Initial Public Offering (IPO): Pre-Effective Amendment to Registration Statement (General Form) — Form S-1
Filing Table of Contents
Document/Exhibit Description Pages Size
1: S-1/A Amendment No. 2 to Form S-1 173 767K
2: EX-3.1 Cross Timbers Restated Certificate of 19 74K
Incorporation
3: EX-5.1 Opinion of Kelly, Hart & Hallman, P.C. 2 12K
4: EX-10.1.1 Restated Net Overriding Royalty Conveyance-Kansas 30 109K
5: EX-10.2.1 Restated Net Overriding Royalty 30 109K
Conveyance-Oklahoma
6: EX-10.3.1 Restated Net Overriding Royalty Conveyance-Wyoming 30 108K
7: EX-10.4 Revolving Credit Agreement 10 34K
8: EX-12.1 Computation of Ratio of Earnings to Fixed Charges 1 8K
9: EX-21.1 Subsidiaries of Cross Timbers Oil Company 1 6K
10: EX-23.1 Consent of Arthur Andersen 1 7K
11: EX-23.5 Consent of Miller and Lents 1 8K
12: EX-27.2 Financial Data Schedule - Cross Timbers 2 8K
EX-10.1.1 — Restated Net Overriding Royalty Conveyance-Kansas
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EXHIBIT 10.1.1
NET OVERRIDING ROYALTY CONVEYANCE
Hugoton Royalty Trust
STATE OF KANSAS (S)
(S)
COUNTIES OF FINNEY, (S) KNOW ALL MEN BY THESE PRESENTS:
GRANT, HASKELL, KEARNY, (S)
MEADE, MORTON, SEWARD, (S)
AND STEVENS (S)
THAT CROSS TIMBERS OIL COMPANY, a corporation formed under the laws of the
State of Delaware ("Assignor"), for and in consideration of the sum of Ten
Dollars ($10.00) and other good and valuable consideration to Assignor paid by
NATIONSBANK, N.A., a bank organized under the laws of the United States, acting
not in its individual corporate capacity but solely as trustee under that
certain Trust Indenture establishing the Hugoton Royalty Trust dated as of
December 1, 1998 ("Assignee"), the receipt and sufficiency of which are hereby
acknowledged, has bargained, sold, granted, conveyed, transferred, assigned, set
over and delivered, and by these presents does bargain, sell, grant, convey,
transfer, assign, set over and deliver unto Assignee a net overriding royalty
interest ("the Royalty Interest") in and to the Subject Hydrocarbons in and
under, and if, as and when produced, saved and sold from, the Subject Lands
during the term of the Subject Interests on and after the Effective Date equal
to eighty percent (80%) of the Net Proceeds attributable to the Subject
Interests, as each of the above capitalized words is defined in Article I hereof
and all as more fully provided herein.
TO HAVE AND TO HOLD the Royalty Interest, together with all and singular
the rights and appurtenances thereto in anywise belonging, unto Assignee, its
successors and assigns, subject, however, to the terms and provisions of this
Conveyance; and Assignor does by these presents bind and obligate itself, its
successors and assigns, to WARRANT and FOREVER defend all and singular the
Royalty Interest unto the said Assignee, its successors and assigns, against
every person whomsoever lawfully claiming or to claim the same or any part
thereof by, through or under Assignor, but not otherwise.
ARTICLE I
DEFINITIONS
As used herein, the following words, terms or phrases have the following
meanings:
SECTION 1.01. "Affiliate" means, as to the party specified, any Person
controlling, controlled by or under common control with such party, with the
concept of control in such context meaning the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of another, whether through the ownership of voting securities, by
contract or otherwise. The Trust shall not be deemed an Affiliate of Assignor.
SECTION 1.02. "Assignor" means the Assignor named herein while Assignor
owns all or any part of or interest in the Subject Interests and any other
Person or Persons (excluding Assignee) who hereafter may acquire all or any part
of or interest in the Subject Interests.
SECTION 1.03. "Assignee" means the Assignee named herein (and any successor
Trustee under the Trust Indenture) while it owns all or any part of or interest
in the Royalty Interest and any other Person or Persons who may acquire legal
title to all or any part of or interest in the Royalty Interest.
SECTION 1.04. "Computation Period" means (i) initially, the period
commencing on the Effective Date and ending on February 28, 1999, and (ii) each
calendar month thereafter.
SECTION 1.05. "Conveyance" means this Net Overriding Royalty Conveyance.
SECTION 1.06. "Effective Date" means 7:00 o'clock A.M., local time in
effect at the location of each Subject Interest, on December 1, 1998.
SECTION 1.07. "Excess Production Costs" means, for any Computation Period,
an amount equal to the excess, if any, of Production Costs for such Computation
Period over Gross Proceeds for such Computation Period.
SECTION 1.08. "Existing Sales Contracts" means all contracts and
agreements in effect as of the Effective Date between or among Assignor and any
Affiliate of Assignor, or between or among any Affiliates of Assignor, for the
Sale, Processing, treatment, compression, gathering or transportation of Subject
Hydrocarbons.
SECTION 1.09. "Gross Proceeds" means, for any Computation Period other than
during the period from the Effective Date through January 31, 2000, and subject
to Section 2.01 (i) during the term of the Existing Sales Contracts, the
proceeds received by Assignor under the Existing Sales Contracts attributable to
the Sale of Subject Hydrocarbons produced after the Effective Date and Sold
during such Computation Period by Assignor after the Effective Date, and (ii) as
to Subject Hydrocarbons produced after the Effective Date and Sold by Assignor
during such Computation Period after the Effective Date other than under the
Existing Sales Contracts (A) if Sold under a Sales Contract with a Non-Affiliate
of Assignor, the proceeds received by Assignor under such Sales Contract, or (B)
if Sold under a Sales Contract with an Affiliate of Assignor, the proceeds
received by Assignor under such Sales Contract but in no event less than 98% of
the proceeds received by such Affiliate upon the resale of such Subject
Hydrocarbons to a Non-Affiliate of Assignor, and (iii) the proceeds received by
Assignor in respect of underproduced gas imbalances attributable to the Subject
Interests as of the Effective Date. "Gross Proceeds" means, for any Computation
Period included in the period from the Effective Date through January 31, 2000,
the sum of (i) for all Subject Hydrocarbons other than gas and natural gas
liquids, if any, extracted from gas by Processing, the Gross Proceeds thereof,
as defined above, and (ii) for that portion of the Subject Hydrocarbons that is
gas and natural gas liquids, if any, extracted from gas by Processing, the
greater of (A) an imputed amount computed as if all gas for which proceeds are
received attributed to the Subject Interests during the period relevant to such
Computation Period was sold for a price of $2.00 per thousand cubic feet at the
wellhead, and (B) the Gross Proceeds of the Sale thereof computed
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on the basis provided for Computation Periods other than during the period from
the Effective Date through January 31, 2000; provided, however, that such
computation under clause (B) above of this sentence shall be modified as needed
to yield the weighted average sales price of all (gas and natural gas liquids,
if any, extracted from gas by Processing) Sold that is included within Subject
Hydrocarbons under all conveyances from Assignor to the Trust, not limited to
this Conveyance. For purposes hereof, the "weighted average sales price of all
gas" shall be determined for any Computation Period by dividing (A) the Gross
Proceeds of the Sale of gas and natural gas liquids, if any, extracted from gas
by Processing for such Computation Period (determined as provided above for all
Computation Periods other than during the period from the Effective Date through
January 31, 2000) attributable to any Subject Interests in which the Trust has a
Royalty Interest ( and including Royalty Interests conveyed to the trust by
Assignor under conveyances other than this Conveyance) by (B) the volume of such
gas (in thousand cubic feet) attributable to such Subject Interests for such
Computation Period. In all instances, the definition of "Gross Proceeds" shall
be subject to the following:
(a) There shall be excluded from Gross Proceeds all Property Taxes
that are deducted or excluded from proceeds of Sale received by Assignor
and, for purposes of the calculation of Gross Proceeds under clause (ii)(A)
of the second sentence of this Section 1.09, there shall also be excluded
the amount of any additional Property Taxes that would have been paid by
Assignor or withheld from Assignor if the imputed Sale price set forth
therein had been the actual Sale price.
(b) There shall be excluded any amount for Subject Hydrocarbons
attributable to nonconsent operations conducted with respect to the Subject
Interests (or any portion thereof) as to which Assignor shall be a
nonconsenting party and which is dedicated to the recoupment or
reimbursement of costs and expenses of the consenting party or parties by
the terms of the relevant operating agreement, unit agreement, contract for
development or other instrument providing for such nonconsent operations.
Assignor agrees that its election not to participate in such operations
shall be made in conformity with the provisions of Section 6.01 of this
Conveyance, but third persons shall not be under any duty to determine that
such election so conformed.
(c) There shall be excluded any amount which Assignor shall receive as
any of the following: consideration for transfer or sale of any of the
Subject Interests (subject to the Royalty Interest) or equipment or other
personal property or fixtures on the Subject Lands; payments for gas not
taken, when such payments are made (but to the extent such payments are
allocated to gas taken in the future such payments shall be included
without interest in Gross Proceeds when such gas is taken); damages arising
from any cause other than drainage or reservoir injury; rental for
reservoir use; payments made to Assignor in connection with the drilling of
any well on any of the Subject Lands or lands in the vicinity thereof (such
exclusion including dry and bottom hole payments, provided that if such
well is drilled on the Subject Lands and Assignor incurs Production Costs
in connection therewith such payments shall reduce Production Costs) or in
connection with any adjustment of any well and leasehold equipment upon
unitization of any of the Subject Interests; provided there shall be
included in Gross Proceeds advance or prepaid payments for future
production received by Assignor to the extent not subject to repayment in
the event of insufficient subsequent
3
production (and to the extent so subject to repayment shall be included
without interest in Gross Proceeds when the Subject Hydrocarbons on which
such payment was so advanced or prepaid are actually produced) and payments
made to Assignor in connection with the deferring of drilling of any well
on any of the Subject Lands (including payments from an operator in the
vicinity for refraining from drilling an offset well).
(d) There shall be excluded any amount for Subject Hydrocarbons lost
in the production or marketing thereof or used by Assignor in conformity
with ordinary or prudent practices for drilling, production and plant
operations (including gas injection, secondary recovery, pressure
maintenance, repressuring, cycling operations, plant fuel or shrinkage)
conducted for the purpose of drilling for, producing or Processing Subject
Hydrocarbons or for operations on any unit or plant to which the Subject
Interests are committed, but only so long as such Subject Hydrocarbons are
so used.
(e) Amounts received as a loan by Assignor from a purchaser of Subject
Hydrocarbons, whether with or without interest, shall not be considered to
be derived from the sale of Subject Hydrocarbons.
(f) If a controversy or possible controversy exists (whether by reason
of any statute, order, decree, rule, regulation, contract or otherwise)
between Assignor and any purchaser as to the correct sales price of any
Subject Hydrocarbons or, for any other reason, as to Assignor's right to
receive or collect the proceeds of sale of any Subject Hydrocarbons, then
(i) amounts withheld by the purchaser or deposited by it with an
escrow agent shall not be considered to be received by Assignor until
actually collected by Assignor, but the amounts received by Assignor
shall include any interest, penalty or other amount paid to Assignor
in respect thereof;
(ii) amounts received by Assignor and promptly deposited by it
with an escrow agent shall not be considered to have been received by
Assignor, but all amounts thereafter paid to Assignor by such escrow
agent shall be considered to be amounts received from the Sale of
Subject Hydrocarbons; and
(iii) amounts received by Assignor and not deposited with an
escrow agent shall be considered to be received for purposes of this
Section 1.09.
SECTION 1.10. "Hydrocarbons" means oil, gas (which term includes coal bed
gas, coal seam gas and methane) and all other minerals produced in association
with oil or gas (including, but not limited to, helium, sulphur and carbon
dioxide), but excluding all other minerals, whether similar or dissimilar.
SECTION 1.11. "Monthly Record Date" for each month means the close of
business on the last day of such month which is not a Saturday, Sunday or other
day on which national banking institutions in the City of Fort Worth, Texas, are
closed as authorized or required by law, unless Assignee determines that a
different date is required to comply with applicable law or the rules of
4
a securities exchange or quotation system pursuant to the terms of the Trust
Indenture, in which event it means such different date.
SECTION 1.12. "Net Proceeds" means, for any Computation Period, the excess
of Gross Proceeds for such Computation Period over Production Costs for such
Computation Period.
SECTION 1.13. "Non-Affiliate" means, as to the party specified, any Person
who is not an Affiliate of such party.
SECTION 1.14. "Person" means any individual, corporation, partnership,
limited liability company, trust, estate or other entity, organization or
association.
SECTION 1.15. "Prime Interest Rate" means the variable rate of interest
most recently announced by NationsBank, N.A. as its "prime rate."
SECTION 1.16. "Process" or "Processing" means to extract or otherwise
recover natural gas liquids from natural gas included in the Subject
Hydrocarbons through the processes of absorption, condensation, adsorption,
cryogenic or other methods in a manner that does not constitute Separation.
SECTION 1.17. "Processing Costs" means the costs to Assignor or any
Affiliate of Assignor to Process Subject Hydrocarbons before the Sale thereof,
which costs for purposes hereof shall consist of the sum of (a) any such
Processing charges paid to Non-Affiliates, (b) the charges by Affiliates of
Assignor under Existing Sales Contracts, and (c) the charges by Affiliates of
Assignor other than under Existing Sales Contracts so long as such charges do
not materially exceed charges prevailing in the area for similar services at the
time of contracting for such charges.
If Assignor (or its Affiliates) receives a share of the production of
others or of plant products therefrom (or proceeds of sale thereof) for
Processing such production of others, such share shall not be included in
Subject Hydrocarbons (or Gross Proceeds). If Assignor (or its Affiliates) does
not bear any Processing Costs but the owners or operators of a plant receive a
share of the Subject Hydrocarbons (or proceeds of sale thereof) for Processing
them, such share (or proceeds) shall be excluded from the Subject Hydrocarbons
(and Gross Proceeds).
SECTION 1.18. "Production Costs" means, for any Computation Period, to the
extent not excluded for purposes of calculating Gross Proceeds, whether capital
or non-capital in nature,
(a) the sum of
(i) all amounts paid by Assignor or any Affiliate of Assignor as
any of the following: royalty, overriding royalty or other presently
existing burden against production or the proceeds of Sale of
production attributable to the Subject Interests; delay rental; shut-
in gas well royalty or payment; minimum royalty; payments to lessors
or others in the area in connection with the drilling or deferring of
drilling of any well on any of the Subject Lands or lands in the
vicinity thereof (including dry and bottom hole payments and payments
made to others for refraining from drilling
5
an offset well) or in connection with any adjustment of any well and
leasehold equipment upon unitization of any of the Subject Interests;
and rent and other consideration paid for use of or damage to the
surface;
(ii) the Property Tax Accrual;
(iii) the overhead costs paid by Assignor or any Affiliate of
Assignor under any joint operating agreement applicable to any of the
Subject Interests to which Assignor and one or more Non-Affiliates of
Assignor are parties and where Assignor or any Affiliate of Assignor
is not the operator of such Subject Interest;
(iv) the overhead rate provided for in any joint operating
agreement applicable to any of the Subject Interests where Assignor or
any Affiliate of Assignor is the operator of such Subject Interests,
less the portion, if any, of the overhead rate due from Non-Affiliates
of Assignor;
(v) with respect to any Subject Interests operated by Assignor
or any of its Affiliates and not subject to a joint operating
agreement, an overhead fee as shown on Schedule B attached hereto and
subject to adjustment as provided in Schedule B attached hereto;
(vi) all other costs, expenses and liabilities (including
Processing Costs) paid or incurred by Assignor or any Affiliate of
Assignor for investigating, exploring, prospecting, drilling and
mining for, operating and producing Subject Hydrocarbons and sale and
marketing thereof, including without implied limitation: costs for
equipping, plugging back, reworking, completing, recompleting and
plugging and abandoning of any well on the Subject Lands and of making
the Subject Hydrocarbons ready or available for market; costs for
construction and operation of gathering lines, tanks, transmission
lines, meters and other production and delivery facilities; costs,
whether paid in cash or by a share of Subject Hydrocarbons, of
transporting, compressing, dehydrating, separating, treating, storing
and marketing the Subject Hydrocarbons and disposing of extraneous
substances produced in association with Subject Hydrocarbons (provided
that such costs, if paid to or incurred by an Affiliate of Assignor
other than pursuant to an Existing Sales Contract, shall not
materially exceed charges prevailing in the area for similar services
at the time of contracting for such charges); costs for secondary
recovery, pressure maintenance, repressuring, cycling and other
operations conducted for the purpose of enhancing production; costs or
expenses (whether paid in cash or by delivery of gas) incurred in
resolving overproduced gas imbalances attributable to the Subject
Interests as of the Effective Date and thereafter; and costs for
litigation concerning title to or operation of the Subject Interests
and any other acts or omissions of Assignor consistent herewith or
brought by Assignor to protect the Subject Interests; and costs for
litigation or regulatory proceedings concerning title to or operation
of the Subject Interests and any other acts or omissions of Assignor
consistent herewith or brought by Assignor to protect the Subject
Interests or to
6
protect or enforce any rights, contractual or otherwise, of Assignor
to produce or market Subject Hydrocarbons therefrom;
(vii) Excess Production Costs for the preceding Computation
Period (including any remaining Excess Production Costs carried
forward from any preceding Computation Period);
(viii) interest on the amount of Excess Production Costs at the
beginning of any Computation Period, calculated from the first day to
the last day of the Computation Period, at the Prime Interest Rate in
effect at the beginning of such Computation Period;
(ix) any amounts paid by Assignor or any Affiliate of Assignor
whether as refund, interest or penalty, to a purchaser or any
governmental agency or other Person because the amount initially
received by Assignor (or Affiliate of Assignor) as sales price for
Sales after the Effective Date was more or allegedly more than
permitted by the terms of any applicable contract, statute,
regulation, order, decree or other obligation; provided such amounts
(in the case of a refund), or the amounts with respect to which the
interest or penalty was paid, were previously included in Gross
Proceeds;
(x) any other amounts paid by Assignor or any Affiliate of
Assignor with respect to ownership or operation of the Subject
Interests after the Effective Date or Sales of production therefrom
after the Effective Date, whether as refund, fine, interest or
penalty, pursuant to litigation or settlement of threatened litigation
or order of governmental agency, provided that Assignor has not
breached Section 6.01 hereof;
(xi) all consideration hereafter paid and costs and expenses
hereafter incurred by Assignor or any Affiliate of Assignor for any
renewals or extensions of leases or other rights acquired after the
Effective Date which are included in the definition herein of Subject
Interests; and
(xii) any accrual or reserve which Assignor or any Affiliate of
Assignor shall have the right, at its election, to charge to
Production Costs for operations (other than day-to-day operations)
budgeted under an operating agreement or approved under an
authorization for expenditures ("AFE"), which accrual or reserve may
be based on the reasonably expected time of performing such operation
or on an estimated percentage of completion of the operation or on any
other reasonable method, and which accrual is in lieu of charging the
cost of such operation when paid for by Assignor (or Affiliate of
Assignor) but which shall be adjusted if and to the extent actual
costs differ from such accrual or reserve;
(b) but excluding
7
(i) costs which would otherwise be treated as Production Costs
(but which shall not be so treated for purposes hereof until the
following amounts have been fully credited against such costs) equal
to amounts reimbursed or credited to Assignor by insurance from damage
to property, by sales of property or transfers of property off the
leases included in the Subject Interests or by proceeds from
unitization or other disposition of property; and
(ii) except for resolution of gas imbalances which are included
in Section 1.18(a)(vi) above, any amounts which would otherwise be
Production Costs but which are attributable to periods before the
Effective Date; and
(iii) costs that otherwise would be treated as Production Costs
but which have already been excluded or deducted from Gross Proceeds
under Section 1.09; and
(iv) costs incurred by any Affiliate of Assignor for which such
Affiliate has received a fee, reimbursement or other payment from
Assignor, where such payment by Assignor constitutes a Production
Cost.
SECTION 1.19. "Property Taxes" means the sum of all general property (ad
valorem), production, severance, sales, gathering and excise taxes and other
taxes (whether state, federal or otherwise), except income taxes, assessed or
levied on or in connection with the Subject Interests, the Royalty Interest or
the production therefrom or equipment on the Subject Lands, or against Assignor
as owner of the Subject Interests or Assignee as owner of the Royalty Interest.
SECTION 1.20. "Property Tax Accrual" means, for any Computation Period, an
amount that may be set aside by Assignor as an accrual to be applied against
Property Taxes other than those that are deducted or excluded from Gross
Proceeds pursuant to Section 1.09(a) above, which accruals shall be adjusted to
the extent actual Property Taxes differ.
SECTION 1.21. "Sale" and "Sold" mean all forms of dispositions of Subject
Hydrocarbons for value, including exchanges and other dispositions for value.
SECTION 1.22. "Sales Contracts" means all contracts and agreements for the
sale of Subject Hydrocarbons.
SECTION 1.23. "Separation" means liquid separation operations in the
vicinity of the well using a conventional mechanical liquid gas separator but
excluding operations involving heat exchange, adiabatic cooling, absorption,
adsorption or refrigeration principles.
SECTION 1.24. "Subject Hydrocarbons" means all Hydrocarbons in and under,
and which may be produced, saved and sold from, and which shall accrue and be
attributable to, the Subject Interests on and after the Effective Date,
including plant products attributable thereto from Processing gas or casinghead
gas included in the Subject Hydrocarbons before sale thereof (but not including
products derived from processing oil).
8
SECTION 1.25. "Subject Interests" means, subject to the exclusions stated
below, each kind and character of right, title, claim or interest which Assignor
has on the Effective Date in or under each oil, gas or mineral lease,
unitization or pooling agreement (and the units created thereby), royalty
interests, overriding royalty interests, fee mineral interests and net profits
interests and any other agreements, conveyances, assignments or instruments
which are described or referred to in Schedule A, and all the right, title,
claim or interest which Assignor has on the Effective Date in and to the Subject
Lands, whether such right, title, claim or interest be under and by virtue of a
lease, a unitization or pooling agreement or order, an operating agreement, a
division order, a transfer order or any other type of agreement, conveyance,
assignment or instrument or under any other type of claim or title, legal or
equitable, recorded or unrecorded, even though Assignor's interests be
incorrectly or incompletely described in, or a description thereof be omitted
from, Schedule A, all as the same shall be enlarged by the discharge of any
payments out of production or by the removal of any charges or encumbrances to
which any of the same are subject and any and all renewals and extensions of any
of the same, but subject to all burdens to which Assignor's such right, title,
claim or interest is subject (while same remains so subject), limited, however,
if Assignor's interest in any Subject Interest should terminate at any time, to
the period to which Assignor's interest in such Subject Interest is limited.
There shall be excluded from the term "Subject Interests" any interest hereafter
acquired by Assignor in and to any of the Subject Lands, except any interest
acquired pursuant to existing agreements for no new consideration and renewals
or extensions of existing leases and other such agreements. For purposes of
this Conveyance "renewals or extensions" of any lease or other such agreement
shall be limited to renewals or extensions of an existing lease or other such
agreement obtained by the present owner thereof (or such owner's successors in
interest) while such lease is in force or within six months after such lease or
other such agreement terminates. Assignor shall be under no duty to seek
renewals or extensions of any lease or other such agreement.
SECTION 1.26. "Subject Lands" means the lands which are described in and
which are subject to the oil, gas or mineral leases, unitization or pooling
agreements or orders, operating agreements, division orders, transfer orders or
other type of agreement, conveyance, assignment or instrument described in
Schedule A attached hereto, provided that, where the description in Schedule A
excepts land or refers to an instrument insofar only as it covers certain land
or certain depths in certain land, no interest in such excepted land or depths
or in land other that to which such reference is limited shall be included in
the terms "Subject Lands" or "Subject Interests".
SECTION 1.27. "Trust" means the Hugoton Royalty Trust established by the
Trust Indenture.
SECTION 1.28. "Trust Indenture" means the Royalty Trust Indenture by and
between Cross Timbers Oil Company and NationsBank, N.A. dated as of December 1,
1998, establishing the Hugoton Royalty Trust, an express Texas Trust under the
Texas Trust Code.
ARTICLE II
MARKETING OF SUBJECT HYDROCARBONS
SECTION 2.01. Sales Contracts. Assignor, to the extent it has the right to
do so, shall market or cause to be marketed the Subject Hydrocarbons and
Assignee shall have no authority to
9
market the Subject Hydrocarbons or to take in-kind any Subject Hydrocarbons. For
such purpose, Sales of Subject Hydrocarbons may continue to be made pursuant to
Existing Sales Contracts. Assignor may amend such Existing Sales Contracts and
may enter into one or more Sales Contracts in the future at the prices and on
the terms Assignor shall deem proper in Assignor's sole and absolute discretion,
which may include sales to Affiliates of Assignor. Further, Assignor may commit
any of the Subject Interests (including the Royalty Interest attributable
thereto) to one or more agreements for Processing pursuant to which, by way of
example and not by way of limitation, the plant owner or operator (which may be
an Affiliate of Assignor) receives a portion of the Subject Hydrocarbons or
plant products derived therefrom or proceeds of the Sale thereof as a fee for
Processing. Except as provided otherwise in Section 1.09 for the period from the
Effective date through January 31, 2000, Gross Proceeds of Subject Hydrocarbons
shall be determined on the basis of amounts actually received by Assignor (and
not, except as provided in Section 1.09, proceeds received by any of Assignor's
Affiliates) from Sales under Sales Contracts regardless of whether at the time
of production or Sale market value should be different from proceeds of Sale. In
no event shall Gross Proceeds or Production Costs include any revenues,
expenses, gains or losses resulting from option transactions or other futures or
hedging transactions (other than forward Sales of the Subject Hydrocarbons)
which, if engaged in by Assignor or any of its Affiliates in respect of Subject
Hydrocarbons, shall be solely for the account of Assignor or such Affiliate.
SECTION 2.02. Delivery of Subject Hydrocarbons. All Subject Hydrocarbons
Sold by Assignor, whether pursuant to Sales Contracts or otherwise, shall be
delivered, by Assignor to the purchasers thereof, into the pipelines to which
the wells producing such Subject Hydrocarbons may be connected or to such other
point of purchase as is reasonably required in the marketing of such Subject
Hydrocarbons.
SECTION 2.03. Reliance by Third Party. As to any party, the acts of
Assignor shall be binding on Assignee. It shall not be necessary for Assignee to
join with Assignor in any division or transfer order, lease extension or Sales
Contract, and proceeds of Sale of the Subject Hydrocarbons shall be paid by the
purchasers thereof (or others disbursing proceeds) directly to Assignor without
necessity of joinder by or consent of Assignee.
ARTICLE III
PAYMENTS
SECTION 3.01. Payment. On or before each Monthly Record Date, beginning
with the Monthly Record Date for March, 1999, Assignor shall pay to Assignee as
an overriding royalty hereunder an amount equal to eighty percent (80%) of the
Net Proceeds for the preceding Computation Period. All payments made to
Assignee on account of the Royalty Interest shall be made entirely and
exclusively out of sale proceeds attributable to the production of Hydrocarbons
from, or attributed to, the Subject Interests after the Effective Time.
Accordingly, the amount of any Net Proceeds in respect of a Computation Period
which cannot be paid out of the sale proceeds of production of Hydrocarbons
from, or attributed to, the Subject Interests shall be carried over and included
in Net Proceeds in the next Computation Period; provided, however, such amount
shall only be payable from the Hydrocarbons produced from or attributable to the
Subject Interests and the sale proceeds thereof, if any.
10
SECTION 3.02. Interest on Past Due Payments. Except as otherwise provided
in Section 9.05 hereof, any amount not paid by Assignor to Assignee when due
shall bear, and Assignor will pay, interest determined at the end of each month,
from such due date until such amount is paid, at the rate of the lesser of (a)
the Prime Interest Rate plus 4% or (b) the maximum lawful contract rate of
interest permitted by the applicable usury laws, now or hereafter enacted, which
interest rate (the "Maximum Rate") shall change when and as said laws change,
effective at the close of business on the day such change in said laws becomes
effective; but, if there shall be no Maximum Rate, then the rate shall be as
specified in the foregoing clause (a).
SECTION 3.03. Overpayment. If at any time Assignor pays Assignee more than
the amount due, Assignee shall not be obligated to return any such overpayment,
but the amount or amounts otherwise payable to Assignee for any subsequent
period or periods shall be reduced by such overpayment, plus an amount equal to
interest during the period of such overpayment at the rate of the lesser of (a)
the Prime Interest Rate or (b) the Maximum Rate; but if there shall be no
Maximum Rate, then the rate shall be as specified in the foregoing clause (a).
ARTICLE IV
RECORDS AND REPORTS
SECTION 4.01. Books and Records. Assignor shall at all times maintain true
and correct books and records sufficient to determine the amounts payable to
Assignee hereunder, including, but not limited to, a Net Proceeds account to
which Gross Proceeds and Production Costs are credited and charged.
SECTION 4.02. Inspections. The books and records referred to in Section
4.01 shall be open for inspection by Assignee and its agents and representatives
at the office of Assignor during normal business hours and after reasonable
advance notice.
SECTION 4.03. Quarterly Statements. Within thirty (30) days next following
the close of each calendar quarter, Assignor shall deliver to Assignee a
statement showing the computation of Net Proceeds attributable to such quarter.
SECTION 4.04. Assignee's Exceptions to Quarterly Statements. If Assignee
shall take exception to any item or items included in the quarterly statements
rendered by Assignor, Assignee shall notify Assignor in writing within 180 days
after the receipt of the report and annual audit furnished pursuant to Section
4.07 hereof, setting forth in such notice the specific charges complained of and
to which exception is taken or the specific credits which should have been made
and allowed; and, with respect to such complaints and exceptions as are
justified, adjustment shall be made. If Assignee shall fail to give Assignor
notice of such complaints and exceptions prior to the expiration of such 180 day
period, then the statements for such calendar year as originally rendered by
Assignor shall be deemed to be correct as rendered.
SECTION 4.05. Geological and Other Data. Upon request by Assignee, Assignor
shall, subject to the limitations of confidentiality or nondisclosure
obligations to co-owners or other third parties, furnish to Assignee access to
all geological, well and production data which Assignor has
11
on hand relating to operations on the Subject Interests. Assignor will use
reasonable efforts to obtain waivers of any such confidentiality or
nondisclosure obligations that prevent it from providing to Assignee any
requested information, but Assignor shall not be obligated to incur any expense
or detriment above a nominal amount to obtain such waiver. Assignor shall also
furnish to Assignee, upon request by Assignee, reports showing the status of
development, producing and other operations conducted by Assignor on the Subject
Interests. Assignor shall, upon request by Assignee, furnish to Assignee all
reserve reports or studies in the possession of Assignor from time to time
relating to the Subject Interests, whether prepared by Assignor or by third
party consulting engineers; provided, it is agreed that Assignor makes no
representations or warranties as to the accuracy or completeness of any such
reports or studies and shall have no liability to Assignee or any other Person
resulting from their use of such reports or studies, and Assignee agrees not to
attribute to Assignor or such third-party consulting engineers any such reports
or studies or the contents thereof in any securities filings or reports to
owners or holders of "Beneficial Interests" in the Trust. All information
furnished to Assignee pursuant to this section is confidential and for the sole
benefit of Assignee and shall not be shown by Assignee to any other Person,
except that this provision shall not prohibit the disclosure by Assignee of any
information that (i) at the time of disclosure is generally available to the
public (other than as a result of a disclosure by Assignee), (ii) was available
to Assignee on a nonconfidential basis from a source other than Assignor,
provided that such source is not known by Assignee to be bound by a
confidentiality obligation owed to Assignor, or (iii) Assignee is legally
required to disclose, provided that Assignee has given to Assignor notice of
such requirement and a reasonable opportunity to seek, at Assignor's expense, a
protective order and other appropriate relief from such requirement.
SECTION 4.06. Monthly Estimates. On or before ten days (excluding
Saturdays, Sundays and other days on which national banking institutions in the
City of Fort Worth, Texas, are closed as authorized or required by law) before
each Monthly Record Date (beginning with the Monthly Record Date for March,
1999), Assignor shall deliver to Assignee a statement of Assignor's best
estimate of the amount payable to Assignee on or before such Monthly Record
Date.
SECTION 4.07. Annual Audits and Reports. Within 90 days after the end of
the calendar year, Assignor shall deliver to Assignee a statement which has been
audited by a nationally recognized firm of independent public accountants
selected by Assignor, which shall show the information provided for in Section
4.03 on an annual basis. Assignee shall bear the cost of each such audit.
SECTION 4.08. Reserve Reports. Assignor may, but is not obligated to,
provide an annual reserve report for the Royalty Interest prepared by
independent consulting reservoir engineers. If such reserve report is provided
by Assignor, Assignee will reimburse Assignor for the cost thereof.
12
ARTICLE V
LIABILITY OF ASSIGNEE
In no event shall Assignee be liable or responsible in any way for any
Production Costs (including Excess Production Costs) or other costs or
liabilities incurred by Assignor or others attributable to the Subject Interests
or to the Hydrocarbons produced therefrom.
ARTICLE VI
OPERATION OF SUBJECT INTERESTS
SECTION 6.01. Prudent Operator Standard. Assignor agrees, to the extent it
has the legal right to do so under the terms of any lease, operating agreement,
contract for development or similar instrument affecting or pertaining to the
Subject Interests (or any portion thereof), that it will conduct and carry on
the maintenance and operation of the Subject Interests with reasonable and
prudent business judgment and in accordance with good oil and gas field
practices, and that it will drill such wells as a reasonably prudent operator
would drill from time to time in order to protect the Subject Interests from
drainage. Assignor further agrees to produce the Subject Interests without
regard to whether any amount is imputed to the Gross Proceeds for any
Computation Period during the period from the Effective Date through January 31,
2000, as provided in Section 1.09. However, nothing contained in this Section
6.01 shall be deemed to prevent or restrict Assignor from electing not to
participate in any operation which is to be conducted under the terms of any
operating agreement, contract for development or similar instrument affecting or
pertaining to the Subject Interests (or any portion thereof) and allowing
consenting parties to conduct nonconsent operations thereon, if such election is
made by Assignor in good faith. Notwithstanding anything elsewhere herein to the
contrary, Assignor shall never be liable to Assignee for the manner in which
Assignor performs its duties hereunder as long as Assignor has acted in good
faith.
SECTION 6.02. Abandonment of Properties. Nothing herein contained shall
obligate Assignor to continue to operate any well or to operate or maintain in
force or attempt to maintain in force any of the Subject Interests when, in
Assignor's opinion, such well or Subject Interest ceases to produce or is not
capable of producing Hydrocarbons in paying quantities. The expiration of a
Subject Interest in accordance with the terms and conditions applicable thereto
shall not be considered to be a voluntary surrender or abandonment thereof.
SECTION 6.03. Insurance. Although Assignor is permitted to carry policies
of insurance covering the property upon the Subject Interests and risks incident
to the operation thereof and to charge premiums therefor to the Net Proceeds
account, Assignor shall not be required to carry insurance on such property or
covering any of such risks unless it elects to do so. In no event shall Assignor
be liable to Assignee on account of any losses sustained which are not covered
by insurance.
SECTION 6.04. Certain Rights to Manage the Subject Interests.
Notwithstanding anything in this Conveyance to the contrary, Assignor shall have
the right and power, acting in good faith and as a reasonably prudent oil and
gas operator, to execute, deliver, and perform operating agreements, oil and gas
leases, farmout agreements, exploration agreements, participation agreements,
drilling agreements, acreage contribution agreements, dry-hole agreements,
bottom-hole agreements, joint venture agreements, partnership agreements, and
other similar instruments and agreements that cover or affect the Subject
Interests and to make all decisions or elections required thereunder, including,
13
but not limited to, decisions to consent or non-consent to drilling and other
operations. The applicable Royalty Interest shall in each case be bound by such
instrument or agreement (and decisions or elections thereunder), without the
necessity of any execution, consent, joinder, or ratification by Assignee, and
the Royalty Interest shall thereafter be calculated and paid with respect to the
interests reserved, obtained, or modified by Assignor in such transaction, not
by reference to the Subject Interests that existed before such transaction. For
example, but not by way of limitation, (a) Assignor may farm out any Subject
Interest that is an oil and gas lease, and the Subject Interest therein shall
subsequently be the overriding royalty interest, reversionary working interest,
and/or other rights and interests reserved by Assignor in the farmout, not the
original leasehold interest, or (b) Assignor may execute an oil and gas lease to
cover any Subject Interest that is a mineral interest, and the Subject Interest
shall subsequently be the royalty and other lease benefits obtained or reserved
by Assignor in such lease, not the original mineral interest.
ARTICLE VII
POOLING AND UNITIZATION
SECTION 7.01. Pooled Subject Interests. To the extent any of the Subject
Interests have been heretofore pooled and unitized for the production of
Hydrocarbons, such Subject Interests are and shall be subject to the terms and
provisions of such pooling and unitization agreements, and the Royalty Interest
in each such Subject Interest shall apply to and affect only the production from
such units which accrues to such Subject Interest under and by virtue of the
applicable pooling and unitization agreements.
SECTION 7.02. Right to Pool and Unitize. Assignor shall have the exclusive
right and power (as between Assignor and Assignee), exercisable only during the
period provided in Section 7.03 hereof, to pool or unitize any of the Subject
Interests and to alter, change or amend or terminate any pooling or unitization
agreements heretofore or hereafter entered into, as to all or any part of the
Subject Lands, as to any one or more of the formations or horizons thereunder,
and as to any one or more Hydrocarbons, upon such terms and provisions as
Assignor shall in its sole and absolute discretion determine. If and whenever
through the exercise of such right and power, or pursuant to any law hereafter
enacted or any rule, regulation or order of any governmental body or official
hereafter promulgated, any of the Subject Interests are pooled or unitized in
any manner, the Royalty Interest insofar as it affects such Subject Interest
shall also be pooled and unitized, and in any such event such Royalty Interest
in such Subject Interest shall apply to and affect only the production which
accrues to such Subject Interest under and by virtue of the pooling and
unitization, and it shall not be necessary for Assignee to agree to, consent to,
ratify, confirm or adopt any exercise of such right and power by Assignor.
SECTION 7.03. Applicable Period. Assignor's power and rights in Section
7.02 shall be exercisable only during the period of the life of the last
survivor of the descendants of the signers of the Declaration of Independence
living on the date of execution hereof, plus twenty-one (21) years after the
death of such last survivor, or the term of this Conveyance, whichever period
shall first expire.
14
ARTICLE VIII
GOVERNMENT REGULATION
All obligations of Assignor hereunder shall be subject to all present and
future valid federal, state and local laws, statutes, codes and orders; and all
applicable rules, orders, regulations and decisions of every court, governmental
agency, body or authority having jurisdiction over the Hydrocarbons in and under
and that may be produced from the Subject Interests. Assignor's obligations are
specifically, but not by way of limitation, subject, to the extent in effect, to
all applicable provisions of the Emergency Petroleum Allocation Act of 1973, the
Department of Energy Organization Act, the Natural Gas Act, the Natural Gas
Policy Act of 1978, the Natural Gas Wellhead Decontrol Act of 1989 and each
other statute purporting to provide regulation of the Sale of Hydrocarbons or
establishing maximum prices at which the same may be Sold and all applicable
laws, orders, rules and regulations thereunder of the Federal Energy Regulatory
Commission, the Department of Energy and each other legislative or governmental
body, agency, board or commission having jurisdiction. If maximum rates
permitted under such statutes, rules and regulations for the Subject
Hydrocarbons are lower than prices established in Sales Contracts, then the
lower regulated prices received by Assignor shall control. Assignor shall be
entitled to use its reasonable discretion in making filings, for itself and on
behalf of Assignee, with the Federal Energy Regulatory Commission, the
Department of Energy or any other governmental body, agency, board or commission
having jurisdiction, affecting the price or prices at which Subject Hydrocarbons
may be Sold, and with purchasers of production, operators or others with respect
to any excise tax.
ARTICLE IX
ASSIGNMENTS
SECTION 9.01. Assignment by Assignor. Assignor shall have the right to
assign, sell, transfer, convey, mortgage or pledge the Subject Interests, or any
part thereof, subject to the Royalty Interest and the terms and provisions of
this Conveyance. From and after the effective date of any such assignment, sale,
transfer or conveyance by Assignor, the assignee thereunder shall succeed to all
the requirements upon and responsibilities of Assignor hereunder, as to the
interests in the Subject Interests so acquired by such assignee, and, from and
after the said effective date, Assignor shall be relieved of such requirements
and responsibilities, excepting only those accrued or due for performance prior
to such effective date.
SECTION 9.02. Partial Assignment. If Assignor assigns its interest under
the Subject Interests as to some of such Subject Interests or as to some part
thereof, then, effective as of the date of such assignment, in determining the
Royalty Interest payable with respect to production from such assigned Subject
Interests or parts thereof, the Gross Proceeds, Production Costs and Net
Proceeds attributable to such assigned interests will be computed and determined
by the assignee of such assigned interests in the aggregate as to the assigned
interests owned by such assignee, but separate from and not aggregated with the
computation and determination made by Assignor as to Subject Interests that have
not been assigned by Assignor.
15
SECTION 9.03. Assignment by Assignee. Assignee has the right to assign the
Royalty Interest in whole or in part only as authorized by the Trust Indenture.
However, no such assignment will affect the method of computing Net Proceeds,
and if more than one Person becomes entitled to participate in the Royalty
Interest, Assignor may withhold from such other Person payments to which such
Person would otherwise be entitled hereunder and the furnishing of any data or
information which Assignor is required by the terms hereof to furnish Assignee
until Assignor is furnished a recordable instrument executed by or binding upon
all Persons interested in the Royalty Interest designating one Person who is to
receive such payments, data and information. In making conveyances or
assignments of any of the Subject Interests (to the extent permitted hereunder),
Assignee need not vest in its grantee or assignee all of the rights of Assignee
hereunder with respect to the interest in the Subject Interests so conveyed or
assigned.
SECTION 9.04. Certain Sales of Subject Interests. Subject to the
limitations set forth in Section 3.02(b) of the Trust Indenture, Assignor may
cause the sale of certain Subject Interests, including the appurtenant Royalty
Interest from time to time and Assignee will join in such sales as provided in
the Trust Indenture. The proceeds of any such sale shall be apportioned and
paid as provided in the Trust Indenture, but the purchasers of such Subject
Interests (inclusive of the appurtenant Royalty Interest) may pay the full
amount of the purchase price therefor to Assignor and shall have no
responsibility to see to the proper allocation thereof between Assignor and
Assignee.
SECTION 9.05. Change in Ownership. No change of ownership or right to
receive payment of the Royalty Interest, or of any part thereof, however
accomplished, shall be binding upon Assignor until notice thereof shall have
been furnished by the Person claiming the benefit thereof, and then only with
respect to payments thereafter made. Notice of sale or assignment shall consist
of a certified copy of the recorded instrument accomplishing the same; notice of
change of ownership or right to receive payment accomplished in any other manner
(for example by reason of incapacity, death or dissolution) shall consist of
certified copies of recorded documents and complete proceedings legally binding
and conclusive of the rights of all parties. Until such notice accompanied by
such documentation shall have been furnished Assignor as above provided, the
payment or tender of all sums payable on the Royalty Interest may be made in the
manner provided herein precisely as if no such change in interest or ownership
or right to receive payment had occurred, or (at Assignor's election) Assignor
shall have the right to suspend payment of such sums without interest in the
event of such change until such documentation is furnished. The kind of notice
herein provided shall be exclusive, and no other kind, whether actual or
constructive, shall be binding on Assignor.
SECTION 9.06. Rights of Mortgagee or Trustee. If Assignee shall at any
time execute a mortgage or deed of trust covering all or part of the Royalty
Interest, the mortgagee(s) or trustee(s) therein named or the holder of any
obligation secured thereby shall be entitled, to the extent such mortgage or
deed of trust so provides, to exercise all the rights, remedies, powers and
privileges conferred upon Assignee by the terms of this Conveyance and to give
or withhold all consents required to be obtained hereunder by Assignee, but the
provisions of this Section 9.06 shall in no way be deemed or construed to impose
upon Assignor any obligation or liability undertaken by Assignee under such
mortgage or deed of trust or under the obligation secured thereby.
16
ARTICLE X
MISCELLANEOUS
SECTION 10.01. Proportionate Reduction. In the event of failure or
deficiency in title to any of the Subject Interests, the portion of the
production from such Subject Interest out of which the Royalty Interest
attributable to such Subject Interest shall be payable shall be reduced in the
same proportion that such Subject Interest is reduced. Notwithstanding the
foregoing, if any Person claims that this Conveyance gives rise to a
preferential right of such Person to acquire any portion of the Royalty Interest
(or any of the Subject Interests), then Assignor shall indemnify Assignee and
the trustee of the Trust against any liability, expense, damage or loss in
regard to such claim and the provisions of Section 6.05 of the Trust Indenture
shall apply with respect to such indemnity obligation. If such claim results in
the acquisition of any portion of the Royalty Interest by the Person claiming
the preferential right then, subject to the proviso below, Assignor shall pay to
Assignee the amount determined by multiplying (i) the product of 40,000,000
multiplied by the initial public offering price of the Trust's units of
beneficial interest by (ii) a fraction, the numerator of which is the value of
the portion of the Royalty Interest acquired by the Person claiming the
preferential right, as determined by reference to the most recent Reserve Report
(as defined in the Trust Indenture) of the Trust and the denominator of which is
the value of all the Royalty Interest as determined by reference to such Reserve
Report; provided, however, that if the Person claiming such preferential right
makes any payment to the Trust in connection with the acquisition of a portion
of the Royalty Interest, then the amount of such payment shall be credited
against Assignor's payment obligation set forth above, but not to create a
negative number.
SECTION 10.02. Term. This Conveyance shall remain in force as long as any
of the Subject Interests are in effect.
SECTION 10.03. Further Assurances. Should any additional instruments of
assignment and conveyance be required to describe more specifically any
interests subject hereto, Assignor agrees to execute and deliver the same. Also,
if any other or additional instruments are required in connection with the
transfer of State, Federal or Indian lease interests in order to comply with
applicable laws, regulations or agreements, Assignor will execute and deliver
the same.
SECTION 10.04. Notices. All notices, statements, payments and
communications between the parties hereto shall be deemed to have been
sufficiently given and delivered if enclosed in a post paid wrapper and
deposited in the United States Mails directed, or if personally delivered, to
the party to whom the same is directed or to be furnished or made at the
respective addresses, as follows:
17
If to Assignor:
Cross Timbers Oil Company
810 Houston Street, Suite 2000
Fort Worth, Texas 76102
Attention: Corporate Secretary
If to Assignee:
NationsBank, N.A.
17th Floor
901 Main Street
NationsBank Plaza
Dallas, Texas 75202
Attention: Trust Department
Either party or the successors or assignees of the interest or rights or
obligations of either party hereunder may change its address or designate a new
or different address or addresses for the purposes hereof by a similar notice
given or directed to all parties interested hereunder at the time.
SECTION 10.05. Binding Effect. This Conveyance shall bind and inure to the
benefit of the successors and assigns of Assignor and Assignee.
SECTION 10.06. Governing Law. The validity, effect and construction of
this Conveyance shall be governed by the laws of the State of Texas.
SECTION 10.07. Headings. Article and Section headings used in this
Conveyance are for convenience only and shall not affect the construction of
this Conveyance.
SECTION 10.08. Substitution of Warranty. This instrument is made with full
substitution and subrogation of Assignee in and to all covenants of warranty by
others heretofore given or made with respect to the Subject Interests or any
part thereof or interest therein.
SECTION 10.09. Counterpart Execution. This Conveyance may be executed in
multiple counterparts, each of which shall be an original. Certain counterparts
may have descriptions relating to different recording jurisdictions omitted from
Schedule A. A counterpart with all such descriptions is being filed for record
in Seward County, Kansas. Where a description covers an interest located in more
than one county, such description may be included in counterparts recorded in
each county but such inclusion of the same description in more than one
counterpart does not have any cumulative effect as to the interests covered by
such description.
SECTION 10.10. Amended and Restated Conveyance. This Conveyance amends
and restates fully a document previously executed by Assignor and Assignee.
Such prior document was
18
not recorded and is fully replaced and superseded by this Conveyance and such
previously executed document is to be disregarded for all purposes.
IN WITNESS WHEREOF, each of the parties hereto has caused this Conveyance
to be executed in its name and behalf and delivered as of the Effective Date.
ATTEST:
CROSS TIMBERS OIL COMPANY
-------------------------
Virginia Anderson, Secretary
of Cross Timbers Oil Company By:
-------------------------------
Vaughn O. Vennerberg, II
Senior Vice President - Land
ATTEST:
NATIONSBANK, N.A., acting not in its
individual capacity but solely as the
Trustee of the Hugoton Royalty Trust
-------------------------
By:
---------------------------------
Ron E. Hooper, Vice President
19
STATE OF TEXAS (S)
(S)
COUNTY OF TARRANT (S)
This instrument was acknowledged before me on this ____ day of _______,
1999, by Vaughn O. Vennerberg II, Senior Vice President - Land of Cross Timbers
Oil Company, on behalf of said corporation.
Commission Expires:
-------------------------------------
Notary Public State of Texas
-------------------
THE STATE OF TEXAS (S)
(S)
COUNTY OF DALLAS (S)
This instrument was acknowledged before me on this ____ day of _______,
1999, by Ron E. Hooper, Vice President of NationsBank, N.A., Trustee of the
Hugoton Royalty Trust, on behalf of said Bank as Trustee of the Hugoton Royalty
Trust.
Commission Expires:
-------------------------------------
Notary Public State of Texas
-------------------
20
SCHEDULE B
Attached to and made a part of that certain Net Overriding Royalty Conveyance
(Hugoton Royalty Trust) dated effective December 1, 1998 (the "Conveyance")
ACCOUNTING PROCEDURE
I. GENERAL PROVISIONS
1. Definitions
"Joint Property" shall mean the real and personal property subject to the
Conveyance.
"Joint Operations" shall mean all operations necessary or proper for the
development, operation, protection and maintenance of the Joint Property.
"Joint Account" shall mean the account showing the charges paid and credits
received in the conduct of the Joint Operations and which are used in the
calculation of Gross Proceeds, Net Proceeds, Processing Costs and
Production Costs, as said terms are defined in the Conveyance.
"Operator" shall mean Cross Timbers Oil Company or any of its affiliates
that conduct Joint Operations on the Joint Property.
"Parties" shall mean Operator and the Hugoton Royalty Trust (herein
referred to as the "Trust").
"First Level Supervisors" shall mean those employees whose primary function
in Joint Operations is the direct supervision of other employees and/or
contract labor directly employed on the Joint Property in a field operating
capacity.
"Technical Employees" shall mean those employees having special and
specific engineering, geological or other professional skills, and whose
primary function in Joint Operations is the handling of specific operating
conditions and problems for the benefit of the Joint Property.
"Personal Expenses" shall mean travel and other reasonable reimbursable
expenses of Operator's employees.
"Material" shall mean personal property, equipment or supplies acquired or
held for use on the Joint Property.
"Controllable Material" shall mean Material which at the time is so
classified in the Material Classification Manual as most recently
recommended by the Council of Petroleum Accountants Societies.
2. Designation and Responsibilities of Operator
Cross Timbers Oil Company shall be the Operator of the Joint Property, and
shall, to the extent it has the legal right to do so, conduct and direct
and have full control of all operations on the Joint Property as permitted
and required by, and within the limits of the Conveyance.
3. Payments and Accounting
Except as herein otherwise specifically provided, Operator shall promptly
pay and discharge expenses incurred in the development and operation of the
Joint Property and shall charge the Joint Account with the appropriate
proportionate share upon the expense basis provided herein. Operator shall
keep an accurate record of the expenses incurred and charges and credits
made and received.
4. Application of Agreement
This Accounting Procedure will apply to Joint Properties where Cross
Timbers Oil Company is the Operator and the Operator owns all or a portion
of the leasehold interest in the Joint Properties. In the event there is
an existing Accounting Procedure or related instrument governing the
operations of the Joint Properties, this
21
Accounting Procedure will control except as to the overhead rate stated in
the existing Accounting Procedure or related instrument.
5. Conflicts
In the event there exists any conflict between the terms of this Accounting
Procedure or any Accounting Procedure that applies to the Joint Properties
and the Conveyance to which it is attached, the Conveyance will control.
II. DIRECT CHARGES
Operator shall charge the Joint Account with the following items, which shall be
allocated to Processing Costs or Production Costs as appropriate:
1. Ecological and Environmental
Costs incurred for the benefit of the Joint Property as a result of
governmental or regulatory requirements to satisfy environmental
considerations applicable to the Joint Operations. Such costs may include
surveys of an ecological or archaeological nature and pollution control
procedures as required by applicable laws and regulations, and costs
related to employees of Operator performing any environmental work
involving the Joint Property.
2. Rentals and Royalties
Lease rentals and royalties paid by Operator for the Joint Operations.
3. Labor
A. (1) Salaries and wages of Operator's field employees employed on the
Joint Property in the conduct of Joint Operations.
(2) Salaries of First Level Supervisors in the field.
(3) Salaries and wages of Technical Employees directly employed on
the Joint Property.
(4) Salaries and wages of Technical Employees either temporarily or
permanently assigned to and directly employed in the operation of
the Joint Property.
(5) Salaries and wages of support employees whose duties are
primarily field related in connection with the Joint Operations,
regardless of their location (e.g., field superintendents and
clerical employees located in the field).
B. Operator's cost of holiday, vacation, sickness and disability benefits
and other customary allowances paid to employees whose salaries and
wages are chargeable to the Joint Account under Paragraph 3A of this
Section II. Such costs under this Paragraph 3B may be charged on a
"when and as paid basis" or by "percentage assessment" on the amount
of salaries and wages chargeable to the Joint Account under Paragraph
3A of this Section II. If percentage assessment is used, the rate
shall be based on the Operator's cost experience.
C. Expenditures or contributions made pursuant to assessments imposed by
governmental authority which are applicable to Operator's costs
chargeable to the Joint Account under Paragraphs 3A and 3B of this
Section II.
22
D. Personal Expenses of those employees whose salaries and wages are
chargeable to the Joint Account under Paragraph 3A of this Section II.
4. Employee Benefits
Operator's current costs of established plans for employees' group life
insurance, hospitalization, pension, retirement, stock purchase, thrift,
bonus, and other benefit plans of a like nature, applicable to Operator's
labor cost chargeable to the Joint Account under Paragraph 3A and 3B of
this Section II shall be Operator's actual cost not to exceed the percent
most recently recommended by the Council of Petroleum Accountants
Societies.
5. Material
Material purchased or furnished by Operator for use on the Joint Property
as provided under Section IV. Only such Material shall be purchased for or
transferred to the Joint Property as may be required for immediate use and
is reasonably practical and consistent with efficient and economical
operations. The accumulation of surplus stocks shall be avoided.
6. Transportation
Transportation of employees and Material necessary for the Joint Operations
but subject to the following limitations:
A. If Material is moved to the Joint Property from the Operator's
warehouse or other properties, no charge shall be made to the Joint
Account for a distance greater than the distance from the nearest
reliable supply store where like material is normally available or
railway receiving point nearest the Joint Property.
B. If surplus Material is moved to Operator's warehouse or other storage
point, no charge shall be made to the Joint Account for a distance
greater than the distance to the nearest reliable supply store where
like material is normally available, or railway receiving point
nearest the Joint Property. No charge shall be made to the Joint
Account for moving Material to other properties belonging to Operator.
C. In the application of subparagraphs A and B above, the option to
equalize or charge actual trucking cost is available when the actual
charge is $400 or less excluding accessorial charges. The $400 will be
adjusted to the amount most recently recommended by the Council of
Petroleum Accountants Societies.
7. Services
The cost of contract services, equipment and utilities provided by outside
sources, except services excluded by Paragraph 10 of Section II and
Paragraph i, ii, and iii, of Section III. The cost of professional
consultant services and contract services of technical personnel directly
engaged on the Joint Property if such charges are excluded from the
overhead rates.
8. Equipment and Facilities Furnished By Operator
A. Operator shall charge the Joint Account for use of equipment and
facilities owned by Operator or any of its affiliates at rates
commensurate with costs of ownership and operation. Such rates shall
include costs of maintenance, repairs, other operating expense,
insurance, taxes, depreciation, and interest on gross investment less
accumulated depreciation not to exceed twelve percent (12%) per annum.
Such rates shall not exceed average commercial rates currently
prevailing in the immediate area of the Joint Property.
23
B. In lieu of charges in paragraph 8A above, Operator may elect to use
average commercial rates prevailing in the immediate area of the Joint
Property less 20%. For automotive equipment, Operator may elect to
use rates published by the Petroleum Motor Transport Association.
C. This Paragraph 8 shall not affect any current charges made by Operator
to the Joint Account related to transportation, gathering, treating,
compression or processing or related charges by an affiliate of
Operator.
9. Damages and Losses to Joint Property
All costs or expenses necessary for the repair or replacement of Joint
Property made necessary because of damages or losses incurred by fire,
flood, storm, theft, accident, or other cause, except those resulting from
Operator's gross negligence or willful misconduct.
10. Legal Expense
Expense of handling, investigating and settling litigation or claims,
discharging of liens, payment of judgments and amounts paid for settlement
of claims incurred in or resulting from operations under the Conveyance or
necessary to protect or recover the Joint Property, and the costs and
expenses incurred in connection with hearings and other matters before
governmental bodies and agencies and costs and expenses incurred in curing
title to the Joint Property. Costs incurred by Operator in procuring
abstracts and fees paid outside attorneys for title examination (including
preliminary, supplemental, shut-in gas royalty opinions and division order
title opinions) shall be borne by the Joint Account. Operator shall make
no charge for services rendered by its staff attorneys or other personnel
in the performance of the above functions. All other legal expense is
considered to be covered by the overhead provisions of Section III.
11. Taxes
All taxes of every kind and nature assessed or levied upon or in connection
with the Joint Property, the operation thereof, or the production
therefrom, and which taxes have been paid by the Operator for the benefit
of the Parties. If the ad valorem taxes are based in whole or in part upon
separate valuations of each party's interest, then notwithstanding anything
to the contrary herein, charges to the Joint Account shall be made and paid
by the Parties hereto in accordance with the tax value generated by each
party's interest.
12. Insurance
Net premiums paid for insurance required to be carried for the Joint
Operations for the protection of the Parties. In the event Joint
Operations are conducted in a state in which Operator may act as self-
insurer for Worker's Compensation and/or Employers Liability under the
respective state's laws, Operator may, at its election, include the risk
under its self-insurance program and in that event, Operator shall include
a charge at Operator's cost not to exceed manual rates.
13. Abandonment and Reclamation
Costs incurred for abandonment of the Joint Property, including costs
required by governmental or other regulatory authority.
14. Communications
Cost of acquiring, leasing, installing, operating, repairing and
maintaining communication systems, including radio and microwave facilities
or any form of telephonic equipment or service used in serving the Joint
Property. In the event communication facilities/systems serving the Joint
Property are Operator owned, charges to the Joint Account shall be made as
provided in Paragraph 8 of this Section II.
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15. Other Expenditures
Any other expenditure not covered or dealt with in the foregoing provisions
of this Section II, or in Section III and which is of direct benefit to the
Joint Property and is incurred by the Operator in the necessary and proper
conduct of the Joint Operations.
III. OVERHEAD
1. Overhead - Drilling and Producing Operations
i. As compensation for administrative, supervision, office services and
warehousing costs, Operator shall charge drilling and producing
operations on a Fixed Rate Basis, Paragraph 1A. Such charge shall be
in lieu of costs and expenses of all offices and salaries or wages
plus applicable burdens and expenses of all personnel, except those
directly chargeable under Paragraph 3A, Section II. The cost and
expense of services from outside sources in connection with matters of
taxation, traffic, accounting or matters before or involving
governmental agencies shall not be considered as included in the
overhead rates.
ii. The salaries, wages and Personal Expenses of Technical Employees
and/or the cost of professional consultant services and contract
services of technical personnel directly employed on the Joint
Property shall not be covered by the overhead rates.
iii. The salaries, wages and Personal Expenses of Technical Employees
and/or costs of professional consultant services and contract services
of technical personnel either temporarily or permanently assigned to
and directly employed in the operation of the Joint Property shall not
be covered by the overhead rates.
A. Overhead - Fixed Rate Basis
(1) Operator shall charge the Joint Account at the following rates
per well per month:
For wells located in the Hugoton Field
Drilling Well Rate $2,350.00
(Prorated for less than a full month)
Producing Well Rate $235.00
For wells located in all other areas
Drilling Well Rate $4,760.00
(Prorated for less than a full month)
Producing Well Rate $476.00
(2) Application of Overhead - Fixed Rate Basis shall be as follows:
(a) Drilling Well Rate
(1) Charges for drilling wells shall begin on the date the
well is spudded and terminate on the date the drilling
rig, completion rig, or other units used in completion
of the well is released, whichever is later, except
that no charge shall be made during suspension of
drilling or completion operations for fifteen (15) or
more consecutive calendar days.
(2) Charges for wells undergoing any type of workover or
recompletion or swabbing shall be made at the drilling
well rate. Such charges shall be
25
applied for the period from date such operations, with
rig or other units used, commence through date of rig
or other unit release, except that no charge shall be
made during suspension of operations for fifteen (15)
or more consecutive calendar days.
(b) Producing Well Rates
(1) An active well either produced or injected into for any
portion of the month shall be considered as a one-well
charge for the entire month.
(2) Each active completion in a multi-completed well in
which production is not commingled down hole shall be
considered as a one-well charge providing each
completion is considered a separate well by the
governing regulatory authority.
(3) An inactive gas well shut in because of overproduction
or failure of purchaser to take the production shall be
considered as a one-well charge providing the gas well
is directly connected to a permanent sales outlet.
(4) A one-well charge shall be made for the month in which
plugging and abandonment operations are completed on
any well. This one-well charge shall be made whether
or not the well has produced except when drilling well
rate applies.
(5) All other inactive wells (including but not limited to
inactive wells covered by unit allowable, lease
allowable, transferred allowable, etc.) shall not
qualify for an overhead charge.
(3) The well rates shall be adjusted as of the first day of April
each year beginning in 1999. The adjustment shall be computed by
multiplying the rate currently in use by the percentage increase
or decrease in the average weekly earnings of Crude Petroleum and
Gas Production Workers for the last calendar year compared to the
calendar year preceding as shown by the index of average weekly
earnings of Crude Petroleum and Gas Production Workers as
published by the United States Department of Labor, Bureau of
Labor Statistics. The adjusted rates shall be the rates
currently in use, plus or minus the computed adjustment.
2. Overhead - Major Construction
To compensate Operator for overhead costs incurred in the construction and
installation of fixed assets, the expansion of fixed assets, and any other
project clearly discernable as a fixed asset required for the development
and operation of the Joint Property, Operator shall charge the Joint
Account for overhead based on the following rates for any Major
Construction project in excess of $25,000.00:
A. 5% of first $100,000 or total cost if less, plus
B. 3% of costs in excess of $100,000 but less than $1,000,000, plus
C. 2% of costs in excess of $1,000,000.
Total cost shall mean the gross cost of any one project. For the purpose
of this paragraph, the component parts of a single project shall not be
treated separately and the cost of drilling and workover wells and
artificial lift equipment shall be excluded.
26
3. Catastrophe Overhead
To compensate Operator for overhead costs incurred in the event of
expenditures resulting from a single occurrence due to oil spill, blowout,
explosion, fire, storm, hurricane, or other catastrophes as agreed to by
the Parties, which are necessary to restore the Joint Property to the
equivalent condition that existed prior to the event causing the
expenditures, Operator shall charge the Joint Account for overhead based on
the following rates:
A. 5% of total costs through $100,000; plus
B. 3% of total costs in excess of $100,000 but less than $1,000,000; plus
C. 2% of total costs in excess of $1,000,000.
Expenditures subject to the overheads in this Section 3 above will not be
reduced by insurance recoveries, and no other overhead provisions of this
Section III shall apply.
IV. PRICING OF JOINT ACCOUNT MATERIAL PURCHASES, TRANSFERS AND DISPOSITIONS
Operator is responsible for Joint Account Materials and shall make proper and
timely charges and credits for all Material movements affecting the Joint
Property. Operator shall provide all Material for use on the Joint Property.
Operator shall make timely disposition of idle and/or surplus Material, such
disposal being made either through sale to Operator, or sale to outsiders.
Operator may purchase, but shall be under no obligation to purchase, interest of
the Trust in surplus condition A or B Material at the prices defined below.
1. Purchases
Material purchased shall be charged at the price paid by Operator after
deduction of all discounts, adjustments or rebates received. In case of
Material found to be defective or returned to vendor for any other reasons,
credit shall be passed to the Joint Account when adjustment has been
received by the Operator.
2. Transfers and Dispositions
Material furnished to the Joint Property and Material transferred from the
Joint Property or disposed of by the Operator shall be priced on the
following basis exclusive of cash discounts:
A. New Material (Condition A)
(1) Tubular Goods Other than Line Pipe
(a) Tubular goods, sized 2-3/8 inches OD and larger, except line
pipe, shall be priced at Eastern mill published carload
prices effective as of date of movement plus transportation
cost using the 80,000 pound carload weight basis to the
railway receiving point nearest the Joint Property for which
published rail rates for tubular good exist. If the 80,000
pound rail rate is not offered, the 70,000 pound or 90,000
pound rail rate may be used. Freight charges for tubing
will be calculated from Lorain, Ohio and casing from
Youngstown, Ohio.
(b) For grades which are special to one mill only, prices shall
be computed at the mill base of that mill plus
transportation cost from that mill to the railway receiving
point nearest the Joint Property as provided above in
Paragraph 2.a.(1)(a). For transportation cost from points
other than Eastern mills, the 30,000 pound Oil Field Haulers
Association interstate truck rate shall be used.
27
(c) Special end finish tubular goods shall be priced at the
lowest published out-of-stock price, f.o.b. Houston, Texas,
plus transportation cost, using Oil Field Haulers
Association interstate 30,000 pound truck rate, to the
railway receiving point nearest the Joint Property.
(d) Macaroni tubing (size less than 2-3/8 inch OD) shall be
priced at the lowest published out-of-stock prices f.o.b.
the supplier plus transportation costs, using the Oil Field
Haulers Association interstate truck rate per weight of
tubing transferred, to the railway receiving point nearest
the Joint Property.
(2) Line Pipe
(a) Line pipe movements (except size 24 inch OD and larger with
walls 3/4 inch and over) 30,000 pounds or more shall be
priced under provisions of tubular goods pricing in
Paragraph A.(1)(a) as provided above. Freight charges shall
be calculated from Lorain, Ohio.
(b) Line pipe movements (except size 24 inch OD and larger with
walls 3/4 inch and over) less than 30,000 pounds shall be
priced at Eastern mill published carload base prices
effective as of date of shipment, plus 20 percent, plus
transportation costs based on freight rates as set forth
under provisions of tubular goods pricing in Paragraph
A.(1)(a) as provided above. Freight charges shall be
calculated from Lorain, Ohio.
(c) Line pipe 24 inch OD and over and 3/4 inch wall and larger
shall be priced f.o.b. the point of manufacture at current
new published prices plus transportation cost to the railway
receiving point nearest the Joint Property.
(d) Line pipe, including fabricated line pipe, drive pipe and
conduit not listed on published price lists shall be priced
at quoted prices plus freight to the railway receiving point
nearest the Joint Property or at prices agreed to by the
Parties.
(3) Other Material shall be priced at the current new price, in
effect at date of movement, as listed by a reliable supply store
nearest the Joint Property, or point of manufacture, plus
transportation costs, if applicable, to the railway receiving
point nearest the Joint Property.
(4) Unused new Material, except tubular goods, moved from the Joint
Property shall be priced at the current new price, in effect on
date of movement, as listed by a reliable supply store nearest
the Joint Property, or point of manufacture, plus transportation
costs, if applicable, to the railway receiving point nearest the
Joint Property. Unused new tubulars will be priced as provided
above in Paragraph 2 A (1) and (2).
B. Good Used Material (Condition B)
Material in sound and serviceable condition and suitable for reuse
without reconditioning:
(1) Material moved to the Joint Property
At seventy-five percent (75%) of current new price, as determined
by Paragraph A.
(2) Material used on and moved from the Joint Property
(a) At seventy-five percent (75%) of current new price, as
determined by Paragraph A, if Material was originally
charged to the Joint Account as new Material.
28
(b) At sixty-five percent (65%) of current new price, as
determined by Paragraph A, if Material was originally
charged to the Joint Account as used Material.
(3) Material not used on and moved from the Joint Property
At seventy-five percent (75%) of current new price as determined
by Paragraph A.
The cost of reconditioning, if any, shall be absorbed by the
transferring property.
C. Other Used Material
(1) Condition C
Material which is not in sound and serviceable condition and
suitable for its original function until after reconditioning
shall be priced at fifty percent (50%) of current new price as
determined by Paragraph A. The cost of reconditioning shall be
charged to the receiving property, provided Condition C value
plus cost of reconditioning does not exceed Condition B value.
(2) Condition D
Material, excluding junk, no longer suitable for its original
purpose, but usable for some other purpose shall be priced on a
basis commensurate with its use. Operator may dispose of
Condition D Material under procedures normally used by Operator
without prior approval of the Assignee.
(a) Casing, tubing or drill pipe used as line pipe shall be
priced as Grade A and B seamless line pipe of comparable
size and weight. Used casing, tubing or drill pipe utilized
as line pipe shall be priced at used line pipe prices.
(b) Casing, tubing or drill pipe used as higher pressure service
lines than standard line pipe, e.g. power oil lines, shall
be priced under normal pricing procedures for casing,
tubing, or drill pipe. Upset tubular goods shall be priced
on a non upset basis.
(3) Condition E
Junk shall be priced at prevailing prices. Operator may dispose
of Condition E Material under procedures normally utilized by
Operator without prior approval of Non-Operators.
D. Obsolete Material
Material which is serviceable and usable for its original function but
condition and/or value of such Material is not equivalent to that
which would justify a price as provided above may be specially priced
as reasonably determined by Operator. Such price should result in the
Joint Account being charged with the value of the service rendered by
such Material.
E. Pricing Conditions
(1) Loading and unloading costs related to the movement of the
Material to the Joint Property shall be charged in accordance
with the methods specified in COPAS Bulletin 21.
(2) Material involving erection costs shall be charged at applicable
percentage of the current knocked-down price of new Material.
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3. Premium Prices
Whenever Material is not readily obtainable at published or listed prices
because of national emergencies, strikes or other unusual causes over which
the Operator has no control, the Operator may charge the Joint Account for
the required Material at the Operator's actual cost incurred in providing
such Material, in making it suitable for use, and in moving it to the Joint
Property.
4. Warranty of Material Furnished by Operator
Operator does not warrant the Material furnished. In case of defective
Material, credit shall not be passed to the Joint Account until adjustment
has been received by Operator from the manufacturers or their agents.
V. INVENTORIES
The Operator shall maintain detailed records of Controllable Material.
1. Periodic Inventories, Notice and Representation
At reasonable intervals, inventories shall be taken by Operator of the
Joint Account Controllable Material.
2. Reconciliation and Adjustment of Inventories
Adjustments to the Joint Account resulting from the reconciliation of a
physical inventory shall be made within six months following the taking of
the inventory. Inventory adjustments shall be made by Operator to the
Joint Account for overages and shortages, but Operator shall be held
accountable only for shortages due to lack of reasonable diligence.
3. Special Inventories
Special inventories may be taken whenever there is any sale, change of
interest, or change of Operator in the Joint Property. It shall be the
duty of the party selling to notify all other Parties as quickly as
possible after the transfer of interest takes place. In such cases, both
the seller and the purchaser shall be governed by such inventory. In cases
involving a change of Operator, all Parties shall be governed by such
inventory.
4. Expense of Conducting Inventories
A. The expense of conducting periodic inventories shall not be charged to
the Joint Account.
B. The expense of conducting special inventories shall be charged to the
Parties requesting such inventories, except inventories required due
to change of Operator shall be charged to the Joint Account.
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Dates Referenced Herein
| Referenced-On Page |
|---|
| This ‘S-1/A’ Filing | | Date | | First | | Last | | | Other Filings |
|---|
| |  |
| | 1/31/00 | | 2 | | 13 | | | None on these Dates |
| Filed on: | | 3/16/99 |
| | 2/28/99 | | 2 |
| | 12/1/98 | | 1 | | 21 |
| List all Filings |
4 Subsequent Filings that Reference this Filing
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