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TERM ROYALTY CONVEYANCE

Royalty Agreement

TERM ROYALTY CONVEYANCE | Document Parties: ENERGY CORP OF AMERICA | Black Stone Minerals  Company,  L.P. | EASTERN AMERICAN ENERGY CORPORATION You are currently viewing:
This Royalty Agreement involves

ENERGY CORP OF AMERICA | Black Stone Minerals Company, L.P. | EASTERN AMERICAN ENERGY CORPORATION

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Title: TERM ROYALTY CONVEYANCE
Governing Law: West Virginia     Date: 5/19/2005

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                                   EXHIBIT "F"

 

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

                                 (WEST VIRGINIA)

 

                                  INTRODUCTION

 

     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.

 

                                    ARTICLE I

                                   CONVEYANCE

 

      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

Royalty   Interest.

 

     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

 

 

<PAGE>

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

 

 

                                        2

<PAGE>

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

interest   therein.

 

     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.

 

                                   ARTICLE II

                                   DEFINITIONS

 

     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:

 

 

                                        3

<PAGE>

                                  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.

 

 

                                         4

<PAGE>

     "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

restated.

 

     "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,

actually   paid.

 

     "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

Governmental   Authorities.

 

 

                                         5

<PAGE>

     "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

     Appalachian Basin;

 

          (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

 

 

                                        6

<PAGE>

     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

     Legal   Requirements;

 

          (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.

 

 

                                        7

<PAGE>

     "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

property.

 

     "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

provisions:

 

               (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

 

 

                                        8

<PAGE>

          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

                    Development Lands);

 

                             (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

 

 

                                        9

<PAGE>

                    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

                    Assignor.

 

                    (b)      "Subject   Gas"   includes Gas, not otherwise excluded

               above,   that   is   sold   or   otherwise   disposed   of   for valuable

               consideration.

 

     "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

Exhibit   A-1.

------------

 

     "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.

 

 

                                       10

<PAGE>

     "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

3.01.

 

     "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

      -------------

respective   Affiliates.

 

     "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

such   Well.

 

 

                                        11

<PAGE>

                                   ARTICLE III

                         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

Interest.

 

          (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


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