonably satisfactory to the indemnified party; and provided, further, that if the defendants in any such actions include both the indemnified persons and the indemnifying party and the indemnified persons shall have reasonably concluded that there may be legal defenses or rights available to them which have not been waived and are in actual or potential conflict with those available to the indemnifying party, the indemnified persons shall have the right to select one law firm reasonably acceptable to the indemnifying party to act as separate counsel, on behalf of such indemnified persons, at the expense of the indemnifying party. Subject to the second proviso of the immediately preceding sentence, if an indemnifying party assumes the defense of any such claim or legal proceeding, such indemnifying party shall not consent to entry of any judgment, or enter into any settlement, that (a) is not subject to full indemnification hereunder (except for the deductible referred to in the first proviso to the first sentence of each of Section 10.1 and Section 10.2), (b) provides for injunctive or other non-monetary relief affecting the indemnified persons or (c) does not include as an unconditional term thereof the giving by each claimant or plaintiff to such indemnified persons of a release from all liability with respect to such claim or legal proceeding, without the prior written consent of the indemnified persons (which consent, in the case of clauses (b) and (c), shall not be unreasonably withheld); provided, however, that subject to the second proviso of the immediately preceding sentence, the indemnified persons may, at their own expense, participate in any such proceeding with the counsel of their choice without any right of control thereof. So long as the indemnifying party is in good faith defending such claim or proceeding, the indemnified persons shall not compromise or settle such claim or proceeding without the prior written consent of the indemnifying party, which consent shall not be unreasonably withheld. If the indemnifying -67- 75 party does not assume the defense of any such claim or litigation in accordance with the terms hereof, the indemnified persons may defend against such claim or litigation in such manner as they may deem appropriate, including, without limitation, settling such claim or litigation (after giving prior written notice of the same to the indemnifying party and obtaining the prior written consent of the indemnifying party, which consent shall not be unreasonably withheld) on such terms as the indemnified persons may deem appropriate, and the indemnifying party will promptly indemnify the indemnified persons in accordance with the provisions of this Section 10.4. SECTION 10.5. EXCLUSIVE REMEDY. In the event the Merger is consummated, any claim against either the Stockholders or CMS Energy or the Surviving Corporation for any breach of this Agreement or in connection with any of the transactions contemplated hereby (other than a claim for breach of Section 7.2 and other than claims by or against the Preferred Stockholders) shall, to the extent permitted by law, be made solely pursuant to this Article X. SECTION 10.6. SURVIVAL OF OBLIGATIONS. All representations, warranties, covenants and obligations contained in this Agreement shall survive the consummation of the transactions contemplated by this Agreement; provided, however, that the representations and warranties in Articles III and IV shall terminate on the third anniversary of the Effective Date except for the representations and warranties contained in Sections 3.3 and 3.4, which shall survive without termination, the representations and warranties contained in Section 3.9, which shall terminate on the first anniversary of the Effective Date, the representations contained in Sections 3.8, 3.22 and 7.1(c), which shall survive until expiration of the applicable statute of limitations, and any representations relating to ACEC, which shall terminate on the second anniversary of the Effective Date; and provided, further, that if any claim under this Article X for Loss or Expense in respect of any representations and warranties is asserted in writing prior to the expiration of the applicable period set forth above, the obligations of the indemnifying party with respect to such claim shall not be affected by the expiration of such period. SECTION 10.7. UPDATE OF THE REPRESENTATIONS AND WARRANTIES. (a) Not later than ten days prior to the Effective Date, Walter, any Stockholder, any Preferred Stockholder and any Warrantholder may deliver a written notice to CMS Energy setting forth any and all facts, conditions, occurrences, changes and other matters, in each case, occurring after the date hereof, that has caused or may cause the representations and warranties of the Stockholders, the Preferred Stockholders and/or the Warrantholders contained herein (including the Schedules hereto) not to be true and correct in all respects (in the case of any representation or warranty containing any materiality -68- 76 qualification) or in all material respects (in the case of any representation and warranty without any materiality qualification). In the event that any of such facts, conditions, occurrences, changes and other matters shall have caused or will cause, on or prior to the Effective Date, any such representation or warranty not to be true and correct in all respects (in the case of any representation or warranty containing any materiality qualification) or in all material respects (in the case of any representation and warranty without any materiality qualification) on the Effective Date with the same effect as though made on the Effective Date, CMS Energy may elect to terminate this Agreement pursuant to Section 11.1(d) based on such facts, conditions, occurrences, changes or other matters. If CMS Energy shall nevertheless proceed to consummate the Merger, such facts, conditions, occurrences, changes and other matters so disclosed as to each such representation or warranty of the Stockholders, the Preferred Stockholders and/or the Warrantholders contained herein (including the Schedules) shall be deemed to constitute an exception to such representation or warranty reflecting the facts, conditions, occurrences, changes and other matters so disclosed with the same effect as if such exception had been made in such representation or warranty as of the date hereof in this Agreement to the extent, but only to the extent, of such disclosure. (b) Not later than ten days prior to the Effective Date, CMS Energy may deliver a written notice to Walter, the Stockholders, the Preferred Stockholders and the Warrantholders setting forth any and all facts, conditions, occurrences, changes and other matters, in each case, occurring after the date hereof, that has caused or may cause the representations and warranties of CMS Energy contained herein (including the Schedules hereto) not to be true and correct in all respects (in the case of any representation or warranty containing any materiality qualification) or in all material respects (in the case of any representation and warranty without any materiality qualification). In the event that any of such facts, conditions, occurrences, changes and other matters shall have caused or will cause, on or prior to the Effective Date, any such representation or warranty not to be true and correct in all respects (in the case of any representation or warranty containing any materiality qualification) or in all material respects (in the case of any representation and warranty without any materiality qualification) on the Effective Date with the same effect as though made on the Effective Date, Walter may elect to terminate this Agreement pursuant to Section 11.1(e) based on such facts, conditions, occurrences, changes or other matters. If Walter shall nevertheless proceed to consummate the Merger, such facts, conditions, occurrences, changes or other matters so disclosed as to each such representation or warranty of CMS Energy contained herein (including the Schedules) shall be deemed to constitute an exception to such representation or warranty reflecting the facts, conditions, occurrences, changes and other matters so -69- 77 disclosed with the same effect as if such exception had been made in such representation or warranty as of the date hereof in this Agreement to the extent, but only to the extent, of such disclosure. SECTION 10.8. ADJUSTMENT TO CONSIDERATION. All indemnity payments made pursuant to this Article X (other than by or to the Preferred Stockholders) shall be considered as adjustments to the consideration paid in connection with the Merger. ARTICLE XI TERMINATION SECTION 11.1. TERMINATION. Anything contained in this Agreement to the contrary notwithstanding, this Agreement may be terminated at any time prior to the Effective Date: (a) by the mutual consent of CMS Energy and Walter; (b) by CMS Energy upon any material breach by Walter or any Stockholder or any Preferred Stockholder or any Warrantholder of any of the covenants contained in Article VI or VII or Section 12.1; (c) by Walter upon any material breach by CMS Energy or Sub of any of the covenants contained in Article VI or VII or Section 12.1; (d) by CMS Energy if any of the conditions specified in Article VIII has not been met in all material respects or waived by CMS Energy at such time as such condition can no longer be satisfied; (e) by Walter if any of the conditions specified in Article IX has not been met in all material respects or waived by Walter and the Stockholders, as applicable, at such time as such condition can no longer be satisfied; or (f) by CMS Energy or Walter if the Merger shall not have been consummated on or before February 28, 1995. In the event that this Agreement shall be terminated pursuant to this Section 11.1, all further obligations of the parties under this Agreement (other than Sections 12.1, 12.2 and 12.10) shall terminate without further liability of any party to the others; provided, however, that nothing herein shall relieve any party from liability for its willful breach of this Agreement. -70- 78 ARTICLE XII OTHER PROVISIONS SECTION 12.1. CONFIDENTIAL NATURE OF INFORMATION. Each party agrees that it will treat in strict confidence all documents, materials and other information which it obtains regarding the other parties during the course of the negotiations leading to the consummation of the transactions provided for herein and the preparation of this Agreement; and if for any reason whatsoever the transactions contemplated by this Agreement shall not be consummated, each party shall return to the other party all copies of non-public documents and materials which have been furnished or acquired in connection therewith and shall not use or disseminate such documents, materials or other information for any purpose whatsoever. SECTION 12.2. FEES AND EXPENSES. Except as otherwise provided in this Section 12.2, each of the parties hereto shall bear its own costs and expenses (including, without limitation, fees and disbursements of its counsel, accountants and other financial, legal, accounting or other advisors), incurred by it or its affiliates in connection with the preparation, negotiation, execution, delivery and performance of this Agreement and each of the other documents and instruments executed in connection with or contemplated by this Agreement, and the consummation of the transactions contemplated hereby and thereby (collectively "Acquisition Expenses"); provided, however, that, except for the Acquisition Expenses of the Stockholders and Walter relating to the transactions contemplated by this Agreement incurred on or prior to June 30, 1994 and Acquisition Expenses included in Section 2.1(c)(B)(VI), which may be borne by Walter, the Acquisition Expenses of the Stockholders and Walter shall be borne entirely by the Stockholders, and the Stockholders shall reimburse Walter for any such Acquisition Expenses paid by Walter in connection with the foregoing. SECTION 12.3. NOTICES. All notices and other communications under this Agreement shall be in writing and shall be deemed given when delivered personally or by overnight mail, or four days after being mailed (by registered mail, return receipt requested) to a party at the following address (or to such other address as such party may have specified by notice given to the other parties pursuant to this provision): If to CMS Energy to: CMS Energy Corporation Fairlane Plaza South, Suite 1100 330 Town Center Drive Dearborn, Michigan 48126 Attention: Corporate Secretary -71- 79 with a copy to: Sidley & Austin One First National Plaza Chicago, Illinois 60603 Attention: Andrew H. Shaw, Esq. and NOMECO Oil & Gas Co. One Jackson Square P.O. Box 1150 Jackson, Michigan 49201 Attention: William H. Stephens III If to Sub to: CMS Merging Corporation c/o CMS Energy Corporation Fairlane Plaza South, Suite 1100 330 Town Center Drive Dearborn, Michigan 48126 Attention: Corporate Secretary with a copy to: Sidley & Austin One First National Plaza Chicago, Illinois 60603 Attention: Andrew H. Shaw, Esq. If to Walter to: Walter International, Inc. 1021 Main Street, Suite 2110 Houston, Texas 77082 Attention: F. Fox Benton, Jr. with a copy to: Vinson & Elkins L.L.P. 2500 First City Tower 1001 Fannin Houston, Texas 77002 Attention: Douglas Glass, Esq. If to the Stockholders to: F. Fox Benton, Jr. c/o Walter International, Inc. 1021 Main Street, Suite 2110 Houston, Texas 77082 -72- 80 If to the Preferred Stockholders to: BraeLoch Holdings Inc. P.O. Box 3134 114 Northpark Blvd., Suite 9 Covington, Louisiana 70434-3134 Attention: Mr. Russell Allen President with a copy to: Mr. William Hardie Jones, Walker, Waechter, Poitevant, Carrere & Denegre L.L.P. Place St. Charles 201 St. Charles Ave. New Orleans, Louisiana 70170-5100 If to the Warrantholders to: F. Fox Benton III c/o Walter International, Inc. 1021 Main Street, Suite 2110 Houston, Texas 77002 SECTION 12.4. DEFINITIONS. For purposes of this Agreement: (a) an "affiliate" of any person means another person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such first person; provided that in the case of Walter and its Subsidiaries, Walter Oil & Gas Corporation shall not be considered an affiliate thereof; (b) an "associate" of any person means (i) a corporation or organization of which such person is an officer or partner or is, directly or indirectly, the beneficial owner of 10 percent or more of a class of equity securities, (ii) any trust or other estate in which such person has substantial beneficial interest or as to which such person serves as trustee or in a similar capacity and (iii) any relative or spouse of such person, or any relative of such spouse, who has the same home as such person or who is a director or officer of the person or any of its parents or Subsidiaries. -73- 81 (c) the "knowledge of Walter" means the knowledge of the persons listed in Schedule 12.4, which Schedule includes all directors of Walter, the chief executive officers of Walter and each of its Subsidiaries and all officers of Walter. (d) "Material Adverse Effect" means any change or effect (or any development that, insofar as can reasonably be foreseen, would result in any change or effect) that is materially adverse to the business, properties, assets, condition (financial or otherwise) or results of operations of the applicable person or persons; and (e) "person" means an individual, corporation, partnership, association, trust, unincorporated organization or other entity. SECTION 12.5. PARTIAL INVALIDITY. In case any one or more of the provisions contained herein shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Agreement, but this Agreement shall be construed as if such invalid, illegal or unenforceable provision or provisions had never been contained herein unless the deletion of such provision or provisions would result in such a material change as to cause completion of the transactions contemplated hereby to be unreasonable. SECTION 12.6. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective permitted successors or assigns. SECTION 12.7. EXECUTION IN COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be considered an original counterpart, and shall become a binding agreement when CMS Energy, Sub, Walter, the Stockholders, the Preferred Stockholders and the Warrantholders shall have each executed one counterpart. SECTION 12.8. TITLES AND HEADINGS. Titles and headings to Articles and Sections herein are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. SECTION 12.9. SCHEDULES AND EXHIBITS. The Schedules and Exhibits referred to in this Agreement shall be construed with and as an integral part of this Agreement to the same extent as if the same had been set forth verbatim herein. -74- 82 SECTION 12.10. ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS; ASSIGNMENT. This Agreement, including the Schedules and Exhibits, contains the entire understanding of the parties hereto with regard to the subject matter contained herein except that the confidentiality letter agreement, dated May 18, 1994 (the "Confidentiality Agreement"), between Walter and NOMECO shall remain in full force in effect pursuant to the terms thereto after the execution of this Agreement; provided, however, that the Confidentiality Agreement shall terminate as of the Effective Time. The parties hereto, by mutual agreement in writing, may amend, modify and supplement this Agreement. The failure of any party hereto to enforce at any time any provision of this Agreement shall not be construed to be a waiver of such provision, nor in any way to affect the validity of this Agreement or any part hereof or the right of such party thereafter to enforce each and every such provision. No waiver of any breach of this Agreement shall be held to constitute a waiver of any other or subsequent breach. Except as expressly provided herein, the rights and obligations of the parties under this Agreement may not be assigned or transferred by any party hereto without the prior written consent of the other parties hereto. SECTION 12.11. INDEPENDENT INVESTIGATION AND SCOPE OF REPRESENTATIONS. CMS Energy acknowledges and confirms that (i) in making the decision to enter into this Agreement and to consummate the transactions contemplated hereby, it has relied on the representations, warranties, covenants and agreements of Walter, the Stockholders, the Preferred Stockholders and the Warrantholders set forth in the Agreement (including the exhibits and schedules) and on no other representations, warranties, covenants and agreements, and (ii) it has made its own independent investigation, analysis and evaluation of Walter's properties (including CMS Energy's own estimate and appraisal of the extent and value of Walter's hydrocarbon reserves, pipelines and contracts), business, financial condition, operations and prospects. Except to the extent expressly set forth in this Agreement, including Section 3.35, no party makes any representation or warranty whatsoever. Without limiting the generality of the foregoing, except as set forth in Article III, NO REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR IMPLIED, ARE MADE WITH RESPECT TO THE MERCHANTABILITY, USEFULNESS OR SUITABILITY FOR ANY PURPOSE OF ANY PERSONAL PROPERTY OF WALTER OR ITS SUBSIDIARIES, INCLUDING, WITHOUT LIMITATION (a) ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, (b) ANY RIGHTS OF CMS ENERGY UNDER APPROPRIATE STATUTES TO CLAIM DIMINUTION OF CONSIDERATION AND (c) ANY CLAIM FOR DAMAGES BECAUSE OF DEFECTS, WHETHER KNOWN OR UNKNOWN, WITH RESPECT TO SUCH PERSONAL PROPERTY, IT BEING UNDERSTOOD THAT, EXCEPT AS AFORESAID, SUCH PERSONAL PROPERTY SHALL EXIST IN ITS PRESENT CONDITION AND STATE OF REPAIR, "AS IS" AND "WHERE IS," WITH ALL FAULTS. -75- 83 SECTION 12.12. GOVERNING LAW; ARBITRATION. (a) Except to the extent that Texas law is mandatorily applicable to the Merger and the rights and obligations of the stockholders of Walter and Sub, this Agreement, and the application or interpretation thereof, shall be governed by its terms and by the internal laws of the State of Texas, without regard to principles of conflicts of laws as applied in the State of Texas or any other jurisdiction which, if applied, would result in the application of any laws other than the internal laws of the State of Texas. (b) Any action, dispute, claim or controversy arising under, out of, in connection with, or relating to, this Agreement, or any amendment hereof, or the breach hereof (a "Dispute"), shall be determined and settled by binding arbitration in Houston, Texas, by a person or persons mutually agreed upon, or in the event of a disagreement as to the selection of the arbitrator or arbitrators, in accordance with the rules of the American Arbitration Association ("AAA"). Any award rendered therein shall specify the findings of fact of the arbitrator or arbitrators and the reasons for such award, with the reference to and reliance on relevant law. Any such award shall be final and binding on each and all of the parties thereto and their personal representatives, and judgment may be entered thereon in any court having jurisdiction thereof. Any party may, by summary proceedings, bring an action in court to compel arbitration of any Dispute. Any arbitration hereunder shall be administered by the AAA in accordance with the terms of this Section 12.11, the Commercial Arbitration Rules of the AAA, and, to the maximum extent applicable, the Federal Arbitration Act. To the maximum extent practicable, an arbitration proceeding hereunder shall be concluded within 180 days of the filing of the Dispute with the AAA. Each party agrees to keep all Disputes and arbitration proceedings strictly confidential except for disclosure of information required by applicable law. SECTION 12.13. NO THIRD-PARTY BENEFICIARIES. Except for Section 7.2 and Article X, nothing in this Agreement, expressed or implied, is intended or shall be construed to confer upon any person other than the parties hereto and successors and assigns permitted by Section 12.6 any right, remedy or claim under or by reason of this Agreement. -76- 84 IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the parties hereto or by their duly authorized officers, all as of the date first above written. CMS ENERGY CORPORATION, a Michigan corporation By: /s/ Preston D. Hopper Name: Preston D. Hopper Title: Vice President CMS MERGING CORPORATION, a Texas corporation By: /s/ William H. Stephens, III Name: William H. Stephens, III Title: General Counsel WALTER INTERNATIONAL, INC., a Texas corporation By: /s/ J. C. Walter, Jr. Name: J. C. Walter, Jr. Title: President /s/ J.C. Walter, Jr. J.C. WALTER, JR. /s/ J.C. Walter, III J.C. WALTER, III /s/ Carole Walter Looke CAROLE WALTER LOOKE By: /s/ J. C. Walter, Jr. Name: J. C. Walter, Jr. As Agent and Attorney-in-Fact /s/ F. Fox Benton, Jr. F. FOX BENTON, JR. -77- 85 /s/ Gordon A. Cain GORDON A. CAIN THE CAIN 1988 DESCENDANTS TRUST By: /s/ James D. Weaver Name: James D. Weaver Title: Trustee WILLIAM C. OEHMIG By: /s/ Margaret W. Oehmig Margaret W. Oehmig Attorney-in-Fact PRUDENTIAL-BACHE ENERGY GROWTH FUND, L.P. G-2 By: GRAHAM ENERGY, LTD, as liquidating agent By: /s/ Russell L. Allen Name: Russell L. Allen Title: President PRUDENTIAL-BACHE ENERGY GROWTH FUND, L.P. G-3 By: GRAHAM ENERGY, LTD, as liquidating agent By: /s/ Russell L. Allen Name: Russell L. Allen Title: President PRUDENTIAL-BACHE ENERGY GROWTH FUND, L.P. G-4 By: GRAHAM ENERGY, LTD, as liquidating agent -78- EX-10.22 27 EXHIBIT 10.22 1 EXHIBIT 10.22 PROMISSORY NOTE $6,500,000.00 July 17, 1995 CMS NOMECO Oil & Gas Co., formerly known as NOMECO Oil & Gas Co., a corporation duly organized and existing in good standing under the laws of the State of Michigan (the "Borrower"), for value received, hereby promises to pay to the order of CMS Energy Corporation, a Michigan corporation (the "Lender"), the principal sum of Six Million Five Hundred Thousand Dollars ($6,500,000.00) or, if less, the aggregate unpaid principal amount of all loans made by the Lender to the Borrower and endorsed by the Lender on Schedule A hereto (the "Schedule") on November 1, 1999. The Borrower promises to pay interest on the unpaid principal balance of each loan hereunder from and including the date of such loan to the maturity date of such loan (as shown on the Schedule) at a rate per annum equal to the average cost of debt of CMS (on an unconsolidated basis) for the most recent quarter (the "Borrowing Rate"), payable quarterly in arrears and on such maturity date. Any principal not paid when due shall bear interest from maturity until paid in full, payable upon demand, at a rate per annum equal to 120% of the Borrowing Rate. Interest shall be calculated on the basis of a year of 360 days and actual days elapsed. All payments hereunder shall be made in lawful money of the United States and in immediately available funds. Any extension of time for the payment of the principal of this note resulting from the due date falling on a Saturday, Sunday or legal holiday shall be included in computation of interest. If (i) any sum payable on any liability of the Borrower to the Lender hereunder shall not be paid when due and such default shall continue for 30 consecutive days; or (ii) the Borrower shall default on any obligation for repayment of borrowed money and the holder of such borrowed money shall accelerate the due date thereof, the Lender may, at its option, declare the principal and interest on this note immediately due and payable, without protest, presentment, notice or demand, all of which the Borrower hereby waives. Notwithstanding the above, the Lender may terminate the unused portion of this facility in whole or in part by giving the Borrower thirty days advance written notice thereof. The Borrower agrees to pay on demand all expenses, including reasonable attorneys' fees, the Lender may incur in connection with the enforcement of this note. The indebtedness evidenced by this note (including the obligations described in the preceding paragraph) and any renewals or extension hereof, shall at all times be wholly subordinate and junior in right of payment to any and all present and future indebtedness, obligations and liabilities of the Borrower pursuant to the Amended and Restated Credit -1- 2 Agreement dated as of November 1, 1993 among the Borrower, the banks now or hereafter parties thereto and NBD Bank, N.A., as agent, and pursuant to the Borrower's Senior Serial Notes in the aggregate principal amount of $50,000,000 issued pursuant to the Note Agreements dated as of March 1, 1990 of the Borrower regarding the $25,000,000 9.30% Senior Serial Notes, Series A due March 1, 1997 and the $25,000,000 9.45% Senior Serial Notes, Series B due March 1, 2000, as such Amended and Restated Credit Agreement, Note Agreements and Senior Serial Notes are amended, modified, restated or refinanced from time to time and all renewals or increases therein and further including without limitation all reimbursement obligations pursuant to any letters of credit issued pursuant thereto and all obligations pursuant to any promissory notes issued pursuant thereto, all amounts accruing after the filing of any petition in bankruptcy or similar loss, whether or not such amount is an allowable claim, all guarantees, all guarantees for any of the foregoing and all rights and remedies of the holders of any of the foregoing (herein called "Superior Indebtedness"), in the manner and with the force and effect hereafter set forth: (1) In the event of any liquidation, dissolution, or winding up of the Borrower, or of any execution receivership, insolvency, bankruptcy, liquidation, reorganization or other similar proceeding relative to the Borrower or its property, all Superior Indebtedness shall first be paid in full in cash or cash equivalents before any payment is made upon the indebtedness evidenced by this note; and in any such event any payment or distribution of any kind or character, whether in cash, property or securities (other than in securities, including equity securities, or other evidences of indebtedness, the payment of which is subordinated to the payment of all Superior Indebtedness which may at the time be outstanding in the same manner as the subordinated notes are subordinated to the Superior Indebtedness, but only to the extent that the court awarding or permitting the distribution of such securities states that in doing so it is giving effect to the subordination of this note to the Superior Indebtedness set forth herein) which shall be made upon or in respect of this note shall be paid over the holders of such Superior Indebtedness, pro rata, for application in payment thereof unless and until such Superior Indebtedness shall have been paid or satisfied in full; (2) In the event that this note is declared or becomes due and payable because of the occurrence of any event of default hereunder or otherwise than at the option of the Borrower, under circumstances when the foregoing clause (1) shall not be applicable, the Lender shall be entitled to payments only after there shall first have been paid in full in cash or cash equivalents all Superior Indebtedness outstanding at the time this note so becomes due and payable because of any such event, or payment shall have been provided for in a manner satisfactory to the holders of such Superior Indebtedness; and (3) During the continuance of any default with respect to any Superior Indebtedness permitting the holders thereof to accelerate the maturity of such Superior Indebtedness, no payment of principal, premium or interest or other amount shall be made on this note, if either (i) notice of such default in writing or by telegram has been given to the Borrower by the holders of a majority in aggregate principal amount of the outstanding Superior Indebtedness in default, -2- 3 provided that judicial proceedings shall be commended with respect to such default (x) within one hundred twenty (120) days thereafter in the case such default relates to the non-payment of principal, interest or premium on such Superior Indebtedness or (y) within 90 days after the giving of such notice in the case of any other event or condition causing such default, or (ii) judicial proceedings shall be pending in respect of such default. The holders of Superior Indebtedness shall not be entitled to give notice pursuant to this clause (3) more than once with respect to any default which was specified in such a notice and which has continued without interruption since the date such notice was given, nor shall such holders be entitled go give a separate notice with respect to any default not so specified which (to the knowledge of any holder giving such notice) was existing on the date notice shall have been given pursuant to this clause (3) and which has continued without interruption from the date such notice was given. Upon receipt of any notice from such holders of Superior Indebtedness pursuant to this clause (3), the Borrower shall forthwith send a copy thereof to the Lender. In the event that, notwithstanding the foregoing, any payment or distribution of assets or securities of the Borrower of any kind or character, whether in cash, property or securities, shall be received by any trustee, agent or paying agent or the holders of this note (or, if the borrower of any subsidiary or affiliate of the Borrower is acting as paying agent, money, assets or securities shall be segregated or held in trust) on account of principal of, premium on, interest on or other amounts with respect to this note contrary to the terms hereof, such payment of distribution shall be received, segregated from other funds, and held in trust by such trustee, agent, paying agent or holder for the benefit of, and shall immediately be paid over to, the holders of Superior Indebtedness or their representative, ratably according to the respective amounts of Superior Indebtedness held or represented by each. The Lender undertakes and agrees for the benefit of each holder of Superior Indebtedness to execute, verify, deliver and file any proofs of claim which any holder of Superior Indebtedness may at any time require in order to prove and realize upon any rights or claims pertaining to this note and to effectuate the full benefit of the subordination contained herein; and upon failure of the Lender so to do, any such holder of Superior Indebtedness shall be deemed to be irrevocably appointed the agent and attorney-in-fact of the Lender to execute, verify, deliver and file any such proofs of claim. No right of any holder of any Superior Indebtedness to enforce subordination as herein provided shall at any time or in any way be affected or impaired by any failure to act on the part of the Borrower or the holders of Superior Indebtedness, or by any noncompliance by the Borrower with any of the terms, provisions and covenants of this note or the agreement under which they are issued, regardless of any knowledge thereof that any holder of Superior Indebtedness may have or be otherwise charged with. The Borrower agrees, for the benefit of the holders of Superior Indebtedness, that in the event that this note is declared due and payable before its expressed maturity because of the occurrence of a default hereunder, (i) the Borrower will give prompt notice in writing of such happening to the holders of Superior Indebtedness and (ii) all Superior Indebtedness shall -3- 4 forthwith become immediately due and payable upon demand, regardless of the expressed maturity thereof. The Borrower may make optional prepayments on this note at any time, provided that no event of default under the Superior Indebtedness and no event which may become such an event of default with notice or lapse of time, or both, has occurred and is continuing at the time of such payment or would be caused by such payment, in which case the Borrower not make, and the holder of this note shall not accept, any such optional prepayment. The foregoing provisions are solely for the purpose of defining the relative rights of the holders of Superior Indebtedness on the one hand, and the Lender on the other hand, and nothing herein shall impair, as between the Borrower and the Lender, the obligation of the Borrower which is unconditional and absolute, to pay the principal, premium, if any, and interest on this note in accordance with its terms, nor shall anything herein prevent the Lender from exercising all remedies otherwise permitted by applicable law or hereunder upon default hereunder, subject to the rights of the holders of Superior Indebtedness as herein provided for. This note shall be governed by, and interpreted and construed in accordance with, the laws of the State of Michigan. CMS NOMECO OIL & GAS CO. BY: /s/ Paul E. Geiger ----------------------------- Paul E. Geiger ITS: Vice President, Secretary and Treasurer --------------------------------------- -4- EX-10.23 28 EXHIBIT 10.23 1 EXHIBIT 10.23 TAX AGREEMENT This Tax Agreement is made and entered into as of the 23rd day of February, 1995, by and between Amoco Production Company ("Seller"), a Delaware corporation, Amoco Corporation ("Amoco"), an Indiana corporation and the indirect parent of Seller, Walter International, Inc. ("Walter"), a corporation organized under the laws of Texas, Walter Congo Holdings Company ("Walter Holdings"), a corporation organized under the laws of Texas and a wholly-owned subsidiary of Walter, Nuevo Energy Company ("Nuevo"), a corporation organized under the laws of Delaware, The Congo Holding Company ("Nuevo Holdings"), a corporation organized under the laws of Texas and a wholly-owned subsidiary of Nuevo (Walter, Walter Holdings, Nuevo, and Nuevo Holdings hereinafter collectively "Guarantors"), and Walter International Congo, Inc. ("Walter Congo"), a corporation organized under the laws of Texas and a wholly-owned subsidiary of Walter Holdings, and The Nuevo Congo Company ("Nuevo Congo"), a corporation organized under the laws of Texas and a wholly-owned subsidiary of Nuevo Holdings (Walter Congo and Nuevo Congo hereinafter collectively "Purchasers"). W I T N E S S E T H: WHEREAS, Seller is the owner of ten (10) issued capital shares, one hundred United States Dollars (U.S. $100.00) par value per share, of each of Amoco Congo Exploration Company ("ACEC") and Amoco Congo Petroleum Company ("ACPC"), both Delaware corporations (hereinafter referred to as "Company" or "Companies"), constituting all of the Companies' issued and outstanding shares of capital stock ("Shares"); and WHEREAS, Seller, Guarantors, and Purchasers have entered into a Stock Purchase Agreement dated June 30, 1994 ("Agreement"), pursuant to which Seller agrees to sell and Purchasers agree to purchase the Shares on the terms and conditions stated therein; and WHEREAS, the Agreement contemplates that the purchase and sale of the Shares by Seller to Purchasers will be effectuated by means of a taxable reverse subsidiary merger, with the result that ACEC will be wholly owned by Walter Holdings and ACPC will be wholly owned by Nuevo Holdings; and WHEREAS, OPIC has issued to Walter and Nuevo a contract of political risk insurance (individually, an "Insurance Policy" and collectively, "Insurance Policies") in respect of such Guarantor's investment in the Companies; and, upon the payment of certain claims under either such policy, the applicable Guarantor will transfer, or cause to be transferred, to OPIC Shares and/or other interests in, or of, the applicable Company; WHEREAS, OPIC and the Purchasers have entered into a Finance Agreement (the "Finance Agreement") and a related Participation and Guaranty Agreement, each dated as of the date hereof (collectively the "Loan Documents") (which Loan Documents will become binding on the Companies upon consummation of the mergers referenced above), pursuant to which OPIC has guaranteed the obligations of the Purchasers and the Companies in respect of loans (the "Loans") to be made by as yet unspecified lenders pursuant to the Finance Agreement; WHEREAS, true and correct copies of the Insurance Policies and the Loan Agreements will be provided to Seller prior to Closing; 2 WHEREAS, the proceeds of the Loans advanced to Purchasers will be used exclusively to finance the purchase of the Shares by the Purchasers; WHEREAS, the obligations of the Companies and the Purchasers under the Loan Agreements will be secured by a pledge of the Shares and by a lien on specified escrow accounts at a bank in the United States containing only funds denominated in U.S. dollars; WHEREAS, the execution of this Tax Agreement by Purchasers, Guarantors, Seller, Amoco, and the Companies is a condition precedent to Closing of the sale of the Shares; and WHEREAS, Companies' operations are subject to taxation in the Republic of the Congo ("Congo") as branch operations of a foreign corporation; and WHEREAS, Companies may have incurred substantial dual consolidated losses ("DCLs"), as defined by the DCL Regulations; and WHEREAS, Seller and its Consolidated Group have filed all necessary certifications required pursuant to Treasury Regulation Section 1.1503-2A(d)(3), and intend to timely file all certifications required pursuant to Treasury Regulation Section 1.1503-2(g)(2), with the United States Internal Revenue Service ("IRS") regarding the use of said DCLs; and WHEREAS, the existing DCLs of the Companies must be recaptured into income under circumstances, potentially resulting in substantial tax liability; and WHEREAS, the parties hereto desire to avoid triggering recapture into income of said DCLs pursuant to the provisions of the DCL Regulations, and WHEREAS, the Purchasers hereby acknowledge that, after the sale of the Companies to the Purchasers, the Seller can rely only on the Guarantors, Purchasers and their successors and assigns, and the Companies to monitor the transactions of the Companies and take any action necessary to prevent the triggering of the DCL recapture liability. NOW THEREFORE, in consideration of the premises and the respective covenants, agreements, and conditions contained herein, the parties hereby agree as follows: 1. Definitions For the purposes of this Tax Agreement, the following terms shall have the following meanings: "Affiliate" shall mean: (1) any company at least fifty percent (50%) of whose shares entitled to vote for the election of directors are owned, directly or indirectly, by such party; (2) any company which owns, directly or indirectly, at least fifty percent (50%) of the shares entitled to vote for the election of directors of such party; or 2 3 (3) any company at least fifty percent (50%) of whose shares entitled to vote for the election of directors are owned, directly or indirectly, by a company which at the same time owns, directly or indirectly, at least fifty percent (50%) of the shares entitled to vote for the election of directors of such party. "Closing Agreement" shall mean an agreement described in Treasury Regulation Section 1.1503-2(g)(2)(iv)(B)(2). "Code" shall mean the U.S. Internal Revenue Code of 1986, as amended. All references herein to the Code, or to the Treasury Regulations promulgated thereunder, shall include any amendments or any substitute or successor provisions thereto. "Consolidated Group" shall mean a group of corporations that has elected to make a consolidated return with respect to income tax imposed by chapter 1 of the Code. "DCL" shall mean the dual consolidated losses of the Companies, if any, as defined in section 1503(d) of the Code and the DCL Regulations. "DCL Regulations" shall mean Treasury Regulation Section 1.1503-2A, Treasury Regulation Section 1.1503-2, or any successor regulation as in effect from time to time. "Event of Default" shall have the meaning defined in the Finance Agreement. "Loss Event" shall have the meaning defined in the Insurance Policies. "Obligated Person" shall mean any Person (other than OPIC or any Person (other than a Person who is a party to this Tax Agreement) who acquires any interest in any of the Shares or any of the assets of any Company from or under the direction of OPIC solely as a result of OPIC's exercise of its rights under any Insurance Policy or Loan Agreement) who acquires any interest in any of the Shares or any of the assets of any Company (including but not limited to any transferee, creditor, guarantor, or subrogee), excluding any unrelated third party who purchases hydrocarbons or surplus materials or equipment from a Company in the ordinary course of the Company's business. "OPIC" shall mean the Overseas Private Investment Corporation, an agency of the United States of America organized as a corporation under the laws of the United States. "Person" shall have the meaning contained in section 7701(a)(1) of the Code and any Treasury Regulations promulgated thereunder. 3 4 "Separate Unit" shall have the meaning contained in Treasury Regulation Section 1.1503-2(c)(3). "Taxes" shall mean all federal, state, local, foreign, and other net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, lease, service, service use, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, windfall profits, customs, duties, or other taxes, fees, assessments, or charges in the nature of a tax, together with any interest and any penalties, additions to tax or additional amounts with respect thereto, and the term "Tax" means any of the foregoing Taxes. "Tax Agreement" shall mean this Tax Agreement and any amendments thereto. "Triggering Event" shall mean any one or more of the events specified in Treasury Regulation Section 1.1503-2(g)(iii)(A) or Treasury Regulation 1.1503-2A(d)(4), the occurrence of which would require the recapture of DCLs, plus applicable interest, into income as provided in the DCL Regulations. All other terms specifically defined in the Agreement and not defined herein shall have the meanings assigned to them in the Agreement unless the context clearly requires otherwise. 2. Initial Closing Agreement A. Amoco, Guarantors, and Companies agree that prior to Closing, they shall submit to the IRS a request for a Closing Agreement as specified in Treasury Regulation Section 1.1503-2(g)(2)(iv)(B)(2). B. In conjunction with the Closing Agreement specified in Article 2.A, above, and as an integral part thereof, Amoco shall request from the IRS, on behalf of itself Guarantors, Purchasers, and Companies, such rulings as Amoco, in its sole discretion (but in consultation with Guarantors), deems necessary, which may include, but may not be limited to, the following: (1) that the net operating losses incurred by the Companies are not DCLs; (2) that the sale of the Shares pursuant to the Agreement will not constitute a Triggering Event with respect to any DCLs of the Companies; (3) that a subsequent transfer of any of the Shares or any of the assets of either of the Companies to OPIC or to any other creditor as the result of a foreclosure or Loss Event, to a bankruptcy trustee or receiver (or substantially similar Person) as the result of a bankruptcy proceeding or receivership (or a substantially similar proceeding), or to the Congo (or an Affiliate thereof) as a result of an expropriation, will not constitute a Triggering Event; and (4) that any transfer of any of the Shares or any of the assets of either of the Companies to any Person that is already a party to 4 5 the Closing Agreement specified in Article 2.A above will not constitute a Triggering Event. C. Amoco, Guarantors, Purchasers, and Companies agree to make all representations and to supply all information necessary for the IRS to enter into the Closing Agreement and to issue the rulings requested under this Article 2, including, but not limited to: (1) representations by Amoco, Guarantors, and Companies that they agree to be jointly and severally liable for the amount of income tax, plus applicable interest, due as a result of the occurrence of any Triggering Event; (2) representations by Guarantors and Companies that they will treat any potential recapture amount as unrealized built-in gain for purposes of section 384(a) of the Code; (3) representations by Walter, Nuevo and Companies that they will each timely file the certifications required by Treasury Regulation Section Section 1.1503-2(g)(2)(iv)(B)(2)(iii) and 1.1503-2(g)(2)(i). 3. Covenants Regarding Periods After Closing Purchasers, Guarantors, and Companies agree with respect to each taxable year ending after the Closing Date that they: A. shall not take any action to cause the occurrence of any Triggering Event; B. shall limit the business of the Companies to the exploitation of the Yombo Permit; C. shall promptly notify Seller of (i) any proposed voluntary sale, exchange, transfer, contribution, distribution, actual or constructive liquidation, dissolution, reorganization, lease, farmout, or other disposition of a Company, any of the Shares that would have the effect of causing a Company to cease being a member of its Consolidated Group, or any of the assets of a Company or any Separate Unit thereof (other than sales of hydrocarbons or surplus materials or equipment to unrelated third parties in the ordinary course of business), or (ii) any proposed sale, exchange, transfer, contribution, reorganization, distribution, actual or constructive liquidation, dissolution, lease, or other disposition of a Guarantor or the stock of a Guarantor that would have the effect of causing a Company to become a member of a new Consolidated Group. Prior to the consummation of any such voluntary sale, exchange, transfer, contribution, reorganization, distribution, actual or constructive liquidation, dissolution, lease, farmout, or other disposition, Guarantors, Purchasers, and Companies shall: (1) allow Seller to advise Guarantors, Purchasers, and Companies regarding the terms and conditions of such proposed sale, exchange, transfer, contribution, reorganization, distribution, actual or constructive liquidation, dissolution, lease, farmout, or other disposition solely for the purpose of avoiding recapture of any DCLs of the Companies or any Separate Unit thereof as a result of said sale, exchange, transfer, contribution, 5 6 reorganization, distribution, actual or constructive liquidation, dissolution, lease, farmout, or other disposition; and (2) obtain the written approval of Seller with respect to such terms and conditions, which approval shall not be unreasonably withheld; D. shall promptly notify Seller of any actual or potential involuntary sale, exchange, transfer, contribution, reorganization, distribution, actual or constructive liquidation, dissolution, lease, farmout, or other disposition of a Company or any of the Shares or any of the assets of a Company or any Separate Unit thereof, or any sale, exchange, transfer, contribution, reorganization, distribution, actual or constructive liquidation, dissolution, lease, or other disposition of any of a Guarantor or the stock of a Guarantor that could have the effect of causing a Company to become a member of a new Consolidated Group, including, but not limited to (i) any Event of Default by any of Guarantors, Purchasers, or Companies under any Loan Document or other obligation to OPIC; (ii) any default or claimed default by any of the Guarantors, Purchasers, or Companies with respect to any indebtedness that could result in a recapture of DCLs of the Companies or any Separate Unit thereof; or (iii) any Loss Event under any Insurance Policy or any other similar policy issued by any other Person relating to the Companies that could result in a recapture of DCLs of the Companies or any Separate Unit thereof; E. shall, prior to any sale, exchange, transfer, contribution, reorganization, distribution, actual or constructive liquidation, dissolution, lease, farmout, or other disposition of a Company or any of the Shares that would have the effect of causing a Company to cease being a member of its Consolidated Group or any of the assets of a Company or any Separate Unit thereof (other than sales of hydrocarbons or surplus materials or equipment in the ordinary course of business), notify Seller in writing of the terms and conditions of the proposed sale, exchange, transfer, contribution, disposition, reorganization, actual or constructive liquidation, dissolution, lease, farmout, or other disposition and Seller shall then have thirty (30) days to elect to purchase such Shares or assets on such notified terms; F. shall require any Obligated Person to agree to fulfill and be bound by all of the obligations and covenants of Purchasers, Guarantors, and Companies contained in this Tax Agreement; G. shall honor and abide by, and shall not in any way amend the terms and obligations, of that certain Letter dated November 21, 1994, to the Director General of Taxation of the Congo; H. shall not permit any Company to incur secured indebtedness in excess of $10,000,000 in the aggregate, other than the Loans, without the prior written consent of Seller, which consent shall be granted if the lender enters into an option agreement with Seller similar in form and substance to that certain Option Agreement attached as Schedule L to the Agreement; and I. shall not permit any omission (other than any failure to contribute money or assets to the Companies) that causes a Triggering Event. 6 7 Notwithstanding the covenants contained in this Article 3, (A) if (i) the conditions contained in Article 4.B or Article 4.C hereof are met with respect to an event and (ii) any Guarantor or Purchaser is released from any indemnity in accordance with Article 4.B hereof or Article 4.C hereof, then the Guarantors and Purchasers shall, with respect to that event only, (a) have no further obligation to comply with the obligations or covenants contained herein and (b) be released from any breach of any covenant or obligation contained herein, and (B) if (i) the conditions contained in Article 4.B hereof are met with respect to an event and (ii) any Company is released from any indemnity in accordance with Article 4.B hereof, then the Companies, Guarantors, and Purchasers shall, with respect to that event only, (a) have no further obligation to comply with the obligations or covenants contained herein, and (b) be released from any breach of any covenant or obligation contained herein. For purposes of this paragraph and Article 4.B and Article 4.C hereof, an event shall be deemed to be a separate event regardless of whether it may be, or may have been intended to be, directly or indirectly, dependent on, related to, or contemporaneous with any other event. 4. Indemnification by Guarantors- Purchasers, and Companies A. Except as expressly provided in Article 4.B and 4.C hereof Walter, Walter Holdings, Walter Congo, Nuevo, Nuevo Holdings, Nuevo Congo, ACEC, ACPC, or each of them, jointly and severally, agree to indemnify and hold harmless Seller, its Affiliates and their respective directors, officers and employees from and against any and all Taxes, tax credits utilized, interest, penalties, costs of enforcement and reasonable attorneys fees incurred in defending any claim for Taxes, interest, penalties, or additional income or the enforcement of this indemnification, if any, arising out of or based upon or with respect to any failure by Walter, Walter Holdings, Walter Congo, Nuevo, Nuevo Holdings, Nuevo Congo, a Company, or any of them, to comply with each and every obligation and covenant of this Tax Agreement. B. Notwithstanding the foregoing Article 4.A, no Guarantor, Purchaser, or Company, shall be required to indemnify Seller, its Affiliates or their respective directors, officers, and employees: (1) if, in the case of (i) a voluntary sale, exchange, transfer, contribution, reorganization, distribution, actual or constructive liquidation, dissolution, lease, farmout, or other disposition of a Company or any of the Shares that would have the effect of causing a Company to cease being a member of its Consolidated Group or assets of a Company (other than sales of hydrocarbons or surplus materials or equipment in the ordinary course of business), or (ii) any sale, exchange, transfer, contribution, reorganization, distribution, actual or constructive liquidation, dissolution, lease, or other disposition of a Guarantor or the stock of a Guarantor that would have the effect of causing a Company to become a member of a new Consolidated Group, such Guarantor, Purchaser, or Company obtained the review and written approval described in Article 3.C hereof; (2) in the case of a transfer of any Shares or U.S. dollars contained in any escrow account to OPIC or any other secured lender as a result of a foreclosure upon default, but only if Seller and OPIC or other secured lender, as the case may be, are, at the time of 7 8 such transfer of Shares or U.S. dollars, parties to an option agreement in the form and substance of that certain Option Agreement attached as Schedule L to the Agreement; (3) in the case of any transfer of Shares or assets resulting from an expropriation or other Loss Event under an Insurance Policy, unless OPIC fails to pay compensation for any loss under political risk or similar insurance because OPIC has determined that a primary cause of the loss was unreasonable actions, including corrupt practices, attributable to a Company, Purchaser, or Guarantor; or (4) if, in the case of any other sale, exchange, transfer, contribution, reorganization, distribution, actual or constructive liquidation, dissolution, lease, farmout, or other disposition of a Company or any of the Shares or assets of a Company not otherwise described in this Article 4.B, such Guarantor, Purchaser, or Company complied with Article 3.E hereof. C. Notwithstanding the foregoing Article 3 or Article 4.A, none of the Guarantors or Purchasers shall be required to comply with the covenants and obligations contained in Article 3 hereof or to indemnify Seller, its Affiliates, or their respective directors, officers, and employees in the case of a Triggering Event attributable to a taxable period in which a Company is not an Affiliate of any of the Guarantors. 5. Indemnification by Seller If the Guarantors, Purchasers, and Companies shall have complied with the obligations and covenants contained in Article 3 of this Tax Agreement with respect to a Triggering Event that caused the recapture of DCLs of a Company or a Separate Unit thereof and such DCLs are attributable to periods ending on or before the Closing Date, then Seller shall indemnify and hold harmless Guarantors, Purchasers, Companies, their Affiliates, and their respective directors, officers and employees from and against any and all Taxes, tax credits utilized, interest, penalties, costs of enforcement, and reasonable attorneys fees incurred in defending against any claim for Taxes, interest, penalties, or additional income or the enforcement of this indemnification, if any, arising out of or based upon or with respect to any such recapture. 6. Rights of Indemnifying Party A. Each indemnified party hereunder agrees that within five (5) calendar days following the issuance of any notice from any taxing authority of a Tax assessment or deficiency resulting from any DCL recapture in connection with which a claim for indemnification under this Tax Agreement might be made (a "Claim"), it will give prompt notice thereof to the indemnifying party, together with a statement of such information respecting any of such facts as it may have and a formal demand for indemnification. The indemnifying party shall not be obligated to indemnify the indemnified party with respect to any Claim if the indemnified party falls to notify the indemnifying party in sufficient time to permit the indemnifying party to defend against such matter and to make a timely response thereto. 8 9 B. The indemnifying party shall be entitled at its cost and expense to contest and defend by all appropriate legal proceedings any Claim with respect to which they are called upon to indemnify the indemnified party; provided, that notice of the intention so to contest shall be delivered by the indemnifying party to indemnified party within 10 days after the date of receipt by the indemnifying party of notice by the indemnified party of the assertion of the Claim. Any such contest may be conducted in the name and on behalf of the indemnifying party or the indemnified party as may be appropriate. The indemnified party shall have the right but not the obligation to participate in such proceedings and to be represented by counsel of its own choosing at its sole cost and expense. C. If requested by the indemnifying party, the indemnified party agrees to cooperate with the indemnifying party and its counsel in contesting any Claim that the indemnifying party elects to contest or, if appropriate, in making any counterclaim against the Person asserting the Claim, or any cross-complaint against any Person, and the indemnifying party will reimburse the indemnified party for any expenses it incurs by so cooperating. The indemnified party agrees to afford the indemnifying party and its counsel the opportunity to be present at, and to participate in, conferences with all Persons asserting any Claim the indemnified party or conferences with representatives of or counsel for such Persons. D. The indemnified party shall take no action which would prejudice the indemnifying party's defense of the matter giving rise to the Claim. E. The indemnified party shall have no right to recover from any other party hereto any losses, costs, expenses, or damages arising under or in connection with this Tax Agreement any amount in excess of actual damages, court costs, and reasonable attorney fees, suffered by such party. Each indemnified party waives any right to recover punitive, special, exemplary, and consequential damages arising under or in connection with this Tax Agreement. 7. Defense Against Tax Claims A. Seller, Guarantors, Purchasers, and Companies each agrees to notify the other parties to this Tax Agreement promptly in the event that, in respect of a Company or any Separate Unit thereof, (i) any tax authority, in the course of any audit or other examination of the tax returns or records of such party, raises any question or issue with respect to any loss, expense, or deduction constituting a DCL or any potential DCL recapture, or (ii) any tax authority issues a notice of proposed adjustment or similar notice with respect to any potential DCL recapture. Purchasers will permit Seller and will cause the Companies and/or their successors to permit Seller, at Seller's option and expense, to direct the Companies or Purchasers to take whatever actions are reasonably necessary in Seller's judgment to contest and defend any issues which may result in a claim for such Taxes prior to the payment of such Taxes. 9 10 In the event Purchasers and/or the Companies are responsible for paying Taxes described in this Tax Agreement or required to pay Seller the amount of such Taxes under any of the terms of this Tax Agreement, Seller will permit Purchasers, at Purchasers' option and expense, to direct Seller to take whatever actions are reasonably necessary in Purchasers' judgment to contest and defend any issues which may result in a claim for such Taxes prior to the payment of such Taxes and prior to the payment of the amount of such Taxes to Seller. If Purchasers exercise the option provided for in the preceding sentence, Seller will, at Purchasers' request, cause its employees and representatives to be available (at reasonable times and places) to consult with employees and representatives of the Purchasers regarding the issues relating to such Taxes. Purchasers shall reimburse Seller for all its reasonable costs and expenses in complying with the previous sentence. In the event of a claim by any taxing authority which will adversely affect both Seller, Purchasers and/or the Companies by the liability to pay Taxes and by payments under the terms of this Tax Agreement or, if the liability under such claim cannot be readily ascertained, Seller and Purchasers agree to cooperate fully with each other, each bearing its own expenses, to take whatever action is necessary to contest and defend or to direct the Companies to contest and defend any issue which may result in a claim for Taxes or a payment under the terms of this Tax Agreement prior to the payment of such Taxes and prior to the payment of the amount of such Taxes to Purchasers or Seller. B. If a Tax has been paid to any taxing authority and, as a result of the payment of such Tax, either Seller or Purchasers incurs a liability to make payment to the other because of the payment of such Tax, provisions similar to Article 6.A above shall apply to enable the party or parties bearing the burden of the Tax liability to cause the appropriate party to take whatever action is necessary to claim, pursue or litigate with respect to a refund of such Tax. If the entire burden of an increased Tax liability has been borne by Seller or by Purchasers, the right to litigate for or otherwise claim Tax refunds shall be assigned, to the extent it is legally permissible to do so, to the party bearing such economic burden. If any refunds or settlement amounts shall be delivered to the party who did not bear the burden of the Tax liability, such party shall assign such amounts to the party who bore the burden of the Tax liability. In the event both Seller and Purchasers jointly bear the economic burden of the payment of any Tax described in this Tax Agreement, Seller and Purchasers agree to cooperate fully with each other, each bearing its own expenses, to cause the appropriate party to litigate the claim for Tax refund and to share the proceeds of any refund or settlement in proportion to the economic burden previously borne. 8. Survival The obligations, covenants, and agreements set forth in this Tax Agreement and in any certificate or instrument delivered in connection herewith shall, unless otherwise provided herein, survive the date of Closing. 9. Notices 10 11 A. All notices shall be given in writing and shall be delivered (i) by hand to the party for which intended, (ii) by registered or certified mail, return receipt requested, postage prepaid, (iii) by telex, or (iv) by facsimile, all of which addressed to the party for which it is intended at the following respective addresses or such other address previously furnished in writing by either party: To Amoco or Seller: Amoco Production Company 501 WestLake Park Boulevard Houston, Texas 77079 Telephone: (713) 366-7119 Facsimile: (713) 366-7596 Attention: Michael A. Wolf, Director of Taxes--APC(I) To Guarantors or Purchasers: Walter International, Inc. 1021 Main Street, Suite 2110 Houston, Texas 77002-6502 Telephone: (713) 756-1100 Facsimile: (713) 756-1111 Attention: Mr. F. Fox Benton, Jr. Nuevo Energy Company 1221 Lamar, Suite 1600 Houston, Texas 77010-3039 Telephone: (713) 650-1246 Facsimile: (713) 756-1898 Attention: Mr. Roland Sledge To Companies: The Nuevo Congo Company (formerly Amoco Congo Petroleum Company) 1221 Lamar, Suite 1600 Houston, Texas 77010-3039 Telephone: (713) 650-1246 Facsimile: (713) 756-1898 Attention: Mr. Roland Sledge Walter International Congo, Inc. (formerly Amoco Congo Exploration Company) 1021 Main Street, Suite 2110 Houston, Texas 77002-6502 Telephone: (713) 756-1100 Facsimile: (713) 756-1111 Attention: Mr. F. Fox Benton, Jr. B. The date of service of the notice shall be the date on which notice is received. 11 12 10. No Waiver No failure or delay by any party hereto in exercising any right, power, privilege or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power, privilege or remedy preclude the exercise of any other right power, privilege or remedy. The rights and remedies herein provided are cumulative and not exclusive of any rights or remedies provided by law. No amendment, modification or waiver of, or consent with respect to, any provision of this Tax Agreement shall in any event be effective unless the same shall be in writing. 11. Successors and Assigns This Tax Agreement shall be binding upon and inure to the benefit of the parties and their respective permitted successors and assigns other than OPIC or any other Person who is not an Obligated Person. No party to this Tax Agreement shall be relieved of its obligations hereunder, by assignment or otherwise, without the prior written consent of the other parties hereto. 12. Governing Law and Dispute Resolution A. This Tax Agreement shall be governed by the laws of Illinois excluding any choice of law provisions which would require the application of the law of any other jurisdiction. B. Any action, dispute, claim or controversy of any kind now existing or hereafter arising between any of the parties hereto in any way arising out of, pertaining to or in connection with this Tax Agreement (a "Dispute") shall be resolved by binding arbitration in accordance with the terms hereof. Any party may, by summary proceedings, bring an action in court to compel arbitration of any Dispute. C. Any arbitration shall be administered by the American Arbitration Association (the "AAA") in accordance with the terms of this Article 12, the Commercial Arbitration Rules of the AAA, and, to the maximum extent applicable, the Federal Arbitration Act. Judgment on any award rendered by an arbitrator may be entered in any court having jurisdiction. D. Any arbitration shall be conducted before one arbitrator. The arbitrator shall be a licensed practicing attorney who is knowledgeable in the subject matter of the Dispute selected by agreement between the parties hereto. If the parties cannot agree on an arbitrator within 30 days after the request for an arbitration, then any party may request the AAA to select an arbitrator. The arbitrator may engage engineers, accountants or other consultants that the arbitrator deems necessary to render a conclusion in the arbitration proceeding. E. To the maximum extent practicable, an arbitration proceeding hereunder shall be concluded within 180 days of the filing of the Dispute with the AAA. Arbitration proceedings shall be conducted in Houston, Texas. Arbitrators shall be empowered to impose sanctions and to take such other actions as the arbitrators deem necessary to the same extent a judge could impose sanctions or take such other actions 12 13 pursuant to the Federal Rules of Civil Procedure and applicable law. At the conclusion of any arbitration proceeding, the arbitrator shall make specific written findings of fact and conclusions of law. The arbitrator shall have the power to award recovery of all costs and fees to the prevailing party. Each party agrees to keep all Disputes and arbitration proceedings strictly confidential except for disclosure of information required by applicable law. F. All fees of the arbitrator and any engineer, accountant or other consultant engaged by the arbitrator, shall be paid by Seller, on the one hand, and the Purchasers, on the other hand, equally unless otherwise awarded by the arbitrator. 13. Further Assurances and Guaranty A. Purchasers and Seller hereby agree to execute all such further instruments and documents, and to take all such other actions, as may be reasonable and appropriate to further effectuate the intent of this Tax Agreement. B. The Guarantors, jointly and severally, unconditionally guarantee as if each of them were the primary obligor, the punctual payment and performance of the Purchasers' and the Companies' obligations under this Tax Agreement and any other agreement between Purchasers, Companies, and Seller required by this Tax Agreement. 14. Headings References herein to Articles are to Articles of this Tax Agreement. Article headings in this Tax Agreement are included herein for convenience of reference only and shall not constitute a part of the Tax Agreement for any other purpose. 15. Severability of Provisions Any provision of this Tax Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. 16. Execution in Counterparts This Tax Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. 17. Entire Agreement This Tax Agreement represents the entire understanding of the parties with respect to the subject matter hereof. There are no other terms, conditions, representations or warranties, express or implied, written or 13 14 oral, except as set forth herein. No amendments, modifications or additions hereto shall be binding unless executed in writing by all of the parties to this Tax Agreement. 18. Expenses Except as otherwise expressly provided in the Agreement or in this Tax Agreement, each party shall pay its own expenses, including consultants', counsels', and public accountants' fees and expenses incurred in any way in connection with this Tax Agreement. 19. Confidentiality Except as may be required by law or regulation or this Tax Agreement, the parties agree to keep confidential this Tax Agreement and the terms and provisions hereof and not to disclose them to any third party without the prior written consent of the parties hereto. 20. No Third Party Beneficiaries Nothing expressed or referred to in this Tax Agreement is intended to or shall be construed to give any Person other than Amoco, Seller, Purchasers, Guarantors, or Companies any legal or equitable remedy or claim under or with respect to this Tax Agreement. IN WITNESS WHEREOF, the parties have negotiated and duly executed this Tax Agreement at Houston, Texas, on the day and year first written above. AMOCO CORPORATION By: /s/ John D Spence Name: John D. Spence Title: Attorney-in-Fact AMOCO PRODUCTION COMPANY By: /s/ John D Spence Name: John D. Spence Title: Attorney-in-Fact WALTER INTERNATIONAL CONGO, INC. By: /s/ J C Walter, Jr Name: J.C. Walter, Jr. Title: President THE NUEVO CONGO COMPANY By: /s/ Michael D Watford 14 15 Name: Michael D. Watford Title: President WALTER INTERNATIONAL, INC. By: /s/ J C Walter, Jr Name: J.C. Walter, Jr. Title: President NUEVO ENERGY COMPANY By: /s/ Michael D Watford Name: Michael D. Watford Title: President THE CONGO HOLDING COMPANY By: /s/ Michael D Watford Name: Michael D. Watford Title: President WALTER CONGO HOLDINGS, INC. By: /s/ J C Walter, Jr Name: J.C. Walter, Jr. Title: President AMOCO CONGO EXPLORATION COMPANY By: /s/ John D Spence Name: John D. Spence Title: Attorney-in-Fact AMOCO CONGO PETROLEUM COMPANY By: /s/ John D Spence Name: John D. Spence Title: Attorney-in-Fact 15 EX-10.24 29 EXHIBIT 10.24 1 EXHIBIT 10.24 CMS TAX AGREEMENT This Agreement is made and entered into as of the 24th day of February, 1995, by and between Amoco Corporation ("Amoco"), an Indiana corporation ("Amoco"), Amoco Production Company, a Delaware corporation ("APC"), CMS Energy Corporation, a Michigan corporation ("CMS"), CMS Enterprises, Inc., a Michigan corporation ("Enterprises"), CMS-Nomeco Oil & Gas Co., a Michigan corporation ("Nomeco"), Walter International, Inc., a Texas corporation ("Walter"), Walter Congo Holdings, Inc., a Texas corporation ("Walter Holdings"), and Walter International Congo, Inc., a Delaware corporation ("Walter Congo"). W I T N E S S E T H: WHEREAS, Amoco is the indirect parent of APC; and WHEREAS, APC was the owner of ten (10) issued capital shares, one hundred United States Dollars (U.S. $100.00) par value per share, of Amoco Congo Exploration Company ("ACEC") (ACEC or its successor corporation, Walter Congo, sometimes hereinafter referred to as the "Company"), constituting all of the ACEC's issued and outstanding shares of capital stock ("Shares"); and WHEREAS, the Company's operations are subject to taxation in the Republic of the Congo ("Congo") as a branch operation of a foreign corporation; and WHEREAS, ACEC may have incurred substantial dual consolidated losses ("DCLs"), as defined by the DCL Regulations; and WHEREAS, APC and the Amoco Consolidated Group have filed all necessary certifications required pursuant to Treasury Regulation Section 1.1503-2A(d)(3), and have filed and will timely file all certifications required pursuant to Treasury Regulation Section 1.1503-2(g)(2), and have filed the replacement election under Treasury Regulation Section 1.1503-2(h)(2)(ii) with the United States Internal Revenue Service ("IRS") regarding the use of said DCLs; and WHEREAS, the existing DCLs of the Company must be recaptured into income under certain circumstances, potentially resulting in substantial tax liability, as well as an interest charge thereon; and WHEREAS, on February 22, 1995, Amoco filed a request for a private letter ruling with the U.S. Internal Revenue Service (the "Service") that the net operating losses of ACEC do not constitute DCLs; and WHEREAS, on the Sale Closing Date (as hereinafter defined), APC sold all of the Shares of ACEC to Walter Holdings by means of a taxable reverse subsidiary merger; and 2 WHEREAS, Walter Holdings is a wholly-owned subsidiary of Walter; and WHEREAS, OPIC has issued to Walter a contract of political risk insurance ("Insurance Policy") with respect to Walter's investment in the Company, and, upon payment of certain claims under such policy, Walter will transfer or cause to be transferred, to OPIC the Shares and/or other interests in, or of, the Company; and WHEREAS, OPIC and Walter Holdings have entered into a Finance Agreement (the "Finance Agreement") and a related Participation and Guaranty Agreement, pursuant to which OPIC has guaranteed the obligations of Walter Holdings and the Company in respect of loans (the "Loans") to be made by lenders pursuant to the Finance Agreement; and WHEREAS, the obligations of the Company and Walter Holdings under the Loan Agreements will be secured by a pledge of the Shares and by a lien on specified escrow accounts at a bank in the United States containing funds denominated in U.S. dollars; and WHEREAS, under the terms of that certain Tax Agreement dated February 23, 1995, between, inter alia, Amoco, APC, Walter, Walter Holdings, and the Company (the "Tax Agreement"), Walter, Walter Holdings, and the Company agreed that they shall (i) promptly notify APC of any proposed transaction that might constitute an event that could trigger recapture of any DCLs under the DCL Regulations; (ii) allow APC to advise them regarding the terms and conditions of such proposed transaction solely for the purpose of avoiding recapture of any DCLs; and (iii) obtain the written approval of APC with respect to such proposed transaction, which approval is not to be unreasonably withheld; and WHEREAS, following the sale of ACEC to Walter Holdings, CMS Merging Corporation, a Texas corporation and a wholly-owned subsidiary of CMS, will be merged with and into Walter. It is contemplated that following the CMS Merging Corporation-Walter merger, CMS will transfer all the outstanding stock of Walter to Enterprises, a subsidiary of CMS, and immediately thereafter, Enterprises will transfer all of the outstanding stock of Walter to Nomeco, a subsidiary of Enterprises (the transactions described in this paragraph hereinafter collectively referred to as the "Proposed Acquisition"); and WHEREAS, follow the Proposed Acquisition, each of Enterprises, Nomeco, Walter, Walter Holdings, and Walter Congo will be members of the CMS Consolidated Group; and WHEREAS, the execution of this Agreement by the parties hereto is a condition precedent to Amoco's granting its approval to the Proposed Acquisition; and WHEREAS, the parties hereto desire to avoid triggering recapture into income of any DCLs pursuant to the provisions of the DCL Regulations; and 2 3 WHEREAS, CMS Enterprises, Nomeco, Walter, Walter Holdings, and Walter Congo collectively, the "CMS Indemnifying Parties") hereby acknowledge that, after the Proposed Acquisition, Amoco and APC can rely only on CMS, Enterprises, Nomeco, Walter, Walter Holdings, Walter Congo, and their successors and assigns, to monitor transactions with respect to the Company and take any action necessary to prevent the triggering of the DCL recapture liability. NOW THEREFORE, in consideration of the premises and the respective covenants, agreements, and conditions contained herein, the parties hereby agree as follows: 1. Definitions For the purposes of this Agreement, the following terms shall have the following meanings: "Affiliate" shall mean: (1) any company at least fifty percent (50%) of whose shares entitled to vote for the election of directors are owned, directly or indirectly, by such party; (2) any company which owns, directly or indirectly, at least fifty percent (50%) of the shares entitled to vote for the election of directors of such party; or (3) any company at least fifty percent (50%) of whose shares entitled to vote for the election of directors are owned, directly or indirectly, by a company which at the same time owns, directly or indirectly, at least fifty percent (50%) of the shares entitled to vote for the election of directors of such party. "Agreement" shall mean this Agreement and any amendments thereto. "Closing Agreement" shall mean an agreement described in Treasury Regulation Section 1.1503-2(g)(2)(iv)(B)(2). "Closing Date" shall mean the date of the proposed merger of CMS Merging Corporation into Walter. "Code" shall mean the U.S. Internal Revenue Code of 1986, as amended. All references herein to the Code, or to the Treasury Regulations promulgated thereunder, shall include any amendments or any substitute or successor provisions thereto. "Consolidated Group" shall mean a group of corporations that has elected to make a consolidated return with respect to income tax imposed by chapter 1 of the Code. 3 4 "DCL" shall mean the dual consolidated losses of the Company, if any, as defined in section 1503(d) of the Code and the DCL Regulations. "DCL Regulations" shall mean Treasury Regulation Section 1.1503-2A, Treasury Regulation Section 1.1503-2, or any successor regulation as in effect from time to time. "Event of Default" shall have the meaning defined in the Finance Agreement. "Loss Event" shall have the meaning defined in the Insurance Policy. "Obligated Person" shall mean any Person (other than OPIC or any Person (other than a Person who is a party to this Agreement) who acquires any interest in any of the Shares or any of the assets of the Company from or under the direction of OPIC solely as a result of OPIC's exercise of its rights under any Insurance Policy or Loan Agreement) who acquires any interest in any of the Shares or any of the assets of the Company (including but not limited to any transferee, creditor, guarantor, or subrogee), excluding any unrelated third party who purchases hydrocarbons or surplus materials or equipment from the Company in the ordinary course of the Company's business. "OPIC" shall mean the Overseas Private Investment Corporation, an agency of the United States of America organized as a corporation under the laws of the United States. "Person" shall have the meaning contained in section 7701(a)(1) of the Code and any Treasury Regulations promulgated thereunder. "Sale Closing Date" shall mean the date on which APC sold all of the Shares to Walter Holdings by means of a taxable reverse subsidiary merger. "Separate Unit" shall have the meaning contained in Treasury Regulation Section 1.1503-2(c)(3). "Taxes" shall mean all federal, state, local, foreign, and other net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, lease, service, service use, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, windfall profits, customs, duties, or other taxes, fees, assessments, or charges in the nature of a tax, together with any interest and any penalties, additions to tax or additional amounts with respect thereto, and the term "Tax" means any of the foregoing Taxes. "Treasury Regulations" shall mean the Treasury Regulations promulgated under the Code, including any amendments or any substitute or successor provisions thereto. "Triggering Event" shall mean any one or more of the events specified in Treasury Regulation Section 1.1503-2(g)(iii)(A) or Treasury Regulation Section 1.1503-2A(d)(4), the occurrence of which would require the recapture of DCLs, plus applicable interest, into income as provided in the DCL Regulations. 4 5 2. Closing Agreement A. Amoco and CMS agree that prior to the Closing Date, CMS, Walter, the Company, and if the Service deems it necessary, Amoco, shall submit to the IRS a request for a Closing Agreement as specified in Treasury Regulation Section 1.1503-2(g)(2)(iv)(B)(2) in the form and substance attached hereto as Exhibit A. B. In conjunction with the Closing Agreement specified in Article 2.A, above, and as an integral part thereof, CMS, Walter, the Company, and if the Service deems it necessary, Amoco, shall request from the Service a ruling that the Proposed Acquisition will not constitute a Triggering Event with respect to any DCLs of the Company. C. CMS, Walter, the Company, and, if necessary, Amoco, agree to make all representations and to supply all information necessary for the Service to enter into the Closing Agreement and to issue the rulings requested under this Article 2, including, but not limited to: (1) representations by CMS, Walter, Walter Congo, and, if deemed necessary by the Service in order to have an effective Closing Agreement, Amoco, that they agree to be jointly and severally liable for the amount of United States federal income tax with respect to any DCLs of ACEC incurred up to and including the Sale Closing Date, plus any applicable interest charge thereon, due as a result of the occurrence of any Triggering Event; (2) representations by CMS, Walter, and Walter Congo that they agree to be jointly and severally liable for the amount of United States federal income tax, plus any applicable interest charge thereon, with respect to any DCLs of the Company incurred after the Sale Closing Date, due as a result of the occurrence of any Triggering Event; (3) representations by CMS that it will treat any potential recapture amount as unrealized built-in gain for purposes of section 384(a) of the Code; (4) representations by CMS and the Company that they will each timely file the agreement (including applicable certifications) required by Treasury Regulation Section Section 1.1503-2(g)(2)(iv)(B)(2)(iii) and 1.1503-2(g)(2)(i). 5 6 3. Covenants Regarding Periods After Closing Date CMS, Enterprises, Nomeco, Walter, and the Company agree with respect to each taxable year ending after the Closing Date that they: A. shall not take any action to cause the occurrence of any Triggering Event; B. shall limit the business of the Company to the exploitation of the Yombo Permit; C. shall promptly notify APC of (i) any proposed voluntary sale, exchange, transfer, contribution, distribution, actual or constructive liquidation, dissolution, reorganization, lease, farmout of any of the Shares or any of the assets of the Company or any Separate Unit thereof that would have the effect of causing the Company to cease being a member of its Consolidated Group, or any of the assets of the Company or any Separate Unit thereof (other than sales of hydrocarbons or surplus materials or equipment to unrelated third parties in the ordinary course of business), or (ii) any proposed sale, exchange, transfer, contribution, reorganization, distribution, actual or constructive liquidation, dissolution, lease, or other disposition of CMS, Enterprises, Nomeco, Walter, or Walter Holdings or the stock of CMS, Enterprises, Nomeco, Walter, or Walter Holdings that would have the effect of causing the Company to become a member of a new Consolidated Group. Prior to the consummation of any such voluntary sale, exchange, transfer, contribution, reorganization, distribution, actual or constructive liquidation, dissolution, lease, farmout, or other disposition, CMS shall: (1) allow APC to advise CMS and its Affiliates regarding the terms and conditions of such proposed sale, exchange, transfer, contribution, reorganization, distribution, actual or constructive liquidation, dissolution, lease, farmout, or other disposition solely for the purpose of avoiding recapture of any DCLs of the Company or any Separate Unit thereof as a result of said sale, exchange, transfer, contribution, reorganization, distribution, actual or constructive liquidation, dissolution, lease, farmout, or other disposition; and (2) obtain the written approval of APC with respect to such terms and conditions, which approval shall not be unreasonably withheld; D. shall promptly notify APC of any actual or potential involuntary sale, exchange, transfer, contribution, reorganization, distribution, actual or constructive liquidation, dissolution, lease, farmout, or other disposition of the Company or any of the Shares or any of the assets of a Company or any Separate Unit thereof, or any sale, exchange, transfer, contribution, reorganization, distribution, actual or constructive liquidation, dissolution, lease, or other disposition of CMS or any Affiliate of CMS or the stock of CMS or any Affiliate of CMS that could have the effect of causing a Company to become a member of a new Consolidated Group, including, but not 6 7 limited to (i) any Event of Default by any of Walter, Walter Holdings, or the Company under any Loan Document or other obligation to OPIC; (ii) any default or claimed default by any of Walter, Walter Holdings, or the Company with respect to any indebtedness that could result in a recapture of DCLs of the Company or any separate Unit thereof; or (iii) any Loss Event under any Insurance Policy or any other similar policy issued by any other Person relating to the Company that could result in a recapture of DCLs of the Company or any Separate Unit thereof; E. shall, prior to any sale, exchange, transfer, contribution, reorganization, distribution, actual or constructive liquidation, dissolution, lease, farmout, or other disposition of the Company or any of the Shares that would have the effect of causing a Company to cease being a member of its Consolidated Group or any of the assets of the Company or any Separate Unit thereof (other than sales of hydrocarbons or surplus materials or equipment in the ordinary course of business), notify APC in writing of the terms and conditions of the proposed sale, exchange, transfer, contribution, disposition, reorganization, actual or constructive liquidation, dissolution, lease, farmout, or other disposition and APC shall then have thirty (30) days to elect to purchase such Shares or assets on such notified terms; F. shall require any Obligated Person to agree to fulfill and be bound by all of the obligations and covenants of CMS, Enterprises, Nomeco, Walter, Walter Holdings, and Walter Congo contained in this Agreement; G. shall honor and abide by, and shall not in any way amend the terms and obligations, of that certain Letter dated November 21, 1994, from ACEC to the Director General of Taxation of the Congo; H. shall not permit the Company to incur secured indebtedness in excess of $10,000,000 in the aggregate, other than the Loans, without the prior written consent of APC, which consent shall be granted if the lender enters into an option agreement with APC similar in form and substance to that certain Option Agreement between Amoco and OPIC dated February 24, 1995; and I. shall not permit any omission within its control that causes a Triggering Event (other than any failure to contribute money or assets to the Company). Notwithstanding the covenants contained in this Article 3, (A) if (i) the conditions contained in Article 4.B or Article 4.C hereof are met with respect to an event and (ii) CMS or any Affiliate of CMS is released from any indemnity in accordance with Article 4.B hereof or Article 4.C hereof, then CMS or such Affiliate shall, with respect to that event only, (a) have no further obligation to comply with the obligations or covenants 7 8 contained herein and (b) be released from any breach of any covenant or obligation contained herein, and (B) if (i) the conditions contained in Article 4.B hereof are met with respect to an event and (ii) the Company is released from any indemnity in accordance with Article 4.B hereof, then CMS and its Affiliates shall, with respect to that event only (a) have no further obligation to comply with the obligations or covenants contained herein, and (b) be released from any breach of any covenant or obligation contained herein. For purposes of this paragraph and Article 4.B and Article 4.C hereof, an event shall be deemed to be a separate event regardless of whether it may be, or may have been intended to be, directly or indirectly, dependent on, related to, or contemporaneous with any other event. 4. Indemnification by CMS, Enterprises, Nomeco, Walter, Walter Holdings, and the Company A. Except as expressly provided in Article 4.B and 4.C hereof, CMS, Enterprises, Nomeco, Walter, Walter Holdings, the Company, or each of them, jointly and severally, agree to indemnify and hold harmless APC, its Affiliates, and their respective directors, officers, and employees from and against any and all Taxes, tax credits utilized, interest, penalties, costs of enforcement, and reasonable attorneys fees incurred in defending against any claim for Taxes, interest, penalties, or additional income or the enforcement of this indemnification, if any, arising out of or based upon or with respect to any failure by CMS, Enterprises, Nomeco, Walter, Walter Holdings, the Company, or any of them, to comply with each and every obligation and covenant of this Agreement. B. Notwithstanding the foregoing Article 4.A, CMS, Enterprises, Nomeco, Walter, Walter Holdings, or the Company shall not be required to indemnify APC, its Affiliates, or their respective directors, officers, and employees: (1) if, in the case of (i) a voluntary sale, exchange, transfer, contribution, reorganization, distribution, actual or constructive liquidation, dissolution, lease, farmout, or other disposition of the Company or any of the Shares that would have the effect of causing the Company to cease being a member of its Consolidated Group or assets of the Company or any Separate Unit thereof (other than sales of hydrocarbons or surplus materials or equipment in the ordinary course of business), or (ii) any sale, exchange, transfer, contribution, reorganization, distribution, actual or constructive liquidation, dissolution, lease, or other disposition of CMS, Enterprises, Nomeco, Walter, Walter Holdings or the stock of CMS, Enterprises, Nomeco, Walter, or Walter Holdings that would have the effect of causing the Company to become a member of a new Consolidated Group, CMS, Enterprises, Nomeco, Walter, Walter Holdings, and the Company obtained the review and written approval described in Article 3.C hereof. (2) in the case of a transfer of any Shares of U.S. dollars contained in any escrow account to OPIC or any other secured lender as a result of a foreclosure upon default, but only if APC and OPIC or other secured lender, as the case may be, are, at the time of such transfer of Shares of U.S. dollars, parties to an option agreement in the form and substance of that certain Option Agreement attached as Schedule L to the Agreement; 8 9 (3) in the case of any transfer of Shares or assets resulting from an expropriation or other Loss Event under an Insurance Policy, unless OPIC fails to pay compensation for any loss under political risk or similar insurance because OPIC has determined that a primary cause of the loss was unreasonable actions, including corrupt practices, attributable to CMS or any Affiliate of CMS; or (4) if, in the case of any other sale, exchange, transfer, contribution, reorganization, distribution, actual or constructive liquidation, dissolution, lease, farmout, or other disposition of the Company or any of the Shares or assets of the Company not otherwise described in this Article 4.B, CMS, Enterprises, Nomeco, Walter, Walter Holdings, or Company complied with Article 3.E hereof. C. Notwithstanding the foregoing Article 3 or Article 4.A, in the case of a Triggering Event attributable to a taxable period in which the Company is not an Affiliate of CMS, CMS and its Affiliates at the time of such Triggering Event shall not be required to comply with the covenants and obligations contained in Article 3 hereof or to indemnify APC, its Affiliates, or their respective directors, officers, and employees. 5. Indemnification by APC If CMS, Enterprises, Nomeco, Walter, Walter Holdings, and the Company shall have complied with the obligations and covenants contained in Article 3 of this Agreement with respect to a Triggering Event that caused the recapture of DCLs of a Company or a Separate Unit thereof and such DCLs are attributable to periods ending on or before the Sale Closing Date, then APC shall indemnify and hold harmless CMS and its Affiliates, and their respective directors, officers, and employees from and against any and all Taxes, tax credits utilized, interest, penalties, costs of enforcement, and reasonable attorneys fees incurred in defending against any claim for Taxes, interest, penalties, or additional income or the enforcement of this indemnification, if any, arising out of or based upon or with respect to any such recapture. 6. Rights of Indemnifying Party A. Each indemnified party hereunder agrees that within five (5) calendar days following the issuance of any notice from any taxing authority of a Tax assessment or deficiency resulting from any DCL recapture in connection with which a claim for indemnification under this Agreement might be made (a "Claim"), it will give prompt notice thereof to the indemnifying party, together with a statement of such information respecting any of such facts as it may have and a formal demand for indemnification. The indemnifying party shall not be obligated to indemnify the indemnified party with respect to any Claim if the indemnified party fails to notify the indemnifying party in sufficient time and with sufficient detail to permit the 9 10 indemnifying party to defend against such matter and to make a timely response thereto. B. The indemnifying party shall be entitled, at its cost and expense, to contest and defend by all appropriate legal proceedings any Claim with respect to which they are called upon to indemnify the indemnified party; provided, that notice of the intention so to contest shall be delivered by the indemnifying party to the indemnified party within 10 days after the date of receipt by the indemnifying party of notice by the indemnified party of the assertion of the Claim. Any such contest may be conducted in the name and on behalf of the indemnifying party or the indemnified party as may be appropriate. The indemnified party shall have the right but not the obligation to participate in such proceedings and to be represented by counsel of its own choosing at its sole cost and expense. C. If requested by the indemnifying party, the indemnified party agrees to cooperate with the indemnifying party and its counsel in contesting any Claim that the indemnifying party elects to contest or, if appropriate, in making any counterclaim against the Person asserting the Claim, or any cross-complaint against any Person, and the indemnifying party will reimburse the indemnified party for any expenses it incurs by so cooperating. The indemnified party agrees to afford the indemnifying party and its counsel the opportunity to be present at, and to participate in, conferences with all Persons asserting any Claim against the indemnified party or conferences with representatives of or counsel for such Persons. D. The indemnified party shall take no action which would prejudice the indemnifying party's defense of the matter giving rise to the Claim. E. The indemnified party shall have no right to recover from any other party hereto any losses, costs, expenses, or damages arising under or in connection with this Agreement any amount in excess of actual damages, court costs, and reasonable attorney fees, suffered by such party. Each indemnified party waives any right to recover punitive, special, exemplary, and consequential damages arising under or in connection with this Agreement. 7. Defense Against Tax Claims A. Amoco and CMS each agrees to notify the other parties to this Agreement promptly in the event that, in respect of the Company or any Separate Unit thereof, (i) any tax authority, in the course of any audit or other examination of the tax returns or records of such party, raises any question or issue with respect to any loss, expense, or deduction constituting a DCL or any potential DCL recapture, or (ii) any tax authority issues a notice of proposed adjustment or similar notice with respect to any potential DCL recapture. 10 11 CMS will permit Amoco and will cause the Company and/or its successors to permit Amoco, at Amoco's option and expense, to direct the Company or any other Affiliate of CMS to take whatever actions are reasonably necessary in Amoco's judgment to contest and defend any issues which may result in a claim for such Taxes prior to the payment of such Taxes. In the event CMS or any Affiliate of CMS is responsible for paying Taxes described in this Agreement or required to pay Amoco the amount of such Taxes under any of the terms of this Agreement, Amoco will permit CMS, at CMS's option and expense, to direct Amoco to take whatever actions are reasonably necessary in CMS's judgment to contest and defend any issues which may result in a claim for such Taxes prior to the Payment of such Taxes and prior to the payment of the amount of such Taxes to Amoco. If CMS exercises the option provided for in the preceding sentence, Amoco will, at CMS's request, cause its employees and representatives to be available (at reasonable times and places) to consult with employees and representatives of CMS regarding the issues relating to such Taxes. CMS shall reimburse Amoco for all its reasonable costs and expenses in complying with the previous sentence. In the event of a claim by any taxing authority which will adversely affect both Amoco and CMS by the liability to pay Taxes and by payments under the terms of this Agreement or, if the liability under such claim cannot be readily ascertained, Amoco and CMS agree to cooperate fully with each other, each bearing its own expenses, to take whatever action is necessary to contest and defend or to direct the Company to contest and defend any issue which may result in a claim for Taxes or a payment under the terms of this Agreement prior to the payment of such Taxes and prior to the payment of the amount of such Taxes to CMS or Amoco. B. If a Tax has been paid to any taxing authority and, as a result of the payment of such Tax, either Amoco or CMS incurs a liability to make payment to the other because of the payment of such Tax, provisions similar to Article 6.A above shall apply to enable the party or parties bearing the burden of the Tax liability to cause the appropriate party to take whatever action is necessary to claim, pursue or litigate with respect to a refund of such Tax. If the entire burden of an increased Tax liability has been borne by Amoco or by CMS, the right to litigate for or otherwise claim Tax refunds shall be assigned, to the extent it is legally permissible to do so, to the party bearing such economic burden. If any refunds or settlement amounts shall be delivered to the party who did not bear the burden of the Tax liability, such party shall assign such amounts to the party who bore the burden of the Tax liability. In the event both Amoco and CMS jointly bear the economic burden of the payment of any Tax described in this Agreement, Amoco and CMS agree to cooperate fully with each other, each bearing its own expenses, to cause the appropriate party to litigate the claim for Tax refund and to share the proceeds of any refund or settlement in proportion to the economic burden previously borne. 11 12 8. Survival Except as otherwise expressly provided in Article 4.C hereof, the obligations, covenants, and agreements set forth in the Tax Agreement and this Agreement and in any certificate or instrument delivered in connection therewith and herewith shall, unless otherwise provided, survive regardless of any subsequent transaction involving the stock or assets of the CMS, Enterprises, Nomeco, Walter, Walter Holdings, or the Company or any Separate Unit thereof. 9. Notices A. All notices shall be given in writing and shall be delivered (i) by hand to the party for which intended, (ii) by registered or certified mail, return receipt requested, postage prepaid, (iii) by telex, or (iv) by facsimile, all of which addressed to the party for which it is intended at the following respective addresses or such other person or address previously furnished in writing by either party in the manner provided herein: To Amoco or its Affiliates: Amoco Corporation 501 WestLake Park Boulevard Houston, Texas 77079 Telephone: (713) 366-7119 Facsimile: (713) 366-7596 Attention: Michael A. Wolf, Director of Taxes--APC(I) with a copy to: Amoco Corporation 501 WestLake Park Boulevard Houston, Texas 77079 Telephone: (713) 366-2755 Facsimile: (713) 366-7596 Attention: Robert M. Gordon, Senior Tax Attorney (International) To CMS or its Affiliates: CMS-Nomeco Oil & Gas Company 1 Jackson Square Jackson, Michigan 49204 Telephone: (517) 787-9011 Facsimile: (517) 787-6360 Attention: William H. Stephens, III B. The date of service of the notice shall be the date on which notice is received. 12 13 10. No Waiver No failure or delay by any party hereto in exercising any right, power, privilege or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power, privilege or remedy preclude the exercise of any other right, power, privilege or remedy. The rights and remedies herein provided are cumulative and not exclusive of any rights or remedies provided by law. No amendment, modification or waiver of, or consent with respect to, any provision of this Agreement shall in any event be effective unless the same shall be in writing. 11. Successors and Assigns This Agreement shall be binding upon and inure to the benefit of the parties and their respective permitted successors and assigns other than OPIC or any other Person who is not an Obligated Person. No party to this Agreement shall be relieved of its obligations hereunder, by assignment or otherwise, without the prior written consent of the other parties hereto. 12. Governing Law and Dispute Resolution A. This Agreement shall be governed by the laws of Illinois excluding any choice of law provisions which would require the application of the law of any other jurisdiction. B. Any action, dispute, claim or controversy of any kind now existing or hereafter arising between any of the parties hereto in any way arising out of, pertaining to or in connection with this Agreement (a "Dispute") shall be resolved by binding arbitration in accordance with the terms hereof. Any party may, by summary proceedings, bring an action in court to compel arbitration of any Dispute. C. Any arbitration shall be administered by the American Arbitration Association (the "AAA") in accordance with the terms of this Article 12, the Commercial Arbitration Rules of the AAA, and, to the maximum extent applicable, the Federal Arbitration Act. Judgment on any award rendered by an arbitrator may be entered in any court having jurisdiciton. D. Any arbitration shall be conducted before one arbitrator. The arbitrator shall be a licensed practicing attorney who is knowledgeable in the subject matter of the Dispute selected by agreement between the parties hereto. If the parties cannot agree on an arbitrator within 30 days after the request for an arbitration, then any party may request the AAA to select an arbitrator. The arbitrator may engage engineers, accountants or other consultants that the arbitrator deems necessary to render a conclusion in the arbitration proceeding. 13 14 E. To the maximum extent practicable, an arbitration proceeding hereunder shall be concluded within 180 days of the filing of the Dispute with the AAA. Arbitration proceedings shall be conducted in Houston, Texas. Arbitrators shall be empowered to impose sanctions and to take such other actions as the arbitrators deem necessary to the same extent a judge could impose sanctions or take such other actions pursuant to the Federal Rules of Civil Procedure and applicable law. At the conclusion of any arbitration proceeding, the arbitrator shall make specific written findings of fact and conclusions of law. The arbitrator shall have the power to award recovery of all costs and fees to the prevailing party. Each party agrees to keep all Disputes and arbitration proceedings strictly confidential except for disclosure of information required by applicable law. F. All fees of the arbitrator and any engineer, accountant or other consultant engaged by the arbitrator, shall be paid by Amoco, on the one hand, and CMS, on the other hand, equally unless otherwise awarded by the arbitrator. 13. Further Assurances and Guaranty A. The parties hereto hereby agree to execute all such further instruments and documents, and to take all such other actions, as may be reasonable and appropriate to further effectuate the intent of this Agreement. B. CMS, Enterprises, Nomeco, Walter, Walter Holdings, and Walter Congo, jointly and severally, unconditionally guarantee as if each of them were the primary obligor, the punctual payment and performance of each of their obligations under this Agreement and any other agreement between any of the parties hereto required by this Agreement. 14. Headings References herein to Articles are to Articles of this Agreement. Article headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of the Agreement for any other purpose. 15. Severability of Provisions; Effectiveness Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. This Agreement shall become effective when CMS Merging Corporation, or another member of the CMS consolidated group, merges into and with Walter as contemplated by the fourteenth Whereas paragraph hereof. 14 15 16. Execution in Counterparts This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. 17. Entire Agreement Except for the Tax Agreement, to which Amoco, APC, Walter, Walter Holdings, and the Company shall remain subject, this Agreement represents the entire understanding of the parties with respect to the subject matter hereof. There are no other terms, condiitions, representations or warranties, express or implied, written or oral, except as set forth herein or in the Tax Agreement. No amendments, modifications or additions hereto shall be binding unless executed in writing by all of the parties to this Agreement. 18. Expenses Except as otherwise expressly provided in the Agreement or in this Agreement, each party shall pay its own expenses, including consultants', counsels', and public accountants' fees and expenses incurred in any way in connection with this Agreement. 19. Confidentiality Except as may be required by law or regulation or this Agreement, the parties agree to keep confidential this Agreement and the terms and provisions hereof and not to disclose them to any third party without the prior written consent of the parties hereto. 20. No Third Party Beneficiaries Nothing expressed or referred to in this Agreement is intended to or shall be construed to give any Person other than Amoco or CMS (and their respective Affiliates) any legal or equitable remedy or claim under or with respect to this Agreement. 15 16 IN WITNESS WHEREOF, the parties have negotiated and duly executed this Agreement on the day and year first written above. AMOCO CORPORATION By /s/ John D. Spence ------------------------ Name: John D. Spence Title: Attorney-In-Fact AMOCO PRODUCTION COMPANY By /s/ John D. Spence ------------------------ Name: John D. Spence Title: Attorney-In-Fact CMS ENERGY CORPORATION By P. D. Hopper ------------------------ Name: Preston D. Hopper Title: Vice President CMS ENTERPRISES COMPANY By P. D. Hopper ------------------------ Name: Preston D. Hopper Title: Vice President CMS-NOMECO OIL & GAS COMPANY By /s/ W. H. Stephens ------------------------ Name: W. H. Stephens, III Title: Sr. Vice President WALTER INTERNATIONAL, INC. By F. Fox Benton, Jr. ------------------------ Name: F. Fox Benton, Jr. Title: Exec. Vice President 16 17 WALTER CONGO HOLDINGS COMPANY By F. Fox Benton, Jr. ------------------------ Name: F. Fox Benton, Jr. Title: Exec. Vice President WALTER INTERNATIONAL CONGO, INC. By F. Fox Benton, Jr. ------------------------ Name: F. Fox Benton, Jr. Title: Exec. Vice President 17 EX-10.25 30 EXHIBIT 10.25 1 EXHIBIT 10.25 INTER-PURCHASER AGREEMENT This Inter-Purchaser Agreement (this "Agreement") dated as of December 28, 1994, is entered into by and among Walter International, Inc., a Texas corporation ("Walter"), Walter Congo Holdings, Inc., a Texas corporation ("Walter Holdings"), Walter International Congo, Inc., a Texas corporation ("Old Walter Congo"), Nuevo Energy Company, a Delaware corporation ("Nuevo"), The Congo Holding Company, a Texas corporation ("Nuevo Holdings"), and The Nuevo Congo Company, a Texas corporation ("Old Nuevo Congo"). 1. INTRODUCTION. 1.1 On June 30, 1994, Walter entered, and caused its indirect subsidiary Old Walter Congo to enter, and Nuevo entered and caused its indirect subsidiary, Old Nuevo Congo, to enter, into that certain Stock Purchase Agreement (the "Purchase Agreement") with Amoco Production Company ("Amoco"). Pursuant to the Purchase Agreement, Old Walter Congo will merge with and into Amoco Congo Exploration Company, a Delaware corporation ("ACE"), with ACE as the surviving entity, and Old Nuevo Congo will merge with and into Amoco Congo Petroleum Company, a Delaware corporation ("ACP"), with ACP as the surviving entity (collectively, the "Mergers"). After the Mergers, the name of ACE will be changed to Walter International Congo, Inc. ("New Walter Congo") and the name of ACP will be changed to The Nuevo Congo Company ("New Nuevo Congo"). In this Agreement, any reference to "Walter Congo" shall mean Old Walter Congo prior to the Mergers and New Walter Congo after the Mergers, and any reference to "Nuevo Congo" shall mean Old Nuevo Congo prior to the Mergers and New Nuevo Congo after the Mergers. 1.2 All of the capital stock of Old Nuevo Congo is held by Nuevo Holdings, prior to the Mergers, and all the capital stock of New Nuevo Congo will be held by Nuevo Holdings after the Mergers. Nuevo Holdings is a wholly-owned subsidiary of Nuevo. All of the capital stock of Old Walter Congo is held by Walter Holdings, prior to the Mergers, and all of the capital stock of New Walter Congo will be held by Walter Holdings after the Mergers. Walter Holdings is a wholly-owned subsidiary of Walter. 1.3 ACE owns an undivided 25% interest in the Marine I Joint Operating Agreement and a like beneficial interest in the Convention and Yombo Permit. ACP owns an undivided 18.75% interest in the Marine I Joint Operating Agreement and a like beneficial interest in the Convention and Yombo Permit. 1.4 Nuevo has posted a letter of credit for the benefit of Amoco on behalf of both of the Purchasers in connection with the letter of intent dated December 2, 1993, executed by Walter, Nuevo and Amoco; replacement letters of credit in connection with extensions of the letter of intent; and a letter of credit for the benefit of Amoco on behalf of both of the Purchasers as required by Section 5 of the Purchase Agreement. In addition, Nuevo will post a letter of credit for the benefit of Amoco on behalf of both Purchasers to secure the Promissory Note as required by Section 3.A(2) of the Purchase Agreement. 2 1.5 The purpose of this Agreement is to set forth certain understandings between Walter and certain of its subsidiaries and Nuevo and certain of its subsidiaries. For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as set forth herein. 2. DEFINITIONS. Capitalized terms used in this Agreement and not otherwise defined herein shall have the meanings set forth in the Purchase Agreement or the Tax Agreement (as defined in the Purchase Agreement). In addition to the terms defined elsewhere in this Agreement, the following terms shall have the meaning set forth below, which shall be equally applicable to both the singular and the plural forms of the terms herein defined: "Business Day" means any day excluding Saturday, Sunday, or any day which shall be in Houston, Texas, a legal holiday or a day on which banking institutions in Houston, Texas are authorized or required by law to close. "Finance Agreement" shall mean, with respect to Walter Congo, the Finance Agreement to be entered into between OPIC, Walter Holdings and Walter Congo and, with respect to Nuevo Congo, the Finance Agreement to be entered into between OPIC, Nuevo Holdings and Nuevo Congo; and "Finance Agreements" shall mean both such agreements. "Interests" shall mean the undivided interests in the Marine I Joint Operating Agreement and the beneficial interests in the Convention and Yombo permit. "Latent ORRI" shall mean those certain contractual obligations of Walter Congo (or its assigns or successors) as described in Section 6.4. "Latent Working Interest" shall mean those certain contractual obligations and rights of Walter Congo (or its assigns or successors) as described in Section 6.3. "NOMECO" shall mean NOMECO Oil & Gas Company. "OPIC Financing" shall mean (i) the loans to be obtained by Nuevo Congo and Walter Congo for the cash to be paid to Amoco pursuant to the Mergers and the development of the Yombo Permit and the related guarantee to be provided by OPIC and (ii) the political risk insurance to be provided by OPIC. "Promissory Note" shall mean the Promissory Note payable to Amoco to be delivered by Purchasers pursuant to Section 3.A(2) of the Purchase Agreement. "Republic" shall mean the Republic of the Congo. "Walter Congo Note" shall mean that demand promissory note payable to Nuevo Holdings (or its assigns or successors) delivered by Walter Congo as described in paragraph 6.1 below. -2- 3 3. RELATIONSHIP OF THE PARTIES. Walter and Nuevo are causing Old Walter Congo and Old Nuevo Congo, respectively, to enter into the transactions contemplated by the Purchase Agreement and to become independent owners of the capital stock of ACE and ACP, respectively. After the Closing, Walter and Nuevo will cause Walter Congo and Nuevo Congo, respectively, to own and operate the interests under the Convention on the same terms and conditions as currently in force pursuant to the Marine I Joint Operating Agreement. Nothing contained in this Agreement or the Stock Purchase Agreement shall be deemed to constitute any of Nuevo, Nuevo Holdings or Nuevo Congo, on the one hand, and Walter, Walter Holdings or Walter Congo, on the other hand, as a partner, joint venturer, agent or legal representative of the other or to create any fiduciary relationship. Except as otherwise expressly provided in the Marine I Joint Operating Agreement, or the Purchase Agreement, neither Purchaser shall have any authority to act for or to assume any obligation or responsibility on behalf of any other Purchaser. 4. TRANSACTION EXPENSES. 4.1 Except as provided in Section 4.2, each of Nuevo and Walter shall reimburse the other for one-half of all reasonable and customary expenses incurred by the other (or its respective subsidiaries) that are common to the parties in connection with the transactions contemplated by the Purchase Agreement and the OPIC Financing, including, without limitation, (i) all fees and expenses in connection with the letters of credit posted pursuant to the letter of intent and the Purchase Agreement prior to the Closing, (ii) all fees and expenses in connection with the letter of credit posted by Nuevo pursuant to the Purchase Agreement to secure payment of the Promissory Note described in Section 3(B)(2) of the Purchase Agreement, but only to the extent that a party's respective share of the obligations under such Promissory Note remains unpaid, (iii) all legal and accounting fees and disbursements and fees and expenses of other advisers retained by it in connection with due diligence, negotiation, drafting, transition expenses and other similar activities, whether in the Republic or elsewhere, and (iv) travel and other reasonable business expenses incurred in connection with the Purchase Agreement. 4.2 Each of Walter and Nuevo shall individually bear and pay their respective (x) fees and expenses relating to negotiations and agreements between them, including fees and expenses incurred with respect to this Agreement, (y) fees and expenses relating to compliance by each of Walter (including its Affiliates) and Nuevo (including its Affiliates) with representations, warranties and covenants relating or pertaining to each of them, individually, in favor of Amoco, OPIC or each other, and (z) fees and expenses relating to any other matters not substantially related to the common undertaking by such parties as contemplated by the Purchase Agreement and the OPIC Financing. 4.3 Walter and Nuevo shall invoice each other for amounts that may be reimbursed pursuant to this Section, and all such amounts that meet the requirements of this Section shall be paid by Walter to Nuevo or by Nuevo to Walter, as appropriate, within thirty days after receipt of the invoice. Any single expense that is to be borne by both parties in excess of $10,000 shall be approved by both Walter and Nuevo. -3- 4 5. OBLIGATIONS TO AMOCO AND THE IRS. 5.1 Walter shall, and shall require Walter Congo and Walter Holdings to, and Nuevo shall, and shall require Nuevo Congo and Nuevo Holdings to, perform all of their respective obligations (including both affirmative and negative covenants) under the Marine I Joint Operating Agreement, the Tax Agreement, the Purchase Agreement, the Closing Agreement and all of the agreements executed in connection with the OPIC Financing. In addition, (i) neither Walter nor Nuevo shall, and Walter and Nuevo shall not permit any of their respective Affiliates to, take (or, to the extent possible, permit) any action for which any of them would have an obligation to indemnify Amoco or any of its Affiliates under the terms of the Tax Agreement without obtaining the prior consent of the other and (ii) unless they obtain the prior consent of the other, Walter and Nuevo shall, and Walter and Nuevo shall cause each of their respective Affiliates to, take all actions necessary to avoid the occurrence of an event for which any of them would have an obligation to indemnify Amoco or any of its Affiliates under the terms of the Tax Agreement. Such consent may be conditioned on, among other things, the receipt by the party that is to provide the consent of an indemnity from an entity acceptable to such consenting party (in its sole discretion) against any liability, cost or expense in connection with such action. 5.2 To the extent that any act, omission, condition or event with respect to Walter or any of its Affiliates causes the occurrence of a Triggering Event without the prior consent of Nuevo or any Affiliate of Nuevo having been obtained to such act, omission, condition or event, Walter shall reimburse Nuevo for any and all amounts payable by Nuevo or any Affiliate of Nuevo to Amoco or any Affiliate of Amoco pursuant to the Tax Agreement or to the IRS pursuant to the Closing Agreement. Such reimbursement shall be adjusted to eliminate any net tax effect from such reimbursement or payments pursuant to the Tax Agreement or to the IRS. 5.3 To the extent that any act, omission, condition or event with respect to Nuevo or any of its Affiliates causes the occurrence of a Triggering Event without the prior consent of Walter or any Affiliate of Walter having been obtained to such act, omission, condition or event, Nuevo shall reimburse Walter for any and all amounts payable by Walter or any Affiliate of Walter to Amoco or any Affiliate of Amoco pursuant to the Tax Agreement or to the IRS pursuant to the Closing Agreement. Such reimbursement shall be adjusted to eliminate any net tax effect from such reimbursement or payments pursuant to the Tax Agreement or to the IRS. 5.4 Nuevo shall reimburse Walter for any payment that Walter is required to make to Amoco or its Affiliates in connection with any representation or warranty relating or pertaining to Nuevo or its Affiliates in the Purchase Agreement. 5.5 Walter shall reimburse Nuevo for any payment that Nuevo is required to make to Amoco or its Affiliates in connection with any representation or warranty relating or pertaining to Walter or its Affiliates in the Purchase Agreement. -4- 5 5.6 Except as provided in Sections 5.2, 5.3, 5.4 or 5.5, in the event Walter or any of its respective Affiliates is obligated to pay to Amoco or any of its Affiliates any amount in connection with the Purchase Agreement (including the Promissory Note and the Production Payment), the Tax Agreement or the Closing Agreement and Nuevo does not pay an equal amount to Amoco or its Affiliates, then Nuevo shall reimburse Walter the amount necessary to equalize the payments by Walter and its Affiliates, collectively, and Nuevo and its Affiliates, collectively. 5.7 Except as provided in Sections 5.2, 5.3, 5.4 or 5.5, in the event Nuevo or any of its respective Affiliates is obligated to pay to Amoco or any of its Affiliates any amount in connection with the Purchase Agreement (including the Promissory Note and the Production Payment), the Tax Agreement or the Closing Agreement and Walter does not pay an equal amount to Amoco or its Affiliates, then Walter shall reimburse Nuevo the amount necessary to equalize the payments by Walter and its Affiliates, collectively, and Nuevo and its Affiliates, collectively. 5.8 In the event that Amoco or any of its Affiliates receives any funds under the letters of credit posted by Nuevo prior to the Closing, then reimbursements to the issuer of such letters of credit by Nuevo or any of its Affiliates that are discharged by the funds delivered to Amoco or its Affiliates shall be deemed a payment by Nuevo and its Affiliates for purposes of this Section 5. In the event that Amoco or any of its Affiliates receives any funds under the letter of credit posted by Nuevo pursuant to the Purchase Agreement to secure payment of the Promissory Note described in Section 3(B)(2) of the Purchase Agreement, then reimbursements to the issuer of such letter of credit by Nuevo or any of its Affiliates shall be deemed a payment by Nuevo and its Affiliates for purposes of this Section 5 as long as Walter has not paid its share of such Promissory Note. 5.9 At least ten days prior to filing any consolidated federal income tax return, Walter shall provide Nuevo a copy of the certification to be included with such return described in Treas. Reg. Section 1.1503-2(g)(2)(vi)(B) which is required to avoid a Triggering Event. At least ten days prior to filing any consolidated federal income tax return, Nuevo shall provide Walter a copy of the certification to be included with such return described in Treas. Reg. Section 1.1503-2(g)(2)(vi)(B) which is required to avoid a Triggering Event. Within two business days of a party's providing a notice to Amoco under Section 3 of the Tax Agreement, it shall provide a copy to the other parties hereto. 5.10 Pursuant to the Stock Purchase Agreement, the combined purchase price for the stock of ACE and ACP is the sum of $31.5 million plus the Balancing Payment--the sum of $18 million plus 57.143% of the Balancing Payment attributable to the ACE stock and the sum of $13.5 million plus 42.857% of the Balancing Payment attributable to the stock of ACP. The parties will pay this purchase price to Amoco in the following manner: Walter Holdings will pay the sum of $18 million plus 57.143% of the Balancing Payment to Amoco for 100% of the stock of ACE and Nuevo Holdings will pay the sum of $13.5 million plus 42.857% of the Balancing Payment to Amoco for 100% of the stock of ACP. -5- 6 6. NUEVO HOLDINGS LOAN TO WALTER CONGO; CREATION OF LATENT WORKING INTEREST AND LATENT ORRI. 6.1 To enable Walter Holdings to purchase 100% of the stock of ACE, Nuevo Holdings will loan to Walter Congo pursuant to the Walter Congo Note a principal amount equal to the sum of $2.25 million plus 7.143% of the Balancing Payment (the "Principal Amount"). The terms of the Walter Congo Note shall authorize Nuevo Holdings (or its assigns or successors) to demand (at the option of Nuevo Holdings or its assigns or successors) payment of the Walter Congo Note either (i) in cash or (ii) in kind through the creation of certain contract rights pursuant to the Latent Working Interest and the Latent ORRI. The various steps associated with the Walter Congo Note and the creation of the Latent Working Interest and the Latent ORRI are set out below and shall occur in the order set out: First, on the Closing Date, Nuevo Holdings will loan the Principal Amount to Walter Congo, and such loan shall be evidenced by the Walter Congo Note. Walter Congo agrees to use the proceeds of this loan solely to acquire the stock of ACE. Second, on the Closing Date, Walter Holdings will arrange for Walter Congo to obtain, as of the Closing Date, but prior to the Closing, an amount equal to the sum of $18 million plus 57.143% of the Balancing Payment (including the proceeds from the Walter Congo Note). Nuevo Holdings will arrange for Nuevo Congo to obtain, as of the Closing Date but prior to the Closing, an amount equal to the sum of $13.5 million plus 42.857% of the Balancing Payment. Third, on the Closing Date, Walter Holdings will purchase 100% of the stock of ACE from Amoco for an amount equal to the sum of $18 million plus 57.143% of the Balancing Payment, by causing Walter Congo to merge into ACE, with ACE the surviving entity. Walter Holdings will cause ACE to change its name to Walter International Congo, Inc. Simultaneously Nuevo Holdings will purchase 100% of the stock of ACP from Amoco for an amount equal to the sum of $13.5 million plus 42.857% of the Balancing Payment, by causing Nuevo Congo to merge into ACP, with ACP the surviving entity. Nuevo Holdings will cause ACP to change its name to The Nuevo Congo Company. Fourth, on the Closing Date, Nuevo Holdings will contribute the Walter Congo Note to the capital of Nuevo Congo. Fifth, no sooner than the day immediately after the Closing Date, Nuevo Congo will demand of Walter Congo the payment of the Walter Congo Note by the creation of the contractual rights and obligations represented by the Latent Working Interest and the Latent ORRI. Walter Congo will create contracts represented by the Latent Working Interest and the Latent ORRI and deliver them to Nuevo Congo, in complete satisfaction of all obligations of Walter Congo under the Walter Congo Note. 6.2 Walter and Nuevo agree that they will take consistent income tax reporting positions with respect to the contractual rights and obligations represented by the Latent Working Interest and the Latent ORRI. -6- 7 6.3 The contract for the Latent Working Interest will evidence for Nuevo Congo the following contractual rights and obligations: (i) the right of Nuevo Congo (or its assigns or successors) to receive from Walter Congo (or its assigns or successors) an amount of cash equal to the amount of cash, proceeds and revenues attributable to an undivided 12.5% of Walter Congo's 25% interest in the Marine I Joint Operating Agreement and like beneficial interest in the Convention and Yombo Permit and any rights of Walter Congo arising after the Closing Date under the Purchase Agreement, payable by Walter Congo (or its assigns or successors) at the times that the operator under the Marine I Joint Operating Agreement makes distributions of proceeds from the sale of hydrocarbons to working interest owners or at the time of a sale of such interests; and (ii) the obligation of Nuevo Congo (or its assigns or successors) to pay to Walter Congo (or its assigns or successors) an amount of cash equal to 12.5% of the obligations, costs, expenses and other liabilities payable by Walter Congo with respect to its interest in the Marine I Joint Operating Agreement, the Convention and the Yombo Permit, including a proportionate part of the obligations after the Closing Date under the Purchase Agreement (but excluding (A) any part of the OPIC Financing or any OPIC Insurance Costs and (B) the Latent ORRI), payable at such time as Walter Congo (or its assigns or successors) is obligated to make such payments under the Marine I Joint Operating Agreement or other instruments. 6.4 The contract for the Latent ORRI will evidence for Nuevo Congo (or its assigns or successors) a contractual right to receive from Walter Congo (or its assigns or successors) an amount of cash equal to the amounts that would be paid with respect to an overriding royalty interest equal to the difference between (a) one-half the aggregate royalty burden to the Republic on the interest of Walter Congo and Nuevo Congo in the Convention and (b) the royalty burden to the Republic on the interest of Walter Congo beneficially owned by Walter Congo (ie., 21.875% out of Walter Congo's 25% interest). Such amounts shall be calculated and paid in the same manner as royalty payments are made to or for the account of the Republic. The Latent ORRI will also evidence the parties' obligations to make additional payments measured by the Congolese income tax consequences of their Congolese operations. 6.5 Walter Congo shall not be liable for any actions taken hereunder with respect to the Latent Working Interest or the Latent ORRI if made in good faith and without gross negligence, fraud or bad faith. Walter Congo shall not be treated as a fiduciary with respect to the Latent Working Interest or the Latent ORPI. 6.6 Nuevo and Nuevo Congo hereby jointly and severally agree to indemnify and hold harmless Walter Congo and its Affiliates from and against any and all claims, damages, losses, liabilities and expenses of any kind, including but not limited to any liability or expense arising from U.S. or Congolese income, capital gains, or other taxes paid or payable on production or with respect to the Latent Working Interest or the Latent ORRI, in connection with or arising directly or indirectly out of the creation of the Latent Working Interest or the Latent ORRI and payments made thereunder, unless such claims, damages, losses, liabilities or expenses resulted from the sole gross negligence, fraud or bad faith of Walter or Walter Congo. Such indemnity with respect to taxes shall be grossed up or decreased as necessary to eliminate any net tax effect from such indemnity payments. -7- 8 6.7 Nuevo and Walter agree that prior to the creation of the contractual rights represented by the Latent Working Interest and the Latent ORRI, they shall (i) comply with the requirements of the Tax Agreement, and (ii) submit (and shall cause their respective controlled subsidiaries to join in such submission) to the Internal Revenue Service (the "IRS") a request for a Closing Agreement as specified in Treasury Regulations Section 1.1503-2(g)(2)(iv)(B)(2). In conjunction with such Closing Agreement, Walter shall request from the IRS such rulings as Nuevo and Walter shall jointly deem necessary, taking into account the ruling submitted to the IRS by Amoco in conjunction with the sale of the stock of ACE and ACP. The parties agree to make all representations and supply all information necessary for the IRS to enter into the Closing Agreement and to issue the rulings that may be requested pursuant to the prior sentence. 6.8 If Nuevo Congo requests and Nuevo Congo has obtained the appropriate approvals, Walter Congo will make assignments to Nuevo Congo of the interests in the Marine I Joint Operating Agreement represented by the Latent Working Interest and the Latent ORRI. 7. LOANS BETWEEN THE COMPANIES; ACQUISITIONS PURSUANT TO FINANCE AGREEMENTS. 7.1 In the event that either Walter Congo acquires the capital stock or assets of Nuevo Congo or Nuevo Congo acquires the capital stock or assets of Walter Congo pursuant to Section 9.14 of the respective Finance Agreement, the acquiring party shall pay to the other an amount equal to the appraised value as determined by an independent appraiser selected by Walter and Nuevo (and, if Walter and Nuevo are unable to agree, then, at the request of either of them, the judge of the Southern District of Texas that is senior in term of service shall select an independent appraiser). The appraiser shall utilize the most recent reserve value calculations prepared by the engineer most recently employed by Walter Congo and Nuevo Congo pursuant to the Finance Agreements. Such engineer shall utilize pricing parameters consistent with the methodology utilized in connection with reports provided under the Finance Agreements and shall utilize a discount rate of 25%. 7.2 In the event that either Nuevo Congo or Walter Congo becomes a defaulting party under the terms of Section 8.05 of the Marine I Joint Operating Agreement, the non-defaulting party shall have the right (but not the obligation) to loan to the defaulting party prior to the expiration of the ninety-day period described in Section 8.05(b) of the Marine I Joint Operating Agreement the amount necessary to cure such default. The entire amount loaned by the non-defaulting party to the defaulting party shall be used within such ninety-day period to cure the default in accordance with Section 8.05(b) of the Marine I Joint Operating Agreement. 7.3 In the event that either Walter Congo or Nuevo Congo cures a default by the other pursuant to Section 9.13 of the respective Finance Agreement, the amount advanced to cure the default shall be deemed to be a loan by the non-defaulting party. 7.4 In the event that any amount is loaned by either Walter Congo or Nuevo Congo pursuant to Section 7.2 or is deemed to be loaned pursuant to Section 7.3, such loaned amount shall be payable on demand (subject to the terms of any subordination agreement in favor of OPIC required in connection with the OPIC Financing) and shall bear interest at the lesser of (i) the prime rate announced from time to time by Texas Commerce Bank National -8- 9 Association plus 5% per annum or (ii) the maximum nonusurious rate permitted by applicable law. 8. WORK PROGRAMS, BUDGET AND AFES; ADMINISTRATIVE AND TECHNICAL MATTERS. 8.1 After the earlier of (i) the repayment by each of Walter Congo and Nuevo Congo of all its obligations under its respective Finance Agreement and all related documents or (ii) the completion of the development program approved by OPIC in connection with the Finance Agreements, Walter shall not permit Walter Congo, and Nuevo shall not permit Nuevo Congo, to submit any work program, budget or authorization for expenditure pursuant to Article 6 of the Marine I Joint Operating Agreement, or submit any other matter for a vote of the owners of the Interests under the Marine I Joint Operating Agreement without obtaining the prior approval of Nuevo Congo or Walter Congo, as the case may be, which approval shall not be unreasonably withheld. 8.2 If (i) any matter is presented for a vote to the owners of the Interests under the Marine I Joint Operating Agreement and (ii) the result of the vote would change if the percentage attributable to the Latent Working Interest were voted by Nuevo Congo rather than Walter Congo, then Walter Congo shall vote its interest in a manner that will cause the same result that would be obtained if the Latent Working Interest were voted by Nuevo Congo. 8.3 In the event that Walter or any of its Affiliates engages Nuevo, Torch Operating Company or any of their respective Affiliates to perform services with respect to the Yombo Permit, Nuevo shall, or shall cause Torch Operating Company or such Affiliate to, provide a monthly invoice to Walter Congo for such services, and Walter shall pay or cause Walter Congo to pay the amount of such invoice within thirty days after receipt of such invoice. 8.4 Walter shall administer, or cause its Affiliates to administer, in conformity with the standards set forth in Section 4.07 of the Marine I Joint Operating Agreement, the OPIC Financing on behalf of Nuevo Holdings and Nuevo Congo, including (i) the preparation for the review and approval by Nuevo Holdings of all reports, certificates and other submissions by Nuevo Holdings and Nuevo Congo pursuant to the agreements evidencing the OPIC Financing, other than any financial statements or other financial information pertaining primarily to Nuevo or its Affiliates, and (ii) the coordination with the engineer that will provide reports to OPIC in connection with the OPIC Financing so that the engineer has full and complete information necessary to timely prepare whatever reports the engineer is required to deliver pursuant to the OPIC Financing. Nuevo may assume the obligation to administer the OPIC Financing provided to Nuevo Holdings and Nuevo Congo at any time after thirty days notice to Walter. As long as Walter or one of its Affiliates is administering the OPIC Financing on behalf of Nuevo Congo and Nuevo Holdings, Nuevo shall cause Nuevo Congo to reimburse Walter and its Affiliates for one-half of all of the reasonable costs and expenses incurred by Walter and its Affiliates in connection with the administration of the OPIC Financing. -9- 10 9. RIGHT OF FIRST REFUSAL. 9.1 If Walter or Nuevo, or any of their respective Affiliates, agrees or makes an arrangement (i) to sell all or any portion of the assets constituting the interests under the Convention, the Yombo Permit or the Marine I Joint Operating Agreement, (ii) to sell all or any portion of the capital stock of Walter Holdings or Nuevo Holdings or any rights thereto, (iii) to sell all or any portion of the capital stock of Walter Congo or Nuevo Congo, respectively, (iv) for a merger of Walter Congo or Nuevo Congo, respectively, with or into any other entity, or (v) for a merger of Walter Holdings or Nuevo Holdings, respectively, with or into any other entity, then Walter or Nuevo, respectively, shall promptly give written notice to Nuevo or Walter, respectively. The notice shall contain the name and address of the prospective purchaser, a summary of all relevant terms of the offer and a copy of all agreements with, and offers from, the prospective purchaser relating to the sale. 9.2 To the extent that Amoco or any of its Affiliates has a preferential right under the Purchase Agreement, the Tax Agreement, or the Option Agreement in connection with a proposed sale of Interests or capital stock, or proposed merger, by or on behalf of either Nuevo Congo or Walter Congo, and none of Amoco or such Affiliates elects to exercise such preferential right, (i) Nuevo shall have an optional prior right to purchase or merge (or to cause one of its subsidiaries to purchase or merge) on the same terms and conditions as the proposed sale of such Interests or such capital stock, or the proposed merger, as appropriate, by Walter Congo, Walter Holdings or Walter, respectively; and (ii) Walter shall have an optional prior right to purchase or merge (or to cause one of its subsidiaries to purchase or merge) on the same terms and conditions as the proposed sale of such Interests, or the proposed sale of such capital stock, or the proposed merger, as appropriate, by Nuevo Congo, Nuevo Holdings, or Nuevo, respectively. To exercise the prior right, Nuevo or Walter, as appropriate, must provide to the other a notice of its (or its Affiliate's) intent to purchase such Interests or capital stock, or to merge, as the case may be, within 15 days after receipt of the notice described in Section 9.1. If such prior right is exercised and any right of Amoco or any of its Affiliates is not exercised, the purchasing or merging parties shall be entitled to complete the proposed purchase or merger in accordance with the terms specified in the notice. 9.3 In the event that the proposed consideration to be received by Walter or Nuevo or any of their respective Affiliates in connection with any transaction described in Section 9.1 is not cash, then Nuevo and Walter shall engage an independent appraiser acceptable to both of them to determine the cash value of the proposed consideration. The person exercising the right of first refusal shall pay to the other the cash value of the non-cash consideration as determined by the appraiser. 9.4 There shall not be a preferential right under this Section 9 where Nuevo or Walter or any of their respective Affiliates grants a lien or security interest in any asset or transfers any asset (via merger, consolidation or otherwise) to any Affiliate of Nuevo or Walter, respectively, nor shall the preferential right under this Section 9 apply to a merger by Walter (or its Affiliates) with or into NOMECO (or its Affiliates). -10- 11 10. BALANCING OF WORKING CAPITAL. The combined working capital of ACE and ACP on the date of Closing shall be allocated to Walter Congo and Nuevo Congo such that Walter Congo will own 57.143% of total combined working capital of both entities and Nuevo Congo will own 42.857% of the total combined working capital of both entities. To accomplish this, Walter and Nuevo shall prior to June 30, 1995 examine the books of ACE and ACP to determine the actual working capital of the two Companies as of the date of Closing. As soon as practical after this determination has been made, Walter Congo shall pay to Nuevo Congo an amount equal to the difference between (i) 42.857% of the amount obtained by adding total cash and accounts receivable of both ACE and ACP and subtracting therefrom total current liabilities of ACE and ACP, in each case determined after, but as of, the Closing and (ii) the balance reflected on the books of ACP equal to the amount obtained by adding cash and accounts receivable and subtracting therefrom total current liabilities in each case determined on, but as of, the Closing. In addition, amounts with respect to each of Crude Oil Inventory, Materials and Supplies, and Prepaid Expenses equal to the difference between 42.857% of the combined total amount determined after, but as of, the Closing and the amount reflected on the books of ACP on the date of Closing shall be transferred from the books of ACE to the books of ACP. 11. RESOLUTION OF DISPUTES. 11.1 On the request of any party hereto, whether made before or after the institution of any legal proceeding, any action, dispute, claim or controversy of any kind now existing or hereafter arising between any of the parties hereto in any way arising out of, pertaining to or in connection with this Agreement (a "Dispute") shall be resolved by binding arbitration in accordance with the terms hereof. Any party may, by summary proceedings, bring an action in court to compel arbitration of any Dispute. 11.2 Any arbitration shall be administered by the American Arbitration Association (the "AAA") in accordance with the terms of this Section, the Commercial Arbitration Rules of the AAA, and, to the maximum extent applicable, the Federal Arbitration Act. Judgment on any award rendered by an arbitrator may be entered in any court having jurisdiction. 11.3 Any arbitration shall be conducted before one arbitrator. The arbitrator shall be a practicing attorney licensed to practice in the State of Texas who is knowledgeable in the subject matter of the Dispute selected by agreement between the parties hereto. If the parties cannot agree on an arbitrator within 30 days after the request for an arbitration, then any party may request the AAA to select an arbitrator. The arbitrator may engage engineers, accountants or other consultants that the arbitrator deems necessary to render a conclusion in the arbitration proceeding. 11.4 To the maximum extent practicable, an arbitration proceeding hereunder shall be concluded within 60 days of the filing of the Dispute with the AAA. Arbitration proceedings shall be conducted in Houston, Texas. The arbitrator shall be empowered to impose sanctions and to take such other actions as the arbitrator deems necessary to the same extent a judge could impose sanctions or take such other actions pursuant to the Federal Rules of Civil Procedure and applicable law. At the conclusion of any arbitration proceeding, the arbitrator shall make specific written findings of fact and conclusions of law. The arbitrator shall have the power to -11- 12 award recovery of all costs and fees to the prevailing party. Each party agrees to keep all Disputes and arbitration proceedings strictly confidential except for disclosure of information required by applicable law. 11.5 All fees of the arbitrator and any engineer, accountant or other consultant engaged by the arbitrator, shall be paid by Walter and Nuevo equally unless otherwise awarded by the arbitrator. 12. PAYMENTS AND RECORDS. All payments due pursuant to Section 6 hereof shall be made at the address set forth below or at such other address as Nuevo Congo may designate. All payments due with respect to any loan made pursuant to Section 7 shall be made at the address set forth below or at such other address as Nuevo or Walter may designate. Walter Congo shall maintain true and correct books and records sufficient to enable Nuevo Congo to verify the correctness of the amounts paid and payable to Nuevo Congo in connection with the Latent Working Interest and the Latent ORRI. 13. ACCESS TO BOOKS AND RECORDS. At Nuevo's request, Walter shall provide Nuevo with access, at the office of Walter during normal business hours, to the books and records of Walter and its Affiliates relating to the payments due under Section 4 hereof, the Yombo Permit, the Convention, the Marine I Joint Operating Agreement and the OPIC Financing to enable Nuevo to verify the compliance with the obligations of Walter and its Affiliates hereunder. At Walter's request, Nuevo shall provide Walter with access, at the office of Nuevo during normal business hours, to the books and records of Nuevo and its Affiliates relating to the Yombo Permit, the Convention, the Marine I Joint Operating Agreement and the OPIC Financing to enable Walter to verify the compliance with the obligations of Nuevo and its Affiliates hereunder. 14. AREA OF INTEREST. In the event that Walter or Nuevo, or any of their respective Affiliates, acquires, or acquires any right to acquire, any interest in any rights to explore for, develop or produce hydrocarbons within the Republic (the "Acquisitor"), then the Acquisitor shall provide a notice to the other (the "offeree") describing the acquisition and all relevant terms of any obligations associated with the acquired rights. In addition, the notification by the Acquisitor shall contain an offer to assign to the offeree one-half of the interest acquired for the payment of one-half of the consideration paid by the Acquisitor and the assumption by the offeree of one-half of the obligations of the Acquisitor with respect to the acquired interest. To exercise the right to acquire, the offeree must notify the Acquisitor within thirty days receipt of the notice. 15. SUCCESSORS AND ASSIGNS. Subject to the provisions of Section 9, this Agreement shall inure to the benefit of and be binding upon the successors and assigns of the respective parties hereto. 16. WAIVERS AND AMENDMENTS. To be effective, all amendments and other modifications hereof and all consents that may be given pursuant hereto must be in writing and signed by each of the parties hereto. Any party may by written instrument (i) waive compliance by any other party with, or modify any of, the covenants or agreements made to it by any other -12- 13 party contained in this Agreement of (ii) waive or modify performance of any of the obligations or other acts of any of the other parties hereto. The delay or failure on the part of any party hereto to insist, in any one instance or more, upon strict performance of any of the terms or conditions of this Agreement, or to exercise any right or privilege herein conferred shall not be construed as a waiver of any such terms, conditions, rights or privileges but the same shall continue and remain in full force and effect. All rights and remedies are cumulative. 17. NOTICES. All notices, consents and other communications under this Agreement shall be in writing and shall be deemed to have been duly given (a) when delivered by hand, (b) when sent by telecopier (with receipt confirmed), provided that a copy is promptly thereafter mailed in the United States by first class postage prepaid registered or certified mail, return receipt requested, (c) when received by the addressee, if sent by express delivery service (receipt requested) or by such other means as the parties may agree from time to time or (d) five Business Days after being mailed in the United States, by first class postage prepaid registered or certified mail, return receipt requested; in each case to the appropriate addresses and telecopier numbers set forth below (or to such other addresses, telex numbers and telecopier numbers as a party may designate as to itself by notice to the other parties): if to Walter or any of its Affiliates: Walter International, Inc. 1021 Main Street, Suite 2110 Houston, Texas 77002-6502 Telecopier No.: (713) 756-1111 Attention: F. Fox Benton, Jr. if to Nuevo or any of its Affiliates: Nuevo Energy Company 1221 Lamar, Suite 1600 Houston, Texas 77010 Telecopier No.: (713) 655-1711 Attention: Roland E. Sledge 18. SECTION HEADINGS. The section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 19. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 20. ENTIRE AGREEMENT. This Agreement, the exhibits, schedules and annexes hereto, if any, contain the entire agreement between the parties hereto with respect to the subject matter -13- 14 hereof and thereof and supersede all prior agreements and undertakings between the parties hereto relating to the subject matters hereof and thereof. 21. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the law of the State of Texas. 22. PAYMENT TERMS AND INTEREST CALCULATIONS. 22.1 If the due date for any payment hereunder falls on the Saturday or a non-Monday bank holiday, such payment shall be made on the last banking day before the non-banking day, and if such payment falls due on a Sunday or a Monday bank holiday, such payment shall be made on the next succeeding banking day. 22.2 Interest shall accrue on any unpaid and outstanding amount on which interest is stated to accrue hereunder from the time such amount is due and payable through the date upon which such amount, together with accrued interest thereon, is paid in full. 22.3 All interest calculations hereunder shall be compounded quarterly, to the extent permitted by law, if not paid currently. 22.4 A wire transfer or delivery of a check shall not operate to discharge any payment under this Agreement and is accepted subject to collection. 23. NO THIRD PARTY BENEFICIARIES. Nothing in this Agreement shall entitle any party other than Walter, Walter Holdings, Old Walter Congo, Nuevo, Nuevo Holdings, and Old Nuevo Congo to any claim, cause of action, remedy or right of any kind. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. Walter International, Inc. Walter Congo Holdings, Inc. Walter International Congo, Inc. By: /s/ F. Fox Benton, Jr. ------------------------------ Name: F. Fox Benton, Jr. ----------------------- Title: Exec. Vice Pres. ----------------------- Nuevo Energy Company The Congo Holding Company The Nuevo Congo Company By: /s/ Michael D. Watford ------------------------------ Michael D. Watford President -14- EX-10.26 31 EXHIBIT 10.26 1 EXHIBIT 10.26 STOCK PURCHASE AGREEMENT SALE OF SHARES IN AMOCO CONGO EXPLORATION COMPANY AND AMOCO CONGO PETROLEUM COMPANY BY AMOCO PRODUCTION COMPANY TO WALTER INTERNATIONAL CONGO, INC. AND THE NUEVO CONGO COMPANY 2 TABLE OF CONTENTS 1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Purchase and Sale of Capital Shares . . . . . . . . . . . . . . . 3 3. Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . 3 4. Further Consideration . . . . . . . . . . . . . . . . . . . . . . . 6 5. Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 6. Other Mutual Considerations . . . . . . . . . . . . . . . . . . . 8 7. Company Name Change . . . . . . . . . . . . . . . . . . . . . . . 10 8. Closing Transactions . . . . . . . . . . . . . . . . . . . . . . . 10 9. Representations and Warranties of Seller . . . . . . . . . . . . . 12 10. Representations and Warranties of Purchasers . . . . . . . . . . . 17 11. Additional Agreements, Covenants, Rights and Obligations . . . . . 23 12. Breach of Representations or Warranties . . . . . . . . . . . . . 24 13. Conditions Precedent for Closing by Seller . . . . . . . . . . . . 24 14. Conditions Precedent for Closing by Purchasers . . . . . . . . . . 26 15. Actions of the Companies Prior to Closing . . . . . . . . . . . . 28 16. Commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 17. Termination of Use of Trademarks . . . . . . . . . . . . . . . . . 31 18. Records & Access to Properties & Records by Seller & Affiliates . 31 19. Indemnification by Seller . . . . . . . . . . . . . . . . . . . . 31 20. Indemnification by Purchasers . . . . . . . . . . . . . . . . . . 32 21. Right to Defend . . . . . . . . . . . . . . . . . . . . . . . . . 33 i 3 22. Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 23. Right of First Refusal . . . . . . . . . . . . . . . . . . . . . . 37 24. Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 25. Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 26. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 27. No Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 28. Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . 39 29. Governing Law and Dispute Resolution . . . . . . . . . . . . . . . 39 30. Further Assurances and Guaranty . . . . . . . . . . . . . . . . . 40 31. Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 32. Severability of Provisions . . . . . . . . . . . . . . . . . . . . 41 33. Execution in Counterparts . . . . . . . . . . . . . . . . . . . . 41 34. Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 41 35. Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 36. Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . 41 37. Restricted Transactions . . . . . . . . . . . . . . . . . . . . . 42 38. No Third Party Beneficiaries . . . . . . . . . . . . . . . . . . . 42 39. Compliance with Agreement . . . . . . . . . . . . . . . . . . . . 42 Schedules: Schedule A - Promissory Note, Guaranty and Letter of Credit Schedule B - Production Payment Schedule C - Letter of Credit ii 4 Schedule D - Tax Agreement Schedule E - Law Suits and Claims Schedule F - Balance Sheet Schedule G - Unplugged Wells Schedule H - Listed Agreements Schedule I - Continuing Insurance Policies Schedule J - Tubulars and Drilling Equipment Schedule K - Proprietary Items Schedule L - Option Agreement Schedule M - Agreement and Plan of Merger iii 5 STOCK PURCHASE AGREEMENT This Agreement is made and entered into as of the 30th day of June, 1994, by and between Amoco Production Company, a Delaware corporation ("Seller"), and Walter International, Inc., a company organized under the laws of Texas and Nuevo Energy Company, a company organized under the laws of Delaware (collectively "Guarantors"), and Walter International Congo, Inc. ("Walter"), a company organized under the laws of Texas, Walter Congo Holdings, Inc. ("Walter Holdings"), a company organized under the laws of Texas, The Nuevo Congo Company ("Nuevo"), a company organized under the laws of Texas and The Congo Holdings Company ("Nuevo Holdings'), a company organized under the laws of Texas (Walter, Walter Holdings, Nuevo and Nuevo Holdings collectively "Purchasers"). WITNESSETH: WHEREAS, Seller is the owner of ten (10) issued capital shares, one hundred United States Dollars (U.S. $100.00) par value per share, of each of Amoco Congo Exploration Company ("ACEC") and Amoco Congo Petroleum Company ("ACPC") both Delaware corporations (hereinafter referred to as "Company" or "Companies"), constituting all of the Companies' issued and outstanding shares of capital stock ("Shares"); and WHEREAS, Seller desires to sell to Purchasers, and Purchasers desire to purchase from Seller, said Shares for the purchase price and upon the terms and conditions hereinafter set forth; NOW THEREFORE, in consideration of the premises and the respective representations, warranties, covenants, agreements and conditions contained herein, the parties hereby agree as follows: 1. Definitions For the purposes of this Agreement the following terms shall have the following meanings: A. "AFFILIATE" shall mean: (1) any company at least fifty percent (50%) of whose shares entitled to vote for the election of directors are owned, directly or indirectly, by such party; (2) any company which owns, directly or indirectly, at least fifty percent (50%) of the shares entitled to vote for the election of directors of such party; or 1 6 (3) any company at least fifty percent (50%) of whose shares entitled to vote for the election of directors are owned, directly or indirectly, by a company which at the same time owns, directly or indirectly, at least fifty percent (50%) of the shares entitled to vote for the election of directors of such party. B. "AGREEMENT" shall mean this Agreement and any amendments thereto. C. "CLOSING" or "CLOSE" shall mean, respectively, the consummation of or to consummate the transactions contemplated by this Agreement as provided in Article 8. D. "CODE" shall mean the U.S. Internal Revenue Code of 1986, as amended. All references herein to the Code, or to the Treasury Regulations promulgated thereunder, shall include any amendments or any substitute or successor provisions thereto. E. "CONKOUATI" shall mean the floating production, storage and offloading facility of that name located on the Yombo Permit. F. "CONVENTION" shall mean the Convention dated May 25, 1979, as amended, relative to Marine I originally by and between The People's Republic of Congo, Congolese Superior Oil Company, Cities Service Congo Petroleum Corporation, Canadian Superior Oil Ltd., and Societe Nationale de Recherches et d'Exploitation Petrolieres "HYDRO-CONGO". G. "EFFECTIVE DATE" shall mean 12:01 A.M. Congo time on December 1, 1993. H. "GOVERNMENT" shall mean the government of the Congo. I. "HSR ACT" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976. J. "HYDRO-CONGO" shall mean the Societe Nationale de Recherches et d'Exploitation Petrolieres. K. "LETTER OF INTENT" shall mean the Letter of Intent executed by the parties on December 2, 1993, as amended. L. "MARINE I" shall mean the area covered by the Marine I exploration permit, offshore Congo, as defined in the Convention as the "Permit" and originally granted pursuant to Decree 253/79 by the Government. 2 7 M. "YOMBO PERMIT" shall mean the Yombo-Masseko-Youbi exploitation permit issued on March 15, 1989, pursuant to Decree 89/211 of the Government, pursuant to the Convention and created out of Marine I. N. "MARINE I JOINT OPERATING AGREEMENT" or "JOA" shall mean the Joint Operating Agreement, as amended, entered into on May 25, 1979, pursuant to the Convention. O. "PRODUCTION PAYMENT" shall have the meaning contained in Article 4. P. "SECURITY" shall mean the security provided by Purchasers to Seller pursuant to the Article 5. Q. "TAX RETURNS" shall mean all returns, declarations, reports, statements, and other documents required to be filed in respect of Taxes, and the term "Tax Return" means any of the foregoing Tax Returns. R. "TAXES" shall mean all federal, state, local, foreign, and other net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, lease, service, service use, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, windfall profits, customs, duties, or other taxes, fees, assessments, or charges of any kind whatever, together with any interest and any penalties, additions to tax or additional amounts with respect thereto, and the term "Tax" means any of the foregoing Taxes. S. "TREASURY REGULATIONS" shall mean the Treasury Regulations promulgated under the Code, including any amendments or any substitute or successor provisions thereto. 2. Purchase and Sale of Capital Shares Pursuant to the terms of this Agreement, on the date of Closing Seller will sell and assign and Purchasers will purchase and accept the Shares. Seller will deliver to Purchasers certificates representing the Shares, together with stock powers duly endorsed by Seller, so that the Shares may be duly registered in Purchasers' name upon receipt by Seller of confirmation that the consideration required pursuant to Article 3.A hereof has been received. Each purchase shall be accomplished by a reverse subsidiary merger as described in Article 11.D(4). 3. Purchase Price Upon the terms and subject to the conditions of this Agreement, Purchasers will purchase the Shares for the purchase price ("Purchase Price") of thirty one million five hundred 3 8 thousand United States ("U.S.") Dollars ($31,500,000), without prejudice to the Production Payment pursuant to Article 4, as follows: A. Purchasers will deliver at the Closing: (1) the sum of twenty one million five hundred thousand U.S. Dollars (U.S. $21,500,000) to the bank designated by Seller in Article 8.A hereof, by transfer in immediately available U.S. Dollars; plus (2) a Promissory Note in the amount of ten million U.S. Dollars ($10,000,000), subject to increase in accordance with Article 3.B below, in the form attached hereto as Schedule A, which Promissory Note shall be subordinate to the Overseas Private Investment Corporation ("OPIC") financing guarantee on terms acceptable to OPIC and Seller, together with a joint and several guaranty of payment from each of the Guarantors and an unconditional and irrevocable letter of credit in the form attached hereto as Schedule A securing payment of the Promissory Note, which letter of credit shall equal thirty percent (30%) of the principal amount of the Promissory Note after giving effect to the initial payment of principal contemplated in Article 3.B. B. At Closing, there shall be a calculation of a Balancing Payment. The Balancing Payment shall be the net sum of all amounts described in this Article 3.B (without duplication). If the Balancing Payment is positive, the principal amount of the Promissory Note shall be increased by such amount. If the Balancing Payment is negative, an initial payment of principal shall be deemed made under the Promissory Note at Closing in the amount of the Balancing Payment. If the Balancing Payment is negative and is in excess of the principal amount of the Promissory Note, the Promissory Note shall be deemed to have been paid in full and the excess amount shall be paid in cash by Seller to Purchasers. (1) In the event that the combined Adjusted Working Capital (as hereinafter defined) of the Companies (i) is less than $0.00, the Balancing Payment shall be reduced in the amount by which the Adjusted Working Capital of the Companies is less than $0.00, or (ii) exceeds $0.00, the Balancing Payment shall be increased in the amount by which the Adjusted Working Capital of the Companies so exceeds $0.00. The term "Adjusted Working Capital" shall mean the sum of: the cash, securities and cash equivalents, accounts receivable (minus reserves therefor), crude oil, fuel, materials and supplies, and materials in transit (less reserves therefor), prepaid expenses (including Tax and lease expenses) and other current assets of the Companies as at the Effective Date, less the sum of all current liabilities (which shall not include any liability for disputed royalty as referenced Schedule E) of the Companies as at the Effective Date, all as determined 4 9 in accordance with generally accepted accounting principles employed by the Companies on a basis consistent with prior periods and exclusive of any deferred income taxes. For purposes of calculating Adjusted Working Capital, the value of any unsold crude oil inventory of the Companies in storage on the Conkouati on the Effective Date shall be included in current assets, shall be measured as of 12:01 a.m. Congo time on the Effective Date and shall be valued based on the net price per barrel received by the Companies for the first sale of crude oil following the Effective Date. In addition, any unsold crude oil lifted from the Conkouati prior to the Effective Date shall be included in such current assets (to the extent not otherwise included in such current assets) at the actual net price received by the Companies, less the royalty and other amounts payable by the Companies with respect thereto (to the extent not otherwise included in such current liabilities). For purposes of both current assets and current liabilities, amounts in local currency will be converted into U.S. dollars using the exchange rate available from BIDC - Pointe Noire (i) on the Effective Date for purposes of Article 3.B(l), and (ii) for purposes of Article 3.B(2) through (4), on the first business day of the month in which Closing occurs. (2) The Balancing Payment shall be adjusted to reflect intercompany transfers of cash ("Transfers") between the Effective Date and the Closing. All Transfers from the Companies to Seller and its Affiliates (other than the Companies) shall be subtracted from the sum of all Transfers from Seller and its Affiliates (other than the Companies) to the Companies. If the result so obtained is a positive amount, the Balancing Payment shall be increased by such amount. If the result so obtained is a negative amount, the Balancing Payment shall be reduced by such amount. Transfers do not include payments of receivables and receipts of payables as specified in Article 3.B(4) below. (3) The Balancing Payment shall be increased by all capital contributions by Seller to the Companies between the Effective Date and the Closing insofar as such capital contributions do not constitute Transfers. (4) Receivables and payables between the Companies and their Affiliates on the date of Closing shall be offset. All of the payables owed by the Companies to Seller and its Affiliates (other than the Companies) on the date of Closing shall be subtracted from the sum of all receivables owed by the Seller and its Affiliates (other than the Companies) to the Companies on the date of Closing. If the result so obtained is a positive amount, the Balancing Payment shall be reduced by such amount. If the result so obtained is a negative amount, the Balancing Payment shall be 5 10 increased by such amount. All of the receivables and payables that have been offset shall be cancelled. (5) Recognizing that the resolution of the royalty issue as addressed in Schedule E will result in increased royalty payments being due from the Companies in the future, the Balancing Payment shall be reduced by an amount (the "Royalty Adjustment") equal to U.S. Dollars two million three hundred thousand (U.S. $2,300,000). (6) In order to reflect Purchasers' contribution to the Companies' share of the signature bonus paid to the Government with regard to Amendment No. 2 to the Convention, the Balancing Payment shall be increased by an amount equal to U.S. Dollars one million (U.S. $1,000,000). C. No fewer than ten (10) days prior to Closing, Seller shall prepare and deliver to Purchasers an estimated Balancing Payment statement as of the date of Closing. Such Balancing Payment shall be reflected in the Promissory Note as provided in 3.B above. Within ninety (90) days following the date of Closing, Purchasers shall prepare and deliver to Seller a final Balancing Payment statement as of the date of Closing. Within thirty calendar days after Seller's receipt of the final Balancing Payment statement, Purchasers and Seller shall endeavor to agree on the final adjustments of the Balancing Payment. If Seller and Purchasers cannot agree on the final Balancing Payment, the Houston Office of the firm of Price Waterhouse is designated to act as an arbitrator and to decide all points of disagreement with respect to the final Balancing Payment, such decision to be binding on both parties. The costs and expenses of the arbitrator shall be shared equally by Seller and Purchasers. Notwithstanding the Balancing Payment being reflected in the Promissory Note as set forth above, payments pursuant to the final Balancing Payment shall be made in cash. Should any adjustment be necessary to the Balancing Payment as determined at Closing, the party owing funds to the other shall pay such funds within thirty (30) days following the date of agreement or the decision of the arbitrator. 4. Further Consideration A. As further consideration, Purchasers shall cause the Companies to pay Seller a Production Payment based on the crude oil produced and sold by the Companies after the Effective Date as set forth in Schedule B. Purchasers shall use reasonable efforts to sell the crude oil to third parties in arms length transactions in a manner which will achieve the best available net back value FOB the Conkouati for the product. Should the crude oil be marketed by an Affiliate of Seller pursuant to an Agency Agreement or other agreement with Purchasers, Purchasers shall be deemed to have met such "reasonable efforts" requirement. 6 11 B. Payments made pursuant to the Production Payment shall be made by the Companies in U.S. dollars from a United States bank account to a bank account of Seller in the United States, which account shall be designated in writing. The Purchasers further agree that no payments pursuant to the Production Payment will be deducted from the income of any taxpayer for Congolese income tax purposes. C. APC and the Purchasers shall reach an agreement as to the value of the Production Payment and shall both report consistently with such agreed upon value for U.S. federal income Tax purposes. If the parties cannot agree upon a value, the parties shall submit the issue to an agreed upon reputable appraiser with expertise in such valuations and shall both report consistently with the valuation determined by such appraiser. D. Seller shall be entitled to recoup the Royalty Adjustment, as determined in Article 3.B(5), in the manner set forth this Article 4(D). Within forty (40) days after the end of each quarterly period in which IA(n) (hereinafter "Payout Amount") is greater than zero, Purchasers shall pay Seller an amount equal to 50% of IA(n), determined as set forth below, until the sum of all such payments shall equal the Royalty Adjustment, plus interest at a rate of 7.0% per annum on the unrecouped balance of said Royalty Adjustment. For period n = 1: IA(l) = IA(O) X (1.020833) + NCF(l); and For all periods other than n (1): IA(n) = IA(n-1) X (1.06250) + NCF(n) Where: n = the quarterly period in question, with n(l) being the one month period ending December 31, 1993. IA(n) = Payout Amount at the end of the quarterly period "n", where IA(O) = $30,200,000, expressed as a negative number. NCF(n) = Net Cash Flow during the quarterly period "n". For purposes of this Article 4(D), "Net Cash Flow" shall mean proceeds from the sale of (i) the Companies' total Participating Interest share of production and (ii) the Companies' total entitlement to Hydro-Congo's Participating Interest share of production; LESS, applicable 7 12 royalty payments to the Government and all Costs and Expenses incurred during such quarter. "Costs and Expenses" shall include all costs including capital costs, direct operating costs, indirect operating costs and administrative costs as chargeable to the Joint Account under the JOA, Taxes paid on the total production sold by the Companies and Production Payments. For purposes of computing Net Cash Flow, the principle of depreciation of capital costs shall not be applicable. Net Cash Flow shall be negative in any quarter in which all payments exceed all receipts. E. Purchasers shall afford to the officers, attorneys, accountants and other authorized representatives of Seller at Seller's sole risk and expense, free and full access upon reasonable notice to the accounting and production books and records of the Companies in order that such individuals may have full opportunity to make such examinations and audits as Seller shall deem reasonably necessary for the purposes of determining the accuracy of the payments made for the recoupment of the Royalty Adjustment as provided in Article 4.D., provided such examinations shall not unreasonably interfere with the operations of the Companies and shall be carried out during regular business hours. Seller shall have the right to make such copies as it deems necessary of any such accounting and production books and records. Seller shall keep the results of such examinations confidential and shall not reveal the same to any third party without the consent of Purchasers. F. The recoupment of the Royalty Adjustment pursuant to Article 4.D shall be subordinate to the OPIC Financing Guarantee on terms acceptable to OPIC and Seller. G. In consideration for the execution of Amendment No. 2 to the Convention, Amoco Congo Exploration Company and Amoco Congo Petroleum Company (Amoco Companies) will pay to the Government of the Republic of the Congo a signature bonus sum of U.S. $2,900,625, representing the Companies' net share of such signature bonus. This payment will be financed one hundred percent (100%) by the Companies and shall be treated as a Pre-Effective Date liability, with the amount of $2,900,625 being included as a current liability on the Effective Date for purposes of the Balancing payment calculation in Article 3.B.(l). As noted in Article 3.B.(6), Purchasers' contribution to the Companies' Share of the signature bonus will be included in the balancing payment. 5. Security On the date that this Agreement is signed, Purchasers shall cause Banque Paribas, Houston Agency to issue an Irrevocable Standby Letter of Credit in the form attached 8 13 hereto as Schedule C, to secure certain aspects of the performance of Purchasers hereunder. The letter of credit may be drawn by Seller as provided therein. 6. Other Mutual Considerations A. Purchasers have reviewed the assets of the Companies and agree to accept those assets at Closing on an "as-is" basis. Seller shall use reasonable efforts to insure that assets as are necessary for the continued operation of the Companies will be present in the Companies at Closing. Purchasers recognize, however, that Seller is attempting to sell certain tubulars and drilling equipment, as listed in Schedule J which are deemed to be surplus to the Companies' operations, but not to include those listed in the letter of November 23, 1993, from Gerald Livingston to Ron Cole likewise included in Schedule J, and certain Submarine Power Cable located in France, which are likewise deemed to be surplus, and agree that the proceeds from any such sale which occurs prior to Closing shall be treated as if they were pre Effective Date proceeds, even if sold after the Effective Date. Any obligations or liabilities for storage or handling charges, customs duties and fees or other costs incurred prior to Closing relating to such surplus equipment and materials shall be reimbursed to the Companies by Seller. B. The Companies shall not terminate the national payroll employees of the Companies prior to Closing without the prior consent of Purchasers. The Companies shall retain or assume all of the liability associated with the pension/benefit obligations with respect to the employees of the Companies who are national payroll employees, including but not limited to obligations associated with salary, severance and/or retirement benefits. Purchasers will indemnify and hold Seller and its Affiliates harmless from any claims which may arise from such obligations. Purchasers shall not terminate the employment or reduce the benefits of any of the Companies' national payroll employees (other than for theft or other illegal acts) for a period of one (1) year after Closing. The Seller represents and covenants that, at Closing, the Companies shall not have any employees who are non national payroll employees or any liability with respect to any former employees who are or were non national payroll employees, except with regard to potential liability relating to the lawsuit Patricia Bettis vs. Amoco Production Company, Amoco Corporation and Amoco Congo Exploration Company (hereinafter "Bettis Litigation") (See Schedule E). C. Seller shall bear and indemnify Purchasers and Companies with respect to any obligations or liabilities associated with the plugging and abandonment of any wells drilled prior to the Effective Date and not listed on Schedule G. Purchasers will fulfill all of the obligations of the Companies, if any (and/or of Seller and its Affiliates, if any), associated with plugging and abandonment of the wells drilled under the Convention in Marine I and all other abandonment and removal obligations related to Marine I; and Purchasers will hold the Seller and its 9 14 Affiliates harmless from any claim which may arise from such obligations and Purchasers will indemnify the Seller and its Affiliates from any claims asserted by any third party with regard to such plugging, abandonment or removal. D. Except to the extent any refund was reflected in the balance sheet of either of the Companies on the Effective Date as an asset, the Companies will transfer and assign to Seller prior to Closing all their rights to refunds (whether cash or non-cash) or credits received after the Closing Date on account of operations prior to the Effective Date. E. Materials on order to the Companies at the time of the Effective Date shall constitute a post-Effective Date liability. F. Subsequent to Closing, Purchasers shall cause the Companies to operate under the Convention as a prudent operator in accordance with generally accepted international petroleum standards. G. Should any of Seller's expatriate personnel remain in Pointe Noire beyond Closing, they may remain in their current housing and retain their current vehicles for so long as they remain in the Congo at no expense to Seller. H. At the time of Closing, the assets of the Companies shall not include any Amoco Corporation or affiliate or subsidiary, proprietary data, software, technology, or information (including manuals) as listed in Schedule K or any data or software (including Petroware) procured by Amoco Corporation or affiliate or subsidiary from a third party under a confidentiality agreement. 7. Company Name Change Prior to Closing, Seller shall cause the name of Amoco Congo Exploration Company and the name of Amoco Congo Petroleum Company to be changed to Yombo Exploration Company and Yombo Petroleum Company, respectively. Purchasers shall have no right to use the trade name or trademark "Amoco" or any derivative thereof for any purpose whatsoever and shall cause to be removed all signs or labels with such name. 8. Closing Transactions Should Closing not occur by September 15, 1994, or a mutually agreed later date, then any Party may by notice to the other Parties, terminate this Agreement, subject to the provisions of Article 5; provided, however, that if the Closing does not occur because of the failure to conclude the closing agreement with the U.S. Internal Revenue Service as referred to in Article 13.G., then this date shall be automatically extended at the request of Seller for ninety (90) days. 10 15 A. The following transactions shall take place at Closing: (1) Purchasers shall pay the cash portion of the Purchase Price specified in Article 3.A to Seller's account number 910-1-409-887 at the Chase Manhattan Bank, New York, New York. (2) Purchasers shall deliver the Promissory Note portion of the Purchase Price specified in Article 3.A to Seller, together with the unconditional and irrevocable letter of credit referenced in that Article. (3) Seller shall deliver stock certificates representing the Shares, accompanied by stock powers duly executed in blank or duly executed instruments of transfer, and any other documents necessary to transfer to Purchasers title to the Shares. (4) Seller shall deliver to Purchasers the corporate minute books of the Companies which shall be current as of the date of Closing and which shall contain a Resolution of the Board of Directors of each Company terminating all outstanding Powers of Attorney as of the date of Closing. (5) Seller shall deliver to Purchasers and Purchasers shall accept the resignations of all directors and officers of the Companies at the Closing, effective as of 7:00 A.M. Congo time on the date of Closing. (6) Seller and Purchasers shall make the elections provided for in Article 22(H) and/or enter into the other agreements as provided in Article 22. (7) Seller shall pay Purchasers any cash amounts due as provided in Article 3.B. B. Closing shall take place on a date and at a location to be mutually agreed between Seller and Purchasers. Each Party shall bear and pay the expenses incurred by it in connection with the Closing. C. On or before Closing the Purchasers shall deliver to the Seller a copy, certified as a true copy and in full force and effect by a Director, Secretary or Assistant Secretary of a resolution of the Board of Directors of the Purchasers approving the purchase of the Shares on the terms of this Agreement and the execution on behalf of the Purchasers of all other documents contemplated hereby. D. The Parties shall execute all such other documents and do all acts and things as may be reasonably required in order to effect the sale and purchase of the Shares and otherwise carry out the intent of this Agreement. 11 16 9. Representations and Warranties of Seller Seller represents and warrants to the Purchasers the following: A. Seller is duly organized, validly existing and in good standing under the laws of the State of Delaware. B. Seller has the corporate power and authority to enter into and perform this Agreement and all documents and actions required of Seller hereunder. All corporate proceedings necessary for Seller's execution and performance of this Agreement and of all other documents and actions required of Seller hereunder have been taken; and this Agreement constitutes, and such documents upon their execution by duly authorized officer of Seller will constitute the legal, valid and binding obligations of Seller enforceable in accordance with the terms hereof, except as may be limited by applicable bankruptcy, insolvency, and moratorium and other laws affecting the enforcement of creditors' rights in general and by general principles of equity (whether applied in a proceeding at law or in equity); provided, however, that the inclusion of the foregoing exception shall not be construed to waive, impair, diminish or reduce, or to expand or create, any right, power, privilege or benefit of Seller hereunder, and, in particular, but not by way of limitation, shall not impair any right of Seller to contest the propriety of any bankruptcy, insolvency, moratorium, equitable, or other proceeding. No other act, approval, or proceeding on the part of Seller or the holders of any class of its equity or debt securities or any other person or entity is required to authorize the execution, delivery and performance of this Agreement by Seller. C. The Companies are duly organized, existing and in good standing under the laws of the State of Delaware and have the corporate power and authority to own and hold the properties and assets they now own and hold and to carry on their business as and where such properties are now owned or held and such business is now conducted. Each of the Companies is duly registered or qualified to do business as a foreign corporation in the Republic of the Congo. D. Complete and correct copies of the certificate of incorporation and by-laws, as amended to the date hereof, of each Company, together with a list of all their officers and directors, all of which have been certified as complete and correct by an Assistant Secretary of each Company have been furnished to Purchasers. E. The Shares consist of (i) ten (10) shares of common stock which constitute all of the issued shares of ACEC, par value One Hundred United States Dollars (U.S. $100) per share, and (ii) ten (10) shares of common stock which constitute all of the issued shares of ACPC, par value One Hundred United States Dollars (U.S. $100) per share, all of which Shares are validly issued, outstanding, fully paid and nonassessable. All of the Shares are owned by Seller and are free and clear of 12 17 all security interests, liens, charges, encumbrances or other evidence of indebtedness, and rights of others. There are no outstanding subscriptions, options, convertible securities, warrants, calls, rights or other agreements or commitments obligating the Companies to issue shares of its capital stock or other securities or obligating Seller to transfer any of the Shares, other than pursuant to this Agreement. F. The Companies have no subsidiaries and have no direct or indirect investment or interest in or control over any other corporation, partnership, joint venture or other business entity, except as relates to the Joint Operating Agreement or to equipment or facility sharing arrangements. G. Except for the flags under the HSR Act, this Agreement and the execution and delivery hereof by Seller do not, and the fulfillment and compliance with the terms and conditions hereof and the consummation of the transactions contemplated hereby will not, (i) conflict with any of, or require the consent of any person or entity under, the terms, conditions or provisions of the charter documents or bylaws or equivalent governing instruments of Seller or either of the Companies; (ii) violate any provision of, or require any consent, authorization or approval under, any United States law or administrative regulation or any United States judicial, administrative or arbitration order, award, judgment, writ, injunction or decree applicable to the Seller or either of the Companies; (iii) violate the provisions of, result in a breach of, constitute a default under (whether with notice or the lapse of time or both), or accelerate or permit the acceleration of the performance required by, or require any consent, authorization or approval under, any indenture, mortgage or lien, or, any agreement, contract, commitment or instrument to which Seller or either of the Companies is a party or by which any of them is bound or to which any property of Seller or either of the Companies is subject; or (iv) result in the creation of any lien, charge or encumbrance on the assets of either of the Companies under any such indenture, mortgage, lien, lease, agreement or instrument. Furthermore, to the best of Seller's knowledge, this Agreement and the execution and delivery hereof by Seller do not violate any provision of or require any consent, authorization or approval under any Congolese law or administrative regulation or any judicial, administrative or arbitration order, award, judgment, writ, injunction or decree applicable to the Seller or either of the Companies. H. Except as set forth in Schedule E, and except for those violations which could not reasonably be expected materially and adversely to affect the businesses, operations, affairs, prospects, properties, assets, profits or condition (financial or otherwise) of the Companies, taken as a whole, the Companies are not in violation of or in default under any United States law or regulation, or under any order of any United States court or governmental department, commission, board, bureau, agency or instrumentality applicable to them and are not knowingly in violation 13 18 of or in default under any Congolese law or regulation, or under any order of any Congolese court or governmental department, commission, board, bureau, agency or instrumentality applicable to them. I. Except as set forth in Schedule E, and except for such lack of compliance, violations or liabilities that could not reasonably be expected materially and adversely to affect the businesses, operations, affairs, prospects, properties, assets, profits or condition (financial or otherwise) of the Companies, taken as a whole, the Companies have conducted and are conducting their businesses in compliance with, and are in compliance with the requirements, standards, criteria and conditions set forth in applicable United States federal, state and local statutes, ordinances, permits, permit applications, licenses, orders, approvals, variances, rules and regulations applicable to them and have to the best of Seller's knowledge conducted and are conducting their businesses in compliance with, and are in compliance with the requirements, standards, criteria and conditions set forth in applicable Congolese federal, state and local statutes, ordinances, permits, permit applications, licenses, orders, approvals, variances, rules and regulations applicable to them. J. Except to the extent set forth in Schedule E, there are no claims, fines, actions, suits, demands, investigations or proceedings pending or, to the best knowledge of Seller, threatened against or affecting either of the Companies, at law or in equity, or before or by any governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over the Companies. K. Except as set forth in Schedule E, neither of the Companies is in default under, and no condition exists that with notice or lapse of time or both could constitute a default under, (i) any mortgage, loan agreement, indenture, evidence of indebtedness or other instrument evidencing borrowed money to which it or any of its properties are bound, (ii) any judgment, order or injunction of any United States court, arbitrator or governmental agency, or (iii) any other agreement, except for such defaults and conditions that, individually or in the aggregate, are insignificant to the business, financial condition or results of operations of the Companies. Furthermore, to the best of Seller's knowledge, neither of the Companies is in default under, and no condition exists that with notice or lapse of time or both could constitute a default under any judgment, order or injunction of any Congolese Court, arbitrator or governmental agency. L. Attached as Schedule F are copies of each Company's unaudited balance sheet (the "Balance Sheet") as at December 1, 1993 (the "Balance Sheet Date") and the statement of income, cash flows and shareholders' equity for the nine months ending September 30, 1993 (collectively, the "Financial Statements"). The Financial Statements have been prepared in accordance with generally accepted accounting principles consistently applied except as noted therein and except for 14 19 normal year-end adjustments, and (except with regard to insurance and abandonment and removal obligations) fairly present in all material respects the financial position of each of the Companies as of the respective dates set forth therein and the results of operations and cash flows for the Companies for the respective fiscal periods set forth therein. M. Except on account of matters that generally affect the economy or the oil and gas industry, since the Balance Sheet Date there have been no material adverse changes in (i) the assets, liabilities or financial condition of the Companies, taken as a whole, from that set forth in the Financial Statements or (ii) the business or financial condition of the Companies, taken as a whole, other than, with respect to clauses (i) and (ii) hereof, changes in the ordinary course of business or as permitted in Article 15. The Companies own, free and clear of any security interest, lien or encumbrance, their Participating Interest Share in the JOA and all property owned jointly by the parties to the JOA. N. Except as set forth on Schedule E or as otherwise set forth on the Balance Sheet or reflected in the notes thereto, and except with regard to abandonment and removal obligations or liabilities related to national payroll employees, neither of the Companies has any obligation or liability material to the Companies, taken as a whole (whether accrued, absolute, contingent, unliquidated or otherwise, whether due or to become due), other than contractual liabilities incurred in the ordinary course of business which are not required to be disclosed on the Financial Statements and other than liabilities which have arisen after the Balance Sheet Date in the ordinary course of business, consistent with past practices, or as permitted in Article 15. O. Except as set forth on Schedule G, all wells drilled by the Companies in Marine I have been plugged and abandoned. P. Except as set forth on Schedule H and as may be required by Congolese law regarding employees, neither of the Companies are bound by or subject to (i) any agreement that contains any severance pay obligations, (ii) any employment agreements or consulting contracts, (iii) any agreement of surety or guaranty, (vi) any agreement, contract or commitment relating to the acquisition or disposition of the assets of, or any interest in, any business enterprise, (vii) any indenture, mortgage, pledge, credit or other financing commitment or agreement for the borrowing of funds from any person for which either Company has or will have any liability to any person, or (viii) any joint operating or other similar agreements. Q. All of the documents required to be set forth under Article 9.P above are in full force and effect and constitute the legal, valid, binding and enforceable obligations of the parties thereto. 15 20 R. The Companies have paid all corporate income Taxes, as they have become due and payable, including penalties, interest, and related charges, and have filed all returns for such Taxes as they have become due, it being acknowledged and agreed, however, that Seller makes no representation or warranty concerning the ability of the Companies to carry forward any Tax losses or deductions. S. Except as provided in Schedule E, the Companies' interest in the Convention and in the JOA and to all personalty of any kind or nature owned by it is free and clear of all liens, encumbrances or claims whatsoever, except for such liens, encumbrances, claims or easements on personalty as do not materially detract from or interfere with the value, or present or reasonably foreseeable use in its business of the properties subject thereto. T. Except with regard to the Hydro-Congo advance account under the JOA, each of the Companies' receivables can be collected in the amounts shown on Schedule F in the usual and ordinary course of business without resort to legal proceedings. U. The historical production figures, revenue and expense figures, and the advance account figures related to the interest in Marine I of Societe Nationale de Recherches et d'Exploitation (Hydro-Congo) provided by Seller or caused to be provided by the Companies are accurate and complete in all material respects. Except for such representation, and as otherwise expressly warranted herein, Seller makes no representations or warranties, express or implied, regarding the completeness, quality or accuracy of the data and information or any manuals or plans provided to Purchasers. Without limiting the generality of the foregoing, Seller makes no representations or warranties whatsoever, express, implied or statutory, with respect to any report regarding reserves of petroleum that may have been provided Purchasers or which, subsequent to this Agreement, comes into Purchasers' possession, in connection with the transactions contemplated hereby or the completeness or accuracy of any such report or the validity of assumptions made with respect thereto. Furthermore, Seller makes no representations or warranties concerning the condition or operation of any fields under the Convention. V. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED HEREIN, SELLER SPECIFICALLY DISCLAIMS ANY WARRANTY OF MERCHANTABILITY OR WARRANTY OF FITNESS FOR A SPECIFIC PURPOSE WITH REGARD TO ANY INTEREST OF THE COMPANIES IN WELLS, PLATFORMS, THE CONKOUATI, EQUIPMENT, MATERIALS OR SUPPLIES. Except as made in this Agreement, Seller hereby disclaims all liability and responsibility for any statement or information made or communicated (orally or in writing) to Purchasers or to an Affiliate thereof including, but not limited to any opinion, information or advice which may have been provided to 16 21 Purchasers by any officer, stockholder, director, employee, agent, consultant or representative of Seller or the Companies, or by any petroleum engineer or engineering firm, or any other agent, consultant or representative. Without limiting the generality of the foregoing, except as and to the extent set forth in this Article 9, Seller makes no representations or warranties whatsoever, express, implied or statutory, in connection with the transactions contemplated by this Agreement and/or the matters set forth herein. Provided that, the Seller shall use all reasonable efforts to ensure that the representations and warranties referred to in the Article 9 are true and accurate on the Closing Date; but if, notwithstanding such efforts, any matter or thing occurs which would be materially inconsistent with any of such representations and warranties on the Closing Date, the Seller shall promptly notify the Purchasers thereof. 10. Representations and Warranties of Purchasers A. Walter represents and warrants to Seller the following: (1) Walter is duly organized, validly existing and in good standing under the laws of the State of Texas and has the corporate power and authority to carry on its business as now conducted. (2) Walter has the corporate power and authority to enter into and perform this Agreement and all other documents and actions required of Walter hereunder. All corporate proceedings necessary for Walter's execution and performance of this Agreement and of all documents and actions required of Walter hereunder have been taken; and this Agreement constitutes, and such documents upon their execution by duly authorized officers of Walter will constitute, the valid and binding obligations of Walter enforceable in accordance with the terms hereof, except as may be limited by applicable bankruptcy, insolvency, and moratorium and other laws affecting the enforcement of creditors' rights in general and by general principles of equity (whether applied in a proceeding at law or in equity); provided, however, that the inclusion of the foregoing exception shall not be construed to waive, impair, diminish or reduce, or to expand or create, any right, power, privilege or benefit of Walter hereunder, and, in particular, but not by way of limitation, shall not impair any right of Walter to contest the propriety of any bankruptcy, insolvency, moratorium, equitable or other proceeding. No other act, approval, or proceeding on the part of Walter or the holders of any class of its equity or debt securities or any other person or entity is required to authorize the execution, delivery and performance of this Agreement by Walter. 17 22 (3) Walter is purchasing the Shares for its own account for investment purposes and not with a view to, or for sale in connection with, any distribution thereof. Walter undertakes that the Shares shall not be sold, transferred, offered for sale, pledged, hypothecated or otherwise disposed of in violation of any applicable securities laws or regulations. (4) Walter hereby acknowledges and affirms that it has made its own independent investigation, analysis and evaluation of the Companies and their properties, assets (including its own estimate and appraisal of the extent and value of petroleum reserves), business, financial condition, operations and prospects and have the capacity to evaluate the merits and risks of the acquisition of the Shares. (5) To the best of Walter's knowledge and belief, the making and performance of this Agreement by Walter will not violate any provisions of any laws, rules, regulations, decrees, orders or judgments or any provision of Walter's certificate of incorporation or by-laws and will not result in the breach or violation of, or constitute a default under, any contractual agreement of Walter or require any consent under Walter's certificate of incorporation or by-laws or any law or regulation to which Walter or any of its Affiliates is subject, or any provision of any material indenture, mortgage, lien, lease agreement, instrument, order, arbitration award, judgment or decree to which Walter, or any of its Affiliates is a party or by which Walter or any of its Affiliates or any other respective assets or properties are bound. (6) Walter acknowledges that Seller and the Companies and their respective directors, employees, representatives and agents, disclaim any representations or warranties concerning the profitability of the Companies, the markets for the Companies products or, except as otherwise expressly provided herein, the capabilities and condition of the Companies or the wells or other facilities in which they hold an interest, and any representations or warranties other than those expressly set forth in this Agreement. B. Walter Holdings represents and warrants to Seller the following: (1) Walter Holdings is duly organized, validly existing and in good standing under the laws of the State of Texas and has the corporate power and authority to carry on its business as now conducted. (2) Walter Holdings has the corporate power and authority to enter into and perform this Agreement and all other documents and actions required of Walter Holdings hereunder. All corporate proceedings necessary for 18 23 Walter Holdings's execution and performance of this Agreement and of all documents and actions required of Walter Holdings hereunder have been taken; and this Agreement constitutes, and such documents upon their execution by duly authorized officers of Walter Holdings will constitute, the valid and binding obligations of Walter Holdings enforceable in accordance with the terms hereof, except as may be limited by applicable bankruptcy, insolvency, and moratorium and other laws affecting the enforcement of creditors' rights in general and by general principles of equity (whether applied in a proceeding at law or in equity); provided, however, that the inclusion of the foregoing exception shall not be construed to waive, impair, diminish or reduce, or to expand or create, any right, power, privilege or benefit of Walter Holdings hereunder, and, in particular, but not by way of limitation, shall not impair any right of Walter Holdings to contest the propriety of any bankruptcy, insolvency, moratorium, equitable or other proceeding. No other act, approval, or proceeding on the part of Walter Holdings or the holders of any class of its equity or debt securities or any other person or entity is required to authorize the execution, delivery and performance of this Agreement by Walter Holdings. (3) Walter Holdings is purchasing the Shares for its own account for investment purposes and not with a view to, or for sale in connection with, any distribution thereof. Walter Holdings undertakes that the Shares shall not be sold, transferred, offered for sale, pledged, hypothecated or otherwise disposed of in violation of any applicable securities laws or regulations. (4) Walter Holdings hereby acknowledges and affirms that it has made its own independent investigation, analysis and evaluation of the Companies and their properties, assets (including its own estimate and appraisal of the extent and value of petroleum reserves), business, financial condition, operations and prospects and have the capacity to evaluate the merits and risks of the acquisition of the Shares. (5) To the best of Walter Holdings's knowledge and belief, the making and performance of this Agreement by Walter Holdings will not violate any provisions of any laws, rules, regulations, decrees, orders or judgments or any provision of Walter Holdings's certificate of incorporation or by-laws and will not result in the breach or violation of, or constitute a default under, any contractual agreement of Walter Holdings or require any consent under Walter Holdings's certificate of incorporation or by-laws or any law or regulation to which Walter Holdings or any of its Affiliates is subject, or any provision of any material indenture, mortgage, lien, lease agreement, instrument, order, arbitration award, judgment or decree to 19 24 which Walter Holdings, or any of its Affiliates is a party or by which Walter Holdings or any of its Affiliates or any other respective assets or properties are bound. (6) Walter Holdings acknowledges that Seller and the Companies and their respective directors, employees, representatives and agents, disclaim any representations or warranties concerning the profitability of the Companies, the markets for the Companies products or, except as otherwise expressly provided herein, the capabilities and condition of the Companies or the wells or other facilities in which they hold an interest, and any representations or warranties other than those expressly set forth in this Agreement. C. Nuevo represents and warrants to Seller the following: (1) Nuevo is duly organized, validly existing and in good standing under the laws of the State of Texas and has the corporate power and authority to carry on its business as now conducted. (2) Nuevo has the corporate power and authority to enter into and perform this Agreement and all other documents and actions required of Nuevo hereunder. All corporate proceedings necessary for Nuevo's execution and performance of this Agreement and of all documents and actions required of Nuevo hereunder have been taken; and this Agreement constitutes, and such documents upon their execution by duly authorized officers of Nuevo will constitute, the valid and binding obligations of Nuevo enforceable in accordance with the terms hereof, except as may be limited by applicable bankruptcy, insolvency, and moratorium and other laws affecting the enforcement of creditors' rights in general and by general principles of equity (whether applied in a proceeding at law or in equity); provided, however, that the inclusion of the foregoing exception shall not be construed to waive, impair, diminish or reduce, or to expand or create, any right, power, privilege or benefit of Nuevo hereunder, and, in particular, but not by way of limitation, shall not impair any right of Nuevo to contest the propriety of any bankruptcy, insolvency, moratorium, equitable or other proceeding. No other act, approval, or proceeding on the part of Nuevo or the holders of any class of its equity or debt securities or any other person or entity is required to authorize the execution, delivery and performance of this Agreement by Nuevo. (3) Nuevo is purchasing the Shares for its own account for investment purposes and not with a view to, or for sale in connection with, any distribution thereof. Nuevo undertakes that the Shares shall not be sold, 20 25 transferred, offered for sale, pledged, hypothecated or otherwise disposed of in violation of any applicable securities laws or regulations. (4) Nuevo hereby acknowledges and affirms that it has made its own independent investigation, analysis and evaluation of the Companies and their properties, assets (including its own estimate and appraisal of the extent and value of petroleum reserves), business, financial condition, operations and prospects and have the capacity to evaluate the merits and risks of the acquisition of the Shares. (5) To the best of Nuevo's knowledge and belief, the making and performance of this Agreement by Nuevo will not violate any provisions of any laws, rules, regulations, decrees, orders or judgments or any provision of Nuevo's certificate of incorporation or by-laws and will not result in the breach or violation of, or constitute a default under, any contractual agreement of Nuevo or require any consent under Nuevo's certificate of incorporation or by-laws or any law or regulation to which Nuevo or any of its Affiliates is subject, or any provision of any material indenture, mortgage, lien, lease agreement, instrument, order, arbitration award, judgment or decree to which Nuevo, or any of its Affiliates is a party or by which Nuevo or any of its Affiliates or any other respective assets or properties are bound. (6) Nuevo acknowledges that Seller and the Companies and their respective directors, employees, representatives and agents, disclaim any representations or warranties concerning the profitability of the Companies, the markets for the Companies products or, except as otherwise expressly provided herein, the capabilities and condition of the Companies or the wells or other facilities in which they hold an interest, and any representations or warranties other than those expressly set forth in this Agreement. D. Nuevo Holdings represents and warrants to Seller the following: (1) Nuevo Holdings is duly organized, validly existing and in good standing under the laws of the State of Texas and has the corporate power and authority to carry on its business as now conducted. (2) Nuevo Holdings has the corporate power and authority to enter into and perform this Agreement and all other documents and actions required of Nuevo Holdings hereunder. All corporate proceedings necessary for Nuevo Holdings's execution and performance of this Agreement and of all documents and actions required of Nuevo Holdings hereunder have been taken; and this Agreement constitutes, and such documents upon their 21 26 execution by duly authorized officers of Nuevo Holdings will constitute, the valid and binding obligations of Nuevo Holdings enforceable in accordance with the terms hereof, except as may be limited by applicable bankruptcy, insolvency, and moratorium and other laws affecting the enforcement of creditors' rights in general and by general principles of equity (whether applied in a proceeding at law or in equity); provided, however, that the inclusion of the foregoing exception shall not be construed to waive, impair, diminish or reduce, or to expand or create, any right, power, privilege or benefit of Nuevo Holdings hereunder, and, in particular, but not by way of limitation, shall not impair any right of Nuevo Holdings to contest the propriety of any bankruptcy, insolvency, moratorium, equitable or other proceeding. No other act, approval, or proceeding on the part of Nuevo Holdings or the holders of any class of its equity or debt securities or any other person or entity is required to authorize the execution, delivery and performance of this Agreement by Nuevo Holdings. (3) Nuevo Holdings is purchasing the Shares for its own account for investment purposes and not with a view to, or for sale in connection with, any distribution thereof. Nuevo Holdings undertakes that the Shares shall not be sold, transferred, offered for sale, pledged, hypothecated or otherwise disposed of in violation of any applicable securities laws or regulations. (4) Nuevo Holdings hereby acknowledges and affirms that it has made its own independent investigation, analysis and evaluation of the Companies and their properties, assets (including its own estimate and appraisal of the extent and value of petroleum reserves), business, financial condition, operations and prospects and have the capacity to evaluate the merits and risks of the acquisition of the Shares. (5) To the best of Nuevo Holdings's knowledge and belief, the making and performance of this Agreement by Nuevo Holdings will not violate any provisions of any laws, rules, regulations, decrees, orders or judgments or any provision of Nuevo Holdings's certificate of incorporation or by-laws and will not result in the breach or violation of, or constitute a default under, any contractual agreement of Nuevo Holdings or require any consent under Nuevo Holdings's certificate of incorporation or by-laws or any law or regulation to which Nuevo Holdings or any of its Affiliates is subject, or any provision of any material indenture, mortgage, lien, lease agreement, instrument, order, arbitration award, judgment or decree to which Nuevo Holdings, or any of its Affiliates is a party or by which Nuevo Holdings or any of its Affiliates or any other respective assets or properties are bound. 22 27 (6) Nuevo Holdings acknowledges that Seller and the Companies and their respective directors, employees, representatives and agents, disclaim any representations or warranties concerning the profitability of the Companies, the markets for the Companies products or, except as otherwise expressly provided herein, the capabilities and condition of the Companies or the wells or other facilities in which they hold an interest, and any representations or warranties other than those expressly set forth in this Agreement. E. Purchasers jointly represent and warrant that they have received a commitment for political risk insurance and for financial guarantees for third party financing from OPIC in a form acceptable to Purchasers. 11. Additional Agreements, Covenants, Rights and Obligations A. Purchasers and Seller shall cooperate and use their best efforts to secure any approvals or consents which may be legally or contractually required from the Government of Congo, the Government of the United States or other governmental authorities, or any other entity for the transactions contemplated by this Agreement. Purchasers and Seller shall keep each other advised on a timely basis of the steps proposed to be taken to obtain such approvals and consents and the results thereof. B. Purchasers and Seller shall issue such notices to third parties as may be required by law, regulations, rules, decrees or orders to inform them of the sale and purchase of the Companies. C. The Parties have determined that the preferential rights provided under the JOA will not be triggered by the transaction contemplated by this Agreement and that therefore the notices in regard to such rights should not be given to the JOA Partners. Any assertion by a JOA Partner of such a preferential right shall not be considered a breach of any warranty given by Seller. D. Purchasers and Guarantors further covenant and represent: (1) Purchasers were each formed solely for the purpose of enabling Purchasers to acquire the Shares. (2) Prior to the Closing, Purchasers conducted no business, had no income, had no operating assets, had substantially no liabilities, and conducted no activities that were not related to the acquisition of the Shares. (3) Purchasers have furnished to Seller correct and complete written commitments from OPIC committing to provide Walter and Nuevo only 23 28 with such financing as is necessary to consummate the purchase of the Shares. (4) To accomplish the acquisition of the Shares, Walter will merge with and into ACEC, and Nuevo will merge with and into ACPC, on the terms and conditions contained in that certain Agreement of Merger in the form attached hereto as Schedule M (the "Merger"), pursuant to which the Companies shall be the surviving entities, and the separate existences of Walter and Nuevo will cease upon completion of the Merger. This Agreement shall be implemented by means of reverse subsidiary mergers consistent with Schedule M, without affecting any of the rights, remedies or obligations of any of the parties hereto. (5) Prior to the Closing, no Shares are or will be owned either actually or constructively within the meaning of section 318(a) of the Code by Guarantors or a member of an affiliated group (within the meaning of section 338(h)(5) of the Code) of which Guarantors are members. (6) There is no plan or intention to liquidate Guarantors. 12. Breach of Representations or Warranties The liability of the Seller for the breach of any of the representations and warranties of the Seller set forth herein shall survive the Closing, but shall be limited to claims for which any of the Purchasers delivers written notice to the Seller on or before the second anniversary date of the date of Closing. The liability of the Purchasers for the breach of any of the respective representations and warranties of the Purchasers set forth herein shall survive the Closing, but shall be limited to claims for which Seller shall deliver written notice to the appropriate Purchaser on or before the second anniversary date of the date of Closing. The foregoing is not intended to in any way limit the obligation of the Guarantors under Article 30, except with regard to liability for Purchasers' breach of any of the representations and warranties. 13. Conditions Precedent for Closing by Seller The obligations of Seller to proceed with the Closing are subject to the completion on or prior to the date of Closing, to the satisfaction of Seller, of all of the following conditions precedent, any one or more of which may be waived in whole or in part by Seller: A. Seller shall have received a resolution of the Board of Directors of each of the Purchasers, certified by the Secretary or Assistant Secretary of such Purchaser, authorizing Purchaser's execution, delivery and performance of this Agreement. 24 29 B. Purchasers shall have complied in all material respects with each of their covenants and agreements contained herein and all of the representations and warranties of Purchasers stated in Article 10 shall be true and correct in all material respects on the date hereof and the date of Closing. C. Seller shall have received a certificate, dated as of the date of Closing, of an executive officer of each of Purchaser certifying as to the matters specified in Article 13.B above. D. On the date of Closing no action or proceeding by or before any court or other governmental body shall have been threatened in writing or instituted by or on behalf of any third party (expressly excluding any party hereto, any Affiliate of such party, and any director, officer, employee or representative of such party or Affiliate) to restrain or prohibit the transactions contemplated by this Agreement. E. All necessary filings with and consents of any United States governmental authority or agency required for the consummation of the transactions contemplated in this Agreement shall have been made and obtained, and all waiting periods with respect to filings made with United States governmental authorities in contemplation of the consummation of the transactions described herein shall have expired or been terminated. In addition, Seller shall have received from the Government of the Congo such consents as may be required by law or contract (if any) with the Government to the transactions contemplated by this Agreement. F. Seller shall have received from the Government such releases as Seller may require. G. Purchasers, Sellers and Companies shall have entered into a closing agreement pursuant to Section 1.1503-2(g)(2)(iv)(B)(2) of the Treasury Regulations with the U.S. Internal Revenue Service, as more fully described in Article 22 and Schedule D. H. On the date of Closing, Purchasers shall make an election under section 338(g) of the Code with respect to the Companies, and Purchasers and Seller shall make a timely and effective election under section 338(h)(10) of the Code with respect to Purchasers' purchase of the Shares. I. At Closing, Purchasers, Guarantors, Seller, the Companies, and Amoco Corporation shall execute the Tax Agreement in the form attached hereto as Schedule D and incorporated herein. 25 30 J. Seller shall have received assurances from the Government, in form and substance acceptable to Seller in its sole discretion, that, as of the date of Closing, the income tax laws of the Republic of the Congo, as applicable to the Companies: (1) Do not permit a Company to use its losses, expenses or deductions to offset the income of any other person that is recognized in the same taxable year in which the losses, expenses, or deductions are incurred, and (2) Do not permit the losses, expenses or deductions of a Company to be carried over or back to be used, by any means, to offset the income of any other person in other taxable years. K. Seller and OPIC shall have entered into the Option Agreement in the form and substance attached hereto as Schedule L and incorporated herein. 14. Conditions Precedent for Closing by Purchasers The obligations of Purchasers to proceed with the Closing are subject to the completion on or prior to the date of Closing to the satisfaction of Purchasers of all of the following conditions precedent, any one or more of which may be waived in whole or in part by Purchasers: A. Purchasers shall have received a resolution of the Board of Directors of Seller, certified by the Secretary or Assistant Secretary of Seller authorizing Seller's execution, delivery and performance of this Agreement. B. The Seller shall have complied in all material respects with each of its covenants and agreements contained herein and all the representations and warranties of Seller stated in Article 9 shall be true and correct in all material respects on the date hereof and the date of Closing. C. Purchasers shall have received a certificate, dated the Effective Date, of an executive officer of Seller certifying as to the matters specified in Article 14.B above. D. On the date of Closing no action or proceeding by or before any court or other governmental body shall have been threatened in writing or instituted by or on behalf of any third party (expressly excluding any party hereto, any Affiliate of such party, and any director, officer, employee or representative of such party or Affiliate) to restrain or prohibit the transactions contemplated by this Agreement. E. All necessary filings with and consents of any United States governmental authority or agency required for the consummation of the transactions contemplated in this Agreement shall have been made and obtained, and all 26 31 waiting periods with respect to filings made with United States governmental authorities in contemplation of the consummation of the transactions described herein shall have expired or been terminated. F. OPIC shall have obtained an agreement of cooperation with the Government that includes the following: (1) The Government grants approval of OPIC's financing of the acquisition of the purchase of the Shares and the further development of the Yombo Permit. (2) The Government agrees not to impose any tax, tariff, duty, levy or similar charge on the payment of principal, interest or other fees due in connection with the OPIC guaranteed loans. (3) The Government recognizes the transfer of the Shares and agrees that such transfer and any change of name shall in no way affect the validity or status of the Companies' registration, permits, properties, assets, operations, and/or financial and tax accounts and does not result in any tax or other fees payable to the Government. (4) The Government consents to the conditional assignment to OPIC of the Shares. (5) The Government agrees that in the event OPIC proceeds against the collateral under its loan, OPIC shall enjoy all the rights and benefits of the Companies under the Yombo Permit and that the Government shall communicate, cooperate and otherwise deal with OPIC as it would have dealt but for the assignment of the shares of the Companies. (6) The Government agrees that in the event of any asserted post-closing default under the Yombo Permit which would give the Government the possible right to terminate, the Government agrees to give OPIC the right to cure. (7) The Government agrees to confirm that immediately following the transfer of the Companies' shares from Seller to Purchasers: (a) The Companies and/or their Congo branches are validly registered and in good standing. (b) The Yombo Permit is in good standing and in full force and effect. 27 32 (8) The Government agrees that the representations, warranties, covenants and confirmations are for the benefit of the Purchasers, the Companies and the Seller, as well as for the benefit of OPIC. G. Seller shall have entered into a subordination agreement with OPIC in form and substance acceptable to OPIC and Seller. H. Purchasers shall have obtained from the Overseas Private Investment Corporation ("OPIC") the political risk insurance and the financial guarantees for third party financing referenced in the commitment issued by OPIC to Purchasers on June 27, 1994. I. The royalty issue as addressed in Schedule E and the ability of the Companies to maintain accounting records in United States dollars rather than CFAs shall have been resolved to the satisfaction of Purchasers as well as Seller. 15. Actions of the Companies Prior to Closing A. Until the Closing, unless Purchasers otherwise consent and except as otherwise provided in this Agreement, Seller shall cause each Company: (1) not to create, permit or suffer the creation of any liens, security interests or other encumbrances on any of its real or personal property, except in connection with transactions in the ordinary course of business; (2) not to purchase, redeem or otherwise acquire any of its capital stock, issue any additional capital stock or reclassify its capital stock, or change any of the privileges or limitations of its capital, stock or, except as otherwise provided in this Agreement, amend its certificate of incorporation or bylaws; (3) not to make any capital or major expenditures or investments, or incur any obligations for capital or major expenditures or enter into any leases for personal or real property, in excess of fifty thousand U.S. Dollars ($50,000) per transaction without the prior approval of Purchasers; (4) except as to the production and sale of crude oil and except as provided in Article 6.A., not to sell, lease, transfer or otherwise dispose of any substantial part or amount of its assets, other than in the ordinary course of business, or discontinue or liquidate or dispose of any substantial part of its operations or business without consulting with Purchasers; for the purpose of this Article 15, "substantial" shall mean having an individual replacement value of greater than five thousand United States Dollars ($5,000); 28 33 (5) not to merge or consolidate with or into any other firm or corporation or purchase or otherwise acquire any substantial part or amount of the capital stock or assets of any other firm or corporation; (6) to carry on its business in a manner consistent with prior practice in the usual and ordinary course, including the purchase of warehouse inventory, and to use its best efforts to preserve its business organization intact and to conserve the good will and relationships of its employees, customers, suppliers and others having business relations with it; (7) to maintain its corporate existence and good standing in its jurisdiction of incorporation; (8) from the date hereof and to the extent that it does not interfere unreasonably with normal business operations, on reasonable notice, to afford Purchasers, their advisers and representatives, full access at Purchasers' sole risk and expense during normal business hours throughout the period prior to the date of Closing to all of Companies' employees, plants, offices, properties and records, including such access as may be necessary to allow Purchasers at their expense to make an audit or otherwise satisfy itself of the accuracy of the representations contained in this Agreement and that the conditions contained in this Agreement have been complied with, and to furnish documents and all such other information concerning its properties and business as Purchasers may reasonably request; provided, however, that, Seller and Purchasers shall use their best efforts take whatever actions are reasonable to reconcile discrepancies in the representations and warranties contained in this Agreement discovered by Purchasers prior to the date of Closing. (9) other than in the ordinary course of business, not to enter into any contract or agreement that Seller is required to disclose under Article 9.P., or to terminate or amend in any material respect, or be in default in any material respect under any contract or agreement that Seller is required to disclose under Article 9.P; (10) not to increase the indebtedness of, or incur any obligation or liability, direct or indirect, for, either of the Companies other than the incurrence of liabilities in the ordinary course of business consistent with past practices; provided, however, that in no event will either Company incur any obligation or liability for funded indebtedness; (11) not to allow or permit the expiration, termination or cancellation at any time prior to the Closing of any existing insurance policies, unless it is replaced, with no loss of coverage, by a comparable insurance policy 29 34 issued by a comparably rated insurance company; provided, however, that at Closing such insurance policies will terminate, with the exception of those listed on Schedule I; (12) not to implement or adopt any change in their tax methods, principles or elections; or (13) to maintain its properties and facilities in materially the same working order and condition as at present, ordinary wear and tear excepted; B. The Companies shall close all bank accounts of the Companies effective as of Closing. C. For the avoidance of doubt, Seller shall not be in breach of this Article: (i) in circumstances in which the Seller or the Companies have acted with the consent of the Purchasers, or (ii) in circumstances where the Seller or the Companies have acted in an emergency to prevent danger to life or damage to property or to prevent or mitigate the effects of pollution. D. Post Effective Date casualty losses shall be borne by the Companies as post Effective Date liabilities. In the event of a casualty loss prior to Closing that exceeds $5,000,000.00, by notice to the Seller the Purchasers may terminate this Agreement and receive a release and refund of any security for the performance of Purchasers obligations to Seller. 16. Commissions A. Purchasers agree to be responsible for payment of any commissions, brokerage or finder's fees incurred by them or on their behalf in connection with the sale and purchase of the Shares. Purchasers agree to indemnify and save harmless Seller from and against any claims, losses or expenses arising from or in any way connected with agents, brokers, or finders acting or claiming to act for Purchasers in respect of the transactions contemplated by this Agreement. B. Seller agrees to be responsible for payment of any commissions, brokerage or finder's fees incurred by Seller or on its behalf in connection with the sale and purchase of the Shares. Seller agrees to indemnify and save harmless the Purchasers from and against any claims, losses or expenses arising from or in any way connected with agents, brokers, or finders acting or claiming to act for Seller in respect of the transactions contemplated by this Agreement. 30 35 17. Termination of Use of Trademarks From the date of Closing, Purchasers shall cause the Companies to discontinue the use of the name "Amoco" and the "Amoco Torch and Oval" trademark and to remove all signs or labels with such name or trademark. 18. Records and Access to Properties and Records by Seller and Affiliates The following records relating to the years prior to the date of Closing shall remain with the Companies in the Congo and Purchasers shall cause the Companies to maintain the same for the period specified by the laws of Congo, but in no event for less than fifteen (15) years after the Closing: - Accounting ("fiscal") documentation which involves payments to the Government (e.g., Tax payments, employee salary deductions for insurance, medical, etc.), and payments and/or receipts for third parties. - Customs related documentation concerning the importations or exportations of materials, all correspondence on Tax exoneration and all documentation referring to customs payment matters. - "Social issues" documentation concerning employee payroll, both national and expatriate, and all personnel files for national employees. Purchasers shall afford to the officers, attorneys, accountants and other authorized representatives of Seller at Seller's sole risk and expense, free and full access to such records and shall make them available to the Government upon request from Seller, provided that such examination shall be preceded by reasonable notice and carried out during regular business hours. 19. Indemnification by Seller A. Subject to Article 12, Seller agrees to indemnify and hold harmless Purchasers, their Affiliates and their respective directors, officers and employees from and against any and all lawsuits, losses, claims, damages, liabilities, out-of-pocket expenses and costs and penalties, if any, arising out of or based upon or with respect to any failure to perform any covenant, agreement or undertaking on the part of Seller contained in this Agreement, or any breach of Seller's representations or warranties stated herein. B. Seller agrees to indemnify and hold harmless Purchasers, their Affiliates and their respective directors, officers and employees from and against any and all lawsuits, 31 36 losses, claims, damages, liabilities, out-of-pocket expenses and arising out of or based upon (1) any suit, action, arbitration or other proceeding or governmental investigation which as of the Effective Date is pending against the Companies or as to which the Companies have received notice, or (2) the Bettis Litigation and any acts, omissions, events or circumstances that occurred prior to the Effective Date and as to which the Companies receive notice within two (2) years subsequent to the Effective Date, except for those liabilities specifically set out in Article 6 above, which Purchasers have expressly agreed that the Companies will retain, or that assumed in Article 20.C. below. 20. Indemnification by Purchasers A. Subject to Article 12, Purchasers agree to indemnify and hold harmless Seller, its Affiliates and their respective directors, officers and employees from and against any and all lawsuits, losses, claims, damages, liabilities, out-of-pocket expenses and costs and penalties, if any, arising out of or based upon or with respect to any failure to perform any covenant, agreement or undertaking on the part of Purchasers contained in this Agreement, or any breach of Purchasers' representations or warranties stated herein. B. Purchasers agree to indemnify and hold harmless Seller, their Affiliates and its respective directors, officers and employees from and against any and all lawsuits, losses, claims, damages, liabilities, out-of-pocket expenses and costs and penalties, if any, arising out of or based upon (1) any suit, action, arbitration or other proceeding or governmental investigation for which the Seller has not indemnified the Purchasers pursuant to Article 19, or (2) any acts, omissions, events or circumstances that Occur after the Effective Date. C. Purchasers agree to indemnify and hold harmless Seller and Amoco Corporation, their Affiliates and their respective directors, officers and employees from and against any and all liabilities, out of pocket expenses and costs occurring after the Effective Date arising out of or related to the litigation National Union Fire Insurance Company of Pittsburgh, Pa. vs The People's Republic of the Congo, CP No. 91 C 3172 in the U.S. District Court for the Northern District of Illinois. Furthermore, Purchasers agree to submit themselves to the jurisdiction of the U.S. 32 37 District Court for the Northern District of Illinois, including substituting themselves for Seller and Amoco Corporation and their Affiliates in the above mentioned litigation as Seller may direct. 21. Right to Defend A. Each indemnified party hereunder agrees that promptly upon its discovery of facts giving rise to a claim for indemnity hereunder (a "Claim"), it will give prompt notice thereof to the indemnifying party, together with a statement of such information respecting any of such facts as it may have and a formal demand for indemnification. The Indemnifying party shall not be obligated to indemnify the indemnified party with respect to any Claim if the indemnified party knowingly fails to notify the indemnifying party in sufficient time to permit the indemnifying party to defend against such matter and to make a timely response thereto. B. The indemnifying party shall be entitled at its cost and expense to contest and defend by all appropriate legal proceedings any Claim with respect to which they are called upon to indemnify the indemnified party; provided, that notice of the intention so to contest shall be delivered by the indemnifying party to indemnified party within 20 days after the date of receipt by the indemnifying party of notice by the indemnified party of the assertion of the Claim. Any such contest may be conducted in the name and on behalf of the indemnifying party or the indemnified party as may be appropriate. The indemnified party shall have the right but not the obligation to participate in such proceedings and to be represented by counsel of its own choosing at its sole cost and expense. C. If requested by the indemnifying party, the indemnified party agrees to cooperate with the indemnifying party and its counsel in contesting any Claim that the indemnifying party elects to contest or, if appropriate, in making any counterclaim against the person asserting the Claim, or any cross-complaint against any person, and the indemnifying party will reimburse the indemnified party for any expenses it incurs by so cooperating. The indemnified party agrees to afford the indemnifying party and its counsel the opportunity to be present at, and to participate in, conferences with all persons asserting any Claim against the indemnified party or conferences with representatives of or counsel for such persons. D. The indemnified party shall take no action which would prejudice the indemnifying party's defense of the matter giving rise to the Claim. 33 38 22. Taxation A. Tax Indemnification. Except as otherwise provided in the Tax Agreement attached hereto as Schedule D, Purchasers agree to indemnify and pay Seller or its Affiliates for Taxes, if any, attributable to the Companies in the following manner: (i) for the taxable periods which begin after the Effective Date, Purchasers shall indemnify Seller or its Affiliates for all Taxes, if any, attributable to the Companies for such periods, and (ii) for taxable periods which begin prior to the Effective Date but which end after the Effective Date (a "Straddle Taxable Period"), Purchasers shall indemnify Seller or its Affiliates for its allocable portion of the Taxes attributable to such period. Except as otherwise provided in the Tax Agreement attached hereto as Schedule D, Seller agrees to indemnify and pay Purchasers or their Affiliates for all Taxes, if any, attributable to the Companies in the following manner: (i) for taxable periods which end prior to the Effective Date, Seller agrees to indemnify Purchasers or their Affiliates for all Taxes attributable to such periods, and (ii) for a Straddle Taxable Period, Seller shall indemnify Purchasers and their Affiliates for its allocable portion of the Taxes attributable to such period. Taxes for a Straddle Taxable Period shall be apportioned between two short periods. Taxes attributable to the short period beginning on the opening date of the Straddle Taxable Period and ending at the close of the Effective Date shall be attributed to Seller, and Taxes attributable to the short period beginning on the first day after the Effective Date and ending on the last day of the Straddle Taxable Period shall be attributed to Purchasers and their Affiliates. Taxes shall be apportioned between the two short periods by prorating such Taxes on a daily basis for the Straddle Taxable Period. Purchasers agree to execute and file and/or cause the Companies to execute and file such reasonable consents, elections and other documents and to take such other actions as may be reasonably necessary or appropriate to file, and to enable Seller or its Affiliates to file, all Tax returns for periods ending on or prior to the Effective Date to the extent that such Tax returns include the Companies. Seller agrees to cooperate with Purchasers in the filing of all of the Tax returns for the Companies, the Purchasers, and their Affiliates and to execute and file such reasonable consents, elections and other documents and to take such other actions as may be reasonably necessary or appropriate to file such Tax returns. In addition, Purchasers agree to be responsible for the payment of duties, if any, which are payable or may become due on the sale of the Shares of the Companies by Seller to Purchasers and indemnify Seller against any such liability, except as provided in Article 22.G. B. Tax Refunds. Purchasers agree to pay to Seller, or cause the Companies to pay to Seller, any and all Tax refunds received by or credited to the Companies after the Effective Date attributable to periods of the Companies' corporate existence prior to the Effective Date, and to pay such Tax refunds to Seller within ten (10) 34 39 days after the Companies receives or is credited with such refunds. All other Tax refunds after the Effective Date shall be for the account of Purchasers. C. Rights to Contest Tax Claims Before the Payment of Tax. Seller and Purchasers each agree to notify the other promptly in the event that in respect of the Companies (i) an examination of any Tax return is commenced, (ii) a deficiency assessment or other claim is made or asserted by the United States Internal Revenue Service, the Congolese Taxing Authority or any other Taxing authority. In the event Seller is solely responsible for paying the Taxes described in this Article 22 or required to pay Purchasers the amount of such Taxes under any of the terms of this Agreement, Purchasers will permit Seller and will cause the Companies and/or its successor to permit Seller, at Seller's option and expense, to direct the Companies or Purchasers to take whatever actions are reasonably necessary in Seller's judgment to contest and defend any issues which may result in a claim for such Taxes prior to the payment of such Taxes and prior to the payment of the amount of such Taxes to Purchasers. In the event Purchasers and/or the Companies are responsible for paying Taxes described in this Article 22 or required to pay Seller the amount of such Taxes under any of the terms of this Agreement, Seller will permit Purchasers at Purchasers' option and expense, to direct Seller to take whatever actions are reasonably necessary in Purchasers' judgment to contest and defend any issues which may result in a claim for such Taxes prior to the payment of such Taxes and prior to the payment of the amount of such Taxes to Seller. In the event of a claim by any Taxing authority which will adversely affect both Seller, Purchasers and/or the Companies by the liability to pay Taxes and by payments under the terms of this Agreement or, if the liability under such claim cannot be readily ascertained, Seller and Purchasers agree to cooperate fully with each other, each bearing its own expenses, to take whatever action is necessary to contest and defend or to direct the Companies to contest and defend any issue which may result in a claim for Taxes or a payment under the terms of this Agreement prior to the payment of such Taxes and prior to the payment of the amount of such Taxes to Purchasers or Seller. D. Right to Litigate for Tax Refunds. If a Tax has been paid to any Taxing authority and, as a result of the payment of such Tax, either Seller or Purchasers incurs a Unity to make payment to the other because of the payment of such Tax, provisions similar to Article 22.B above shall apply to enable the party or parties bearing the burden of the Tax liability to cause the appropriate party to take whatever action is necessary to claim, pursue or litigate with respect to a refund of such Tax. If the entire burden of an increased Tax liability has been borne by Seller or by Purchasers, the right to litigate for or otherwise claim Tax refunds shall be assigned, to the extent it is legally permissible to do so, to the party bearing such economic burden. If any refunds or settlement amounts shall be delivered to the party who did not bear the burden of the Tax liability, such party shall assign such amounts to the party who bore the burden of the Tax liability. 35 40 In the event both Seller and Purchasers jointly bear the economic burden of the payment of any Tax described in this Article 22.D, Seller and Purchasers agree to cooperate fully with each other, each bearing its own expenses, to cause the appropriate party to litigate the claim for Tax refund and to share the proceeds of any refund or settlement in proportion to the economic burden previously borne. E. Tax Returns. Seller shall be responsible for the preparation and filing of all Tax Returns of the Companies for taxable periods ending on or before the Closing Date. Purchasers shall be responsible for the preparation and filing of all other Tax returns of the Companies for taxable periods ending after the Closing Date. Purchasers shall execute and file and/or cause the Companies to execute and file such reasonable consents, elections and other documents and to take such other actions as may be reasonably necessary or appropriate to file, and to enable Seller or its Affiliates to file any Tax returns for which the Seller is responsible. Seller shall execute and file and/or cause its Affiliates to execute and file such reasonable consents, elections, and other documents and to take such other actions as may be reasonably necessary or appropriate to file, and to enable Purchasers, the Companies, or their Affiliates to file any Tax returns for which the Purchasers are responsible. F. Payment. All Taxes shall be paid by the party which is legally responsible therefor. Upon payment of any Taxes with respect to which a party is entitled to receive indemnification hereunder, such party shall submit an invoice to the indemnifying party stating that such Taxes have been paid and providing in appropriate detail the particulars relating thereto. The indemnifying party shall remit payment for such Taxes promptly upon receipt of such invoice. G. Transfer Taxes. Seller will pay any United States sales, use, transfer, or documentary Taxes and recording and filing fees applicable to the transfer of the Shares to Purchasers at Closing. H. Election Under Section 338(h)(10). Purchasers shall make an election under section 338(g) of the Code with respect to the Companies. Purchasers and Seller shall make a timely and effective election under section 338(h)(10) of the Code with respect to Purchasers' purchase of the Shares. Purchasers and Seller shall cooperate fully with each other in the making of such election, and Seller's parent, Seller, Purchasers' parents, and Purchasers further agree that they will not take, or cause to be taken, any action in connection with the filing of any Return of the Companies or otherwise which would be inconsistent with or prejudice such elections. In particular, and not by way of limitation, Purchasers shall deliver to Seller all information to enable Seller to prepare Form 8023 and all attachments 36 41 required to be filed therewith (the "Form"), including the schedule of required data (as provided in Treasury Regulation Section 1.338-IT(e)(1) and any other schedules or data required to be attached to the Form. At Closing, the Form shall be duly executed by an authorized person for each Party, and duly and timely filed by the Seller on behalf of the Purchasers and the Seller (as prescribed by Treasury Regulation Section 1.338(h)10-1T). The allocation of purchase price among the assets of the Companies shall be made in accordance with section 338 of the Code and the Treasury Regulations promulgated thereunder and shall be mutually agreed to by the parties. I. Termination of Tax Sharing Agreement The Companies' obligations under any tax sharing or tax allocation agreement shall be extinguished as of the Closing Date and such agreement shall be null and void as to the Companies after the Closing Date. 23. Right of First Refusal Guarantors shall, prior to any sale, exchange, transfer, contribution, reorganization, distribution, actual or constructive liquidation, dissolution, lease, farmout, or other disposition of a Company or any of the Shares that would have the effect of causing a Company to cease being a member of its Consolidated Group or any of the assets of a Company or any Separate Unit thereof (other than sales of hydrocarbons or surplus materials or equipment in the ordinary course of business), notify Seller in writing of the terms and conditions of the proposed sale, exchange, transfer, contribution, disposition, reorganization, actual or constructive liquidation, dissolution, lease, farmout, or other disposition and Seller shall then have thirty (30) days to elect to purchase such Shares or assets on such notified terms. 24. Termination A. This Agreement may be terminated at any time: (1) prior to Closing by the written agreement of Seller and Purchasers; (2) prior to Closing by Seller or Purchasers, by notice thereof to the other, if the purchase and sale of the Shares contemplated hereby shall not have been consummated by September 15, 1994, or December 13, 1994, if this Agreement has been extended pursuant to Article 8, or such other date, if any, as Seller and Purchasers shall agree in writing, subject to the provisions of Article 5. In the event of the termination of this Agreement by either party as provided hereunder, none of the parties shall have any liability hereunder of any nature whatsoever to the 37 42 other, including any liability for damages; provided that if such termination shall result from the willful failure of one party to fulfill a condition to the performance of the other party hereto or to perform a covenant of this Agreement or from a willful misrepresentation by either party, such party shall be fully liable for any and all actual damages sustained or incurred by the other party, but shall not be liable for indirect, incidental or consequential damages, including without limitation, loss of profit or business interruption. 25. Survival The covenants and agreements set forth in this Agreement and in any certificate or instrument delivered in connection herewith shall, unless otherwise provided herein, survive the date of Closing. 26. Notices A. All notices shall be given in writing and shall be delivered (i) by hand to the party for which intended, (ii) by registered or certified mail, return receipt requested, postage prepaid, (iii) by telex, or (iv) by facsimile, all of which addressed to the party for which it is intended at the following respective addresses or such other address previously furnished in writing by either party: To Seller: Amoco Production Company 501 WestLake Park Boulevard Houston, Texas 77079 Telephone: (713) 366-2000 Facsimile: (713) 366-2139 Attention: Mr. Martin Zimmerman To Purchasers: Walter International Congo, Inc. and Walter Congo Holdings Company, Inc. c/o Walter International, Inc. 1021 Main Street, Suite 2110 Houston, Texas 77002-6502 Telephone: (713) 756-1100 Facsimile: (713) 756-1111 Attention: Mr. F. Fox Benton, Jr. The Nuevo Congo Company and The Congo Holdings Company c/o Torch Energy Advisors Incorporated 1221 Lamar, Suite 1600 Houston, Texas 77010-3039 Telephone: (713) 650-1246 38 43 Facsimile: (713) 756-1898 Attention: Mr. Roland Sledge To Guarantors: Walter International, Inc. 1021 Main Street, Suite 2110 Houston, Texas 77002-6502 Telephone: (713) 756-1100 Facsimile: (713) 756-1111 Attention: Mr. F. Fox Benton, Jr. Nuevo Energy Company 1221 Lamar, Suite 1600 Houston, Texas 77010-3039 Telephone: (713) 650-1246 Facsimile: (713) 756-1898 Attention: Mr. Roland Sledge B. The date of service of the notice shall be the date on which notice is received. 27. No Waiver No failure or delay by any party hereto in exercising any right, power, privilege or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power, privilege or remedy preclude the exercise of any other right, power, privilege or remedy. The rights and remedies herein provided are cumulative and not exclusive of any rights or remedies provided by law. No amendment, modification or waiver of, or consent with respect to, any provision of this Agreement shall in any event be effective unless the same shall be in writing. 28. Successors and Assigns This Agreement shall be binding upon and inure to the benefit of the parties and their respective permitted successors and assigns. No party to this Agreement shall assign its rights or obligations hereunder without the prior written consent of the other parties hereto. 39 44 29. Governing Law and Dispute Resolution A. This Agreement shall be governed by the laws of Illinois excluding any choice of law provisions which would require the application of the law of any other jurisdiction. B. Any action, dispute, claim or controversy of any kind now existing or hereafter arising between any of the parties hereto in any way arising out of, pertaining to or in connection with this Agreement (a "Dispute") shall be resolved by binding arbitration in accordance with the terms hereof. Any party may, by summary proceedings, bring an action in court to compel arbitration of any Dispute. C. Any arbitration shall be administered by the American Arbitration Association (the "AAA") in accordance with the terms of this Article 30, the Commercial Arbitration Rules of the AAA, and, to the maximum extent applicable, the Federal Arbitration Act. Judgment on any award rendered by an arbitrator may be entered in any court having jurisdiction. D. Any arbitration shall be conducted before one arbitrator. The arbitrator shall be a licensed practicing attorney who is knowledgeable in the subject matter of the Dispute selected by agreement between the parties hereto. If the parties cannot agree on an arbitrator within 30 days after the request for an arbitration, then any party may request the AAA to select an arbitrator. The arbitrator may engage engineers, accountants or other consultants that the arbitrator deems necessary to render a conclusion in the arbitration proceeding. E. To the maximum extent practicable, an arbitration proceeding hereunder shall be concluded within 180 days of the filing of the Dispute with the AAA. Arbitration proceedings shall be conducted in Houston, Texas. Arbitrators shall be empowered to impose sanctions and to take such other actions as the arbitrators deem necessary to the same extent a judge could impose sanctions or take such other actions pursuant to the Federal Rules of Civil Procedure and applicable law. At the conclusion of any arbitration proceeding, the arbitrator shall make specific written findings of fact and conclusions of law. The arbitrator shall have the power to award recovery of all costs and fees to the prevailing party. Each party agrees to keep all Disputes and arbitration proceedings strictly confidential except for disclosure of information required by applicable law. F. All fees of the arbitrator and any engineer, accountant or other consultant engaged by the arbitrator, shall be paid by Seller, on the one hand, and the Purchasers, on the other hand, equally unless otherwise awarded by the arbitrator. 40 45 30. Further Assurances and Guaranty A. Purchasers and Seller hereby agree to execute all such further instruments and documents, and to take all such other actions, as may be reasonable and appropriate to further effectuate the intent of this Agreement. B. The Guarantors, jointly and severally, unconditionally guarantee as if each of them were the primary obligor, the punctual payment and performance of the Purchasers' obligations under this Agreement, the Promissory Note and any other agreement between Purchasers and Seller required by this Agreement. 31. Headings References herein to Articles are to Articles of this Agreement. Article headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of the Agreement for any other purpose. 32. Severability of Provisions Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. 33. Execution in Counterparts This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. 34. Entire Agreement This Agreement, including the Schedules, represents the entire understanding of the parties, and supersedes and replaces the letter of intent, dated December 2, 1993, as amended, and all other prior agreements, contracts, arrangements and understandings between the parties concerning the subject matter hereof. There are no other terms, conditions, representations or warranties, express or implied, written or oral, except as set forth herein. No amendments, modifications or additions hereto shall be binding unless executed in writing by Purchasers and Seller. 41 46 35. Expenses Each party shall pay its own expenses, including consultants', counsels' and public accountants' fees and expenses incurred in any way in connection with this Agreement. 36. Confidentiality Except for any necessary advice to the Congolese government, OPIC, or Purchasers' financial institutions, and except as may be required by law or regulation, the Convention, JOA, or this Agreement, the parties agree to keep confidential this Agreement and the terms and provisions hereof and not to disclose them to any third party without the prior written consent of the parties hereto, provided that after the date of Closing the parties hereto jointly shall issue a public announcement of the sale and purchase of the Shares. 37. Restricted Transactions During the period beginning on the date hereof and ending on the earlier of the Closing or the termination of this Agreement, Seller will not initiate, or solicit any inquiries, offers or proposals by any person other than Purchasers (a "Third Party") with respect to, or participate in, any effort or attempt by any Third Party to do or seek, any transaction of the type contemplated by Article 15.A(4) and 15.A(5). The foregoing shall not apply to the Government or any designee thereof. 38. No Third Party Beneficiaries Nothing expressed or referred to in this Agreement, is intended to or shall be construed to give any person other than Seller, Purchasers or Guarantors any legal or equitable remedy or claim under or with respect to this Agreement. 39. Compliance with Agreement From and after the date of Closing, Purchasers agrees to cause each of the Companies to comply with and faithfully, perform all the terms and provisions of this Agreement applicable to it. 42 47 IN WITNESS WHEREOF, the parties have negotiated and duly executed this Agreement at June 30, 1994, on the day and year first written above. AMOCO PRODUCTION COMPANY By: /s/ Martin Zimmerman - ------------------------ Name: Martin Zimmerman Title: Vice President WALTER INTERNATIONAL CONGO, INC. By: /s/ J. C. Walter - ------------------------ Name: J. C. Walter Title: President THE NUEVO CONGO COMPANY By: /s/ Willard I. Boss - ------------------------ Name: Willard I. Boss Title: Vice President WALTER CONGO HOLDINGS, INC. By: /s/ J. C. Walter, Jr. - ------------------------ Name: J. C. Walter, Jr. Title: President THE CONGO HOLDINGS COMPANY By: /s/ Willard I. Boss - ------------------------ Name: Willard I. Boss Title: Vice President 43 48 WALTER INTERNATIONAL, INC. By: /s/ J. C. Walter, Jr. - ------------------------ Name: J. C. Walter, Jr. Title: President NUEVO ENERGY COMPANY By: /s/ Willard I. Boss - ------------------------ Name: Willard I. Boss Title: Vice President 44 EX-10.27 32 EXHIBIT 10.27 1 EXHIBIT 10.27 SWAP AGREEMENT THIS SWAP AGREEMENT (together with Schedules A, B, C, D and E the "Agreement") made and entered by and between NOMECO Oil & Gas Co., a Michigan corporation ("NOGC") and Louis Dreyfus Exchanges Ltd., a Delaware corporation ("LDEL"); RECITAL LDEL and NOGC have entered into a transaction pursuant to which payments will be made based on fixed and floating prices of natural gas. AGREEMENTS LDEL and NOGC agree as follows: ARTICLE I. DEFINITIONS For the purposes of this Agreement, the terms set forth below shall have the meanings indicated: 1.1 "BUSINESS DAY" shall mean a day on which commercial banks in New York are open for business. 1.2 "COMMODITY" shall mean natural gas. 1.3 "DEFAULTING PARTY" shall mean a Party with respect to which an Event of Default has occurred. 1.4 "DETERMINATION DAY" shall mean each Business Day during the period that commences on the Effective Date and ends on the date on which all of the obligations of LDEL and NOGC under this Agreement have been performed. 1.5 "DOLLARS" (and the symbol "$") shall mean dollars in the lawful currency of the United States of America. 1.6 "EARLY TERMINATION DATE" shall mean a date that is designated as such by a Party pursuant to Article V. 1.7 "EARLY TERMINATION EVENT" shall mean any event which permits the establishment of an Early Termination Date. 1.8 "EFFECTIVE DATE" shall mean May 8, 1992. 1.9 "EVENT OF DEFAULT" shall mean each of the events set forth in Section 5.1(c). 1.10 "EXPOSURE AMOUNT" shall be the amount computed pursuant to Schedule C. 2 3 1.11 "EXPOSED PARTY" shall be the Party which is described as the Exposed Party in Schedule C. 1.12 "FIXED AMOUNT" shall mean with respect to a Settlement Period the product, in Dollars, of the Quantity Per Settlement Period and the Fixed Price for that Settlement Period. 1.13 "FIXED PRICE" shall mean for the Settlement Period ending on: December 31, 2001 -- $2.82 December 31, 2002 -- $3.04 December 31, 2003 -- $3.28 December 31, 2004 -- $3.55 December 31, 2005 -- $3.83 December 31, 2006 -- $4.14 1.14 "FLOATING AMOUNT" shall mean with respect to a Settlement Period the product, in Dollars, of the Quantity Per Settlement Period and the Floating Price for that Settlement Period. 1.15 "FLOATING PRICE" shall mean for a Settlement Period the amount computed to two decimal places using the Floating Price Determinant. 1.16 "FLOATING PRICE DETERMINANT" shall mean the formulas, set of calculations, or indices designated in Schedule B to be used to calculate the Floating Price. 1.17 "GUARANTY" shall mean the guaranty substantially in the form of Schedule E duly executed and delivered by LDNG to NOGC. 1.18 "INDEMNIFIABLE TAX" shall mean a Tax that is imposed in respect of a payment made under this Agreement as a result of a present or former connection (and that would not be imposed but for that connection) between the jurisdiction of the government or taxing authority imposing that Tax and the person to whom that payment is made or a person related to that person including without limitation, a connection arising from that person's or that related person's being or having been (a) a citizen or resident of, (b) organized, present or engaged in a trade or business, or (c) having or having had a permanent establishment or fixed place of business in that jurisdiction; but excluding a connection arising solely from that recipient's having executed, delivered, enforced, or performed obligations or received a payment under this Agreement. 1.19 "LETTER OF CREDIT" shall mean irrevocable letter of credit in the form of Schedule D appropriately completed and with such changes in that form as the issuing bank may require. 1.20 "LOCAL BANKING DAY" shall mean a day on which commercial banks are open for business in the locality to which a notice or communication under this Agreement is addressed in accordance with this Agreement. 1.21 "LDNG" shall mean Louis Dreyfus Natural Gas Corp., a Delaware corporation. 1.22 "NOT EXPOSURE AMOUNT" shall mean the excess of the Exposure Amount over $2 million. 1.23 "NON-DEFAULTING PARTY" shall have the meaning set forth in Section 5.1(a). 3 4 1.24 "NON-EXPOSED PARTY" shall be the Party which is not the Exposed Party. 1.25 "OBLIGATED PARTY" shall mean for a Payment Date (i) LDEL if the Floating Price exceeds the Fixed Price and (ii) NOGC if the Fixed Price exceeds the Floating Price. 1.26 "PARTY" shall mean either LDEL or NOGC; and "PARTIES" shall mean LDEL and NOGC. 1.27 "PAYMENT DATE" shall mean for the Period End Date of: December 31, 2001 - January 3, 2002 December 31, 2002 - January 3, 2003 December 31, 2003 - January 2, 2004 December 31, 2004 - January 3, 2005 December 31, 2005 - January 3, 2006 December 31, 2006 - January 3, 2007 except that if the Floating Amount is not determinable on the Calendar Day immediately preceding the Payment Date, then the Payment Date shall be the Business Day immediately following the day on which LDEL notifies NOGC of the Floating Amount in accordance with Section 2.1. 1.28 "PERIOD END DATE" shall mean the December 31 in each of the years 2001 through 2006, both inclusive. 1.29 "PROCEEDINGS" shall mean any suit, action or proceedings between the Parties relating to this Agreement. 1.30 "QUANTITY PER SETTLEMENT PERIOD" shall mean 3,650,000 MMBtu's. 1.31 "RECEIVING PARTY" shall mean (i) NOGC if LDEL is the Obligated Party and (ii) LDEL if NOGC is the Obligated Party. 1.32 "SETTLEMENT PERIOD" shall mean each period that ends on a Period End Date, the first of which commences on January 1, 2001 and continues through the first Period End Date, and the remainder of each of which commences on the calendar day immediately following each Period End Date and continues to, and includes, the next following Period End Date. 1.33 "TAX" shall mean any existing or future tax, levy, impost, duty charge, assessment or fee of any nature (including interest, penalties and additions thereto) that is imposed by any government or other taxing authority in respect of any payment made under this Agreement other than a stamp, registration, documentation or similar tax. 1.34 "TERMINATION DATE" shall mean February 23, 2007. 1.35 "TERMINATION NOTICE" shall mean the notice designating an Early Termination Date that is sent pursuant to Section 5.1(a). 4 5 ARTICLE II. PAYMENTS 2.1 No later than 10:00 a.m., Connecticut time, on the Calendar Day immediately preceding each Payment Date LDEL shall determine and notify NOGC of the Floating Amount for the Settlement Period then ended, the calculation of the Floating Amount and the difference between the Floating Amount and the Fixed Amount; except that if the Floating Amount is not determinable in accordance with the Floating Price Determinant on the Calendar Day immediately preceding a Payment Date, then LDEL shall determine and notify NOGC of the Floating Amount on the first Calendar Day on which the Floating Amount is determinable. If (a) the Floating Amount is greater than the Fixed Amount, then LDEL shall pay to NOGC a sum equal to the difference between the two amounts and, (b) the Fixed Amount is greater than the Floating Amount, then NOGC shall pay to LDEL a sum equal to the difference between the two amounts and (c) there is no difference between the Fixed Amount and the Floating Amount, then, no payment shall be made. 2.2 All payments under Section 2.1 shall be made on a same day basis in immediately available funds, by wire transfer on the applicable Payment Date to the account designated on Schedule A no later than 10:00 A.M. in the place where such account is located on the Payment Date, except that neither Party shall be obligated to make the payment on the Payment Date if an Event of Default or an event which with the giving of notice or lapse of time or both could become an Event of Default with respect to the Party otherwise entitled to receive the payment has occurred and is continuing (but shall pay or be entitled to a credit on account of that payment on an Early Termination Date as is provided in Section 5.3(b)) Notwithstanding the failure of LDEL to give the notice as set forth in Section 2.1, payment shall be deemed to be due by either Party at 12 Noon New York City time on the Payment Date. Payments that are not made when due by either Party shall bear interest at the rate set forth in Section 2.7. Any Failure by LDEL to give the notice pursuant to Section 2.1 shall not be deemed to be an Event of Default. If LDEL fails to give the notice required in Section 2.1 then, unless LDEL has given that notice, NOGC may make the determinations that LDEL was obligated to make and give the notice to LDEL, which determination and notice will have the same effect as the notice that was to have been given by LDEL. 2.3 No payment that is made or accepted by either Party pursuant to Section 2.2 and based on LDEL's notice (pursuant to Section 2.1) or NOGC's notice (pursuant to Section 2.2) shall constitute acceptance by either Party of the correctness of the calculations set forth in the notice. Either Party may request a recalculation or adjustment if it believes the calculations were made incorrectly, and any adjustments in payments by either Party due to incorrect calculations will be made promptly by the Parties; except that no such adjustment in payment will be made after two years from rendition of the notice on account of which the payments were made. The provisions of this Section 2.3 will survive any termination of this Agreement for a period of two years from the date of such termination. 2.4 All payments shall be made without any deduction or withholding for, or on account of any Tax unless that deduction or withholding is required by any law (as modified by the practice or regulation of any relevant governmental revenue authority) in effect at the time at which the payment is made. If an Obligated Party is required to deduct or withhold on account of any Tax, then the obligated Party will (a) pay to the relevant authority the full amount required to be deducted or withheld (including the full amount required to be deducted or withheld from any additional amount paid by the obligated Party to the Receiving Party under this Section 2.4) promptly upon the later of the last date on which that amount is required to be paid to the relevant authority and the date on which the Obligated Party receives notice that the amount (i) is payable to the relevant authority or (ii) has been assessed against the Receiving 5 6 Party; (b) promptly forward to the Receiving Party an official receipt (or a certified copy) or other documentation reasonably acceptable to the Receiving Party evidencing the payment to the relevant authority; and (c) if the Tax is an Indemnifiable Tax, pay to the Receiving Party, in addition to the payment to which the Receiving Party otherwise is entitled, such additional amount as is necessary to ensure that the net amount actually received by the Receiving Party (free and clear of Indemnifiable Taxes whether assessed against either Party) will equal the full amount that the Receiving Party would have received if no such deduction or withholding had been required. 2.5 The Receiving Party will deliver to the Obligated Party promptly upon request at any time (unless such delivery is reasonably likely to prejudice the Receiving Party's Tax position) any Tax certificates or documents reasonably requested to enable the Obligated Party to make payments without deduction or withholding for or on account of Taxes or to make such deduction or withholding at a reduced rate. If the Receiving Party subsequently receives a Tax credit resulting from a payment which includes an additional amount under Section 2.4, then promptly upon its receipt of that Tax credit, it will pay to the Obligated Party such amount as the Receiving Party reasonably determines will leave it (after such payment) in the same position as it would have been if no additional amount had been required to be paid. 2.6 If the Obligated Party would not be required to deduct or withhold for or on account of Taxes but for the failure by the Receiving Party to deliver any certificate or document referred to in Section 2.5, then the Obligated Party shall not be required to pay to the Receiving Party any additional amount referred to above. If, in such circumstances, a liability is assessed directly against the Obligated Party for not so deducting or withholding, then, except to the extent the Receiving Party has satisfied or then satisfies the liability resulting from such Tax, promptly upon demand therefor by the Obligated Party the Receiving Party will promptly pay to the Obligated Party the amount of the liability so assessed against it, including any related liability for penalties. 2.7 If either Party fails to pay the full amount payable by it when due, then interest on the unpaid portion shall accrue (both before and after judgment) at a rate equal to 1 1/2 percent per annum above the base rate from time to time of Citibank N.A. from the date on which the payment was due until the date of payment. If either Party fails to make timely payment of any amount due under this Agreement, then the other Party, in addition to any other remedy it may have, shall have the right to suspend its performance hereunder until such amount, including interest, has been paid. 2.8 All obligations arising out of this Agreement shall be paid and settled in cash. LDEL and NOGC shall have no obligation to deliver or receive any Commodity in its physical form. ARTICLE III. REPRESENTATIONS AND WARRANTIES 3.1 Each Party represents and warrants to the other that on the date of this Agreement: (a) It is duly organized and validly existing in good standing under the laws of the jurisdiction of its organization or incorporation; (b) It has the corporate power to execute and deliver and perform its obligations under this Agreement; 6 7 (c) Such execution, delivery and performance does not and will not violate or conflict with its charter or by-laws (or comparable constitutive documents), any law applicable to it or any order or judgment of any court or other agency of government applicable to it or any agreement to which it is a party or by which it or any of its property is bound; (d) This Agreement constitutes its legal, valid and binding obligation enforceable in accordance with its terms (except as enforcement may be limited by bankruptcy, reorganization, insolvency, moratorium or other laws affecting the enforcement of creditors' rights generally and subject, as to enforceability, to equitable principles of general application); (e) It is entering into this Agreement in connection with business or the financing of its business; (f) The material terms of this Agreement have been individually tailored and negotiated; (g) It has obtained all governmental, regulatory or other consents, authorizations or clearances that are required to be obtained by it in respect of its entry into and its performance of this Agreement, and all of those consents are in full force and effect and any conditions have been complied with; (h) No Early Termination Event with respect to it has occurred and is continuing and no such event would occur by its entry into or its performance of its obligations under this Agreement; and (i) Information provided to the other Party in writing relating to itself in connection with this Agreement is, as of the date of the information, true, accurate and complete in every material respect. 3.2 LDEL represents and warrants to NOGC that LDEL is a wholly-owned subsidiary of LDNG. ARTICLE IV. UNDERTAKINGS 4.1 Concurrently with its execution and delivery of this Agreement, (a) each Party shall furnish the other Party with evidence reasonably satisfactory to the other Party as to the names, the signatures and authority of its officers or officials signing this Agreement and the Guaranty, and (b) LDEL will deliver to NOGC the Guaranty. 4.2 So long as it has or may have any obligation under this Agreement, each Party will (a) pay any stamp, registration, documentation or similar tax that is levied or imposed upon it in respect of its execution or performance of this Agreement by a jurisdiction in which it is incorporated, organized, managed and controlled, or considered to have its seat, or in which a branch or office through which it is acting for the purpose of this Agreement is located, and (b) indemnify the other Party against any such tax that is levied or imposed upon the other Party or in respect of the other Party's execution or performance of this Agreement by any jurisdiction in which the indemnifying Party is and the indemnified Party is not incorporated, organized, managed and controlled. 7 8 ARTICLE V. EARLY TERMINATION 5.1 (a) If any of the events set forth below in Section 5.1(c) or (d) occurs (an "Event of Default"), and is continuing with respect to either Party, then that Party shall be deemed the Defaulting Party and the other Party (the "Non-Defaulting Party") may, subject to Section 5.1 (b), by notice which, if applicable, specifies the relevant event to the Defaulting Party, designate a Business Day as an Early Termination Date which shall be no earlier than the date such notice is received or deemed to have been received by the Defaulting Party and no later than 30 days after giving that Termination Notice, on which all obligations under this Agreement with respect to amounts payable pursuant to Section 2.1 on all Payment Dates falling after the Early Termination Date shall be terminated, whereupon such obligations shall terminate (without regard to subsequent events, and without affecting the Party's other obligations under this Agreement). (b) If the Event of Default is one that is described in Sections 5.1(c)(i), (ii), (iii), (iv), (v), or (xi), then the Non-Defaulting Party may designate the Early Termination Date by sending a Termination Notice to the Defaulting Party. If the Event of Default is one that is described in Sections 5.1(c)(vi) [other than Section 5.1(c)(vi)(z)), (vii), (viii), or (x), then an Early Termination Date shall be deemed to occur upon the occurrence of that Early Termination Event without the giving of a Termination Notice and if the Event of Default is one that is described in Section 5.1(c)(vi)(z) or 5.1(c)(ix), then an Early Termination Date shall be deemed to have occurred immediately preceding the institution of the relevant proceeding or the presentation of the relevant petition. (c) Each of the following shall be an Event of Default: (i) The Party fails to make a payment required under this Agreement and does not remedy the failure to pay within a period of three Business Days after receipt of notice of that failure from the other Party; (ii) Any representation or warranty made by a Party in this Agreement or in any document required to be delivered by it hereunder proves to have been false or misleading in any material respect when made or whenever deemed to be repeated and remains so false or misleading at the time at which the Termination Notice is given; (iii) The Party fails to perform, observe or comply with any covenant, condition or provision (other than one dealt with in the preceding subsections) contained in this Agreement and fails to cure the failure ten Business Days after receipt of notice of that failure from the other Party; (iv) The Party fails in the (x) payment when due (whether at maturity, by acceleration or otherwise) of an aggregate amount that exceeds $2 million with respect to obligations in respect of money borrowed from or guaranteed to any person or persons and fails to remedy the non-payment or failure within any applicable grace period; or (y) performance of, or occurrence of any other event of default, however defined, under any agreement in which those obligations are created, evidenced or secured, if that failure or event of default is not remedied within any applicable grace period and the effect of that failure or event of default is to cause an amount that exceeds $2 million of those obligations to become, or to permit the holder or holders of those obligations (or a trustee or agent on behalf of such holder or holders) to declare such an amount of those obligations, due and payable before they would otherwise have become due; 8 9 (v) The Party becomes insolvent or fails or is unable to pay its debts as they become due or admits in writing its inability generally to pay its debts as they become due or is adjudicated a bankrupt or insolvent; (vi) The Party (w) applies for or consents to the appointment of, or the taking of possession by, a receiver, receiver manager, custodian, trustee, liquidator, administrator or other similar official for itself or for all or a substantial part of its property, (x) makes an assignment or any general arrangement for the benefit of its creditors, (y) files a petition or otherwise commences, authorizes or acquiesces in the commencement of a proceeding or cause under any bankruptcy, insolvency or similar law for the protection from creditors or have such petition or proceeding commenced against it; or (z) in the absence of such application, consent, assignment, filing, failure or acquiescence, a trustee, custodian or receiver is appointed for the Party or for a substantial part of its property and is not discharged within 30 days; (vii) The Party winds up its affairs; (viii) The Party takes any corporate action to authorize any of the actions towards winding-up its affairs or liquidating; (ix) Any bankruptcy, reorganization, debt arrangement, or other proceeding under any bankruptcy or insolvency law, or any dissolution or liquidation proceeding is instituted against the Party, or any material event comparable to any of the foregoing shall occur under the laws of any competent jurisdiction, and the proceeding is consented to or acquiesced in by the Party and remains for 30 days undismissed, or an order for relief against the Party is entered under applicable bankruptcy law or other law for the relief of debtors; (x) Any event occurs with respect to the Party which, under the applicable laws of any jurisdiction, has an analogous effect to any of the events specified in Sections 5(c)(v) to (ix) both inclusive; or (xi) The Party consolidates or amalgamates with or merges into, or transfers all or substantially all of its assets to another entity and either (i) the resulting survivor or transferee entity fails to assume (by operation of law or otherwise) all of the obligations of that Party under this Agreement, or (ii) the creditworthiness of the resulting, surviving or transferee entity is materially less than was the creditworthiness of the Party immediately before the consolidation, amalgamation, merger or transfer. (d) The occurrence of any event described -in (i) Sections 5.1(c)(i), (ii) or (iii) by or in respect of the Guarantor under the Guaranty (except that for the purpose of applying those three sections to the Guarantor the words "this Agreement" as used in those three sections shall read "the Guaranty") or (ii) Sections 5.1(c)(iv) through (xi), both inclusive, by or in respect of the Guarantor in each case shall constitute an Event of Default by LDEL. 5.2 If an event occurs such as (a) the adoption of, or any change in a law or regulation or in the interpretation or application thereof which makes it unlawful for a Party to perform any of its material obligations under this Agreement, or (b) it is reasonably foreseeable that a Party will be required on the next succeeding date on which a payment is due under this Agreement to pay to the other Party an additional amount in respect of an Indemnifiable Tax under Section 2.4 (except on account of interest on any past due payment), or (c) if the prices at which the Commodity may be bought and sold are fixed by federal, state or local government so that the Floating Price Determinant does not reflect the normal free market response to supply and demand which would exist if prices were not so fixed, or (d) there is an increase of more than 30 cents in the Daily Determination Price of the Commodity as is described in 9 10 paragraph (c) of Schedule B, then either Party, by appropriate notice may designate an Early Termination Date. 5.3 (a) Upon the designation of an Early Termination Date pursuant to Section 5.1, the terminating Party shall (i) promptly calculate an amount that is equal to the then present value of the total of all actual damages suffered and costs and expenses reasonably incurred and reasonably expected to be incurred by the terminating Party as a result of the occurrence of the Early Termination Date including, without limitation, any loss, cost or expense that would be incurred to preserve for the terminating Party the economic equivalent of the payment obligations of the Parties under this Agreement in respect of each Payment Date that is scheduled to occur after the Early Termination Date, which may be the costs and expenses to replace this Agreement with one or more swap agreements or arrangements which will provide the terminating Party with equivalent payment obligations in respect of each Payment Date, and (ii) send a statement of its calculation to the other Party. (b) On the Early Termination Date pursuant to Section 5.1, (i) the Defaulting Party shall owe to the Non-Defaulting Party the sum of the amount payable under Section 5.3(a), and the aggregate amount, if any, owed by the Defaulting Party pursuant to Article II up to the Early Termination Date if such amounts remain unpaid as of the Early Termination Date for any reason, including under the provisions of Section 2.2, and (ii) the Non-Defaulting Party shall owe the Defaulting Party the aggregate amount, if any, owed by the Non-Defaulting Party to the Defaulting Party pursuant to Article II up to the Early Termination Date if such amounts remain unpaid as of the Early Termination Date. The Party owing the greater amount under clauses (i) and (ii) of the immediately preceding sentence shall pay to the other Party the excess of the greater amount over the lesser amount on demand. (c) Upon the designation of an Early Termination Date pursuant to Section 5.2, each Party shall (i) promptly calculate an amount that is equal to the then present value of the total of all actual damages suffered or actual gains or benefits received and costs and expenses reasonably incurred or avoided or reasonably expected to be incurred or avoided by that Party as a result of the occurrence of the Early Termination Date including, without limitation, any gain, loss, cost or expense that would be incurred to preserve for such Party the economic equivalent of the payment obligations of the Parties hereunder in respect of each Settlement Date scheduled to occur after the Early Termination Date, which may be the costs and expenses to replace this Agreement with one or more swap agreements or arrangements which will provide such Party with equivalent payment obligations in respect of each Settlement Date, and (ii) send a statement of its calculation to the other Party. (d) (i) The Party having the larger gain or smaller lose pursuant to Section 5.3(c) shall pay to the other Party an amount equal to one-half of the difference between that gain or loss and (ii) each Party shall pay the aggregate amount owed to the other Party under Article II up to the Early Termination Date. 5.4 All amounts payable pursuant to Section 5.3 shall be calculated as of the Early Termination Date and be payable upon demand after the amounts payable are determined, together with interest on the amounts from the Early Termination Date to the date of payment at the rate specified in Section 2.7. 5.5 If either Party disagrees with the calculation of any amounts payable under this Article V, then two independent experts agreeable to both Parties shall mutually determine the matter and those experts' determination shall be binding save for fraud or manifest error. If the Parties fail to agree promptly upon the independent experts or if the independent experts agreed upon fail to mutually determine the matter promptly, then each Party shall promptly nominate one independent expert (if they have not been nominated previously) and the two experts so nominated shall promptly in turn nominate a third 10 11 independent expert and the determination of the third independent expert shall be binding upon the Parties save for fraud or manifest error. All of the independent experts shall be at the time at which they act under this Section 5.5 persons who are actually engaged in business as swap dealers in the Commodity. Each Party shall be entitled to (a) submit to the independent experts written briefs setting forth their views on the matter submitted for the determination; if copies of those briefs are forwarded to the other Party, and (b) make to the independent experts oral arguments, but only in the presence of the other Party. ARTICLE VI. FINANCIAL RESPONSIBILITY 6.1 On each Determination Day LDEL shall determine an Exposure Amount and shall send a notice of its determination to NOGC. 6.2 (a) If on any Determination Day a Net Exposure Amount exists for an Exposed Party, then, within seven Business Days after that Determination Date the Non-Exposed Party shall establish and thereafter maintain so long as there is a Net Exposure Amount for that Exposed Party a Letter of Credit from a major U.S. commercial bank acceptable to the Exposed Party (which shall not unreasonably withhold its acceptance) for the benefit of the Exposed Party that is equal to the Net Exposure Amount rounded to the next highest integral multiple of $500,000. (b) If on any Determination Day the aggregate amount of existing Letters of Credit that have been established by the Non-Exposed Party exceeds the Net Exposure Amount rounded to the next highest integral multiple of $500,000, then the Exposed Party shall do whatever the Non-Exposed Party reasonably requests as being necessary to authorize the appropriate reduction in the aggregate amount of the Letters Of Credit. (c) If on any Determination Day the aggregate amount of existing Letters of Credit is less than the Net Exposure Amount rounded to the next highest integral multiple of $500,000, then the Non-Exposed Party shall do whatever is necessary to cause an appropriate increase in the aggregate amount of the Letters of Credit or the issuance of additional Letters of Credit so that the aggregate amount of all Letters of Credit in favor of the Exposed Party equals the Net Exposure Amount rounded to the next highest integral multiple of $500,000. 6.3 Notwithstanding the foregoing, neither Party shall be required to provide a Letter of Credit in excess Of $10 million. 6.4 Within 120 days after the end of each of its fiscal years, (a) NOGC will provide to LDEL a copy of NOGC's audited financial statements (including, without limitation, its balance sheet and income statement) for that fiscal year, and (b) LDEL will deliver or cause to be delivered to NOGC a copy of LDNG's audited financial statements (including, without limitation, its balance sheet and income statement) for that fiscal year. In the event that at any time (a) NOGC has shareholders, equity below $125 million, positive working capital (current assets minus current liabilities, excluding deferred taxes and current maturities on long-term debt) below $1 million or total liabilities exceeding twice the amount of its shareholders, equity, or (b) LDNG has shareholders, equity below $20 million, positive working capital below $1 million or (c) the sum of LDNG's earnings before income taxes for any fiscal year of LDNG, plus depreciation, amortization and other items that were deducted in determining those earnings before taxes, but were not paid in cash, is less than one sixth of the amount at the end of that fiscal year of LDNG's total indebtedness for money borrowed which is not subordinated in right of payment to LDNG's obligations under the Guaranty or (d) any event that is described in Sections 5.1(c)(v)(vi)(vii)(viii) 11 12 or (ix) of this Agreement which if that event occurred with respect to a Party would constitute an Event of Default, occurs with respect to any entity ("Controlling Entity") that directly or indirectly controls the right to vote the majority of the shares of that Party or owns the majority of the equity interest in that Party or to LDNG (whether or not LDNG controls the right to vote the majority of the shares of LDEL or owns the majority of the equity interest in LDEL at the time at which that event occurs), then in any of those four events, and without affecting any other rights or remedies a Party may have under this Agreement because of the occurrence of any such event, the Letter of Credit to be provided by NOGC (if the events are those described in clause (a) or clause (d) of this sentence; but, as to clause (d), only to the extent the events relate to NGOC's Controlling Entity) or by LDEL (if the events are those described in clause (b), (c) or (d) of this sentence; but, as to clause (d), only to the extent the events relate to LDNG or to any other Controlling Entity of LDEL) under Section 6.2 shall equal the Exposure Amount and not the Net Exposure Amount, without giving effect to Section 6.3. 6.5 All of the financial statements referred to in Section 6.4 shall be prepared in accordance with generally accepted accounting principles in the United States as in effect at the time at which the financial statements are prepared. Each of the Parties will deliver or cause to be delivered to the other party upon the other Party's request, unaudited interim financial statements of the types described in Section 6.4 if and to the extent that those interim financial statements are prepared in the normal course of business of NOGC or LDNG, as the case may be. ARTICLE VII. ASSIGNMENT 7.1 Either Party may assign all or part of its rights to receive payments under this Agreement, subject to the agreement by the Parties to procedures which will ensure compliance by the assignor with the terms and obligations of this Agreement, otherwise no assignment of this Agreement or any of the rights or obligations under this Agreement will be made unless or until the Party seeking the assignment obtains the written consent thereto of the non-assigning Party. No transfer or succession to the interest of either Party under this Agreement, wholly or partially, will affect or bind the non-assigning Party until it has been furnished with written notice and a true copy of such assignment or with other proper proof that the claimant is legally entitled to such interest. ARTICLE VIII. WAIVER 8.1 No waiver by either Party of any one or more defaults by the other Party in the performance of any of the provisions of this Agreement shall operate or be construed to be a waiver of any other default or defaults whether of a like kind or different nature. 12 13 ARTICLE IX. APPLICABLE LAW 9.1 THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CONNECTICUT WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. 9.2 Each Party irrevocably waives, to the fullest extent permitted by applicable law, with respect to itself and its revenues and assets (irrespective of their use or intended use), all immunity on the grounds of sovereignty or other similar grounds to which it or its revenues or assets might otherwise be entitled in any Proceedings in the courts of any jurisdiction and irrevocably agrees, to the extent permitted by applicable law, that it will not claim any such immunity in any Proceedings. ARTICLE X. NOTICES 10.1 Any notice or communication in respect of this Agreement will be sufficiently given to a Party if in writing and delivered in person, sent by recorded delivery or registered mail (airmail if overseas) or the equivalent or by overnight courier or given by telex or by facsimile (in each case with answerback received) at the address or telex number or facsimile number specified in Schedule A. A notice or communication will be effective: (a) if delivered by hand or sent by overnight courier, on the day on which it is delivered; (b) if transmitted by telex or facsimile, at the time of transmission; or (c) if sent by recorded delivery or registered mail (airmail, if overseas) or the equivalent, two Local Banking Days after despatch if the recipient's address for service is in the same country as the place of despatch and otherwise seven Local Banking Days after despatch; except that, in the case of delivery by hand or by courier or by transmission or by telex or facsimile that is made after 4:00 PM on a Local Banking Day in the locality to which the delivery is made, or that is made on a day which is not a Local Banking Day in that locality, service shall be deemed to occur at 9:00 AM on the next Local Banking Day in that locality. 10.2 In proving the making of service under Section 10.1 it shall be sufficient to prove that delivery by hand or by courier was made, or that the envelope containing such notice or communication was correctly addressed and posted, or that the telex was transmitted with the correct answerback, or that a facsimile transmission report (or other appropriate evidence) was obtained that the facsimile had been fully and legibly transmitted to and received by the addressee and no notification was received from the addressee that the transmission was incomplete or illegible by 4:00 PM on the Local Banking Day in the locality to which the transmission was addressed immediately following the day of transmission. 10.3 Either Party may, by notice to the other, change the address, telex number or facsimile number at which notices or communications are to be given to it as provided in Schedule A. 13 14 ARTICLE XI. MISCELLANEOUS 11.1 The kinds of the remedies and their extent provided for in this Agreement are the sole and exclusive kinds and extent of the remedies that are available to and that may be asserted by either Party under or on account of the breach of this Agreement (whether statutory or otherwise), and each of the Parties waives any right to seek any other remedy' Each of the Parties acknowledges that those remedies will provide appropriate and the only relief to it for a breach by the other Party of its obligations under this Agreement, notwithstanding that those remedies may not provide any or complete compensation for such breach. In no event shall either Party be liable to the other for, and each of the Parties waives the right to seek, incidental, consequential or punitive damages, except that either Party shall be entitled to reimbursement from the other Party for the attorneys, fees and expenses that it incurs in successfully enforcing this Agreement against the other. 11.2 This Agreement may be executed in counterparts, each of which when executed and delivered shall be deemed to be an original and all of which taken together shall constitute one and the same instrument. No amendment, waiver, modification or supplement of any provision of this Agreement and no consent to any departure from such a provision shall be effective unless in writing and signed by both Parties and designated as an amendment or, in the case of a waiver or consent, by the Party granting it. 11.3 This Agreement is not intended, and shall not be construed, to confer any benefits on, or result in any responsibility to, any third party except an approved successor or assignee of a Party pursuant to an assignment valid under Article VII. 11.4 This Agreement constitutes the entire agreement between the Parties relating to the subject matter hereof and supersedes all prior communications between the Parties relating thereto. 11.5 All payments of any kind under this Agreement shall be in Dollars. 11.6 The existence of this Agreement, its contents, and the existence of and contents of all other instruments and documents relating hereto and any information made available by one Party to the other Party with respect to this transaction are confidential and will not be discussed with or disclosed to any third party, nor shall any public announcement or press release be made by either Party, except with the express prior written consent of the other Party or as may be required by contract or law, except for such information (a) as may become generally available to the public, (b) as may be required or appropriate in response to any summons, subpoena or in connection with any litigation or to comply with any applicable law, order, regulation or ruling, (c) as may be obtained from a non-confidential source, (d) as may be required to be furnished to that Party's (i) affiliated companies, (ii) auditors, (iii) third party lawyer's, (iv) financial institutions, or (v) prospective business parties with which the Party has a written agreement to keep the information that is disclosed in confidence. 14 15 IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed in multiple originals as of May 8, 1992. Louis Dreyfus Exchanges Ltd. By: /s/ Michael Cornish ------------------------------------------- Name: Michael Cornish ------------------------------------------- Title: Vice President ------------------------------------------- NOMECO Oil & Gas Co. By: /s/ Paul E. Geiger ------------------------------------------- Name: Paul E. Geiger ------------------------------------------- Title: Vice President, Secretary & Treasurer ------------------------------------------- 15 16 SCHEDULE A TO SWAP AGREEMENT NOTICE AND COMMUNICATION Notice to LDEL: Notice to NOGC: c/o Louis Dreyfus Exchanges Ltd. NOMECO Oil & Gas CO. 10 Westport Road One Jackson Square P.O. Box 810 Jackson, MI 49204 Wilton, CT 06897-0810 Attn: Richard Rulewicz Attn: Peter Fritzinger Telex: 62205218 Telex: 981937 Fax: (517) 787-0139 Fax: (203) 761-2321 Payments to LDEL: Payments to NOGC: Wire Transfer to Morgan Wire Transfer to NBD Bank, N.A. Guaranty Trust Company for account of NOMECO for the account of Louis Dreyfus Oil & Gas Co. Exchanges Ltd. A/C # 09430 A/C Louis Dreyfus Corporation ABA 1072-000326 Account #017-57-892 Billing and Accounting Matters Billing and Accounting Matters To LDEL: to NOGC: c/o Louis Dreyfus Exchanges Ltd. c/o NOMECO Oil & Gas Co. 10 Westport Road One Jackson Square P.O. Box 810 Jackson, MI 49204 Wilton, CT 06897-0810 Attn: Richard Rulewicz Attn: Steve Waugh Telex: 62205218 Telex: 981937 Fax: (517) 787-0139 Fax: (203) 761-2321
16 17 SCHEDULE B FLOATING PRICE DETERMINANT The Floating Price Determinant for a Settlement Period shall be an amount (rounded to the second decimal place) computed for the Settlement Period that is equal to the Daily Average Price. (a) The "Daily Average Price" shall be the sum of the Daily Determination Price for each calendar day during the Settlement Period (each, a "Calendar Day") divided by the number of Calendar Days in the Settlement Period. (b) The "Daily Determination Price" shall be: (i) For each Calendar Day when natural gas futures contracts (the "Gas Contracts") are being regularly traded on the New York Mercantile Exchange ("NYMEX"), the Daily Determination Price for each Calendar Day on which the Gas Contracts (x) were traded shall be the closing price of the one of the Gas Contracts the last trading date of which occurs (m) on that Calendar Day or (n) if no Gas Contracts have a last trading day on that Calendar Day, then the closing price on that Calendar Day of the Gas Contract having a last trading day most nearly following that Calendar Day (the "Prompt Contract") and (y) were not traded because of a temporary, short-term suspension of trading not exceeding five consecutive Calendar Days (Such as on a Saturday, Sunday or holiday on which NYMEX did not conduct trading) the closing price of the Prompt Contract on the most recent Calendar Day on which the Gas Contracts were traded (in either case, the "NYMEX Price"). (ii) For each Calendar Day for which the provisions of paragraph (b) (i) are not applicable to establish the Daily Determination Price, the Daily Determination Price Shall be the arithmetic average of the Index prices of spot gas delivered to pipelines for the following pipelines and markets, as each is reported in Inside F.E.R.C.'s Gas Market Report for the first day of the calendar month in which that Calendar Day fell: (q) ANR Pipeline Co., Louisiana; (r) Columbia Gulf Transmission Co., Louisiana; (s) Florida Gas Transmission Co., Louisiana; (t) Natural Gas Pipeline Co. of America, Louisiana; (u) Tennessee Gas Pipeline Co., Louisiana; (v) Trunkline Gas Co., Field Zone; (w) United Gas Pipe Line Co., Louisiana; (x) Texas Eastern Transmission Corp., Louisiana; (y) Texas Gas Transmission Corp., Zone SL; and (z) The Transcontinental Gas Pipe Line Corporation, the average price for Zones 2 and 3 (pooling points). If at any time the provisions of this paragraph b(ii) would be applicable but for the fact that Inside F.E.R.C. has not reported such an Index price for all the pipelines referred to above, but has reported such an Index price for at least [five] of such pipelines, then the Daily Determination Price shall be calculated as provided herein but using only such of those Index prices for such of those pipelines as were reported. (iii) For each Calendar Day for which the provisions of paragraph (b) (i) or (b) (ii) are not applicable to determine a Daily Determination Price, but for which Natural Gas Week (the "Report") reports "spot" prices for "Gulf Coast, Onshore" in the "Delivered to Pipeline" column in the Louisiana section under 17 18 the heading "Gas Price Report ($/MMBtu)", the Daily Determination Price shall be the Report Price, for the first day of the calendar month in which that Calendar Day fell, regardless of the date of the issue of the Report in which the report price is published. (iv) If the Daily Determination Price for any Calendar Day cannot be determined in the manner contemplated above by the tenth Business Day after a Period End Date, then the price for that Calendar Day to be used in calculating the Floating Price shall be the amount mutually determined by NOGC and LDEL to reflect most closely the average spot price for that Calendar Day for natural gas delivered to an interstate pipeline in the Louisiana market. (v) If, NOGC and LDEL are unable to agree upon the Daily Determination Price pursuant to paragraph (b)(iv) on or before the Payment Date, but in no event later than ten days after a Period End Date, then either Party may submit the matter to arbitration by written notification to the other Party of its desire to submit the matter to arbitration and in that notification shall name its arbitrator. The Party receiving a notification for arbitration shall notify the other Party of the name of its arbitrator within ten calendar days thereafter. The two arbitrators so named shall choose a third arbitrator. If the Party receiving the notification for arbitration fails to name an arbitrator within ten calendar days, then the arbitration shall be heard and determined by the single arbitrator which has been named. If two arbitrators are named but fail to name a third arbitrator, then the Chief Judge, United States District Court, Southern District of New York shall name the third arbitrator. The arbitration shall be conducted in accordance with the Commercial Rules of Arbitration of the American Arbitration Association. All arbitrators shall be individuals who are qualified by education, knowledge and experience to determine the issue being arbitrated. The decision of the arbitrators (a) shall be within the positions of the parties, (b) shall clearly state the Daily Determination Price, (c) if the arbitration was required because the sources of prices set forth in paragraph (b) are unavailable due to termination of trading of Gas Contract or termination of publication of prices, shall provide the parties with a method for calculating the Daily Determination Price for the remaining term of the Agreement, (d) shall be written and (e) shall be rendered within 15 days after all evidence has been submitted and arguments concluded. After the date of a notification of a Party's desire to submit a matter to arbitration until the matter is finally resolved by arbitration or by agreement of the parties, no payments attributable to the Settlement Period in question shall be due. Upon resolution of the matter, payment shall made within five business days and shall include interest accruing from the Payment Date until the date on which payment is made at a rate that is equal to the lesser of the then effective prime rate of interest for large U.S. Money Center Commercial Banks, published under "Money Rates" by The Wall Street Journal, and the maximum applicable non-usurious rate. (c) If any tax or similar charge that is imposed on the Commodity by any governmental body or agency after the date of the Agreement results in any increase in the Daily Determination Price that, but for that tax or charge would not have occurred at that time, then, for so long as that tax or charge and increase remain in effect, the Floating Price for each Settlement Period after the date on which that increase first 18 19 occurs shall be the Floating Price calculated using the Daily Determination Price for each Calendar Day of the Settlement Period less an amount which shall be the lesser, determined for each such Calendar Day, of: (i) one half of the amount of the increase in effect on such Calendar Day, and (ii) 15 cents per MMBtu. If that increase exceeds 30 cents per MMBtu at any time during the term of this Agreement, then that increase shall constitute an event on account of which either Party shall have the option to exercise its rights under Section 5.2 of the Agreement. If NOGC and LDEL are unable to agree if such an increase in the Daily Determination Price has occurred or upon the amount, duration or other aspects of such increase relevant to the calculation of the Floating Price, on or before the Payment Date then either Party may submit the matter to arbitration in the same manner and under the same procedures as are described in paragraph (b)(v). 19 20 SCHEDULE C EXPOSURE AMOUNT COMPUTATION On any Determination Day: (a) The Exposure Amount shall be equal to the positive number (in which case LDEL will be the Exposed Party) or the negative number (in which case NOGC will be the Exposed Party) that is calculated by adding each of the Settlement Period Exposure Amounts for that Determination Day. (b) The Settlement Period Exposure Amount for each Settlement Period shall be the positive or negative amount that is equal to the present value on the Determination Date of the Settlement Period Price Amount Difference for that Settlement Period from the Period End Date of that Settlement Period which is computed using a discount rate that is equal to the effective interest rate return that a purchaser would receive if it purchased on that Determination Date U.S. government securities that mature, as nearly as are available, on the Period End Date of that Settlement Period. (c) The Settlement Period Price Amount Difference for each Settlement Period shall be the product of multiplying (i) the Settlement Period Measurement Unit Price Difference for that Settlement Period by (ii) the Quantity per Settlement Period for that Settlement Period. (d) The Settlement Period Price Measurement Unit Difference for a Settlement Period shall be the difference of subtracting (i) the Escalated Collateral Base Price for that Settlement Period from (ii) the Fixed Price for that Settlement Period. (e) The Escalated Collateral Base Price for a Settlement Period shall be the Collateral Base Price on that Determination Day increased by compounding that Collateral Base Price from that Determination Day at the annual rate of eight percent on (i) each January 1 after that Determination Day to and including the first day of that Settlement Period and (ii) on the Period End Date of that Settlement Period. (f) The Collateral Base Price shall mean, (i) if there are futures contracts for natural gas ("Gas Contracts") regularly traded on the New York Mercantile Exchange ("NYMEX") on that Determination Day, the quotient of dividing (x) the sum of adding each of the closing prices on that Determination Day (or if there was no trading on the Determination Day because the NYMEX did not conduct trading on that Determination Day, the most recent day before the Determination Day on which there was trading conducted on NYMEX) of the 12 Gas Contracts for which the last trading day occurs most nearly after the month in which the Determination Day falls (except if a Gas Contract has a last trading day on that Determination date, that Gas Contract shall be the first of those 12 Gas Contracts) by (y) 12; or (ii) if there is no Gas Contract being traded on NYMEX on that Determination Day, then the prices that would be used to determine the Daily Determination Price under Schedule B if the prices of Gas Contracts are not available for determination of the Daily Determination Price shall be used to determine the Collateral Base Price in lieu of the prices of the Gas Contracts. 20 21 SCHEDULE D LETTER OF CREDIT FORMAT To: -------------------------------------------------- -------------------------------------------------- -------------------------------------------------- We hereby authorize you to draw at sign on ourselves for the account of for any sum or sums not exceeding in the aggregate _________________________. Drafts must be accompanied by a statement signed by an officer of _____________________________________ stating that: 1. An Early Termination has [designate whichever of the following applies]: (a) Been declared by [the Party drawing upon the Letter of Credit] by a Notice given in accordance with Section 5.1(a) of the Swap Agreement between Louis Dreyfus Exchanges Ltd. and NOMECO Oil & Gas Co. dated as of May 8, 1992; or (b) Been deemed to have occurred pursuant to Section 5.l(b) of the Swap Agreement between Louis Dreyfus Exchanges Ltd. and NOMECO Oil & Gas Co. dated as of May 8, 1992. 2. [The Party drawing under the Letter of Credit] has notified _________________________________pursuant to Section 5.3(a) or 5.3(c) of the Agreement that _______________________________ is obligated to [the Party drawing upon the Letter of Credit] in the amount of $______________________; and 3. _____________________________________ has failed to make the payment to [the Party drawing upon the Letter of Credit] in the amount of $__________________________________ as is required by Article 5 of the Agreement. Partial drawings are permitted. This letter of credit will expire on the 180th day after the date of its issuance, but will automatically extend without amendment for an additional 180-day period from that 180th day, or any future expiration date, if you as beneficiary, and the applicant have not received due notice by certified mail, registered mail, telegram, fax, telex, or hand delivery of our intention not to renew this letter of credit at least 30 days before that 180th day and each subsequent expiration date. 21 22 SCHEDULE E GUARANTY 1. In order to induce NOMECO Oil & Gas Co., ("NOGC") to enter in the Swap Agreement (the "Agreement") dated as of May 8, 1992, between NOGC and Louis Dreyfus Exchanges Ltd. ("LDEL"), Louis Dreyfus Natural Gas Corp. (the "Guarantor") guarantees and promises (a) to pay to NOGC, on demand, all amounts which LDEL becomes obligated to pay to NOGC under the Agreement and including, without limitation, obligations and liabilities of LDEL made, incurred or created under the Agreement for principal, interest, expenses, damages or otherwise, whether voluntary or involuntary and whether the obligations become unenforceable due to the bankruptcy or insolvency of LDEL (the "Obligations") as and when any of the Obligations become due; and (b) that all payments made to or received by NOGC on account of the obligations will, when made, be final, and if any such payment is recovered from or is repaid by NOGC in whole or in part in any bankruptcy, insolvency or similar proceeding that is instituted by or against LDEL or under any other circumstance, then this Guaranty shall continue to apply to those Obligations to the same extent as though the payment so recovered or repaid never had been made or received on account of those Obligations. 2. This is a continuing and irrevocable guaranty relating to the obligations, irrespective of (a) any lack of validity or enforceability of any of the Obligations resulting from the bankruptcy or insolvency of LDEL, (b) any present or future law or order of any government or of any agency that purports to reduce, amend or otherwise affect any of the Obligations or their terms of payment of, (c) any release of, or granting of time or any other indulgence to LDEL and (d) any other circumstance which might otherwise constitute a defense available to, or a legal or equitable discharge of, a guarantor under a guaranty given by it. 3. The obligations of the Guarantor under this Guaranty are independent of the Obligations and at NOGC's election a separate action or actions may be brought and prosecuted against the Guarantor alone or joined in an action brought against LDEL. The Guarantor will indemnify NOGC on demand if any amount due under Section 1 is not recoverable on the basis of a guaranty for any reason whatsoever. 4. The Guarantor authorizes NOGC, without notice to, without consent from or demand of the Guarantor, and without affecting the liability of the Guarantor under this Guaranty, from time to time to (a) renew, compromise, extend, accelerate or otherwise change the time for payment of, or otherwise change the terms of, the obligations or any part thereof, including any increase or decrease of the rate of interest thereon; (b) take and hold security for the payment of the obligations, and exchange, enforce, waive and release any such security; and (c) apply such security and direct the order or manner of sale thereof as NOGC in its discretion determines. This is a guaranty of payment. NOGC may with notice to the Guarantor assign this Guaranty to a party to which it has assigned its interest in the Agreement in accordance with the terms of the Agreement. 5. The Guarantor waives (a) any right to require NOGC to (i) proceed against LDEL, (ii) proceed against or exhaust any security, or (iii) pursue any other remedy that is available to NOGC; and (b) all presentments, demands for performance, notices of non-performance, protests, notices of protest, notices of dishonor, notices of acceleration of or intent to accelerate the maturity of any indebtedness, notices of acceptance of this Guaranty and of the existence, creation, or incurring of new or additional obligations and all other notices expressly set forth in this Guaranty. 22 23 6. Until all of the Obligations have been paid in full, the Guarantor shall have no right of subrogation and waives any right to enforce any remedy which NOGC now has or may hereafter have against LDEL under the Agreement, and waives any benefit of, and any right to participate in, any security now or hereafter held by. NOGC. NOGC may foreclose, either by judicial foreclosure or by exercise of power of sale, any mortgage, deed of trust or other similar documents or other collateral securing the obligations and, even though the foreclosure may destroy or diminish the Guarantor's rights against LDEL, the Guarantor shall be liable to NOGC for any part of the obligations that remains unpaid after the foreclosure. 7. Every lien and right of setoff given to NOGC by law may be exercised by NOGC without demand upon or notice to the Guarantor. No lien or right of setoff shall be deemed to have been waived by any act or conduct on the part of NOGC, or by any neglect to exercise such right of setoff or to enforce such lien, or by any delay in so doing, and every right of setoff and lien shall continue in full force and effect until that right of setoff or lien is specifically waived or released by an instrument in writing duly signed by an authorized officer of NOGC. 8. The Guarantor represents and warrants to NOGC that (a) all authorizations, approvals, notices, filings and other actions required by the internal documents governing the Guarantor and the regulatory authorities having jurisdiction over the Guarantor in connection with the due authorization, execution and delivery of this Guaranty have been duly obtained or made and are in full force and effect; (b) this Guaranty has been duly executed and delivered by the Guarantor; and (c) it owns all of the issued and outstanding capital stock of LDEL. 9. The Guarantor will pay reasonable attorneys, fees and other costs and expenses which are incurred by NOGC in the enforcement of this Guaranty. 10. All of the Guarantor's agreements in this Guaranty shall be binding upon the Guarantor and its successors and assigns and shall inure to the benefit of NOGC and its successor and assigns under assignments that have been made in accordance with the Agreement. 11. THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF CONNECTICUT WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. 12. None of the terms or provisions of the Guaranty may be waived, altered, modified or amended except by a writing duly signed by an authorized officer of NOGC and by an authorized officer of the Guarantor. If any term of this Guaranty is held to be invalid, illegal or unenforceable in any jurisdiction, the validity of all other terms shall in no way be affected thereby in that jurisdiction, and the unenforceability in that jurisdiction shall in no way affect the validity or enforceability of that or any other term hereof in any other jurisdiction. 13. The Guarantor reserves to itself all rights, setoffs, counterclaims and other defenses which LDEL has, or may be entitled to, arising from or out of the Agreement. 23 24 IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be signed on its behalf by its duly authorized representatives as of the 8th day of May, 1992. Louis Dreyfus Natural Gas Corp. By: -------------------------------------- Name: --------------------------------------- Title: -------------------------------------- 24 25 SCHEDULE E GUARANTY 1. In order to induce NOMECO Oil & Gas Co., ("NOGC") to enter in the Swap Agreement (the "Agreement") dated as of May 8, 1992, between NOGC and Lou is Dreyfus Exchanges Ltd. ("LDEL"), Louis Dreyfus Natural Gas Corp. (the "Guarantor") guarantees and promises (a) to pay to NOGC, on demand, all amounts which LDEL becomes obligated to pay to NOGC under the Agreement and including, without limitation, obligations and liabilities of LDEL made, incurred or created under the Agreement for principal, interest, expenses, damages or otherwise, whether voluntary or involuntary and whether the obligations become unenforceable due to the bankruptcy or insolvency of LDEL (the "Obligations") as and when any of the Obligations become due; and (b) that all payments made to or received by NOGC on account of the obligations will, when made, be final, and if any such payment is recovered from or is repaid by NOGC in whole or in part in any bankruptcy, insolvency or similar proceeding that is instituted by or against LDEL or under any other circumstance, then this Guaranty shall continue to apply to those Obligations to the same extent as though the payment so recovered or repaid never had been made or received on account of those Obligations. 2. This is a continuing and irrevocable guaranty relating to the Obligations, irrespective of (a) any lack of validity or enforceability of any of the obligations resulting from the bankruptcy or insolvency of LDEL, (b) any present or future law or order of any government or of any agency that purports to reduce, amend or otherwise affect any of the Obligations or their terms of payment of, (c) any release of, or granting of time or any other indulgence to LDEL and (d) any other circumstance which might otherwise constitute a defense available to, or a legal or equitable discharge of, a guarantor under a guaranty given by it. 3. The obligations of the Guarantor under this Guaranty are independent of the obligations and at NOGC's election a separate action or actions may be brought and prosecuted against the Guarantor alone or joined in an action brought against LDEL. The Guarantor will indemnify NOGC on demand if any amount due under Section 1 is not recoverable on the basis of a guaranty for any reason whatsoever. 4. The Guarantor authorizes NOGC, without notice to, without consent from or demand of the Guarantor, and without affecting the liability of the Guarantor under this Guaranty, from time to time to (a) renew, compromise, extend, accelerate or otherwise change the time for payment of, or otherwise change the terms of, the obligations or any part thereof, including any increase or decrease of the rate of interest thereon; (b) take and hold security for the payment of the Obligations, and exchange, enforce, waive and release any such security; and (c) apply such security and direct the order or manner of sale thereof as NOGC in its discretion determines. This is a guaranty of payment. NOGC may with notice to the Guarantor assign this Guaranty to a party to which it has assigned its interest in the Agreement in accordance with the terms of the Agreement. 5. The Guarantor waives (a) any right to require NOGC to (i) proceed against LDEL, (ii) proceed against or exhaust any security, or (iii) pursue any other remedy that is available to NOGC; and (b) all presentments, demands for performance, notices of non-performance, protests, notices of protest, notices of dishonor, notices of acceleration of or intent to accelerate the maturity of any indebtedness, notices of acceptance of this Guaranty and of the existence, creation, or incurring of new or additional obligations and all other notices expressly set forth in this Guaranty. 25 26 6. Until all of the Obligations have been paid in full, the Guarantor shall have no right of subrogation and waives any right to enforce any remedy which NOGC now has or may hereafter have against LDEL under the Agreement, and waives any benefit of, and any right to participate in, any security now or hereafter held by NOGC. NOGC may foreclose, either by judicial foreclosure or by exercise of power of sale, any mortgage, deed of trust or other similar documents or other collateral securing the Obligations and, even though the foreclosure may destroy or diminish the Guarantor's rights against LDEL, the Guarantor shall be liable to NOGC for any part of the obligations that remains unpaid after the foreclosure. 7. Every lien and right of setoff given to NOGC by law may be exercised by 3NOGC without demand upon or notice to the Guarantor. No lien or right of setoff shall be deemed to have been waived by any act or conduct on the part of NOGC, or by any neglect to exercise such right of setoff or to enforce such lien, or by any delay in so doing, and every right of setoff and lien shall continue in full force and effect until that right of setoff or lien is specifically waived or released by an instrument in writing duly signed by an authorized officer of NOGC. 8. The Guarantor represents and warrants to NOGC that (a) all authorizations, approvals, notices, filings and other actions required by the internal documents governing the Guarantor and the regulatory authorities having jurisdiction over the Guarantor in connection with the due authorization, execution and delivery of this Guaranty have been duly obtained or made and are in full force and effect; (b) this Guaranty has been duly executed and delivered by the Guarantor; and (c) it owns all of the issued and outstanding capital stock of LDEL. 9. The Guarantor will pay reasonable attorneys' fees and other costs and expenses which are incurred by NOGC in the enforcement of this Guaranty. 10. All of the Guarantor's agreements in this Guaranty shall be binding upon the Guarantor and its successors and assigns and shall inure to the benefit of NOGC and its successors and assigns under assignments that have been made in accordance with the Agreement. 11. THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF CONNECTICUT WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. 12. None of the terms or provisions of the Guaranty may be waived, altered, modified or amended except by a writing duly signed by an authorized officer of NOGC and by an authorized officer of the Guarantor. If any term of this Guaranty is held to be invalid, illegal or unenforceable in any jurisdiction, the validity of all other terms shall in no way be affected thereby in that jurisdiction, and the unenforceability in that jurisdiction shall in no way affect the validity or enforceability of that or any other term hereof in any other jurisdiction. 13. The Guarantor reserves to itself all rights, setoffs, counterclaims and other defenses which LDEL has, or may be entitled to, arising from or out of the Agreement. 26 27 IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be signed on its behalf by its duly authorized representatives as of the 8th day of May, 1992. Louis Dreyfus Natural Gas Corp. By: /s/ Richard Gray ------------------------------------ Name: Richard Gray ------------------------------------- Title: Vice President ------------------------------------ EX-10.28 33 EXHIBIT 10.28 1 Exhibit 10.28 CERTAIN RIGHTS AND OBLIGATIONS OF THE OVERSEAS PRIVATE INVESTMENT CORPORATION ("OPIC") ARE SET FORTH IN AN OPTION AGREEMENT, DATED AS OF FEBRUARY 24, 1995, BY AND AMONG AMOCO PRODUCTION COMPANY, AMOCO CORPORATION AND OPIC, WHICH SHOULD BE REVIEWED IN CONNECTION WITH THE AGREEMENT SET FORTH HEREIN ________________________________________________________________________________ ________________________________________________________________________________ FINANCE AGREEMENT AMONG WALTER INTERNATIONAL CONGO, INC. WALTER CONGO HOLDINGS, INC. AND OVERSEAS PRIVATE INVESTMENT CORPORATION DATED AS OF DECEMBER 28, 1994 OPIC 679-94-139-IG ________________________________________________________________________________ ________________________________________________________________________________ 2 TABLE OF CONTENTS
PAGE ---- ARTICLE I DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Section 1.01. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Section 1.02. Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 1.03. Project Cost; Financial Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 1.04. Assumption of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 ARTICLE II AMOUNT AND TERMS OF THE LOAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 2.01. Amount and Disbursement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 2.02. Commitment Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 2.03. Cancellation of the Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 2.04. Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 2.05. Repayment of the Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 2.06. Amortization of the Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 2.07. Voluntary Prepayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 2.08. Mandatory Prepayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 2.09. OPIC Guaranty Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 2.10. Facility and Maintenance Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 2.11. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Section 2.12. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 ARTICLE III REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 3.01. Existence and Power of the Holding Company and the Borrower. . . . . . . . . . . . . . . . . . 20 Section 3.02. Authority of the Holding Company and the Borrower. . . . . . . . . . . . . . . . . . . . . . . 20 Section 3.03. Status of Holding Company and Walter Congo . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 3.04. Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 3.05. Capitalization of the Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 3.06. Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 3.07. Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 3.08. Taxes and Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 3.09. Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 3.10. Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 3.11. Compliance with Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 3.12. Easements, Property Interests, Utilities, Etc. . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 3.13. Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 3.14. Project Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 3.15. Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 ARTICLE IV CONDITIONS PRECEDENT TO THE FIRST DISBURSEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 4.01. Corporate Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Section 4.02. Participation and Guaranty Agreement and OPIC's Guaranty . . . . . . . . . . . . . . . . . . . 25 Section 4.03. Financing Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
3 ii Section 4.04. Stock Purchase Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 4.05. Engineer's Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 4.06. Parents' Equity Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 4.07. Government Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 4.08. Financial Condition of the Borrower. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 4.09. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 4.10. Development Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 4.11. Environmental and Worker Rights Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 4.12. Appointment of Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Section 4.13. Legal Opinions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Section 4.14. Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Section 4.15. Capital and Organizational Structure of the Borrower . . . . . . . . . . . . . . . . . . . . . 29 Section 4.16. Escrow Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Section 4.17. Other Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 ARTICLE V CONDITIONS PRECEDENT TO THE DISBURSEMENTFOR THE KUFPEC ACQUISITION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Section 5.01. Kufpec Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Section 5.02. Corporate Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Section 5.03. Legal Opinions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Section 5.04. Governmental Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Section 5.05. Parent Equity Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Section 5.06. Amendments to the Financing Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Section 5.07. Engineer's Report and Borrower's Certificate . . . . . . . . . . . . . . . . . . . . . . . . . 31 ARTICLE VI CONDITIONS PRECEDENT TO THEFIRST DEVELOPMENT DISBURSEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Section 6.01. Normal Field Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 6.02. Engineer's Report and Borrower's Certificate; Treatment of Designated Wells . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 ARTICLE VII CONDITIONS PRECEDENT TO THESECOND DEVELOPMENT DISBURSEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 7.01. Completion of Phase I; Development Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 7.02. Engineer's Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 ARTICLE VIII CONDITIONS PRECEDENT TO ALL DISBURSEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 8.01. Representations and Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 8.02. Change in Circumstances; Tax Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 8.03. Certification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 8.04. Payment or Reimbursement of Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 8.05. OPIC Notifications to Paying Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 8.06. Disbursement to Other Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 8.07. Delivery of Note(s) to OPIC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 ARTICLE IX AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Section 9.01. Permit Area Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
4 iii Section 9.02. Borrower Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Section 9.03. Maintenance of Rights and Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . 35 Section 9.04. Government Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Section 9.05. Insurance .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Section 9.06. Accounting and Financial Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 9.07. Financial Statements and Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 9.08. Access to Records; Inspection; Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Section 9.09. Notice of Default and Other Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 9.10. Security Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 9.11. Funding of the Loan; Funding Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 9.12. Project Monitoring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Section 9.13. Cure of Defaults Under JOA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Section 9.14. Compliance with Environmental Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Section 9.15. Engineer's Reports; Present Value Ratio Calculations . . . . . . . . . . . . . . . . . . . . . 42 ARTICLE X NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Section 10.01. Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Section 10.02. No Alteration of Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Section 10.03. Dividends and Share Redemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Section 10.04. Conduct of Business with Other Borrower and Affiliates . . . . . . . . . . . . . . . . . . . 44 Section 10.05. Sale of Assets, Mergers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Section 10.06. Mortgages and Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Section 10.07. Ordinary Conduct of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Section 10.08. Worker Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 ARTICLE XI DEFAULTS AND REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Section 11.01. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Section 11.02. Remedies upon Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Section 11.03. Jurisdiction and Consent to Suit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Section 11.04. Judgment Currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Section 11.05. Immunity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 ARTICLE XII MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Section 12.01. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Section 12.02. English Language . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Section 12.03. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Section 12.04. Succession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Section 12.05. Survival of Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Section 12.06. Integration; Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Section 12.07. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Section 12.08. No Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Section 12.09. Waiver of Jury Trial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Section 12.10. Waiver of Litigation Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Section 12.11. Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Section 12.12. Assumption of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Section 12.13. Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
5 FINANCE AGREEMENT AGREEMENT, dated as of December 28, 1994 between and among Walter International Congo, Inc., a Texas corporation ("Walter Congo"), Walter Congo Holdings, Inc., a Texas corporation which wholly-owns Walter, Congo (the "Holding Company"), and Overseas Private Investment Corporation ("OPIC"), an agency of the United States of America. WITNESSETH: WHEREAS, (i) the Holding Company intends to acquire, through the Merger of Walter Congo with and into ACEC, all of the Interests held by ACEC in the Yombo-Masseko-Youbi exploitation Permit issued by the GORC, (ii) the Other Holding Company intends to acquire through the Other Merger of the Other Borrower with and into ACPC all of the Interests held by ACPC in the Permit, (iii) subject to the successful negotiation of the terms thereof, the Holding Company and the Other Holding Company may acquire all or a portion of the Interests in the Permit held by Kufpec, and (iv) the Holding Company, the Borrower, the Other Holding Company and the Other Borrower intend to further develop the Permit area, all as more fully described in the Application and the Development Plan (collectively, the "Project") (all capitalized terms used in these recitals and not defined herein are as defined below); and WHEREAS, it is a condition to the making of the Loan contemplated by this Finance Agreement that, as of the date hereof, the Other Holding Company and Other Borrower shall enter into the Other Finance Agreement and related financing documents with OPIC in connection with the Project; and WHEREAS, the Parent, the Other Parent, the Holding Company, the Other Holding Company, the Borrower and the Other Borrower have entered into a Stock Purchase Agreement with APC pursuant to which, among other things, the Holding Company shall acquire by merger ACEC and the Other Holding Company shall acquire by merger ACPC; and WHEREAS, ACEC, ACPC, the GORC and certain other parties are parties to the Convention, pursuant to which the GORC granted the Interests in the Permit to the holders thereof; and WHEREAS, ACEC, ACPC, Hydro-Congo and certain other parties are parties to the JOA, which sets forth the terms and conditions of the relations among the holders of Interests in the Permit, and it is contemplated that, upon the Merger of Walter Congo with and into ACEC, New Walter Congo will act as the Operator under the JOA; and WHEREAS, in connection with this Finance Agreement and the Other Finance Agreement and the Loan and the Other Loan contemplated hereby and thereby, OPIC is entering into an agreement with the GORC and Hydro-Congo with respect to certain approvals, consents and agreements relating to, among other things, the Project, the Loan and the Other Loan, and investment insurance that may be provided by OPIC; and 6 2 WHEREAS, OPIC is entering into a Participation and Guaranty Agreement, dated as of the date hereof, with the Borrower and the Paying Agent with respect to the Loan and the Finance Agreement, and is also entering into the Other Participation and Guaranty Agreement, dated as of the date hereof with the Other Borrower and the Paying Agent with respect to the Other Loan and the Other Finance Agreement; and WHEREAS, OPIC is entering into an Option Agreement with Amoco and APC, the execution and delivery of which is a condition precedent to the closing of the Mergers referred to above, which Option Agreement sets forth certain rights and obligations of the parties thereto in the event of a default hereunder or under the Other Loan Agreement; and WHEREAS, to secure a portion of the financing for the Project, the Holding Company has requested that OPIC extend a credit facility to the Borrower in an amount up to U.S. $25,000,000 pursuant to Section 234(b) of the Foreign Assistance Act of 1961, as amended, which OPIC is willing to do on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises and of the agreements contained herein, it is hereby agreed as follows: ARTICLE I DEFINITIONS Section 1.01. Definitions. Unless otherwise provided, capitalized terms used herein shall have the definitions specified below: "ACEC" means Amoco Congo Exploration Company, a Delaware corporation. "ACPC" means Amoco Congo Petroleum Company, a Delaware corporation. "Acquisition Expenses" means, (i) with respect to each of the Mergers and the Kufpec Acquisition, the reasonable expenses of such transaction, determined in accordance with GAAP, including fees for business and legal counsel, accounting, engineering and technical advisors, and costs of document preparation and distribution, plus (ii) with respect to the Mergers only, other expenses of personnel performing due diligence and transitional duties in the Congo, and all expense reimbursements and fees payable to OPIC and/or the Holders hereunder, under the Other Finance Agreement or under the Commitment Letter prior to the First Disbursement, all as certified to, and approved by, OPIC. "Affiliate" means, with respect to any Person, (i) any other Person that is directly or indirectly controlled by, under common control with or controlling such Person; (ii) any other Person owning beneficially or controlling five percent (5%) or more of the equity interest in such Person; (iii) any officer, director or partner of such 7 3 Person; or (iv) any spouse or relative of such Person. As used herein, the term "control" means possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of partnership interests or voting securities, by contract or otherwise. "Aggregate Present Value Ratio" means, as of any date of determination, the ratio of (i) Future Cash Flows, discounted from the projected dates of receipt and/or payment of each component thereof to the date of determination at the Discount Rate, compounded quarterly, to (ii) the aggregate outstanding principal amount of the Loan and the Other Loan as of the date of determination. "Agreement" means this Finance Agreement among the Borrower, the Holding Company and OPIC. "Amoco" means Amoco Corporation, an Illinois corporation. "APC" means Amoco Production Company, a Delaware corporation and a wholly-owned subsidiary of Amoco. "APC Subordination Agreement" means the Subordination Agreement to be entered into pursuant hereto, among APC, the Borrower, the Holding Company, the Other Borrower, the Other Holding Company and OPIC, substantially in the form attached hereto as Exhibit C-2. "Applicable World Bank Guidelines" means the Offshore Hydrocarbon Project Guidelines, in the form attached hereto as Exhibit J. "Application" means the application to OPIC for the Loan, consisting of the Sponsor Disclosure Report dated November 29, 1993, the Commitment Letter and the items described in Schedule 1.01 hereto. "Assignment Agreement" means the Conditional Assignment and Security Agreement to be entered into pursuant hereto, between the Borrower and OPIC, substantially in the form attached hereto as Exhibit E. "Authorized Officer" means, with respect to any Person, its Chairman, Managing Director, President, Secretary or Treasurer, any Vice President, Assistant Secretary or Assistant Treasurer thereof, and any other officer designated in writing by such Person as having been authorized to execute and deliver this Agreement, the Notes, any of the other Financing Documents to which it is or will be a party or any other notice or instrument contemplated hereunder. "Borrower" means, prior to consummation of the Merger, Walter Congo, and from and after such time, New Walter Congo. "Borrower's Environmental Manuals" has the meaning set forth in Section 9.14. 8 4 "Borrower's Share" means, as of any date, (i) until the independent Voluntary Prepayment Date, fifty percent (50%); and (ii) from and after the Independent Voluntary Prepayment Date, the percentage of the sum of the Loan and the Other Loan outstanding on such date which is represented by the Loan. "Business Day" means any day other than a Saturday, Sunday or day on which commercial banks are authorized or required by law to close in the City of New York, New York, in Houston, Texas or in Washington, D.C., United States of America. "Cancellation Fee" has the meaning set forth in Section 2.03. "Charter Documents" means, in respect of any company, corporation, partnership, governmental agency or other enterprise, its founding act, articles of incorporation and by-laws, memorandum and articles of association, statute or similar instrument. "Closing Agreement" means the agreement with the IRS to be entered into by the Borrower and the other parties thereto pursuant to the Tax Agreement. "Closing Date" means any Business Day on which a Disbursement is made. "Commitment" means, as of any date during the Commitment Period, the amount of $25,000,000 less the portion thereof which has expired or been cancelled pursuant to Section 2.03 hereof. "Commitment Fee" has the meaning set forth in Section 2.02. "Commitment Letter" means the letter agreement among the Parent, the Other Parent and OPIC dated June 27, 1994, in which OPIC has agreed to guarantee, and the Parents have agreed to borrow or cause to be borrowed, the Loan and the Other Loan, subject to the conditions stated therein. "Commitment Period" means the period commencing on the date hereof and ending on the earlier of (i) the first date on which the aggregate principal amount of all Disbursements made hereunder equals the Commitment and (ii) June 26, 1999. "Congo" means the Republic of the Congo. "Convention" shall mean the Convention, dated May 25, 1979, among the GORC, Hydro-Congo and the other holders of Interests in the Permit. "Current Assets" means assets treated as current assets under GAAP. "Current Liabilities" means all Indebtedness and liabilities due on demand or to become due within one year and other liabilities treated as current liabilities under GAAP. "Debt Service Reserve Account" has the meaning set forth in the Escrow Agreement. "Debt Service Reserve Amount" has the meaning set forth in the Escrow Agreement. 9 5 "Deemed Acquisition Costs" shall mean (A) with respect to the Mergers, the sum of (i) $31,500,000, increased or decreased to reflect any cash Balancing Payments (as referred to in the Stock Purchase Agreement) pursuant to Section 3(B) or Section 3(C) of the Stock Purchase Agreement and (ii) the applicable Acquisition Expenses; and (B) with respect to the Kufpec Acquisition, the actual purchase price of the Interest held by Kufpec (which may include the principal of subordinated debt issued to the seller), as reasonably determined by OPIC, plus the applicable Acquisition Expenses. "Designated Wells" means a well or wells that the Engineer has confirmed are located in an area covered by the Permit which, in the Engineer's sole opinion, contains proved Oil reserves. "Development Plan" means the development plan of the Borrower and the Other Borrower, dated December 28, 1994, as amended from time to time with the prior written consent of OPIC. "Disbursement" means each disbursement of the Loan. "Disbursement Maturity Date" means (i) with respect to the First Disbursement, the fourth anniversary of the first Payment Date occurring at least 180 days after the date of such Disbursement, and (ii) with respect to each Disbursement thereafter, the fourth anniversary of the first Payment Date occurring at least 90 days after the date of such Disbursement. "Discount Rate" means, for a given calendar year, the rate determined by calculating as of January 1 of such year the weighted average of the Note Rates (as defined in the Participation and Guaranty Agreement) for each outstanding Note, weighted on the basis of the outstanding amount of the Loan represented by each such Note. Such calculation shall be made by the Borrower and the Other Borrower and shall be approved by OPIC. "Dollars" or "$" means United States dollars. "Engineer" means Arthur Bear of Poco Oil Company or such other individual employed by Poco Oil Company or such other independent engineering firm as shall, in either case, be approved by OPIC. "Engineer's Report" has the meaning set forth in Section 6.05. "Environmental Laws" means any federal, state or local statute, law, ordinance, code, rule, regulation, order, decree or other requirement of any Governmental Body regulating, relating to or imposing liability or standards of conduct concerning any hazardous, toxic or dangerous waste, substance or material and applicable to the Project or to the Borrower or the Other Borrower. 10 6 "Escrow Account" or "Escrow Accounts" means a Dollar-denominated escrow account or accounts established pursuant to the terms of the Escrow Agreement. "Escrow Agent" means Citibank, N.A., a national banking association, or any successor or successors thereto as Escrow Agent under the Escrow Agreement. "Escrow Agreement" means the Escrow and Security Agreement to be entered into pursuant hereto, among the Borrower, OPIC and the Escrow Agent, substantially in the form attached hereto as Exhibit D. "Event of Default" has the meaning set forth in Section 11.01. "Existing Environmental Manuals" has the meaning set forth in Section 9.14. "Facility Fee" has the meaning set forth in Section 2.10. "Financial Plan" has the meaning set forth in Section 1.03. "Financial Statements" means, with respect to any Person, such Person's quarterly or annual balance sheet and statements of income, retained earnings, and sources and application of funds for such fiscal period, together with all notes thereto and with comparable figures for the corresponding period of its previous Fiscal Year, each prepared in Dollars in accordance with GAAP. "Financing Documents" means the Loan Documents, the Security Documents and the Project Documents, each as defined in Section 4.03. "First Development Disbursement" has the meaning set forth in Section 2.01(c). "First Disbursement" has the meaning set forth in Section 2.01(c). "Fiscal Year" means, with respect to ACEC and the Borrower, the period beginning on January 1 and ending on December 31 of each year. "Future Cash Flows" means, as of any date of determination, the amount equal to (I) gross revenues allocable to the Interests of the Borrower and the Other Borrower projected, for the period from the date of determination through the economic life of the proved reserves, to be realized from production from proved reserves in the Permit area, plus (II) without duplication, amounts projected to be repaid by Hydro-Congo pursuant to Article 9.02 of the JOA on the advance accounts of the Borrower and the Other Borrower during the projection period, less (III) the aggregate amount of Project Expenses projected to be paid during the projection period, plus (IV) the aggregate amount of such Project Expenses reasonably expected to be funded by the proceeds of Disbursements made (or to be made) on or prior to the date of determination. The Future Cash Flows shall be computed on the basis of projections and the related price of Oil determined by the Engineer for purposes of the Engineer's Report. 11 7 "GAAP" means generally accepted accounting principles in the United States of America in effect from time to time, applied on a consistent basis both as to classification of items and amounts. "GORC" means the Government of the Congo. "GORC Approval Letters" means collectively the letter dated February 22, 1995 from the Minister of Foreign Affairs of the Congo, the letters dated February 14, 1995 from the Minister of Hydrocarbons of the Congo, and the letter dated February 22, 1995 from the President of Hydro-Congo. "Governmental Body" means and includes any national, federal, state, county, city, town, village, municipal or other local governmental department, commission, board, bureau, agency, authority or instrumentality, domestic or foreign, or any political subdivision thereof, and any Person exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to any government, including without limitation all commissions, boards, bureaus, arbitrators and arbitration panels, and any corporation, authority or other Person owned or controlled (through stock or capital ownership or otherwise) by any of the foregoing. "Guaranty Fee" has the meaning set forth in Section 2.09. "Hazardous Materials" means any hazardous, toxic or dangerous waste, substance or material defined as such in any of the applicable Environmental Laws. "Holder" means any holder of a fractional, undivided beneficial interest in the Loan and the Notes, pursuant to the terms of the Participation and Guaranty Agreement. "Holding Company" has the meaning set forth in the recitals to this Agreement. "Hydro-Congo" means Societe Nationale de Recherches et d'Exploration Petrolieres Hydro-Congo, a Congolese corporation that is wholly-owned by the GORC. "Indebtedness" of any Person means, at any date, all or any liabilities, obligations and reserves, contingent or otherwise, which, in accordance with GAAP, would be reflected as a liability on a balance sheet, including without limitation, (i) any obligation of such Person for borrowed money or arising out of any credit facility, (ii) any obligation of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) any obligation of such Person to pay the deferred purchase price of property or services, (iv) any obligation of such Person under conditional sales or other title retention agreements, (v) the net aggregate rentals under any lease by such Person as lessee which under GAAP would be capitalized on the books of the lessee or which is the substantial equivalent of the financing of the property so leased, (vi) any obligation of such Person to purchase securities or other property which arise out of or in connection with the sale of the same or substantially similar securities or property, (vii) any obligation of such Person secured by any Lien upon property, (viii) any Indebtedness of others secured by a 12 8 Lien on any asset of such Person and (ix) any Indebtedness of others guaranteed, directly or indirectly, by such Person. "Indemnified Persons" has the meaning set forth in Section 12.11. "Independent Voluntary Prepayment Date" has the meaning set forth in Section 2.07(b). "Individual Present Value Ratio" means the ratio determined in a manner identical to the Aggregate Present Value Ratio but taking into account only (i) Future Cash Flows attributable to the Interests of the Borrower and (ii) the Loan. "Interests" means the beneficial interests in the Permit. "Inter-Purchaser Agreement" means the Inter-Purchaser Agreement, to be entered into in connection with the Mergers, between the Borrower and the Other Borrower. "IRS" means the Internal Revenue Service of the United States Department of the Treasury. "Issuing Instructions" has the meaning set forth in the Participation and Guaranty Agreement. "JOA" means the Joint Operating Agreement among Hydro-Congo, Kufpec, ACEC (or, following the Merger, the Borrower) and ACPC (or, following the Other Merger, the Other Borrower), as amended from time to time. "Kufpec" means Kufpec (Congo) Limited, a Cayman Islands corporation that is wholly-owned by the Kuwait Foreign Petroleum Corporation. "Kufpec Acquisition" means the acquisition by the Borrower and/or the Other Borrower of all of the Interests held by Kufpec or all of the outstanding capital stock of Kufpec. "Lien" means any lien, pledge, mortgage, security interest, deed of trust, charge, assignment, hypothecation, title retention or other encumbrance on or with respect to, or any preferential arrangement having the practical effect of constituting a security interest with respect to the payment of any obligation with, or from the proceeds of, any asset or revenue of any kind. "Loan" means, on any date, the aggregate of the outstanding unpaid principal amounts of the Notes then outstanding. "Loan Documents" has the meaning set forth in Section 4.03(a). "Loan Maturity Date" means the last occurring Disbursement Maturity Date of any Disbursement made hereunder. "Maintenance Fee" has the meaning set forth in Section 2.10(b). 13 9 "Merger Closing Date" means the closing date for the transactions contemplated by the Merger. "Merger" means the merger of Walter Congo with and into ACEC pursuant to the Plan of Merger contemplated by the Stock Purchase Agreement. "Mergers" means the Merger and the Other Merger. "Net Cash Flow" means, for any period, the aggregate Proceeds attributable to the Interests of the Borrower and the Other Borrower less the aggregate Operating Costs and Required Payments for such period (as such terms are defined in the Escrow Agreement). "Net Income" means, with respect to any Person for any fiscal period, the net income of such Person for such period after Taxes but before extraordinary items, determined in accordance with GAAP. "New Walter Congo" means, from and after the effective time of the Merger, Walter Congo International, Inc., a Delaware corporation and the surviving entity of the Merger of Walter Congo into ACEC. "Note" or "Notes" means any promissory note issued by the Borrower pursuant to this Agreement and the Participation and Guaranty Agreement, substantially in the form of Exhibit A to the Participation and Guaranty Agreement. "Nuevo Congo" means The Nuevo Congo Company, a Texas corporation. "NUFIC" means National Union Fire Insurance Co. "Oil" means oil, other hydrocarbons and any other energy natural resources which are exploited in the Permit area as part of the Project. "Operator" means New Walter Congo, in its capacity as "Operator" under the JOA and any successor entity appointed as operator pursuant to the JOA. "OPIC" means Overseas Private Investment Corporation, an agency of the United States of America. "Option Agreement" means the Option Agreement by and among APC, Amoco and OPIC substantially in the form of Schedule L to the Stock Purchase Agreement. "Other Borrower" means, prior to the consummation of the Other Merger, Nuevo Congo, and from and after such time, the surviving entity of the Other Merger. "Other Finance Agreement" means the Finance Agreement, dated as of the date hereof, by and among the Other Borrower, the Other Holding Company and OPIC. 14 10 "Other Holding Company" means The Congo Holding Company, a Texas corporation which owns all of the issued and outstanding capital stock of the Other Borrower. "Other Loan" means, on any date, the aggregate of the unpaid principal amounts of the notes outstanding under the Other Finance Agreement. "Other Merger" means the merger of Nuevo Congo with and into ACPC pursuant to the Other Plan of Merger contemplated by the Stock Purchase Agreement. "Other Parent" means Nuevo Energy Company, a Delaware corporation which owns all of the issued and outstanding capital stock of the Other Holding Company. "Other Participation and Guaranty Agreement" means the Participation and Guaranty Agreement among the Other Borrower, OPIC and the Paying Agent. "Other Plan of Merger" means the Agreement and Plan of Merger of Nuevo Congo with and into ACPC substantially in the form of Schedule M-2 to the Stock Purchase Agreement. "Other Subordination Agreement" means the Subordination Agreement by and among OPIC, the Other Borrower, the Other Holding Company and the Other Parent. "Parent" means Walter International, Inc., a Texas corporation, which owns all of the issued and outstanding capital stock of the Holding Company. "Parent Reimbursement Agreement" means a Reimbursement Agreement, which may be entered into pursuant to the Escrow Agreement between OPIC and the Parent, substantially in the form attached to the Escrow Agreement as Exhibit A thereto. "Parent Tax Indemnity Agreement" means the Tax Indemnity Agreement to be entered into pursuant hereto, between the Parent and OPIC, substantially in the form attached hereto as Exhibit G. "Parents" means the Parent and the Other Parent. "Participation and Guaranty Agreement" means the Participation and OPIC Guaranty Agreement among the Borrower, OPIC and the Paying Agent, substantially in the form attached hereto as Exhibit A. "Paying Agent" means NationsBank of Texas, N.A., a national banking association, or any successor or successors thereto as Paying Agent under the Participation and Guaranty Agreement and the Other Participation and Guaranty Agreement. "Payment Date" means each January 15, April 15, July 15 and October 15 commencing on April 15, 1995 until the Loan and all amounts due hereunder or under the Notes are paid in full, unless such date is not a Business Day, in which case the Payment Date will be the next succeeding Business Day. 15 11 "Payment Target" has the meaning set forth in the Escrow Agreement. "Payments Account" has the meaning set forth in the Escrow Agreement. "Permit" means the Yombo-Masseko-Youbi exploitation permit created out of the Marine I exploration permit, offshore the Congo, which was issued by Decree 89/211 of the GORC pursuant to the Convention. "Person" means and includes an individual, a legal entity, including but not limited to, a partnership, a joint venture, a corporation, a trust and an unincorporated organization, and a government or any department or agency thereof. "Phase I Cap Ex" has the meaning set forth in Section 2.01(c). "Phase II Cap Ex" has the meaning set forth in Section 2.01(c). "Plan of Merger" means the Agreement and Plan of Merger of Walter Congo with and into ACEC substantially in the form of Schedule M-1 to the Stock Purchase Agreement. "Prepayment Premium" has the meaning set forth in Section 2.07. "Present Value Ratio" means (i) on any date as of which the Loan and the Other Loan are equal, the Aggregate Present Value Ratio and (ii) on any other date, each of (A) the Individual Present Value Ratio and (B) the "Individual Present Value Ratio" as defined in the Other Loan Agreement (it being understood that, on any date described in clause (ii), a requirement that the Present Value Ratio equal 2.0 to 1.0 shall be a requirement that each ratio described in clauses (A) and (B) equal 2.0 to 1.0). "Proceeds" has the meaning set forth in the Escrow Agreement. "Project" has the meaning set forth in the Recitals. "Project Assets" means materials and equipment governed by Article 8.01 of the JOA and any other property or assets of the Borrower or the Other Borrower that are used from time to time in connection with the Project. "Project Documents" has the meaning set forth in Section 4.03(c). "Project Expenses" means, for any applicable period, (i) production and other payments (including royalty recoupment and subordinated debt) to be made by the Borrower or the Other Borrower to Amoco and, if applicable, the seller of the Kufpec Interests, and (ii) Required Payments to the GORC and NUFIC, taxes, operating costs and expenses reasonably projected to be paid and capital expenditures reasonably projected to be necessary, in each case (x) to cause the Oil production for the projection period to be achieved, and (y) to be paid by, or for the account of, the Borrower or the Other Borrower. 16 12 "Required Payments" has the meaning set forth in the Escrow Agreement. "Security Documents" has the meaning set forth in Section 4.03(b). "Self-Monitoring Questionnaire" means the Annual Self-Monitoring Questionnaire attached hereto as Exhibit I as the same may be revised and supplemented by OPIC from time to time. "Stock Pledge Agreement" means the Stock Pledge Agreement to be entered into pursuant hereto, between the Holding Company and OPIC, substantially in the form attached hereto as Exhibit F. "Stock Purchase Agreement" means the Stock Purchase Agreement, dated as of June 30, 1994, by and among Walter Congo, the Holding Company, the Parent, APC and the other parties named therein. "Subordination Agreement" means the Subordination Agreement to be entered into pursuant hereto, by and among OPIC, the Borrower, the Holding Company and the Parent, substantially in the form attached hereto as Exhibit C-1. "Tax Agreement" means the Tax Agreement among Walter Congo, the Holding Company, APC, and the other parties thereto, substantially in the form as attached as Exhibit D to the Stock Purchase Agreement. "Taxes" has the meaning set forth in Section 2.11. "World Bank" means the International Bank for Reconstruction and Development, an international organization headquartered in Washington, D.C., United States of America. Section 1.02. Interpretation. In this Agreement, unless otherwise indicated or otherwise required by the context: (a) Reference to and the definition of any document (including this Agreement) shall be deemed a reference to such document as it may be amended or modified from time to time; (b) All references to an "Article", "Section", "Schedule" or "Exhibit" are to an Article or Section hereof or to a Schedule or an Exhibit attached hereto; (c) The table of contents, article and section headings and other captions in this Agreement are for the purpose of reference only and do not limit or affect its meaning; (d) Defined terms in the singular shall, except where the context otherwise requires, include the plural and vice versa, and the masculine, feminine or neuter gender shall include all genders; 17 13 (e) Accounting terms used herein but not defined in Section 1.01 hereof shall have the respective meanings given to them under GAAP; (f) The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement; the headings in this Agreement are for the purpose of reference only and do not limit or affect its meaning; and (g) Any reference herein to a time of day means Washington, D.C. time. (h) In the event of any conflict or inconsistency between the terms and provisions of this Agreement and the terms and provisions of any certificate or notice delivered pursuant hereto, the terms and provisions of this Agreement shall be controlling for all purposes. Section 1.03. Project Cost; Financial Plan. The total cost of the Project (including provisions for contingencies) is estimated to be the equivalent of $78,300,000 based on the financial plan set forth in Schedule 1.03 hereto (the "Financial Plan"). Section 1.04. Assumption of Obligations. Immediately upon the consummation of the Merger and pursuant to the terms of the Plan of Merger, the surviving entity of such Merger shall by operation of law assume and become obligated in respect of all the liabilities and obligations of Walter Congo under the Financing Documents and shall, upon the request of OPIC, countersign the Notes issued to OPIC in connection with the First Disbursement. ARTICLE II AMOUNT AND TERMS OF THE LOAN Section 2.01. Amount and Disbursement. (a) Subject to the terms and conditions hereof and in accordance with the Participation and Guaranty Agreement, OPIC agrees to make and the Borrower agrees to accept, the Loan for the Project in the principal amount of not more than $25,000,000. Not more than $9,250,000 in Loan proceeds shall be applied to finance the Merger, not more than $750,000 shall be applied to finance the Kufpec Acquisition; and the balance shall be applied to finance the development of Oil reserves in the Permit area. (b) Subject to the satisfaction of the conditions set forth in Articles IV, V, VI VII and VIII hereof the Borrower may request Disbursements of the Loan in accordance with the Participation and Guaranty Agreement by delivering Issuing Instructions to OPIC pursuant thereto. 18 14 Each Disbursement shall be evidenced by one or more (as OPIC may specify) Notes aggregating the principal amount of the Disbursement and dated the Closing Date. Each Note shall be issued for a term ending on or before the applicable Disbursement Maturity Date. The principal amount of each Disbursement of the Loan will be repaid in Dollars in equal quarterly installments as follows: (i) in the case of the First Disbursement, in no more than 16 quarterly installments commencing on the first Payment Date occurring at least 180 days after the date of such Disbursement, and (ii) in the case of each Disbursement thereafter, in no more than 16 quarterly installments commencing on the first Payment Date occurring at least 90 days after the date of such Disbursement. The outstanding principal amount of the Loan shall not exceed the amount of the Commitment on any date during the Commitment Period. OPIC, in accordance with the Participation and Guaranty Agreement, shall notify the Paying Agent forthwith after the conditions set forth in Article VIII and, as applicable, Article IV, V, VI or VII have been satisfied or waived. (c) The Loan will be disbursed in no more than four (4) separate Disbursements on or prior to the last day of the Commitment Period. The first Disbursement shall be applied to fund the Merger (the "First Disbursement") and shall not exceed the lesser of (i) $9,250,000, (ii) 37.5% of the Deemed Acquisition Costs with respect to the Mergers and (iii) the difference between 50% of such Deemed Acquisition Costs and $2,250,000. The Kufpec Acquisition shall be funded by a single Disbursement in an aggregate amount not to exceed the lesser of (iv) $750,000, (v) 50% of the sum of (X) 50% of the purchase price payable on the date of such acquisition in cash and/or notes and (Y) the applicable Acquisition Expenses and (vi) an amount that, when added to the amount of the First Disbursement, equals 37.5% of the Deemed Acquisition Costs. The first Disbursement to fund development of the Permit area (the "First Development Disbursement") will not exceed the lesser of (vii) $9,350,000, (viii) 75% of the capital expenditures (the "Phase I Cap Ex") reasonably (in OPIC's sole judgment) estimated to be required, and to be funded by the Borrower, to complete "Phase I" of the Development Plan and (ix) an amount that, when added to the aggregate principal amount of prior Disbursements, equals 75% of the sum of (A) 50% of the Deemed Acquisition Costs and (B) the Phase I Cap Ex; provided, however, that Phase I Cap Ex shall not include capital expenditures relating to wells which are not Designated Wells. The final disbursement to fund development (the "Second Development Disbursement") will be the lesser of (x) an amount equal to the Commitment as of the date of Disbursement, less the aggregate principal amount of all prior Disbursements, (xi) 75% of the capital expenditures reasonably (in OPIC's sole judgment) estimated to be required, and to be funded by the Borrower, to complete the Development Plan (the "Phase H Cap Ex") and (xii) an amount that, when added to the aggregate principal amount of all prior Disbursements, equals 75% of the sum of (A) actual capital expenditures theretofore incurred by the Borrower to implement the Development Plan, (B) without duplication, the Phase H Cap Ex and (C) 50% the Deemed Acquisition Costs; provided, however, that Phase H Cap Ex shall not include capital expenditures relating to wells that are not Designated Wells. No Disbursements will be made after the last day of the Commitment Period or in respect of Loan amounts repaid or prepaid. Section 2.02. Commitment Fee. Commencing from the date hereof and continuing through the last day of the Commitment Period, a commitment fee (the "Commitment Fee") shall accrue on a daily basis at the rate of 19 15 0.4375% (seven sixteenths of one percent) per annum on the difference, calculated for each day during such period, between (i) the Commitment and (ii) the aggregate principal amount of all Disbursements made on or prior to such day. The Commitment Fee shall be payable in arrears to OPIC on each Payment Date and upon the termination of the Commitment or any portion thereof. Section 2.03. Cancellation of the Commitment. Following consummation of the Merger, the Borrower may cancel all or any part of the Commitment (less the aggregate amount of all Disbursements to the date of cancellation), upon payment to OPIC of a fee (the "Cancellation Fee") equal to 0.5% (one-half of one percent) of the amount of the Commitment then canceled, together with the Commitment Fee accrued on such amount through the date of cancellation provided, however, that such cancellation shall only be effective if at the same time the Other Borrower shall cancel an equal amount of the OPIC commitment to fund the Other Loan. Any part of the Commitment not disbursed at the close of business on the last day of the Commitment Period shall be deemed to have been cancelled and the Cancellation Fee on such amount shall be due and payable. Anything to the contrary herein notwithstanding, if any portion, up to a maximum of $5,650,000, of the Commitment is canceled solely because OPIC (in consultation with the Engineer) and the Borrower shall have determined that further development of the Oil reserves in the Permit area is not economically feasible, then the Cancellation Fee payable with respect to such cancellation shall be 0.25% (one-quarter of one percent) of the amount cancelled. Section 2.04. Interest. Interest payable on any Note shall be at the rate (which may be fixed or floating), or in the amount, specified in such Note (which rate or amount must be satisfactory to OPIC); provided, however, that if the Borrower fails to pay in full when due (whether at scheduled maturity, by acceleration or otherwise) any amount of principal or interest on any Note, the Borrower shall pay interest to OPIC on demand (to the extent permitted by applicable law) at a rate of interest equal to the sum of 2.0% (two percent) plus the rate specified in such Note applied on a daily basis to the amount in default from the due date thereof to the date of actual payment of the defaulted amount. Section 2.05. Repayment of the Loan. Subject to the provisions of Section 2.06, the Borrower shall repay each Note at such times and in such amounts as are set forth in such Note and in the manner prescribed in the Participation and Guaranty Agreement. Upon repayment in full of the amounts due under the Notes and the discharge of all obligations of the Borrower under this Agreement and the Participation and Guaranty Agreement, OPIC shall cancel and return each Note to the Borrower. 20 16 Section 2.06. Amortization of the Notes. Each Disbursement shall mature on the applicable Disbursement Maturity Date and, in accordance with Section 2.01(b), shall have a separate schedule of principal payments for the portion of the Loan advanced pursuant to such Disbursement; and the Note or Notes issued in connection with each such Disbursement shall set forth the scheduled principal payments due on each Payment Date with respect to such portion of the Loan. At any time following the end of the Commitment Period, OPIC may elect to replace outstanding Notes that have identical Note Rates (as defined in the Participation and Guaranty Agreement) with a single Note that consolidates the schedule of principal payments into a single schedule. Section 2.07. Voluntary Prepayment. (a) Subject to the requirements of the Holders and the provisions of Section 2.07(b), on any date the Borrower may, upon not less than ten (10) Business Days' prior notice to OPIC and the Paying Agent, reduce the amount of the Loan outstanding upon (A) the payment to the Holders of any premium or other amount required by such Holders, and (B) the payment to OPIC of a prepayment premium (the "Prepayment Premium") of (i) 3% (three percent) of the amount by, which the Loan is so reduced during the year immediately following the date of the First Disbursement, (ii) 2% (two percent) of the amount by which the Loan is so reduced during the year immediately following the first anniversary of the date of the First Disbursement, and (iii) 1% (one percent) of the amount by which the Loan is so reduced during the year immediately following the second anniversary of the date of the First Disbursement. No prepayment premium shall be payable to OPIC following the third anniversary of the date of the First Disbursement. The amount by which the Loan is so reduced shall be applied against the outstanding Loan in the inverse order of the reductions thereof provided for in all outstanding Notes. (b) Until the date on which the conditions set forth in Section 7.01 have been satisfied in OPIC's sole discretion or OPIC and the Borrower have mutually agreed to the abandonment or discontinuation of the Development Plan (such date, the "Independent Voluntary Prepayment Date"), any voluntary prepayment pursuant to Section 2.07(a) may only be made at the time, and in the amount, of a simultaneous voluntary prepayment of the Other Loan by the Other Borrower pursuant to the Other Finance Agreement. From and after the Independent Voluntary Prepayment Date, the Borrower may make voluntary prepayments on the Loan pursuant to Section 2.07(a) independent of any voluntary prepayment by the Other Borrower. Section 2.08. Mandatory Prepayment The Borrower shall reduce the amount of the Loan outstanding by: (a) 50% of the amount by which (x) the aggregate amount of insurance proceeds received by the Borrower, the Other Borrower or the Operator for or in respect of the Interests of the Borrower or the Other Borrower in the Project Assets during any Fiscal Year, other than proceeds received in respect of political risk coverages, which are not applied or committed within 21 17 180 days after the receipt thereof to the repair or replacement of such properties or assets, exceeds (y) $500,000; and (b) (x) On any date when the Loan and the Other Loan are equal, the Borrower's Share of the amount by which the aggregate outstanding balance of the Loan and the Other Loan exceeds the amount that would yield a Present Value Ratio, as of any date of determination, of at least 2.0 to 1.0, and (y) on any other date, the amount by which the aggregate outstanding balance of the Loan exceeds the amount that would yield an Individual Present Value Ratio of 2.0 to 1.O. Any prepayment obligation arising solely as a result of the Present Value Ratio, or the Individual Present Value Ratio, as applicable, being less than 2.0 to 1.0 but which is at least 1.3 to 1.0 may be satisfied by retaining 100% (one hundred percent) of Net Cash Flow on a reserved basis in the Payments Account, and applying such accumulated amounts to make the required prepayment (together with all interest and fees accrued on the amount prepaid) on successive Payment Dates, until the prepayment obligation has been satisfied in full. The reduction in the outstanding Loan occasioned pursuant to this Section 2.08 shall have the same effect as if such reduction occurred pursuant to Section 2.07 above, except that no Prepayment Premium to OPIC shall be due. Except as provided in Section 2.08(b) above, all mandatory prepayment amounts shall be due immediately. Section 2.09. OPIC Guaranty Fee. The Borrower shall pay to OPIC a fee (the "Guaranty Fee") for its guaranty under the Participation and Guaranty Agreement at the rate of 2.75% (two and three-quarters percent) per annum on the amount of the Loan outstanding from time to time. The Guaranty Fee shall be payable in arrears on each Payment Date and upon the repayment of the Loan in full. Section 2.10. Facility and Maintenance Fees. (a) The Borrower agrees to pay to OPIC a one-time facility fee (the "Facility Fee") in the amount of $250,000, of which a total of $100,000 has previously been paid to OPIC. Of the remaining amount, $100,000 shall be due and payable upon the execution and delivery of this Agreement; and the remaining outstanding balance of $50,000 shall be due and payable on the date of the First Disbursement. (b) Commencing on October 15, 1995 and continuing until all amounts due hereunder are paid in full, the Borrower shall pay to OPIC in arrears on October 15 of each year an annual maintenance fee (the "Maintenance Fee") of $2,500. Section 2.11. Taxes. (a) All sums payable by the Borrower hereunder or under the Notes or under the Participation and Guaranty Agreement, whether of principal, interest, fees, expenses or otherwise, shall be paid in full, free of any deductions or withholdings for any and all present and future taxes, 22 18 levies, imposts, stamps, duties, fees, deductions, charges, withholdings, and all liabilities with respect thereto (herein, collectively, but subject to the following exclusions, referred to as "Taxes"), excluding income, franchise or ad valorem taxes imposed by any jurisdiction as a direct consequence of OPIC, the Paying Agent or any Holder, as the case may be, being organized and existing, qualified to do business, or maintaining a permanent establishment, in such jurisdiction. In the event that the Borrower is prohibited by law from making payments hereunder or under the Notes free of such deductions or withholdings, then the Borrower shall pay such additional amount as may be necessary in order that the actual amount received after such deduction or withholding shall equal the full amount stated to be payable hereunder or under the Notes. (b) The Borrower shall pay directly to the appropriate taxing authority any and all present and future Taxes, and all liabilities with respect thereto imposed by law or by any taxing authority on or with regard to any aspect of the transactions contemplated by this Agreement or the execution and delivery of this Agreement, the Notes or the Participation and Guaranty Agreement, except for any Taxes or other liabilities which the Borrower is contesting in good faith by appropriate proceedings, provided that OPIC, the Paying Agent and the Holders shall be indemnified and held harmless from and against any and all liabilities, fees or additional expense with respect to or resulting from any delay in paying, or omission to pay, Taxes. Within 30 days after the payment by the Borrower of any Taxes, the Borrower shall furnish OPIC with the original or a certified copy of the receipt evidencing payment thereof, together with any other information OPIC may reasonably require to establish to its satisfaction that full and timely payment of such Taxes has been made. (c) OPIC or the Paying Agent, as the case may be, shall notify the Borrower of any payment of Taxes required or requested of either of them or of any Holder and shall give due consideration to any advice or recommendation given in response thereto by the Borrower, and upon notice from OPIC or the Paying Agent, as the case may be, that Taxes or any liability relating thereto (including penalties and interest) have been paid by any of them, the Borrower shall pay or reimburse such party therefor within 30 days of such notice. (d) Without prejudice to the survival of any other agreement of the Borrower hereunder, the agreements and obligations of the Borrower contained in this Section 2.11 shall survive the payment in full of principal and interest hereunder and under the Notes. Section 2.12. Miscellaneous. (a) Payment or Reimbursement of Expenses. The Borrower shall pay or reimburse OPIC, upon request, for the Borrower's Share of all costs and expenses incurred by OPIC in connection with the negotiation, preparation, execution and delivery, and implementation of this Agreement, the Commitment Letter, the Notes, the other Financing Documents, the Other Finance Agreement, and the notes and other financing documents related thereto, including, without limitation, (i) the reasonable fees and expenses of outside legal counsel, business consultants and technical advisors (including without limitation all such fees and expenses incurred prior to the date hereof), (ii) all expenses associated with document preparation and distribution, costs of reproducing and binding document transcripts (including up to five copies for OPIC), (iii) all 23 19 expenses associated with the translation, authentication and recordation (if required) of the Loan, the Other Loan or any of the related documents, and (iv) communication and travel expenses and other such out-of-pocket expenses incurred by OPIC. In addition, the Borrower shall pay or reimburse OPIC, upon request, for all reasonable costs and expenses (including, without limitation, reasonable attorneys' fees and expenses and the reasonable cost of travel) incurred by OPIC in preserving in full force and effect or enforcing its rights hereunder, including collecting amounts due hereunder and under the Notes, the Escrow Agreement, the Participation and Guaranty Agreement, the Subordination Agreement, the Stock Pledge Agreement, and the Assignment Agreement, and such costs and expenses with respect to the other Financing Documents or incurred in connection with the modification, amendment or waiver of any provision of any of the foregoing documents. Such payments or reimbursements shall be due and payable upon the receipt by the Borrower of OPIC's request therefor from time to time; provided, however, that to the extent of any portion of the Facility Fee that previously has been paid to OPIC, travel expenses incurred directly by OPIC prior to the date of the First Disbursement shall be reimbursed out of such Fee. The obligation of the Borrower to pay or reimburse OPIC as provided herein shall remain whether or not any Disbursement occurs under this Agreement. (b) Currency and Place of Payments. All payments required hereunder or under the Participation and Guaranty Agreement shall be made in Dollars in immediately available funds without any offset or deduction for Taxes or otherwise to the Paying Agent at the address specified in the Participation and Guaranty Agreement or, as the case may be, to OPIC by wire transfer (via a United States domestic bank) as follows: U.S. Treasury Department New York, NY ABA No. 0210-3000-4 TREAS NYC/CTR/BNF=AC-71000001 OBI=OPIC Loan Number 679-94-139-IG (c) Computation of Interest on Notes and Fees. Except as otherwise provided herein or in the Participation and Guaranty Agreement or in any Note, interest, Commitment Fees and the Guaranty Fee shall be computed on the basis of 360-day years consisting of twelve 30-day months. (d) Application of Payments to OPIC. Payments received by OPIC under this Agreement or payments made with respect to any Note shall be applied to amounts due under this Agreement and under the Notes in such manner as OPIC in its sole discretion may determine to be appropriate, notwithstanding any instruction to the contrary from the Borrower. ARTICLE III REPRESENTATIONS AND WARRANTIES Each of the Borrower and the Holding Company represents, covenants, and warrants to OPIC that: 24 20 Section 3.01. Existence and Power of the Holding Company and the Borrower. Each of the Holding Company and the Borrower is a corporation duly organized, validly existing, and in good standing under the laws of Texas (or, with respect to the Borrower, from and after consummation of the Merger, under the laws of Delaware). Each of the Holding Company and the Borrower is duly authorized to borrow money and create a charge on its properties and to execute, deliver and perform this Agreement, the Notes and each of the other Financing Documents to which it is or will be a party. From and after consummation of the Merger, the Borrower shall be duly registered or qualified to do business as a foreign corporation in the Congo. Section 3.02. Authority of the Holding Company and the Borrower. The Holding Company's and the Borrower's execution, delivery and performance of this Agreement, the Notes (with respect to the Borrower) and each of the other Financing Documents to which it is or will be a party: (i) have been duly authorized by all necessary corporate action; (ii) will not violate any applicable regulation or ruling of any governmental authority; and (iii) will not breach, or result in the imposition of any Lien upon any of its assets (except as permitted by Section 10.06 hereof) under, any of its Charter Documents or any agreement or other requirement by which it or any of its properties may be bound or affected. The execution and delivery by the Holding Company or the Borrower of this Agreement, the Notes and each of the other Financing Documents to which it is or will be a party will cause each such respective instrument to constitute a legal, valid and binding obligation of the Holding Company or the Borrower enforceable in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights generally or general principles of equity (regardless of whether such enforcement is considered in a proceeding in equity or at law). Except as set forth in Section 3.11 hereof, no consent of any other Person, including shareholders of the Holding Company or the Borrower, is required in connection with the execution, delivery, performance, validity or enforceability of any of the Financing Documents. The Borrower's obligations hereunder and under the Notes will rank not less than pari passu with all of the Borrower's other Indebtedness and obligations. 3.03. Status of Holding Company and Walter Congo. Each of the Holding Company and Walter Congo were formed solely for the purpose of the transactions contemplated by the Stock Purchase Agreement and this Agreement; and neither the Holding Company nor Walter Congo have conducted any business, own any assets, or are subject to any liabilities, except, in each case, as are incident to their formation or as contemplated by the Stock Purchase Agreement, the Inter-Purchaser Agreement, or this Agreement. Section 3.04. Financial Condition. The consolidated unaudited balance sheet for ACEC and ACPC (the "Balance Sheet") as at December 1, 1993 (the "Balance Sheet Date") have been furnished to OPIC. The Balance Sheet 25 21 has been prepared in accordance with generally accepted accounting principles consistently applied except as noted therein and except for normal year-end adjustments, and (except with regard to insurance and abandonment and removal obligations) fairly presents in all material respects the combined financial position of ACEC and ACPC as of the Balance Sheet Date. Except on account of matters that generally affect the economy or the oil and gas industry, since the Balance Sheet Date there have been no material adverse changes in (i) the assets, liabilities or financial condition of ACEC or ACPC, taken as a whole, from that set forth in the Balance Sheet or (ii) the business or financial condition of ACEC or ACPC, taken as a whole, other than, with respect to clauses (i) and (ii) hereof changes in the ordinary course of business or as permitted in Article 15 of the Stock Purchase Agreement. ACEC owns, free and clear of any security interest, lien or encumbrance, its Participating Interest Share (as defined in the Stock Purchase Agreement) in the JOA and all property owned jointly by the parties to the JOA. Except as set forth on Schedule E of the Stock Purchase Agreement or as otherwise set forth on the Balance Sheet or reflected in the notes thereto, and except with regard to abandonment and removal obligations or liabilities related to national payroll employees, ACEC and ACPC have no obligation or liability material which is to ACEC and ACPC, taken as a whole (whether accrued, absolute, contingent, unliquidated or otherwise, whether due or to become due), other than contractual liabilities incurred in the ordinary course of business which are not required to be disclosed on the Balance Sheet and other than liabilities which have arisen after the Balance Sheet Date in the ordinary course of business, consistent with past practices, or as permitted in Article 15 of the Stock Purchase Agreement Section 3.05. Capitalization of the Borrower. Following consummation of the Merger, the authorized capital of the Borrower shall consist only of ten (10) shares of common stock, par value $100.00 per share. As of the consummation of the Merger, all such capital stock of the Borrower shall have been duly authorized and validly issued, and shall be fully paid and nonassessable. There are no outstanding subscriptions, options, warrants, calls, agreements, preemptive rights, acquisition rights, redemption rights or any other rights or claims of any character which restrict the transfer of, require the issuance of, or otherwise relate to any class of the capital stock of the Borrower. From and after the consummation of the Merger, all of the issued and outstanding capital stock of the Borrower shall be owned beneficially and of record by the Holding Company. Section 3.06. Subsidiaries. The Borrower does not own or otherwise control any voting stock of, or have any ownership interest in, any other Person, including any other corporation or partnership. Section 3.07. Liens. The Security Documents are, or upon filing and registration will be, effective to create in favor of OPIC legal, valid and enforceable first Liens on all of the assets intended to be covered thereby. The Borrower does not have outstanding, nor is it contractually bound to create, any 26 22 Lien on or with respect to, any of its properties, rights or revenues, except as permitted in Section 10.06. Section 3.08. Taxes and Reports. All material tax returns and reports of the Borrower required by law to be filed in the United States and the Congo, and each governmental subdivision thereof, have been duly filed for periods ending prior to the date of this Agreement, and all material Taxes, assessments, fees and other governmental charges due, or reasonably anticipated to become due with respect to the period up to and including the first Closing Date, in respect of the Borrower, or any assets, income or franchises of the Borrower, have been duly paid, or have been adequately provided for on the books of the Borrower. Section 3.09. Defaults. No Event of Default hereunder, or event which with the passage of time or the giving of notice would constitute an Event of Default hereunder, has occurred and is continuing. Neither the Borrower nor any other party is in breach of any provision of any contract to which the Borrower is a party, which breach would have a material adverse effect upon the Borrower's financial condition or upon the Borrower's right or ability to perform its obligations under this Agreement, any Note or any other Financing Document. Section 3.10. Litigation. No action, suit, other legal proceeding, arbitral proceeding or investigation is pending by or before any domestic or foreign court or governmental authority or in any arbitral or other forum, or, to the knowledge of the Borrower after due inquiry, is threatened, against the Borrower, the Holding Company or the Parent (or, to the best knowledge of the Borrower, the Other Borrower or the Operator) or any of its properties or rights that (i) relates to any of the transactions contemplated by this Agreement or any other Financing Document, or (ii) has, or if adversely determined would have, a material adverse effect on the Borrower's financial condition or on its right or ability to perform its obligations under this Agreement, any Note or any other Financing Document. Section 3.11. Compliance with Law. The Borrower is conducting its business and the Project is being operated in compliance in all material respects with all applicable laws, regulations and authorizations of all relevant governmental authorities, non- compliance with which could reasonably be expected to have material adverse legal or financial consequences for the Borrower, and in compliance with its Charter Documents. The Borrower or the Operator has duly obtained all material consents, licenses, approvals and authorizations and has effected all declarations, filings and registrations 27 23 necessary for the due execution, delivery and performance by the Borrower of this Agreement, the Notes and each of the other Financing Documents to which it is or will be a party, except for those relating to future operations and transactions, which are expected to be obtained as a matter of course. Section 3.12. Easements, Property Interests, Utilities, Etc. All easements, leasehold and other property interests, and to the knowledge of the Borrower after due inquiry, all utility and other services, means of transportation, facilities, other materials and other rights that can reasonably be expected to be necessary for the construction, completion and operation of the Project in accordance with applicable requirements of law and the Financing Documents (including, without limitations gas, electrical water and sewage services and facilities) have been procured or are commercially available to the Project, and, to the extent appropriate, arrangements have been made on commercially reasonable terms for such easements, interests, services, means of transportation, facilities, materials and rights. To the best knowledge of the Borrower after due inquiry, no material licenses, trademarks, patents or other similar agreements are necessary for the construction, ownership, operation and maintenance of the Project. Section 3.13. Environmental Matters. (a) The Borrower has duly complied with, and its businesses, operations, assets, equipment, property, leaseholds, or other facilities are materially in compliance with, the provisions of all applicable environmental, health and safety laws, codes and ordinances, and all rules and regulations promulgated thereunder. The Borrower (x) has been issued and will maintain all required permits, licenses, certificates and approvals relating to, and (y) has received no complaint, order, directive, claim, citation or notice by any governmental authority or any Person with respect to: (i) air emissions, (ii) discharges to surface water or ground water, (iii) noise emissions, (iv) solid or liquid waste disposal, (v) the use, generation, storage, transportation or disposal of toxic or hazardous substances or wastes, or (vi) other environmental, health or safety matters. (b) No real property owned or leased by the Borrower contains, to the Borrower's knowledge after due inquiry, any Hazardous Materials that, under any applicable Congolese Environmental Law currently in effect and under the Applicable World Bank Guidelines (i) could reasonably be expected to impose liability on the Borrower or the Project Assets that could reasonably be expected to have a material adverse effect on the business (including the Project), results of operations or financial condition of the Borrower, (ii) could reasonably be expected to have a material adverse effect on the value or prospects of the Project, or (iii) will result in the imposition of a Lien on the Project Assets or any other real property owned or leased by the Borrower. 28 24 Section 3.14. Project Cost. The Borrower's good faith estimate of the total cost to the Borrower and the Other Borrower of the Project (including provisions for contingencies) is the equivalent of $78,300,000, based on the Financial Plan set forth in Schedule 1.03. The Project costs related to the Mergers include an aggregate cash payment of $21,500,000 (representing a purchase price of $31,500,000, reduced by a Balancing Payment (as defined in the Stock Purchase Agreement) of $10,000,000) to APC and estimated Acquisition Expenses of $2,800,000. Section 3.15. Disclosure. All documents, reports or other written information pertaining to the Project (including, without limitation, the Application and this Agreement) which have been furnished to OPIC are true and correct in all material respects and do not contain any material misstatement of fact or omit to state a material fact or any fact necessary to make the statements contained herein or therein not materially misleading. There is no fact known to the Borrower, that has not been disclosed to OPIC in writing, the existence of which would have a material adverse effect upon the business, operations, properties or prospects of the Borrower or the Other Borrower or the ability of the Borrower or the Other Borrower to perform its respective obligations under any of the Financing Documents. No condition has arisen since the date of the Commitment Letter that has or would have a material adverse effect on the Borrower's ability to perform its obligations hereunder or under the Financing Documents. To the best knowledge of the Borrower, after due inquiry, the representations and warranties of APC in the Stock Purchase Agreement are true and correct in all material respects. ARTICLE IV CONDITIONS PRECEDENT TO THE FIRST DISBURSEMENT Unless OPIC otherwise agrees in writing, the obligation of OPIC to make the First Disbursement of the Loan is subject to the prior fulfillment, to OPIC's satisfaction in its sole discretion, of the following conditions precedent and to their continued turbulent on the date of the First Disbursement: Section 4.01. Corporate Authorization. (a) OPIC shall have received a certificate of an Authorized Officer of the Borrower and the Holding Company, dated the Closing Date, in form and substance satisfactory to OPIC attaching a copy of each of the Charter Documents of the Borrower (after giving effect to the Merger), as amended to date, certifying that the attached copies are true and complete and in full force and effect as of the Closing Date; 29 25 (b) OPIC shall have received a certificate of an Authorized Officer of each party executing the applicable agreements and documents (i) attaching a true and complete copy of the resolutions of the Board of Directors of each applicable party, and of all documents evidencing any other necessary corporate action (each such resolution and document in form and substance satisfactory to OPIC), authorizing such party to execute, deliver and perform this Agreement, the Notes and each of the other Financing Documents to which it is or will be a party and to engage in the transactions herein contemplated, and certifying that such resolutions and other documents are in full force and effect as of the Closing Date; and (ii) certifying the names, titles and specimen signatures of the Persons who are authorized to execute and deliver on behalf of such party this Agreement, the Notes, each of the other Financing Documents to which it is or will be a party and all other notices or instruments contemplated hereunder. Section 4.02. Participation and Guaranty Agreement and OPIC's Guaranty. The Paying Agent shall have received a duly executed original copy of the Participation and Guaranty Agreement, and OPIC's guaranty thereunder shall be in full force and effect. Section 4.03. Financing Documents. OPIC shall have received the following documents, each of which shall be in form and substance satisfactory to OPIC, each of which shall have been duly executed by the parties thereto and each of which shall be in full force and effect in accordance with its terms without default: (a) OPIC shall have received duly executed original copies (except as otherwise indicated) of each of the following agreements and documents (the "Loan Documents"): (i) this Agreement; (ii) the Note or Notes issued in connection with the First Disbursement; (iii) the Participation and Guaranty Agreement; (iv) the Escrow Agreement; (v) the Option Agreement among OPIC, APC and Amoco; (vi) the Subordination Agreement; (vii) the Parent Tax Indemnity Agreement; (viii) the APC Subordination Agreement; and (ix) a form of the Parent Reimbursement Agreement (which shall not be executed). 30 26 (b) OPIC shall have received duly executed original copies (or, at OPIC's sole discretion, a true and complete copy) of the following agreements and documents (collectively, the "Security Documents"), whereby the payment of all amounts due or to become due hereunder and under the Notes (including but not limited to principal, interest and fees) is secured by valid and enforceable first priority security interest in favor of OPIC on such assets of the Borrower as may be required by OPIC, whether located in the Congo or elsewhere, including: (i) the Stock Pledge Agreement; (ii) the Escrow Agreement; (iii) the Assignment Agreement; and (iv) all such other agreements, documents or actions which OPIC determines are necessary to secure the payment of all amounts due or to become due hereunder and under the Notes. Each of the Security Documents shall be in full force and effect and shall have been duly filed and registered in every jurisdiction in which such filing and recording is necessary to make valid and effective the Liens intended to be created thereby, and the rights of OPIC thereunder, and OPIC shall have received evidence satisfactory to it that such filing and registration has been made. (c) OPIC shall have received copies of the following agreements, each of which shall be in form and substance satisfactory to OPIC, shall have been duly executed by the parties thereto and shall have been certified by an Authorized Officer of the Borrower as being true and complete and in full force and effect in accordance with its terms without default (the "Project Documents"): (i) the JOA; (ii) the Convention; (iii) the Permit; (iv) the Inter-Purchaser Agreement; (v) the Stock Purchase Agreement; (vi) the Tax Agreement; (vii) the Closing Agreement (which shall have been approved by the other parties and submitted to the IRS for approval); and (viii) the Plan of Merger and the Other Plan of Merger. 31 27 Section 4.04. Stock Purchase Agreement. (a) OPIC shall have received a copy of the officer's certificate of APC delivered to the Borrower and the Holding Company or the Parent pursuant to the Stock Purchase Agreement certifying that (i) all representations and warranties of APC in the Stock Purchase Agreement shall be true and correct as of the date of the First Disbursement; (ii) all conditions to the obligations of the Purchasers (as defined in the Stock Purchase Agreement) under the Stock Purchase Agreement have been satisfied or, with OPIC's prior written consent, waived; and (iii) APC is ready, willing and able to consummate the Mergers simultaneously with the First Disbursement. (b) OPIC shall be satisfied, in its sole discretion, with the computation and effect of the "Balancing Payment" to be made pursuant to Section 3 of the Stock Purchase Agreement, as certified to OPIC by the Borrower. (c) OPIC shall have received original counterparts or certified true copies of all documents, agreements and instruments to be delivered pursuant to the Stock Purchase Agreement, and all such agreements, documents and instruments shall be satisfactory in form and substance to OPIC. Section 4.05. Engineer's Report OPIC shall have received a report, in form and substance satisfactory to OPIC, from the Engineer dated May 20, 1994 (which shall include an analysis dated as of January 1, 1994), or such other current date as OPIC may request, which report shall contain projections of production from proved reserves allocable to the Interests of the Borrower and the Other Borrower and the related Future Cash Flows allocable to such Interests, adjusted to the date of the First Disbursement. OPIC shall also have received a certificate from an Authorized Officer of the Borrower stating that, based on such projections, the Present Value Ratio shall be at least 2.0 to 1.0 immediately following such Disbursement. Section 4.06. Parents' Equity Investment. OPIC shall have received evidence satisfactory to it that the Parent has contributed at least $2,937,500 in equity capital to the Borrower and that the Other Parent has contributed at least $2,937,500 in equity capital to the Other Borrower. Section 4.07. Government Approvals. OPIC shall have received copies, certified by an Authorized Officer of the Borrower as true and complete and in full force and effect, of any registration, governmental consent, approval or permit required by the GORC or obtained in compliance with Section 3.11 hereof or which, in the opinion of special legal counsel to OPIC in the Congo, are necessary for (i) the approval of the Project by the GORC for purposes of the OPIC guaranty under the Participation and Guaranty 32 28 Agreement, and (ii) this Agreement, the Loan and the Note(s) and the payment of all amounts due or to become due with respect thereto not to be subject to any Taxes. Such registrations, consents, approvals or permits shall include, without limitation, (x) the Convention, (y) the Government of the Congo Decree No. 89/211, dated March 15, 1989, granting the Permit, and (z) the GORC Approval Letters. Section 4.08. Financial Condition of the Borrower. OPIC shall have received evidence satisfactory to it, which may, at OPIC's request, include a certificate from the Borrower's chief financial officer or other officer satisfactory to OPIC substantially in the form attached as Exhibit K hereto, with respect to the financial solvency of the Borrower after giving effect to the Merger and the First Disbursement. Section 4.09. Insurance. OPIC shall have received evidence satisfactory to it that the insurance required by Section 9.05 hereof is in full force and effect without default. Section 4.10. Development Plan. OPIC shall have received from the Borrower the Development Plan prepared jointly by the Borrower and the Other Borrower (certified by an Authorized Officer of each of the Borrower and the Other Borrower as true and correct), which shall be in form and substance satisfactory to OPIC. In the event of any inconsistency between the terms and provisions of this Agreement and those contained in the Development Plan, the terms and provisions of this Agreement shall be governing. Section 4.11. Environmental and Worker Rights Matters. (a) OPIC shall have received a certificate from an Authorized Officer of the Borrower or other evidence reasonably satisfactory to OPIC affirming that, after giving effect to the Merger, the Borrower will be in compliance with the more stringent of the Applicable World Bank Guidelines or Congolese Environmental Laws relating to, without limitation, the prevention and, if necessary, the mitigation of any potential adverse environmental consequences arising from the Project. (b) OPIC shall also have received a certificate from an Authorized Officer of the Borrower or other evidence reasonably satisfactory to OPIC affirming that each of the Operator and the Borrower (i) is not taking any actions to prevent employees of the Borrower or Other Borrower from lawfully exercising their right of association and their right to organize and bargain collectively; (ii) is observing applicable laws relating to a minimum age for employment of children, 33 29 acceptable conditions of work with respect to minimum wages, hours of work, and occupational health and safety, and (iii) are not utilizing forced or compulsory labor. The Borrower is not responsible under this Section 4.11 for the actions of a government that may affect any of the foregoing. Section 4.12. Appointment of Agent. OPIC shall have received evidence that the agent for service of process referred to in Section 11.03 has been duly appointed and holds such appointment without reservation until the Loan Maturity Date. Section 4.13. Legal Opinions. OPIC shall have received written opinions, dated the Closing Date, in form and substance satisfactory to OPIC, of (i) United States counsel to the Holding Company and the Borrower, and (ii) Moquet Borde & Associes Societe d'Avocats. Section 4.14. Accountants. OPIC shall have received evidence satisfactory to it that the Borrower (or, if separate audited financial statements of the Borrower are not prepared, then the Parent) has authorized its independent accountants to communicate with OPIC as required by Section 9.06. Section 4.15. Capital and Organizational Structure of the Borrower. OPIC shall have received originals or copies of such documents, which shall be in form and substance satisfactory to OPIC, evidencing all shareholder and management arrangements among the Borrower, the Holding Company and the Parent as OPIC shall reasonably request, in each case duly executed by the parties to each such agreement and certified by Authorized Officers of the Borrower as being true and correct and in full force and effect in accordance with their terms without default. Section 4.16. Escrow Arrangements. OPIC shall have received a duly executed copy of the Escrow Agreement and evidence satisfactory to OPIC in its sole discretion that, pursuant to the Escrow Agreement, the Borrower has established the Escrow Accounts (as defined in the Escrow Agreement) denominated in Dollars at the banking offices of the initial Escrow Agent. 34 30 Section 4.17. Other Documents. OPIC shall have received such other certificates, opinions, agreements and documents, each in form and substance satisfactory to OPIC, as it may reasonably request. ARTICLE V CONDITIONS PRECEDENT TO THE DISBURSEMENT FOR THE KUFPEC ACQUISITION Unless OPIC otherwise agrees in writing, the obligation of OPIC to make the Disbursement for the Kufpec Acquisition is subject to the prior fulfillment, to OPIC's satisfaction in its sole discretion, of the following conditions precedent and to their continued fulfillment on the date of the Disbursement for the Kufpec Acquisition. Section 5.01. Kufpec Acquisition. All representations and warranties of the seller in the acquisition agreement for the Kufpec Acquisition shall be true and correct as of the Closing Date of the Disbursement; all conditions to the obligations of the Purchasers (as defined in the acquisition documents for the Kufpec Acquisition) under such agreement shall have been satisfied (or waived with OPIC's consent); all parties to such agreement shall be ready, willing and able to consummate the Kufpec Acquisition; and the acquisition agreement, all documents, agreements and instruments to be delivered pursuant thereto, the structure of the acquisition and any purchase price or similar adjustments to be made pursuant thereto, shall be satisfactory in form and substance to OPIC. Section 5.02. Corporate Authorization. OPIC shall have received satisfactory evidence of all necessary corporate authorizations, including resolutions authorizing the Kufpec Acquisition and all related obligations of the Borrower, the Holding Company and the Parent, and OPIC shall otherwise be satisfied with all corporate proceedings in connection with the Kufpec Acquisition. Section 5.03. Legal Opinions. OPIC shall have been authorized by counsel to Kufpec to rely on any opinion of such counsel delivered to the Borrower as if such opinion were addressed to OPIC, and shall have received opinions of counsel dated the date of such Disbursement, confirming in form and substance satisfactory to OPIC the continuing validity of the opinions delivered for the First Disbursement. 35 31 Section 5.04. Governmental Approvals. Such governmental approvals and consents as OPIC in its sole discretion shall deem necessary shall have been received with respect to the Kufpec Acquisition. Section 5.05. Parent Equity Contributions. OPIC shall have received evidence satisfactory to it that the Parent has contributed at least $1,250,000 in equity capital or subordinated debt (on terms and conditions satisfactory to OPIC) and that the Other Parent has contributed at least $1,250,000 in equity capital or subordinated debt (on terms and conditions satisfactory to OPIC) to the Other Borrower. Section 5.06. Amendments to the Financing Documents. An amendment or amendments in form and substance satisfactory to OPIC, shall have been executed and delivered by the applicable parties making such changes to this Agreement and/or the Financing Documents as may, in OPIC's judgment, be required in connection with the consummation of the Kufpec Acquisition. Without limiting the foregoing, the Financing Documents shall be amended or supplemented in connection with the Kufpec Acquisition as necessary in OPIC's judgment to create Liens for the benefit of OPIC on the Kufpec stock and/or the Interests held by Kufpec, as applicable, equivalent to the Liens provided by the Security Documents. Section 5.07. Engineer's Report and Borrower's Certificate. OPIC shall have received (i) a written report by the Engineer dated as of a current date acceptable to OPIC, satisfactory to OPIC in form and substance, containing projections of production from proved reserves allocable to the Interests of the Borrower and the Other Borrower and the related Future Cash Flows, adjusted to the Closing Date of the Disbursement for the Kufpec Acquisition (and giving effect to such Disbursement) and (ii) a certificate of an Authorized Officer of each of the Borrower and the Other Borrower showing the Present Value Ratio as of such date (after taking into account such Disbursement) to be at least 2.0 to 1.0. ARTICLE VI CONDITIONS PRECEDENT TO THE FIRST DEVELOPMENT DISBURSEMENT Unless OPIC otherwise agrees in writing, the obligation of OPIC to make the First Development Disbursement of the Loan is subject to the prior fulfillment, to OPIC's satisfaction in its sole discretion, of the following conditions precedent and to their continued fulfillment on the Closing Date of the First Development Disbursement. 36 32 Section 6.01. Normal Field Operations. Not less than 60 days shall have elapsed since the consummation of the Merger and, during such period, normal field operations at the Project shall have been conducted and production levels shall have been substantially as projected in the Engineering Report. Section 6.02. Engineer's Report and Borrower's Certificate; Treatment of Designated Wells. (a) OPIC shall have received (i) a written report by the Engineer dated as of a current date acceptable to OPIC, and satisfactory to OPIC in form and substance, containing projections of production from proved reserves allocable to the Interests of the Borrower and the Other Borrower and the related Future Cash Flows, adjusted to the Closing Date of the First Development Disbursement (and giving effect to such Disbursement) and (ii) a certificate of an Authorized Officer of each of the Borrower and the Other Borrower showing the Present Value Ratio as of such date (after taking into account such Disbursement) to be at least 2.0 to 1.0. (b) OPIC shall be satisfied, in its sole discretion, with the Development Plan as amended to the Closing Date of the First Development Disbursement and with the identification and treatment of Designated Wells and non-designated wells, including as set forth in the Development Plan as amended to such date. (c) OPIC shall have received a certificate of an Authorized Officer of the Borrower in form and substance satisfactory to OPIC (i) setting forth the results of the post-closing audit and related adjustment, if any, to the "Balancing Payment" contemplated by the Stock Purchase Agreement and (ii) certifying the actual Acquisition Expenses of the Mergers. ARTICLE VII CONDITIONS PRECEDENT TO THE SECOND DEVELOPMENT DISBURSEMENT Unless OPIC otherwise agrees in writing, the obligation of OPIC to make the Second Development Disbursement is subject to the prior fulfillment, to OPIC's satisfaction in its sole discretion, of the Following conditions precedent and to their continued fulfillment on the Closing Date of the Second Development Disbursement. Section 7.01. Completion of Phase 1; Development Plan. Phase I of the Development Plan shall have been completed by the Borrower and the Other Borrower, and the wells drilled as part of Phase I shall have been in normal field operations for at least 30 days, and production levels during such 30-day period shall have been substantially as projected in the Engineering Report. An amended Development Plan providing detail for the 37 33 Phase II development of the Permit area shall have been delivered to OPIC and shall be satisfactory in form and substance to OPIC. Section 7.02. Engineer's Report. OPIC shall have received (i) a written report by the Engineer dated as of a current date acceptable to OPIC, and satisfactory to OPIC in form and substance, containing projections of production from proved Borrower and the related Future Cash Flows, adjusted to the Closing Date of the Second Development Disbursement (and giving effect to such Disbursement) and (ii) a certificate of an Authorized Officer of each of the Borrower and the Other Borrower showing the Present Value Ratio as of such date (after taking into account such Disbursement) to be at least 2.0 to 1.0. ARTICLE VIII CONDITIONS PRECEDENT TO ALL DISBURSEMENTS Unless OPIC otherwise agrees in writing and save as otherwise provided herein, it shall be a condition precedent to the Borrower's right to each Disbursement (including the First Disbursement), that each of the following conditions be satisfied on the date of any such Disbursement: Section 8.01. Representations and Defaults. The representations and warranties set forth in Article III hereof shall be true and correct in all material respects on the date of such Disbursement after giving effect to such Disbursement and, in the case of the Mergers or the Kufpec Acquisition, the consummation of the contemplated transactions, as if made on such date, and on such date (after giving such effect) no Event of Default, and no event or condition which with lapse of time or the giving of notice, or both, would constitute an Event of Default, shall exist. Section 8.02. Change in Circumstances; Tax Events. At the time of each Disbursement: (a) no change in circumstances shall have occurred which could reasonably be expected to materially adversely affect (I) the financial condition of the Borrower, (II) OPIC's rights and remedies in respect of the Loan, or (III) the ability of the Borrower, the Holding Company or the Parent (x) to fulfill its respective obligations under the Financing Documents or (y) otherwise to complete the Project in accordance with the Development Plan; and (b) no "Triggering Event' shall have occurred under the "dual consolidated loss" provisions of the Internal Revenue Code of 1986, as amended. 38 34 Section 8.03. Certification. The Borrower shall have furnished OPIC with a certificate of an Authorized Officer of the Borrower, dated the date of such Disbursement, in form and substance satisfactory to OPIC (i) certifying the satisfaction of each of the conditions set forth in Section 8.01 hereof, (ii) setting forth the Project costs to which any prior Disbursements have been applied, (iii) setting forth the Project costs to which the present Disbursement will be applied and certifying that the proceeds of such Disbursement are presently needed for these purposes, and (iv) setting forth the pro forma Escrow Account funding as of the first Payment Date following such Disbursement and certifying that, as of such Payment Date, the Payment Target will be fully reserved in the Payments Account. Section 8.04. Payment or Reimbursement of Expenses. All fees and other amounts due to OPIC on or prior to the date of such Disbursement with respect to the making of the Loan, and all other amounts payable or reimbursable by the Borrower in connection with the making of the Loan, shall have been paid, including, but not limited to, (i) the Commitment Fee, (ii) the Facility Fee, (iii) any Taxes payable pursuant to Section 2.11, (iv) any amounts payable pursuant to Section 2.12(a), including the fees and expenses of OPIC legal counsel and business consultants and the costs of registration and recordation of any of the Financing Documents, and (v) the fees of the agent for service of process referred to in Section 11.03. Section 8.05. OPIC Notifications to Paying Agent. If any condition set forth in this Article VIII shall not be satisfied or waived by OPIC, OPIC shall be entitled to notify the Paying Agent to the effect that (i) such condition has not been satisfied and (ii) the Paying Agent should cease authenticating and issuing Participation Certificates (as defined in the Participation and Guaranty Agreement). If OPIC shall have notified the Paying Agent to cease authenticating and issuing Participation Certificates, as aforesaid, OPIC shall, when the conditions set forth in this Article VIII have been satisfied or waived, forthwith dispatch a further notice to the Paying Agent to the effect that the Paying Agent should resume authenticating and issuing Participation Certificates in accordance with the Participation and Guaranty Agreement. Section 8.06. Disbursement to Other Borrower. The Other Borrower shall have requested a disbursement under the Other Finance Agreement in the same amount and for the same purposes as the Disbursement hereunder, and as of the date of the proposed Disbursement hereunder all conditions precedent to the disbursement to the Other Borrower shall be satisfied. 39 35 Section 8.07. Delivery of Note(s) to OPIC. OPIC shall have received an executed copy of the Note or Notes to be issued in connection with the Applicable Disbursement. ARTICLE IX AFFIRMATIVE COVENANTS Unless OPIC otherwise agrees in writing, so long as the Commitment shall remain outstanding and until all amounts due and to become due hereunder and under the Notes shall have been paid in full, each of the Borrower and the Holding Company covenants and agrees as follows: Section 9.01. Permit Area Development. The Borrower shall, together with the Other Borrower, develop the Permit area pursuant to the Development Plan, shall apply the proceeds of the Loan exclusively to the Project and shall use its best efforts to cause the Project to be developed in accordance with the Development Plan (and, if the Second Development Disbursement is made, in accordance with the amended Development Plan providing for the Phase II development of the Permit area). If the Borrower becomes unable to achieve the undertakings set out in the preceding sentence, or becomes unable to meet its other obligations hereunder, it shall promptly so notify OPIC. Section 9.02. Borrower Operations. The Borrower shall comply with and perform its obligations and undertakings under this Agreement, the Notes, and each of the other Financing Documents to which it is a party. The Borrower shall conduct its operations on the basis of customary commercial practice and arm's-length arrangements, with due diligence and efficiency and under the supervision of qualified and experienced management. The Borrower shall repair, replace and protect each of its assets so that its business can be conducted properly at all times. Section 9.03. Maintenance of Rights and Compliance with Laws. The Borrower shall (i) whenever in its power to do so, acquire, maintain and if necessary renew all rights, contracts, powers, privileges, leases, lands, sanctions and franchises necessary for the conduct of its business and the performance of its obligations hereunder and under the other Financing Documents; (ii) conduct its business in compliance in all material respects with all applicable laws and directives of governmental authorities having force of law, including applicable environmental, health and safety standards; and (iii) duly pay before they become overdue all Taxes, assessments and other government charges levied or imposed in any jurisdiction upon its property, earnings or business, except amounts being contested in good faith by appropriate 40 36 proceedings diligently pursued for which adequate reserves in accordance with GAAP shall have been established. Section 9.04. Government Approvals. The Borrower shall obtain, and shall at all times maintain in full force and effect, all material consents, licenses, registrations, approvals and authorizations necessary for the performance by the Borrower of this Agreement, the Notes and each of the other Financing Documents to which it is a party. Section 9.05. Insurance. (a) The Borrower shall maintain or cause to be maintained in effect insurance with respect to its Interest in the Project and the assets thereof, against such hazards (including, without limitation, fire, lightning, collapse, wind and hail, explosion, smoke, aircraft and vehicles, riot, civil commotion, vandalism, other extended coverage risks, flood and earthquake, environmental remediation and sudden and accidental seepage and pollution, and any other hazards to the extent that properties of a nature similar to those included in the Project and in the same or similar localities are usually insured), in such form (including the form of the loss payable clauses) and with such insurers as shall be selected by the Borrower and approved by OPIC (such approval not to be withheld unreasonably), such insurance to be in such amount as the Borrower would, in the prudent management of its property, maintain, or would be maintained by others similarly situated in respect of property similar to the Project, provided that (i) the amount of such insurance with respect to the Project shall not at any time be less than the amount of all obligations of the Borrower from time to time owing to OPIC under this Agreement or any other Financing Document, whether for principal, interest, fees, expenses or otherwise and (ii) such insurance shall be on a "no co-insurance/agreed-amount" basis. The Borrower shall also carry workmen's compensation insurance, disability benefits insurance, and such other form of insurance which the Borrower is required by law to provide, covering loss resulting from injury, sickness, disability, or death of the employees of the Borrower. All insurance policies required hereby covering loss or damage to the Project shall name the Borrower and the Other Borrower as additional insureds as their interests may appear and shall provide that any payment thereunder for any loss or damage shall be made to OPIC (unless otherwise approved by OPIC), except that such policies may provide that any payment of less than $250,000 made in respect of any single casualty or other occurrence may be paid solely to the Borrower. OPIC shall apply all such proceeds as a prepayment of the Loans pursuant to Section 2.08, provided that OPIC shall forthwith remit to the Borrower any proceeds paid to OPIC, (i) upon certification by the Borrower that the property damaged or lost has been fully repaired or replaced, or (ii) if, within 60 days of the event giving rise to such payment of proceeds, OPIC shall have approved a plan submitted by the Borrower whereby the property damaged or destroyed by such event is to be fully repaired or replaced, and provided further that if an Event of Default shall have occurred and be continuing, OPIC shall apply such amount in accordance with Section 11.02. 41 37 Any other permitted payee of such insurance proceeds shall also apply all such proceeds as a prepayment of the Loan pursuant to Section 2.08, provided that, if within 60 days of the event giving rise to such payment of proceeds, OPIC shall have approved a plan submitted by the Borrower whereby application of such proceeds shall not be required. Each such policy shall expressly provide that all provisions thereof, except the limits of liability, shall operate in the same manner as if there were a separate policy covering each such insured; each such policy shall waive any right of subrogation of the insurers to any rights of the Borrower or OPIC in respect of any liability of the Borrower or OPIC; and shall waive any right of the insurers to any setoff or counterclaim or any other deduction, whether by attachment or otherwise, in respect of any liability of the Borrower or OPIC; each such policy shall provide that, if such insurance is cancelled, terminated or materially changed for any reason whatsoever (other than non-payment of premium), the insurers will provide 30 days' prior notice of such cancellation, termination or change; and each such policy shall provide, or each insurer shall agree with OPIC, that the insurer shall give OPIC 30 days' prior notice of the expiration of insurance under such policy in accordance with its terms if the Borrower has failed by such time to pay any premium due in respect of the renewal of insurance under such policy. (b) The Borrower shall, without cost to OPIC, maintain or cause to be maintained in effect insurance policies with respect to the Project insuring against liability for death of, or loss, injury or damage to, the person or property of others from such risks, in such form and with such insurers as shall (in the case of such risks, form and insurers) be selected by the Borrower and approved by OPIC (which approval shall not be unreasonably withheld) and in such amounts as the Borrower would in the prudent management of its property maintain, or would be maintained by others similarly situated in respect of property similar to the Project. Each of the insurance policies maintained in accordance with this Section 9.05(b) shall name the Borrower and OPIC as additional insureds thereunder with respect to the Project. Each such insurance policy shall expressly provide that all of the provisions thereof except the limits of liability (which shall be applicable to all insureds as a group) and liability for premiums (which shall be solely a liability of the Borrower) shall operate in the same manner as if there were a separate policy covering each insured, and shall provide that such insurance, as to the interest of OPIC therein, shall not be invalidated by the use or operation of the Project for purposes which are not permitted by such policy. (c) On or before the date of the First Disbursement hereunder and thereafter at intervals of not more than twelve calendar months (or less at the request of OPIC) until all obligations of the Borrower under the Financing Documents shall have been paid in full, the Borrower shall furnish to OPIC a certificate signed by a duly authorized representative of each insurer, showing the insurance then maintained by the Borrower pursuant to this Section 9.05. The Borrower shall use its best efforts to cause the insurers with whom it maintains such insurance to agree to advise the Borrower and OPIC in writing promptly of any default in the payment of any premiums or any other act or omission on the part of the Borrower of which they have knowledge and which might invalidate or render unenforceable, in whole or in party, any such insurance. (d) In the event the Borrower fails to take out or maintain the full insurance coverage required by this Agreement, fails to pay the fees and other charges referred to in Section 9.05(a) at or prior to the time they are required to be paid, or fails to keep the Project in good order and 42 38 repair and in as reasonably safe conditions as its operations permit, OPIC, upon thirty days' written notice (unless the aforementioned insurance would lapse within such period or such other event as would lessen the security for the Loan would occur, in which event notice should be given as soon as reasonably possible) to the Borrower of any such failure on its part, may (but shall not be obligated to) take out the required policies of insurance. and pay the premiums on the same, pay such taxes or other charges or complete the Project or make such repairs, renewals and replacements as may be necessary to maintain the Project in good order and repair and in as reasonably safe conditions as the Borrower's operations permit. All amounts so advanced therefor by OPIC shall become an additional obligation of the Borrower to OPIC, and the Borrower will forthwith pay such amounts to OPIC, together with interest thereon at the default rate specified in Section 2.04 from the date so advanced. Section 9.06. Accounting and Financial Management. (a) The Borrower shall (i) maintain adequate management information and cost control systems, (ii) maintain a system of accounting, (iii) prepare its Financial Statements in accordance with GAAP, (iv) engage independent internationally-recognized accountants satisfactory to OPIC, (v) notify OPIC of any change in such accountants and the reason therefor and (vi) upon OPIC's reasonable request to the Borrower, shall instruct such accountants to communicate directly with OPIC regarding the Borrower's accounts and operations. (b) The Borrower shall make arrangements satisfactory to OPIC for overseeing the financial operations of the Borrower, including its cash management, accounting and financial reporting, and for overseeing the Borrower's relationship with its lenders and independent accountants; such arrangements may include, but shall not be limited to, employing a chief financial officer to oversee the financial operations of the Borrower. Section 9.07. Financial Statements and Other Information. At its cost the Borrower shall furnish to OPIC each of the following documents: (a) Within 45 days after the end of each fiscal quarter of each Fiscal Year, its unaudited Financial Statements, and a comparison between the results of operations included in such Financial Statements and the projections for such fiscal quarter furnished pursuant to Section 9.07(e) below, all certified by the chief financial officer of the Borrower as being complete and correct, together with such officer's certificate that such officer's review has not disclosed the existence of an Event of Default, or an event which with the passage of time or the giving of notice, or both, would constitute an Event of Default, or, if any such event then exists, specifying the nature and period of existence thereof and what action the Borrower has taken or proposes to take with respect thereto; (b) Within 90 days after the end of each Fiscal Year, its audited Financial Statements, or audited consolidated Financial Statements for the Parent with consolidating statements for the Borrower, together with a certificate by the chief financial officer of the Borrower certifying that 43 39 such officer's review of such audited Financial Statements has not disclosed the existence of an Event of Default, or an event which with the passage of time or the giving of notice, or both, would constitute an Event of Default or, if any such event then exists, specifying the nature and period of existence thereof and what action the Borrower has taken with respect thereto; (c) Until the Borrower and the Other Borrower shall have achieved completion of all activities contemplated by the Development Plan, a joint report by the Borrower and the Other Borrower within 45 days after the end of each fiscal quarter certified by an Authorized Officer setting forth in reasonable detail the progress of the Project, including (i) expenditures of funds, (ii) estimated future costs, (iii) unexpended funds available to the Borrower, (iv) the progress of the major phases of the Project, (v) the acquisition of fixtures and equipment and (vi) any material variation order, amendment or waiver relating to the Development Plan; (d) Within 45 days after the end of each Fiscal Year, a report certified by an Authorized Officer setting forth in reasonable detail all transactions, other than in the ordinary course of business, between the Borrower and (x) the Parent or any Affiliate thereof or (y) the Other Borrower or any Affiliate thereof, in each case other than payments pursuant to the Inter-Purchaser Agreement as amended from time to time with OPIC's prior consent. (e) Not later than 30 days prior to the beginning of each Fiscal Year, an annual operating forecast which shall be prepared jointly for the Borrower and the Other Borrower, including projected quarterly financial and operational results for the Interests of the Borrower and the Other Borrower for such Fiscal Year, together with a statement of the assumptions on which such forecast is based; and (f) Copies of all other annual or interim audit reports submitted to the Borrower by its independent accountants and such other information and data with respect to its operations (including supporting information as to compliance with this Agreement) as OPIC may reasonably request from time to time. Section 9.08. Access to Records; Inspection; Meetings. The Borrower shall, upon request of OPIC, give, or cause to be given, to any representatives of OPIC access during normal business hours to, and permit them to examine, copy and make extracts from, any and all records and documents in the possession or subject to the control of the Borrower relating to its operations and financial affairs and otherwise respecting the Project, and to inspect any of its facilities or properties and the Project site. If OPIC so requests, the Borrower shall give OPIC not less than 15 days' notice of, and shall permit OPIC's Authorized Officer to attend, each meeting of its shareholders and of its directors. Subject to all applicable law, OPIC shall treat the information contained in such records and documents and received in such meetings, or otherwise received from the Borrower, as confidential information not to be disclosed to other parties. 44 40 Section 9.09. Notice of Default and Other Matters. The Borrower shall promptly and, in any event within five (5) Business Days, notify OPIC of (i) the occurrence of each Event of Default and of each event known to any of its officers which, upon the giving of notice, the lapse of time or both, would become an Event of Default, (ii) any actions, suits, other legal proceedings or arbitral proceedings against the Borrower which involve claims aggregating more than the equivalent of $100,000, (iii) the occurrence of each event of default and of each event known to any of its officers which, upon the giving of notice or the lapse of time or both, would become an event of default under any of the Project Documents; and (iv) the occurrence of any other condition or event (including government action) which is likely to have a material adverse effect on the Borrower's financial condition or its ability to perform its obligations under any of the Financing Documents. Without limiting the foregoing, the Borrower, in its capacity as Operator, shall promptly, and in any event within five (5) Business Days, notify OPIC if any party to the JOA shall fail to advance to the Operator its share of expenditures or to pay its share of costs and expenses as required by the JOA. Section 9.10. Security Documents. The Borrower at its own cost shall take all actions necessary to maintain each of the Security Documents in full force and effect and enforceable in accordance with its terms, including all (i) filings and recordations, (ii) payments of fees and other charges, (iii) issuance of supplemental documentation, (iv) discharge of all claims or other Liens adversely affecting the rights of OPIC in the property subject to any Security Document, (v) publication or other delivery of notice to third parties and (vi) deposit of title documents. Section 9.11. Funding of the Loan; Funding Losses. The Borrower shall arrange for and pay all costs associated with the funding of the Loan, including, without Stations the fees of all placement agents, paying agents and liquidity facility providers and their respective counsel; and shall provide to OPIC satisfactory evidence of the payment of, or provision for the payment of, such funding costs. Without prejudice to any other rights that OPIC may have, the Borrower shall on demand make reimbursement payments to or for the account of OPIC for any costs, losses, expenses and liabilities incurred in connection with the funding of the Loan under the Participation and Guaranty Agreement and other agreements contemplated therein and for any costs, losses, expenses and liabilities incurred by OPIC if it is required to repurchase all or a portion of the Participations in the Loan from the Holders. A certificate prepared by or on behalf of OPIC setting forth the amount of such funding costs, losses, expenses or liabilities and specifying in reasonable detail the basis therefore shall, in the absence of manifest error, be conclusive and binding on the parties hereto. 45 41 Section 9.12. Project Monitoring. The Borrower shall complete and deliver to OPIC not later than 90 days following the end of each year a Self-Monitoring Questionnaire, in the form attached hereto as Exhibit I, or such other form as OPIC may from time to time prescribe, certified by an Authorized Officer as true and complete. Section 9.13. Cure of Defaults Under JOA. So long as the Other Loan remains outstanding, in the event of a default under the JOA by the Other Borrower, the Borrower shall (i) cure the default (which may include providing a loan to the Other Borrower pursuant to the Inter-Purchaser Agreement), (ii) acquire the Other Borrower's Interests or (iii) acquire all of the capital stock of the Other Borrower, in each case at least 45 days prior to the expiration of the 90-day period described in Section 8.05 of the JOA and, in the case of any such acquisition, shall assume all of the Other Borrower's obligations under the Other Finance Agreement, the related financing agreements, and the Other Loan. Section 9.14. Compliance with Environmental Standards. The Borrower (x) shall comply and shall cause all tenants and other authorized persons occupying the Project to comply with and implement in all material respects all of the mitigating measures specified in the manuals described on Schedule 9.14 (the "Existing Environmental Manuals") and, after the Borrower has prepared and OPIC has approved the Borrower's own environmental and operational manuals (the "Borrower's Environmental Manuals"), the Borrower's Environmental Manuals, (y) shall immediately pay or cause to be paid all costs and expenses incurred in such compliance and implementation, and (z) shall keep or cause to be kept the Project free and clear of any Liens imposed pursuant to applicable Environmental Laws. The Borrower shall ensure that the implementation and effectiveness of the mitigating measures and the performance of the Project site activities shall comply with all applicable Environmental Laws and with Applicable World Bank Guidelines, whichever shall be the more stringent standard. The Borrower shall, in addition, comply with any applicable Environmental Laws that come into force subsequent to the date hereof. The Borrower shall conduct any investigation, study, sampling and testing and undertake any clean-up, removal remedial or other action necessary to remove and clean-up all Hazardous Materials from the Project in accordance with the requirements of the more stringent of the Applicable World Bank Guidelines or Environmental Laws and in accordance with orders and directives of all relevant Governmental Bodies. The Borrower shall not generate, use, treat, store, release or dispose of, or permit the generation, use, treatment, storage, release or disposal of Hazardous Materials on or in the Project, or transport or permit the transportation of Hazardous Materials to or from the Project site except in compliance with the more stringent of the Applicable World Bank Guidelines or Environmental Laws. 46 42 Subsequent to the date hereof, the Borrower shall prepare and submit to OPIC the Borrower's Environmental Manuals and, upon approval by OPIC, shall substitute such manuals for the Existing Environmental Manuals. The Borrower shall conduct environmental monitoring of the Project substantially in accordance with the monitoring program set forth in the Existing Environmental Manuals or the Borrower's Environmental Manuals, as the case may be. The Borrower shall provide OPIC with copies of any reports or studies which primarily address environmental issues or the results of the environmental monitoring program at the Project, which are (a) prepared by the Borrower for Congolese Governmental Bodies, (b) prepared by an independent consultant, engineer, environmental specialist or other third party at the request of or for the account of the Borrower, or (c) prepared by the Borrower or by the Borrower together with the Other Borrower on a regular or periodic basis for internal purposes or for any Affiliate. The Borrower shall also permit OPIC or its representatives (which may include independent contractors) to conduct periodic Project site inspections to monitor the Borrower's compliance with the requirements of this Section. Any costs incurred by OPIC or its representatives in connection with such Project site inspections shall be borne by OPIC. The Borrower shall advise OPIC promptly in writing of any complaint, dispute or other matter of which the Borrower is aware or should have been reasonably aware that reasonably might be expected to give rise to a violation of this Section. Section 9.15. Engineer's Reports; Present Value Ratio Calculations. (a) The Borrower and the Other Borrower, at their cost, shall cause to be furnished annually to OPIC, so long as any portion of the Loan is outstanding, a report prepared by the Engineer (the "Engineer's Report") which shall be satisfactory to OPIC in form and substance, and which shall set forth a projection of production from proved reserves allocable to the Interests of the Borrower and the Other Borrower and the related Future Cash Flows, calculated using reasonable and customarily accepted parameters. The report shall be prepared as of January 1 of each year and shall be delivered to OPIC within 60 days thereafter. (b) The Borrower and the Other Borrower, at their cost, shall determine the Present Value Ratio at least once each calendar quarter (and as of any other time as is required pursuant to the Escrow Agreement or as OPIC may reasonably request), and shall report such Present Value Ratio to OPIC within 15 days following the end of such quarter (or within 15 days following the date of a request by OPIC), together with such supporting data as shall be satisfactory to OPIC. ARTICLE X NEGATIVE COVENANTS Unless OPIC otherwise agrees in writing, so long as the Commitment shall remain outstanding and until all amounts due and to become due hereunder and under the Notes shall have been paid in full, each of the Borrower and the Holding Company covenants and agrees as follows: 47 43 Section 10.01. Indebtedness. The Borrower shall not incur, assume, guarantee, endorse or permit to exist or otherwise become directly or contingently liable for any Indebtedness except: (a) the Loan; (b) Indebtedness consisting of trade credit from suppliers of goods or services incurred in the ordinary course of business and on terms requiring payment in full in not more than 90 days; (c) Indebtedness arising from any subordinated promissory note issued in connection with the Kufpec Acquisition in a principal amount, and on terms, approved in advance in writing by OPIC; (d) Indebtedness consisting of subordinated indebtedness to APC in respect of royalty recapture payments and additional indebtedness to APC in respect of production payments, in each case pursuant to the terms and provisions of the Stock Purchase Agreement as in effect on the date hereof; (e) Indebtedness to its Parent or wholly-owned subsidiaries thereof which shall be subordinated to the Loan pursuant to a subordination agreement substantially in the form of Exhibit C-1 attached hereto; (f) Indebtedness to the Other Borrower incurred solely to enable the Borrower to comply with its obligations under the JOA, provided that such Indebtedness shall be subordinated to the Loan pursuant to a subordination agreement in substantially the form of Exhibit C-3 attached hereto; (g) Indebtedness incurred in respect of equipment and facility leases or sharing arrangements entered into on an arms length basis in the ordinary course of the business of the Project; (h) Indebtedness in an aggregate principal amount not to exceed $100,000 in respect of letters of credit issued to secure payment of contracts entered into in the ordinary course of the business of the Project; and (i) Indebtedness to the Other Holding Company incurred in connection with the Merger as contemplated by Section 6 of, and subject to the terms and conditions stated in, the Inter-Purchaser Agreement. Section 10.02. No Alteration of Agreements. (a) The Borrower shall not terminate, amend or grant any waiver of, or assign any of the respective rights, duties or obligations under, any of its Charter Documents or any provision of any of the Financing Documents to which it is a party (other than, upon prior written notice to OPIC, amendments or waivers to correct manifest error or which are of a formal minor or 48 44 technical nature and do not change materially any party's rights or obligations or which are pursuant to Section 9.13 hereof). (b) The Borrower shall not, without the prior consent of OPIC, approve any material variation under, or amend or grant any waiver of any provision of, (i) the Development Plan, or (ii) the Existing Environmental Manuals. Section 10.03. Dividends and Share Redemptions. The Borrower shall not declare or pay any dividends (or the equivalent thereof), or make any other distributions on or in respect of its capital stock, or purchase, acquire, redeem or retire (directly or indirectly) any such capital stock until all amounts due or to become due hereunder or under the Notes shall have been paid in full; provided, however, that the Borrower may pay such dividends or make such redemptions, but only if, after giving effect to each such dividend or redemption, (i) no Event of Default shall have occurred and be continuing, and no event or condition which with the lapse of time or the giving of notice, or both, would constitute an Event of Default, shall exist; (ii) the amounts on deposit in the Debt Service Reserve Account (and funded out of post-Merger cash flow from operations) equal or exceed the Debt Service Reserve Amount and the Payment Target is fully funded (out of cash flow from post-Merger operations) and reserved in the Payments Account, and (iii) the Present Value Ratio, as certified to OPIC in conjunction with such action, equals or exceeds 2.0 to 1.O. Section 10.04. Conduct of Business with Other Borrower and Affiliates. The Borrower shall not conduct any business with, or enter into any business transaction involving, the Other Borrower or an Affiliate of the Borrower or the Other Borrower, except on an arm's length basis and subject to the reporting requirement set forth in Section 9.07(d). Section 10.05. Sale of Assets, Mergers. The Borrower shall not: (a) sell, assign, convey, lease or otherwise dispose of all or any material part of its assets or properties, whether now owned or hereafter acquired, except for the replacement of a capital asset with an asset of equal or greater value; (b) dissolve, liquidate or otherwise cease to do business; (c) except as contemplated by this Agreement, acquire by purchase or otherwise all or substantially all of the shares of capital stock or assets of another entity; or (d) except as contemplated by this Agreement, merge or consolidate with any Person. 49 45 Section 10.06. Mortgages and Liens. The Borrower shall not create or suffer to exist any Lien with respect to any of its properties or assets, whether now owned or hereafter acquired, or in any proceeds or income therefrom except for: (a) the Liens created under the Security Documents or pursuant to any of the other Financing Documents; (b) Liens for Taxes or other governmental Liens and charges which are not yet due and payable or which are being contested or litigated in good faith and are adequately reserved for in accordance with GAAP; (c) any mechanic's, workmen's or other like Liens arising by mandatory provision of law securing obligations incurred in the ordinary course of business that are not yet overdue or that are being contested or litigated in good faith and that are adequately reserved for in accordance with GAAP; (d) Liens arising under the JOA (as in effect on the first Closing Date); and (e) Liens arising under the Stock Purchase Agreement or the Inter-Purchaser Agreement or the obligation to pay Required Payments to the GORC, in any case (i) as such agreements or obligations are in effect on the date hereof and (ii) only with respect to amounts that are not yet due and payable. Section 10.07. Ordinary Conduct of Business. The Borrower shall not: (a) engage in any business other than its present business activities and those related to the Project; (b) materially change the nature or scope of the Project; (c) change its Charter Documents in a manner that would be inconsistent with the provisions of any of the Financing Documents; (d) materially change its capitalization; (e) except as contemplated in the Stock Purchase Agreement, the JOA and the Inter-Purchaser Agreement, enter into any partnership, joint venture, profit-sharing or royalty agreement or other similar arrangement whereby the Borrower's income or profits are, or might be, shared with any other Person; (f) except as contemplated in the Stock Purchase Agreement, the JOA and the Inter-Purchaser Agreement, form any subsidiaries, purchase any equity securities of, make or permit to 50 46 exist any loans or advances to, invest or acquire any interest whatsoever in, or assume, guarantee, endorse or otherwise become directly or contingently liable for any obligation or Indebtedness of, any Person, other than (i) the endorsement of negotiable instruments for collection in the ordinary course of business and the prudent investment of idle surplus funds in readily marketable Dollar-denominated debt securities and (ii) loans and advances to employees in the ordinary course of business, in an aggregate outstanding principal amount not to exceed $200,000 at any time; provided, however, notwithstanding the foregoing, that the Borrower shall be permitted to acquire all the stock or all or a portion of the Interests of Kufpec subject to the satisfaction of the conditions set forth in Articles V and VIII; and, provided further that, anything in the Inter-Purchaser Agreement to the contrary notwithstanding, the Borrower shall not make any loans or advances to the Other Borrower except, so long as the Other Loan remains outstanding, loans in an aggregate principal amount not to exceed the amount required to comply with the Borrower's obligations under Section 9.13; or (g) fail to maintain its corporate existence and its right to carry on its operations. Section 10.09. Worker Rights. The Borrower shall not take any action to prevent its employees (or other persons employed in connection with the Project) from lawfully exercising their right of free association and their right to organize and bargain collectively. The Borrower further agrees to observe applicable laws relating to a minimum age for employment of children, acceptable conditions of work with respect to minimum wages, hours of work and occupational health and safety, and not to use forced labor. The Borrower is not responsible under this Section 10.08 for the actions of a government. ARTICLE XI DEFAULTS AND REMEDIES Section 11.01. Events of Default The occurrence and continuation of any of the following events or circumstances shall constitute an "Event of Default" hereunder: (a) The Borrower fails to pay punctually when due any principal or interest payable pursuant to any Note or any other amount payable pursuant to this Agreement; (b) The Borrower fails to pay when due any principal of or interest on any of its Indebtedness of $500,000 or more outstanding principal amount and such failure continues beyond the grace period, if any, applicable thereto; or a default occurs under any agreement or instrument evidencing, or under which the Borrower has outstanding at the time, any such Indebtedness and such default continues beyond the grace period, if any, applicable thereto, if the effect of such default is to accelerate, or to permit the acceleration of, the maturity of such Indebtedness; 51 47 (c) Any representation or warranty made by or on behalf of the Borrower in this Agreement, or in any notice or other certificate, document, Financial Statement or other statement delivered pursuant hereto, proves to have been incorrect in any material respect when made; (d) The Borrower (i) fails to comply with any covenant or provision set forth in Section 9.09 or 9.13 hereof or in Article X hereof or (ii) fails to advance to Operator its share of expenditures, or to pay its share of costs and expenses, in accordance with the terms of the JOA, and, with respect to this clause (ii), such failure is not cured within 45 days of the occurrence thereof, (e) The Borrower fails to comply with or perform any agreement or covenant contained herein other than those referred to in Sections 11.01(a), (b), (c) and (d) above, and such failure continues for 30 days after OPIC has notified such Borrower thereof, (f) Any authorization, consent or approval of any governmental agency or public authority necessary for the execution, delivery or performance of this Agreement, the Notes, or any of the other Financing Documents or for the validity or enforceability of any of either Borrower's obligations under this Agreement, the Notes or any of the other Financing Documents, is not effected or given or is withdrawn or ceases to remain in full force and effect; (g) This Agreement, the Notes or any of the other Financing Documents at any time for any reason ceases to be in full force and effect or is declared to be void or is repudiated or the validity or enforceability hereof or thereof is at any time contested by the Borrower, or, in the case of the Security Documents or the Inter-Purchaser Agreement, ceases to give or provide the respective Liens, rights, titles, remedies, powers or privileges intended to be created thereby; (h) Any governmental authority condemns, nationalizes, seizes or otherwise expropriates any substantial portion of the assets of the Project or the assets or capital stock of the Borrower or takes any action that would prevent the Borrower from carrying on any material part of its business or operations; (i) The Borrower or any other party fails to comply with or perform any of its material obligations or undertakings set forth in any Financing Document (other than this Agreement) and such failure continues for 30 days after OPIC has notified such Borrower thereof, (j) The Borrower, the Holding Company or the Parent (or any successor in interest thereto), (i) applies for, or consents to the appointment of, a receiver, trustee, custodian, intervenor or liquidator of itself or of all or a substantial part of its assets, (ii) files a voluntary petition in bankruptcy, admits in writing that it is unable to pay its debts as they become due or generally fails to pay its debts as they become due, (iii) makes a general assignment for the benefit of creditors, (iv) files a petition or answer seeking reorganization or arrangement with creditors or to take advantage of any bankruptcy or insolvency laws, (v) files an answer admitting the material allegations of, or consents to, or defaults in answering, a petition filed against it in any bankruptcy, reorganization or insolvency proceeding where such action or failure to act will result in a determination of bankruptcy or insolvency against it; 52 48 (k) Without its application, approval or consent, a proceeding is instituted in any court of competent jurisdiction or by or before any government or governmental agency of competent jurisdiction, seeking in respect of the Borrower, the Holding Company or the Parent (or any successor in interest thereto): adjudication in bankruptcy, reorganization, dissolution, winding up, liquidation, a composition or arrangement with creditors, a readjustment of Indebtedness, the appointment of a trustee, receiver, liquidator or the like of it or of all or any substantial part of its property or assets, or other like relief in respect of it under any bankruptcy, reorganization or insolvency law; and, if such proceeding is being contested by it in good faith, the same continues undismissed for a period of 60 days; (l) Any final non-appealable judgment or judgments for the payment of money in an aggregate amount in excess of $500,000 or its equivalent in another currency is rendered against the Borrower, and such judgment or judgments is not satisfied or discharged within 60 days of entry; (m) The Parent ceases to hold, directly or indirectly, the legal and beneficial title to 100% of the issued and outstanding shares of the capital stock of the Borrower or ceases to retain management control of the Borrower, or the Other Parent ceases to hold, directly or indirectly, the legal and beneficial title to 100% of the issued and outstanding shares of the capital stock of the Other Borrower or ceases to retain management control of the Other Borrower, or the Other Borrower ceases to own beneficially that portion of the Interests which it owned upon consummation of the Merger. Anything to the contrary herein notwithstanding, the acquisition of the outstanding stock of the Parent by NOMECO Oil & Gas Co. or an Affiliate thereof shall not constitute an Event of Default under this Section 11.01(m); (n) Any of the Convention, the Permit, the GORC Approval Letters or the JOA, or the rights of the Borrower under any of them, shall have been terminated or repealed, or in the reasonable judgment of OPIC (and without limiting the obligations of the Borrower under Section 10.02) amended in a manner that could have a material adverse effect on the ability of any party to observe or perform any of its respective obligations or undertakings under any of the Financing Documents. (o) Either the Borrower or the Escrow Agent fails to make the payments required under the Escrow Agreement when due or otherwise fails to comply with its obligations thereunder (and, solely in the case of a failure to fund the Payment Target 30 days prior to the Payment Date, such failure is not cured on or prior to such Payment Date); (p) Any event shall have occurred which, in the reasonable judgment of OPIC, is likely to have a material adverse effect on the ability of any party to observe or perform any of its respective material obligations or undertakings under any of the Financing Documents; (q) Any person other than the Borrower is appointed as "Operator" under the JOA without OPIC's prior consent; or the Operator fails to comply in any material respect with any of its obligations under the JOA and such failure shall not be cured within 30 days thereof; 53 49 (r) The Borrower fails in any material respect to comply with any of its obligations under the Tax Agreement or the Closing Agreement, or the Internal Revenue Service issues a notice of deficiency under Section 6212 of the Internal Revenue Code with respect to the "dual consolidated losses" of ACEC or the Borrower; or (s) The Parent shall fail to make any required payment when due to the Debt Service Reserve Account pursuant to the Parent Reimbursement Agreement. Section 11.02. Remedies upon Event of Default. (a) Except as otherwise provided in Section 11.02(b), if any Event of Default has occurred and is continuing, OPIC may at any time in its sole discretion, (i) suspend or terminate the Commitment, (ii) declare, by written demand for payment to the Borrower, any portion or all of the Loan to be due and payable, whereupon such portion of the Loan shall immediately mature and become due and payable together with interest accrued thereon, without any other presentment, demand, diligence, protest, notice of acceleration, or other notice of any kind, all of which the Borrower hereby expressly waives, and/or (iii) without notice of default or demand, proceed to protect and enforce its rights and remedies by appropriate proceedings, whether for damages or the specific performance of any provision of this Agreement or any Note, or in aid of the exercise of any power granted in this Agreement, any Note or by law, or may proceed to enforce the payment of any Note. (b) Upon the occurrence of an Event of Default referred to in Sections 11.01(j) or (k), (i) the Commitment shall automatically be terminated, and (ii) the Loan, together with interest accrued thereon and all other amounts due under this Agreement, the Notes, and the other Financing Documents, shall immediately mature and become due and payable, without any other presentment, demand, diligence, protest, notice of acceleration, or other notice of any kind, all of which the Borrower hereby expressly waives. Section 11.03. Jurisdiction and Consent to Suit. Without prejudice to OPIC's right to bring suit in the courts of the Republic of the Congo or any other jurisdiction, any proceeding to enforce this Agreement or any Note may be brought in the courts of the United States of America in the State of New York or the District of Columbia. The Borrower hereby irrevocably waives any present or future objection to such venue, and irrevocably consents and submits unconditionally to the non-exclusive jurisdiction for itself and in respect of any of its property of any such court. The Borrower further irrevocably waives any claim that any such court is not a convenient forum for any such proceeding. The Borrower agrees that any service of process, writ, judgment or other notice of legal process shall be deemed and held in every respect to be effectively served upon it in connection with proceedings in the District of Columbia, if delivered to CT Corporation System, the offices of which are now located at 1025 Vermont Avenue, N.W., Washington, D.C. 20005, which it irrevocably designates and appoints as its authorized agent for the service of process in the courts in the District of Columbia. Nothing herein shall affect OPIC's right to serve process in any other manner permitted by 54 50 applicable law. The Borrower further agrees that final judgment against it in any such action or proceeding arising out of or relating to this Agreement or any Note, shall be conclusive and may be enforced in any other jurisdiction within or outside the United States of America by suit on the judgment, a certified or exemplified copy of which shall be conclusive evidence of the fact and of the amount of its indebtedness. Section 11.04. Judgment Currency. This is an international loan transaction in which the specification of United States Dollars is of the essence, and such currency shall be the currency of account in all events. The payment obligation of the Borrower hereunder and under the Notes shall not be discharged by an amount paid in another currency, whether pursuant to a judgment or otherwise, to the extent that the amount so paid on prompt conversion to Dollars or transfer to the District of Columbia under normal banking procedures does not yield the amount of Dollars then due. In the event that any payment by the Borrower, whether pursuant to a judgment or otherwise, upon conversion and transfer, does not result in the payment of such amount of Dollars at the place such amount is due, OPIC shall be entitled to demand immediate payment of, and shall have a separate cause of action against the Borrower for, the additional amount necessary to yield the amount of Dollars then due. In the event OPIC, upon the conversion of such judgment into Dollars, shall receive (as a result of currency exchange rate fluctuations) an amount greater than that to which it was entitled, the Borrower shall be entitled to immediate reimbursement of the excess amount. Section 11.05. Immunity. The Borrower represents and warrants that it is subject to civil and commercial law with respect to its obligations under this Agreement, the Notes and each of the other Financing Documents to which it is a party, that the making and performance of this Agreement, the Notes and such other Financing Documents and the borrowings by the Borrower pursuant hereto constitute private and commercial acts rather than governmental or public acts and that neither such Borrower nor any of its properties or revenues has any right of immunity from suit, court jurisdiction, attachment prior to judgment, attachment in aid of execution of a judgment, set-off execution of a judgment or from any other legal process with respect to its obligations under this Agreement, the Notes and such other Financing Documents. To the extent that the Borrower may hereafter be entitled, in any jurisdiction in which judicial proceedings may at any time be commenced with respect to this Agreement, any Note or any other Financing Document to which it is a party, to claim for itself or its revenues or assets any such immunity, and to the extent that in any such jurisdiction there may be attributed to such Borrower such an immunity (whether or not claimed), such Borrower hereby irrevocably agrees not to claim and hereby irrevocably waives such immunity. The foregoing waiver of immunity shall have effect under the United States Sovereign Immunities Act of 1976. 55 51 ARTICLE XII MISCELLANEOUS Section 12.01. Notices. Each report, notice and other communication to be given under this Agreement or the Notes shall be in writing, shall be delivered by hand, mail telegram, telex, or facsimile transmission, postage prepaid, and shall be deemed to have been duly given when received by the addressee as follows: To the Borrower: Walter International Congo, Inc. 1021 Main Street Suite 2110 Houston, Texas 77002-6502 United States of America Attn: Mr. William H. Gibbons Facsimile: (713) 756-1111 To OPIC: Overseas Private Investment Corporation 1100 New York Avenue, N.W. Washington, D.C. 20527 United States of America Attn: Vice President for Finance Facsimile: (202) 408-9866 With a copy, which shall not constitute notice, to: Overseas Private Investment Corporation 1100 New York Avenue, N.W. Washington, D.C. 20527 Attn: Vice President and Treasurer Facsimile: 202-408-9862 Either party may, by written notice to the other, change the address to which such communications should be sent to it. 56 52 Section 12.02. English Language. All documents to be furnished or communications the be given or made under this Agreement, the Notes and each of the other Financing Documents to which the Borrower is a party shall be in the English language or, if in another language, shall be accompanied by a translation into English certified by an Authorized Officer of the Borrower, which translation shall be the governing version between the Borrower and OPIC. Section 12.03. GOVERNING LAW. THIS AGREEMENT AND THE NOTES SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, UNITED STATES OF AMERICA, WITHOUT REGARD TO ITS CONFLICT OF LAWS PROVISIONS. Section 12.04. Succession. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of the parties hereto, provided that the Borrower shall not, without the prior written consent of OPIC, assign or delegate all or any part of its interest herein or obligations hereunder. Section 12.05. Survival of Agreements. Each agreement, representation, warranty and covenant contained or referred to in this Agreement shall survive any investigation at any time made by OPIC and shall survive the Disbursement of the Loan, except for changes permitted hereby, and, save as otherwise provided in Section 2.11 or this Section 12.05, shall terminate only when all amounts due or to become due under this Agreement and the Notes are paid in full. The agreements set forth in Sections 12.11 and 12.12 shall survive any such payment in full. Section 12.06. Integration; Amendments. This Agreement embodies the entire understanding of the parties hereto, and supersedes all prior negotiations, understandings and agreements between them with respect to the subject matter hereof. The provisions of this Agreement may be waived, supplemented or amended only by an instrument in writing signed by Authorized Officers of the Borrower and OPIC. Section 12.07. Severability. If any provision of this Agreement is prohibited or held to be invalid, illegal or unenforceable in any jurisdiction, the parties hereto agree to the fullest extent permitted by law that (i) the validity, legality and enforceability of the other provisions in such jurisdiction shall not be affected or impaired thereby, and (ii) any such prohibition, invalidity, illegality or unenforceability shall not render such provision prohibited, invalid, illegal or unenforceable in any other jurisdiction. Section 12.08. No Waiver. No course of dealing and no failure or delay by OPIC in exercising any right, power or remedy hereunder shall operate as a waiver thereof or otherwise prejudice OPIC's rights, powers or remedies. No 57 53 right, power or remedy conferred upon OPIC hereby or by any Note shall be exclusive of any other right, power or remedy referred to herein or therein or now or hereafter available at law, in equity, by statute or otherwise. 58 54 Section 12.09. WAIVER OF JURY TRIAL. THE BORROWER, THE HOLDING COMPANY AND OPIC EACH HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE ARISING OUT OF, IN CONNECTION WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP BETWEEN THEM ESTABLISHED BY THIS AGREEMENT, THE NOTES, ANY OTHER FINANCING DOCUMENT AND ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT ENTERED INTO IN CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. Section 12.10. Waiver of Litigation Payments. In the event that any action or lawsuit is initiated by or on behalf of OPIC against the Borrower, the Holding Company or any other party to any Financing Document, the Borrower and the Holding Company, to the fullest extent permissible under applicable law, each irrevocably waives its right to, and agrees not to request, plead, or claim that OPIC and its successors, transferees, and assigns (any such Person, an "OPIC Plaintiff") post, pay, or offer, cautio judicatum solvi bond, litigation bond, or any other bond, fee, payment, or security measure provided for by any provision of law applicable to such action or lawsuit (any such bond, fee, payment, or measure, a "Litigation Payment"), and the Borrower and the Holding Company each further waives any objection that it may now or hereafter have to an OPIC Plaintiffs claim that such OPIC Plaintiff should be exempt or immune from posting, paying, making or offering any such Litigation Payment. Section 12.11. Indemnity. To the extent permitted by law, the Borrower and the Holding Company each hereby indemnifies and holds harmless OPIC and its directors, officers, employees, agents, counsel, subsidiaries and Affiliates (the "Indemnified Persons") from and against any and all losses, liabilities, obligations, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever that may be imposed on, incurred by or asserted against any Indemnified Person in any way relating to or arising out of this Agreement, the Financing Documents or any of them or any of the transactions contemplated hereby or thereby including, without Stations the use or intended use of the proceeds of the Loan; provided, however, that neither the Borrower nor the Holding Company shall be liable to any Indemnified Person for any losses, liabilities, obligations, damages, penalties, actions, judgments, suits, costs, expenses or disbursements that resulted from the gross negligence or willful misconduct of such Indemnified Person. Section 12.12. Assumption of Obligations. In the event that the Borrower or the Holding Company shall, pursuant to the JOA or otherwise, acquire any or all of the stock or Interests of the Other Borrower, the Borrower shall be liable for all of the obligations of the Other Borrower in respect of the Other Borrower's obligations under the Other Finance Agreement, the Other Participation and Guaranty Agreement and the other related escrow and security documents. 59 55 Section 12.13. Further Assurances. From time to time, the Borrower and the Holding Company shall execute and deliver to OPIC such additional documents as OPIC may require to carry out the purposes of this Agreement or the Financing Documents or to preserve and protect OPIC's rights as contemplated herein or therein. Section 12.14. Counterparts. This Agreement may be executed in counterparts, each of which when so executed and delivered shall be deemed an original and all of which together shall constitute one and the same instrument. [The remainder of this page intentionally left blank] 60 56 IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed and delivered on its behalf by its Authorized Officer on the date first above written. WALTER INTERNATIONAL CONGO, INC. By: /s/ F. Fox Benton III ---------------------------------------- Its: Vice President, F. Fox Benton III ---------------------------------------- WALTER CONGO HOLDINGS, INC. By: /s/ F. Fox Benton III ---------------------------------------- Its: Vice President, F. Fox Benton III ---------------------------------------- OVERSEAS PRIVATE INVESTMENT CORPORATION By: ---------------------------------------- Its: ---------------------------------------- 61 57 IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed and delivered on its behalf by its Authorized Officer on the date first above written. WALTER INTERNATIONAL CONGO, INC. By: ---------------------------------------- Its: ---------------------------------------- WALTER CONGO HOLDINGS, INC. By: ---------------------------------------- Its: ---------------------------------------- OVERSEAS PRIVATE INVESTMENT CORPORATION By: /s/ F. Carl Reinhardt ---------------------------------------- Its: Regional Manager, Finance ---------------------------------------- EX-10.29A 34 EXHIBIT 10.29(A) 1 EXHIBIT 10.29(a) NOMECO OIL & GAS CO. _______________________________________ AMENDED AND RESTATED CREDIT AGREEMENT dated as of November 1, 1993 _______________________________________ NBD BANK, N.A., as Agent 2 TABLE OF CONTENTS
Section Page - ------- ---- 1. DEFINITIONS 1.1 Certain Definitions . . . . . . . . . . . . . . . . 1 1.2 Other Definitions; Rules of Construction . . . . . . 14 2. THE COMMITMENTS 2.1 Revolving Credit Loans. . . . . . . . . . . . . . . 15 2.2 Term Loan . . . . . . . . . . . . . . . . . . . . . 15 2.3 Standby Letters of Credit . . . . . . . . . . . . . 16 2.4 Limit on Advances . . . . . . . . . . . . . . . . . 16 3. THE ADVANCES 3.1 Disbursement of Advances. . . . . . . . . . . . . . 16 3.2 Conditions of Advances. . . . . . . . . . . . . . . 18 3.3 Certification . . . . . . . . . . . . . . . . . . . 20 3.4 Subsequent Elections as to Loans . . . . . . . . . . 20 3.5 Minimum Amounts; Limitation on Number of Loans. . . . . . . . . . . . . . . . 20 3.6 Termination of Prior Loan Agreement . . . . . . . . 20 4. PAYMENT AND PREPAYMENT; PARTNERSHIPS; ELECTED AVAILABLE PORTION; FEES; CASH COVER OF S/L/Cs; INDEMNITY 4.1 Principal Payments. . . . . . . . . . . . . . . . . 21 4.2 Interest Payments . . . . . . . . . . . . . . . . . 23 4.3 Partnerships. . . . . . . . . . . . . . . . . . . . 23 4.4 Elected Available Portion . . . . . . . . . . . . . 24 4.5 Fees . . . . . . . . . . . . . . . . . . . . . 24 4.6 Cash Cover of S/L/Cs. . . . . . . . . . . . . . . . 25 4.7 Indemnity . . . . . . . . . . . . . . . . . . . . . 25 4.8 Payment Method. . . . . . . . . . . . . . . . . . . 27 4.9 No Setoff or Deduction. . . . . . . . . . . . . . . 27 4.10 Payment on Non-Business Day; Payment Computations. . . . . . . . . . . . . . . 27 4.11 Agent's Fees. . . . . . . . . . . . . . . . . . . . 27
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Section Page - ------- ---- 5. YIELD PROTECTION AND CONTINGENCIES 5.1 Additional Costs. . . . . . . . . . . . . . . . . . 27 5.2 Limitations of Requests and Elections . . . . . . . 29 5.3 Illegality and Impossibility. . . . . . . . . . . . 29 5.4 Indemnification . . . . . . . . . . . . . . . . . . 30 6. REPRESENTATIONS AND WARRANTIES 6.1 Corporate Existence and Power . . . . . . . . . . . 30 6.2 Corporate Authority . . . . . . . . . . . . . . . . 30 6.3 Binding Effect. . . . . . . . . . . . . . . . . . . 30 6.4 Subsidiaries. . . . . . . . . . . . . . . . . . . . 30 6.5 Litigation. . . . . . . . . . . . . . . . . . . . . 31 6.6 Financial Condition . . . . . . . . . . . . . . . . 31 6.7 Use of Advances . . . . . . . . . . . . . . . . . . 31 6.8 Consents, Etc . . . . . . . . . . . . . . . . . . . 32 6.9 Taxes . . . . . . . . . . . . . . . . . . . . . 32 6.10 Liens and Title to Properties . . . . . . . . . . . 32 6.11 Partnerships. . . . . . . . . . . . . . . . . . . . 32 6.12 ERISA . . . . . . . . . . . . . . . . . . . . . . 33 6.13 Disclosure . . . . . . . . . . . . . . . . . . . . . 33 6.14 Environmental and Safety Matters. . . . . . . . . . 33 7. COVENANTS 7.1 Affirmative Covenants. . . . . . . . . . . . . . . . 34 (a) Preservation of Corporate Existence, Etc.34 (b) Compliance with Laws, Etc. . . . . . . . . 34 (c) Maintenance of Properties; Insurance . . . 35 (d) Reporting Requirements . . . . . . . . . . 35 (e) Access to Records, Books, Etc. . . . . . . 37 (f) Maintenance of Records, Books, Etc . . . . 38 (g) Change of Control. . . . . . . . . . . . . 38 (h) Additional Reserve Reports . . . . . . . . 38 (i) Prepayments. . . . . . . . . . . . . . . . 38
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Section Page - ------- ---- 7.2 Negative Covenants. . . . . . . . . . . . . . . . . 39 (a) Borrowing Base . . . . . . . . . . . . . . 39 (b) Current Ratio. . . . . . . . . . . . . . . 39 (c) Total Liabilities to Tangible Net Worth. . . . . . . . . . . . . . . . 39 (d) Tangible Net Worth . . . . . . . . . . . . 39 (e) Debt Service . . . . . . . . . . . . . . . 39 (f) Liens. . . . . . . . . . . . . . . . . . . 39 (g) Investments. . . . . . . . . . . . . . . . 41 (h) Disposal of Subsidiaries, Sale of Assets . . . . . . . . . . . . . . . . . 41 (i) Mergers or Consolidation . . . . . . . . . 43 (j) Dividends. . . . . . . . . . . . . . . . . 43 (k) Indebtedness . . . . . . . . . . . . . . . 43 (l) Transactions with Affiliates . . . . . . . 45 8. DEFAULT 8.1 Events of Default . . . . . . . . . . . . . . . . . 45 8.2 Remedies. . . . . . . . . . . . . . . . . . . . . . 47 9. THE AGENT AND THE BANKS 9.1 Appointment of Agent . . . . . . . . . . . . . . . 48 9.2 Scope of Agency. . . . . . . . . . . . . . . . . . 49 9.3 Duties of Agent. . . . . . . . . . . . . . . . . . 49 9.4 Resignation of Agent . . . . . . . . . . . . . . . 50 9.5 Pro Rata Sharing by Banks. . . . . . . . . . . . . 50 9.6 Determination of Borrowing Base, Etc . . . . . . . 50 10. MISCELLANEOUS 10.1 Amendments, Etc. . . . . . . . . . . . . . . . . . 52 10.2 Notices. . . . . . . . . . . . . . . . . . . . . . 52 10.3 Conduct No Waiver; Remedies Cumulative . . . . . . 52 10.4 Reliance on and Survival of Various Provisions . . . . . . . . . . . . . . . 53
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Section Page - ------- ---- 10.5 Expenses; Indemnification. . . . . . . . . . . . . . 53 10.6 Successors and Assigns; Additional Banks . . . . . . 54 10.7 Governing Law. . . . . . . . . . . . . . . . . . . . 57 10.8 Table of Contents and Headings . . . . . . . . . . . 57 10.9 Construction of Certain Provisions . . . . . . . . . 57 10.10 Integration and Severability . . . . . . . . . . . . 57 10.11 Interest Rate Limitation . . . . . . . . . . . . . . 58 10.12 Confidentiality. . . . . . . . . . . . . . . . . . . 58 10.13 Counterparts . . . . . . . . . . . . . . . . . . . . 58 10.14 Independence of Covenants. . . . . . . . . . . . . . 59 10.15 Jury Trial Waiver. . . . . . . . . . . . . . . . . . 59 EXHIBITS - -------- Exhibit A Revolving Credit Notes Exhibit B S/L/C Application Exhibit C Term Notes Exhibit D Request for Advance Exhibit E Legal Opinion Exhibit F Request for Continuation or Conversion Exhibit G Subsidiaries Exhibit H Litigation Exhibit I Tax Schedule Exhibit J Environmental Matters Exhibit K Certificate of Chief Financial Officer Exhibit L Assignment and Acceptance Exhibit M Assumption Agreement
4 6 AMENDED AND RESTATED CREDIT AGREEMENT THIS AGREEMENT, dated as of November 1, 1993, is by and among NOMECO OIL & GAS CO., a Michigan corporation, (the "Company"), the lenders party hereto from time to time (collectively, the "Banks" and individually, a "Bank") and NBD BANK, N.A., as agent for the Banks (in such capacity, the "Agent"). RECITALS A. The Company, the Banks party thereto and NBD Bank, N.A., as Agent, entered into a Credit Agreement dated as of March 1, 1990 (as amended, the "Prior Loan Agreement"). B. The Company desires to obtain a credit facility providing for both revolving credit loans and standby letters of credit in the aggregate principal amount of $80,000,000, with the possibility of increasing to $110,000,000 if an additional bank is added to this Agreement, to replace the credit facility and to refinance the advances outstanding under the Prior Loan Agreement and otherwise to provide funds for its corporate purposes, and the Banks are willing to establish such a credit facility in favor of the Company on the terms and conditions herein set forth. AGREEMENT In consideration of the premises and of the mutual agreements herein contained, the parties hereto agree that the Prior Loan Agreement shall be amended and restated in its entirety as follows: SECTION 11. Definitions 1.1 Certain Definitions. As used herein, the following terms shall have the following respective meanings: "Adjusted Prime Rate" shall mean the per annum rate equal to the sum of (a) the greater of (i) the per annum rate announced by the Agent from time to time as its "prime rate", which "prime rate" may not be the lowest rate charged by the Agent to any of its customers but will be its only published prime rate, or (ii) the sum of one-half percent (1/2%) per annum plus the per annum rate established and announced by the Agent from time to time as the opening federal funds rate paid by the Agent in its regional federal funds market for overnight borrowings from other banks, all as conclusively determined in good faith by the Agent, such sum to be rounded up, if necessary, to the nearest whole multiple of 1/100 of 1%, plus (b) whichever of the following margins shall be applicable on the date of which such determination is made: 7 With respect to each Revolving Credit Loan....No margin, or With respect to a Term Loan....one-half percent (1/2%) per annum. Such Adjusted Prime Rate to change simultaneously with any change in such prime rate or federal funds rate, as the case may be. "Advance" shall mean any Loan and any S/L/C. "Advance Date" shall mean each date for the making of a Loan or the issuance of an S/L/C as specified in the notice delivered by the Company under Section 3.1 and permitted by this Agreement. "Available Portion" at any time shall be the lesser of (a) the most recently determined Borrowing Base less the principal amount of the Private Placement Notes outstanding at such time, or (b) the Commitments. "Borrowing Base" shall mean, as of any date, the difference of: (a) the present value of the Future Net Income (discounted at the Discount Rate) times a fraction determined by the Agent (or by each of the Banks as described in Section 9.6) based on the Agent's or each Bank's, as the case may be, customary and standard practices in lending to oil and gas companies generally, including without limitation their standard engineering criteria and oil and gas lending criteria (and it is acknowledged and agreed that such customary and standard practices, including without limitation such engineering criteria and oil and gas lending criteria, shall be determined by the Agent and each Bank, as the case may be, in their sole discretion, and such determination shall be conclusive and binding), minus (b) an amount equal to the lesser of (i) the aggregate cumulative amount of all distributions or other payments made to the Company or any of its Subsidiaries related in any way to the Special Project Assets or any interest of the Company or any of its Subsidiaries therein to the extent such distribution or payments can be claimed by the lenders of Non-Recourse Debt to repay Non-Recourse Debt (i.e., if any distributions with respect to a Special Project Asset exceed the amount of Non-Recourse Debt related to such Special Project Asset and cannot be claimed by the lender of such Non Recourse Debt, such amount which cannot be claimed by such lender would not be included in the aggregate cumulative amount of all distributions described in this clause (i)), and (ii) the outstanding liability for principal, interest and other payments under all Non-Recourse Debt. If there is any Lien on any Borrowing Base Asset then such Borrowing Base Asset shall not be included in such calculations, unless such Lien is permitted by Sections 4.3(c) or 7.2(f)(i), (ii), (iii), (iv), (v), (vii), (viii) or (ix) hereof. Notwithstanding anything herein to the contrary, for purposes of calculating the Borrowing Base, the aggregate amount of the Borrowing Base attributable to Borrowing Base Assets owned by (i) any Foreign Restricted 2 8 Subsidiary or any Partnership of which a Foreign Restricted Subsidiary is a partner shall be limited to no more than 10% of the Borrowing Base, (ii) all Foreign Restricted Subsidiaries and all Partnerships of which a Foreign Restricted Subsidiary is a partner shall be limited in the aggregate to no more than 20% of the Borrowing Base, and (iii) any Domestic Restricted Subsidiary or any Partnership of which a Domestic Restricted Subsidiary is a partner shall be limited to no more than 20% of the Borrowing Base. Future Net Income of any Restricted Subsidiary which is not a wholly owned subsidiary of the Company shall be reduced by the percentage thereof which is not owned by the Company. The Borrowing Base shall be determined as described in Section 9.6. "Borrowing Base Assets" shall mean the Oil and Gas Interests and Kalkaska Assets which are included in the calculation of Net Income-Oil and Gas and Net Income-Kalkaska Plant. "Borrowing Base Deficiency" shall mean the condition which exists when the sum of the aggregate principal amount of the outstanding Advances plus the aggregate principal amount of the outstanding Private Placement Notes exceeds the Borrowing Base. "Business Day" shall mean any day other than a Saturday or Sunday or other day on which the Agent or any Bank is not open for transaction of substantially all of its banking functions. "Cash Flow" shall mean, for any period, the sum of net income (excluding extraordinary gains and losses and taxes associated therewith and excluding gross revenues and expenses attributable to Special Project Assets) plus, to the extent deducted in the computation of such net income, depreciation, depletion, deferred taxes, amortization of goodwill plus interest expenses (net of interest capitalized and excluding any interest payable on the Non-Recourse Debt) and plus other non-cash charges acceptable to the Majority Lenders for such period. "CD Interest Period" shall mean, with respect to any CD Rate Loan, the period commencing on the day such Loan is made or converted to a CD Rate Loan and ending on the date 30, 60, 90 or 120 days thereafter, as the Company may elect under Section 3.1 or 3.4, and each subsequent period commencing on the last day of the immediately preceding CD Interest Period and ending on the date 30, 60, 90 or 120 days thereafter, as the Company may elect under Section 3.4, provided, however, that (a) each Interest Period which would otherwise end on a day which is not a Business Day shall end on the next succeeding Business Day, and (b) no CD Interest Period which would end after the maturity date of any outstanding Note shall be permitted. "CD Rate" shall mean, with respect to any CD Rate Loan and the related CD Interest Period, the per annum rate that is equal to the sum of: (a) whichever of the following margins shall be applicable on the date as of which such determination is made: 3 9 With respect to a Revolving Credit Loan....one and three-eighths percent (1-3/8%) per annum, or With respect to a Term Loan....one and seven-eighths percent (1-7/8%) per annum, plus (b) the rate obtained by dividing (i) the arithmetic mean of secondary market bid rates per annum quoted at approximately 10:00 a.m. New York time (or as soon thereafter as practicable) on the first day of the related CD Interest Period by two or more New York certificate of deposit dealers of recognized standing selected by the Agent for the purchase from the Agent at face value of negotiable certificates of deposit of the Agent with a term approximately equal to such CD Interest Period in an aggregate amount approximately equal to the related CD Rate Loan, by (ii) a number equal to 1.0 minus the stated maximum rate (expressed as a decimal) of all reserve requirements under any regulations of the Board of Governors of the Federal Reserve System or other governmental authority having jurisdiction with respect thereto (including, without limitation, any marginal, emergency, supplemental, special or other reserves), as now and from time to time hereafter in effect, applicable on the first day of the related CD Interest Period to a negotiable certificate of deposit of the Agent in excess of $100,000 and with a term approximately equal to such CD Interest Period, plus (c) the annual assessment rate (expressed as a percentage) estimated by the Agent on the first day of the related CD Interest Period to be payable by the Agent to the Federal Deposit Insurance Corporation (or any successor agency thereto) for such Corporation's (or such successor's) insuring negotiable certificates of deposit of the Agent in excess of $100,000 during the related CD Interest Period; all as conclusively determined by the Agent, such sum rounded up, if necessary, to the nearest whole multiple of 1/16 of 1%. "CD Rate Loan" shall mean any Loan which bears interest at the CD Rate. "Change of Control" shall have the meaning ascribed thereto in Section 7.1(g) hereof. "Clause B Prepayment", "Clause C Prepayment", "Clause I Prepayment" and "Clause II Prepayment" shall have the meanings ascribed thereto in Section 4.1(d)(ii) hereof. "CMS" shall mean CMS Energy Corporation, a Michigan corporation. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and the regulations thereunder. "Commitments" shall mean, with respect to each Bank, the commitment of each such Bank to make Advances pursuant to Sections 2.1, 2.2 and 2.3, in amounts not exceeding in aggregate principal amount outstanding at any time the respective commitment amounts for each Bank set forth next to the name of each such Bank on the signature pages hereof or of any Bank added pursuant to Section 10.6, with the amount as specified pursuant to the terms of Section 4 10 10.6, as such amounts may be reduced from time to time pursuant to Section 2.1 or modified pursuant to Section 10.6. "Company Debt" shall mean the aggregate outstanding principal amount of the Advances and the Private Placement Notes. "Consolidated" or "consolidated" shall mean, when used with reference to any financial term in this Agreement, the aggregate for two or more Persons of the amount signified by such term for all such Persons determined on a consolidated basis and in accordance with generally accepted accounting principles. "Consolidated Tangible Net Assets" shall mean the total amount of all assets of the Company and its Restricted Subsidiaries (less depreciation, depletion and other properly deductible valuation reserves and less a percentage of the assets of any Restricted Subsidiary equal to the percentage of all capital stock of such Restricted Subsidiary not owned by the Company), less all goodwill and all other intangible assets of the Company and its Restricted Subsidiaries, and excluding all Special Project Assets. "Consumers" shall mean the Consumers Power Company, a Michigan corporation. "Credit" shall mean the commercial revolving credit established by Section 2.1 hereof. "Current Assets" and "Current Liabilities" shall mean all assets or liabilities, respectively, which should be classified as current assets and current liabilities in accordance with generally accepted accounting principles; provided that the calculation of Current Assets shall not include receivables of the Company or any Subsidiary owing by any Related Entity or Consumers in excess of 90 days or subject to any dispute or offset or otherwise unacceptable, or advances by the Company or any Subsidiary to any Related Entity or Consumers, and Current Liabilities shall not include liabilities for deferred taxes; provided, further, that Current Assets shall not include any Special Project Assets and Current Liabilities shall not include any Non-Recourse Debt. "Debt" shall have the meaning ascribed thereto in the Private Placement Agreement delivered to the Banks on the Effective Date pursuant to Section 3.2(a)(vi) hereof, without giving effect to any amendment, modification or termination after the Effective Date, including without limitation any retroactive amendment or modification, of the Private Placement Agreement. "Discount Rate" shall mean the discount rate determined from time to time by the Agent or, in the case of each Bank calculating the Borrowing Base pursuant to Section 9.6, by such Bank in its own calculation. "Dollars" and "$" shall mean the lawful money of the United States of America. 5 11 "Domestic Subsidiary" shall mean any Subsidiary which is organized under the laws of the United States or any State or other political subdivision thereof. "Effective Date" shall mean the effective date specified in the final paragraph of this Agreement. "Elected Available Portion" at any time shall be the amount of the Available Portion, which could be 100% of the Available Portion but may not exceed the Available Portion, most recently elected by the Company to be available under the Credit pursuant to Section 4.4 hereof. "Enterprises" shall mean CMS Enterprises Company, a Michigan corporation. "Environmental Laws" at any date shall mean all provisions of law, statute, ordinances, rules, regulations, judgments, writs, injunctions, decrees, orders, awards and standards promulgated by the government of the United States of America or any foreign government or by any state, province, municipality or other political subdivision thereof or therein or by any court, agency, instrumentality, regulatory authority or commission of any of the foregoing concerning the protection of, or regulating the discharge of substances into, the environment. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, together with any successor statute thereto and the regulations thereunder. "ERISA Affiliate" shall mean any trade or business (whether or not incorporated) which (i) together with the Company or any Significant Subsidiary, would be treated as a single employer under Section 414(b) or (c) of the Code or (ii) for purposes of liability under Section 412(C)(11) of the Code, the lien created under Section 412(n) of the Code or for a tax imposed for failure to meet minimum funding standards under Section 4971 of the Code, is a member of the same affiliated service group (within the meaning of Section 401(m) of the Code) as the Company or any Significant Subsidiary, or any other trade or business described in clause (i) above. "Eurodollar Business Day" shall mean, with respect to any Eurodollar Rate Loan, a day which is both a Business Day and a day on which dealings in Dollar deposits are carried out in the interbank market selected by the Agent with respect to such Eurodollar Rate Loan. "Eurodollar Interest Period" shall mean, with respect to any Eurodollar Rate Loan, the period commencing on the day such Eurodollar Rate Loan is made or converted to a Eurodollar Rate Loan and ending on the date one, two, three or six calendar months thereafter, as the Company may elect under Section 3.1 or 3.4, and each subsequent period commencing on the last day of the immediately preceding Eurodollar Interest Period and ending on the date one, two, three, or six months thereafter, as the Company may elect under Section 3.4, provided, however, that (a) any Eurodollar Interest Period which commences on the last Eurodollar Business Day of a calendar month (or on any day for which there is no numerically 6 12 corresponding day in the appropriate subsequent calendar month) shall end on the last Eurodollar Business Day of the appropriate subsequent calendar month, (b) each Eurodollar Interest Period which would otherwise end on a day which is not a Eurodollar Business Day shall end on the next succeeding Eurodollar Business Day or, if such next succeeding Eurodollar Business Day falls in the next succeeding calendar month, on the next preceding Eurodollar Business Day, and (c) no Eurodollar Interest Period which would end after the maturity date of any outstanding Note shall be permitted. "Eurodollar Rate" shall mean, with respect to any Eurodollar Rate Loan and the related Eurodollar Interest Period, the per annum rate that is equal to the sum of: (a) whichever of the following margins shall be applicable on the date as of which such determination is made: With respect to a Revolving Credit Loan....one and one-quarter (1-1/4%) per annum, or With respect to a Term Loan....one and three-quarters percent (1-3/4%) per annum, plus (b) The per annum rate obtained by dividing (i) the per annum rate of interest at which deposits in Dollars for such Eurodollar Interest Period and in an aggregate amount approximately equal to the amount of such Eurodollar Rate Loan are offered to the Agent by other prime banks in the London interbank market, at approximately 11:00 a.m. London time, on the second Eurodollar Business Day prior to the first day of such Eurodollar Interest Period, by (ii) a number equal to 1.0 minus the stated maximum rate (expressed as a decimal) which is in effect on such day, under any regulation of the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement for a member bank of the Federal Reserve System with deposits exceeding five billion Dollars in respect of "Eurocurrency liabilities" (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on Eurodollar Rate Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of the Agent to United States residents); all as conclusively determined in good faith by the Agent, such sum to be rounded up, if necessary, to the nearest whole multiple of 1/16 of 1%. "Eurodollar Rate Loan" shall mean any Loan which bears interest at the Eurodollar Rate. "Event of Default" shall mean any of the events or conditions described in Section 8.1. "Expiry Date" shall mean the date occurring after the stated expiry date of an S/L/C which would provide to the Agent a reasonable time after such stated expiry date to examine any document presented pursuant to such S/L/C on such stated expiry date, and, for the purpose of this Agreement, such S/L/C shall be deemed outstanding at all times prior to and including such Expiry Date. 7 13 "Fixed Charges" of any Person shall mean, for any period, the sum of the aggregate interest expense (excluding any interest payable on any Non-Recourse Debt) for such period plus the current maturity of long-term debt (excluding the Non-Recourse Debt) during such period plus all operating lease expenses for such period. "Fixed Rate Loan" shall mean any CD Rate Loan or Eurodollar Rate Loan. "Foreign Restricted Subsidiary" shall mean any Restricted Subsidiary which is not a Domestic Subsidiary. "Future Net Income" shall mean the aggregate amount of Net Income-Oil and Gas Interests and Net Income-Kalkaska Plant estimated by the Agent as of 7:00 A.M. on the date of any determination to be receivable by the Company or any Restricted Subsidiary in the future, provided that revenues, costs and expenses shall be those estimated by the Agent to be receivable or payable in the future. "GAAP" shall mean generally accepted accounting principles applied on a basis consistent with that reflected in the financial statements referred to in Section 6.6 hereof. "Guaranty" shall mean any guaranty delivered at any time pursuant to Section 7.2(h)(ii) hereof. "Hydrocarbons" shall mean oil (including condensates and natural gas liquids) and natural gas. "Indebtedness" of any Person shall mean, as of any date, (a) all obligations of such Person for borrowed money, (b) all obligations which are secured by any lien or encumbrance existing on property owned by such Person whether or not the obligation secured thereby shall have been assumed by such Person, other than those obligations which are incurred in the ordinary course of business and are not required to be shown as a liability on a balance sheet in accordance with GAAP, (c) all obligations as lessee under any lease which, in accordance with GAAP, is or should be capitalized on the books of the lessee, (d) the deferred purchase price for goods, property or services acquired by such Person, and all obligations of such Person to purchase such goods, property or services where payment therefore is required regardless of whether or not delivery of such goods or property or the performance of such services is ever made or tendered, other than unsecured trade payables incurred in the ordinary course of business (e) all obligations of such Person to advance funds to, or to purchase property or services from, any other Person in order to maintain the financial condition of such Person, (f) all obligations of such person in respect of any interest rate or currency swap, rate cap or other similar transaction (valued in an amount equal to the highest termination payment, if any, that would be payable by such person upon termination for any reason on the date of termination), and (g) all obligations of such person or of others for which such person is contingently liable, as guarantor, surety or in any other similar capacity, or in respect of which obligations such person assures a creditor against loss or agrees to take any action to prevent any such loss (other 8 14 than endorsements of negotiable instruments for collection in the ordinary course of business), including without limitation all reimbursement obligations of such person in respect of any letters of credit, surety bonds or similar obligations. "Interest Payment Date" shall mean (a) with respect to any Fixed Rate Loan, the last date of each Interest Period with respect to such Fixed Rate Loan and, in the case of any Interest Period exceeding three months, each date that is three months after the first day of such Interest period, and (b) with respect to any Prime Rate Loan, the last Business Day of each month, commencing with the first such day after the Effective Date. "Interest Period" shall mean any CD Interest Period or any Eurodollar Interest Period. "Kalkaska Assets" shall mean all rights, interests and other assets owned by the Company in or relating to the, Kalkaska Processing Plant, including without limitation the right to receive revenues from such processing plant. "Kalkaska Processing Plant" shall mean the gas processing plant constructed by Consumers Power Company, and the lands associated therewith in Section 31, Township 27 North, Range 7 West, Kalkaska County Michigan, along with all appurtenant facilities and including all additions and modifications thereof. "Lien" shall mean any pledge, assignment, hypothecation, mortgage, security interest, deposit arrangement, option, conditional sale or title retaining contract, sale and leaseback transaction, financing statement filing, lessor's or lessee's interest under any lease, subordination of any claim or right, or any other type of lien, charge, encumbrance, preferential arrangement or other claim or right. "Lenders" shall mean the Banks and the Private Placement Noteholders. "Loans" shall mean the Revolving Credit Loans or the Revolving Credit Loans and the Term Loan, collectively; "Loan" shall mean either a Revolving Credit Loan or the Term Loan. "Major Sales Contract" shall mean, at any time, any agreement between the Company, any Restricted Subsidiary or any Partnership and any Person for the sale of Hydrocarbons if the aggregate sales of Hydrocarbons to such Person during the twelve months immediately preceding such time equals or exceeds 10% of the aggregate sales of Hydrocarbons by the Company, any Restricted Subsidiary or any Partnership during the twelve months immediately preceding such time. "Majority Banks" shall mean Banks holding not less than 61% of the aggregate principal amount of the Advances then outstanding (or 61% of the Commitments if no Advances are then outstanding). 9 15 "Majority Lenders" shall mean holders of at least 75% of the liabilities of the Company under the Private Placement Notes and this Agreement, with liabilities under the Private Placement Notes being measured as the outstanding principal balance of the Private Placement Notes and liabilities under this Agreement being the greater of the Available Portion or the outstanding Advances, provided that once the Term Loan is made under this Agreement and the Commitments are terminated, the liabilities under this Agreement shall be the aggregate outstanding principal balance of the Term Loan plus the outstanding S/L/Cs. Outstanding Advances and outstanding S/L/Cs shall include, without limitation, the maximum amount that may be drawn under all outstanding S/L/Cs and all unpaid reimbursement obligations under any S/L/C. "Majority Private Placement Noteholders" shall mean Private Placement Noteholders holding at least 51% of the liabilities of the Company under the Private Placement Notes. "Maturity Date" shall mean the date three years after the Term Loan is made. "Multiemployer Plan" shall mean any "multiemployer plan" as defined in Section 4001(a)(3) of ERISA or Section 414(f) of the Code. "Net Income-Oil and Gas Interests" shall mean the difference of (a) the aggregate of the proceeds payable to the Company and any Restricted Subsidiary or to the Company and any Restricted Subsidiary as a partner in any Partnership from the sale of Hydrocarbons attributable to Oil and Gas Interests minus (b) the aggregate of all costs and expenses incurred in connection with the production and sale of such Hydrocarbons and the generation of such revenues, including without limitation: (i) all producing and operating costs including expenses of development, extraction, treatment, maintenance, processing, handling, storage, marketing, transportation, delivery, sale and environmental remediation (if any); (ii) all taxes imposed or assessed with respect to, or measured by, or charged against or attributable to, such Hydrocarbons, including all applicable mineral, severance, ad valorem, windfall profits, and property taxes; (iii) all capital expenditures calculated in accordance with GAAP incurred in connection with such production and sales; (iv) all royalties, overriding royalties, production payments and other burdens, charges or fees to which such Hydrocarbons and revenues may be subject which are not payable to the Company, any Restricted Subsidiary or any Partnership; and (v) any other costs, expenses or other amounts deducted by the Agent, or by each Bank in its own calculation of the Borrowing Base pursuant to Section 9.6, in accordance with its customary and standard practices in lending to oil and gas companies. "Net Income-Kalkaska Plant" shall mean the difference of (a) the aggregate amount of revenues payable to the Company from the ownership interest of the Company with respect to the Kalkaska Processing Plant, minus (b) the aggregate of all costs and expenses incurred in connection with such revenues and all other amounts deductible in any manner from such revenues payable to the Company. 10 16 "Non-Recourse Debt" shall mean any indebtedness which is described in any of the four following clauses: (a) such indebtedness is non-recourse to the Company or any of its Subsidiaries except with respect to the Special Project Assets only, and neither the Company nor any of its Subsidiaries shall have any liability whatsoever for any such indebtedness, obligations or other liabilities of any kind, whether direct or indirect, contingent or otherwise, other than recourse solely to the Special Project Assets for which such Non-Recourse Debt was incurred, (b) such indebtedness is for borrowed money incurred by NOMECO Equatorial Guinea Oil & Gas Co., which indebtedness is non-recourse to the Company or any of its Subsidiaries other than NOMECO Equatorial Guinea Oil & Gas Co., except with respect to the assets described in clause (a) of the definition of Special Project Assets, and must also be non-recourse against NOMECO Equatorial Guinea Oil & Gas Co. except with respect to such assets owned in such project, (c) such indebtedness is other non-recourse indebtedness on terms of non-recourse liability in all respects material to the Banks equivalent to the foregoing indebtedness described in clause (b) of this definition, or (d) other indebtedness which has limited recourse on terms which are approved in writing by the Majority Banks in their sole discretion. "Notes" shall mean the Revolving Credit Notes and the Term Notes, collectively; "Note" shall mean any Revolving Credit Note or any Term Note. "Oil and Gas Interests" shall mean all leasehold interests, mineral fee interests, overriding royalty and royalty interests, net revenue and net working interests and other interests in reserves of Hydrocarbons. "Overdue Rate" shall mean (a) in respect of principal on Prime Rate Loans, a rate per annum that is equal to the sum of three percent (3%) per annum plus the Adjusted Prime Rate, (b) in respect of Fixed Rate Loans, a rate per annum that is equal to the sum of three percent (3%) per annum plus the per annum rate then in effect thereon until the end of the then current Interest Period for such Loan and, thereafter, a rate per annum that is equal to the sum of three percent (3%) per annum plus the Adjusted Prime Rate and, (c) in respect of other amounts payable by the Company hereunder (other than interest), a per annum rate that is equal to the sum of three percent (3%) per annum plus the Adjusted Prime Rate. "Partnership" shall mean the Michigan Niagaran Reef Partnership and each other partnership meeting each of the following requirements: (a) the Company or a Restricted Subsidiary is a partner of such partnership, (b) such partnership is primarily involved in oil and gas exploration, development or production, and (c) such partnership shall have been approved in writing by all Banks and the Majority Lenders, such approval to be in the sole discretion of all Banks and the Majority Lenders. "PBGC" shall mean the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA. 11 17 "Person" shall include an individual, a corporation, an association, a partnership, a trust or estate, a joint stock company, an unincorporated organization, a joint venture, a government (foreign or domestic), and any agency or political subdivision thereof, or any other entity. "Plan" shall mean, with respect to any Person, any employee benefit or other plan (other than a Multiemployer Plan) maintained by such Person for its employees and covered by Title IV of ERISA or to which Section 412 of the Code applies. "Prepayment Date" shall have the meaning ascribed thereto in Section 4.1(d) hereof. "Prime Rate Loan" shall mean any Loan which bears interest at the Adjusted Prime Rate. "Private Placement Agreements" shall mean each Note Agreement dated as of March 1, 1990 of the Company regarding the $25,000,000 9.30% Senior Serial Notes, Series A due March 1, 1997 and $25,000,000 9.45% Senior Serial Notes, Series B due March 1, 2000, as amended or modified from time to time. "Private Placement Noteholders" shall mean all holders of the Private Placement Notes. "Private Placement Notes" shall mean the Company's senior serial notes issued pursuant to the Private Placement Agreements in the approximate original aggregate principal amount of $50,000,000. "Pro Rata Share" shall mean, as to obligations of the Banks, the percentage set forth opposite its name on the signature pages hereof or otherwise established pursuant to Section 10.6. As to obligations owing to the Banks, shall mean: (a) in the case of payments of principal and interest on the Loans, in an amount with respect to each Bank equal to the product of such amount received times the ratio which the outstanding principal balance of its Note or Notes bears to the outstanding principal balance of all Notes, and (b) in the case of all other amounts payable hereunder (other than as otherwise noted with respect to fees) and other amounts, in an amount with respect to each Bank equal to the product of such amount received times the ratio which the Commitment of such Bank bears to the Commitments of all Banks. "Related Entities" shall mean (a) each company which is wholly owned by Enterprises, CMS or any wholly owned Subsidiary thereof and which now or hereafter owns any capital stock of the Company, unless the aggregate amount of all capital stock of the Company held by all such companies is less than five (5%) percent of the voting securities of the Company, in which case no such companies shall be included in this definition of Related Entities, (b) Enterprises, and (c) CMS. "Reportable Event" shall mean a reportable event as described in Section 4043(b) of ERISA including those events as to which the thirty (30) day notice period is waived under Part 2615 of the regulations promulgated by the PBGC under ERISA. 12 18 "Required Principal Amount of Private Placement Notes" shall mean, as of any Prepayment Date, (a) the amount by which Company Debt outstanding on such Prepayment Date, after the Clause I Prepayment, if any, the Clause II Prepayment, if any, and the Clause B Prepayment, if any, exceeds the Borrowing Base, multiplied by (b) a fraction, the numerator of which shall be the aggregate unpaid principal amount of the Private Placement Notes then outstanding on such Prepayment Date and the denominator of which shall be the aggregate unpaid principal amount of Company Debt outstanding on such Prepayment Date, after subtracting the Clause I Prepayment, if any, the Clause II Prepayment, if any, and the Clause B Prepayment, if any. "Restricted Subsidiary" shall mean all Subsidiaries of which 80% or more of the voting securities are owned by the Company. "Revolving Credit Loans" shall mean loans made by the Banks to the Company pursuant to Section 2.1. "Revolving Credit Notes" shall mean the promissory notes of the Company issued to the Banks in the form annexed hereto as Exhibit A, evidencing borrowings under Section 2.1 hereof, as amended or modified from time to time and together with any promissory note or notes issued in exchange or replacement therefor. "Significant Subsidiary" shall mean each Subsidiary of the Company which, at the time of determination, satisfies either of the following two conditions: (a) the total assets owned by such Subsidiary equals or exceeds an amount equal to 5% of the Tangible Net Worth of the Company, as determined in accordance with GAAP, or (b) meets the definition of a "significant subsidiary" contained as of the date hereof in Regulation S-X of the Securities and Exchange Commission. "S/L/C" shall mean any Standby Letter of Credit issued by the Agent on behalf of the Banks for the account of the Company under Section 2.3 hereof. "S/L/C Advance" shall mean each issuance of an S/L/C under Section 2.3 hereof. "S/L/C Application" shall mean each Standby Letter of Credit Application and Reimbursement Agreement delivered by the Company to the Agent pursuant to Section 2.3, in the form of Exhibit B hereto or other form then in use by the Agent and agreed upon between the Agent and the Company. "Special Project Assets" shall mean (a) all assets owned by the Company or any of its Subsidiaries in the project involving development of the Alba Gas-Condensate Field located offshore Bioco Island, Republic of Equatorial Guinea, which project is further described in the Equatorial Guinea project financing outline distributed to the Banks, including any production sharing contract regarding such project and any proceeds thereof, and (b) all assets and proceeds thereof owned by any Subsidiary of the Company formed or maintained specifically for a project 13 19 for Hydrocarbon exploration, development, production, processing, refining and/or other industrial use of Hydrocarbons, which Subsidiary is formed or maintained solely to own such assets (and no other assets) and, after the date hereof, seeks non-recourse financing for such project, provided that the terms of non-recourse liability of the financing for such project are in all respects material to the Banks structured similarly to those of the project described in clause (a). "Subordinated Debt" shall mean any Indebtedness for borrowed money of the Company received after the Effective Date which (a) is expressly subordinate and junior in right and priority of payment to the Loans and other Indebtedness of the Company to the Agent and the Banks in manner and by written subordination agreement satisfactory to all Banks and the Majority Lenders and (b) also constitutes Subordinated Debt as defined in the Private Placement Agreements, so long as the Private Placement Agreements remain in effect. "Subsidiary" shall mean each Partnership and any corporation (whether now existing or hereafter organized or acquired) in which (other than directors qualifying shares required by law) at least a majority of the securities of each class having ordinary voting power for the election of directors (other than securities having such power only by reason of the happening of a contingency), at the time as of which any determination is being made, is owned, beneficially and of record, by the Company or by one or more of the other Subsidiaries of the Company or by any combination thereof. "Tangible Net Worth" of any Person shall mean, as of any date, (a) the amount of any capital stock or similar ownership liability plus (or minus in the case of a deficit) the capital surplus and retained earnings of such Person and the amount of any foreign currency translation adjustment account shown as a capital account of such Person, less (b) the net book value of all items of the following character which are included in the assets of such Person: (i) goodwill, including without limitation, the excess of cost over book value of any asset, (ii) organization or experimental expenses, (iii) unamortized debt discount and expense, (iv) stock discount and expense, (v) patents, trademarks, trade names and copyrights, (vi) treasury stock, (vii) deferred taxes and deferred charges, (viii) franchises, licenses and permits, and (ix) other assets which are deemed intangible assets under GAAP; provided, that such calculation of Tangible Net Worth under this definition shall not include receivables of such Person which are owing by any Related Entity or Consumers in excess of 90 days or subject to any dispute or offset or otherwise unacceptable, or advances by such Person to any Related Entity or Consumers; provided, however, that such calculation of Tangible Net Worth under this definition shall not include any Special Project Assets or any Non-Recourse Debt. "Term Loan" shall mean the term loan made by the Banks to the Company pursuant to Section 2.2. "Term Notes" shall mean the promissory notes of the Company issued to the Banks in the form annexed hereto as Exhibit C evidencing borrowings under Section 2.2 hereof, as 14 20 amended or modified from time to time and together with any promissory note or notes issued in exchange or replacement thereof. "Termination Date" shall mean the earlier to occur of (a) the date three years after the Effective Date and (b) the date on which the Commitments shall be terminated pursuant to Section 2.1 or 8.2. "Total Liabilities" of any Person shall mean, as of any date, all obligations which, in accordance with GAAP, are or should be classified as liabilities on a balance sheet of such Person; provided, however, that (a) items properly classified as deferred credits and reserves on the Company's balance sheet shall not be classified as liabilities for purposes of this definition, (b) items which may be classified as long-term liabilities on a balance sheet as a result of the implementation of Statement of Financial Accounting Standards No. 106 issued by the Financial Accounting Standards Board shall not be classified as liabilities for purposes of this definition, provided that any such liabilities shall not be required to be funded in any manner different from the method of their current funding, and (c) Non-Recourse Debt shall be excluded from the calculation of Total Liabilities. 1.2 Other Definitions; Rules of Construction. As used herein, the terms "Agent," "Bank," "Company," "Prior Loan Agreement," and "this Agreement" shall have the respective meanings ascribed thereto in the introductory paragraph of this Agreement. Such terms, together with the other terms defined in Section 1.1, shall include both the singular and the plural forms thereof and shall be construed accordingly. All computations required hereunder and all financial terms used herein shall be made or construed in accordance with GAAP unless such principles are inconsistent with the express requirements of this Agreement. SECTION 2. The Commitments. 2.1 Revolving Credit Loans. Each Bank agrees, for itself only, to lend and to relend, subject to the terms and conditions herein set forth, to the Company at any time and from time to time from the Effective Date hereof until the Termination Date amounts equal to such Bank's Pro Rata Share of such aggregate amounts as the Company may from time to time request, provided that no Advance may be made if the aggregate outstanding amount of all Advances would exceed the amount of the Available Portion. Each borrowing or reborrowing made hereunder shall be evidenced by the Revolving Credit Notes, which shall be in the form of Exhibit A hereto and shall mature and bear interest as set forth in Section 4 hereof and in such Revolving Credit Notes. On the Effective Date, the Company shall issue and deliver to each Bank a Revolving Credit Note in the principal amount of such Banks' Commitment for the period beginning on the Effective Date in substitution for the promissory notes previously issued under the Prior Loan Agreement. Each Bank is hereby authorized by the Company to note on the schedule or other records attached to such Revolving Credit Note, or elsewhere on such Bank's books and records, the date, the amount of each Revolving Credit Loan, the amount of each payment or prepayment of principal thereon, and the other information provided for on 15 21 such schedule, which schedule shall constitute prima facie evidence of the information so noted, provided that failure of any Bank to make any such notation shall not relieve the Company of its obligations to repay the outstanding principal amount of the Revolving Credit Loans, or accrued interest thereon and other amounts payable with respect thereto in accordance with the terms of the Revolving Credit Notes and this Agreement. Subject to the terms and conditions of this Agreement, the Company may borrow, prepay pursuant to Section 4.1(c) and reborrow under this Section 2.1. The Company shall have the right to terminate or reduce the Commitments at any time and from time to time, provided that (a) the Company shall give notice of such termination or reduction to the Agent specifying the amount and effective date thereof, (b) each partial reduction of the Commitments shall be in a minimum amount of $10,000,000 and in integral multiples of $1,000,000 and shall reduce the Commitments of all of the Banks proportionally in accordance with the respective Commitment amounts of each such Bank, (c) no such termination or reduction, either in whole or part and including without limitation any termination, shall be permitted with respect to any portion of the Commitments as to which a request for an Advance is then pending, (d) the Commitments may not be terminated if any Advances are then outstanding and may not be reduced below the principal amount of Advances then outstanding, for the benefit of Banks and (e) each reduction shall be accompanied by a payment to the Agent, for its account and the account of the Banks, of an amount equal to one-quarter of one percent (1/4%) of such reduction, payable upon the effective date of such reduction provided that any termination in total of the Commitments occurring two years after the Effective Date and any such reduction which occurs due to any Bank's election to be prepaid under Section 7.1(g) hereof after the occurrence of a Change of Control shall not be subject to the payment specified in this clause (e). The Commitments or any portion thereof so terminated or reduced may not be reinstated. 2.2 Term Loan. Each Bank further agrees, for itself only, to lend, subject to the terms and conditions set forth herein, its Pro Rata Share of a single Term Loan on the Termination Date, to the Company in an aggregate amount not to exceed the Available Portion; provided, however, that a portion of the proceeds of such Term Loan equal to the principal amount of all S/L/Cs outstanding and not cash collateralized pursuant to Section 4.6 hereof on the Termination Date shall be deposited on the Termination Date with the Agent to cash collateralize all such S/L/Cs pursuant to Section 4.6. The borrowings under this Section 2.2 shall be evidenced by the Term Notes in the form annexed hereto as Exhibit C, dated the date of the borrowings and maturing and bearing interest as provided in said Exhibit C and Section 4.1. At the time of execution and delivery of the Term Notes, the Credit shall be terminated, and may not be reinstated, and the Revolving Credit Notes shall thereupon mature and shall be paid and discharged by surrender against the proceeds of the Term Notes and payment by the Company of any excess of the outstanding principal balance and accrued interest of the Revolving Credit Notes over the principal amount of the Term Notes. 2.3 Standby Letters of Credit. The Agent further agrees to issue S/L/C's for the account of the Company, and each Bank agrees to participate in such S/L/C's in accordance with its Pro Rata Share, provided that all S/L/C Advances under this Section 2.3 shall be in amounts of not less than $100,000, the aggregate of all S/L/C Advances, when issued and added to all 16 22 other Advances, shall not exceed the Available Portion, and shall have an Expiry Date not later than the Maturity Date; provided, however, that the aggregate amount of all S/L/C Advances shall not exceed 45.4545% of the Commitments. Each S/L/C shall be in conformity with the provisions of the S/L/C Application delivered by the Company to the Agent pursuant to Section 3.1 and subject to the conditions described in the S/L/C and the S/L/C Application. S/L/Cs shall only be issued for the account of the Company and only for purposes occurring in the ordinary course of business of the Company, and shall not be issued to guarantee any indebtedness of any Person other than the Company or any Subsidiary. Any S/L/C issued by the Agent for the Company outstanding as of the Effective Date shall be considered an Advance under this Agreement. For purposes of this Agreement, an S/L/C Advance shall be deemed outstanding in an amount equal to the sum of the maximum amount available to be drawn and not drawn under the related S/L/C on or after the date of determination and on or before the stated Expiry Date thereof plus the amount of any draws under the related S/L/C which have not been reimbursed. 2.4 Limit on Advances. Notwithstanding anything herein to the contrary (other than provisions of Section 3.1(a) permitting Revolving Credit Loans to be automatically made in the amount of any reimbursement obligation under an S/L/C), the Company shall not be entitled to obtain, and the Banks shall not be obligated to make, any Advance if on the proposed Advance Date the principal amount of such Advance, when added to the aggregate amount of all Advances then outstanding, would exceed the Available Portion. SECTION 3. The Advances 3.1 Disbursement of Advances. (a) The Company shall give notice to the Agent of each requested Advance in substantially the form of Exhibit D hereto, which notice shall be received by the Agent not later than 11:00 A.M. (Detroit time) (a) three Eurodollar Business Days prior to the proposed Advance Date in the case of any Eurodollar Rate Loan, (b) one Business Day prior to the proposed Advance Date in the case of all other Loans and (c) three Business Days prior to the Advance Date in the case of an S/L/C Advance, which notice shall specify whether a CD Rate Loan, Eurodollar Rate Loan, Prime Rate Loan or S/L/C Advance is requested and, in the case of each Fixed Rate Loan, the Interest Period to be initially applicable to such Loan. Each such notice shall be irrevocable and binding on the Company. The Agent shall provide notice of such requested Advance to each Bank on the same Business Day such notice is received from the Company and the Agent shall provide notice to such Bank on each date on which it honors a draft under any S/L/C, specifying the amount of such draft and any cost and expenses related thereto. If an S/L/C is requested, the Company shall deliver together with such notice a fully completed S/L/C Application with respect to such S/L/C. All obligations of the Company arising under any S/L/C Application shall be deemed obligations of the Company under this Agreement. The Agent will give each Bank oral notice (to be confirmed promptly in writing) on each day on which it honors a draft to it under any S/L/C, specifying the amount of such draft. Notwithstanding anything in any S/L/C Application to the contrary, unless the Company shall have made full payment (which shall include withdrawals 17 23 from deposits of cash cover for any S/L/C) to the Agent on the day of any draw under any S/L/C, the Company, the Agent and the Banks agree that the obligation of the Company to reimburse the Agent in respect of amounts drawn under any S/L/C (and any costs and expenses related thereto) shall be satisfied, on the date due, by disbursement of a Revolving Credit Loan bearing interest at the Adjusted Prime Rate in the amount to be so reimbursed. Such Revolving Credit Loan shall be disbursed notwithstanding any failure to satisfy any conditions for disbursement of any Loan set forth herein. (b) Subject to the terms and conditions of this Agreement, the proceeds of such requested Loan shall be made available to the Company by depositing the proceeds thereof, in immediately available funds, on the Advance Date for such Loan in an account maintained and designated by the Company at the principal office of the Agent and in the case of an S/L/C Advance, by delivery of the S/L/C to the Company or the beneficiary under such S/L/C, provided, however, that disbursements of Revolving Credit Loans made pursuant to the last sentence of Section 3.1(a) shall be made directly from each Bank in respect of the reimbursement and related obligations of the Company. Each Bank, on the Advance Date of each such Loan shall make its Pro Rata Share of such Loan available in immediately available funds at the principal office of the Agent for disbursement to the Company. Unless the Agent shall have received notice from any Bank prior to the date of any requested Loan under this Section 3.1 that such Bank will not make available to the Agent such Bank's Pro Rata Share, the Agent may assume that such Bank has made such share available to the Agent on the Advance Date of such Loan in accordance with this Section 3.1(b). If and to the extent such Bank shall not have so made such Pro Rata Share available to the Agent, the Agent may (but shall not be obligated, except as required under any S/L/C, to) make such amount available to the Company on the relevant Advance Date in the case of a Loan and to the beneficiary in the case of a draw under an S/L/C, and such Bank agrees to pay to the Agent forthwith on demand such amount together with interest thereon, for each day from the date such amount is made available to the Company or such beneficiary by the Agent until the date such amount is paid to the Agent, at a rate per annum equal to the rate at which overnight borrowings are available to the Agent from other banks in its regional federal funds market. If such Bank shall pay to the Agent such amount, such amount so paid shall constitute a Loan by such Bank as a part of such borrowing for purposes of this Agreement. The failure of any Bank to make its Pro Rata Share of any such Loan available to the Agent shall not relieve any other Bank of its obligations to make available its Pro Rata Share of such Loan on the Advance Date of such Loan, but no Bank shall be responsible for failure of any other Bank to make such Pro Rata Share available to the Agent on the Advance Date of any such Loan. 3.2 Conditions of Advances. The Banks shall not be obligated to make any Advance hereunder at any time unless: (a) Prior to or simultaneously with the first Advance hereunder, there shall have been delivered to each Bank the following documents, in form and substance satisfactory to the Agent: 18 24 (i) the favorable opinion of William H. Stephens, III, Vice President-Land and Legal of the Company, in the form of Exhibit E hereto; (ii) certified copies of such corporate documents of the Company, including (A) certificates of recent date of the appropriate authority or official of the Company's state of incorporation listing all charter documents of the Company on file in that office and certifying as to the good standing and corporate existence of the Company together with copies of such charter documents of the Company certified as of a recent date by such authority or official and certified as true and correct as of the Effective Date by a duly authorized officer of the Company, (B) copies of the by-laws of the Company, together with all authorizing resolutions and evidence of other corporate action taken by the Company to authorize the execution, delivery and performance by the Company of this Agreement, the Notes and any S/L/C Application and the consummation by the Company of the transactions contemplated hereby, each certified as true and correct as of the Effective Date by a duly authorized officer of the Company, and (C) certificates of incumbency of the Company containing, and attesting to the genuineness of, the signatures of those officers authorized to act on behalf of the Company in connection with this Agreement, the Notes and any S/L/C Application, and the consummation by the Company of the transactions contemplated hereby, certified as true and correct as of the Effective Date by a duly authorized officer of the Company; (iii) the Revolving Credit Notes duly executed on behalf of the Company; (iv) copies of all Major Sales Contracts in effect on the Effective Date, certified as true and correct by the Company; (v) payment in full of all liabilities of the Company pursuant to the Prior Loan Agreement, provided that it is acknowledged and agreed that all outstanding letters of credit issued by the Agent for the account of the Company, whether pursuant to the Prior Loan Agreement or otherwise, do not need to be terminated or replaced, but instead shall be deemed S/L/Cs outstanding under this Agreement; (vi) an amendment to the Private Placement Agreement executed by all parties thereto, in form and substance satisfactory to the Majority 19 25 Banks, which amendment shall consent to the terms and provisions of this Agreement and contain such other provisions as may be required by the Majority Banks; (vii) copies of each Private Placement Agreement and all agreements, instruments and other documents executed pursuant thereto, including without limitation all amendments or modifications to any of the foregoing, certified as true and correct by the Company; and (viii) such other agreements, documents and certificates as reasonably requested by the Majority Banks. (b) The aggregate outstanding principal amount of all such Advances, after giving effect to the proposed Advance, does not exceed the Available Portion based on the most recently determined Borrowing Base. (c) On and as of the date of each such Advance, the representations and warranties contained in Section 6 hereof, except for Section 6.5, shall be true and correct as if made on such date; provided, however, that for purposes of this Section 3.2(c) the representations and warranties contained in Section 6.6 hereof shall be deemed made with respect to both the financial statements referred to therein and the most recent financial statements delivered pursuant to Section 7.1(d)(ii) and (iii) except for the representation and warranty contained in the last sentence of Section 6.6 hereof which shall be deemed made with respect to the date of the most recent financial statements delivered pursuant to Section 7.1(d)(iii); provided, further, that for purposes of this Section 3.2(c) the representations and warranties contained in the first sentence of Section 6.4 hereof shall be deemed made with respect to the most recent listing of Subsidiaries of the Company delivered by the Company to the Banks and in Section 6.14 hereof shall be deemed made with respect to the most recent Exhibit J delivered by the Company to the Banks. (d) No Event of Default and no event which might become such an Event of Default with notice or lapse of time, or both, has occurred and is continuing or will exist upon the disbursement of such Advance. (e) On and as of the date of each such Advance, there are no actions, suits or proceedings pending (other than those listed on Exhibit H hereto) or, to the best of the Company's knowledge, threatened against or affecting the Company or any of its Significant Subsidiaries before or by any court, governmental authority, or arbitrator which, if adversely decided might result, either individually or collectively, in any material adverse change in the business, property, operations or conditions, financial or otherwise, of the Company or any of its Significant Subsidiaries, and to the best of the Company's knowledge, there is no basis for any such action, suit or proceeding. 20 26 (f) The Company shall have submitted a request pursuant to Section 3.1(a) hereof and, if an S/L/C is requested, shall have paid the fee required by Section 4.5(d) hereof and delivered an appropriately completed S/L/C Application. 3.3 Certification. Acceptance of the proceeds of any Advance hereunder by the Company shall be deemed to be a certification by the Company at such time with respect to the matters set forth in subparagraphs (c), (d) and (e) of Section 3.2. 3.4 Subsequent Elections as to Loans. The Company may elect to continue a Fixed Rate Loan of one type as a Fixed Rate Loan of the then existing type or may elect to convert a Fixed Rate Loan of one type to a Loan of another type by giving notice thereof to the Agent in substantially the form of Exhibit F hereto not later than 11:00 a.m. Detroit time three Eurodollar Business Days prior to the date any such continuation of or conversion to a Eurodollar Rate Loan is to be effective and not later than 11:00 a.m. Detroit time one Business Day prior to the date such continuation or conversion is to be effective in all other cases, provided that an outstanding Fixed Rate Loan may only be converted on the last day of the then current Interest Period with respect to such Loan, and provided, further, if a continuation of a Loan as, or a conversion of a Loan to, a Eurodollar Rate Loan or a CD Rate Loan is requested, such notice shall also specify the Interest Period to be applicable thereto upon such continuation or conversion. If the Company shall fail to deliver timely such a notice with respect to any outstanding Fixed Rate Loan, the Company shall be deemed to have elected to convert such Fixed Rate Loan to a Prime Rate Loan on the last day of the then current Interest Period with respect to such Loan. 3.5 Minimum Amounts; Limitation on Number of Loans. Except for conversions or payments required pursuant to Section 5.3, each Loan and each conversion thereof shall be in a minimum amount of $100,000 and in integral multiples of $100,000 in the case of any Prime Rate Loan and in a minimum amount of $500,000 or a larger integral multiple of $100,000 in the case of any Fixed Rate Loan. The aggregate number of Fixed Rate Loans outstanding at any one time under this Agreement may not exceed three. 3.6 Termination of Prior Loan Agreement. Subject to the satisfaction of the conditions described in Section 3.2(a), the Prior Loan Agreement is hereby terminated. SECTION 4. Payment and Prepayment; Partnerships; Elected Available Portion; Fees; Cash Cover of S/L/C's; Indemnity 4.1 Principal Payments. (a) Unless earlier payment is required under this Agreement, the Company shall pay the outstanding principal amount of, and all accrued interest on, the Revolving Credit Loans on the Termination Date. 21 27 (b) Unless earlier payment is required under the terms of this Agreement, the principal amount of the Term Loan shall be payable in thirty-six monthly installments each in an amount equal to one-thirty-sixth (1/36) of the initial principal amount of the Term Loan, payable the last Business Day of the first full month ending after the Termination Date and on the last Business Day of each month thereafter to and including the Maturity Date, when the entire outstanding principal amount of, and all accrued interest on, the Term Loan shall be due and payable. (c) The Company may from time to time prepay all or a portion of the Loans without premium or penalty, provided, however, that (i) the Company shall have given not less than one Business Day's prior written notice thereof to the Agent, (ii) each such prepayment shall be in an integral multiple of $50,000, (iii) the Company may not prepay any portion of any Loan as to which an election for a continuation of or a conversion to any Fixed Rate Loan is pending pursuant to Section 3.4, (iv) unless earlier payment is required under this Agreement, any Fixed Rate Loan may only be prepaid on the last day of the then current Interest Period with respect to such Loan, and (v) all such prepayments on the Term Notes shall be applied to installments of principal thereon in the inverse order of their maturities. (d) On or prior to the 45th consecutive day after the Company receives notice from the Agent that a Borrowing Base Deficiency existed (the "Prepayment Date"), the Company shall: (i) if no Private Placement Notes are outstanding on such date, prepay the principal amount of outstanding Advances which exceeds the most recently determined Borrowing Base; or (ii) if the Private Placement Notes are outstanding on such date, prepay outstanding Company Debt in the following manner: (A) First, only in the event that on the Prepayment Date (1) the difference between (x) the aggregate unpaid principal amount of all Debt then outstanding minus (y) the aggregate unpaid principal amount of all Subordinated Debt then outstanding is greater than $200,000,000 and (2) the aggregate unpaid principal amount of Company Debt outstanding on such day exceeds 130% of the Borrowing Base. I. (together with the Clause II Prepayment) a principal amount of the Advances outstanding on such day which is equal to the amount by which Company Debt outstanding on such day exceeds 115% of the Borrowing Base, multiplied by a fraction, the numerator of which shall be the aggregate unpaid principal amount of Advances, and the denominator of which shall be the aggregate unpaid principal amount of Company Debt, in each case outstanding on such day (the "Clause I Prepayment"), plus II. (together with the Clause I Prepayment) pro rata to the holders of the Private Placement Notes a principal amount of Private Placement Notes outstanding on 22 28 such day which is equal to the amount by which Company Debt outstanding on such day exceeds 115% of the Borrowing Base, multiplied by a fraction, the numerator of which shall be the aggregate unpaid principal amount of the Private Placement Notes then outstanding on such day and the denominator of which shall be the aggregate unpaid principal amount of Company Debt outstanding on such day (the "Clause II Prepayment"), plus (B) Second, the lesser of (1) the principal amount, if any, of Advances outstanding on such day after the Clause I Prepayment, if any, or (2) the principal amount of Advances outstanding on such day after the Clause I Prepayment, if any, which exceeds 125% of the aggregate principal amount of the outstanding Private Placement Notes after the Clause II Prepayment, if any (the "Clause B Prepayment"), plus (C) Third (together with the Clause D Prepayment), a principal amount of Advances outstanding on such day after the Clause I Prepayment, if any, and the Clause B Prepayment, if any, which is equal to the lesser of (1) the principal amount of Advances outstanding on such day after the Clause I Prepayment, if any, and the Clause B Prepayment, if any, or (2) the amount by which Company Debt outstanding on such day after the Clause I Prepayment, if any, the Clause II Prepayment, if any, and the Clause B Prepayment, if any, exceeds such Borrowing Base, multiplied by a fraction, the numerator of which shall be the principal amount of Advances, and the denominator of which shall be the principal amount of Company Debt, in each case outstanding on such day after the Clause I Prepayment, if any, the Clause II Prepayment, if any, and the Clause B Prepayment, if any (the "Clause C Prepayment"), plus (D) Third (together with the Clause C Prepayment), the Required Principal Amount of Private Placement Notes pro rata to the holders of Private Placement Notes which have given written notice to the Company at least five days prior to the Prepayment Date that they accept the offer of the Company to prepay Private Placement Notes pursuant to the Company {2.4 Notice, as that term is currently defined in Section 2.4(a) of the form of Private Placement Agreement that has been delivered to the Banks on the Effective Date pursuant to Section 3.2(a)(vi) without giving effect to any amendments or modifications thereto (the "Clause D Prepayment"), plus (E) Fourth, a principal amount of Advances outstanding on such day after the Clause I Prepayment, if any, the Clause B Prepayment, if any, and the Clause C Prepayment, which is equal to the lesser of (1) the principal amount of Advances outstanding on such day after the Clause I Prepayment, if any, the Clause B Prepayment, if any, and the Clause C Prepayment, or (2) the amount by which such Borrowing Base is less than Company Debt outstanding on such day after subtracting from such Company Debt the Clause I Prepayment, if any, the Clause II Prepayment, if any, the Clause B Prepayment, if any, the Clause C Prepayment and the Clause D Prepayment. 4.2 Interest Payments. The Company shall pay interest to the Banks on the unpaid principal amount of each Loan, for the period commencing on the date such Loan is made until 23 29 such Loan is paid in full, on each Interest Payment Date and at maturity (whether at stated maturity, by acceleration or otherwise), and thereafter on demand, at the following rates per annum: (a) During such periods that such Loan is a Prime Rate Loan, the Adjusted Prime Rate. (b) During such periods that such Loan is a CD Rate Loan, the CD Rate applicable to such Loan for each related CD Interest Period. (c) During such periods that such Loan is a Eurodollar Rate Loan, the Eurodollar Rate applicable to such Loan for each related Eurodollar Interest Period. (d) Notwithstanding the foregoing paragraphs (a) through (c), the Company hereby agrees to pay interest on demand at the Overdue Rate on the outstanding principal amount of any loan and any other amount payable by the Company hereunder (other than interest) upon and during the continuance of any Event of Default. 4.3 Partnerships. It is expressly understood that if any of the following events or conditions shall have occurred with respect to any Partnership, all Net Income-Oil and Gas Interests attributable to the interests of the Company or any Subsidiary in such Partnership shall be excluded from the calculation of the Borrowing Base: (a) such Partnership shall make or permit to remain outstanding, loans, advances (except advances in the form of payments to third parties made on behalf of such Partnership in the ordinary course of the business of such Partnership), or other extensions of credit to, or become or remain a guarantor or surety or pledge its credit or become liable in any manner (except by endorsement of negotiable instruments for deposit in the ordinary course of business) on undertakings of any other Person, firm, corporation or other entity; (b) such Partnership shall incur or permit to remain outstanding any indebtedness for borrowed money or any other liability of any nature whatsoever, other than current accounts and other obligations payable incurred in the ordinary course of the business of such Partnership; (c) such Partnership shall permit any Lien to exist on any of the assets of such Partnership other than (i) Liens for taxes not delinquent or for taxes being contested in good faith by appropriate proceedings and as to which adequate financial reserves have been established on its books and records, (ii) Liens created in connection with workmen's compensation, unemployment insurance, and social security, or to secure the performance of bids, tenders or contracts (other than for the repayment of borrowed money), leases, statutory obligations, surety and appeal bonds, and other obligations of like nature made in the ordinary course of business (iii) construction liens, mechanics liens and liens pursuant to M.C.L.A. 570.251 or statutes of other jurisdictions similar to M.C.L.A. 570.251 created in the ordinary course of business if (x) payment of the obligation secured thereby is not yet due, (y) such 24 30 obligation is being contested in good faith by appropriate proceedings and for which appropriate reserves have been established in accordance with GAAP, or (z) as to all amounts of the obligations secured by such Liens which are in default, such amount in the aggregate is not material and (iv) operator or non-operator liens created, incurred or suffered to exist in the ordinary course of the business of such Partnership if payment of the obligation secured thereby is not yet due or such obligation is being contested in good faith by appropriate proceedings and for which appropriate reserves have been established in accordance with GAAP; (d) the agreement forming such Partnership or any other organizational document of such Partnership shall be amended or any waiver or consent in connection therewith shall have been granted which shall adversely affect the Company's and its Restricted Subsidiary's aggregate interest in such partnership; and (e) any material adverse change in the business, properties, operations or conditions, financial or otherwise, of such Partnership shall occur, or any event or condition shall occur which could be the basis for the termination, liquidation, winding-up or dissolution of such Partnership, or any default by such Partnership or any partner thereof shall occur under the partnership agreement or other organizational documents of such Partnership (including without limitation any event of a nature described in Section 8.1(h) hereof). 4.4 Elected Available Portion. The Company shall elect in writing to the Banks the Elected Available Portion on the following dates: (a) the Effective Date, and (b) within five Business Days after receipt by the Company of each Borrowing Base determination. Each such election pursuant to the preceding sentence shall remain in effect from the date of such election until the date of the next available election. If the Company fails to make any such election, the Elected Available Portion shall be an amount equal to the Available Portion. Notwithstanding anything herein to the contrary, the Elected Available Portion shall not be less than the difference between the Borrowing Base minus the principal amount outstanding of the Private Placement Notes. If any Advance causes the total outstanding Advances (including such Advance) at any time to exceed the Elected Available Portion, the Elected Available Portion automatically shall be increased thereafter by such excess. 4.5 Fees. (a) The Company agrees to pay to the Agent, for the pro rata account of the Banks, a commitment fee computed at the rate of three-eighths of one percent (3/8%) per annum on the amount by which the Elected Available Portion (without giving effect to any reduction therein caused by the Borrowing Base limitations) exceeds the aggregate outstanding principal amount of the Loans, for the period from the Effective Date until the Termination Date or the earlier termination of the Credit. Said fee shall be paid quarterly, on the last day of each March, June, September and December commencing on the first such date after the Effective Date, and the date of each reduction or termination of the Credit, for the preceding period for which such fee has not been paid. (b) If any Advance causes the aggregate outstanding Advances, including such Advance, at any time to exceed the Elected Available Portion, the Company shall pay an 25 31 additional fee to the Agent, for its account and the account of the Banks, on the date of such Advance equal to three-eighths of one percent (3/8%) per annum, computed for the period from and including the date of the most recent election by the Company of the Elected Available Portion under Section 4.4 hereof to and including the date of such Advance, of the amount of such excess. (c) The Company agrees to pay to the Agent a fee computed at the rate of one and one-quarter of one percent (1-1/4%) per annum (with the Agent retaining for its own account one-quarter of one percent per annum of such fee, and with the remainder of such fee being paid to the Banks according to their Pro Rata Share) of the maximum amount available to be drawn from time to time under each S/L/C for a period from and including the date of the issuance of such S/L/C to and including the Stated Expiry Date of such S/L/C. Such fee shall be payable annually in advance on or before the date of the issuance of each S/L/C and on each anniversary thereof if such S/L/C is then outstanding. Such fees are non-refundable and the Company shall not be entitled to any rebate of any portion thereof if such S/L/C does not remain outstanding through the end of the annual or shorter period for which such fee was paid. Notwithstanding the foregoing, it is understood that if the period from and including the date of the issuance of an S/L/C to and including the Stated Expiry Date of such S/L/C is less than one year, the fee payable hereunder will be payable for the period of time during which such S/L/C may be outstanding and not payable for a one year period. The Company further agrees to pay to the Agent, on demand, such other customary administrative fees, charges and expenses of the Agent in respect of the issuance, negotiation, acceptance, amendment, transfer and payment of such S/L/C or otherwise payable pursuant to the S/L/C Application and related documentation under which such S/L/C is issued. 4.6 Cash Cover of S/L/Cs. The Company may reduce all or any part of the outstanding S/L/C Advances (provided that such reduction is in a minimum amount of $100,000 and in a whole multiple of $100,000) prior to any Expiry Date with respect to any S/L/C by the provision of cash cover in a manner satisfactory to the Banks to meet the maximum contingent obligations of the Banks under such S/L/C. Upon the delivery of such cash cover to the Agent, the Banks shall have a lien thereon and a security interest therein and in all interest and other proceeds thereof to secure the obligations of the Company to the Banks in connection with this Agreement, and the Company shall provide to the Banks such evidence as the Banks may request to establish the legality, validity and enforceability of such lien and security interest. The Agent agrees to deposit such cash cover in an interest bearing account at the main office of the Agent or in an investment acceptable to the Agent. The amount of such S/L/C Advance shall be reduced by the amount of cash cover deposited. If the Company shall have so provided to the Banks cash cover for any S/L/C, the Banks shall make available to the Company promptly after the Expiry Date of such S/L/C the amount of any such cash cover and interest thereon in excess of amounts thereof required by the Banks and the Agent, if any, to satisfy and pay any obligations of the Company to the Banks then due and payable. 4.7 Indemnity. The Company assumes all risks of the acts or omissions of any beneficiary under any S/L/C issued pursuant to this Agreement with respect to the use by such 26 32 beneficiary of such S/L/C. In addition to all undertakings and indemnities of the Company contained in the S/L/C Applications delivered by the Company to the Agent pursuant to Section 3.1, the Company acknowledges that neither the Banks, the Agent nor any of their officers or directors shall be liable or responsible for (i) the use which may be made of any S/L/C or for any acts or omissions of any beneficiary in connection therewith, (ii) the validity, sufficiency or genuineness of any documents delivered in connection with any S/L/C, or of any endorsements thereon, even if such documents should in fact prove to be in any or all respects invalid, insufficient, fraudulent or forged, or (iii) any other circumstances whatsoever in connection with honoring or dishonoring any S/L/C, except that the Company shall have a claim against the Agent, and the Agent shall be liable to the Company, to the extent, but only to the extent, of any direct damages suffered by the Company which the Company proves were caused by the Agent's wrongful dishonor of a draft under any S/L/C after presentation to the Agent by the beneficiary thereunder of documents strictly complying with the terms and conditions of such S/L/C or by the Agent's wrongful honor of a draft under any S/L/C after presentation to the Agent by the beneficiary thereunder of documents not substantially complying with the terms and conditions of such S/L/C, but in no event shall the Banks or the Agent be liable for any special, punitive, exemplary or consequential damages. In furtherance and not in limitation of the foregoing, the Agent may accept documents that appear on their face to be in order, without responsibility for further investigation regardless of any notice or information to the contrary. The Company hereby indemnifies the Banks and the Agent and agrees to keep the Banks and the Agent at all times indemnified against all liabilities which the Banks may incur or which may be claimed against any Bank or the Agent by any Person or entity by reason of or relating to any matters arising in connection with any S/L/C or any of the transactions contemplated thereby, provided, however, that the Company shall not be required to so indemnify any Bank or the Agent for any such liabilities or claims to the extent, but only to the extent, caused by such Bank's or the Agent's gross negligence or willful misconduct under this Agreement. If any law, rule, regulation, directive or request of general applicability, or the interpretation thereof by any court or administrative or governmental authority charged with the administration thereof (whether or not having the force of law), shall either (i) impose, modify or deem applicable any taxation, reserve, special deposit or any other requirement or condition with respect to S/L/Cs issued hereunder (including without limitation the imposition of any reserve requirement by the Federal Deposit Insurance Corporation in respect of any S/L/C), or (ii) impose on any Bank any other requirement or condition regarding this Agreement or its S/L/C issued hereunder or any of the transactions contemplated hereby, and as a result of any such event, or by reason of such Bank's compliance therewith, the cost to such Bank of issuing or maintaining its S/L/C or related obligation, or its participation in related obligations of the Company, or engaging in any of the transactions contemplated hereby shall be increased, then, upon demand by such Bank, the Company agrees to pay immediately to such Bank, from time to time, additional amounts which shall be sufficient to compensate such Bank for such increased cost, together with interest on each such amount from the date demanded until payment in full thereof at the Overdue Rate, provided, however, that any such claims shall not duplicate any claims under Section 5.1. Such amounts shall be due and payable on the Business Day following presentation to the Company by such Bank of a certificate as to such increased cost incurred by such Bank, prepared by such 27 33 Bank and showing the calculation of such cost in reasonable detail, which calculation shall be conclusive absent manifest error in computation. 4.8 Payment Method. All payments to be made by the Company hereunder will be made in Dollars and in immediately available funds to the Agent at its address set forth in Section 10.2 not later than 11:00 a.m. Detroit time on the date on which such payment shall become due. Payments received after 11:00 a.m. Detroit time shall be deemed to be payments made prior to 11:00 a.m. Detroit time on the next succeeding Business Day. At the time of making each such payment, the Company shall specify to the Agent that obligation of the Company hereunder to which such payment is to be applied, or, in the event that the Company fails to so specify or if an Event of Default shall have occurred and be continuing, the Agent may apply such payments as it may determine in its sole discretion. On the day such payments are received, the Agent shall remit to the Banks their respective Pro Rata Shares of such payments, in immediately available funds. 4.9 No Setoff or Deduction. All payments of principal of and interest on the Advances and other amounts payable by the Company hereunder shall be made by the Company without setoff or counterclaim, and free and clear of, and without deduction or withholding for, or on account of, any present or future taxes, levies, imposts, duties, fees, assessments, or other charges of whatever nature, imposed by any governmental authority, or by any department, agency or other political subdivision or taxing authority. 4.10 Payment on Non-Business Day; Payment Computations. Except as otherwise provided in this Agreement to the contrary, whenever any installment of principal of, or interest on, any Advance outstanding hereunder or any other amount due hereunder, becomes due and payable on a day which is not a Business Day, the maturity thereof shall be extended to the next succeeding Business Day and, in the case of any installment of principal, interest shall be payable thereon at the rate per annum determined in accordance with this Agreement during such extension. Computations of interest and other amounts due under this Agreement shall be made on the basis of a year of 360 days for the actual number of days elapsed, including the first day but excluding the last day of the relevant period. 4.11 Agent's Fees. The Company agrees to pay to the Agent agency, engineering, closing and servicing fees for its services under this Agreement in such amounts as may from time to time be agreed upon by the Company and the Agent. Notwithstanding anything herein to the contrary, unless otherwise agreed to by the Agent, such fees shall be retained solely by the Agent. SECTION 5. Yield Protection and Contingencies 5.1 Additional Costs. (a) In the event that any applicable law, treaty, rule or regulation (whether domestic or foreign) now or hereafter in effect and whether or not presently applicable to any Bank, or any interpretation or administration thereof by any governmental 28 34 authority charged with the interpretation or administration thereof, or compliance by any Bank with any request or directive of any such authority (whether or not having the force of law), shall (i) affect the basis of taxation of payments to any Bank of any amounts payable by the Company under this Agreement (other than taxes imposed on the overall net income of any Bank by the jurisdiction, or by any political subdivision or taxing authority of any such jurisdiction, in which such Bank has its principal office), or (ii) shall impose, modify or deem applicable any risk-based capital, reserve, special deposit, deposit insurance or similar requirement against assets of, deposits with or for the account of, or credit extended by such Bank, or (iii) shall impose any other condition with respect to this Agreement, the Notes or the Advances, and the result of any of the foregoing is to increase the cost to any Bank of making or maintaining any Fixed Rate Loan or to reduce the amount of any such receivable by such Bank thereon, then the Company shall pay to such Bank, from time to time, upon request by such Bank additional amounts sufficient to compensate such Bank for such increased cost or reduced sum receivable to the extent such Bank is not compensated therefor in the computation of the interest rate applicable to such Fixed Rate Loan. All claims under this Section 5.1(a) and under Section 5.1(b) shall not duplicate any claims under Section 4.7. A detailed statement as to the amount of such increased cost or reduced sum receivable, prepared in good faith and submitted by such Bank to the Company, shall be conclusive and binding for all purposes absent manifest error in computation. The Banks agree that such costs under this Section 5.1(a) and the compensation requested under Section 5.1(b) shall (i) not be requested if they are not requested of other borrowers similar to the Company, provided that the Banks' determination of similar borrowers shall be conclusive and binding, and (ii) only be charged when actually incurred by any Bank, and if any Bank is refunded such costs after charging the Company for such costs, then such Bank shall refund to the Company such costs to the extent such Bank receives a refund, net of any costs or expenses incurred in pursuing such refund. (b) In the event that any applicable law, treaty, rule or regulation (whether domestic or foreign) now or hereafter in effect and whether or not presently applicable to any Bank or the Agent, or any interpretation or administration thereof by any governmental authority charged with the interpretation or administration thereof, or compliance by any Bank or the Agent with any guideline, request or directive of any such authority (whether or not having the force of law), affects or would affect the amount of capital required or expected to be maintained by such Bank or the Agent or any corporation controlling such Bank or the Agent and such Bank or the Agent, as the case may be, determines that the amount of such capital is increased by or based upon the existence of such Bank's or the Agent's obligations hereunder and such increase has the effect of reducing the rate of return on such Bank's or the Agent's capital as a consequence of its obligations hereunder to a level below that which such Bank or the Agent could have achieved but for such circumstances (taking into consideration its policies with respect to capital adequacy) by an amount deemed by such Bank or the Agent to be material, then the Company shall pay to such Bank or the Agent, as the case may be, from time to time, upon request by such Bank (with a copy of such request to be provided to the Agent) or the Agent, additional amounts sufficient to compensate such Bank or the Agent for any increase in the amount of capital and reduced rate of return which such Bank or the Agent reasonably determines to be allocable to the existence of such Bank's or the Agent's obligations hereunder. A statement as 29 35 to the amount of such compensation, prepared in good faith and in reasonable detail by such Bank or the Agent, as the case may be, and submitted by such Bank or the Agent to the Company, shall be conclusive and binding for all purposes absent manifest error in computation. 5.2 Limitation of Requests and Elections. Notwithstanding any other provision of this Agreement to the contrary, if, upon receiving a request for a Fixed Rate Loan pursuant to Section 3.1, or a request for a continuation of a Fixed Rate Loan as a Fixed Rate Loan of the then existing type pursuant to Section 3.4, or conversion of a Loan to a Fixed Rate Loan pursuant to Section 3.4, (a) in the case of any Eurodollar Rate Loan or CD Rate Loan, deposits in Dollars for periods approximately equal to the Interest Period elected by the Company are not available to any Bank in the relevant interbank or secondary market, or (b) the CD Rate or the Eurodollar Rate, as the case may be, for periods approximately equal to the Interest Period elected by the Company will not adequately and fairly reflect the cost to any Bank of making or maintaining the related CD Rate Loan or Eurodollar Rate Loan, as the case may be, or (c) by reason of national or international financial, political or economic conditions or by reason of any applicable law, treaty, rule or regulation (whether domestic or foreign) now or hereafter in effect and whether or not presently applicable to any Bank, or the interpretation or administration thereof by any governmental authority charged with the interpretation or administration thereof, or compliance by any Bank with any request or directive of such authority (whether or not having the force of law), including without limitation exchange controls, it is impracticable, unlawful or impossible for any Bank (i) to make the relevant Fixed Rate Loan or (ii) to continue such Fixed Rate Loan as a Fixed Rate Loan of the then existing type or (iii) to convert a Loan to such a Fixed Rate Loan, then the Company shall not be entitled, so long as such circumstances continue, to request from each such Bank a Fixed Rate Loan of the affected type pursuant to Section 3.1 or a continuation of or conversion to a Fixed Rate Loan of the affected type pursuant to Section 3.4; provided, however, that nothing in this Section 5.2 shall affect such Bank's obligations under this Agreement to make or continue a Prime Rate Loan. In the event that such circumstances no longer exist, such Bank shall again accept, provided that the other terms and conditions of this Agreement are satisfied, requests for Fixed Rate Loans of the affected type pursuant to Section 3.1, and requests for continuations of and conversions to Fixed Rate Loans of the affected type pursuant to Section 3.4. 5.3 Illegality and Impossibility. In the event that any applicable law, treaty, rule or regulation (whether domestic or foreign) now or hereafter in effect and whether or not presently applicable to any Bank, or any interpretation or administration thereof by any governmental authority charged with the interpretation or administration thereof, or compliance by any Bank with any request or directive of such authority (whether or not having the force of law), including without limitation exchange controls, or any change in such law, treaty, rule, regulation, interpretation or administration shall make it unlawful or impossible for any Bank to maintain any Fixed Rate Loan under this Agreement, the Company shall upon receipt of notice thereof from such Bank, repay in full to such Bank the then outstanding principal amount of each Fixed Rate Loan so affected together with all accrued interest thereon to the date of payment and all amounts due to such Bank under Section 5.4 (a) on the last day of the then current Interest Period applicable to such Loan if such Bank may lawfully continue to maintain 30 36 such Loan to such day, or (b) immediately if such Bank may not continue to maintain such Loan to such day. 5.4 Indemnification. If the Company makes any payment of principal with respect to any Fixed Rate Loan on any date other than the last day of an Interest Period applicable thereto (whether pursuant to Section 4.1(d), Section 5.3, Section 7.1(i), Section 8.2 or otherwise), or if the Company fails to borrow any Fixed Rate Loan after notice has been given in accordance with Section 3.1, or fails to make any payment of principal or interest in respect of a Fixed Rate Loan when due, the Company shall reimburse each Bank on demand for any resulting loss or expense incurred by each such Bank, including without limitation any loss incurred in obtaining, liquidating or employing deposits from third parties. A detailed statement as to the amount of such loss or expense, certified by such Bank as having been prepared in good faith and as being accurate to the best of such Bank's knowledge and submitted by such Bank to the Company, shall be conclusive and binding for all purposes absent manifest error in computation. SECTION 6. Representations and Warranties The Company represents and warrants that: 6.1 Corporate Existence and Power. The Company and each Significant Subsidiary are corporations duly organized, validly existing and in good standing under the laws of the state of their respective incorporation, and are duly qualified to do business and are in good standing in each additional jurisdiction where such qualification is necessary under applicable law. The Company has all requisite corporate power to own its properties and to carry on its business as now being conducted and as proposed to be conducted, and to execute and deliver this Agreement, the Notes and the S/L/C Applications and to engage in the transactions contemplated by this Agreement. 6.2 Corporate Authority. The execution, delivery and performance by the Company of this Agreement, the Notes and the S/L/C Applications are within its corporate powers, have been duly authorized by all necessary corporate action and are not in contravention of any law, rule or regulation, or any judgment, decree, writ, injunction, order or award of any arbitrator, court or governmental authority, or of the terms of the Company's charter or by-laws, or of any contract or undertaking to which the Company is a party or by which the Company or its property may be bound or affected. 6.3 Binding Effect. This Agreement is, and the Notes and the S/L/C Applications when delivered hereunder will be, legal, valid and binding obligations of the Company enforceable against the Company in accordance with their respective terms. 6.4 Subsidiaries. Exhibit G hereto correctly sets forth the corporate name, jurisdiction of incorporation and ownership percentage with respect to each Subsidiary of the Company 31 37 which is a corporation and designates whether such Subsidiary is also a Significant Subsidiary. Each Significant Subsidiary and each person becoming a Significant Subsidiary of the Company after the date hereof is and will be a corporation or partnership duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or formation, as the case may be, and is and will be duly qualified to do business in each additional jurisdiction where such qualification is or may be necessary under applicable law. Each Significant Subsidiary of the Company has and will have all requisite corporate or partnership power, as the case may be, to own its properties and to carry on its business as now being conducted and as proposed to be conducted. All outstanding shares of capital stock of each class of each Significant Subsidiary of the Company which is a corporation have been and will be validly issued and are fully paid and nonassessable and, except as otherwise indicated in Exhibit G hereto or disclosed in writing to the Banks from time to time, are and will be owned, beneficially and of record, by the Company or another Significant Subsidiary of the Company free and clear of any Lien. 6.5 Litigation. Except as disclosed on Exhibit H hereto, there is no action, suit or proceeding pending or, to the best of the Company's knowledge, threatened against or affecting the Company or any of its Significant Subsidiaries before or by any court, governmental authority, or arbitrator which if adversely decided might result, either individually or collectively, in any material adverse change in the business, property, operations or conditions, financial or otherwise, of the Company or any of its Significant Subsidiaries and, to the best of the Company's knowledge, there is no basis for any such action, suit or proceeding. 6.6 Financial Condition. The Consolidated balance sheet of the Company and its Subsidiaries and the Consolidated statements of income and cash flow of the Company and its Subsidiaries for the fiscal year ended December 31, 1992, and reported on by Arthur Andersen & Co., independent certified public accountants, and the unaudited interim Consolidated balance sheet and interim Consolidated statements of income and cash flow of the Company and its Subsidiaries, as of or for the seven-month period ended on July 31, 1993, copies of which have been furnished to the Banks, fairly present the Consolidated financial position of the Company and its Subsidiaries as at the respective dates thereof, and the Consolidated results of operations of the Company and its Subsidiaries for the respective periods indicated, all in accordance with GAAP (subject, in the case of said interim statements, to year-end audit adjustments). There has been no material adverse change in the business, properties, operations or condition, financial or otherwise, of the Company or any of its Subsidiaries since December 31, 1992. 6.7 Use of Advances. The Company will use the proceeds of the Advances for its general purposes. Neither the Company nor any of its Subsidiaries extends or maintains, in the ordinary course of business, credit for the purpose, whether immediate, incidental, or ultimate, of buying or carrying margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System), and no part of the proceeds of any Advance will be used for the purpose, whether immediate, incidental, or ultimate, of buying or carrying any such margin stock or maintaining or extending credit to others for such purpose. After applying the proceeds of each Advance, such margin stock will not constitute more than 25% of the value 32 38 of the assets (either of the Company alone or of the Company and its Subsidiaries on a consolidated basis) that are subject to any provisions of this Agreement that may cause the Advances to be deemed secured, directly or indirectly, by margin stock. 6.8 Consents, Etc. No consent, approval or authorization of or declaration, registration or filing with any governmental authority or any nongovernmental Person or entity, including without limitation any creditor or stockholder of the Company or any of its Subsidiaries or any partner of any Partnership, is required on the part of the Company in connection with the execution, delivery and performance of this Agreement, the Notes, the S/L/C Applications, or the transactions contemplated hereby or as a condition to the legality, validity or enforceability of this Agreement, the Notes, the S/L/C Applications. 6.9 Taxes. The Company and its Significant Subsidiaries have filed all tax returns (federal, state and local) required to be filed and have paid all taxes shown thereon to be due, including interest and penalties, or have established financial reserves in accordance with GAAP on their respective books and records for payment thereof. CMS files a consolidated federal income tax return which includes all federal income tax filings required of the Company and its Subsidiaries. Exhibit I hereto describes the manner in which CMS computes its and its Subsidiaries' tax liabilities and the manner in which such liabilities are paid. 6.10 Liens and Title to Properties. The Company and its Subsidiaries have good and marketable title to, and a valid ownership interest in, all of their respective material properties and material assets (provided that, among other properties and assets, all Borrowing Base Assets shall be considered material), free and clear of any Lien except such as are permitted by Sections 4.3(c) and 7.2(f) hereof. The Company and the Partnerships are the owners as of the Effective Date of all Borrowing Base Assets, subject only to such Liens permitted by Sections 4.3(c) and 7.2(f)(i), (ii), (iii), (iv), (v), (vii), (viii) and (ix), and the Company, its Restricted Subsidiaries and the Partnerships will be the owners of all Borrowing Base Assets, and all Borrowing Base Assets are described in the annual reserve report referred to in Section 7.1(d)(ix) hereof (the "Reserve Report") other than those, if any, acquired after the date of the most recent Reserve Report, subject only to such Liens permitted by Sections 4.3(c) and 7.2(f)(i), (ii), (iii), (iv), (v), (vii), (viii) and (ix). The most recent Reserve Report accurately reflects in all material aspects the respective gross working interests and net revenue interests of the Company and its Subsidiaries in all Oil and Gas Interests owned, directly or indirectly, by the Company or any of its Subsidiaries as of the date of such Reserve Report, including those derived from investments of the Company and its Subsidiaries in the Partnerships, subject only to such Liens as are permitted by Sections 4.3(c) and 7.2(f) hereof. No Borrowing Base Asset is subject to any Lien permitted by Section 7.2(f)(vi). 6.11 Partnerships. Each of the Partnerships is a partnership duly organized, validly existing and in good standing under the laws of the state of its organization, and is duly authorized to do business in all states where the conduct of its business or the ownership of the properties makes such authorization necessary. All interests of the Company and any 33 39 Subsidiary in each Partnership are the legal, valid, binding and enforceable interests and rights of the Company and such Subsidiary, enforceable in accordance with their respective terms. 6.12 ERISA. The Company, each of its Significant Subsidiaries and each ERISA Affiliate and their respective Plans are in compliance in all material respects with those provisions of ERISA and of the Code which are applicable to any Plan. No Prohibited Transaction, within the meaning of Section 4975(c) of the Code, (other than a Prohibited Transaction exempt from the prohibitions provided in Section 4975(c) of the Code pursuant to Section 4975(d) of the Code or otherwise) and no Reportable Event have occurred with respect to any such Plan which provides a reasonable basis for the imposition of any liability. The Company, each Significant Subsidiary of the Company and each ERISA Affiliate have met the minimum funding requirements under ERISA and the Code with respect to each of their respective Plans, if any, and do not have any liability to the PBGC which remains outstanding, other than for the payment of premiums not yet due, and have not terminated any Plan or taken any other action which provides a reasonable basis for the imposition of any such liability to the PBGC. There is no material unfunded benefit liability, determined in accordance with Section 4001(a)(18) of ERISA, with respect to any Plan of the Company, any of its Significant Subsidiaries or any ERISA Affiliate. Neither the Company, any of its Significant Subsidiaries nor any ERISA Affiliate is currently contributing to, or ever has contributed to, any Multiemployer Plan and none of such entities is currently or ever has been obligated to contribute to a Multiemployer Plan. 6.13 Disclosure. This Agreement and all other documents, certificates, reports or statements or other information furnished to any Bank or the Agent in writing by or on behalf of the Company in connection with the negotiation or administration of this Agreement or any transactions contemplated hereby when read together do not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained herein and therein not misleading. There is no fact known to the Company which materially and adversely affects, or which in the future may (so far as the Company can now foresee) materially and adversely affect, the business, properties, operations or condition, financial or otherwise, of the Company or any Subsidiary (except for any economic conditions which affect generally the industry in which the Company, its Subsidiaries and the Partnerships conduct business), which has not been set forth in this Agreement or in the other documents, certificates, statements, reports and other information furnished in writing to the Banks by or on behalf of the Company in connection with the transactions contemplated hereby. 6.14 Environmental and Safety Matters. Except as set forth on Exhibit J hereto, the Company and each Subsidiary and each Partnership are in substantial compliance with all federal, state and local laws, ordinances and regulations relating to safety and industrial hygiene or to the environmental condition, including without limitation all Environmental Laws in jurisdictions in which the Company or any Subsidiary or any Partnership owns or operates, or has owned or operated, a facility or site, or arranges or has arranged for disposal or treatment of hazardous substances, solid waste, or other wastes, accepts or has accepted for transport any hazardous substances, solid wastes or other wastes or holds or has held any interest in real 34 40 property or otherwise. Except as described on Exhibit J hereto, no demand, claim, notice, suit, suit in equity, action, administrative action, or inquiry or, to the knowledge of the Company, any investigation, whether brought by any governmental authority, private Person or otherwise, arising under, relating to or in connection with any Environmental Laws is pending or threatened against the Company or any of its Subsidiaries or any Partnership or with respect to any real property in which the Company or any such Subsidiary or any Partnership holds or has held an interest or with respect to any past or present operation of the Company or any Subsidiary or any Partnership. Except as described on Exhibit J hereto, neither the Company nor any of its Subsidiaries nor any Partnership (a) is, to the Company's knowledge, the subject of any federal or state investigation evaluating whether any remedial action is needed to respond to a release of any toxic substances, radioactive materials, hazardous wastes or related materials into the environment, (b) has received any notice of any toxic substances, radioactive materials, hazardous waste or related materials in, or upon any of its properties in violation of any Environmental Laws, or (c) knows of any basis for any such investigation, notice or violation. The aggregate maximum liability that may be incurred by the Company, its Subsidiaries and the Partnerships with respect to the matters disclosed on Exhibit J does not exceed $5,000,000. No release, threatened release or disposal of hazardous waste, solid waste or other wastes is occurring or has occurred on, under or to any real property in which the Company or any of its Subsidiaries or any Partnership holds any interest or performs any of its operations, in violation of any Environmental Law, which could result in an aggregate liability in excess of $15,000,000. SECTION 7. Covenants 7.1 Affirmative Covenants. The Company covenants and agrees that, until payment in full of the principal of and accrued interest on the Notes, the expiration of all S/L/Cs and this Agreement, and the payment and performance of all other obligations of the Company under this Agreement, unless the Majority Banks, or all Banks if required by Section 10.1 hereof, shall otherwise consent in writing, it shall, and shall cause each of its Significant Subsidiaries to: (a) Preservation of Corporate Existence, Etc. Preserve and maintain its corporate existence, rights and privileges and, except for terminations in the ordinary course of business deemed appropriate by the Company, its licenses, franchises and permits, and qualify and remain qualified as a validly existing corporation in good standing in each jurisdiction in which such qualification is necessary under applicable law. (b) Compliance with Laws, Etc. Comply in all material respects with all applicable laws, rules, regulations and orders of any governmental authority, noncompliance with which could materially and adversely affect the financial condition or operations of the Company or any of its Significant Subsidiaries or the legality, validity or enforceability of this Agreement, the Notes or the S/L/C Applications (such compliance to include, without limitation, paying before the same become delinquent all taxes, assessment and governmental charges imposed upon it or upon its property), except to the extent that compliance with any of the foregoing is 35 41 then being contested in good faith by appropriate proceedings and with respect to which financial reserves in accordance with GAAP have been established on the books and records of the Company or such Significant Subsidiary. (c) Maintenance of Properties; Insurance. Maintain, or cause to be maintained, in good repair, working order and condition all of the material property used or useful in the business of the Company and its Significant Subsidiaries and from time to time will make or cause to be made all appropriate material repairs and renewals thereto and replacements thereof and maintain insurance with responsible and reputable insurance companies or associations in such amounts and covering such risks as is usually carried by companies engaged in similar businesses and owning similar properties similarly situated. (d) Reporting Requirements. Furnish to the Banks, in form and substance satisfactory to the Banks, the following: (i) Promptly and in any event within three calendar days after becoming aware of the occurrence of (A) any Event of Default or any event or condition which, with notice or lapse of time, or both, would constitute an Event of Default, (B) the commencement of any material litigation against, by or affecting, or any material liability pursuant to any Environmental Law of, the Company or any of its Significant Subsidiaries, and, upon request by any Bank, any material developments therein, or (C) entering into any material contract or undertaking by the Company or any Significant Subsidiary that is not entered into in the ordinary course of business, (D) any development in the business or affairs of the Company or any Significant Subsidiary which has resulted in or which is likely in the reasonable judgment of the Company, to result in a material adverse change in the business, properties, operations or condition, financial or otherwise of the Company or any Significant Subsidiary, or (E) any Reportable Event under, or the institution of steps by the Company or a Significant Subsidiary to withdraw from, or the institution of any steps to terminate, any Plan, a statement of the chief financial officer of the Company setting forth details of such Event of Default or such event or condition or such litigation and the action which the Company or such Significant Subsidiary, as the case may be, has taken and proposes to take with respect thereto; (ii) As soon as available and in any event within 30 days after the end of each month, the Consolidated balance sheet of the Company and its Subsidiaries as of the end of such month, and the related Consolidated statements of income and cash flow for the period commencing at the end of the previous fiscal year and ending with the end of such month, setting forth in each case in comparative form the corresponding figures for the corresponding date or period of the preceding fiscal year, all in reasonable detail and, in the case of such statements for the months of March, June, September and December, duly certified (subject to year-end audit adjustments) by the chief financial officer of the Company as having been prepared on a basis consistent with that used in previous years 36 42 and substantially consistent with the previous year-end audited financial statements, together with a certificate of the Company in the form of Exhibit K hereto; (iii) As soon as available and in any event within 105 days after the end of each fiscal year of the Company, a copy of the Consolidated balance sheet of the Company and its Subsidiaries as of the end of such fiscal year and the related Consolidated statements of income and cash flow of the Company and its Subsidiaries for such fiscal year, with a customary audit report of Arthur Andersen & Co., or other independent certified public accountants selected by the Company and acceptable to the Majority Banks, without qualifications unacceptable to the Majority Banks, together with a certificate of such accountants stating that they have reviewed this Agreement and stating further that in making their examination of such financial statements in accordance with generally accepted auditing standards nothing came to their attention that made them believe that any default by the Company in the fulfillment of any of the terms, covenants, provisions or conditions of Section 7, insofar as they pertain to accounting matters has occurred and is continuing, or if their examination has disclosed the existence of any such condition, specifying the nature, period of existence and status thereof; (iv) As soon as possible and in any event within 60 days of the end of each calendar month, a schedule of oil, gas, and other mineral production attributable to the Oil and Gas Interests of the Company and its Subsidiaries; (v) Promptly, all title or other information received after the Effective Date by the Company or any Subsidiary which discloses any material defect in the title to any Borrowing Base Asset; (vi) Promptly, upon the request of any Bank, reserve reports prepared by an independent engineering firm of recognized standing acceptable to such Bank with respect to any Oil and Gas Interest of the Company or any Subsidiary for which there is any significant variance between (A) the information for such Oil and Gas Interest on the reserve reports furnished by the Company pursuant to Sections 7.1(d)(ix) and 7.1(h) and (B) prior reserve reports or other information received by such Bank with respect to such Oil and Gas Interest; (vii) As soon as possible and in any event within 15 days after the date of execution thereof, copies of (A) any amendment of any Major Sales Contract, and (B) any Major Sales Contract entered into after the Effective Date; (viii) Promptly and in any event within 15 days after becoming aware of the occurrence of any material default under or termination of any Major Sales Contract, notice of such event; (ix) As soon as available and in any event within 105 days after the end of each calender year, an annual reserve report with respect to all Hydrocarbon reserves of 37 43 the Company, its Subsidiaries and the Partnerships, prepared by the Company in accordance with accepted industry practices and including without limitation all Borrowing Base Assets, which annual reserve report will be reviewed and favorably opined upon by an independent engineering firm of recognized standing acceptable to the Majority Banks; (x) Promptly upon their execution, copies of any amendments or modifications of any of the Private Placement Agreements or any agreements, instruments or documents executed or delivered in connection therewith, and the supplemental or other agreements, instruments or documents executed in connection therewith after the Effective Date, provided that it is agreed that the Company will not amend, modify or supplement the Private Placement Agreements without the prior written consent of the Majority Banks; (xi) Promptly, written notice of any Subsidiary which at any time becomes a Significant Subsidiary; and (xii) Promptly, such other information respecting the business, properties or the condition or operations, financial or otherwise, including, without limitation, geological and engineering data of the Company or any of its Subsidiaries or the Partnerships and any title work with respect to any Oil and Gas Interests of the Company or any Subsidiary as any Bank may from time to time reasonably request. (e) Access to Records, Books, Etc. At any reasonable time and from time to time, permit any Bank or any agents or representatives thereof, at their own expense (unless pursuant to any action to enforce rights and remedies after an Event of Default), to examine and make copies of and abstracts from the records and books of account of, and visit the properties of, the Company and its Subsidiaries, and to discuss the affairs, finances and accounts of the Company and its Subsidiaries with their respective officers and employees. Without limiting the foregoing, the Company agrees that at any reasonable time and from time to time, the Company will permit any Bank or any agents or representatives thereof to inspect, at the office of the Company listed on its signature page hereto, all opinions with respect to title and other material work received by the Company or any Subsidiary with respect to any Borrowing Base Asset. (f) Maintenance of Records, Books, Etc. Maintain all records and books of account separate from those of Consumers and any Related Entity. (g) Change of Control. Upon the occurrence of a Change of Control, the Company will, at the one-time request of any Bank, repay all Advances of such Bank, provide cash cover for such Bank's Pro Rata Share of all outstanding S/L/Cs and repay such Banks' Pro Rata Share of all other liabilities under this Agreement, including without limitation all accrued interest and fees, after which each such Banks' Commitment shall terminate. The Banks' right to make such request shall expire 90 days after they are notified that a Change of Control has occurred. A "Change of Control" will occur on the first day on which any Person, or group of related 38 44 Persons, (other than any company, all the capital stock of which is owned by CMS or any wholly directly or indirectly owned Subsidiary thereof), acquires (i) beneficial ownership of a majority interest of the outstanding voting stock of the Company, or (ii) all or substantially all of the assets of the Company. (h) Additional Reserve Reports. Upon the request of any Bank when the Borrowing Base is re-evaluated pursuant to Section 9.6(a) hereof and in any event at least once annually, the Agent will determine if reserves constituting at least 75% of the value of the Borrowing Base Assets shall have been evaluated by an independent engineering firm of recognized standing acceptable to the Majority Banks at least once since production commenced from the formation relating to such reserves, and if this condition is not satisfied the Company will within 90 days after written notice from the Agent that such condition is not satisfied, procure such evaluations to satisfy this requirement and deliver them to the Banks. (i) Prepayments. Notwithstanding anything herein to the contrary, the Company will not prepay any Private Placement Note at any time when there is a Borrowing Base Deficiency unless (i) such prepayments are made in the order and in accordance with Section 4.1(d), and (ii) in the case of any prepayment of the Private Placement Note pursuant to Section 4.1(d)(ii)(A) or (D), at the time of such prepayment and after giving effect thereto, no Event of Default shall exist. In the event that the Company is prevented from making any prepayment of the Private Placement Debt in order to cure any Borrowing Base Deficiency due to the existence of an Event of Default, the Company shall, within 45 days after notice shall have been given to the Company by the Agent of the Borrowing Base Deficiency, prepay the Company Debt in such amount as shall be required to cure the Borrowing Base Deficiency. Any such prepayment shall be made pro rata to all holders of the Company Debt in accordance with the then outstanding principal amounts of the Company Debt held by each such holder. Except for the prepayments required by Section 4.1(d) or this Section 7.1(i) pursuant to the curing of any Borrowing Base Deficiency and in the order permitted thereby, the Company will not make any optional prepayment of the Private Placement Notes if an Event of Default then exists or if such prepayment would cause an Event of Default. 7.2 Negative Covenants. Until payment in full of the principal of and accrued interest on the Notes, the expiration of all S/L/Cs and this Agreement and the payment and performance of all other obligations of the Company under this Agreement, the Company agrees that, unless the Majority Banks, or all Banks if required by Section 10.1 hereof, shall otherwise consent in writing it shall not, and shall not permit any Subsidiary to: (a) Borrowing Base. Permit or suffer a Borrowing Base Deficiency at any time for a period in excess of 45 days after notice thereof shall have been given to the Company by the Agent. (b) Current Ratio. Permit or suffer the ratio of Consolidated Current Assets of the Company and its Subsidiaries to Consolidated Current Liabilities of the Company and its Subsidiaries to be less than 0.75 to 1.0 at any time. 39 45 (c) Total Liabilities to Tangible Net Worth. Permit or suffer the ratio of Consolidated Total Liabilities of the Company and its Subsidiaries to Consolidated Tangible Net Worth of the Company and its Subsidiaries to be greater than 0.75 to 1.0 at any time. (d) Tangible Net Worth. Permit or suffer Consolidated Tangible Net Worth of the Company and its Subsidiaries to be less than $150,000,000 at any time. (e) Debt Service. Permit or suffer, as of the last day of each fiscal quarter of the Company, the ratio of Consolidated Cash Flow of the Company and its Subsidiaries less cash dividends, as calculated for the fiscal quarter then ended plus the three immediately preceding fiscal quarters, to Consolidated Fixed Charges of the Company and its Subsidiaries, as calculated for the fiscal quarter then ended plus the three immediately preceding fiscal quarters, to be less than 2.0 to 1.0. (f) Liens. Create, incur or suffer to exist any Lien on any of the property, real, personal or mixed, tangible or intangible, of the Company or any of its Subsidiaries other than the following: (i) Liens for taxes not delinquent or for taxes being contested in good faith by appropriate proceedings and as to which financial reserves in accordance with GAAP have been established on its books and records; (ii) Liens created in connection with workmen's compensation, unemployment insurance, and social security, or to secure the performance of bids, tenders or contracts, leases, statutory obligations, surety and appeal bonds, and other obligations of like nature made in the ordinary course of business and not in connection with the borrowing of money, provided in each case, the obligation secured is not overdue or, if overdue, is being contested in good faith by appropriate actions or proceedings; (iii) Liens, in form and substance satisfactory to the Majority Banks, securing Subordinated Debt only; (iv) Construction Liens, mechanics Liens and Liens pursuant to M.C.L.A. 570.251 or statutes of other jurisdiction similar to M.C.L.A. 570.251 created in the ordinary course of business if (x) payment of the obligation secured thereby is not yet due, (y) such obligation is being contested in good faith by appropriate proceedings and for which appropriate reserves have been established in accordance with GAAP, or (z) as to all amounts of the obligations secured by such Liens which are in default, such amount in the aggregate is not material; (v) Operator and non-operator Liens created in the ordinary course of business under operating and similar agreements if (x) payment of the obligation secured thereby is not yet due, (y) such obligation is being contested in good faith by appropriate proceedings and for which appropriate reserves have been established in accordance with 40 46 GAAP, or (z) as to all amounts of the obligations secured by such Liens which are in default, such amount in the aggregate is not material; (vi) Any Lien created to secure payment of a portion of the purchase price of any fixed asset which satisfy each of the following requirements: (A) such Lien attached at the time of the purchase of such fixed asset relating thereto, (B) the outstanding principal amount of the Indebtedness secured by such Lien does not at any time exceed the purchase price paid by the Company or any Subsidiary for such fixed asset, (C) such Lien does not attach to any other asset at any time owned by the Company or any Subsidiary, and (D) if more than one such Lien burdens any such fixed asset at any one time the aggregate outstanding principal amount of the Indebtedness secured by all such Liens shall not at any time exceed the purchase price paid by the Company or any Subsidiary for such fixed asset; (vii) Zoning and use restrictions, easements, right-of-way, reservations or other similar encumbrances on real property incurred in the ordinary course of business which, in the aggregate, are not substantial in amount and do not materially detract from the value of property subject thereto or interfere with the ordinary conduct of the business of the Company or any of its Subsidiaries; (viii) Judgment Liens in existence less than 15 days after the entry thereof or with respect to which execution has been stayed or the payment of which is covered in full (subject to a customary deductible which is not material) by insurance and the insurer has accepted responsibility for payment without reservation; (ix) Liens which are normal and customary in the industry in which the Company and its Subsidiaries conduct business, and which satisfy each of the following requirements: (A) such Liens are incurred in the ordinary course of business of the Company and its Subsidiaries, (B) such Liens were not incurred in connection with the borrowing of money or the obtaining of advances or credit of any kind, and (C) such Liens, in the aggregate, do not materially detract from the value of the property subject thereto or interfere with the ordinary conduct of the business of the Company or any of its Subsidiaries; and (x) Mortgages, liens and security interests on the Special Project Assets securing the Non-Recourse Debt. The Company further covenants and agrees that the total of all Indebtedness secured by Liens under (i), (ii), (vi), (viii) and (ix) above shall not exceed 10% of the Consolidated Tangible Net Assets and, additionally, the total of all Indebtedness secured by Liens under (vi) above shall not exceed 5% of the Consolidated Tangible Net Assets. (g) Investments. Make investments in, or advances or loans to, any Person or entity other than (i) investments in one or more Restricted Subsidiaries; (ii) investments made for (A) 41 47 the ordinary course of the Company's or its Restricted Subsidiaries' business relating to oil and gas exploration, development and production or the acquisition of oil and gas reserves or (B) all or a substantial portion of the shares of stock or other ownership interests of any Person primarily involved in oil and gas exploration, development or production; (iii) advances for services or equipment in connection with the exploration and the development for, and production of and sale of, oil and gas; (iv) advances or loans by any Subsidiary to the Company; (v) direct obligations of the United States of America or any agencies thereof maturing within one year from the date acquired; (vi) certificates of deposit maturing within one year from the date acquired issued by a bank or trust company organized under the laws of the United States and having capital, surplus and undivided profits aggregating at least $100,000,000; (vii) commercial paper given at least A1/P1 rating, or equivalent rating by a nationally recognized credit rating agency, and maturing not more than 270 days from the date acquired; (viii) time deposits not exceeding 60 days of Barclays Bank PLC or Bank of Montreal; and (ix) other investments not to exceed, in the aggregate, 10% of the Consolidated Tangible Net Worth of the Company and its Subsidiaries. (h) Disposal of Subsidiaries, Sale of Assets. (i) Sell, lease, transfer or otherwise dispose of a substantial portion of its assets or business to any Person, whether in one or a series of transactions, provided that the Company and its Subsidiaries may (A) sell any assets which are not Borrowing Base Assets; (B) transfer any assets from the Company or any Subsidiary to a Significant Subsidiary or to the Company; (C) transfer any assets from any Subsidiary which is not a Significant Subsidiary to a Subsidiary which is not a Significant Subsidiary; (D) sell any Subsidiary which is not a Significant Subsidiary; and (E) sell a Significant Subsidiary, provided the Company gives the Banks at least 30 days prior written notice of such sale and if such sale would not create a Borrowing Base Deficiency; provided, however, each of the foregoing (A), (B), (C), (D) and (E) shall be prohibited if an Event of Default exists or it would result in an Event of Default or any event or condition which might become an Event of Default with notice or lapse of time, or both. (ii) Notwithstanding anything in this Section 7.2(h) or anything elsewhere in this Agreement to the contrary, the Company agrees that (A) any Restricted Subsidiary which is a Domestic Subsidiary and now or hereafter becomes a Significant Subsidiary, or (B) if any Borrowing Base Assets are transferred to or otherwise owned by any Restricted Subsidiary which is a Domestic Subsidiary, the Company shall cause each such Restricted Subsidiary to deliver to all holders of Company Debt an irrevocable, unconditional Guaranty of payment of the Indebtedness of the Company to such holders of Company Debt under the Notes, under the Private Placement Notes and this Agreement. Any payment pursuant to any such Guaranty shall be paid to each holder of Company Debt pro rata in accordance with the unpaid principal amount of Company Debt held by each such holder at the time of such payment. Each such Guaranty shall be in form, substance and amount satisfactory to the holders of at least 66-2/3% in aggregate principal amount of the outstanding Private Placement Notes and the holders of at least 61% in aggregate principal amount of the outstanding Advances (or the Commitments if no 42 48 Advances are then outstanding) and delivered together with all officer's certificates, resolutions, charter documents of such Restricted Subsidiary, opinions of counsel for such Restricted Subsidiary and all other documents in connection therewith requested by the holders of at least 66-2/3% in aggregate principal amount of the outstanding Private Placement Notes or the holders of at least 61% in aggregate principal amount of the outstanding Advances (or the Commitments if no Advances are then outstanding), each in form and substance satisfactory to the holders of at least 66-2/3% in aggregate principal amount of the outstanding Private Placement Notes and Advances (or the Commitments if no Advances are then outstanding). Any Guaranty of a Restricted Subsidiary provided under this Section 7.2(h)(ii) shall terminate upon any sale of such Restricted Subsidiary in compliance with Section 7.2(h)(i) hereof. (iii) Notwithstanding anything in the foregoing Section 7.2(h)(i) or anything elsewhere in this Agreement to the contrary, the Company shall give the Banks at least 30 days prior written notice of any sale of any Borrowing Base Assets; except for (a) assets, the sales price of which, when added to the sales price of all other assets subject to this exception and sold within the previous twelve months, does not exceed $1,000,000 and (b) sales in the ordinary course of business. The Borrowing Base will then be redetermined to reflect such sales and on the date that such sale is effective the sum of the Private Placement Notes and the Advances must be less than or equal to the new Borrowing Base. (iv) Restrictions on disposition of assets shall not prevent the Company from transferring, directly or indirectly, any assets to a corporation which then and thereafter owns all of the capital stock of the Company, provided: (A) such corporation is engaged in the business of exploring, developing, producing and selling Hydrocarbons; (B) subsequent to the transfer, such corporation directly owns the assets so transferred; (C) prior to such transfer, such corporation agrees to be bound by the terms and conditions of this Agreement in the same manner and to the same extent the Company is bound, including without limitation being jointly and severally liable with the Company on all indebtedness and liabilities pursuant to this Agreement, and the Company and such corporation shall execute such agreements and instruments, and provide such documents and opinions of counsel in connection therewith as may be reasonably requested by the Agent; and (D) no Event of Default or any event which might become such an Event of Default with notice or lapse of time, or both, then exists or would be caused by the transaction in connection with such transfer of assets other than by reason of such transfer. (i) Mergers or Consolidation. Merge or consolidate with any other Person; nor make any substantial change in the nature of its business; nor become, or remain, an obligor with respect to any obligation of any other Person if the obligation of such Person would constitute Indebtedness of such Person, provided that (A) the Company and its Subsidiaries may become or remain an obligor or guarantor (subject to the limitations of Section 7.2(k)(vii) hereof) with respect to Indebtedness of the Company and its Subsidiaries, (B) a Subsidiary may merge or consolidate with the Company, provided that the Company shall be the surviving corporation, and (C) any Subsidiary may merge or consolidate with any other Subsidiary. 43 49 (j) Dividends. Make, pay, declare or authorize any dividend, distribution or other payment in respect of any class of its capital stock or any payment in connection with the redemption, purchase, retirement or other acquisition, directly or indirectly, of any shares of its capital stock (other than such dividends, distributions or other payments to the extent payable solely in shares of the capital stock of the Company) if any Event of Default, or any event which might become an Event of Default with notice or lapse of time or both, has occurred and is continuing or will exist after giving effect to such dividend, distribution or other payment. For purposes of this Section 7.2(i), "capital stock" shall include capital stock and any securities exchangeable for or convertible into capital stock and any warrants, rights or other options to purchase or otherwise acquire capital stock or such securities. (k) Indebtedness. Create, incur, assume, guaranty or in any manner become liable in respect of, or suffer to exist, any Indebtedness other than: (i) The Advances; (ii) The Indebtedness described on the audited balance sheet for the year ending December 31, 1992 described in Section 6.6, hereof having the same terms as those then existing, but no increase in the amount thereof shall be permitted; (iii) Indebtedness which is secured by one or more liens permitted by Section 7.2(f), and, as to Section 7.2(f)(vi), which is approved in writing by the Majority Banks before it is incurred; (iv) Indebtedness incurred by the Company or any Subsidiary owing to the Company or to any other Subsidiary (provided that loans or other advances creating Indebtedness may not be made by the Company to any Subsidiary which has not executed a Guaranty); (v) Subordinated Debt; (vi) Non-Recourse Debt, provided that such Non-Recourse Debt must be incurred in connection with the financing, refinancing or other refunding of Special Project Assets; (vii) (A) Obligations, including those under surety or other bonds, of the Company or a Subsidiary incurred in the ordinary course of business which assure performance by third parties of obligations under oil and gas exploration, development or operating agreements or which assure performance of obligations under oil and gas exploration, development or operating agreements undertaken by the Company or any of its Subsidiaries, or (B) Guaranties executed by Restricted Subsidiaries required by Section 7.2(h)(ii) hereof; 44 50 (viii) The Private Placement Notes, provided both of the following conditions are satisfied: (A) the aggregate principal amount of Indebtedness under or pursuant to the Private Placement Notes does not exceed $45,000,000, as such amount is reduced from time to time, and (B) after giving effect to the Indebtedness that would be incurred under the Private Placement Notes and the transactions contemplated by the Private Placement Agreement, no Event of Default, and no event or condition which might become such an Event of Default with notice or lapse of time, or both, shall exist or shall have occurred and be continuing and the representations and warranties contained in Section 6 hereof shall be true and correct on as of the date the Private Placement Notes are issued as if such representations and warranties were made on and as of such date; (ix) Obligations of the Company or a Subsidiary under any surety or similar bonds not to exceed (A) $2,500,000 in the aggregate for any appeal bond or similar surety securing the appeal of the case entitled Travelers Exploration Company v. NOMECO Oil & Gas Co., U.S. Court of Appeals, Fifth Circuit, Case No. 93-2396, and (B) in addition to the amount allowed under the foregoing clause (A), $2,000,000 in the aggregate obtained to secure financial obligations of the Company or any of its Subsidiaries; and (x) Indebtedness of the Company or any Subsidiaries constituting obligations in respect of any interest rate or currency swap, rate cap or similar transaction. (l) Transactions with Affiliates. Enter into or be a party to any transaction or arrangement with any Affiliate (including, without limitation, the purchase from, sale to or exchange of property with, or the rendering of any service by or for, any Affiliate), except in the ordinary course of and pursuant to the reasonable requirements of the Company's or such Subsidiaries' business and upon fair and reasonable terms no less favorable to the Company or such Subsidiary that would be obtained in a comparable arms-length transaction with a Person other than an Affiliate. SECTION 8. Default 8.1 Events of Default. The occurrence of any one of the following events or conditions shall be deemed an "Event of Default" hereunder unless waived by the Majority Banks pursuant to Section 10.1: (a) The Company shall fail to pay when due any principal of or interest on any Note, any amount due under any S/L/C Application (unless paid with proceeds of Revolving Credit Loans under Section 3.1) or any fees or any other amount payable hereunder; or (b) Any representation or warranty made by the Company in Section 6 hereof, in any S/L/C Application or any other document or certificate furnished by or on behalf of the 45 51 Company in connection with this Agreement, shall prove to have been incorrect in any material respect when made; or (c) The Company shall fail to perform or observe any term, covenant or agreement contained in Sections 7.1(a), (b), (e), (f), (g), (h) or (i), Section 7.1(d)(i), (v), (vi), (vii), (viii) or (x) or 7.2 hereof; or (d) The Company shall fail to perform or observe any other term, covenant or agreement contained in this Agreement or in any S/L/C Application, and any such failure shall remain unremedied for 15 calendar days after notice thereof shall have been given to the Company by any Bank; or (e) Failure by the Company or any of its Significant Subsidiaries to pay when due any Indebtedness (not including the Indebtedness hereunder, but specifically including without limitation any Indebtedness pursuant to the Private Placement Notes) which individually or together with any such Indebtedness as to which any such failure exists has an aggregate outstanding principal amount in excess of $5,000,000; or failure by the Company or any of its Significant Subsidiaries to perform or observe any term, covenant or agreement contained in a document evidencing or relating to any such Indebtedness having such aggregate outstanding principal amount, or under which any such Indebtedness was issued or created, beyond any period of grace, if any, provided with respect thereto if the effect of such failure is to either (i) to cause or permit the holders of such Indebtedness (or a trustee on behalf of such holders) to cause, a payment in respect of such Indebtedness to become due prior to its due date or (ii) to permit the holders of such Indebtedness (or a trustee on behalf of such holders) to elect a majority of the board of directors of the Company. (f) A judgment or order for the payment of money, which together with other such judgments or orders exceeds the aggregate amount of $1,000,000, shall be rendered against the Company or any of its Significant Subsidiaries and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order and such judgment or order shall have remained unsatisfied and such proceedings shall have remained unstayed for a period of 20 consecutive days, or (ii) for a period of 30 consecutive days, such judgment or order shall have remained unsatisfied and a stay of enforcement thereof, by reason of pending appeal or otherwise, shall not have been in effect; or (g) The occurrence of a Reportable Event that results in or could result in liability of the Company, any Significant Subsidiary of the Company or their ERISA Affiliates to the PBGC or to any Plan and such Reportable Event is not corrected within thirty (30) days after the occurrence thereof; or the occurrence of any Reportable Event which could constitute grounds for termination of any Plan of the Company, its Significant Subsidiaries or their ERISA Affiliates by the PBGC or for the appointment by the appropriate United States District Court of a trustee to administer any such Plan and such Reportable Event is not corrected within thirty (30) days after the occurrence thereof; or the filing by the Company, any Significant Subsidiary of the Company or any of their ERISA Affiliates of a notice of intent to terminate a Plan or the 46 52 institution of other proceedings to terminate a Plan; or the Company, any Significant Subsidiary of the Company or any of their ERISA Affiliates shall fail to pay when due any liability to the PBGC or to a Plan; or the PBGC shall have instituted proceedings to terminate, or to cause a trustee to be appointed to administer, any Plan of the Company, its Significant Subsidiaries or their ERISA Affiliates; or any Person engages in a Prohibited Transaction with respect to any Plan which results in or could result in liability of the Company, any Significant Subsidiary of the Company, any of their ERISA Affiliates, any Plan of the Company, its Significant Subsidiaries or their ERISA Affiliates or fiduciary of any such Plan; or failure by the Company, any Significant Subsidiary of the Company or any of their ERISA Affiliates to make a required installment or other payment to any Plan within the meaning of Section 302(f) of ERISA or Section 412(n) of the Code that results in or could result in liability of the Company, any Significant Subsidiary of the Company or any of their ERISA Affiliates to the PBGC or any Plan; or the withdrawal of the Company, any of its Significant Subsidiaries or any of their ERISA Affiliates from a Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA; or the Company, any of its Significant Subsidiaries or any of their ERISA Affiliates becomes an employer with respect to any Multiemployer Plan without the prior written consent of the Majority Banks; provided, however, that the occurrence of any event described in this paragraph (g), other than an occurrence described in the final clause above relating to becoming an employer with respect to a Multiemployer Plan, shall be deemed to be an "Event of Default" only if it singly or in the aggregate, after taking into account other such events of default which previously occurred, results in, or provides a reasonable basis for the imposition of, a material liability to the Company, any Significant Subsidiary of the Company or any ERISA Affiliate; or (h) The Company or any of its Significant Subsidiaries shall make a general assignment for the benefit of creditors, or shall institute, or there shall be instituted against the Company or any of its Significant Subsidiaries, any proceeding or case seeking to adjudicate it a bankrupt or insolvent or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief or protection of debtors or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property, and, if such proceeding is instituted against the Company or such Significant Subsidiary and is being contested by the Company or such Significant Subsidiary, as the case may be, in good faith by appropriate proceedings, such proceedings shall remain undismissed or unstayed for a period of 60 days; or the Company or such Significant Subsidiary shall take any action (corporate or other) to authorize or further any of the actions described above in this subsection; or (i) Any Related Entity shall institute, or there shall be instituted against any Related Entity, any proceeding or case seeking to adjudicate such Related Entity bankrupt or insolvent or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief or protection of debtors or seeking the entry of an order or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial 47 53 part of its property, and, if such proceeding is instituted against such Related Entity, and is being contested by such Related Entity in good faith by appropriate proceedings, such proceedings shall remain undismissed or unstayed for a period of 60 days; or such Related Entity shall take any action (corporate or other) to authorize or further any of the actions described above in this subsection; or (j) Any event of default or other default described in any Guaranty shall have occurred and be continuing, or any material provision of any Guaranty shall at any time for any reason cease to be valid, binding and enforceable against any obligor thereunder, or the validity, binding effect or enforceability thereof shall be contested by any Person, or any obligor shall deny that it has any or further liability or obligation thereunder, or any Guaranty shall be terminated, invalidated or set aside, or be declared ineffective or inoperative or in any manner cease to give or provide to the Banks and the Agent the benefits purported to be created thereby; or (k) If the payment of the Company's and its Subsidiaries' taxes fail to continue to be done on a basis consistent with that described on Exhibit I hereto, if such failure would have a material adverse effect on the financial condition of the Company or any of its Significant Subsidiaries. 8.2 Remedies. (a) Upon the occurrence and during the continuance of any Event of Default, the Agent shall, upon being directed to do so by the Majority Banks or, in the case of any Event of Default arising under Section 8.1(a) upon being directed to do so by Banks holding not less than 51% of the principal amount of the Advances then outstanding (or 51% of the Commitments if no Advances are then outstanding), by notice to the Company terminate the Commitments or declare the outstanding principal of, and accrued interest on, the Notes and all other amounts due under this Agreement, and cash cover with respect to any outstanding S/L/C, to be immediately due and payable, or all of the above, whereupon the Commitments shall terminate forthwith and all such amounts shall become immediately due and payable, or both, as the case may be, provided that in the case of any event or condition described in Section 8.1(h) with respect to the Company, the Commitments shall automatically terminate forthwith and all such amounts shall automatically become immediately due and payable without notice; in each case without demand, presentment, protest, diligence, notice of dishonor or other formality, all of which are hereby expressly waived. (b) Upon the occurrence and during the continuance of such Event of Default, the Agent shall, upon being directed to do so by the Majority Banks or, in the case of any Event of Default arising under Section 8.1(a) upon being directed to do so by Banks holding not less than 51% of the principal amount of the Advances then outstanding (or 51% of the Commitments if no Advances are then outstanding), in addition to the remedies provided in Section 8.2(a), enforce its rights either by suit in equity, or by action at law, or by other 48 54 appropriate proceedings, whether for the specific performance (to the extent permitted by law) of any covenant or agreement contained in this Agreement or in any then outstanding Note or any S/L/C Application or in aid of the exercise of any power granted in this Agreement, any then outstanding Note or any S/L/C Application, and may enforce the payment of any then outstanding Notes and any of the other rights of the Agent and the Banks available at law or in equity. (c) Upon the occurrence and during the continuance of any Event of Default hereunder, each Bank may at any time and from time to time, without notice to the Company (any requirement for such notice being expressly waived by the Company) set off and apply against any and all of the obligations of the Company now or hereafter existing under this Agreement, any of the Notes or the S/L/C Applications, any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Bank to or for the credit or the account of the Company and any property of the Company from time to time in possession of such Bank, irrespective of whether or not any Bank shall have made any demand hereunder and although such obligations may be contingent and unmatured. The rights of the Banks under this Section 8.2(c) are in addition to other rights and remedies (including, without limitation, other rights of setoff) which the Banks may have. SECTION 9. The Agent and the Banks 9.1 Appointment of Agent. NBD Bank, N.A. is hereby appointed Agent for the Banks and accepts such appointment and agrees to act as such upon the conditions herein set forth. The Agent shall have no duties or responsibilities except those expressly set forth in this Agreement, and shall not, by reason of this Agreement, have a fiduciary relationship with any Bank. 9.2 Scope of Agency. Neither the Agent nor any of its directors, officers or agents shall be liable to the Banks for any action taken or omitted by any of them hereunder or under the Notes or the S/L/C's, except for its, his or her own gross negligence or willful misconduct and except as provided in Section 9.3 hereof; or be responsible to the Banks for any recitals, warranties or representations herein or in the Notes or the S/L/C Applications or for the execution or validity of this Agreement, the Notes or the S/L/C Applications; or be required to make any inquiry concerning the performance by the Company of any of its obligations under this Agreement, the Notes or the S/L/C Applications. In the absence of gross negligence or willful misconduct, the Agent shall be entitled to rely, without liability therefor, upon any certificate or other document or other communication believed by it to be genuine and correct and to have been signed or sent by the proper officer or Person and upon the advice of legal counsel (which may be legal counsel for the Company), independent public accountants and other experts concerning all matters pertaining to the agency. To the extent that the Company shall fail to pay or to reimburse the Agent for the payment of the same, each Bank shall reimburse the Agent in accordance with such Bank's Pro Rata Share, and any such amount so paid shall be immediately due and payable to the Banks by the Company. The Banks shall 49 55 indemnify the Agent ratably in accordance with their Pro Rata Share of the Commitments for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of this Agreement or the transactions contemplated hereby, provided that no Bank shall be liable for any of the foregoing to the extent they arise from the Agent's gross negligence or willful misconduct. 9.3 Duties of Agent. In carrying out the agency, the Agent shall have only the duties and responsibilities expressly set forth in this Agreement and in performing such duties and responsibilities the Agent shall exercise the same degree of care as it would if the Loans were entirely for its own account, but the Agent shall not be deemed to have knowledge of the occurrence of any Event of Default, or any event or condition which with notice or lapse of time, or both, could become such an Event of Default and need not take or continue any action with respect thereto or toward the enforcement of this Agreement, the Notes or the S/L/C Applications, nor prosecute or defend any suit with respect to this Agreement, the Notes or the S/L/C Applications, unless directed to do so by the Banks and unless indemnified to its satisfaction against any loss, cost, liability or expense which it might incur as a consequence of taking such action. The Agent may employ agents and attorneys and shall not be answerable for the negligence or misconduct of any such agents or attorneys selected by it with reasonable care. The Agent in its capacity as a Bank hereunder shall have the same rights and powers hereunder as any other Bank and may exercise the same as though it were not acting as the Agent hereunder. Each Bank agrees that it has, independently and without reliance on the Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis of the Company and its Subsidiaries in connection with its decision to enter into this Agreement and that it will, independently and without reliance upon the Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement. 9.4 Resignation of Agent. The Agent may resign as such at any time upon thirty days' prior written notice to the Company and the Banks. In the event of any such resignation, the Banks shall, by an instrument in writing delivered to the Company and the Agent, appoint a successor which shall be an incorporated bank or trust company. If a successor is not so appointed or does not accept such appointment at least five days before the Agent's resignation becomes effective, the Agent may appoint a temporary successor to act until such appointment by the Banks is made and accepted. Any successor to the Agent shall be reasonably acceptable to the Company, have adequate expertise in oil and gas lending and execute and deliver to the Company and the Banks an instrument accepting such appointment and thereupon such successor Agent, without further act, deed, conveyance or transfer shall become vested with all of the properties, rights, interests, powers, authorities and obligations of its predecessor hereunder with like effect as if originally named as Agent hereunder. Upon request of such successor Agent, the Company and the Agent ceasing to act shall execute and deliver such instruments of conveyance, assignment and further assurance and do such other things as may reasonably be 50 56 required for more fully and certainly vesting and confirming in such successor Agent all such properties, rights, interests, powers, authorities and obligations. 9.5 Pro Rata Sharing by Banks. Each Bank agrees with every other Bank that, in the event that it shall receive and retain any payment on account of the Company's obligations under this Agreement, the Notes or the S/L/C Applications in a greater proportion than that received by any other Bank, whether such payment be voluntary, involuntary or by operation of law, by application of set-off of any indebtedness or otherwise, then such Bank shall promptly purchase from the other Banks, without recourse, for cash and at face value, ratably in accordance with its Pro Rata Share, in such an amount that each Bank shall have received payment in respect of such obligations in accordance with its Pro Rata Share; provided, that if any such purchase be made by any Bank and if any such excess payment relating thereto or any part thereof is thereafter recovered from such Bank, appropriate adjustment in the related purchase from the other Banks shall be made by rescission and restoration of the purchase price as to the portion of such excess payment so recovered. It is further agreed that, to the extent there is then owing by the Company to any Bank indebtedness other than that evidenced by this Agreement, the Notes and the S/L/C Applications to which such Bank may apply any involuntary payments of indebtedness by the Company, including those resulting from exercise of rights of set-off or similar rights, such Bank shall apply all such involuntary payments first to obligations of the Company to the Banks hereunder and under the Notes and the S/L/C Applications and then to such other indebtedness owed to it by the Company. In addition, it is further agreed that any and all proceeds resulting from a sale or other disposition of any collateral which may be hereafter granted for the benefit of the Banks to secure the obligations of the Company hereunder, shall be applied first to obligations of the Company to the Banks hereunder and under the Notes and the S/L/C Applications, and then ratably to any other indebtedness owed by the Company to the Banks which is secured by such collateral. 9.6 Determination of Borrowing Base, Etc. (a) Any determination of the Borrowing Base shall be made by the Agent, and then shall be submitted to the Banks. If any Bank(s) holding not less than 20% of the aggregate principal amount of the Advances then outstanding, or 20% of the Commitments if no Advances are outstanding (the "20% Banks") determines that such determination made by the Agent is understated or overstated by more than 5% based on the determination of the Borrowing Base by each Bank, in accordance with its customary and standard practices in lending to oil and gas companies, such 20% Banks may object to such determination by the Agent provided such objection is made within fifteen Business Days of such 20% Banks receiving such determination. If the Agent and the 20% Banks cannot mutually agree upon a determination of the Borrowing Base within three days of such objection, then the Borrowing Base shall be immediately redetermined and equal to the weighted average of the determinations of the Borrowing Base of each Bank, weighted in accordance with their Pro Rata Share. Such determination of the Borrowing Base and related determinations shall then become effective, subject to any subsequent reduction that may occur pursuant to Section 9.6(b) hereof. The Borrowing Base may be re-evaluated from time to time as determined by the Banks, and will be re- evaluated upon the request of the Company (provided that the Company cannot request any re-evaluation of the Borrowing Base more than two times in any twelve month period), but 51 57 will be re-evaluated upon receipt of any document referred to in Section 7.1(d)(vi) hereof or the occurrence of any event referred to in Section 7.2(h)(iii) or 7.1(d)(viii) hereof and, in addition, at least twice annually as follows: promptly upon receipt of the annual reserve report referred to in Section 7.1(d)(ix) hereof and each six months thereafter. Except for the scheduled re-evaluations of the Borrowing Base upon receipt of the annual reserve report and each six months thereafter, each Bank requesting a re-evaluation of the Borrowing Base agrees to give notice to the Company of such request. The Company acknowledges that the Borrowing Base may also be re-evaluated upon the request of the holders of at least 66-2/3% in aggregate principal amount of the outstanding Private Placement Notes one time in any twelve month period and as reasonably requested by the holders of at least 30% in aggregate principal amount of the outstanding Private Placement Notes after an Event of Default under the Private Placement Agreement, under the conditions described in the letter agreement of approximately even date herewith among the Agent, the Banks and a Private Placement Noteholders, and the Company agrees that the expenses of any such re-evaluation at the request of such holders shall be borne by the Company. (b) Upon any determination by the Agent and the Banks pursuant to Section 9.6(a) hereof, the Company shall submit such determination to the Private Placement Noteholders, and unless the Majority Private Placement Noteholders determine that the Borrowing Base determination determined by the Agent and the Banks as described in Section 9.6(a) is overstated by more than 5% and notify the Agent and the Banks in writing of such objection within ten business days of the submission of such Borrowing Base determination to the Private Placement Noteholders, the determination of the Borrowing Base by the Agent and the Banks described above shall be final. If the Majority Private Placement Noteholders do so timely object, such objection must be accompanied by appropriate calculations and engineering support for such objection and the Banks and the Private Placement Noteholders thereafter shall negotiate in good faith toward the determination of a new Borrowing Base and the Agent shall resubmit additional determinations of the Borrowing Base until the Majority Lenders approve a Borrowing Base. Until such agreement has been reached among the Majority Lenders, the determination of the Borrowing Base pursuant to Section 9.6(a) shall remain in effect. Under no circumstances may the Private Placement Noteholders effect an increase in the Borrowing Base determined under Section 9.6(a). SECTION 10. Miscellaneous 10.1 Amendments; Etc. This Agreement and any term or provision hereof may be amended, waived or terminated by an instrument in writing executed by the Company and the Majority Banks, provided, that, notwithstanding anything in this Agreement to the contrary, except by an instrument in writing executed by the Company and all of the Banks, no such amendment, waiver or termination shall: (a) Authorize or permit the extension of the time or times of payment of the principal of, or interest on, the Notes or the obligations under the S/L/C Applications or any of them, or 52 58 the reduction in principal amount thereof or the rate of interest thereon, or any fees payable hereunder, or increase the Commitment of any Bank without such Bank's consent or increase the aggregate Commitments of all Banks to an amount greater than $135,000,000, or increase the aggregate Commitments beyond $110,000,000 without making modifications, if any, to this Agreement necessary to insure that NBD Bank, N.A., Bank of Montreal and Banque Paribas each qualify as a 20% Bank under Section 9.6, or amend this Section 10.1 or the definition of Majority Banks; or (b) Any such amendment, waiver or termination shall be effective only in the specific instance and for the specific purpose for which given. 10.2 Notices. (a) Except as otherwise provided in Section 10.2(c) hereof, all notices, requests, consents and other communications hereunder shall be in writing and shall be delivered or sent to the Company, the Banks and the Agent at the respective addresses for notices set forth on the signature pages hereof, or to such other address as may be designated by the Company, the Agent or any Bank by notice to the other parties hereto. All notices shall be deemed to have been given at the time of actual delivery thereof to such address, or if sent by the Agent or any Bank to the Company by certified or registered mail, postage prepaid, to such address, on the fifth day after the date of mailing. (b) Notices by the Company to the Agent with respect to requests for Advances pursuant to Section 3.1 and notices of prepayment pursuant to Section 4.1(c) shall be irrevocable and binding on the Company. (c) Any notice to be given by the Company to the Agent pursuant to Section 4.1(c) or Section 3.1 and any notice to be given by the Agent or any Bank hereunder, may be given by telephone, by telex or by facsimile transmission and must be immediately confirmed in writing in the manner provided in Section 10.2(a). Any such notice given by telephone, telex or facsimile transmission shall be deemed effective upon receipt thereof by the party to whom such notice is given. 10.3 Conduct No Waiver; Remedies Cumulative. No course of dealing on the part of the Agent or the Banks, nor any delay or failure on the part of the Agent or any Bank in exercising any right, power or privilege hereunder shall operate as a waiver of such right, power or privilege or otherwise prejudice the Agent's or the Banks' rights and remedies hereunder; nor shall any single or partial exercise thereof preclude any further exercise thereof or the exercise of any other right, power or privilege. No right or remedy conferred upon or reserved to the Agent or the Banks under this Agreement is intended to be exclusive of any other right or remedy, and every right and remedy shall be cumulative and in addition to every other right or remedy given hereunder or now or hereafter existing under any applicable law. Every right and remedy given by this Agreement or by applicable law to the Agent or the Banks may be exercised from time to time and as often as may be deemed expedient by them. 53 59 10.4 Reliance on and Survival of Various Provisions. All terms, covenants, agreements, representations and warranties of the Company made herein or in any certificate or other document delivered pursuant hereto shall be deemed to be material and to have been relied upon by the Banks, notwithstanding any investigation heretofore or hereafter made by any Bank or on any Bank's behalf, and those covenants and agreements of the Company set forth in Section 10.5 hereof shall survive the repayment in full of the Loans and other obligations of the Company hereunder and under S/L/C Applications and the termination of the Commitment. 10.5 Expenses; Indemnification. (a) The Company agrees to pay and save the Agent and the Banks harmless from liability for the payment of the reasonable fees and expenses of Messrs. Dickinson, Wright, Moon, Van Dusen & Freeman or any other counsel the Agent shall employ, in connection with the preparation, execution and delivery of this Agreement, the Notes and the S/L/C Applications and the consummation of the transactions contemplated hereby (including, without limitation, such fees and expenses in connection with any action or proceeding relating to any court order, injunction or other process or decree restraining or seeking to restrain the Agent from paying any amount under any S/L/C), and in connection with any amendments, waivers or consents in connection therewith, and all reasonable costs and expenses of the Agent and the Banks (including reasonable fees and expenses of counsel) in connection with any Event of Default or the enforcement of this Agreement, the Notes or the S/L/C Applications. (b) In consideration of the execution and delivery of this Agreement by each Bank and the extension of the Commitments, the Company hereby indemnifies, exonerates and holds the Agent, each Bank and each of their respective officers, directors, employees and agents (collectively, the "Indemnified Parties") free and harmless from and against any and all actions, causes of action, suits, losses, costs, liabilities and damages, and expenses incurred in connection therewith (irrespective of whether any such Indemnified Party is a party to the action for which indemnification hereunder is sought), including reasonable attorneys' fees and disbursements (collectively, the "Indemnified Liabilities"), incurred by the Indemnified Parties or any of them as a result of, or arising out of, or relating to: (i) any transaction financed or to be financed in whole or in part, directly or indirectly, with the proceeds of any Loan; (ii) the entering into and performance of this Agreement and any other agreement or instrument executed in connection herewith by any of the Indemnified Parties (including any action brought by or on behalf of the Company as the result of any determination by the Majority Banks not to fund any Advance); (iii) any investigation, litigation or proceeding related to any acquisition or proposed acquisition by the Company or any of its Subsidiaries of any portion of the stock or assets of any Person, whether or not the Agent or such Bank is party thereto; 54 60 (iv) any investigation, litigation or proceeding related to any environmental cleanup, audit, compliance or other matter relating to any release by the Company or any of its Subsidiaries of any hazardous material or any violations of Environmental Laws; or (v) the presence on or under, or the escape, seepage, leakage, spillage, discharge, emission, discharging or releases from, any real property owned or operated by the Company or any Subsidiary thereof of any Hazardous Material (including any losses, liabilities, damages, injuries, costs, expenses or claims asserted or arising under any Environmental Law), regardless of whether caused by, or within the control of, the Company or such Subsidiary, except for any such Indemnified Liabilities arising for the account of a particular Indemnified Party by reason of the activities of the Indemnified Party on the property of the Company conducted subsequent to a foreclosure on such property by the Banks or by reason of the relevant Indemnified Party's gross negligence or wilful misconduct or breach of this Agreement, and if and to the extent that the foregoing undertaking may be unenforceable for any reason, the Company hereby agrees to make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. The Company shall be obligated to indemnify the Indemnified Parties for all Indemnified Liabilities subject to and pursuant to the foregoing provisions, regardless of whether the Company or any of its Subsidiaries had knowledge of the facts and circumstances giving rise to such Indemnified Liability. 10.6 Successors and Assigns. (a) This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, provided that the Company may not, without the prior consent of the Majority Banks, assign its rights or obligations hereunder or under the Notes and the Banks shall not be obligated to make any Advance hereunder to any entity other than the Company. (b) Any Bank may sell a participation interest to any financial institution or institutions, and such financial institution or institutions may further sell, a participation interest (undivided or divided) in, the Advances and such Bank's rights and benefits under this Agreement and the Notes and to the extent of that participation, such participant or participants shall have the same rights and benefits against the Company under Section 8.2(c) as it or they would have had if participation of such participant or participants were the Bank making the Advances to the Company hereunder, provided, however, that (i) such Bank's obligations under this Agreement shall remain unmodified and fully effective and enforceable against such Bank, (ii) such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) such Bank shall remain the holder of its Note for all purposes of this Agreement, (iv) the Company, the Agent and the other Banks shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement, and (v) such Bank shall not grant to its participant any rights to consent or withhold consent to any action taken by such Bank or the Agent under this Agreement other than action requiring the consent of all of the Banks hereunder. The Agent from time to time in its sole discretion may appoint agents for the purpose of servicing and administering this Agreement and 55 61 the transactions contemplated hereby and enforcing or exercising any rights or remedies of the Agent provided under this Agreement, the Notes, or otherwise. In furtherance of such agency, the Agent may from time to time direct that the Company provide notices, reports and other documents contemplated by this Agreement (or duplicates thereof) to such agent. The Company hereby consents to the appointment of such agent and agrees to provide all such notices, reports and other documents and to otherwise deal with such agent acting on behalf of the Agent in the same manner as would be required if dealing with the Agent itself. (c) Each Bank may, with the prior consent of the Company and the Agent, assign to one or more banks or other entities all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment, the Advances owing to it and the Note or Notes held by it); provided, however, that (i) each such assignment shall be of a uniform, and not a varying, percentage of all rights and obligations, (ii) except in the case of an assignment of all of a Bank's rights and obligations under this Agreement, (A) the amount of the Commitment of the assigning Bank being assigned pursuant to each such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall in no event be less than $5,000,000, and in integral multiples of $1,000,000 thereafter, or such lesser amount as the Company and the Agent may consent to and (B) after giving effect to each such assignment, the amount of the Commitment of the assigning Bank shall in no event be less than $5,000,000, and (iii) the parties to each such assignment shall execute and deliver to the Agent, for its acceptance and recording in the Register, an Assignment and Acceptance in the form of Exhibit L hereto (an "Assignment and Acceptance"), together with any Note or Notes subject to such assignment and a processing and recordation fee of $3,000. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in such Assignment and Acceptance, (x) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Bank hereunder and (y) the Bank assignor thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all of the remaining portion of an assigning Bank's rights and obligations under this Agreement, such Bank shall cease to be a party hereto). (d) By executing and delivering an Assignment and Acceptance, the Bank assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, such assigning Bank makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; (ii) such assigning Bank makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Company or the performance or observance by the Company of any of its obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with 56 62 copies of the financial statements referred to in Section 6.6 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance under the Agent, such assigning Bank or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such assignee appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers and discretion under this Agreement as are delegated to the Agent by the terms hereof, together with such powers and discretion as are reasonably incidental thereto; and (vi) such assignee agrees that it will perform in accordance with their terms all of the obligations that by the terms of this Agreement are required to be performed by it as a Bank. (e) The Agent shall maintain at its address designated on the signature pages hereof a copy of each Assignment and Acceptance delivered to and accepted by it and a register for the recordation of the names and addresses of the Banks and the Commitment of, and principal amount of the Advances owing to, each Bank from time to time (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Company, the Agent and the Banks may treat each Person whose name is recorded in the Register as a Bank hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Company or any Bank at any reasonable time and from time to time upon reasonable prior notice. (f) Upon its receipt of an Assignment and Acceptance executed by an assigning Bank and an assignee, together with any Note or Notes subject to such assignment, the Agent shall, if such Assignment and Acceptance has been completed, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Company. Within five Business Days after its receipt of such notice, the Company, at its own expense, shall execute and deliver to the Agent in exchange for the surrendered Note or Notes a new Note to the order of such assignee in an amount equal to the Commitment assumed by it pursuant to such Assignment and Acceptance and, if the assigning Bank has retained a Commitment hereunder, a new Note to the order of the assigning Bank in an amount equal to the Commitment retained by it hereunder. Such new Note or Notes shall be in an aggregate principal amount equal to the aggregate principal amount of such surrendered Note or Notes, shall be dated the effective date of such Assignment and Acceptance and shall otherwise be in substantially the form of Exhibit L hereto. (g) The Company shall not be liable for any costs or expenses of any Bank in effectuating any participation or assignment under this Section 10.6. (h) The Banks may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 10.6, disclose to the assignee or participant or proposed assignee or participant, any information relating to the Company, provided that prior to any such disclosure, each assignee or participant or proposed assignee or participant 57 63 shall agree by executing a confidentiality letter in favor of the Company in form and substance equivalent to the confidentiality agreement described in Section 10.12 hereof. (i) Additional lenders may also become Banks hereunder, with the prior written consent of the Company and the Agent, by executing an Assumption Agreement substantially in the form of Exhibit M hereto, provided that without the prior written consent of the Majority Banks, the aggregate Commitments of all Banks may not exceed $110,000,000. Any Bank, subject to the prior written approval of the Majority Banks, the Agent and the Company and subject to being paid in full or all outstanding liabilities owing to such Bank, may be terminated as a Bank hereunder and upon such termination the Company shall have the option to select a bank to replace such terminating bank and to assume the rights and obligations of such terminated Bank hereunder, provided that such replacement bank is acceptable to the Agent and executes an Assumption Agreement substantially in the form of Exhibit M hereto. Upon any Bank being added hereto or terminated, a new schedule will be distributed by the Agent to all Banks and the Company showing Commitment amount and the Pro Rata Share of each Bank. 10.7 Governing Law. This Agreement is a contract made under, and the rights and obligations of the parties hereunder shall be governed by and construed in accordance with, the laws of the State of Michigan applicable to contracts made and to be performed entirely within such State. 10.8 Table of Contents and Headings. The table of contents and the headings of the various subdivisions hereof are for the convenience of reference only and shall in no way modify any of the terms or provisions hereof. 10.9 Construction of Certain Provisions. All computations required hereunder and all financial terms used herein shall be made or construed in accordance with GAAP unless such principles are inconsistent with the express requirements of this Agreement. If any provision of this Agreement refers to any action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person, whether or not expressly specified in such provision. 10.10 Integration and Severability. This Agreement embodies the entire agreement and understanding between the Company and the Banks, and supersedes all prior agreements and understandings, relating to the subject matter hereof. In case any one or more of the obligations of the Company under this Agreement, the Notes or any S/L/C Application shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining obligations of the Company shall not in any way be affected or impaired thereby, and such invalidity, illegality or unenforceability in one jurisdiction shall not affect the validity, legality or enforceability of the obligations of the Company under this Agreement, the Notes or any S/L/C Application in any other jurisdiction. 10.11 Interest Rate Limitation. Notwithstanding any provisions of this Agreement, the Notes or any S/L/C Application, in no event shall the amount of interest paid or agreed to be 58 64 paid by the Company exceed an amount computed at the highest rate of interest permissible under applicable law. If, from any circumstances whatsoever, fulfillment of any provision of this Agreement, the Notes or any S/L/C Application at the time performance of such provision shall be due, shall involve exceeding the interest rate limitation validly prescribed by law which a court of competent jurisdiction may deem applicable hereto, then, ipso facto, the obligations to be fulfilled shall be reduced to an amount computed at the highest rate of interest permissible under applicable law, and if for any reason whatsoever the Banks shall ever receive as interest an amount which would be deemed unlawful under such applicable law such interest shall be automatically applied to the payment of principal of the Loans outstanding and other obligations of the Company hereunder (whether or not then due and payable) and not to the payment of interest, or shall be refunded to the Company if such principal has been paid in full. Anything herein to the contrary notwithstanding, the obligations of the Company under this Agreement shall be subject to the limitation that payments of interest shall not be required to the extent that receipt of any such payment by the Banks would be contrary to provisions of law applicable to the Banks which limits the maximum rate of interest which may be charged or collected by the Banks. 10.12 Confidentiality. The Banks and the Agent shall hold all confidential information obtained pursuant to the requirements of this Agreement which has been identified as such by the Company in accordance with their customary procedures for handling confidential information of this nature and in accordance with safe and sound banking practices and in any event may make disclosure to its examiners, affiliates, outside auditors, counsel and other professional advisors in connection with this Agreement or as reasonably required by any bona fide transferee or participant in connection with the contemplated transfer of any Note or participation therein, provided that any Bank shall give notice to the Company of such disclosure to any such transferee or participant, or as required by any governmental agency or representative thereof or pursuant to legal process. Without limiting the foregoing, it is expressly understood that such confidential information shall not include information which, at the time of disclosure is in the public domain or, which after disclosure, becomes part of the public domain or information which any Bank or the Agent had obtained prior to the time of disclosure and identification by the Company under this Section, or information received by any Bank or the Agent from a third party. Nothing in this Section or otherwise shall prohibit any Bank or the Agent from disclosing any confidential information to the other Banks or the Agent or render any of them liable in connection with any such disclosure. 10.13 Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and any of the parties hereto may execute this Agreement by signing any such counterpart. 10.14 Independence of Covenants. All covenants hereunder shall be given independent effect so that if a particular action or condition is not permitted by any such covenant, the fact that it would be permitted by an exception to, or would be otherwise within the limitations of, another covenant shall not avoid the occurrence of an Event of Default or any event or condition 59 65 which with notice or lapse of time, or both, could become such an Event of Default if such action is taken or such condition exists. 10.15 Jury Trial Waiver. The Agent, the Banks and the Company, after consulting or having had the opportunity to consult with counsel, knowingly, voluntarily and intentionally waive any right any of them may have to a trial by jury in any litigation based upon or arising out of this Agreement or any related instrument or agreement or any of the transactions contemplated by this Agreement or any course of conduct, dealing, statements (whether oral or written) or actions of any of them. Neither the Agent, the Banks nor the Company shall seek to consolidate, by counterclaim or otherwise, any such action in which a jury trial has been waived with any other action in which a jury trial cannot be or has not been waived. These provisions shall not be deemed to have been modified in any respect or relinquished by either the Agent and the Banks or the Company except by a written instrument executed by all of them. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of this 1st day of November, 1993, which shall be the Effective Date of this Agreement, notwithstanding the day and year first above written. Address for Notices: One Jackson Square NOMECO OIL & GAS COMPANY P.O. Box 1150 Jackson, Michigan 49204 Attention: Paul E. Geiger By: /s/ Paul E. Geiger Telephone No: (517) 787-9011 ----------------------------------------- Facsimile No: (517) 787-6360 Its: Vice President, Secretary ------------------------------------ and Treasurer -------------------- 611 Woodward Avenue NBD BANK, N.A., individually Energy Division as a Bank and as Agent Detroit, Michigan 48226 Attention: Energy Division By: /s/ James L. Caldwell, IV Telephone No: (313) 225-2818 ----------------------------------------- Facsimile No: (313) 225-2649 Commitment: $48,000,000 Its: First Vice President Pro Rata Share: 60% ------------------------------------
60 66 115 S. LaSalle Street BANK OF MONTREAL 11th Floor West Chicago, Illinois 60603 Attention: Michael Linton By: /s/ J. Michael Linton Telephone No: (312) 750-4370 -------------------------------------- Facsimile No: (312) 750-4314 Commitment: $32,000,000 Its: Director Pro Rata Share: 40% ---------------------------------
61 EX-10.29B 35 EXHIBIT 10.29(B) 1 Exhibit 10.29(b) Execution Copy SECOND AMENDMENT TO CREDIT AGREEMENT AND ASSUMPTION AGREEMENT THIS SECOND AMENDMENT TO CREDIT AGREEMENT AND ASSUMPTION AGREEMENT, dated as of March 1, 1995 (this "Amendment"), is among CMS NOMECO OIL & GAS CO., formerly known as NOMECO OIL & GAS CO., a Michigan corporation (the "Company"), the banks set forth on the signature pages hereof (collectively, the "Banks") and NBD BANK, formerly known as NBD BANK, N.A., as agent for the Banks (in such capacity, the "Agent"). RECITALS A. The Company, the Banks and the Agent are parties to an Amended and Restated Credit Agreement, dated as of November 1, 1993, amended by a First Amendment to Credit Agreement dated December 23, 1994 (the "Credit Agreement"). B. The Company has requested that the Agent and the Banks amend the Credit Agreement as set forth herein. TERMS In consideration of the premises and of the mutual agreements herein contained, the parties agree as follows: ARTICLE I. AMENDMENTS AND ADDITION OF ABN-AMRO BANK N.V., CHICAGO BRANCH. Upon the satisfaction of the condition precedent described in Article III hereof, the Credit Agreement shall be amended as follows: 1.1 NBD Bank, N.A. has changed its name to NBD Bank and NOMECO Oil & Gas Co. has changed its name to CMS NOMECO Oil & Gas Co. Accordingly, all references to NBD Bank, N.A. and NOMECO Oil & Gas Co. contained in the Credit Agreement, the Notes and all other documents and agreements executed in connection with the Credit Agreement shall be deemed references to NBD Bank and CMS NOMECO Oil & Gas Co., respectively. 2 1.2 ABN-AMRO Bank N.V., Chicago Branch (the "New Bank") has agreed to become a Bank under the Credit Agreement, with its Commitment and Pro Rata Share and address for notice as described next to its signature below. The New Bank (i) confirms that it has received a copy of the Credit Agreement and related documents, the First Amendment to Credit Agreement dated December 23, 1994, together with copies of the financial statements referred to in Section 6.6 thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assumption Agreement; (ii) agrees that it will, independently and without reliance upon the Agent or any Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (iii) appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers and discretion under the Credit Agreement as are delegated to the Agent by the terms thereof, together with such powers and discretion as are reasonably incidental thereto; (iv) agrees that it will perform in accordance with their terms of all of the obligations that by the terms of the Credit Agreement are required to be performed by it as a Bank; and (v) if the New Bank is organized under the laws of a jurisdiction outside the United States, attaches the forms prescribed by the Internal Revenue Service of the United States certifying as to the New Bank's status for purposes of determining exemption from United States withholding taxes with respect to all payments to be made to the New Bank under the Credit Agreement and the Notes or such other documents as are necessary to indicate that all such payments are subject to such taxes at a rate reduced by an applicable tax treaty. 1.3 The Commitment and Pro Rata Share of each Bank under the Credit Agreement shall be as described next to its signature below, which shall be deemed to amend and modify the Pro Rata Share of NBD Bank, Bank of Montreal and Banque Paribas, New York Branch as currently described in the Credit Agreement. The New Bank shall be a Bank for all purposes under the Credit Agreement. 1.4 Simultaneously herewith, the Company shall deliver a Revolving Credit Note duly executed to the New Bank in the amount of its Commitment (the "Additional Note"). All references to the Revolving Credit Notes in the Credit Agreement and in any agreement or the document executed in connection therewith shall be deemed references to the existing Revolving Credit Notes and the Additional Note, as amended or modified from time to time and together with any promissory note or notes issued in exchange or replacement therefor. 1.5 All references to "20%" in Section 9.6(a) shall be deleted and "15%" shall be substituted in each place thereof. 1.6 Reference in Section 10.6(i) to "$110,000,000" shall be deleted and "$130,000,000" shall be substituted in place thereof. 2 3 ARTICLE II. REPRESENTATIONS. The Company represents and warrants to the Agent and the Banks that: 2.1 The execution, delivery and performance of this Amendment and the Additional Note are within its powers, have been duly authorized and are not in contravention with any law, of the terms of its Articles of Incorporation or By-laws, or any undertaking to which it is a party or by which it is bound. 2.2 This Amendment and the Additional Note are the legal, valid and binding obligations of the Company enforceable against it in accordance with their terms. 2.3 After giving effect to the amendments herein contained, the representations and warranties contained in Section 6 of the Credit Agreement are true on and as of the date hereof with the same force and effect as if made on and as of the date hereof. 2.4 No Event of Default or any event or condition which might become an Event of Default with notice or lapse of time, or both, exists or has occurred and is continuing on the date hereof. 2.5 The most recent amendment to the Private Placement Agreements was the Second Amendment to Note Agreements dated as of November 1, 1993, a complete copy of which was delivered to the Banks, and no further modification or amendment thereto is currently contemplated. 2.6 Other than NOMECO Colombia Oil Company and Explotaciones NOMECO, Inc., each of which has delivered a Guaranty, and Walter International which will be joining in the Guaranty pursuant hereto, as the transactions contemplated by the Purchase Documents have been completed, no other Restricted Subsidiary is required to deliver a Guaranty pursuant to Section 7.2(h)(ii) of the Credit Agreement. ARTICLE III. CONDITIONS PRECEDENT. 3.1 This Amendment shall not become effective until (a) the Company delivers to the Agent and the Banks copies of resolutions adopted by the Board of Directors of the Company evidencing the due authorization of this Amendment and the Additional Note by the Company, (b) the Company shall have executed the Additional Note, (c) Walter International shall join in the Guaranty and deliver a board resolution to the Banks, each in form satisfactory to the Majority Banks, (d) general counsel to the Company shall deliver a letter to the New Bank authorizing the New Bank to rely on his opinion issued to the Banks and (e) the Company, the Agent, the Majority Banks and the New Bank shall execute this Amendment. 3 4 ARTICLE IV. MISCELLANEOUS. 4.1 References in the Credit Agreement or in any Note, certificate, instrument or other document to the Credit Agreement shall be deemed to be references to the Credit Agreement as amended hereby and as further amended from time to time. 4.2 The Company agrees to pay and to save the Agent harmless for the payment of all costs and expenses arising in connection with this Amendment, including the reasonable fees of counsel to the Agent in connection with preparing this Amendment and the related documents. 4.3 Except as expressly amended hereby, the Company agrees that (a) the Credit Agreement, the Notes and all other documents and agreements executed by the Company in connection with the Credit Agreement in favor of the Agent or the Banks are ratified and confirmed and shall remain in full force and effect and (b) it has no set off, counterclaim, defense or other claim or dispute with respect to any of the foregoing. Terms used but not defined herein shall have the respective meanings ascribed thereto in the Credit Agreement. 4.4 This Amendment may be signed upon any number of counterparts with the same effect as if the signatures thereto and hereto were upon the same instrument, and telecopied signatures shall be effective. IN WITNESS WHEREOF, the parties signing this Amendment have caused this Amendment to be executed and delivered as of the day and year first above written, which shall be the effective date of this Amendment. CMS NOMECO OIL & GAS CO. By: /s/ Paul E. Geiger ----------------------------------- Its: Vice President, Secretary ------------------------------ and Treasurer ----------------------------- NBD BANK, as a Bank and as Agent Commitment: $45,000,000 By: /s/ W. Scott Bennett ---------------------------------- Pro Rata Share: 34.6154% Its: Vice President -------------------------------- 4 5 BANK OF MONTREAL Commitment: $40,000,000 By: /s/ J. Michael Linton ---------------------------------- Pro Rata Share 30.7692% Its: Director ----------------------------- BANQUE PARIBAS Commitment: $25,000,000 By:/s/ Clark K. Thompson ---------------------------------- Pro Rata Share 19.2308% Its: Group Vice President ----------------------------- 135 South LaSalle Street ABN-AMRO BANK N.V., Chicago, Illinois 60603 CHICAGO BRANCH Attention: James R. Morgan Telephone No: (312) 904-5216 By: /s/ James R. Morgan Telecopy No: (312) 606-8425 ---------------------------------- Commitment: $20,000,000 Its: Vice President ----------------------------- Pro Rate Share: 15.3846% And: /s/ John Wm. Stanger --------------------------------- Its: Group Vice President ----------------------------- 5 EX-10.29C 36 EXHIBIT 10.29C 1 EXHIBIT 10.29(c) THIRD AMENDMENT TO CREDIT AGREEMENT THIS THIRD AMENDMENT TO CREDIT AGREEMENT, dated as of August 31, 1995 (this "Amendment"), is among CMS NOMECO OIL & GAS CO., a Michigan corporation (the "Company"), the banks set forth on the signature pages hereof (collectively, the "Banks") and NBD BANK, as agent for the Banks (in such capacity, the "Agent"). RECITAL The Company, the Banks and the Agent are parties to an Amended and Restated Credit Agreement, dated as of November 1, 1993, amended by a First Amendment to Credit Agreement dated December 23, 1994 and by a Second Amendment to Credit Agreement and Assumption Agreement dated as of March 1, 1995 (the "Credit Agreement"), and the Company has requested that the Agent and the Banks amend the Credit Agreement as set forth herein. TERMS In consideration of the premises and of the mutual agreements herein contained, the parties agree as follows: ARTICLE I. AMENDMENTS. The Credit Agreement shall be amended as follows: 1.1 Section 7.2(f) is amended by deleting the period at the end of clause 7.2(f)(x) and substituting "; and" in place thereof and adding the following new Section 7.2(f)(xi) to read as follows: "(xi) The Liens described on Schedule 7.2(f) hereto, but no increase in the amount secured thereby." 1.2 Section 7.2(k) is amended by deleting the period at the end of Section 7.2(k)(x) and substituting "; and" in place thereof and adding the following new Section 7.2(k)(xi) to read as follows: "(xi) The Indebtedness described on Schedule 7.2(f) hereto, but no increase in the amount thereof." 1.3 Schedule 7.2(f) attached hereto is hereby added to the Credit Agreement as Schedule 7.2(f). ARTICLE II. REPRESENTATIONS. The Company represents and warrants to the Agent and the Banks that: 2.1 The execution, delivery and performance of this Amendment are within its powers, have been duly authorized and are not in contravention with any law, of the terms of its Articles of Incorporation or By-laws, or any undertaking to which it is a party or by which it is bound. 2 2.2 This Amendment is the legal, valid and binding obligations of the Company enforceable against it in accordance with its terms. 2.3 After giving effect to the amendments herein contained, the representations and warranties contained in Section 6 of the Credit Agreement are true on and as of the date hereof with the same force and effect as if made on and as of the date hereof. 2.4 No Event of Default or any event or condition which might become an Event of Default with notice or lapse of time, or both, exists or has occurred and is continuing on the date hereof. ARTICLE III. MISCELLANEOUS. 3.1 References in the Credit Agreement or in any Note, certificate, instrument or other document to the Credit Agreement shall be deemed to be references to the Credit Agreement as amended hereby and as further amended from time to time. 3.2 The Company agrees to pay and to save the Agent harmless for the payment of all costs and expenses arising in connection with this Amendment, including the reasonable fees of counsel to the Agent in connection with preparing this Amendment and the related documents. 3.3 Except as expressly amended hereby, the Company agrees that (a) the Credit Agreement, the Notes and all other documents and agreements executed by the Company in connection with the Credit Agreement in favor of the Agent or the Banks are ratified and confirmed and shall remain in full force and effect and (b) it has no set off, counterclaim, defense or other claim or dispute with respect to any of the foregoing. Terms used but not defined herein shall have the respective meanings ascribed thereto in the Credit Agreement. 3.4 This Amendment may be signed upon any number of counterparts with the same effect as if the signatures thereto and hereto were upon the same instrument, and telecopied signatures shall be effective. 3.5 The Company represents that it is acquiring Terra Energy, Ltd., which will become a Subsidiary of the Company. Upon Terra Energy, Ltd. becoming a Subsidiary, the Company will (a) pay for the acquisition of Terra Energy, Ltd. by obtaining Subordinated Debt from CMS Enterprises Company ("Enterprises") in an amount greater than $60,000,000 but less than $65,000,000 and the Company will execute the subordinated promissory note in the form of Exhibit A hereto, and will cause Enterprises to execute the Subordination Agreement in the form of Exhibit B attached hereto, and (b) cause Terra Energy, Ltd. to execute a Joinder Agreement in the form of Exhibit C attached hereto and deliver all corporate documents and legal opinions reasonably requested by the Majority Banks in connection therewith. THIRD AMENDMENT TO CREDIT AGREEMENT PAGE 3 3 IN WITNESS WHEREOF, the parties signing this Amendment have caused this Amendment to be executed and delivered as of the day and year first above written, which shall be the effective date of this Amendment. CMS NOMECO OIL & GAS CO. By: /s/ Paul E. Geiger Its: Vice President, Secretary and Treasurer NBD BANK, as a Bank and as Agent By: /s/ W. Scott Bennett Its: Vice President BANK OF MONTREAL By: /s/ Howard H. Turner Its: Director BANQUE PARIBAS By: /s/ Charles Thompson Its: GVP ABN-AMRO BANK N.V., CHICAGO BRANCH By: /s/ James R. Morgan Its: Vice President And: /s/ Andrew K. Miller Its: Assistant Vice President THIRD AMENDMENT TO CREDIT AGREEMENT PAGE 4 4 CONSENT Each of the undersigned Guarantors consents to the above Third Amendment and acknowledges and agrees that its Guaranty shall continue in full force and effect and that is has no set-off, counterclaim, defense or other claim or dispute thereunder. CMS NOMECO COLOMBIA OIL COMPANY By: /s/ Paul E. Geiger Its: Vice President, Secretary and Treasurer EXPLOTACIONES CMS NOMECO, INC. By: /s/ Paul E. Geiger Its: Vice President, Secretary and Treasurer CMS NOMECO INTERNATIONAL, INC. By: Paul E. Geiger Its: Vice President, Secretary and Treasurer THIRD AMENDMENT TO CREDIT AGREEMENT PAGE 5 EX-15.1 37 EXHIBIT 15.1 1 EXHIBIT 15.1 Independent Accountants' Review Report To the Board of Directors, CMS NOMECO Oil & Gas Co.: We have reviewed the accompanying consolidated balance sheet of CMS NOMECO Oil & Gas Co. (a Michigan corporation and wholly owned subsidiary of CMS Enterprises Company) and subsidiaries as of September 30, 1995, and the related consolidated statements of income, stockholder's equity and cash flows for the nine months ended September 30, 1995. These consolidated financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. Arthur Andersen LLP Detroit, Michigan October 20, 1995. 2 EXHIBIT 15.1 To CMS NOMECO Oil & Gas Co.: We are aware that CMS NOMECO Oil & Gas Co. has included in this registration statement our report dated October 20, 1995, covering our review of the unaudited interim financial information contained therein. Pursuant to Regulation C of the Securities Act of 1933, that report is not considered a part of the registration statement prepared or certified by our Firm or a report prepared or certified by our Firm within the meaning of Sections 7 and 11 of the Act. Arthur Andersen LLP Detroit, Michigan October 23, 1995. EX-15.2 38 EXHIBIT 15.2 1 EXHIBIT 15.2 Independent Accountants' Review Report The Board of Directors The Nuevo Congo Company and Walter International Congo, Inc. (formerly Amoco Congo Exploration and Petroleum Companies): We have reviewed the accompanying combined balance sheet of Amoco Congo Exploration and Petroleum Companies (Amoco Congo) as of January 31, 1995, and the related combined statements of operations, stockholder's equity, and cash flows for the month then ended. These combined financial statements are the responsibility of the Companies' management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly we do not express such an opinion. Based on our review we are not aware of any material modifications that should be made to the combined financial statements referred to above for them to be in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Houston, Texas October 17, 1995 2 EXHIBIT 15.2 CMS NOMECO Oil & Gas Co. Jackson, Michigan Re: Registration Statement No. 33-_______ Ladies and Gentlemen: With respect to the subject registration statement, we acknowledge our awareness of the use therein of our report dated October 17, 1995 related to our review of the combined interim financial information of Amoco Congo Exploration and Petroleum Companies. Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not considered part of a registration statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of sections 7 and 11 of the Act. Very truly yours, KPMG Peat Marwick LLP Houston, Texas October 23, 1995. EX-21.1 39 EXHIBIT 21.1 1 Exhibit 21.1 CMS NOMECO OIL & GAS CO. CORPORATE STRUCTURE (ALL ENTITIES 100% OWNED UNLESS OTHERWISE INDICATED) CMS NOMECO Oil & Gas Co. CMS NOMECO Colombia Oil Company NOMECO Ecuador Oil Company NOMECO Thailand Oil Company Comeco Petroleum Holdings, Inc. - 50% Shareholder CMS NOMECO Pipeline Company CMS NOMECO PNG Oil Co. Explotaciones CMS NOMECO Inc. CMS NOMECO Services Company CMS NOMECO Peru Company CMS NOMECO China Oil Co. CMS NOMECO Equatorial Guinea Oil & Gas Co. NOMECO Australia Pty. Limited NOMECO Exploration (Thailand) Limited CMS NOMECO Holdings Ltd. CMS NOMECO International Ltd. CMS NOMECO Ecuador LDC CMS NOMECO Argentina LDC CMS NOMECO Venezuela LDC CMS NOMECO Alba LDC CMS NOMECO E.G. LDC CMS NOMECO International Inc. Walter International Colombia, Inc. Walter International Morocco, Inc. Walter International Senegal, Inc. Walter International France, Inc. Walter International Guinea-Bissau, Inc. Walter International Kenya, Inc. Walter International Espana, Inc. Walter International Gabon, Inc. Walter International Tunisia, Inc. CMS NOMECO International Equatorial Guinea, Inc. Walter International Transportation, Inc. CMS NOMECO International Venezuela, Inc. Walter Congo Holdings, Inc. Walter International Congo, Inc. 2 Terra Energy, Ltd. Terra Pipeline Company Kristin Corporation Energy Acquisition Operating Corporation Wellcorps LLC (55%) Thunder Bay Pipeline Company, LLC (50%) EX-23.1 40 EXHIBIT 23.1 1 Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the inclusion in this prospectus of our report dated January 27, 1995 on the consolidated financial statements of CMS NOMECO Oil & Gas Co. and subsidiaries as of December 31, 1993 and 1994, and for the three years ended December 31, 1994, our report dated October 16, 1995 on the Pro Forma Consolidated Statement of Income for the year ended December 31, 1994, our report dated July 17, 1995 on the consolidated financial statements of CMS NOMECO International, Inc. and subsidiaries as of December 31, 1994, and for the year then ended, and our report dated July 14, 1995 on the consolidated financial statements of Terra Energy Ltd. and subsidiaries as of December 31, 1994, and for the year then ended all included herein and to all references to our Firm included in this prospectus. Arthur Andersen LLP Detroit, Michigan, October 23, 1995. EX-23.2 41 EXHIBIT 23.2 1 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT CMS Nomeco Oil & Gas Co. Detroit, Michigan We consent to the use in this Registration Statement of CMS Nomeco Oil & Gas Co. on Form S-1 of our report dated June 24, 1994 (July 31, 1994, as to Note 8) (such report expresses an unqualified opinion and includes an explanatory paragraph referring to substantial doubt about Walter International, Inc.'s ability to continue as a going concern), appearing in the Prospectus, which is a part of this Registration Statement, and to the references to us under the heading "Experts" in such Prospectus. DELOITTE & TOUCHE LLP Houston, Texas October 23, 1995. EX-23.3 42 EXHIBIT 23.3 1 EXHIBIT 23.3 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors CMS NOMECO Oil & Gas Co.: We consent to the use of our audit report dated April 18, 1995, on the combined financial statements of Amoco Congo Exploration and Petroleum Companies as of December 31, 1994 and 1993, and for each of the years in the three-year period then ended included herein and to the reference to our firm under the heading "Experts" in the prospectus. KPMG Peat Marwick LLP Houston, Texas October 23, 1995. EX-23.5 43 EXHIBIT 23.5 1 Exhibit 23.5 CONSENT OF RYDER SCOTT COMPANY We hereby consent to the reference to our firm under the caption "Experts" and the references to the results of our reserve report, dated October 2, 1995 (the "Reserve Letter") and the inclusion of the summary letter relating to such reserve report, together with appropriate attachments thereto, in the Registration Statement and related Prospectus of CMS NOMECO Oil & Gas Co. (the "Company") on Form S-1 filed with the Securities and Exchange Commission. RYDER SCOTT COMPANY PETROLEUM ENGINEERS Houston, Texas October 26, 1995 EX-24.1 44 EXHIBIT 24.1 1 Exhibit 24.1 October 23, 1995 Mr. Alan M. Wright Mr. William H. Stephens, III and Mr. Paul E. Geiger CMS NOMECO Oil & Gas Co. One Jackson Square Jackson, MI 49201 CMS NOMECO Oil & Gas Co. proposes to file a registration statement with the Securities and Exchange Commission with respect to the proposed issue and sale of up to 20% of the issued and outstanding shares of its Common Stock (on a fully diluted basis) to the public. Each of the persons executing this instrument hereby appoints each of you lawful attorney for him and in his name to sign and cause to be filed with the Securities and Exchange Commission and The New York Stock Exchange a registration statement(s) and/or any appropriate amendment or amendments to said registration statements(s) (including any pre-effective or post-effective amendments) and other necessary documents required to be filed with the Securities and Exchange Commission or The New York Stock Exchange. /s/ Richard J. Burgess - ------------------------- ------------------------- Richard J. Burgess Charles R. Owens /s/ Frank M. Burke, Jr. /s/ S. Kinnie Smith, Jr. - ------------------------- ------------------------- Frank M. Burke, Jr. S. Kinnie Smith, Jr. /s/ Victor J. Fryling /s/ P. W. J. Wood - ------------------------- ------------------------- Victor J. Fryling P. W. J. Wood /s/ J. Stuart Hunt /s/ Alan M. Wright - ------------------------- ------------------------- J. Stuart Hunt Alan M. Wright /s/ Thomas K. Matthews, II /s/ Gordon L. Wright - ------------------------- ------------------------- Thomas K. Matthews, II Gordon L. Wright /s/ William T. McCormick, Jr. - ------------------------- William T. McCormick, Jr. EX-27.1 45 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT OF INCOME AND BALANCE SHEET, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR 9-MOS DEC-31-1993 DEC-31-1994 JAN-01-1994 JAN-01-1995 DEC-31-1994 SEP-30-1995 6,086 9,068 0 0 14,809 69,074 226 226 0 0 22,104 91,342 934,460 1,073,981 496,403 526,038 472,700 662,406 16,494 66,371 119,462 192,371 14,600 14,600 0 0 0 0 274,286 326,489 472,700 662,406 66,735 78,350 79,068 96,088 973 773 23,161 36,256 40,531 26,667 0 0 4,023 6,455 4,274 20,850 (5,523) 386 9,797 20,464 0 0 0 (987) 0 0 9,797 19,477 .43 .76 0 0
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