PURCHASE AGREEMENT
Dated as of December 17, 1999,
by and between
TESORO PETROLEUM CORPORATION and
TESORO GAS RESOURCES COMPANY, INC.
as "Seller" and
EEX OPERATING LLC
as "Buyer" SCHEDULES
- ---------
1A HEDGING CONTRACTS
1B PERMITTED ENCUMBRANCES
2.6(a) RETAINED LIABILITIES
4.1(b)(iv) NO CONFLICT - SELLER
4.1(b)(v) CONSENTS AND WAIVERS - SELLER 4.1(g) LITIGATION
4.1(h) LABOR MATTERS 4.1(i) TAXES
4.1(k) ABSENCE OF CERTAIN CHANGES
4.1(m)(iii) PERMITS AND LICENSES
4.1(m)(iv) EXCEPTIONS TO RIGHT TO USE ASSETS
4.1(o) SUSPENSE FUNDS 4.1(p) INSURANCE
4.1(q) CONTRACTS ON PRODUCTION
4.1(s) TAX PARTNERSHIPS
4.1(u) ENVIRONMENTAL CONDITIONS 4.1(v) CONTRACTS 4.1(x) WELLS
4.1(z) PAYOUT BALANCES
9.2 EXCEPTIONS TO PRE-CLOSING OPERATING COVENANTS
9.2(f) COMMITTED EXPENDITURES
9.4 EXCEPTIONS TO PRE-CLOSING FINANCIAL COVENANTS EXHIBITS
- --------
A ALLOCATED VALUES
B LEASES AND RELATED PIPELINES
C SUBSIDIARIES AND PARTNERSHIP BALANCE SHEET
D SETTLEMENT STATEMENT
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT is dated December 17, 1999, but effective as of the
Effective Time, between Tesoro Petroleum Corporation, a Delaware corporation,
and Tesoro Gas Resources Company, Inc., a Delaware corporation, collectively as
"Seller", and EEX Operating LLC, a Delaware limited liability company, as"Buyer". WITNESSETH: -----------
WHEREAS, Tesoro Gas Resources Company, Inc. owns all of the Membership
Interests in Tesoro Grande LLC, a Delaware limited liability company ("Grande");and
WHEREAS, Tesoro Petroleum Corporation, a Delaware corporation, and Tesoro
Gas Resources Company, Inc., a Delaware corporation, collectively as "Seller",
and EEX Operating LLC, a Delaware limited liability company, as "Buyer", and EEX
Corporation, entered into a Stock Purchase Agreement (the "Stock Purchase
Agreement") dated October 8, 1999 providing for the sale by Seller to Buyer of
all shares of capital stock of Tesoro Exploration and Production Company, a
Delaware corporation ("Exploration") and Tesoro Reserves Company, a Delaware
corporation ("Reserves"), together with the partnership interests in Tesoro E&P
Company, L.P., a Delaware limited partnership (the "Partnership"); and
WHEREAS, the Partnership owns certain assets used in the business of the
exploration, production, gathering, transportation and marketing of oil, natural
gas, condensate and associated hydrocarbons; and
WHEREAS, on the date of the Stock Purchase Agreement, Exploration and
Reserves were the two partners in the Partnership, in which Exploration was the
general partner owning a 1% interest and Reserves was the limited partner owning
a 99% interest; and
WHEREAS, the Partnership was converted into a series limited partnership,
with the entire Series B limited partnership interest being transferred to
Grande, insofar as such interest covers the revenues, expenses, profits and
losses from the Properties described in Exhibit B; and
WHEREAS, Section 9.12 of the Stock Purchase Agreement provides for the
Parties to cooperate at no cost or liability to Buyer, to enable Seller at
Seller's election, to transfer the Operating Assets to Buyer in a manner
enabling the transfer to qualify as a part of a like-kind exchange of property
by Seller within the meaning of Section 1031 of the Code; and
WHEREAS, the Stock Purchase Agreement has been amended to provide for such
a like-kind exchange of property, among other purposes, by a First Amendment to
Stock Purchase Agreement dated December 16, 1999 (the "Amendment"); and
WHEREAS, to facilitate such a like-kind exchange transaction, Seller has
arranged to assign its interests in the proceeds of the sale of Grande and its
interest in the Properties to Bank One Exchange Corporation, as a QualifiedIntermediary;
1
WHEREAS, the Parties have agreed to restructure the Transaction set forth
in the Stock Purchase Agreement, to allow the separate sale of Grande and its
interest in the Properties through the Qualified Intermediary; and
WHEREAS, Seller desires to sell to Buyer and Buyer desires to purchase from
Seller all issued and outstanding Membership Interests of Grande, including all
of Grande's rights and interests in the Partnership and the Properties, under
the terms and conditions set forth in this Agreement and the Stock PurchaseAgreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, the parties hereby agree as follows: ARTICLE I. DEFINITIONS -----------
"Accepting Party" shall have the meaning set forth in Section 16.1(e).
"Accounts Receivable" shall have the meaning set forth in Section 13.4.
"Action" means any action, appeal, petition, plea, charge, complaint,
claim, suit, demand, litigation, arbitration, mediation, hearing, inquiry,
investigation or similar event, occurrence, or proceeding.
"Adjustment Assets and Liabilities" shall mean the items set forth in
Section 2.7.
"Affiliate" shall have the same meaning set forth in Rule 12b-2 of the
regulations promulgated under the Securities Exchange Act of 1934, as amended.
"Agreement" shall mean this Purchase Agreement.
"Allocated Value" shall mean the monetary value allocated to each Property
or group of Properties and the Hedging Contracts on Exhibit A.
"Amendment" shall mean the First Amendment to Stock Purchase Agreement
dated December 16, 1999, by and among Tesoro Petroleum Corporation, a Delaware
corporation, Tesoro Gas Resources Company, Inc., a Delaware corporation, and EEX
Operating LLC, a Delaware limited liability company, and EEX Corporation, a
Texas corporation, for the limited purposes set forth therein
"APO" shall mean "after payout", as such payout may be established under
the respective farmout agreements, joint operating agreements, participation
interests and similar agreements affecting each Property, including payouts
providing reversionary rights of parties who have elected not to participate in
an operation under a joint operating agreement. If there are multiple
outstanding payouts affecting any particular well or Property, then the APO
interest shall mean the interests after all applicable payouts have occurred.
If at the Effective Time there are no outstanding payout balances affecting any
particular well or Property, then the listed APO interest in such well or
Property shall reflect the Partnership's WI and NRI at the Effective Time. 2
"Applicable Environmental Laws" means all Applicable Laws in effect
pertaining to (i) pollution, or the protection of the environment, including
those relating to waste materials and/or hazardous substances, (ii) the
protection of Persons or property from actual or potential exposure (or the
effects of exposure) to an actual or potential spill or release of Hazardous
Substances or petroleum or produced brine or (iii) the manufacture, processing,
production, gathering, transportation, use, treatment, storage or disposal of a
Hazardous Substance or petroleum or produced brine.
"Applicable Law" means any statute, law, rule, or regulation or any
judgment, order, writ, injunction, or decree of any Governmental Authority to
which a specified Person, Operating Asset or property is subject.
"Balance Sheets" shall mean the unaudited combined financial balance sheet
of Grande and the Partnership as of June 30, 1999, attached hereto as Exhibit C.
"Books and Records" shall mean all of the following which pertain to the
conduct of the Business: books, records, manuals and other materials, accounting
books and records, continuing property records for property, plant and
equipment, land and lease files, title opinions, suspense records, production
records, any inventories of equipment and property, well files, engineering
files, maps, surveys, electric logs, seismic records, geological and geophysical
files, and all other technical data, division order files, contract files, other
files, computer tapes, disks, other storage media and records, advertising
matter, correspondence, lists of customers and suppliers, maps, photographs,
production data, sales and promotional materials and records, purchasing
materials and records, work and recent salary history for personnel, credit
records, manufacturing and quality control records and procedures, patent and
trademark files and disclosures, litigation files, leases, oil and gas leases,
deeds, easements and other instruments relating to the Business, any copies of
Tax Returns filed by or with respect to Grande or the Partnership, including
copies of all work papers and calculations relating to Grande and the
Partnership in support of such Tax Returns, and any comparable information with
respect to predecessors of Grande or the Partnership to the extent available,
and copies of any other applicable accounting and tax records of the Seller and
the Partnership pertaining to the Business.
"BPO" shall mean "before payout", as such payout may be established under
the respective farmout agreements, joint operating agreements, participation
interests and similar agreements affecting each Property, including payouts
providing reversionary rights of parties who have elected not to participate in
an operation under a joint operating agreement. If at the Effective Time there
is an outstanding payout balance affecting any particular well or Property, the
listed BPO interest in such well or Property shall reflect the Partnership's WI
and NRI at the Effective Time.
"Business" shall mean the Partnership's business of exploring for,
developing, producing, gathering, transporting and marketing natural gas,
condensate and oil.
"Business Day" shall mean any day exclusive of Saturdays, Sundays and
national holidays.
"Buyer Group" shall have the meaning set forth in Section 15.3.
3
"Buyer's Knowledge" shall mean knowledge of Buyer and management employees
of Buyer's ultimate parent, EEX Corporation, with knowledge of Buyer's
activities, including the negotiation of this Agreement.
"Bylaws" shall mean a corporation's bylaws, code of regulations or
equivalent document.
"Charter" shall mean a company's management agreement, articles of
association, articles of incorporation, certificate of incorporation or
equivalent organizational documents.
"Closing" shall have the meaning set forth in Section 12.1.
"Closing Date" shall have the meaning set forth in Section 12.1.
"Closing Settlement Price" shall mean the Settlement Price calculated in
accordance with the best information available to the Seller prior to Closing,
as reflected on the Settlement Statement delivered prior to Closing pursuant to
Article X and Section 13.1(a).
"Code" shall mean the United States Internal Revenue Code of 1986 and any
successor statute thereto, as amended.
"Consent to Assignment" shall mean an existing contractual or legal right
of any third party to consent to the Partnership's assignment of a Property to
Buyer under such terms as are set forth in this Agreement.
"Contracts" shall mean all of the contracts that govern or relate to the
ownership or operation of the Operating Assets (including without limitation,
the wells, facilities and equipment associated therewith and the production
therefrom, acreage contribution agreements, assignments, bidding agreements,
bottom-hole agreements, contribution agreements, drilling contracts, dry-hole
agreements, exploration agreements, development agreements, farm-in and farmout
agreements, gas balancing agreements, joint venture agreements, production,
sales, marketing and/or brokerage contracts, gas processing agreements,
operating agreements, participation agreements, service contracts, storage
contracts, gathering agreements, transportation agreements, treating contracts,
water rights agreements and the unitization, unit operating, communitization and
pooling declarations, agreements and orders that create or govern units). To
the extent that Seller, Grande or the Partnership have rights of indemnification
or warranty rights with respect to any Operating Asset or any part of an
Operating Asset, the same shall be included in the meaning of "Contracts."
"Damages" shall mean any and all claims, actions, causes of action,
demands, assessments, losses, damages, liabilities, judgments, settlements,
penalties, costs, and expenses (including reasonable attorneys' fees and
expenses, expert fees and expenses and court costs), of any nature whatsoever.
"Effective Time" shall mean July 1, 1999, at 12:00 a.m. local time for each
Operating Asset. 4
"Encumbrance" shall mean any interest (including any security interest),
pledge, mortgage, lien, charge, adverse claim or other right of third Persons.
"Environmental Conditions" shall have the meaning set forth in Section 7.3
of the Stock Purchase Agreement.
"Exploration LLC" shall mean Tesoro Exploration and Production LLC, a
Delaware limited liability company.
"Final Settlement Price" shall mean the Settlement Price calculated in
accordance with the best information available to the Parties during the one
hundred twenty (120) day period after Closing, as reflected on the Final
Statement agreed upon pursuant to Article XIII.
"Final Statement" shall mean the final accounting statement to be agreed
upon by the Parties no later than one hundred twenty (120) days after Closing
pursuant to Section 13.1(b).
"Financial Assets and Liabilities" shall mean the assets, liabilities and
other financial items on the Balance Sheets, effective as of 11:59 p.m. on June
30, 1999, (i) as adjusted for revenues, income, expenses and other assets and
liabilities incurred between the Effective Time and the Closing Date and
included within the Adjustment Assets and Liabilities, and (ii) as adjusted for
the Pre-Closing Financial Adjustments and (iii) as otherwise adjusted as
provided herein. The term "Financial Assets" shall not include any assets,
liabilities or other financial items included within the Operating Assets.
"GAAP" shall mean U.S. generally accepted accounting principles, unless
expressly described otherwise.
"Governmental Authority" shall mean any international, national, Federal,
state, municipal or local government, governmental authority, regulatory or
administrative agency, governmental commission, department, board, bureau,
agency or instrumentality, court, tribunal, arbitrator or arbitral body.
"Governmental Order" shall mean any order, writ, rule, judgment,
injunction, decree, stipulation, determination or award entered by or with any
Governmental Authority.
"Grande" shall mean Tesoro Grande LLC, a Delaware limited liability company
"Hazardous Substance" means a substance, chemical, pollutant, waste or
other material (i) that consists, wholly or in part, of a substance that is
regulated as toxic or hazardous to human health or the environment under any
Environmental Law or (ii) that exists in a condition or under circumstances that
constitute a violation of any Environmental Law. "Hazardous Substance" includes
without limitation any "hazardous substance" under the Comprehensive
Environmental Response, Compensation and Liability Act, any "hazardous chemical"
under the Occupational Safety and Health Act, any "hazardous material" under the
Hazardous Materials Transportation Act, any "hazardous chemical substance" under
the Federal Water Pollution Control Act and any "hazardous waste" under the
Resource Conservation and Recovery Act. 5
"Hedging Contracts" shall mean those natural gas derivative pricing
contracts listed on Schedule 1A.
"Income Taxes" shall mean any Taxes, including franchise taxes, which are
based upon or in respect of income.
"Indemnified Party" shall mean any Party or other Person entitled to an
indemnity under Article XV of this Agreement, with respect to the indemnity soowed.
"Indemnifying Party" shall mean a Party owing an indemnity to any other
Party or Person under Article XV of this Agreement, with respect to the
indemnity so owed.
"Lender" shall have the meaning set forth in Section 9.12(d).
"Liabilities" shall mean any and all debts, claims, liabilities and
obligations of any nature whatsoever, whether accrued or fixed, absolute or
contingent, mature or unmatured or determined or indeterminable.
"Material Adverse Effect" shall mean any event with respect to, change in,
or effect on, Grande, the Partnership or the Business which, individually or in
the aggregate, is reasonably likely to have a material adverse effect on the
Business, or the financial results of operations, assets or properties or
financial condition of Grande and the Partnership, taken as a whole, but the
term "Material Adverse Effect" shall not include any change in market conditions
or other conditions affecting the oil and gas exploration and production
industry generally.
"Membership Interests" shall mean shall mean all issued and outstanding
membership interests in Grande.
"NORM" shall have the meaning set forth in Section 7.2.
"NRI" shall mean the decimal net revenue interest in oil and gas production
from a Property.
"Operating Assets" shall mean all property rights and interests of the
Partnership being sold hereunder in the lands and leases described in Exhibit B,
as set forth in Section 2.4.
"Other Taxes" shall mean all Taxes other than Income Taxes.
"Parties" shall mean Buyer and Seller, collectively.
"Partnership" shall mean Tesoro E&P Company, L.P., a Delaware limited partnership.
"Partnership Agreement" means the Agreement of Limited Partnership of the
Partnership, as amended.
"Party" shall mean either Buyer or Seller.
"Permitted Encumbrances" shall include any Encumbrance which is: (i) listed
on Schedule 1B, for which a duly executed release in recordable form will be
delivered to Buyer at 6
or before Closing; (ii) a lien securing amounts claimed for services provided by
operators or other oil field contractors which are not yet due and owing or
which are being contested in good faith, through adequate procedures; (iii) a
statutory lien arising for Taxes not yet delinquent or which are being contested
in good faith, through adequate procedures; (iv) a reservation, exception,
limitation, encumbrance or burden expressly included within a recorded oil and
gas lease constituting part of a Property with respect to which Seller or the
Partnership is not in default at Closing which does not reduce the Partnership's
NRI in such Property below the respective decimal interests set forth in Exhibit
A; (v) any royalty, overriding royalty or other production burden affecting any
Property which does not and will not reduce the Partnership's NRI in such
Property below the respective decimal interests set forth in Exhibit A; (vi) any
joint operating agreement containing terms and conditions reasonable and
customary in the industry (other than a Preferential Right to Purchase that is
exercised prior to Closing or a required Consent to Assignment, or a
reversionary right that is not reflected in the BPO and APO interests on Exhibit
A); (vii) the right of a third party under any equipment rental or lease
contract, oilfield service contract, production sales contract or transportation
contract affecting any Property, which either may be terminated by the parties
thereto without penalty or does not extend for a term of more than sixty days
after the Closing Date; (viii) any other easement, operating right, concurrent
use right or similar encumbrance that does not affect the Partnership's rights
to a Property or reduce the production revenues attributable thereto or increase
the costs associated with ownership or operation of that Property; and (ix) a
severance tax, production tax, occupation tax, ad valorem tax or similar tax of
general application.
"Person" shall include any individual, trustee, firm, corporation,
partnership, limited liability company, Governmental Authority or other entity,
whether acting in an individual, fiduciary or any other capacity.
"Post-Closing Return" shall have the meaning set forth in Section 16.2(c).
"Pre-Closing Financial Adjustments" shall mean those certain financial
accounting adjustments and payments set forth in Section 2.6.
"Pre-Closing Period" shall have the meaning set forth in Section 16.2(c).
"Pre-Closing Return" shall have the meaning set forth in Section 16.2(c).
"Preferential Right to Purchase" shall mean the right of any third party
under an existing contract or agreement allowing that third party to purchase
the Partnership's interest in a Property whenever Seller proposes to transfer
its interests in the Partnership under terms such as are set forth in this
Agreement and the Stock Purchase Agreement.
"Production" shall mean all oil, natural gas, condensate, natural gas
liquids, and other hydrocarbons or products produced from or attributable to theProperties.
"Properties" shall mean, collectively, (i) all valid and existing oil and
gas leaseholds and mineral fee rights, and all rights and interests appurtenant
thereto, which are owned by the Partnership in the lands and leases described on
Exhibit B attached hereto, including without limitation all oil and gas WIs,
NRIs, mineral fee interests, oil, gas and mineral deeds, leases
7
and/or subleases, royalties, overriding royalties, leasehold interests, mineral
servitudes, production payments and net profits interests, fee mineral
interests, surface estates, fee estates, royalty interests, overriding royalty
interests, or other non-working or carried interests, reversionary rights,
farmout and farmin rights, operating rights, pooled or unitized acreage, and all
other rights, privileges and interests in such oil, gas and other minerals (and
the production thereof), and other mineral rights of every nature now owned by
the Partnership in such lands and leases listed on Exhibit B hereto, (ii) all of
the contractual rights to interests described in (i) above and in all units in
which such interests are pooled, communitized or unitized, and in any other oil,
gas and/or mineral leases or assets arising pursuant to the terms of the oil and
gas leases listed on Exhibit B hereto, and any other rights and agreements or
contracts affecting or relating to interests described in (i) above, or to
Production, whether or not listed on Exhibit B, including any tenements,
appurtenances, surface leases, easements, permits, licenses, servitudes,
franchises or rights of way.
"Property" shall mean any individual one of the Properties.
"Property Tax Period" shall have the meaning set forth in Section 13.2(a).
"Property Taxes" shall have the meaning set forth in Section 13.2(a).
"Proposed Settlement" shall have the meaning set forth in Section 16.1(e).
"Purchase Price" shall have the meaning set forth in Section 3.1.
"Qualified Intermediary" shall mean Bank One Exchange Corporation, in its
capacity as a qualified intermediary to implement a like-kind exchange of the
Properties under Section 1031 of the Code.
"Refusing Party" shall have the meaning set forth in Section 16.1(e).
"Reserves LLC" shall mean Tesoro Reserves Company, LLC, a Delaware limited
liability company.
"Seller" shall mean, collectively, Tesoro Petroleum Corporation, a Delaware
corporation, and Tesoro Gas Resources Company, Inc., a Delaware corporation.
"Seller's Knowledge" shall mean actual knowledge of any fact, circumstance
or condition by the officers or management employees (including those with
titles of "Manager", "Vice President" and "President" or those in the internal
legal department of Seller, Grande and the Partnership who provide specific
advice related to the operations of the Business) of Seller, Grande and the
Partnership involved and knowledge of any fact, circumstance or condition which
such officer or management employee would have been aware of with the exercise
of reasonable diligence and inquiry in the course of his or her duties.
"Settlement Price" shall have the meaning set forth in Section 3.2. 8
"Settlement Statement" shall mean the accounting statement calculating the
Settlement Price, to be furnished by Seller to Buyer prior to Closing, pursuant
to Article X and Section 13.1(a).
"Southeast" shall mean Tesoro Southeast LLC, a Delaware limited liability company.
"Stock Purchase Agreement" shall mean the Stock Purchase Agreement dated
October 8, 1999, as amended by the Amendment, by and among Tesoro Petroleum
Corporation, a Delaware corporation, Tesoro Gas Resources Company, Inc., a
Delaware corporation, and EEX Operating LLC, a Delaware limited liability
company, and EEX Corporation, a Texas corporation, for the limited purposes set
forth therein.
"Straddle Period" shall have the meaning set forth in Section 16.1(e).
"Straddle Return" shall have the meaning set forth in Section 16.2(c).
"Subsidiaries" shall mean Exploration LLC, Grande, Southeast and Reserves
LLC, collectively.
"Tax" shall mean any federal, state, local, or foreign income, gross
receipts, license, payroll, parking, employment, excise, severance, stamp,
occupation, premium, windfall profits, environmental (including taxes under
Section 50A of the Code), customs duties, capital stock, franchise, profits,
withholding, social security (or similar), unemployment, disability, real
property, personal property, sales, use, transfer, registration, ad valorem,
value added, alternative or add-on minimum, estimated tax, or other tax of any
kind whatsoever, including any interest, penalty, or addition thereto, whether
disputed or not, including such item for which Liability arises as a transferee
or successor-in-interest.
"Tax Claim" shall have the meaning set forth in Section 16.1(c).
"Tax Return" shall mean any return, declaration, report, claim for refund,
information return or statement relating to Taxes, including any schedules or
attachments thereto, and including any amendment thereof.
"Taxing Authority" shall mean any Governmental Authority responsible for
the imposition or collection of any Tax.
"Tesoro Group" shall have the meaning set forth in Section 4.1(i).
"Tesoro Parent" shall have the meaning set forth in Section 4.1(i).
"Transaction" shall mean the purchase and sale of the Membership Interests
pursuant to this Agreement and the related transactions contemplated herein.
"WI" shall mean a working interest under an oil and gas lease or other
Contract affecting a Property which shall reflect the decimal interest for
participation in the decisions, costs and risks concerning operations. 9
"Working Capital" shall mean, at any time, the difference between (a) the
sum of the amounts on the line items "cash", "accounts receivable",
"inventories" and "prepayment and other" on the Balance Sheet, less (b) the sum
of the amounts on the line items "accounts payable" and "accrued liabilities" on
the Balance Sheet; all as computed in accordance with GAAP and past practice for
Grande and the Partnership except as expressly provided herein, and in a manner
as reflected on the Balance Sheets; provided, however, that the amounts on the
line items "prepayment and other", "accounts payable" and "accrued liabilities"
on the Balance Sheet shall not include the impact of any amounts referred to in
the first proviso in Section 3.2(a)(i); and provided further, that the stated
amount of Working Capital shall be reduced by the amount of inventories that
existed as of the Effective Time.
"Working Capital Accounts" shall mean the line items "cash", "accounts
receivable", "inventories", "prepayment and other", "accounts payable" and
"accrued liabilities" on the Balance Sheet, all as computed in accordance with
GAAP and past practice for Grande and the Partnership, and in a manner as
reflected on the Balance Sheets; provided, however, that the line items
"prepayment and other", "accounts payable" and "accrued liabilities" shall not
include the impact of any items referred to in the first proviso in Section3.2(a)(i).
ARTICLE II.
PURCHASE AND SALE -----------------
2.1 Sale of Membership Interests. Subject to the terms and conditions of ----------------------------
this Agreement, Seller agrees to sell and assign to Buyer, and Buyer agrees to
purchase and pay for, at Closing, all of the Membership Interests.
2.2 Effect of Sale. The sale of the Membership Interests at Closing --------------
shall transfer to Buyer all of Seller's rights in Grande. On the Closing Date,
Grande shall hold certain interests, assets and liabilities, as set forth in
this Article II. Except as otherwise specifically set forth in this Agreement,
the transfer of Seller's rights in Grande shall assign to Buyer all of Seller's
beneficial right, title, interest and obligations in and to such interests,
assets and liabilities held by Grande.
2.3 Partnership. On the Closing Date, Exploration LLC and Grande shall -----------
own the rights and interests in the Partnership, insofar as they pertain to the
Properties. Exploration LLC shall be the general partner of the Partnership and
Grande shall own the entire Series B limited partnership interest in the
Partnership insofar as it pertains to allocable revenues and expenses
attributable to the Properties. The partnership rights and interests of Grande
described in this Section 2.3 shall pass to Buyer as an attribute of the sale of
the Membership Interests pursuant to this Agreement.
2.4 Operating Assets. On the Closing Date, the Partnership shall own the ----------------
Operating Assets, subject to the Permitted Encumbrances, as follows:
(a) Exploration and Production Assets. ---------------------------------
(i) the Properties;
10
(ii) All the interests in oil and gas wells described on Exhibit A,
together with an interest in the production, compression,
treating, dehydration or processing facilities and other real
or tangible personal property appurtenances and fixtures, which
are located on the lands covered by or within the Properties or
are being used by the Partnership in connection with the
operations on the Properties or Production;
(iii) Subject to the license granted under the License Agreement
(with respect to the rights covered thereby), rights and
interests in geological data and records, seismic data, whether
in digital or paper format, well logs, well files, geological
data, records and maps, land and contract files and records,
accounting files, data and records, computer hardware and
software and other materials (whether electronically stored or
otherwise) used or held for use by Seller, Grande or the
Partnership, or any of their direct or indirect parents,
subsidiaries or other Affiliates, regarding ownership of the
Properties or operations and Production which relate to the
Properties, and other files, documents and records which relate
to the Properties;
(iv) Rights, obligations, title and interests in and to permits,
orders, contracts, abstracts of title, leases, deeds,
unitization agreements, pooling agreements, operating
agreements, farmout agreements, participation agreements,
division of interest statements, division orders, participation
agreements, and other agreements and instruments applicable to
the Properties;
(v) All the rights, obligations, title and interests of Seller in
and to all easements, rights of way, certificates, licenses and
permits and all other rights, privileges, benefits and powers
conferred upon the owner and holder of interests in the
Properties, or concerning software used in conjunction with
ownership or operation of the Properties;
(vi) All the rights, title and interests of Seller and the
Partnership in and to the Bob West Field compression facility
and the Bob West Field amine plant;
(vii) Rights, title, obligations and interests in or concerning any
gas imbalances affecting the Properties; and
(viii) All office equipment, computer equipment, light tables,
drafting tables, drafting equipment, office supplies, facsimile
machines, pool cars and any other equipment or furniture not
herein named which is utilized by the Partnership in its day to
day operations.
(b) Leased Assets. To the extent any of the items of office equipment -------------
listed in Section 2.4(a) above are leased and not owned, Seller, Grande and the
Partnership shall use their best efforts to cause such leases to be assigned to
Buyer at Closing. 11
2.5 Financial Assets and Liabilities. On the Closing Date, the --------------------------------
Partnership shall own the Financial Assets and Liabilities. Grande shall be
allocated its share of the Partnership's respective Financial Assets and
Liabilities attributable to ownership and operation of the Properties in
proportion to its ownership of the Partnership's interests in the Properties.
The Financial Assets and Liabilities at Closing of the Partnership and each
partner in the Partnership shall be computed by Seller in accordance with GAAP,
and shall be allocated to the Properties and the partners in the Partnership in
accordance with the Partnership Agreement. The Financial Assets and Liabilities
shall be adjusted from those set forth on the Balance Sheet to reflect certain
Pre-Closing Financial Adjustments and the Adjustment Assets and Liabilities, as
set forth in Sections 2.6 and 2.7.
2.6 Pre-Closing Financial Adjustments. Prior to the Closing Date, Seller ---------------------------------
shall make certain accounting adjustments and payments regarding the assets,
liabilities and equity of the Partnership and Grande, to the effect that Sellers
shall remove all intercompany accounts involving the Partnership, Grande and
their Affiliates, and all intercompany liabilities shall have been removed. At
Closing the only assets and liabilities of the Partnership and Grande shall be
the Operating Assets and the Adjustment Assets and Liabilities.
(a) Certain Accounts. Immediately prior to the Closing, Seller shall ----------------
take, and shall cause Grande and the Partnership to take, all necessary action
deemed appropriate to adjust the Balance Sheets to account for those items that
are to be retained by Seller, as set forth in Schedule 2.6(a). In doing so,
Seller shall take, and shall cause Grande and the Partnership to take, all
necessary actions deemed appropriate so that the Balance Sheets as of the
Closing Date, as adjusted to reflect such actions, will show zero for those line
items listed in Schedule 2.6(a) as financial items that are to be retained bySeller.
(b) Pre-Closing Cash Distribution. Immediately prior to the Closing, -----------------------------
Tesoro Gas Resources Company, Inc. shall cause Grande to pay to it an amount
equal to the arithmetic mean of Seller's and Buyer's good faith estimates of the
consolidated cash and cash equivalents (other than amounts in suspense accounts)
of Grande as of the Closing Date.
(c) Changes in Balance Sheets Due to Continuing Operations. Buyer and ------------------------------------------------------
Seller expressly recognize that the assets and liabilities of Grande and the
Partnership shall be affected by the effects of ongoing ownership and operation
of the Operating Assets between the Effective Time and the Closing Date. These
changes shall be handled exclusively by adjustments to the Settlement Price as
set forth in Section 3.2 and Article XIII.
2.7 Adjustment Assets and Liabilities. At Closing, the Partnership shall ---------------------------------
retain, to the extent permitted by applicable law and regulations, the following
interests:
(a) All rights, obligations, liabilities, title and interests of Seller
and the Partnership in and to all Hedging Contracts in effect at the Effective
Time or thereafter;
(b) All Working Capital Accounts; and 12
(c) All rights to future proceeds, defenses and indemnities owed under any
bonds or insurance policies covering the Operating Assets, the Partnership,
Grande or the Business for policy periods prior to the Closing Date, for losses,
claims or occurrences, as applicable, arising prior to the Closing Date.
ARTICLE III.
PURCHASE PRICE AND SETTLEMENT PRICE -----------------------------------
3.1 Purchase Price. The monetary consideration ("Purchase Price") for --------------
the sale and conveyance of all the Membership Interests to Buyer, effective as
of the date of Closing, is Buyer's payment of $115,304,126 in cash.
3.2 Settlement Price. Pursuant to the provisions as described below, the ----------------
Purchase Price to be paid by Seller will be subject to certain adjustments made
at Closing and within one hundred twenty (120) days thereafter, as set forth in
Article XIII, to determine the Settlement Price amount that will actually be
paid by Buyer. The Settlement Price will be calculated as follows:
(a) Increases. The Purchase Price shall be increased by the following ---------amounts:
(i) An amount equal to the expenses properly accrued in accordance
with GAAP and past practice, and allocated to Grande under the
Partnership Agreement, and as provided for in Section 13.3,
attributable to the period from the Effective Time to the end
of business on the Closing Date; provided, however, that such
expenses shall exclude all (1) depreciation, depletion and
amortization, (2) income and franchise taxes, (3) one-half of
the amount accrued by and the Partnership and allocated to
Grande under the Partnership Agreement, incentive compensation
arrangements for the Retained Employees, as provided in Section
9.9(c), and (4) severance obligations and other amounts accrued
under any employment retention and management stability
agreements, as provided in Section 9.9(b); provided, further,
however that Seller and the Partnership shall be permitted to
accrue no more than $40,000 per month from the close of
business on June 30, 1999 to the Closing Date for corporate
general and administrative expenses;
(ii) An amount equal to the capital expenditures relating to the
Business properly accrued in accordance with GAAP and past
practice and allocated to Grande under the Partnership
Agreement, attributable to the period from the Effective Time
to the end of business on the Closing Date; and
(iii) The amount of change in Working Capital and allocated to Grande
under the Partnership Agreement between the Effective Time and
the end of business on the Closing Date, if the amount of
change is a positive number.
(b) Decreases. The Settlement Price shall be decreased by the following ---------amounts: 13
(i) An amount equal to the revenues properly accrued in accordance
with GAAP and past practice and allocated to Grande under the
Partnership Agreement attributable to the period from the
Effective Time to the end of business on the Closing Date;
(ii) An amount equal to any Settlement Price Adjustment allocated to
Grande under the Partnership Agreement, subject to the
application of Section 13.1;
(iii) The amount, stated as a positive number, of any change in
Working Capital and allocated to Grande under the Partnership
Agreement between the Effective Time and the end of business on
the Closing Date, if and only if, the amount of change is a
negative number.
The Purchase Price as adjusted pursuant to this Section 3.2 is herein called the
"Settlement Price".
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES ------------------------------
4.1 Seller's Representations and Warranties. Effective as of the Closing ---------------------------------------
Date, Seller shall represent and warrant that:
(a) Disclosure. To Seller's Knowledge, the representations and warranties ----------
set forth in this Section 4.1 of this Agreement, the exhibits to this Agreement,
and the information, documents and Balance Sheets provided under the terms of
this Agreement represent full and fair disclosure as of the Closing Date and do
not contain any untrue statement of any material fact or omit any material fact
necessary in order to make the facts stated not misleading.
(b) Authorization and Enforceability. --------------------------------
(i) This Agreement and the Transaction have been duly authorized by
each Seller.
(ii) Neither the execution and delivery of this Agreement by Seller,
nor the consummation by Seller of the transactions contemplated
hereby, will violate or conflict with, or result in the
acceleration of rights, benefits or obligations under, (1) any
provision of any of Seller's, Grande's or the Partnerships'
respective Charters, Bylaws, management agreements, limited
liability company agreements, operating agreements or
partnership agreements, or (2) any applicable statute, law,
regulation or Governmental Order to which Seller or Grande or
the Partnerships or the assets and properties of such entities,
including without limitation the Operating Assets, are bound or subject.
(iii) This Agreement has been duly executed and delivered by each
Seller and constitutes the valid and binding obligation of each
Seller, enforceable against it in accordance with its terms,
except as such enforceability may be limited by bankruptcy,
insolvency or other laws relating to or affecting 14
the enforcement of creditors' rights generally and general
principles of equity (regardless of whether such enforceability
is considered in a proceeding in equity or at law).
(iv) Except as set forth on Schedule 4.1(b)(iv), or as otherwise
specifically provided herein, the execution, delivery, and
performance of this Agreement (assuming that all applicable
consents are received and all applicable Preferential Rights to
Purchase individual Operating Assets are waived) will not (A)
be in violation of any provisions of any regulation or order
that could reasonably be expected to adversely affect the
ownership or operations of the Operating Asset affected thereby
or give rise to damages, penalties or claims of third parties,
or (B) result in the breach of, or constitute a default under,
any indenture or other material agreement or instrument to
which Seller, Grande or the Partnerships are bound, or (C)
cause the recognition of gain for which the Buyer (or, after
the Closing, the Subsidiaries) will be responsible for the tax
thereon or subject any Subsidiary or its assets to any Tax
other than Tax for which Seller is responsible under Article XVI;
(v) Except as set forth on Schedule 4.1(b)(v) or as otherwise
specifically provided herein, no consent, waiver, approval,
order or authorization of, notice to, or registration,
declaration, designation, qualification or filing with, any
Governmental Authority or third Person, domestic or foreign, is
or has been or will be required on the part of Seller in
connection with the execution and delivery of this Agreement or
the consummation by Seller of the transactions contemplated
hereby or thereby, other than (A) consents and Preferential
Rights to Purchase affecting individual Operating Assets; (B)
filings required (1) to form Grande under Delaware law; (C) tax
filings or (D) where the failure to obtain such consents,
waivers, approvals, orders or authorizations or to make or
effect such registrations, declarations, designations,
qualifications or filings (1) is not reasonably likely to
prevent or materially delay consummation of the transactions
contemplated by this Agreement (2) could reasonably be expected
to adversely affect the Business or (3) could give rise to
damages, penalties or claims of third parties.
(c) Organizational Status. ---------------------
(i) Each Seller: (1) is a corporation duly organized, validly
existing and in good standing under the laws of Delaware, (2)
is duly qualified to transact business in each jurisdiction
where the nature and extent of its business and properties
require such qualification, and (3) possesses all requisite
authority and power to conduct its business and execute,
deliver and comply with the terms and provisions of this
Agreement and to perform all of its obligations hereunder.
There are no pending or threatened Actions (or basis therefor)
for the dissolution, liquidation, insolvency, or rehabilitation
of any Seller. 15
(ii) Grande(1) is a limited liability company duly organized,
validly existing and in good standing under the laws of
Delaware, (2) is duly qualified to transact business in each
jurisdiction where the nature and extent of its business and
properties require such qualification, and (3) possesses all
requisite authority and power to conduct its business. There
are no pending or threatened Actions (or basis therefor) for
the dissolution, liquidation, insolvency, or rehabilitation of Grande.
(iii) The Partnership (1) is a limited partnership duly organized,
validly existing and in good standing under the laws of
Delaware, (2) is duly qualified to transact business in each
jurisdiction where the nature and extent of its business and
properties require such qualification, and (3) possesses all
requisite authority and power to conduct its business. There
are no pending or threatened Actions (or basis therefor) for
the dissolution, liquidation, insolvency, or rehabilitation of
the Partnership.
(d) Subsidiary and Other Equity Interests. -------------------------------------
(i) Grande has no subsidiaries and does not own any stock or other
interest in any other corporation, partnership, joint venture,
or other business entity, with the exception of the Partnership.
(ii) The Partnership has no subsidiaries and does not own any stock
or other interest in any other corporation, partnership, joint
venture, or other business entity.
(e) Membership Interests and Partnership Interests. -----------------------------------------------
(i) Grande has authorized membership interests, of which all are
issued and outstanding and owned by Tesoro Gas Resources
Company, Inc. The membership interests have been duly
authorized by Grande, and the membership interests owned by
Tesoro Gas Resources Company, Inc. are validly issued and
outstanding, fully paid and nonassessable. There are no
preemptive rights, subscriptions, options, consents to
assignment or rights of first refusal, convertible securities,
warrants, calls, stock appreciation rights, phantom stock,
profit participation, or other similar rights, or other
agreements or commitments obligating Seller or Grande to issue
or to transfer (or preventing the transfer of) any membership
interests, capital stock or other equity interest in Grande.
(ii) In the Partnership, the entire Series B limited partnership
interest (representing a 100% interest in all of the capital
and assets of Series C) is held by Grande. Exploration LLC is
the general partner of the Partnership (representing a 1%
interest in all of the capital and assets of Series A). Such
interests are duly authorized under the agreement governing the
Partnership, as currently amended, and are valid. There are no
preemptive rights, or authorized or outstanding subscriptions,
options, consents to assignment or rights of first refusal,
convertible securities, warrants, calls, appreciation rights,
phantom interests, profit participation, or other similar
rights, or other agreements or commitments obligating Seller, the 16
Partnership, Reserves LLC, Grande, Southeast or Exploration LLC
to issue or to transfer (or preventing the transfer of) any
equity interest in the Partnership.
(iii) Seller has delivered to correct and complete copies of Grande's
and the Partnership's respective Charter, Bylaws, management
agreement, limited liability company agreement, operating
agreement or partnership agreement, as amended to date, and the
minute books of Grande and the Partnership. Neither Grande nor
the Partnership is in breach of any provision of its Charter,
Bylaws, management agreement, limited liability company
agreement, operating agreement or partnership agreement.
(f) Title to Membership Interests, Partnership Interests and Assets. ---------------------------------------------------------------
(i) The Membership Interests constitute all of the issued and
outstanding membership interests and other equity interests in
Grande. All of the issued and outstanding membership interests
of Grande are owned of record and beneficially with good and
valid title by Tesoro Gas Resources Company, Inc., free and
clear of any Encumbrance. Upon delivery to Buyer of the
certificates representing the Membership Interests in the
manner and with the powers described in Section 12.2(a),
assuming that Buyer pays the consideration contemplated by this
Agreement and has no notice of any adverse claim, good and
valid title to the Membership Interests will have been
transferred to Buyer, free and clear of any Encumbrances.
Neither Tesoro Petroleum Corporation nor Tesoro Gas Resources
Company, Inc. has received any notice of any adverse claim to
their title to the Membership Interests.
(ii) All of the issued and outstanding partnership interests in the
Partnership are owned of record and beneficially with good and
valid title by Reserves LLC, Grande, Southeast, and Exploration
LLC, free and clear of any Encumbrance. Neither Reserves LLC,
Grande, Southeast, nor Exploration LLC has received any notice
of any adverse claim to their respective interests in the Partnership.
(iii) Grande and the Partnership have good title to all of the assets
and properties (except the Operating Assets) which they own or
purport to own, including the Financial Assets and Liabilities
reflected on the Balance Sheets and allocable to the Properties
under the Partnership Agreement, except for properties sold,
consumed or otherwise disposed of in the ordinary course of
business since the date of the Balance Sheets, free and clear
of any Encumbrances other than Permitted Encumbrances.
(g) Litigation. Except as set forth in Schedule 4.1(g), none of Seller, ----------
Grande or the Partnership have been served with and, to Seller's Knowledge,
there are no pending or threatened Actions before any Governmental Authority
against or affecting Seller, Grande, the Partnership or the Operating Assets,
which, if adversely determined, either would be reasonably expected to expose
Grande or the Partnership to a risk of loss after the Effective Time or would
interfere with 17
Seller's ability or right to execute and deliver this Agreement or consummate
the transactions contemplated by this Agreement.
(h) Labor Matters. Except as set forth on Schedule 4.1(h), there are no -------------
contracts, agreements, or other arrangements whereby Grande or the Partnership
are obligated to compensate or provide health and welfare benefit plans or
retirement benefits to any employees or other persons, except for employment
agreements that are terminable at will, without breach or penalty. To Sellers'
Knowledge, Seller, Grande and the Partnership are in compliance with all
federal, state, and local laws respecting employment and employment practices,
terms and conditions of employment, and wages and hours and are not engaged in
any unfair labor practice with regard to those persons employed in connection
with Grande's or the Partnership's operations. No employee of Grande is covered
under any collective bargaining agreement. There is no unfair labor practice
complaint against Grande pending or, to Seller's Knowledge, threatened before
the National Labor Relations Board or any comparable state or local Governmental
Authority. There is no labor strike, slowdown or work stoppage pending or, to
Seller's Knowledge, threatened against or directly affecting Grande, and no
grievance or any Action arising out of or under collective bargaining agreements
is pending or, to Seller's Knowledge, threatened against Grande.
(i) Taxes. -----
(i) Except as set forth in Schedule 4.1(i), Seller, and the
Partnership have timely filed or caused to be timely filed (or
will timely file or cause to be timely filed) with the
appropriate Taxing Authorities, all Tax Returns required to be
filed on or prior to the Closing Date by or with respect to
Sellers and the Partnership (or their respective Operating
Assets) and have timely paid or adequately provided for (or
will timely pay or adequately provide for) all Taxes shown
thereon as owing, except where the failure to file such Tax
Returns or pay any such Taxes would not, or could not
reasonably be expected to, in the aggregate, result in losses
or costs or expenses to Grande's interests or the Partnership
after the Closing Date.
(ii) Sellers are members of an affiliated group of corporations
which file consolidated federal income tax returns ("Tesoro
Group") with Tesoro Petroleum Corporation as the common parent
("Tesoro Parent"). Grande is not required to and does not file
federal income tax returns as a taxpaying entity, and, for
purposes of federal income taxation, Grande is accounted for
and included as a part of Tesoro Gas Resources Company, Inc..
The Tesoro Group has been subject to normal and routine audits,
examinations and adjustments of Taxes from time to time, but
there are no current audits or audits for which written
notification has been received, other than those set forth in
Schedule 4.1(i). There are no written agreements with any
Taxing Authority with respect to or including Grande's
interests which will in any way affect liability for Taxes
attributable to Grande's interests after the Closing Date.
(iii) Except as set forth in Schedule 4.1(i), no assessment,
deficiency or adjustment for any Taxes has been asserted in
writing or, to the knowledge 18
of Sellers, is proposed with respect to any Tax Return of, or
which includes, Grande's interests.
(iv) Except as set forth in Schedule 4.1(i), there is not in force
any extension of time with respect to the due date for the
filing of any Tax Return of or with respect to or which
includes Grande's interests or any waiver or agreement for any
extension of time for the assessment or payment of any Tax of
or with respect to or which includes Grande's interests.
(v) Except for Taxes due with respect to Tax Returns that will be
paid by Tesoro Parent (and not subject to reimbursement by
Grande), the accounting records of Grande will include
immediately prior to the Closing Date adequate provisions for
the payment of all Taxes allocable to Grande's interests for
all taxable periods or portions thereof through the Closing
Date.
(vi) All Tax allocation or sharing agreements or arrangements have
been or will be canceled on or prior to the Closing Date. No
payments are or will become due by Grande after the Closing
Date pursuant to any such agreement or arrangement.
(vii) Except as set forth on Schedule 4.1(i), none of the Sellers or
Grande will, as a result of the transactions contemplated by
this Agreement, be obligated to make a payment after the
Closing Date to an individual that would be a "parachute
payment" as 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.
(viii) Neither Grande nor the Partnership have participated in or
cooperated with an international boycott within the meaning of
Section 999 of the Code.
(ix) Neither Grande nor the Partnership has filed a consent under
Code Section 341(f) concerning collapsible corporations.
(x) Neither Grande nor the Partnership has been a United States
real property holding corporation within the meaning of Code
Section 897(c)(2) during the applicable period specified in
Code Section 897(c)(1)(A)(ii).
(xi) All monies required to be withheld by either Seller, Grande
and the Partnership and paid to Taxing Authorities for all
Taxes have been (i) collected or withheld and either paid to
the respective Taxing Authorities or set aside in accounts for
such purpose or (ii) properly reflected in the Balance Sheets.
(j) Balance Sheets. --------------
(i) The Balance Sheets have been prepared in accordance with GAAP
applied on a basis consistent with prior periods, except as
described in the notes thereto, which will qualify that the
Partnership and Grande have been accounted for as part of a
consolidated financial group with their affiliates and not as
completely separate stand-alone entities. 19
(ii) The Balance Sheets present fairly, in all material respects,
the financial condition of the combined Partnership and Grande
as of June 30, 1999. The books and records of Grande and the
Partnership from which the Balance Sheets were prepared were
complete and accurate in all material respects at the time of
such preparation.
(iii) Grande and the Partnership have no Liabilities, except for
Liabilities (1) reflected in the Balance Sheets, (2) incurred
by Grande or the Partnership in the ordinary course of
business and consistent with past practices since the date of
the Balance Sheets, or (3) which are Permitted Encumbrances,
or (4) for which the Buyer is being indemnified hereunder. As
used in this subparagraph, the term "Liabilities" excludes any
Liabilities not required to be reflected in the Balance Sheets
under GAAP.
(k) Absence of Certain Changes. Except as set forth in Schedule 4.1(k), or --------------------------
as otherwise contemplated by this Agreement (including without limitation
Sections 2.5 and 2.6), or with Buyer's prior written consent, since the close of
business on June 30, 1999:
(i) Neither Grande nor the Partnership has sold, leased,
transferred, or ass
