This Royalty Agreement involves
Title: TERM ROYALTY CONVEYANCE
Governing Law: West Virginia Date: 5/19/2005
ATTACHED TO AND MADE A PART OF THAT CERTAIN TERM ROYALTY AGREEMENT DATED MAY 17,
2005 BY AND BETWEEN ENERGY CORPORATION OF AMERICA ET AL., AS SELLERS, AND BLACK
STONE MINERALS COMPANY, L. P. [AND/OR ITS DESIGNEES], AS BUYER
TERM ROYALTY CONVEYANCE
THIS TERM ROYALTY CONVEYANCE (this "Conveyance") from ENERGY CORPORATION OF
AMERICA, a West Virginia corporation, with offices at 4643 South Ulster Street,
Suite 100, Denver, Colorado 80237-2867 ("ECA"), and EASTERN AMERICAN ENERGY
CORPORATION, a West Virginia corporation, with offices at 501 56th Street,
Charleston, West Virginia 25304 ("Eastern" or "Assignor"), to Black Stone
Minerals Company, L.P., a Delaware limited partnership, or its permitted
designees ("Assignee") is delivered to be effective as of 7:00 a.m., Eastern
Time, January 1, 2005 (the "Effective Time"). All capitalized terms not
otherwise defined herein shall have the meanings ascribed to such terms in
Article II below.
SECTION 1.01 THE GRANT. For and in consideration of good and valuable
consideration paid by Assignee to Assignor, the receipt and sufficiency of which
are hereby acknowledged, Assignor has, subject to the terms of this Conveyance,
BARGAINED, SOLD, GRANTED, CONVEYED, TRANSFERRED, ASSIGNED, SET OVER, and
DELIVERED, and by these presents does hereby BARGAIN, SELL, GRANT, CONVEY,
TRANSFER, ASSIGN, SET OVER, and DELIVER unto Assignee, for the Term, the Term
SECTION 1.02 TERM. The term of the Term Royalty Interest (the "Term")
shall begin at the Effective Time and end at 7:00 A.M. on January 1, 2025 (the
"Termination Date"). At the end of the Term, all of the Assignee's interest in
and to the Term Royalty Interest shall automatically terminate and immediately
revert to and revest in Assignor.
SECTION 1.03 HABENDUM CLAUSE. TO HAVE AND TO HOLD the Term Royalty
Interest, together with all and singular the rights and appurtenances thereto in
anywise belonging, unto Assignee, its successors and assigns, for the Term,
subject to terms and provisions of this Conveyance.
SECTION 1.04 WARRANTY.
(a) THE WARRANTY. ECA and Assignor warrant to the Assignee, its
successors and assigns, that the Subject Interests are free of all Encumbrances
created by, through, or under Assignor, but not otherwise, except for the
Permitted Encumbrances, and that Assignor's title to (i) the Producing Wells
entitles Assignor to a Net Revenue Interest in each such Producing Well no less
than the Net Revenue Interest for that Producing Well as set forth in
Exhibit A-1, and (ii) as to the Subject Development Lands is sufficient to allow
it to satisfy the Total Drilling Commitment by the Drilling Obligation
Completion Date in accordance with the Development Agreement.
(b) SOLE REMEDY. In the event of a post-Closing breach of the
foregoing warranty for any Subject Interest (pre-Closing breaches thereof being
remedied pursuant to Section 2(a)(ii) of the Term Royalty Agreement), the
Assignee's sole remedy shall be to receive payment for each applicable month, as
damages, subject to offset as provided below and without interest (except such
interest payable under this Conveyance on payments made after the applicable due
date as described in Section 5.02 below), of an amount equal to the difference
between (i) Term Royalty Gas (or the proceeds from the sale thereof) that the
Assignee would have received with respect to a Well in the applicable month if
the warranty had not been breached and (ii) Term Royalty Gas (or the proceeds
from the sale thereof) that the Assignee actually received during that month
with respect to that Well, to the extent such difference is attributable to the
breach of the warranty, but not to the extent that such difference is
attributable to any other cause.
(c) RIGHT OF OFFSET. If any Subject Interest owned by Assignor ever
proves to be larger than the Subject Interest reflected in the exhibits to this
Conveyance and if, as a result, the Assignee receives a greater amount of Term
Royalty Gas (or the proceeds from the sale thereof) with respect to that Subject
Interest than the Assignee would otherwise have received if the Subject Interest
had been the size warranted, then such increased amounts, whenever received by
the Assignee, may be treated by Assignor as a credit or offset (without
interest) against any amounts payable to the Assignee under Section 1.04(b).
(d) DISCLAIMER. EXCEPT FOR THE WARRANTIES OF TITLE GIVEN IN SECTION
1.04(a) AND THE REPRESENTATIONS MADE IN ANY AGREEMENT TO WHICH THIS CONVEYANCE
IS SUBJECT, ASSIGNOR MAKES THIS CONVEYANCE AND ASSIGNS THE TERM ROYALTY INTEREST
WITHOUT RECOURSE, COVENANT OR WARRANTY OF TITLE OF ANY KIND, EXPRESS, IMPLIED OR
STATUTORY. EXCEPT AS OTHERWISE PROVIDED HEREIN OR IN ANY AGREEMENT TO WHICH THIS
CONVEYANCE IS SUBJECT, ANY COVENANTS OR WARRANTIES IMPLIED BY STATUTE OR LAW BY
THE USE HEREIN OF THE WORDS "GRANT", "CONVEY" OR OTHER SIMILAR WORDS ARE HEREBY
EXPRESSLY DISCLAIMED, WAIVED AND NEGATED. WITHOUT LIMITING THE GENERALITY OF THE
TWO PRECEDING SENTENCES, ASSIGNEE ACKNOWLEDGES THAT ASSIGNOR HAS NOT MADE, AND
ASSIGNOR HEREBY EXPRESSLY DISCLAIMS AND NEGATES, AND THE ASSIGNEE HEREBY
EXPRESSLY WAIVES, ANY REPRESENTATION OR WARRANTY, EXPRESS, IMPLIED, AT COMMON
LAW, BY STATUTE OR OTHERWISE RELATING TO (i) PRODUCTION RATES, RECOMPLETION
OPPORTUNITIES, DECLINE RATES OR THE QUALITY, QUANTITY OR VOLUME OF THE RESERVES
OF HYDROCARBONS, IF ANY, ATTRIBUTABLE TO THE SUBJECT INTERESTS, (ii) ANY IMPLIED
OR EXPRESS WARRANTY OF MERCHANTABILITY, (iii) ANY IMPLIED OR EXPRESS WARRANTY OF
FITNESS FOR A PARTICULAR PURPOSE, (iv) ANY IMPLIED OR EXPRESS WARRANTY OF
CONFORMITY TO MODELS OR SAMPLES OF MATERIALS, AND (v) ANY AND ALL IMPLIED
WARRANTIES EXISTING UNDER ANY APPLICABLE LEGAL REQUIREMENT; IT BEING THE EXPRESS
INTENTION OF BOTH THE ASSIGNEE AND
ASSIGNOR THAT, EXCEPT AS OTHERWISE PROVIDED, THE TERM ROYALTY INTEREST IS HEREBY
ASSIGNED TO THE ASSIGNEE ON AN "AS IS" AND "WHERE IS" BASIS WITH ALL FAULTS, AND
THAT THE ASSIGNEE HAS MADE OR CAUSED TO BE MADE SUCH INSPECTIONS AS THE ASSIGNEE
DEEMS APPROPRIATE. ASSIGNOR AND ASSIGNEE AGREE THAT, TO THE EXTENT REQUIRED BY
APPLICABLE LEGAL REQUIREMENTS TO BE EFFECTIVE, THE DISCLAIMERS OF CERTAIN
WARRANTIES CONTAINED IN THIS SECTION ARE "CONSPICUOUS" DISCLAIMERS FOR THE
PURPOSES OF ANY APPLICABLE LEGAL REQUIREMENT.
(e) SUBSTITUTION OF WARRANTY. This Conveyance is made with full
substitution and subrogation of the Assignee in and to all covenants of warranty
by Third Persons (other than Affiliates of Assignor) heretofore given or made
with respect to the Wells and the Subject Interests or any part thereof or
SECTION 1.05 RELEASE OF EXCESS ACREAGE. After the drilling obligations
in Section 2.01(a) of the Development Agreement have been satisfied, Assignee
shall, on request, execute, acknowledge, and deliver to Assignor a recordable
instrument (reasonably acceptable to Assignor) that (a) releases the Term
Royalty Interest with respect to all Subject Development Lands and (b) assigns
such Subject Development Lands to Assignor, except such portion thereof that
covers and pertains to all Term Royalty Gas in, under and that may be produced
from the Wellbores of any Completed Development Well. In addition, upon the
completion of any Development Well or Completed Development Well, Assignee
shall, on request, execute, acknowledge, and deliver to Assignor a recordable
instrument (reasonably acceptable to Assignor) that (i) releases all of the Term
Royalty Interest with respect to each Development Well that does not constitute
a Completed Development Well, and (ii) each Completed Development Well, except
such portion of each such Completed Development Well that covers and pertains to
all Term Royalty Gas in, under and that may be produced from the Wellbores of
any such Completed Development Well. Any such release and assignment shall be
made subject to the provisions of Section 12.02 below.
This Article II defines certain capitalized words, terms, and phrases used
in this Conveyance. Certain other capitalized words, terms, and phrases used in
this Conveyance are defined elsewhere in this Conveyance.
"Additional Lease" is defined in Section 12.01.
"Adjusted Completed Development Well Value" means, with respect to each
Completed Development Well, the value obtained by multiplying for each Completed
Development Well drilled or caused to be drilled by Assignor during any Annual
Period one (1) times the Working Interest (stated as a decimal fraction or 1.00,
where Assignor holds a 100% Working Interest), that Assignor is required to bear
in such Completed Development Well. For example, if Assignor holds an
eighty-five percent (85%) Working Interest in a Completed Development Well, the
computation would be:
1 x .85 = .85
therefore, such Completed Development Well would have a .85 Adjusted Completed
Development Well Value.
"Affiliate" means, for any specified Person, another Person that controls,
is controlled by, or is under common control with, the specified Person.
"Control," in the preceding sentence, refers to the possession by one Person,
directly or indirectly, of the right or power to direct or cause the direction
of the management and policies of another Person, whether through the ownership
of voting securities, by contract, or otherwise.
"AMI Areas" mean the areas depicted on the map set forth on Exhibit B as
the Yawkey Freeman AMI and the PK AMI.
"Annual Period" means the annual period commencing on April 1 each year and
ending on March 31 of the succeeding year.
"Assignee" means Black Stone Minerals Company, L. P., a Delaware limited
partnership or its permitted designees.
"Assignor" is defined in the Introduction to this Conveyance and also
includes all permitted successors and assigns of Assignor.
"Assignor's Net Share of Gas" means the share of Subject Gas from each Well
that is attributable to Assignor's Net Revenue Interest in that Well.
"Business Day" means any day that is not a Saturday, Sunday, a holiday
determined by the New York Stock Exchange, Inc. as "affecting 'ex' dates" or any
other day on which national banking institutions in New York, New York are
closed as authorized or required by law.
"Chargeable Costs" is defined in Section 3.02(a).
"Completed Development Well" means the Wellbore of any Development Well
that is completed pursuant to Section 2.02 of the Development Agreement in the
Big Lime formation or deeper formation(s).
"Conveyance" is defined in the Introduction to this Conveyance.
"Development Agreement" means that certain Development Agreement between
Assignor and the Assignee dated as of even date herewith.
"Development Well" means any Gas well drilled, within the meaning of
Section 2.01(b) of the Development Agreement, after the Effective Time of the
Development Agreement on the Subject Development Lands.
"Drilling Obligation Completion Date" means March 31, 2008.
"Effective Time" is defined in the Introduction to this Conveyance as
January 1, 2005.
"Encumbrance" means any mortgage, lien, security interest, pledge, charge,
encumbrance, limitation, preferential right to purchase, consent to assignment,
irregularity, burden, or defect.
"Excess Costs" means the excess of Chargeable Costs from a prior month that
are actually paid or are deemed to have been paid by Assignor during that month
and not included in any such prior month's Chargeable Costs.
"Existing Gas Purchase Contract" means that certain Natural Gas Sales
Agreement dated March 16, 1993 by and between Mountaineer Gas Services, Inc. and
Mountaineer Gas Company as heretofore and may hereafter be amended, modified or
"Fair Value" means, with respect to any portion of the Term Royalty
Interest to be released pursuant to Section 11.02 or 11.03 in connection with a
sale or release of any Well or Subject Interest, an amount of net proceeds which
could reasonably be expected to be obtained from the sale of such portion of the
Term Royalty Interest to a party which is not an Affiliate of either the
Assignor or the Assignee on an arms'length negotiated basis, taking into account
relevant market conditions and factors existing at the time of any such proposed
sale or release, such net proceeds to be determined by deducting the Assignee's
proportionate share of sales costs, commissions and brokerage fees, if any,
"Farmout Agreements" means any farmout agreement, participation agreement,
exploration agreement, development agreement or any similar agreement.
"Force Majeure" is defined in Section 13.02.
"Gas" means natural gas and all other gaseous hydrocarbons, and all
non-combustible gas that are contained in the full wellstream.
"Governmental Authority" means the United States of America, any state,
commonwealth, territory, or possession thereof, and any political subdivision of
any of the foregoing, including courts, departments, commissions, boards,
bureaus, agencies, and other instrumentalities.
"Kentucky Conveyance" means the Term Royalty Conveyance (Kentucky) by and
between Assignor and Assignee dated as of even date herewith and effective as of
the Effective Time. The Kentucky Conveyance shall be identical in terms to this
Conveyance except where modified as appropriate.
"Legal Requirement" means any law, statute, ordinance, decree, requirement,
order, judgment, rule, or regulation of, including the terms of any license or
permit issued by, any Governmental Authority.
"Mcf" means thousand cubic feet of Gas and "MMcf" means million cubic feet
of Gas, measured and expressed in each case at the same temperature, pressure,
and other conditions of measurement (a) provided in any contract for the
purchase of Gas from the Subject Interest or, (b) if no such contract exists,
provided by applicable state law for purposes of reporting production to
"Monthly Distribution Amount" is defined in Section 5.01(a).
"Net Revenue Interest" means, the interest, stated as a decimal fraction,
in Subject Gas production from a Well that Assignor is entitled to take with
respect to Assignor's Subject Interest in that Well and the associated Subject
Lands, subject only to the Permitted Production Burdens.
"Non-Affiliate" means, for any specified Person, any other Person that is
not an Affiliate of the specified Person.
"Notice" is defined in Section 14.01.
"Party," when capitalized, refers to Assignor or Assignee.
"Parties," when capitalized, refers to Assignor and Assignee.
"Pennsylvania Conveyance" means the Term Royalty Conveyance (Pennsylvania)
by and between Assignor and Assignee dated as of even date herewith and
effective as of the Effective Time. The Pennsylvania Conveyance shall be
identical in terms to this Conveyance except where modified as appropriate.
"Permitted Encumbrances" means:
(a) the Permitted Production Burdens;
(b) the Existing Gas Purchase Contract;
(c) Encumbrances that arise under operating agreements, Farmout
Agreements, leases, assignments, and other instruments and agreements
to secure payments of amounts not yet delinquent and that are of the type
and nature customary in the oil and gas industry, as conducted in the
(d) Encumbrances that arise as a result of pooling and unitization
agreements, declarations, orders, or Legal Requirements to secure
payment of amounts not yet delinquent;
(e) Encumbrances securing payments to mechanics and materialmen
and Encumbrances securing payment of Taxes or assessments that are, in
either case, not yet delinquent or, if delinquent, are being contested in
good faith in the normal course of business;
(f) conventional rights of reassignment that obligate Assignor to
reassign all or part of any Subject Interest to a Third Person if
Assignor intends to release or abandon such interest before the expiration
of the primary term or other termination of such interest;
(g) easements, rights-of-way, servitudes, permits, surface leases,
surface use restrictions, and other surface uses and impediments on,
over, or in respect of the Subject
Interests that are not such as to interfere materially with the operation,
value, or use of the Subject Interests;
(h) covenants, conditions, and other terms subject to which
Assignor acquired the Subject Interests;
(i) rights reserved to or vested in any Governmental Authority to
control or regulate any Subject Interests in any manner, and all applicable
(j) the terms of the instruments creating the Subject Interests
and Subject Lands;
(k) any Prior Reversionary Interests disclosed in writing to
Assignee prior to the execution of the Term Royalty Agreement that
affect the Subject Interests;
(l) other Encumbrances that affect any Subject Interest that do
not, alone or in the aggregate, materially and adversely affect the
operation, value, or use of the Subject Interests; and
(m) mortgages, deeds of trust or other security interests
burdening Assignor's interest in the Subject Interests or any extensions or
renewals thereof and Subject Lands, including, without limitation, the Deed
of Trust; provided however that any such mortgage, deed of trust or
security interest shall not affect and shall be made expressly subject to
the Term Royalty Conveyance;
all to the extent, and for so long as, such Permitted Encumbrances are
(i) otherwise valid and enforceable against the Subject Interests,
without recognizing, expressly or by implication, any rights or
interests in any Third Person or Governmental Authority that such
Third Person or Governmental Authority does not otherwise lawfully
possess, or (ii) they do not cause Assignor's Net Revenue Interests in
any Producing Well to be less than the Net Revenue Interest for that
Producing Well as stated in Exhibit A-1.
"Permitted Production Burdens" means (a) all Production Burdens that
affected the Subject Interests when they were acquired by Assignor and (b) all
Production Burdens that were created by Assignor, to the extent they do not
cause Assignor's Net Revenue Interest in any (i) Producing Well to be less than
the Net Revenue Interest for that Producing Well reflected in Exhibit A-1, or
(ii) Completed Development Well to be less than 87.5% (proportionately reduced
to Assignor's Working Interest in such Completed Development Well). It is
understood and agreed that with respect to Completed Development Wells, the Term
Royalty Interest will be calculated on the basis that Assignor's Working
Interest in the Subject Development Lands is not burdened by Production Burdens
that exceed 12.5%. In the event that Assignor's Working Interest in any of the
Completed Development Wells is subject to Production Burdens in excess of 12.5%,
such excess burdens will be the sole responsibility of Assignor and paid out of
Assignor's fifty percent (50%) interest in the Subject Development Lands
retained by Assignor hereunder.
"Person" means any natural person, corporation, partnership, trust, estate,
or other entity, organization, or association.
"Producing Well" means the Wellbore of each Gas well more particularly
described in Exhibit A-1, subject to the exceptions, exclusions and reservations
set forth on such Exhibit A-1.
"Post Production Cost Charge" is defined in Section 3.02(c).
"Prime Interest Rate" is defined in Section 5.02(b).
"Prior Reversionary Interest" means any contract, agreement, Farmout
Agreement, lease, deed, conveyance or operating agreement disclosed in writing
to Assignee prior to the execution of the Term Royalty Agreement that exists as
of the Effective Time or that burdens the Subject Interests at the time such
Subject Interests are acquired, that by the terms thereof requires a Person to
convey any part of the Subject Interests to another Person, including any
operating agreements, oil and gas leases, coal leases, and other similar
agreements or instruments affecting the Subject Interests.
"Production Burdens" means, with respect to any Subject Lands, Subject
Interests, or Subject Gas, all royalty interests, overriding royalty interests,
production payments, net profits interests, Prior Reversionary Interests and
other similar interests that constitute a burden on, are measured by, or are
payable out of the production of Gas or the proceeds realized from the sale or
other disposition thereof.
"Reasonably Prudent Operator Standard" means the standard of conduct of a
reasonably prudent oil and gas operator in the Appalachian Basin under the same
or similar circumstances, acting with respect to its own property and
disregarding the existence of the Term Royalty Interest as a burden on such
"Reserved Amounts" means those amounts set aside from Term Royalty Proceeds
by Assignor in accordance with the provisions of Section 5.04 below.
"Sales Price" means, for any month, the sales price received by Assignor
per Mcf for Term Royalty Gas determined in accordance with the following
(a) "sale" refers to any sale or other disposition of Term
Royalty Gas for value, the value of such Gas that is sold or
otherwise disposed of for valuable consideration being (i) with
respect to any Gas not sold under the Existing Gas Contract, the sales
price that Assignor receives for any such Gas sold pursuant to Section
4.01 for any such Gas, or (ii) with respect to any Gas sold under the
Existing Gas Contract, notwithstanding the provisions of the Existing
Gas Contract, the Sales Price for any Gas sold thereunder shall be
deemed to be, for each month during the term of the Existing Gas
Contract, the Platt's Inside FERC Gas Market Report first of the month
posted Columbia Gas Transmission Corporation Appalachia Index price
for Spot Gas Delivered to Pipelines for that month.
(b) amounts of money not paid to Assignor when due by any
purchaser of Term Royalty Gas (for example, Taxes or other
amounts withheld or deducted by any such purchaser) shall not be
included within the Monthly
Distribution Amount until actually received by, or credited to
the account of, Assignor;
(c) advance payments and prepayments for future deliveries
of Term Royalty Gas shall be included within the Monthly
Distribution Amount, without interest, when received by Assignor; and
(d) if a controversy or, in the reasonable opinion of
Assignor's counsel, a possible controversy exists, whether by
reason of any statute, order, decree, rule, regulation, contract, or
otherwise, between Assignor and any purchaser of Term Royalty Gas or
any other Person, about the correct Sales Price of any Term Royalty
Gas, about deductions from the Sales Price, about Assignor's right to
receive the proceeds of any sale of Term Royalty Gas, or about any
other matter relating thereto, then monies withheld by the purchaser
or deposited by such Purchaser or, after receipt, by Assignor with a
Third Party escrow agent as a result of such controversy, shall not be
included within the Monthly Distribution Amount until received by or
returned to Assignor, as applicable. In addition, to the extent that
Assignor receives interest on such payment, Assignor shall pay to
Assignee its proportionate share of such interest.
"Subject Development Lands" means the lands subject to or covered by the
oil and gas leases described in Exhibit A-2, subject to the exceptions,
exclusions and reservations set forth on such Exhibit A-2, as such Exhibit may
be modified pursuant to Section 1.05 and Section 12.01.
"Subject Gas" means with respect to each Well, Gas in and under, and that
may be produced, saved, and sold from all producing horizons from the Wellbore
of such Well, subject to the following:
(a) "Subject Gas" excludes Gas that is:
(i) lost in accordance with the Reasonably
Prudent Operator Standard in the production, gathering,
or marketing of Gas, or that is liquefied and removed from
the gas stream in the normal course of Assignor's operation,
consistent with prior practice, via any method other than
processing as contemplated in Section 4.04;
(ii) subject to the Reasonably Prudent Operator
Standard, used in operations on the Subject Lands,
including drilling and production operations on the Subject
(iii) retained by a Third Person, or Assignor
(pursuant to Section 3.02(c)), for gathering,
transportation, processing, or marketing services related to
the Subject Gas in lieu of or in addition to cash payment
for such services; or
(iv) in excess of the percentage attributable to
Assignor's Net Share of Gas taken by Assignor to
recover costs, or some multiple of
costs, paid or incurred by Assignor under any operating
agreement, unit agreement, or other agreement in connection
with nonconsent operations conducted (or participated in) by
(b) "Subject Gas" includes Gas, not otherwise excluded
above, that is sold or otherwise disposed of for valuable
"Subject Interests" means Assignor's undivided interests in the Subject
Lands as lessee under Gas leases covering and affecting the Subject Lands, as an
owner of the Subject Gas (or the right to extract such Gas), or otherwise, by
virtue of which undivided interests Assignor has the right to conduct
exploration, drilling, development, and Gas production operations on the Subject
Lands, or to cause such operations to be conducted, or to participate in such
operations by paying and bearing all or any part of the costs, risks, and
liabilities of such operations, to drill, test, complete, equip, operate, and
produce Wells to exploit the Gas. Any oil and gas lease or other similar
instrument that covers Gas produced from the Subject Lands shall be considered a
"Gas lease" hereunder, even if it also covers other substances. "Subject
Interests" includes all extensions and renewals of Gas leases covering and
affecting the Subject Lands acquired within six (6) months after the expiration
or termination of any such lease, and all new Gas leases covering the Subject
Lands (or any portion thereof) obtained by Assignor, or any Affiliate thereof
prior to the termination of the Development Agreement. "Subject Interests" do
not include (a) Assignor's rights to substances other than Gas; (b) Assignor's
rights under contracts for the purchase, sale, transportation, storage,
processing, or other handling or disposition of Gas; (c) Assignor's interests
in, or rights with respect to, pipelines, gathering systems, storage facilities,
processing facilities, or other equipment or facilities, other than the Wells;
or (d) subject to Section 1.04(c), any after-acquired, additional, or enlarged
interests in the Wells, Subject Lands or Subject Gas, except those reflected in
Exhibit A-1 or Exhibit A-2 or any Additional Lease as provided for in Section
12.01, or extensions and renewals covered by the preceding sentence. "Subject
Interests" may be owned by Assignor by virtue of grants or reservations in
deeds, Gas leases, or other instruments, or by virtue of operating agreements,
pooling or unitization agreements or orders, or other kinds of instruments,
agreements, or documents, legal or equitable, recorded or unrecorded. The
Subject Interests are subject to the Permitted Encumbrances.
"Subject Lands" means collectively, the Subject Producing Lands and the
Subject Development Lands.
"Subject Producing Lands" means the lands subject to or covered by the oil
and gas leases described in Exhibit A-1 for lands related to the Producing
Wells, subject to the exceptions, exclusions and reservations set forth on such
"Taxes" is defined in Section 3.02(b).
"Term" is defined in Section 1.02.
"Term Royalty Agreement" means that certain Term Royalty Agreement between
Assignor and the Assignee dated as of May 17, 2005.
"Term Royalty Conveyances" means collectively, this Conveyance, the
Kentucky Conveyance and the Pennsylvania Conveyance.
"Term Royalty Gas" means, for any month, that percentage of Gas to which
the Assignee is entitled, calculated in accordance with Section 3.01.
"Term Royalty Interest" means the variable undivided interest in and to the
Subject Interests, to the extent that the Subject Interests pertain to Gas in,
under and that may be produced from the Wellbores of the Wells, sufficient to
cause Assignee to receive a volume of Term Royalty Gas and the revenues
attributable thereto calculated and paid in money in accordance with Section
"Term Royalty Proceeds" means for any month, proceeds received by Assignor
for the account of Assignee, as the Assignee's marketing and payment agent and
representative, from the sale of Term Royalty Gas under this Conveyance less
Chargeable Costs calculated in accordance with Section 3.03.
"Termination Date" is defined in Section 1.02.
"Third Person" means a Person other than Assignor or Assignee, or their
"Total Drilling Commitment" means that number of Completed Development
Wells where the cumulative total of all such Adjusted completed Development Well
Value for all Completed Development Wells drilled or cause to be drilled by
Operator equals 180.
"Total Subject Gas" means the total of all Subject Gas from each of the
applicable Term Royalty Conveyances.
"Transfer" including its syntactical variants, means any assignment, sale,
transfer, conveyance, or disposition of any property; provided, Transfer as used
herein does not include the granting of a security interest in Assignor's
interest in any property including the Subject Interests or Subject Lands so
long as any such security interest shall not affect and is made expressly
subject to the Term Royalty Interest.
"Wellbore" means the wellbore of any Well from the surface of the ground to
the total depth of such Well.
"Wells" means, collectively, the Wellbores of the Producing Wells and the
Completed Development Wells.
"Working Interest" means with respect to any Well, the interest in and to
such Well that is burdened with the obligation to bear and pay costs and
expenses of maintenance, development and operations on or in connection with
CALCULATION OF TERM ROYALTY GAS
SECTION 3.01 CALCULATION. Term Royalty Gas shall be calculated in
accordance with the following formula:
With respect to any Producing Well:
NINETY PERCENT (90%) X (ASSIGNOR'S NET SHARE OF GAS PRODUCED
DURING THAT MONTH).
With respect to any Completed Development Well:
FIFTY PERCENT (50%) X (ASSIGNOR'S NET SHARE OF GAS PRODUCED
DURING THAT MONTH).
It is understood and agreed that with respect to Completed Development Wells,
the Term Royalty Interest will be calculated on the basis that Assignor's
Working Interest in the Subject Development Lands is not burdened by Production
Burdens that exceed 12.5%. In the event that Assignor's Working Interest in any
of the Completed Development Wells is subject to Production Burdens in excess of
12.5%, such excess burdens will be the sole responsibility of Assignor and paid
out of Assignor's fifty percent (50%) interest in the Subject Development Lands
retained by Seller hereunder.
SECTION 3.02 CHARGEABLE COSTS.
(a) DEFINITION. Subject to Section 5.04 hereof, for each month,
"Chargeable Costs" means the sum of (i) Taxes, (ii) the Post Production Cost
Charge and (iii) any Excess Costs. All other costs, including, without
limitation, those costs associated with or paid or incurred in connection with
the drilling, testing, completing, equipping for production, operating and
plugging and abandoning of the Wells shall be borne solely by Assignor and shall
not be included as Chargeable Costs.
(b) TAXES. "Taxes" means general property, ad valorem,
production, severance, sales, gathering, windfall profit, excise, and other
taxes, except income and franchise taxes, assessed or levied (i) on or in
connection with the Subject Interests, the Term Royalty Interest, this
Conveyance, production of Subject Gas, Assignor's Net Share of Gas, or the Term
Royalty Gas (or the proceeds from the sale thereof), or (ii) against Assignor as
owner of the Subject Interests or Assignee as owner of the Term Royalty
(c) POST PRODUCTION COST CHARGE. (i) "Post Production Cost
Charge" means those costs incurred by Assignor (including, internal post
production costs and Third Person post production costs) to gather, transport,
compress, process, treat, dehydrate and market the Subject Gas, including any
costs as may be required to make merchantable and to deliver such Gas to market;
provided, any internal post production costs of Assignor and its Affiliates that
are part of the Post Production Cost Charge shall not exceed the weighted
average post production costs of
all Third Parties in the area where the Subject Gas is being produced for
similar services; and further shall not exceed, on a weighted average basis,
such internal costs as are deducted by Assignor from its payments of royalties
to the owners of the royalty interests in the Subject Gas and provided, further,
with respect to marketing costs, only Non-Affiliate marketing costs shall be
included, and marketing costs of Assignor and its Affiliates with respect to any
Subject Gas will be specifically excluded from the Post Production Cost Charge.
Any costs, fees or expenses that are properly charged or allocated to the Term
Royalty Gas pursuant to another provision of this Conveyance (including, as
provided for in the definition of Subject Gas) shall not be included as part of
the Post Production Cost Charge. (ii) Notwithstanding the provisions of Section
3.02(c)(i) above, for the period from June 10, 2005 until June 10, 2006,
Assignor's internal post production costs relating to Assignor's facilities in
existence as of June 10, 2005 shall not exceed the amounts being charged by
Assignor as of June 10, 2005, and for the period from June 10, 2006 until June
10, 2010 such Post Production Cost Charge may be increased annually by
multiplying such internal post production costs currently in use by the
percentage increase recommended by the All Urban Consumers (CPI-U) - U. S. City
Average CPI, or a comparable index.
SECTION 3.03 CALCULATION OF TERM ROYALTY PROCEEDS. Term Royalty Proceeds
shall be calculated by multiplying the volume of Term Royalty Gas (on an mcf
basis) for the applicable month by the Sales Price less the Chargeable Costs
associated with such Term Royalty Gas for the applicable month.
MARKETING OF TERM ROYALTY GAS
SECTION 4.01 RIGHTS AND DUTIES REGARDING MARKETING OF TERM ROYALTY GAS.
Assignor shall market or shall cause to be marketed Assignor's Net Share of Gas
(including the Term Royalty Gas) in good faith in accordance with the Reasonably
Prudent Operator Standard and Section 4.02(d). Assignor shall use commercially
reasonable efforts in connection with any sale of Assignor's Net Share of Gas
(including the Term Royalty Gas) to (a) obtain the best available market price
in the area for such Gas and (b) to obtain, as soon as reasonably practicable,
full payment for such Gas; provided, however that it shall not be considered a
breach of Assignor's marketing duty or standard of conduct (i) for Assignor to
market such Gas to an Affiliate of Assignor, so long as Assignor receives the
applicable Sales Price therefor, which in any event shall not be less than the
volume weighted average price upon which Assignor pays royalties to the owners
of the royalty interests in the Subject Gas, or (ii) for Assignor or its
Affiliates to receive the Post Production Cost Charge.
SECTION 4.02 ASSIGNEE'S AGENT AND REPRESENTATIVE.
(a) APPOINTMENT. Assignee appoints Assignor as the Assignee's
agent and representative to market and deliver or cause to be marketed and
delivered all Term Royalty Gas and to collect and receive all payments therefrom
under any gas purchase agreement or contract without deduction (except to the
extent Chargeable Costs are deducted for any month). The appointment of Assignor
as the Assignee's agent and representative for such purpose is also a material
item of consideration to the Parties in connection with the execution and
delivery of this Conveyance. Assignee may not remove Assignor from office as the
Assignee's agent and
representative, except for cause upon a material breach by Assignor of its
duties to the Assignee under this Conveyance.
(b) DUTIES AND POWERS. As the Assignee's agent and
representative, Assignor shall receive all payments for the sale of the Term
Royalty Gas and account to Assignee, receive and make all communications with
the purchaser of such Gas, and otherwise act and speak for the Assignee in
connection with the sale of the Term Royalty Gas. Third Persons may rely
conclusively on the authority of Assignor to market the Term Royalty Gas, and
with respect to Third Persons, th