Exhibit 10.1


 


EXECUTION VERSION


 


 


AGREEMENT AND PLAN OF MERGER


 


by and among


 


 


WINCHESTER ENERGY COMPANY, LTD.


 


PROGRESS FUELS CORPORATION


 


 


and


 


 


WGC HOLDCO, LLC


 


 


and


 


 


WINCHESTER ACQUISITION, LLC


 


 


Dated July 22, 2006


 

















 


TABLE OF CONTENTS


 


	
  ARTICLE I THE
  MERGER AND THE PURCHASE PRICE

  	
  2

  
	
  1.1 Agreement
  to Merge

  	
  2

  
	
  1.2 The Plan of Merger and
  Effective Time.

  	
  2

  
	
  1.3 Base
  Purchase Price

  	
  3

  
	
  1.4 Adjustments to the Base
  Purchase Price.

  	
  3

  
	
  1.5 Determination of Adjusted
  Purchase Price; Preliminary Settlement Statement.

  	
  4

  
	
  1.6 Final Settlement Statement.

  	
  5

  
	
  ARTICLE II
  CLOSING

  	
  7

  
	
  2.1 Closing

  	
  7

  
	
  2.2 Deliveries by PFC and the
  Company

  	
  8

  
	
  2.3 Deliveries by Buyer

  	
  9

  
	
  ARTICLE III
  REPRESENTATIONS AND WARRANTIES OF PFC AND GP

  	
  9

  
	
  3.1 Organization.

  	
  9

  
	
  3.2 Title to
  Interests

  	
  9

  
	
  3.3 Authority.

  	
  10

  
	
  3.4 Valid and Binding Agreement

  	
  10

  
	
  3.5
  Non-Contravention

  	
  10

  
	
  3.6 Consents
  and Approvals

  	
  11

  
	
  3.7 Pending Litigation

  	
  11

  
	
  3.8 PFC Benefit Plans.

  	
  11

  
	
  ARTICLE IV
  REPRESENTATIONS AND WARRANTIES OF PFC AND THE COMPANY

  	
  12

  
	
  4.1
  Organization.

  	
  12

  
	
  4.2 Governing
  Documents.

  	
  13

  
	
  4.3 Capital Structure.

  	
  13

  
	
  4.4 Authority,
  Valid and Binding Agreement.

  	
  14

  
	
  4.5
  Non-Contravention, Consents and Approvals.

  	
  14

  
	
  4.6 Ownership; Capitalization of
  Subsidiaries.

  	
  15

  
	
  4.7 Financial Statements.

  	
  16

  
	
  4.8
  Undisclosed Liabilities

  	
  17

  
	
  4.9 Absence of Certain Changes
  or Events

  	
  17

  
	
  4.10 Controls and Procedures.

  	
  17

  
	
  4.11 Pending
  Litigation.

  	
  18

  
	
  4.12 Compliance with Laws;
  Permits

  	
  18

  
	
  4.13 FCC Licenses.

  	
  19

  
	
  4.14 Taxes

  	
  20

  
	
  4.15 Contracts.

  	
  21

  
	
  4.16 Certain Real Property.

  	
  24

  
	
  4.17 Oil and Gas Properties.

  	
  24

  
	
  4.18 Gas
  Regulatory Matters.

  	
  26

  
	
  4.19 Reserve Report Information

  	
  27

  
	
  4.20 Tangible
  Midstream Assets.

  	
  27

  
	
  4.21 Environmental Matters.

  	
  28

  
	
  4.22
  Intellectual Property.

  	
  28

  
	
  4.23 Insurance

  	
  29

  



 


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  4.24 Absence of Certain Business
  Practices

  	
  29

  
	
  4.25 Employee Related Matters.

  	
  29

  
	
  4.26 Brokers

  	
  30

  
	
  4.27 Disclaimers.

  	
  30

  
	
  4.28 Limitations on
  Representations and Warranties.

  	
  31

  
	
  ARTICLE V
  REPRESENTATIONS AND WARRANTIES OF BUYER

  	
  31

  
	
  5.1 Organization

  	
  31

  
	
  5.2 Power and Authority

  	
  31

  
	
  5.3 Valid and
  Binding Agreement

  	
  31

  
	
  5.4
  Non-Contravention

  	
  32

  
	
  5.5 Consents
  and Approvals

  	
  32

  
	
  5.6
  Proceedings

  	
  32

  
	
  5.7 Financing

  	
  32

  
	
  5.8 Investment
  Experience

  	
  32

  
	
  5.9 Accredited
  Investor; Investment Intent

  	
  32

  
	
  5.10 Independent
  Evaluation

  	
  32

  
	
  5.11 Brokers

  	
  33

  
	
  ARTICLE VI
  CONDUCT OF COMPANY AND THE SUBSIDIARIES PENDING CLOSING

  	
  33

  
	
  6.1 Conduct
  and Preservation of Business.

  	
  33

  
	
  6.2 Restrictions on Certain
  Actions

  	
  34

  
	
  6.3 Conversion of Vaughan

  	
  36

  
	
  6.4 Retained Legacy Hedges

  	
  36

  
	
  ARTICLE VII
  ADDITIONAL AGREEMENTS OF THE PARTIES

  	
  36

  
	
  7.1 Access

  	
  36

  
	
  7.2
  Cooperation and Governmental Consents

  	
  37

  
	
  7.3 Notice of
  Litigation

  	
  37

  
	
  7.4 Notification of Certain
  Matters

  	
  37

  
	
  7.5
  Resignation of Officers and Directors

  	
  38

  
	
  7.6 Continued Employment; Post-Closing
  Compensation and Benefits.

  	
  38

  
	
  7.7 Taxes.

  	
  40

  
	
  7.8 Fees and
  Expenses.

  	
  46

  
	
  7.9 Publicity

  	
  47

  
	
  7.10 Books and
  Records

  	
  47

  
	
  7.11 HSR Act
  Filing

  	
  47

  
	
  7.12 No
  Amendment of Indemnification Provisions

  	
  48

  
	
  7.13 Third Party Consents

  	
  48

  
	
  7.14 No Solicitation of
  Transactions

  	
  48

  
	
  7.15 Financing Cooperation;
  Financial Information.

  	
  49

  
	
  7.16 FCC Filings.

  	
  49

  
	
  7.17 PFC Guarantees.

  	
  50

  
	
  7.18 New Projects and Capex
  Budget.

  	
  50

  
	
  7.19 PFC Retained Environmental
  Responsibilities and Indemnification.

  	
  50

  
	
  7.20 Cooperation with Audits

  	
  52

  
	
  7.21 Transition Services;
  Horizon License.

  	
  53

  
	
  7.22 PFC Assets

  	
  54

  



 


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  7.23 Buyer Put Option

  	
  54

  
	
  ARTICLE VIII
  BUYER’S DUE DILIGENCE AND TITLE DEFECT PROCESS

  	
  54

  
	
  8.1 Title Due Diligence
  Examination.

  	
  54

  
	
  8.2 Environmental Investigation.

  	
  59

  
	
  8.3 Cure of Certain Title
  Defects Post-Closing.

  	
  59

  
	
  8.4 Buyer Indemnification

  	
  60

  
	
  ARTICLE IX
  CONDITIONS TO OBLIGATIONS OF THE PARTIES; TERMINATION

  	
  60

  
	
  9.1 Conditions
  to Obligations of PFC, GP and the Company

  	
  60

  
	
  9.2 Conditions
  to Obligations of Buyer

  	
  61

  
	
  9.3
  Termination

  	
  63

  
	
  9.4 Effect of Termination

  	
  64

  
	
  9.5 Amendment

  	
  65

  
	
  9.6 Waiver

  	
  65

  
	
  ARTICLE X
  SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS; INDEMNIFICATION

  	
  65

  
	
  10.1 Survival.

  	
  65

  
	
  10.2
  Indemnification by PFC

  	
  66

  
	
  10.3
  Indemnification by Buyer.

  	
  67

  
	
  10.4
  Indemnification Proceedings.

  	
  68

  
	
  10.5
  Exclusivity.

  	
  69

  
	
  10.6
  Limitations on Indemnities.

  	
  70

  
	
  10.7 Indemnification Despite
  Negligence

  	
  71

  
	
  ARTICLE XI
  MISCELLANEOUS

  	
  71

  
	
  11.1 Dispute Resolution.

  	
  71

  
	
  11.2 Notices

  	
  73

  
	
  11.3 Entire
  Agreement

  	
  74

  
	
  11.4 Waiver of Compliance

  	
  75

  
	
  11.5 Binding
  Effect; Assignment; No Third Party Benefit

  	
  75

  
	
  11.6
  Severability

  	
  75

  
	
  11.7 Governing Law

  	
  75

  
	
  11.8 Consent to Jurisdiction;
  Venue.

  	
  75

  
	
  11.9 Further
  Assurances

  	
  76

  
	
  11.10 Counterparts

  	
  76

  
	
  11.11
  Injunctive Relief

  	
  76

  
	
  11.12
  Schedules

  	
  76

  
	
  11.13 Time of
  Essence

  	
  77

  
	
  11.14 Confidentiality

  	
  77

  
	
  11.15 Affiliate Liability

  	
  77

  
	
  11.16 Waiver of Jury Trial

  	
  78

  
	
  ARTICLE XII
  DEFINITIONS AND REFERENCES

  	
  78

  
	
  12.1 Certain
  Defined Terms

  	
  78

  
	
  12.2 References and Construction

  	
  91

  



 


iii

















 


EXHIBITS AND SCHEDULES


 


	
  Exhibits

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Exhibit A –

  	
   

  	
  Form of
  Transition Services Agreement

  
	
  Exhibit B –

  	
   

  	
  Form of
  Letter of Acknowledgment

  
	
  Exhibit C –

  	
   

  	
  Forms of
  Legal Opinions of Counsel to PFC, GP and the Company and Counsel to Buyer

  
	
   

  	
   

  	
   

  
	
  Schedules

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Schedule
  1.4(D)(1)

  	
   

  	
  Example of
  Presentation of Adjusted Interim EBITDA

  
	
  Schedule
  1.4(D)(2)

  	
   

  	
  Example of
  Presentation of Closing Date Working Capital

  
	
  Schedule
  7.7(C)(3)

  	
   

  	
  Section 1060
  Allocation (Post-signing)

  
	
  Schedule
  7.18

  	
   

  	
  Project Plan

  
	
  Schedule
  9.2(L)

  	
   

  	
  Required
  Third Party Consents

  
	
   

  	
   

  	
   

  
	
  Company
  Schedules

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Schedule
  3.1(C)

  	
   

  	
  GP and
  Holdco Foreign Qualifications

  
	
  Schedule 3.2

  	
   

  	
  Title to
  Interests

  
	
  Schedule 3.6

  	
   

  	
  Consents and
  Approvals

  
	
  Schedule 3.7

  	
   

  	
  Litigation

  
	
  Schedule
  3.8(A)

  	
   

  	
  PFC Benefit
  Plans

  
	
  Schedule
  3.8(C)

  	
   

  	
  Pension
  Liabilities

  
	
  Schedule
  3.8(D)

  	
   

  	
  Termination
  Benefits and/or Compensation

  
	
  Schedule
  4.1(B)

  	
   

  	
  Company
  Foreign Qualifications

  
	
  Schedule
  4.1(D)

  	
   

  	
  Other
  Company Activity

  
	
  Schedule 4.5(A)

  	
   

  	
  Non-Contravention

  
	
  Schedule
  4.5(B)

  	
   

  	
  Consents and
  Approvals

  
	
  Schedule
  4.6(B)

  	
   

  	
  Ownership/Capitalization
  of Subsidiaries

  
	
  Schedule
  4.6(C)(2)

  	
   

  	
  Subsidiary
  Foreign Qualifications

  
	
  Schedule
  4.7(A)

  	
   

  	
  Financial
  Statements

  
	
  Schedule
  4.7(B)

  	
   

  	
  GAAP
  Qualifications

  
	
  Schedule
  4.7(C)

  	
   

  	
  Distributions

  
	
  Schedule 4.8

  	
   

  	
  Undisclosed
  Liabilities

  
	
  Schedule 4.9

  	
   

  	
  Absence of
  Certain Changes or Events

  
	
  Schedule
  4.10

  	
   

  	
  Exceptions
  to Controls

  
	
  Schedule
  4.11

  	
   

  	
  Litigation

  
	
  Schedule
  4.12

  	
   

  	
  Exceptions
  to Compliance With Laws; Permits

  
	
  Schedule
  4.13

  	
   

  	
  FCC Licenses

  
	
  Schedule
  4.13(B)

  	
   

  	
  Exceptions
  to FCC Licenses

  
	
  Schedule
  4.14

  	
   

  	
  Taxes

  
	
  Schedule
  4.15(A)

  	
   

  	
  Company
  Contracts

  
	
  Schedule
  4.15(B)

  	
   

  	
  Certain Oil
  and Gas Contracts

  
	
  Schedule
  4.15(C)

  	
   

  	
  Enforceability
  of Company Contracts and Oil and Gas Contracts

  



 


iv

















 


	
  Schedule
  4.15(D)

  	
   

  	
  Compliance
  with Company Contracts and Oil and Gas Contracts

  
	
  Schedule
  4.15(E)

  	
   

  	
  Events
  Affecting Company Contracts and Oil and Gas Contracts

  
	
  Schedule
  4.15(F)

  	
   

  	
  Notice of
  Termination of Company Contracts and Oil and Gas Contracts

  
	
  Schedule
  4.16

  	
   

  	
  Owned Real
  Property, Leased Real Property

  
	
  Schedule
  4.17(A)

  	
   

  	
  Oil and Gas
  Properties

  
	
  Schedule
  4.17(A)(6)

  	
   

  	
  Suspense
  Funds

  
	
  Schedule
  4.17(A)(7)

  	
   

  	
  Royalty
  Owner Claims

  
	
  Schedule
  4.17(B)

  	
   

  	
  Imbalances

  
	
  Schedule
  4.17(C)

  	
   

  	
  Calls on
  Production

  
	
  Schedule
  4.17(D)

  	
   

  	
  Payment of
  Expenses on Properties

  
	
  Schedule
  4.17(E)

  	
   

  	
  Condition of
  Fixtures, Facilities and Equipment

  
	
  Schedule
  4.17(F), Part I

  	
   

  	
  Wells and
  Leases

  
	
  Schedule
  4.17(F), Part II

  	
   

  	
  Non-Producing
  Wells

  
	
  Schedule
  4.19

  	
   

  	
  Reserve
  Reports

  
	
  Schedule
  4.20(A)

  	
   

  	
  Tangible
  Midstream Assets

  
	
  Schedule
  4.21

  	
   

  	
  Environmental
  Matters

  
	
  Schedule
  4.23

  	
   

  	
  Insurance

  
	
  Schedule
  4.25

  	
   

  	
  Employee
  Related Matters

  
	
  Schedule 6.2

  	
   

  	
  Dispositions

  
	
  Schedule
  6.2(H)

  	
   

  	
  Intracompany
  Obligations

  
	
  Schedule 6.2(I)

  	
   

  	
  Hydrocarbon
  Sales Agreements

  
	
  Schedule 7.5

  	
   

  	
  List of
  Directors and Officers

  
	
  Schedule
  7.6(A)

  	
   

  	
  List of
  Employees

  
	
   

  	
   

  	
   

  
	
  Buyer
  Schedules

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Schedule
  7.19

  	
   

  	
  Environmental
  Defects

  
	
  Schedule
  8.1(D)

  	
   

  	
  Examined
  Properties

  
	
  Schedule
  8.1(F)(3)

  	
   

  	
  Allocated
  Values

  



 


v

















 


THIS AGREEMENT
AND PLAN OF MERGER, dated as of July 22,
2006, is by and between PROGRESS FUELS CORPORATION, a Florida corporation (“PFC”),
WINCHESTER ENERGY COMPANY, LTD., a Texas limited partnership (“Company”) and
WGC HOLDCO, LLC, a Texas limited liability company, the general partner of
Company (“GP”), on the one hand, and WINCHESTER ACQUISITION, LLC, a Delaware
limited liability company (“Buyer” which term shall also mean, from and after
the Effective Time, the entity surviving the Merger) on the other hand.


 


RECITALS:


 


A.            PFC
owns, directly and indirectly, 100% of the Equity Interests of PFC Gas
Holdings, LLC, a Florida limited liability company (“Holdco”), and GP.


 


B.            Holdco
and GP (collectively, the “Company Partners”) together own 100% of the
partnership interests of Company (the “Interests”).


 


C.            Holdco
owns, as the sole limited partner of the Company, 99% of the partnership
interests of Company. Holdco is the sole member and owns 100% of the membership
interests of GP. GP owns the remaining 1% of the partnership interests of, and
is the sole general partner of Company.


 


D.            Company
owns, as sole limited partner, 96.1% of the partnership interests of Winchester
Production Company, Ltd., a Texas limited partnership (“Winchester”). Company
is the sole member and owns 100% of the membership interests of Vaughan Holding
Company, LLC, a Texas limited liability company (“Vaughan”). Vaughan owns the
remaining 3.9% of the partnership interests of, and is the general partner of,
Winchester.


 


E.             Company,
owns, as sole limited partner, 99.5% of the partnership interests of TGG
Pipeline, Ltd., a Texas limited partnership (“TGG”). Vaughan owns the remaining
0.5% of the partnership interests of, and is the general partner of, TGG.


 


F.             Company,
owns, as sole limited partner, 99.5% of the partnership interests of Talco
Midstream Assets, Ltd., a Texas limited partnership (“Talco”). Vaughan owns the
remaining 0.5% of the partnership interests of, and is the general partner of,
Talco.


 


G.            Talco
owns 100% of the membership interests of Garrison Gathering, LLC, a Texas
limited liability company (“Garrison,” and, along with Winchester, TGG and
Talco, the “Operating Companies”).


 


H.            Garrison
owns a 50% undivided interest in the portion of the Midstream Assets serving
certain Oil and Gas Properties of Winchester in Nacogdoches and Shelby
Counties, Texas.


 


I.              Buyer
desires to acquire the Company and its Subsidiaries, and the parties have
determined that the most practical manner to give effect to such combination is
through the merger of the Company with and into Buyer.


 


1

















 


J.             Pursuant
to the Merger (as hereafter defined), each 1% of the outstanding Interests at
the Effective Time on the Closing Date will be converted into the right to
receive 1% of the Adjusted Purchase Price payable by Buyer as provided herein.


 


K.            Pursuant
to and in consideration of this Agreement, in connection with the Merger PFC
will cause Dulcimer Land Company, an Affiliate of PFC, to convey certain real
property interests to a designee of Buyer.


 


L.            The
Operating Companies and Vaughan are also referred to herein collectively as the
“Subsidiaries” and individually as a “Subsidiary.”


 


AGREEMENT:


 


NOW, THEREFORE,
in consideration of the mutual covenants and agreements contained herein, PFC,
GP and the Company and Buyer agree as follows:


 


ARTICLE I


THE MERGER AND THE PURCHASE PRICE


 


1.1           Agreement to Merge. Prior to the date hereof, PFC has caused Holdco, as the sole
limited partner of the Company, to provide its consent to and approval of this
Agreement and the Merger and the provisions regarding payment of the Adjusted
Purchase Price to GP on behalf of the Company Partners, pursuant to Applicable
Law and the Company Partnership Agreement. GP as general partner of the
Company, in connection with the consummation of the Closing and subject to the
terms and conditions of this Agreement, by its execution of this Agreement on
behalf of the Company, hereby consents to and approves this Agreement and the
Merger and will cause the Company to execute and deliver the Texas Certificate
of Merger.


 


1.2           The
Plan of Merger and Effective Time.


 


(A)          Subject to
the provisions of this Agreement, on the Closing Date GP shall cause the Texas
Certificate of Merger to be filed with the Secretary of State of the State of
Texas, as executed by Buyer in accordance with the TRLPA, Buyer shall cause the
Delaware Certificate of Merger to be filed with the Secretary of State of
Delaware pursuant to the DLLCA, and the Company and Buyer shall make all other
recordings or filings required under the TRLPA and the DLLCA. The Merger shall
become effective upon the later of filing of the Texas Certificate of Merger
with the Secretary of State of the State of Texas and the filing of the
Delaware Certificate of Merger with the Secretary of State of the State of
Delaware, or at such later date and time as is agreed to by PFC and Buyer prior
to such filing and is set forth in the Certificates of Merger (such time, the “Effective
Time” and such date, the “Effective Date”).


 


(B)           Upon the
terms and subject to the conditions of this Agreement and the Certificate of
Merger, at the Effective Time (1) the separate existence of the Company
shall cease and the Company shall be merged with and into Buyer in accordance
with the provisions of and with the effects provided in the TRLPA and the DLLCA (the “Merger”),
(2) the Certificate of Formation of Buyer shall be the certificate of
formation of Buyer until further amended in accordance with the DLLCA,
(3) the officers of the Buyer immediately prior to the Effective Time
shall be the officers of Buyer after the Effective Time, and such officers
shall


 


2

















 


serve until their successors have been duly elected or
appointed and qualified or until their earlier death, resignation or removal in
accordance with Buyer’s Certificate of Formation, Limited Liability Company
Agreement or the DLLCA, and (4) the Merger shall have the effects set
forth herein and in the DLLCA. Buyer shall be the surviving entity resulting
from the Merger and shall continue to be governed by the laws of the State of
Delaware. Without limiting the generality of the foregoing (or the consequences
of the Merger under Applicable Law), and subject thereto, at the Effective
Time, all rights, property, privileges, immunities, powers and franchises of
the Company shall vest in Buyer, and all debts, liability, obligations and
duties of the Company shall become the debts, liabilities, obligations and
duties of the Buyer.


 


(C)           At the
Effective Time, by virtue of the Merger and without any further action on the
part of the parties, each 1% of the Interests shall be automatically converted
into the right to receive payment of 1% of the Adjusted Purchase Price payable
by Buyer as provided herein with the aggregate amount of all such payments not
exceeding the Adjusted Purchase Price. As of the Effective Time, all of the
Interests shall cease to exist, and the Company Partners shall cease to have
any rights with respect thereto, except the right to receive the payments of
Adjusted Purchase Price as provided herein, and Buyer membership interests then
existing shall continue without change and no holder of a Buyer membership interest
shall be entitled to any consideration in connection with the Merger.


 


(D)          If,
pursuant to Section 1.6, Article VIII or Section 11.1, any
amount of the Adjusted Purchase Price paid to the Company Partners becomes
repayable to Buyer, such repayment obligation shall be an obligation of PFC and
not of the Company Partners or of GP or the Company.


 


1.3           Base Purchase Price. The consideration payable by Buyer in
the Merger shall be an aggregate cash purchase price of $1,195,000,000 (the
“Base Purchase Price”), as adjusted pursuant to this Agreement (the “Adjusted
Purchase Price”).


 


1.4           Adjustments
to the Base Purchase Price.


 


(A)          The Base
Purchase Price shall be increased by:


 


(1)           the
amount, if any, by which the Closing Date Working Capital exceeds zero;


 


(2)           the
Interim Capital Costs; and


 


(3)           the
amount, if any, by which zero exceeds the Adjusted Interim EBITDA.


 


(B)           The Base
Purchase Price shall be decreased by:


 


(1)           the
amount, if any, by which the Adjusted Interim EBITDA exceeds zero;


 


(2)           the
amount, if any, by which zero exceeds the Closing Date Working Capital;


 


3

















 


(3)           $2,160,000,
in compensation for the loss in value of the Winchester Hedges prior to
June 29, 2006;


 


(4)           the
amount of any Extraordinary Payments payable by the Company or any Subsidiary
and not otherwise satisfied by PFC prior to Closing;


 


(5)           the
amount of any Transaction Costs payable by the Company or any Subsidiary and
not otherwise satisfied by PFC prior to Closing;


 


(6)           the
actual aggregate Imbalances, if any, owed by the Company or any Subsidiary to
third parties, as of the Valuation Date, as set forth on Company Schedule
4.17(B), multiplied by a price of $6.9843 per MMBtu; and


 


(7)           if
the Put Election Notice is delivered to PFC in accordance with Section 7.23,
the aggregate amount of the Allocated Values for the Put Properties.


 


(C)           At least 5
Business Days prior to the Closing Date, GP shall deliver to Buyer wire
transfer instructions for the payment to GP on behalf of the Company Partners,
at Closing, of the Closing Payment pursuant to this Agreement. The Adjusted
Purchase Price (whether payable at Closing or thereafter) will be paid by wire
transfer of immediately available funds. GP shall be responsible for paying
from such account all amounts payable to Holdco as the other Company Partner
pursuant to the Merger and this Agreement.


 


(D)          The amount
of Base Purchase Price adjustments for Closing Date Working Capital, Interim
Capital Costs, Adjusted Interim EBITDA, Extraordinary Payments and Transaction
Costs shall be determined in accordance with this Agreement and the Accounting
Principles. By way of example only, (1) attached hereto as Schedule
1.4(D)(1) is a statement of Net Working Capital determined in accordance
with the foregoing as of 5:00 p.m., Dallas, Texas time on the Valuation Date,
and (2) attached hereto as Schedule 1.4(D)(2) is the calculation of
Adjusted Interim EBITDA determined in accordance with the foregoing as if the
relevant period were the six months
ended June 30, 2006.


 


1.5           Determination
of Adjusted Purchase Price; Preliminary Settlement Statement.


 


(A)          PFC shall
prepare and deliver to Buyer, no later than 5 Business Days prior to the
Closing Date, a detailed statement (the “Preliminary Settlement Statement”)
that shall reflect PFC’s good faith estimate of each adjustment to be made in
accordance with Section 1.4. The Preliminary Settlement Statement shall
include a detailed statement of the preliminary calculation of Closing Date
Working Capital, Adjusted Interim EBITDA, Interim Capital Costs, Transaction
Costs and Extraordinary Costs.


 


(B)           Buyer may
dispute in good faith any adjustment proposed in the Preliminary Settlement
Statement by delivering to PFC no later than 5:00 p.m., Dallas, Texas time
on the date that is 3 Business Days prior to the Closing Date a written notice
of any objection, specifically referring to the calculation component in issue
(e.g., the specific components of the Adjusted Interim EBITDA calculation to
which Buyer objects) and stating the reasons for the objection in reasonable
detail, as well as any calculation Buyer proposes as the correct calculation (a
“Preliminary Objection”). Buyer and the PFC shall use commercially


 


4

















 


reasonable efforts to resolve any such dispute set
forth in Buyer’s Preliminary Objection prior to Closing.


 


(C)           PFC shall
afford Buyer and its representatives the opportunity to review the Preliminary
Settlement Statement and such supporting schedules, analyses, workpapers, and
other underlying records or documentation as are reasonably necessary and
appropriate in Buyer’s review of the Preliminary Settlement Statement. Each
party shall cooperate fully and promptly with the other and their respective
representatives in such examination with respect to all reasonable requests
related thereto.


 


(D)          If Buyer
and PFC resolve a disputed item in an amount different than presented in the
Preliminary Settlement Statement, the Preliminary Settlement Statement will be
amended accordingly. If Buyer and PFC are not able to resolve a dispute
regarding an item to which Buyer objected, the Preliminary Settlement Statement
will be amended to delete the disputed portion in such item from the
Preliminary Settlement Statement and to note that such portion is disputed. At
the Closing Buyer shall pay the amount set forth as the Adjusted Purchase Price
in the Preliminary Settlement Statement as so amended, if amended (the “Closing
Payment”). The resolution of any unpaid disputed portion will occur pursuant to
Section 1.6.


 


(E)           After the
Closing, the Purchase Price shall be subject to further adjustment pursuant to
Section 1.6, and neither PFC’s delivery of an estimate of adjustments
pursuant to this Section 1.5, the delivery of a Preliminary Objection by
Buyer pursuant to this Section 1.5, the settlement of a disputed item as
reflected in an amended Preliminary Settlement Statement, nor the failure to
deliver any such dispute notice shall bar any such further adjustments pursuant
to Section 1.6.


 


1.6           Final
Settlement Statement.


 


(A)          On or
before the 90th day after the Closing Date, PFC shall prepare and deliver to
Buyer a statement (the “Final Settlement Statement”) setting forth PFC’s final
calculation of the adjustments to be made to the Purchase Price pursuant to
Section 1.4. The Final Settlement Statement shall include a detailed
statement of the (1) final statement of Closing Date Working Capital,
Adjusted Interim EBITDA, Interim Capital Costs, Transaction Costs and
Extraordinary Costs and (2) the amount of any Title Defects that PFC and
Buyer have agreed under Article VIII shall be deducted from the Adjusted
Purchase Price then unpaid by Buyer. The Final Settlement Statement shall show
the net amount due to the Company Partners, or repayable to Buyer by PFC, as
applicable, giving effect to the Closing Payment paid by Buyer at the Closing
and the Adjusted Purchase Price as shown in the Final Settlement Statement.


 


(B)           Buyer may
dispute in good faith any adjustment proposed in the Final Settlement Statement,
including the schedules thereto (other than amounts with respect to Title
Defects, which are determined according to Article VIII and
Section 11.1) by delivering to PFC, within 30 days after receipt of the
Final Settlement Statement, a written notice of objection specifically
referring to the calculation component in issue (e.g., the specific components
of the Adjusted Interim EBITDA calculation to which Buyer objects) and stating
the reasons for the objection in reasonable detail, as well as any calculation
Buyer proposes as the correct calculation (the “Final Objection Notice”). If
within 30 days following delivery of the Final


 


5

















 


Settlement Statement to Buyer, Buyer has not delivered
to PFC a Final Objection Notice, then the Final Settlement Statement shall be
deemed final and conclusive as to all items and such items shall thereafter not
be subject to any appeal or further challenge hereunder or otherwise. PFC and
Buyer shall use commercially reasonable efforts to resolve any item disputed in
the Final Objection Notice for a period of time not to exceed 30 days from the
date of Final Objection Notice (the “Final Settlement Date”).


 


(C)           PFC shall
afford Buyer and its representatives the opportunity to review the Final
Settlement Statement and such supporting schedules, analyses, workpapers, and
other underlying records or documentation as are reasonably necessary and
appropriate in Buyer’s review of the Final Settlement Statement. Each party
shall cooperate fully and promptly with the other and their respective
representatives in such examination with respect to all reasonable requests
related thereto.


 


(D)          If Buyer
and PFC resolve a disputed item in an amount different than presented in the
Final Settlement Statement, the Final Settlement Statement will be amended
accordingly. If Buyer and PFC are not able to resolve the disputed portion
regarding an item to which Buyer objected, the Final Settlement Statement will
be amended to delete such disputed portion from the Final Settlement Statement,
and to note that the item is disputed and is to be resolved pursuant to this
Section 1.6. Within 5 Business Days from the Final Settlement Date, the
party entitled to a payment as reflected in the Final Settlement Statement as
so amended, if amended, shall pay such amount by wire transfer of immediately
available funds.


 


(E)           If PFC and
Buyer are unable to agree upon an item in the Final Settlement Statement by the
Final Settlement Date, PFC and Buyer will refer all such disputed items to
Ernst & Young LLP (or, if such firm is unable or unwilling to act,
such other nationally recognized independent public accounting firm as shall be
agreed upon by Buyer and PFC in writing) (the “Referral Firm”). If any disputed
item is submitted to the Referral Firm for resolution, PFC and Buyer each shall
promptly enter into a reasonable and customary engagement letter with the
Referral Firm at the time a dispute is first submitted. The Referral Firm will
be directed to review the Final Settlement Statement and the records relating
thereto only with respect to items identified in Buyer’s Final Objection Notice
that remain disputed immediately following the Final Settlement Date, and
determine the final adjustments, other than adjustments with respect to
outstanding and unresolved Title Defects (which are to be determined according
to the procedures set forth in Article VIII and Section 11.1). Each
party shall furnish the Referral Firm such work papers and other records and
information relating to the objections in dispute as the Referral Firm may
reasonably request and that are available to such party or its Affiliates (and
such parties’ independent public accountants).


 


(F)           The
Referral Firm will apply the Accounting Principles in accordance with this
Agreement in assigning a value to each disputed item. To the extent that a
value has been assigned to any item that remains in dispute, the Referral Firm
shall not assign a value to such item that is greater than the greatest value
for such item claimed by PFC or Buyer or less than the smallest value for such
item claimed by PFC or Buyer, except in a case where PFC failed to provide to
Buyer the information as required by this Agreement for Buyer’s assessment of
the Final Settlement Statement.


 


6

















 


(G)           With
respect to any matter for which interpretation of this Agreement is required
for the settlement of matters under this Section 1.6, the Referral Firm
must construe this Agreement in accordance with the interpretation thereof
mutually agreed to by Buyer and PFC. If Buyer and PFC cannot agree on such
interpretation, such matter shall be submitted to arbitration in accordance
with Section 11.1 and the Referral Firm shall decide all other matters specified
for its determination in this Section 1.6 (if possible without an
interpretation, or as soon as practicable after the Referral Firm is advised of
the resolution of a contested interpretation necessary for the Referral Firm’s
decision). The decision of the Referral Firm shall be binding and conclusive on
Buyer, the Company Partners, and PFC, and shall not be subject to challenge
under Section 11.1 (except for any contention that the Referral Firm
exceeded its authority in rendering such decision) and such decision shall
constitute an arbitral award upon which a judgment may be entered by a court
having jurisdiction thereof.


 


(H)          The
Referral Firm shall deliver its final calculation of the Final Settlement
Statement as amended pursuant to Section 1.6(D) and as further amended by
the Referral Firm to reflect the Referral Firm’s determination as to each
disputed item submitted to it pursuant hereto, in writing to Buyer, GP and PFC
as soon as practicable, and PFC or Buyer, as applicable, shall pay and Buyer or
GP (on behalf of the Company Partners), as applicable, shall receive the amount
owed as stated therein (after taking into account all amounts previously paid
by all parties hereto), no later than the 5th Business Day following the owing
party’s receipt from the Referral Firm of its decision.


 


(I)            The net
amount due from Buyer to GP on behalf of the Company Partners, or from PFC to
Buyer, as a result of the decision of the Referral Firm, if any, shall be
increased by interest at the Prime Rate, accruing from the date such amount
should have been paid to the date of payment.


 


(J)            The
parties will, and will cause their representatives to, cooperate and assist in
the conduct of any review by the Referral Firm, including but not limited to
making available books, records and, as available, personnel as reasonably
required.


 


(K)          The fees
and expenses of the Referral Firm shall be borne one-half each by Buyer and
PFC.


 


ARTICLE II

CLOSING


 


2.1           Closing.
The closing of the transactions contemplated hereby (the “Closing”) shall take
place (A) at the offices of Hunton
& Williams LLP in Dallas, Texas, at 10:00 a.m. (local Dallas,
Texas time) on the later of (i) October 2, 2006; or (ii) the
first Business Day of the month following the satisfaction (or waiver by the party
or parties entitled to the benefit thereof) of each of the conditions set forth
in Sections 9.1 and 9.2 (other than those conditions that by their nature
are to be satisfied at the Closing, but subject to the fulfillment or waiver of
those conditions at the Closing) or (B) at such other time or place or on
such other date as the parties hereto shall agree. The date on which the
Closing is required to take place is herein referred to as the “Closing Date.”  All Closing transactions shall be deemed to
have occurred simultaneously.


 


7

















 


2.2           Deliveries
by PFC and the Company. At the Closing, PFC and the Company shall deliver
or cause to be delivered to Buyer the following:


 


(A)          a
counterpart of the transition services agreement substantially in the form
attached hereto as Exhibit A (the “Transition Services Agreement”),
duly executed by PFC and Buyer;


 


(B)           evidence
of the filing of the Texas Certificate of Merger;


 


(C)           the Letter
of Acknowledgment, duly executed by all necessary parties;


 


(D)          evidence
reasonably satisfactory to Buyer of the complete cancellation of all
Intracompany Obligations without further obligation by the Company or any
Subsidiary thereafter;


 


(E)           a
certificate of non-foreign status, duly executed by the Company which meets the
requirements of the Department of Treasury (“Treasury”) Regulation
Section 1.1445-2(b)(2);


 


(F)           the
certificate described in Section 9.2(D);


 


(G)           all
documentation evidencing the Winchester Hedges and the Retained Legacy Hedges,
and (1) with respect to the Retained Legacy Hedges, evidence reasonably
satisfactory to Buyer that prior to the Closing, one of the two alternatives
contemplated in Section 6.4 hereof has been effectuated; (2) with
respect to the Set-Aside Hedges, evidence reasonably satisfactory to Buyer that
prior to the Closing, such transactions have been terminated such that none of
the Company or any Subsidiary has any continuing obligation or liability with
respect to such transactions; and (3) with respect to the other Non-Retained
Legacy Hedges (other than the Set-Aside Hedges), evidence reasonably
satisfactory to Buyer that prior to the Closing, the Company has either
(a) terminated and liquidated such transactions such that the party to
such transactions that is net out-of-the-money pays the other party to such
transactions such net liquidated amount, or (b) assigned each such
transaction to a third party other than the Company or any Subsidiary, such
that in either case, as of the Closing, none of the Company or any Subsidiary
has any continuing obligation or liability with respect to such transactions;


 


(H)          an Asset
Purchase Agreement and Special Warranty Deed or other instruments of conveyance
reasonably acceptable to Buyer in form and substance, conveying to Buyer (or
Buyer’s designee(s)) interests in oil and gas owned by Dulcimer Land Company,
an Affiliate of PFC, as described in such Special Warranty Deed (or other
instrument) executed by Dulcimer Land Company;


 


(I)            a legal opinion rendered by counsel to PFC,
GP and the Company in substantially the form attached hereto as Exhibit C;
and


 


(J)            the
Horizon License.


 


8

















 


2.3           Deliveries
by Buyer. At the Closing, Buyer shall deliver or cause to be delivered to PFC,
the Company or any Subsidiary, as applicable the following:


 


(A)          immediately
available funds in an amount equal to the Closing Payment pursuant to the
provisions of Section 1.5(D);


 


(B)           the
certificate described in Section 9.1(C);


 


(C)           a legal
opinion rendered by counsel to Buyer in substantially the form attached hereto
as Exhibit C;


 


(D)          evidence of
the filing of the Delaware Certificate of Merger;


 


(E)           the Asset
Purchase Agreement identified in Section 2.2(H), in form and substance
reasonably acceptable to Buyer, and payment pursuant to the Asset Purchase
Agreement of $5,000,000 to GP on behalf of Dulcimer Land Company as
consideration for the assets conveyed by Dulcimer Land Company.


 


ARTICLE III

REPRESENTATIONS AND WARRANTIES OF PFC AND GP


 


PFC and GP
jointly and severally represent and warrant to Buyer as follows:


 


3.1           Organization.


 


(A)          PFC is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Florida. Holdco is a limited liability company duly organized,
validly existing and in good standing under the laws of the State of Florida. GP
is a limited liability company duly organized, validly existing and in good
standing under the laws of the State of Texas.


 


(B)           PFC has
full power and authority to own, lease and operate its properties and to
conduct its business as it is now being conducted. Each Company Partner has
full power and authority to own, lease and operate its properties and to
conduct its business as it is now being conducted.


 


(C)           PFC is
duly qualified to do business as a corporation and is in good standing in each
jurisdiction in which the nature of its business or the ownership or leasing of
its properties makes such qualification or licensing necessary under Applicable
Law as a result of the conduct of its business and the ownership or lease of
its properties. Each Company Partner is duly qualified or licensed to do
business as a limited liability company and is in good standing in each
jurisdiction in which the nature of its business or the ownership or leasing of
its properties makes such qualification or licensing necessary, and all such
jurisdictions are set forth on Company Schedule 3.1(C).


 


3.2           Title to Interests. PFC is (and at the Closing will be)
the record and beneficial owner of all of the Equity Interests of Holdco, which
is the sole limited partner of the Company and the sole member of GP, the sole
general partner of the Company. Each Company Partner


 


9

















 


has good, valid,
and marketable title to the Interests, free and clear of all Liens other than
(A) liens that may arise by virtue of any actions taken by or on behalf of
Buyer or its Affiliates, (B) restrictions on transfer that may be imposed
by federal or state securities laws, and (C) restrictions on transfer
described on Company Schedule 3.2, all of which will be cancelled
as of the Closing.


 


3.3           Authority.


 


(A)          PFC has all
requisite corporate power and authority, and each Company Partner has all
requisite limited liability company power and authority, to execute, deliver,
and perform this Agreement and the other Transaction Documents to which it is a
party and to consummate the transactions contemplated hereby and thereby. GP
has all requisite limited liability company power and authority to act as the
general partner of the Company, and Holdco has all requisite limited liability
company power and authority to act as the limited partner of the Company.


 


(B)           The
execution and delivery by PFC and GP of this Agreement and the other Transaction
Documents to which it is a party and the consummation of the transactions
contemplated hereby and thereby have been duly and validly authorized by all
necessary corporate or limited liability company action on the part of PFC, GP,
for and on behalf of itself and in its capacity as the general partner of the
Company, and Holdco, for and on behalf of itself and in its capacity as the
limited partner of the Company, and no other proceedings on the part of PFC and
each Company Partner are necessary to authorize the execution or delivery of
such Transaction Documents or to consummate the transactions contemplated
hereby and thereby.


 


(C)           Prior to
the date hereof, GP, as the general partner of the Company, has consented to
and approved this Agreement and the Merger in accordance with the Governing
Documents of the Company, and no other approval by the Company Partners is
necessary to approve and adopt this Agreement and the transactions contemplated
hereby.


 


3.4           Valid
and Binding Agreement. Each of this Agreement and the other Transaction
Documents to which PFC and GP are a party has been, or when executed will be,
duly and validly executed and delivered by PFC and GP, as applicable, and
constitutes, or when executed and delivered will constitute, PFC’s and GP’s
valid and legally binding obligation, enforceable against it in accordance with
its terms, except as such enforceability may be limited by bankruptcy,
insolvency, moratorium or other similar laws affecting or relating to the
enforcement of creditors’ rights generally and the application of general
principles of equity (regardless of whether that enforceability is considered
in a proceeding at law or in equity).


 


3.5           Non-Contravention. Except for the Consents described on
Company Schedule 3.6, neither the execution, delivery, and
performance by PFC and GP of this Agreement and each other Transaction Document
executed or to be executed by PFC or GP or both in connection with the
transactions contemplated hereby and thereby, nor the consummation by it of the
transactions contemplated hereby and thereby will (with or without the giving
of notice or the passage of time or both) (A) conflict with or result in a
violation of any provision of, or constitute a breach of or default under, or
give rise to a right to impose any fine or penalty, any right of termination,
cancellation, amendment, modification, payment or acceleration, the


 


10

















 


loss of a material
benefit under any provision of any bond, debenture, note, mortgage, lease,
license, franchise, indenture, or any other Contract or other instrument or
obligation to which it is a party or by which it or any of its properties may
be bound or subject, (B) conflict with or result in a violation of any
provision of the Governing Documents of PFC or GP, as amended, (C) violate
any Applicable Law binding upon it or any of its properties (which
representation, with respect to federal and state securities laws, is made in
reliance on Buyer’s representations in Sections 5.8 through 5.10); or
(D) give rise to a right to purchase or foreclose upon any Interests,
other than as contemplated by this Agreement, or result in the creation of a
Lien on any of the Interests.


 


3.6           Consents and Approvals. Except in connection with the filing
of a pre-merger notification report and any other filings required under the
HSR Act, the filing of the Merger Certificates, or as set forth on Company
Schedule 3.6, no Consent is required to be obtained or made by PFC or any
Company Partner in connection with the execution, delivery, or performance by
PFC or GP of this Agreement and the other Transaction Documents to which it is
a party or the consummation by it of the transactions contemplated hereby and
thereby (which representation, with respect to federal and state securities
laws, is made in reliance on Buyer’s representations in Sections 5.8
through 5.10).


 


3.7           Pending
Litigation. Except as set forth on Company Schedule 3.7, there are
no Proceedings pending or, to the Knowledge of PFC or GP, threatened, in which
PFC, GP, Holdco or any Affiliate thereof is or may be a party, affecting the
execution and delivery of this Agreement or any other Transaction Documents by
PFC or GP or the consummation by PFC, GP or Holdco of the transactions
contemplated hereby and thereby.


 


3.8           PFC
Benefit Plans.


 


(A)          Company
Schedule 3.8(A) sets forth a list of each of the following which is
sponsored, maintained or contributed to by PFC or any trade or business
(whether or not incorporated) which is under common control, or which is
treated as a single employer, with PFC under Section 414(b), (c), (m) or
(o) of the Code (a “PFC ERISA Affiliate”), or which has been so sponsored,
maintained or contributed to within six years prior to the Closing Date, in
which any Affected Employee (as defined in Section 7.6(A)) currently
participates or may be eligible for a benefit (the “PFC Benefit Plans”):


 


(1)           each
“employee benefit plan,” as such term is defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended (“ERISA”),
(including, but not limited to, employee benefit plans, such as foreign plans,
which are not subject to the provisions of ERISA) (each a “Plan,” and
collectively, the “Plans”); and


 


(2)           each
material personnel policy, stock option plan, stock purchase plan, stock
appreciation rights plan, phantom stock plan, collective bargaining agreement,
bonus plan or arrangement, incentive award plan or arrangement, vacation
policy, educational, adoption or dependent care assistance program, severance
pay plan, policy or agreement, deferred compensation agreement or arrangement,
executive compensation or supplemental income arrangement,


 


11

















 


consulting agreement,
employment agreement and each other employee benefit plan, agreement,
arrangement, program, practice or understanding (each a “Benefit Program or
Agreement,” and collectively the “Benefit Programs or Agreements”).


 


(B)           The most
recent determination letter from the IRS and any outstanding determination
letter applications for each PFC Benefit Plan intended to be qualified under
Section 401 of the Code have been provided to Buyer.


 


(C)           Except as
set forth in Company Schedule 3.8(C), neither PFC nor any PFC ERISA
Affiliate (including the Company and the Subsidiaries) has incurred any of the
following liabilities, except for liabilities that have been discharged, and
neither PFC nor any of its Affiliates (including the Company and the
Subsidiaries) nor Buyer will incur or become subject to any such liabilities as
a result of the transactions contemplated by this Agreement (1) any
withdrawal liability, within the meaning of Section 4201 of ERISA;
(2) any liability to the Pension Benefit Guaranty Corporation; and
(3) any accumulated funding deficiency, whether or not waived, within the
meaning of Section 302 of ERISA or Section 412 of the Code;


 


(D)          Except as
disclosed in Company Schedule 3.8(D), the execution and delivery of this
Agreement and the consummation of the transaction(s) contemplated hereby will
not (1) require the Company or any Subsidiary to make a larger
contribution to, or pay greater compensation or benefits under, any Plan or
Benefit Program or Agreement than it otherwise would, whether or not some other
subsequent action or event would be required to cause such payment or provision
to be triggered, (2) create or give rise to any additional vested rights
or service credits under any Plan or Benefit Program or Agreement, or
(3) result in any payment to any Affected Employee failing to be deductible
by the Company or any Subsidiary under Code Section 280G or any Affected
Employee being subject to a Tax to the extent that it would constitute a
penalty under Code Section 409A or 4999.


 


ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF PFC AND THE COMPANY


 


PFC and the
Company jointly and severally represent and warrant to Buyer as follows:


 


4.1           Organization.


 


(A)          The Company
is a limited partnership duly formed and validly existing under the laws of the
State of Texas and has all requisite limited partnership power and authority to
carry on its business as now being conducted.


 


(B)           The
Company is duly qualified or licensed to do business and in good standing in
each jurisdiction in which the nature of its business or the ownership or
leasing of its properties makes such qualification or licensing necessary, and
all such jurisdictions are set forth on Company Schedule 4.1(B).


 


12

















 


(C)           The
Company does not have any Proceeding pending, or to the Knowledge of PFC and
the Company, threatened, against it to dissolve or liquidate the Company or any
of the Subsidiaries.


 


(D)          Except as
set forth on Company Schedule 4.1(D), since its inception, the Company
has not engaged in any activity, other than actions in connection with
(1) its organization, (2) the purchase and ownership of all of the
outstanding Equity Interests of the Subsidiaries, (3) the preparation,
negotiation and execution of this Agreement and the other Transaction Documents
and the consummation of the transactions contemplated hereby and thereby, and
(4) other actions solely in connection with the business of the Operating
Companies.


 


4.2           Governing Documents.


 


(A)          PFC and the
Company have made available to Buyer accurate and complete copies of:


 


(1)           the
Governing Documents as in effect as of the date hereof for each of Company,
Holdco, GP and the Subsidiaries (except as to the new Subsidiary formed
pursuant to Section 6.3, with respect to which this representation and
warranty will speak as of the date of formation); and


 


(2)           minutes
of all meetings of the GP (as general partner of the Company) and the governing
body or general partner, as applicable, of the Subsidiaries, along with all
written consents and resolutions of the GP and the governing body or general
partner of Holdco and the Subsidiaries, any committees of such governing bodies
and the members, or other equity holders of the GP, the Company and the
Subsidiaries in the possession of PFC, the GP, the Company, Holdco, and any
Subsidiary (which, as to the period of time from and after April 25, 2002,
represent all of such minutes, consents and resolutions).


 


(B)           Such
Governing Documents, minutes, consents and resolutions accurately reflect the
current Equity Interests in the Company and the Subsidiaries.


 


4.3           Capital
Structure.


 


(A)          The Interests are not subject to, and have not been issued in
violation of, preemptive rights, preferential rights of subscription or
purchase or similar rights.


 


(B)           Except
for the Interests and the rights created by this Agreement, there are (and as
of the Closing Date there will be) outstanding or in existence:


 


(1)           no
partnership interests or other Equity Interests or debt securities of the
Company; and


 


(2)           no
equity equivalents, interests in the ownership or earnings, or other similar
rights of or with respect to the Company.


 


13

















 


(C)           No Equity
Interests of the Company are reserved for issuance or for any other purpose.


 


(D)          There are
no issued or outstanding bonds, debentures, notes or other indebtedness having
the right to vote on any matters pertaining to the Company.


 


(E)           There are
(and as of the Closing Date there will be) no outstanding obligations of the
Company to repurchase, redeem, or otherwise acquire any Interests or other
Equity Interests of the Company.


 


4.4           Authority, Valid and Binding Agreement.


 


(A)          The Company has all requisite power and authority to execute, deliver,
and perform this Agreement and the other Transaction Documents to which it is a
party and to consummate the transactions contemplated hereby and thereby.


 


(B)           The
execution and delivery by the Company of this Agreement and the other
Transaction Documents to which it is a party and the consummation of the
transactions contemplated hereby and thereby have been duly and validly
authorized by all necessary action on the part of the Company, and, except for the consent of the limited partner of Company
as required by the Company Partnership Agreement, which consent will be
delivered at Closing, no other proceedings on the part of the Company
are necessary to authorize the execution or delivery of such Transaction
Documents or to consummate the transactions contemplated hereby and thereby.


 


(C)           This Agreement has been duly executed
and delivered by the Company and constitutes, and each other Transaction
Document to be executed by the Company in connection with the transactions
contemplated hereby and thereby to which it is a party has been, or when
executed will be, duly executed and delivered by the Company, and constitutes,
or when executed and delivered will constitute, a valid and legally binding
obligation of the Company, enforceable against the Company in accordance with
their respective terms, except as such enforceability may be limited by bankruptcy,
insolvency, moratorium or other similar laws affecting or relating to the
enforcement of creditors’ rights generally and the application of general
principles of equity (regardless of whether that enforceability is considered
in a proceeding at law or in equity).


 


4.5           Non-Contravention, Consents and Approvals.


 


(A)          Except as set forth on Company
Schedule 4.5(A), neither the execution, delivery, and performance by the
Company of this Agreement and each other Transaction Document executed or to be
executed by the Company in connection with the transactions contemplated hereby
and thereby, nor the consummation by it of the transactions contemplated hereby
and thereby will (with or without the giving of notice or the passage of time
or both):


 


(1)           conflict
with or result in a violation of any provision of the Governing Documents of
the Company or any Subsidiary;


 


14

















 


(2)           result
in the creation or imposition of any Lien (other than Permitted Encumbrances) on
any of the Company’s or any Subsidiary’s properties or other assets;


 


(3)           conflict
with or result in a violation of any provision of, or constitute a breach of or
default under, or give rise to a right to impose any fine or penalty, a right
to purchase or foreclose upon any of the Properties or Midstream Assets, any
right of termination, cancellation, amendment, modification, payment or
acceleration, the loss of a material benefit, or result in the creation of any
Lien on any Interests under any provision of any bond, debenture, note,
mortgage, lease, license, franchise, 
indenture, or any other Contract or other instrument or obligation to
which the Company or a Subsidiary is a party or by which the Company any Subsidiary
or any of the Company’s or a Subsidiary’s properties may be bound or subject;
or


 


(4)           violate
in any material respect any Applicable Law binding upon the Company or any
Subsidiary or any of their respective properties, including the Properties and
Midstream Assets; and


 


(B)           except in
connection with the filing of a premerger notification report and any other
filings required under the HSR Act, the filing of the Merger Certificates, or
as set forth on Company Schedule 4.5(B) no consent, approval, order, or
authorization of, or declaration, filing, or registration with, any
Governmental Entity or of any third party is required to be obtained or made by
the Company or any Subsidiary in connection with the execution, delivery, or
performance by the Company of this Agreement, each other Transaction Document
executed or to be executed by the Company or any Subsidiary in connection with
the transactions contemplated hereby to which they are a party or the
consummation by them of the transactions contemplated hereby and thereby.


 


4.6           Ownership;
Capitalization of Subsidiaries.


 


(A)          Except for
the Company’s direct or indirect ownership in the Subsidiaries, the Company
does not own, directly or indirectly, or have the right to acquire, by Contract
or otherwise, any capital stock of, or other Equity Interest in, any Person.


 


(B)           Company
Schedule 4.6(B) sets forth a true and complete list of the jurisdiction of
incorporation or organization of each Subsidiary and the number and percentage
of each Subsidiary’s outstanding Equity Interests owned by the Company or
another Subsidiary as defined therein (subject to the transfers by Vaughan
contemplated by Section 6.3).


 


(C)           Each
Subsidiary:


 


(1)           is
duly formed, validly existing and, if applicable, in good standing under the
laws of the jurisdiction of its formation;


 


(2)           is
duly qualified or licensed to do business as a foreign entity and in good
standing in each jurisdiction in which the nature of its business or the
ownership or leasing of its properties makes such qualification or licensing


 


15

















 


necessary, and all such
jurisdictions are set forth on Company Schedule 4.6(C)(2); and


 


(3)           has
all requisite entity power and authority to carry on its business as now being
conducted.


 


(D)          No
Subsidiary has any Proceeding pending, or to the Knowledge of PFC and the
Company, threatened, against it to dissolve or liquidate such Subsidiary.


 


(E)           No Equity Interests of any Subsidiary
are subject to, nor have any been issued in violation of, preemptive rights,
preferential rights of subscription or purchase of any Person or any similar
rights.


 


(F)           All the
outstanding Equity Interests of each Subsidiary are owned directly or
indirectly by the Company, free and clear of all Liens.


 


(G)           Except as set forth on Company Schedule 4.6(B), there are
outstanding:


 


(1)           no
Equity Interests or debt securities of any Subsidiary; and


 


(2)           no
equity equivalents, interests in the ownership or earnings, or other similar
rights of or with respect to any Subsidiary.


 


(H)          No Equity
Interests of any Subsidiary are reserved for issuance or for any other purpose.


 


(I)            There are
no issued or outstanding bonds, debentures, notes or other indebtedness having
the right to vote on any matters pertaining to any Subsidiary.


 


(J)            There are
(and as of the Closing Date there will be) no outstanding obligations of the
Company or any Subsidiary to repurchase, redeem, or otherwise acquire any
Equity Interests of any Subsidiary.


 


4.7           Financial
Statements.


 


(A)          Company Schedule 4.7(A) sets forth accurate and complete copies
of:  (1) the unaudited consolidated
balance sheets of the Company and the Subsidiaries as of December 31,
2005, 2004 and 2003, together with the unaudited consolidated statements of
income for each of the years then ended and (2) the unaudited consolidated
balance sheet of the Company and the Subsidiaries as of June 30, 2006 (the
“Balance Sheet”), together with the unaudited consolidated statements of income
for the six-month period then ended (collectively, the “Financial Statements”).


 


(B)           The Financial Statements for 2005 and 2006 fairly present in all material
respects the consolidated financial position of the Company and the
Subsidiaries as of their respective dates and the consolidated results of
operations of the Company and the Subsidiaries for the periods indicated
therein, and have been prepared in accordance with GAAP applied on a consistent
basis throughout the periods involved (except: 
for (i) the absence of notes thereto as


 


16

















 


required by GAAP:  (ii) as noted on Company Schedule
4.7(B) and, (iii) as to the June 30, 2006 interim statements, to
immaterial year-end adjustments). The Financial Statements have been prepared
from, and are consistent with, the books and records of the Company and the
Subsidiaries. The books and records of the Company and the Subsidiaries have
been, and are being, maintained in accordance with GAAP and any other
applicable legal and accounting requirements and reflect only actual
transactions.


 


(C)           Since the Valuation Date, there have been no distributions by the Company
or any of the Subsidiaries to PFC or any Related Affiliate of cash or Equity
Interests except as set forth on the June 30, 2006 Financial Statements or
Company Schedule 4.7(C). There is no Indebtedness of the Company and the
Subsidiaries other than (1) the Intracompany Obligations and (2) the
Retained Legacy Hedges, the Non-Retained Legacy Hedges, and the Winchester
Hedges.


 


4.8           Undisclosed Liabilities. There is no liability or obligation
of any kind, whether accrued, absolute, secured, unsecured, fixed, contingent,
or otherwise, of the Company and/or the Subsidiaries other than (A) liabilities
adequately reflected or reserved against in the Balance Sheet, (B) liabilities
incurred in the Ordinary Course of Business since June 30, 2006,
(C)liabilities disclosed in Company Schedule 4.8, and (D) liabilities
that would not be required to be presented in financial statements or the notes
thereto prepared in conformity with GAAP applied in a manner consistent with
past practice, in the preparation of the Financial Statements that in the
aggregate are not material to the financial condition or operating results of
the Company and the Subsidiaries taken as a whole.


 


4.9           Absence
of Certain Changes or Events. Except as otherwise set forth in Company
Schedule 4.8 or Company Schedule 4.9, since June 30,
2006, (A) the Company and each Subsidiary has conducted their respective
businesses in all material respects in the Ordinary Course of Business, except
as modified to be able to represent compliance with the performance of the
covenants set forth in Sections 6.1,  6.2, and 6.3, and
(B) there has not been any event, occurrence, circumstance or fact that
has had or would be reasonably likely to result in or constitute, individually
or in the aggregate, a Material Adverse Effect. Except as set forth in Company
Schedule 4.9, since June 30, 2006, neither the Company nor any
Subsidiary has acted or failed to act in a manner that would have been
prohibited by Sections 6.2(F) through 6.2(N) if the terms of such
Sections had been in effect as of and after such date.


 


4.10         Controls
and Procedures.


 


(A)          The Company
and the Subsidiaries have operated under Progress Energy, Inc. systems of
internal accounting controls sufficient to provide reasonable assurances at a
Progress Energy, Inc. level of materiality that (1) all transactions
related to the Company or any Subsidiary are executed in accordance with
management’s general or specific authorization, (2) except as set forth on
Company Schedule 4.10, transactions are recorded as necessary to
permit preparation of the consolidated financial statements of the Company and
the Subsidiaries and to maintain accountability for the Company’s and the
Subsidiaries’ assets, and (3) access to the property and assets of the
Company or any Subsidiary is permitted only in accordance with management’s
general or specific authorization. Except as set forth on Company Schedule
4.10, to the Knowledge of PFC and the Company, at a Progress Energy, Inc.,
level of materiality, there


 


17

















 


are (1) no significant deficiencies in the design
or operation of internal controls that could adversely affect the Company’s or
any Subsidiary’s ability to record, process, summarize and report financial
data, (2) any material weaknesses in the Company’s or any Subsidiary’s
internal controls and (3) any fraud, whether or not material, that
involves management or other employees who have a significant role in the
Company’s or any Subsidiary’s internal control over financial reporting.


 


(B)           PFC AND THE COMPANY MAKE NO REPRESENTATION WITH
RESPECT TO ANY FINANCIAL INFORMATION OF THE COMPANY AND THE SUBSIDIARIES
DELIVERED TO BUYER OTHER THAN AS CONTAINED IN THIS AGREEMENT AND THE SCHEDULES
HERETO OR ANY REPRESENTATION OR WARRANTY WITH RESPECT TO THE INFORMATION
PRESENTED OR REFLECTED IN THE FINANCIAL STATEMENTS OTHER THAN AS CONTAINED IN
THIS AGREEMENT AND THE SCHEDULES HERETO.


 


4.11         Pending Litigation.


 


(A)          Except as
set forth in Company Schedule 4.11, (1) no Proceeding is pending
or, to the Knowledge of PFC or the Company, threatened against the Company, the
Subsidiaries or any of their respective assets, the Properties or the Midstream
Assets, (2) to the Knowledge of PFC and the Company, no circumstances
exist that reasonably could be expected to give rise to a material Proceeding,
and (3) neither the Company nor any Subsidiary is subject to any
outstanding injunction, judgment, order, decree, compliance or settlement
agreement, conciliation agreement, memorandum of understanding, writ, letter of
commitment, deficiency letter or ruling issued by a Governmental Entity (other
than routine oil and gas field regulatory orders). True, correct and complete
copies of all pleadings, orders and settlement Contracts relating to each
matter identified in Company Schedule 4.11 have been made available to
Buyer.


 


(B)           There are
no Proceedings pending or, to the Knowledge of PFC or the Company, threatened,
in which the Company or any Subsidiary is or may be a party affecting the
execution and delivery of this Agreement or any other Transaction Document by
the Company or the consummation of the transactions contemplated hereby and
thereby.


 


4.12         Compliance
with Laws; Permits. Except as set
forth on Company Schedule 4.12:


 


(A)          the Company
and the Subsidiaries are in compliance in all material respects with all
Applicable Laws (including with respect to the jurisdiction of the Texas
Railroad Commission, the Louisiana Office of Conservation and the Louisiana
Public Service Commission), and none of the Company, PFC or any Subsidiary has
received any written or, to the Knowledge of PFC and the Company, oral, notice
from any Governmental Entity or any other Person that the Company or any
Subsidiary is in violation of, or has violated, any Applicable Laws in any
material respect that remain unresolved;


 


(B)           each of
the Company and the Subsidiaries has obtained and holds all material federal,
state and local governmental Permits reasonably necessary for the lawful
conduct of its business and the lawful ownership, lease, use and operation of
the Properties and


 


18

















 


the Midstream Assets, and each of the Company and the
Subsidiaries is in compliance in all material respects with all such Permits;
and


 


(C)           neither
the execution and delivery of this Agreement or the other Transaction Documents
by PFC, the GP or the Company nor the consummation by the Company of the
transactions contemplated hereby and thereby will result in a violation or
breach of, or constitute (with or without due notice or lapse of time or both)
a default (or give rise to a right of termination or cancellation) under, any
Permit.


 


4.13         FCC
Licenses.


 


(A)          One or more
of the Company and the Subsidiaries holds the FCC Licenses listed and described
on Company Schedule 4.13 (the “FCC Licenses”).


 


(B)           Except as
set forth on Company Schedule 4.13(B):


 


(1)           the
FCC Licenses are not material to the conduct of the business of the Company and
the Subsidiaries and do not apply to the SCADA system. To the Knowledge of PFC
and the Company, the FCC Licenses constitute all of the authorizations required
under the Communications Act, or the rules, regulations and policies of the FCC
for the present operation of the facilities for which the FCC Licenses have
been issued (each such facility individually, a “Station” and collectively the “Stations”);


 


(2)           the
FCC Licenses are in full force and effect and have not been revoked, suspended,
canceled, rescinded or terminated and have not expired;


 


(3)           there
is no pending or threatened formal action by or before the FCC to revoke,
suspend, cancel, rescind or modify any of the FCC Licenses (other than
proceedings relating to FCC Rules of general applicability) and there is no
order to show cause, notice of violation, notice of apparent liability, or
notice of forfeiture or complaint pending or threatened against PFC, the
Company, any Subsidiary or any of the Stations by or before the FCC;


 


(4)           to
the Knowledge of PFC and the Company, the Company, the Subsidiaries and each of
the Stations are in compliance in all material respects with the FCC Licenses
and the Communications Act;


 


(5)           PFC,
the Company, the Subsidiaries and the Stations are in compliance in all
material respects with all rules and regulations of the Federal Aviation
Administration applicable to the Stations;


 


(6)           all
reports and filings required to be filed with, and all regulatory fees required
to be paid to, the FCC by PFC, the Company or any Subsidiary with respect to
each Station have been timely filed and paid; and


 


(7)           all such
reports and filings are accurate and complete.


 


19

















 


4.14         Taxes.
Except as set forth on Company Schedule 4.14:


 


(A)          Each of the
Company and Winchester is taxable as a corporation for federal (but not Texas)
tax purposes, each of the Subsidiaries (other than Winchester) is a disregarded
entity for federal (but not Texas) tax purposes as defined in Treasury
Regulation §§ 301.7701-1 to 301.7701-3, and Winchester will become such a
disregarded entity effective before the Closing Date as provided in
Section 7.7(C)(1).


 


(B)           Each of
the Company and the Subsidiaries has timely filed (taking into account all
properly granted extensions) all material Tax Returns required to be filed by
it with respect to all Taxes, and all such Tax Returns are true, correct and
complete in all material respects.


 


(C)           Each of
the Company and the Subsidiaries has paid all Taxes which are due and payable
by it, and there are no unpaid Taxes of any predecessor entity for which any of
the Company and the Subsidiaries is liable. The reserve for Tax liabilities
(other than liabilities for income Taxes and liabilities for property Taxes) of
the Company and the Subsidiaries reflected in the Balance Sheet adequately
reflects (in accordance with GAAP) all such Taxes accrued through the date
thereof. Neither the Company nor any of the Subsidiaries has incurred any
liability for Taxes (excluding any federal income Taxes of the PFC Group) after
the date of the Balance Sheet other than in the Ordinary Course of Business or
as a result of the transactions contemplated by this Agreement. All Tax
withholding and deposit requirements imposed on or with respect to the Company
and the Subsidiaries, or for which the Company or any of the Subsidiaries are
liable, have been satisfied in all material respects.


 


(D)          There are
no Liens for Taxes upon the assets or properties of any of the Company and the
Subsidiaries other than Liens for Taxes not yet due and those which are being
contested in good faith by appropriate proceedings.


 


(E)           Neither
the PFC Group (with respect to the Company or any of the Subsidiaries), the
Company nor any of the Subsidiaries has granted (or is subject to) any waiver
or extension that is currently in effect for the period of limitations for the
assessment or payment of any Tax or the filing of any Tax Return. No unpaid Tax
assessment, deficiency or adjustment has been assessed or asserted in writing
against or with respect to the PFC Group (with respect to the Company or any of
the Subsidiaries), the Company, or any of the Subsidiaries, by any Governmental
Entity; there are no currently pending or, to the Knowledge of the Company,
threatened, audits, administrative or judicial proceedings, or any deficiency
or refund litigation, with respect to Taxes owed by the Company, any of the
Subsidiaries or the PFC Group (with respect to the Company or any of the
Subsidiaries).


 


(F)           No
unresolved claim has been made by any Governmental Entity in any jurisdiction
in which the Company or any of the Subsidiaries does not file Tax Returns that
any such Person is or may be subject to Taxation by that jurisdiction.


 


(G)           Neither
the Company nor any of the Subsidiaries will be required to include any amount
in income for any Taxable period ending after the Closing Date as a result of a
change in accounting method for any Taxable period ending on or before the
Closing Date or


 


20

















 


pursuant to any agreement with any Governmental Entity
with respect to any such Taxable period. Neither the Company nor any of the
Subsidiaries will be required to include in any period ending after the Closing
Date any income that accrued in a prior period but was not recognized in any
prior period as a result of the installment method of accounting, the completed
contract method of accounting, the long-term contract method of accounting, the
cash method of accounting, or otherwise.


 


(H)          Excluding
(1) agreements and arrangements to which all parties are members of the
PFC Group and (2) agreements and arrangements under which the lessee or
similar user of property is required to pay property or severance Taxes,
neither the Company nor any of the Subsidiaries is party to or has any
obligation under any Tax-sharing, Tax indemnity or Tax allocation agreement or
similar arrangement, nor does the Company or any of the Subsidiaries have any
liability or potential liability to another party under any such agreement or
arrangement.


 


(I)            Neither
the Company nor any of the Subsidiaries has consummated, has participated in,
or is currently participating in any transaction that was or is a “listed
transaction” as defined in Sections 6011, 6662A or 6707A of the Code or the
Treasury Regulations promulgated thereunder, including, but not limited to,
transactions identified by the IRS by notice, regulation or other form of
published guidance as set forth in Treasury Regulation Section 1.6011-4(b)(2).


 


(J)            Neither
the Company nor any of the Subsidiaries is a party to any safe harbor lease
within the meaning of Section 168(f)(8) of the Code, as in effect prior to
amendment by The Tax Equity and Fiscal Responsibility Act of 1982. None of the
assets of the Company or any of the Subsidiaries (directly or indirectly)
secures any debt the interest on which is exempt from Tax under
Section 103(a) of the Code, and none of the property owned by the Company
or any of the Subsidiaries is “tax-exempt use property” within the meaning of
Section 168(h) of the Code.


 


(K)          Neither the
Company nor any Subsidiary thereof (1) has been a member of an affiliated
group (other than the PFC Group or a group not including a member other than
the Company and its subsidiaries) or (2) has any liability for the Taxes
of any Person (other than the members of the PFC Group or a group not including
a member other than the Company and its subsidiaries) under Treasury Regulation
Section 1.1502-6 (or any similar provision of state, local or foreign law)
or as a transferee or successor.


 


4.15         Contracts.


 


(A)          Company
Schedule 4.15(A) sets forth a complete and accurate list of all material
Contracts relating to the Company’s or any Subsidiary’s business or their
ownership or operation of the Properties (exclusive of the Oil and Gas
Contracts) to which the Company or any Subsidiary is a party or bound or to
which any of their properties or assets are subject, as of the date of this
Agreement, which consist of the following (collectively, the “Company Contracts”):


 


21

















 


(1)           any
contract covering compensation and employment or service of any director,
officer, employee or consultant of the Company or any Subsidiary, or relating
to any loan from the Company or any Subsidiary to such officer, director, employee
or consultant;


 


(2)           any
indenture, mortgage, loan, credit or similar contract of the Company or any
Subsidiary pursuant to which the Company or any Subsidiary has borrowed any
money or issued any note, bond, indenture or other evidence of Indebtedness,
sold and leased back assets and any Hedge or other similar Contracts;


 


(3)           any
guarantee by the Company or any Subsidiary of any obligation of another or of
any Hedge;


 


(4)           any
agreement under which the Company or any Subsidiary has granted any Person any
registration rights (including demand and piggyback registration rights);


 


(5)           any
agreement respecting any partnership, joint venture, or, with respect to the
Interests or any Equity Interests in any Subsidiary, any option, put or call,
or right of first refusal;


 


(6)           other
than the Intracompany Obligations, any Contract that is executory in whole or
in part and that involves expenditures, benefits, receipts or liabilities of
the Company or any Subsidiary of an amount in excess of $250,000 after the date
of this Agreement;


 


(7)           any
non-competition Contract or any other Contract or obligation which, in whole or
in part, purports to restrict, limit or prohibit the manner in which, or the
localities in which, the business of the Company or any Subsidiary is
conducted;


 


(8)           any
Contract with PFC or any Related Affiliate that would remain in effect after
the Effective Time (other than a Transaction Document);


 


(9)           Hydrocarbon
purchase and sale agreements, gas transportation agreements, residue gas sales
agreements, gas gathering agreements, gas transportation agreements, gas
processing agreements and gas treating agreements;


 


(10)         any
agreement of indemnification, surety or guarantee entered into outside the
Ordinary Course of Business; and


 


(11)         any
written amendment, supplement, modification or waiver in respect of any of the
foregoing Contracts.


 


(B)           PFC and
the Company have made available to Buyer at the Company’s offices, for
inspection and copying, each Oil and Gas Contract (as defined herein) (subject
to


 


22

















 


Section 7.1 regarding confidential information). Company
Schedule 4.15(B) sets forth a list of all of the Oil and Gas Contracts
as of the date of this Agreement described in Sections 4.15(B)(1), (2), (3), (4), (5), (6), and (10). Each Lease and
each agreement and other Contract of a type described below by which the
Company or any Subsidiary is bound or subject or that are related to the
Properties are referred to herein as the “Oil and Gas Contracts”:


 


(1)           partnership
or joint venture agreements;


 


(2)           agreements
pursuant to which the Company or any Subsidiary has granted any Person, or any
Person has granted to Company or any Subsidiary, a right of first refusal, a
preemptive right of purchase, or other option to acquire any Oil and Gas
Property;


 


(3)           farmin
or farmout agreements;


 


(4)           joint
operating, participation or other similar agreements;


 


(5)           exploration
agreements;


 


(6)           area
of mutual interest agreements;


 


(7)           pooling,
communitization and unitization agreements;


 


(8)           rights
of way, surface use, saltwater disposal well and other material agreements
relating to the Company’s oil and gas operations entered into in the Ordinary
Course of Business;


 


(9)           gas
balancing agreements;


 


(10)         agreements
containing seismic licenses, permits and other rights to geological or
geophysical data and information relating to the Leases held by the Company or
any Subsidiary; and


 


(11)         any
written amendment, supplement, modification or waiver in respect of any of the
foregoing Oil and Gas Contracts.


 


(C)           Except as
set forth on Company Schedule 4.15(C), each Company Contract or Oil and
Gas Contract is in full force and effect and is a legal, valid and binding
obligation of the Company or the Subsidiary party thereto or bound thereby and,
to the Knowledge of PFC and the Company, is enforceable against the other
parties thereto in accordance with their respective terms, except as such
enforceability may be limited by bankruptcy, insolvency, moratorium or other
similar laws affecting or relating to the enforcement of creditors’ rights
generally and the application of general principles of equity (regardless of
whether that enforceability is considered in a proceeding at law or in equity).


 


(D)          Except as
set forth on Company Schedule 4.15(D) each of the Company and the
Subsidiaries has performed all material obligations and are not in material
breach or default under any Company Contract or Oil and Gas Contract.


 


23

















 


(E)           Except as
set forth on Company Schedule 4.15(E), no event has occurred, which
after notice or lapse of time, or both, would constitute a material default by
the Company or any Subsidiary, or to the Knowledge of PFC and the Company, any
other party, under a Company Contract or an Oil and Gas Contract.


 


(F)           Except as
set forth in Company Schedule 4.15(F) none of the Company or any
Subsidiary has received from any other party to a Company Contract or any Oil
and Gas Contract written or, to the Knowledge of PFC and the Company, oral
notice of the termination or intention to terminate such Company Contract or
Oil and Gas Contract.


 


4.16         Certain
Real Property.


 


(A)          Company
Schedule 4.16 contains a complete and correct list, as of the date of this
Agreement, of all real property and interests in real property owned by the
Company and the Subsidiaries (or leased by any of them, as lessee), other than
the Properties and Midstream Assets, setting forth information sufficient to
identify such real property and the legal owner thereof. To the extent not
constituting leased property and except for the C&S Field Office described
on Company Schedule 4.16, the Company or a Subsidiary has good, valid
fee simple title to the real property set forth on Company Schedule 4.16
that, to the Knowledge of PFC and the Company, is free and clear of any Liens
other than Permitted Encumbrances except as shown on Company Schedule 4.16.
Except as set forth in Company Schedule 4.16, each lease in such real
property grants the lessee under such lease the exclusive right to use and
occupy the premises and rights demised thereunder free and clear of any Lien
other than Permitted Encumbrances. Each of the Company and the Subsidiaries has
good and valid title to the leasehold estate or other interest created under
its respective leases (other than the Leases) free and clear of any Liens other
than Permitted Encumbrances.


 


(B)           To the
Knowledge of PFC and the Company, the use and operation of the real property
set forth on Company Schedule 4.16 in the conduct of the business
of the Company and the Subsidiaries does not violate in any material respect
any instrument of record or agreement affecting the real property, and no
assertion of such violation has been made against PFC, the Company or any
Subsidiary.


 


4.17         Oil
and Gas Properties.


 


(A)          Except as
set forth on Company Schedule 4.17(A):


 


(1)           neither
the Company nor any Subsidiary has received written, or, to the Knowledge of
PFC or the Company, oral notice or claim from any Governmental Entity or third
party, which remains unresolved as of the date of this Agreement, that any of
the Wells are being overproduced and there are no well bore imbalances such
that any Well is subject or liable to being shut-in or to any overproduction
penalty;


 


(2)           neither
the Company nor any Subsidiary has received written, or to the Knowledge of PFC
or the Company, oral notice or claim that there has been any change proposed in
the production allowables for any Wells;


 


24

















 


(3)           neither
the Company now any Subsidiary has incurred, made or entered into any
commitments to incur, capital expenditures outside of the capital expenditures
budget for 2006 previously provided to Buyer and the Project Plan provided in
accordance with Section 7.18;


 


(4)           since
the Valuation Date, none of the Company or any Subsidiary has abandoned, or is
in the process of abandoning, any Wells (or removed, or is in the process of
removing, any material items of equipment, except those replaced by items of
substantially equivalent suitability and value) on the Properties;


 


(5)           there
are no outstanding proposals (whether made by the Company, any Subsidiary, or
any other party) to drill additional Wells, or to deepen, plug back, or rework
existing Wells, or to conduct other operations for which consent is required
under the applicable operating agreement, or to conduct any other operations,
or to abandon any Wells, on the Properties which, if authorized, would require
the expenditure of more than $2,000,000 net to the applicable Company’s or
Subsidiary’s Working Interest;


 


(6)           Company
Schedule 4.17(A)(6) sets forth, by Well, the amount of money held in
suspense by Company or any Subsidiary out of the collected proceeds from the
sale of Hydrocarbons; and


 


(7)           except
as set forth on Company Schedule 4.17(A)(7), there are no written, or to
the Knowledge of PFC and the Company, oral claims outstanding by owners of
royalty, overriding royalty, compensatory royalty or other payments due from or
in respect of production from the Properties that such payments have not been
properly and correctly paid or provided for in all material respects.


 


(B)           Company
Schedule 4.17(B) sets forth all Imbalances as of the Valuation Date with
respect to the Properties and/or the Midstream Assets. Except as set forth on Company
Schedule 4.17(B), none of the Company or any Subsidiary has received, or is
obligated to receive, prepayments (including payments for gas not taken
pursuant to “take-or-pay” arrangements) for any of the Company’s or any
Subsidiary’s share of the Hydrocarbons produced from the Properties, as a
result of which the obligation exists to deliver Hydrocarbons produced from the
Properties after the Valuation Date without then or thereafter receiving
payment therefor.


 


(C)           Except as
set forth on Company Schedule 4.17(C), there exist no agreements or
arrangements for the sale of production from the Properties (including calls
on, or other rights to purchase, production, whether or not the same are
currently being exercised) other than agreements or arrangements which are
cancelable on 60 days notice or
less without penalty or detriment.


 


(D)          Except as
set forth on Company Schedule 4.17(D), all expenses (including all bills
for labor, materials and supplies used or furnished for use in connection with
the Properties relating to the ownership or operation of the Properties, have
been, and are being, paid (timely, and before the same become delinquent) by
the Company and the Subsidiaries, except


 


25

















 


such expenses as are disputed in good faith by the
Company or a Subsidiary and for which an adequate accounting reserve has been
established by the Company or a Subsidiary.


 


(E)           Except as
set forth on Company Schedule 4.17(E) and
subject to normal wear and tear and to scheduled or necessary repairs in the
Ordinary Course of Business, all material Fixtures, Facilities and Equipment
are in reasonably good and serviceable condition and there are no necessary
material repairs, improvements, restoration or other service work necessary to
make such assets serviceable. The Fixture, Facilities and Equipment are owned
by the Company or the Subsidiaries free and clear of any Lien other than
Permitted Encumbrances.


 


(F)           Company
Schedule 4.17(F), Part I, contains a complete and correct list of the Wells
(and the associated API numbers) as of the date hereof, and a complete and
correct list of the Leases, with the Company’s and any Subsidiary’s Net Revenue
Interest therein. Except as set forth in Company Schedule 4.17(F), Part II,
there are no Wells located on the Leases that:


 


(1)           the
Company or any Subsidiary has received an order from any Governmental Entity
requiring that such Well be plugged and abandoned;


 


(2)           formerly
produced but that are currently shut-in or temporarily abandoned; and


 


(3)           to
the Knowledge of PFC and the Company, have been plugged and abandoned but have
not been plugged in accordance with all applicable requirements of each
Governmental Entity having jurisdiction over the Properties.


 


4.18         Gas Regulatory Matters.


 


(A)          Other than
flowlines and similar pipelines used in connection with a single Oil and Gas
Property, all of the Midstream Assets are owned by TGG, Talco and Garrison
Gathering (collectively, the “Midstream Companies”) and are intrastate,
gathering and transmission pipelines used to gather and transport natural gas
produced from the Oil and Gas Properties and the oil and gas properties of
third parties.


 


(B)           None of
TGG, Talco or Garrison Gathering is a “natural-gas company” under the Natural
Gas Act of 1938 (“NGA”) and none of TGG, Talco or Garrison Gathering has
operated or provided services on its pipeline facilities in a manner that would
subject it to the jurisdiction of, or regulation by, the Federal Energy
Regulatory Commission under the NGA. Neither Talco nor Garrison Gathering has
performed services or is subject to regulation under the Natural Gas Policy Act
of 1978.


 


(C)           TGG is a
gas utility under Section 121.001 and Section 101.003(7) of the Texas
Utilities Code.


 


(D)          None of TGG, Talco or Garrison Gathering has operated or provided
services on its pipeline facilities in a manner that would subject it to
regulation by the Louisiana Office of Conservation and the Louisiana Public
Service Commission.


 


26

















 


(E)           Garrison
Gathering owns only a 50% non-operated interest in a gathering system in Texas.


 


(F)           Neither
Talco nor Garrison Gathering is a gas utility under the Texas Utilities Code.


 


(G)           None of
the Midstream Companies is the target of a formal or informal complaint,
protest or similar action before the Federal Energy Regulatory Commission, the
Texas Railroad Commission, the Louisiana Office of Conservation or the
Louisiana Public Service Commission, or is the target of any public or non-public
audit or informal or formal investigation by one or more of such agencies or by
the staff of any such agency.


 


4.19         Reserve
Report Information. The factual information furnished by PFC, the Company
and the Subsidiaries to Haas Petroleum Engineering Services, Inc. and
Netherland, Sewell and Associates, Inc., in connection with the preparation of
a reserve report with respect to certain of the Wells dated effective as of December 31, 2005 is true and
correct in all material respects; provided, however, Company makes no
representations with respect to: 
(i) reserve projections; (ii) prices; or (iii) Working
Interest or Net Revenue Interest figures used in such report. The portions of
the reserve reports listing the Wells and Valued Well Locations, and the
Company’s or any Subsidiary’s Working Interest and Net Revenue Interest
therein, are attached hereto as Company Schedule 4.19.


 


4.20         Tangible Midstream Assets.


 


(A)          Except as
set forth on Company Schedule 4.20(A):


 


(1)           subject
to ordinary wear and tear and to scheduled or necessary repairs in the Ordinary
Course of Business, all material portions of the Midstream Assets that are
tangible personal property are in reasonably good and serviceable condition and
repair and there are no necessary material repairs, improvements, restoration
or other service work necessary to make such assets serviceable and the
Midstream Companies own such property (except for the interest of Enerquest
Corporation in the assets co-owner with Garrison Gathering) free and clear of
any Lien, other than Permitted Encumbrances; and


 


(2)           no
Midstream Company has abandoned (or is in the process of abandoning) any
material portion of the Midstream Assets or removed (or is in the process of
removing) any material items of equipment, except those replaced by items of
substantially equivalent suitability and value).


 


(B)           The
Midstream Companies’ title to the Midstream Assets is (1) to the extent
constituting real property, of record (except for newly acquired rights-of-way
not yet filed for record) in the appropriate county and such title that enables
the Midstream Companies to carry on in the Ordinary Course of Business and, to
the Knowledge of the Company and PFC, no Midstream Company has received any
written or, to the Knowledge of PFC and the Company, oral claims or demands
with regard to the use of the surface of any lands associated with the
Midstream Assets, and (2) free and clear of all Liens, except for
Permitted Encumbrances.


 


27

















 


(C)           To the
Knowledge of Company and PFC, the entire continuous length of each intrastate,
gathering and transmission pipeline owned by any of the Midstream Companies is
covered by a right-of-way, easement or servitude held by such Midstream Company
and each such right-of-way, easement or servitude allows for the transportation
of the Hydrocarbons currently transported through such pipelines.


 


4.21         Environmental
Matters.


 


(A)          PFC and the
Company have made available to Buyer all material environmental investigations
or audits (including Phase I Reports) in possession of PFC, the Company,
any Subsidiary or Related Affiliate addressing the Properties and the
operations of the Company and the Subsidiaries, a list of which is set forth on
Company Schedule 4.21.


 


(B)           Except as
set forth in Company Schedule 4.21, (1)  the Company and the
Subsidiaries are conducting their respective operations in compliance in all
material respects with all applicable Environmental Laws; and (2) there
are no pending or, to the Knowledge of PFC or the Company, threatened,
enforcement, clean-up, removal, mitigation or other claims or Proceedings
against the Company or any Subsidiary under any Environmental Law (including
any claim resulting from off-site disposal).


 


(C)           Except as
set forth in Company Schedule 4.21, each Operating Company has all
material Environmental Permits for the ownership and operation of the
Properties, no Proceeding is pending to revoke any such Environmental Permit
and such Operating Company is in material compliance with such Environmental
Permits.


 


4.22         Intellectual Property.


 


(A)          The Company
and the Subsidiaries either own or have valid licenses or other rights to use
all patents, copyrights, service marks, brand names, computer programs,
trademarks, trade names, domain names, industrial designs, software, databases,
geological data, geophysical data, engineering data, maps, interpretations,
other technical information or data, tools, methods, processes, devices,
prototypes, schematics, trade secrets or other intangible property used in
their businesses as presently conducted, or that are necessary for the
operation, or continued operation, of the business of the Company or any
Subsidiary, or for the ownership and operation, or continued ownership and
operation, of any assets of the Company or any Subsidiary including the right
to use the SCADA system as currently used (collectively, the “Company
Intellectual Property”), free and clear of any Liens except those express
limitations contained in the agreements governing the use of the same.


 


(B)           The use of
the Company Intellectual Property that is owned by the Company and its
Subsidiaries does not, to the Knowledge of PFC or the Company, in any material
respect, conflict with, infringe upon, violate or interfere with or constitute
an appropriation of any right, title, interest or goodwill, including any
intellectual property right, trademark, trade name, patent, service mark, brand
mark, brand name, computer program, database, industrial design, domain name,
copyright or any pending application therefore, of any other Person. Neither
the Company nor any of its Subsidiaries has received any written, or to the
Knowledge of PFC and the Company, oral notice of any claim that any of the
Company


 


28

















 


Intellectual Property, is invalid or conflicts with
the asserted rights of any other Person. To the Knowledge of PFC and the
Company, no Person has alleged that the conduct of the business of the Company
or any Subsidiaries infringes upon, violates or constitutes the unauthorized
use of the intellectual property of any third person.


 


4.23         Insurance. Company Schedule 4.23 is a list of all policies of
insurance insuring the Company, the Subsidiaries or any of their properties or
operations. Such policies are in full force and effect. Company Schedule
4.23 lists all surety bonds, performance bonds, parental guarantees or
letters of credit posted with Governmental Entities or any other Person to
secure the Company’s and the Subsidiaries’ performance obligations under
Applicable Laws. Except as set forth in Company Schedule 4.23,
(A) there are no outstanding claims relating to the Company or the
Subsidiaries under any such policies and (B) no notice of cancellation or
non-renewal of any such policies has been received.


 


4.24         Absence
of Certain Business Practices. None of the Company, the Subsidiaries, any
of their Affiliates or any of their respective directors, stockholders,
officers, partners, members, managers, agents or employees (or anyone working
on their behalf) has, directly or indirectly, (A) used any corporate funds
for unlawful contributions, gifts, entertainment or other unlawful expenses
relating to political activity, (B) made any unlawful payment to foreign
or domestic government officials or employees or to foreign or domestic
political parties or campaigns from corporate funds or violated any provision
of the Foreign Corrupt Practices Act of 1977, as amended, or (C) made any
other unlawful payment, in any of cases (A), (B) or (C), that subjected or that
may have subjected the Company, any Subsidiary, or any of their respective
directors, officers, partners, members, managers, agents or employees (or
anyone working on their behalf) to any damage or penalty in any civil or criminal
action.


 


4.25         Employee
Related Matters.


 


(A)          Except as
set forth on Company Schedule 4.25, neither the Company nor any
Subsidiary sponsors or maintains, or has sponsored or maintained since
April 26, 2002, or to the Knowledge of PFC and the Company, in the 2 years
prior to such date, any Plan within the meaning of Section 3.8(A)(1), or
Benefit Program or Agreement within the meaning of Section 3.8(A)(2), and
neither the Company nor any Subsidiary has any liability with respect to any
Plan or Benefit Program or Agreement, except for amounts withheld from the
compensation of Affected Employees for the payroll period that includes the
Closing Date and the immediately preceding payroll period.


 


(B)           Neither
the Company nor any of its Subsidiaries has agreed to recognize any labor union
or other collective bargaining representative, nor has any labor union or other
collective bargaining representative been certified as the exclusive bargaining
representative of any employees of the Company or any of its Subsidiaries. There
is no question concerning representation as to any labor union or other
collective bargaining representative with respect to any employees of the
Company or any of its Subsidiaries, and no labor union or other collective
bargaining representative claims to or is seeking to represent any employees of
the Company or any of its Subsidiaries. To the Knowledge of PFC, no union
organizational campaign or representation petition is currently pending with
respect to any employees of the Company or any of its Subsidiaries. Neither the
Company nor any of its Subsidiaries is a party to or bound by


 


29

















 


any collective bargaining agreement, other labor
contract or individual Contracts applicable to any employees of the Company or
any of its Subsidiaries, and no collective bargaining agreements, other labor
contract or individual Contracts relating to any employees of the Company or
any of its Subsidiaries are being negotiated. There is no labor strike or labor
dispute, slow down, lockout or stoppage actually pending or threatened against
or affecting the Company or any of its Subsidiaries, and neither the Company
nor any of its Subsidiaries has experienced any labor strikes or material labor
disputes, slowdowns, lockouts or stoppages since before 2002.


 


4.26         Brokers. Except for the amounts due by PFC to Petrie Parkman & Co.,
no broker, investment banker, financial advisor or other Person is entitled to
any broker’s, finder’s, financial advisor’s or other similar fee or commission
in connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of the Company.


 


4.27         Disclaimers.


 


(A)          EXCEPT AS
SET FORTH IN THE TRANSACTION DOCUMENTS, NO EXPRESS, STATUTORY, OR IMPLIED WARRANTY
OR REPRESENTATION OF ANY KIND IS MADE BY ANY OF PFC, GP, THE COMPANY OR ANY OF
THEIR RESPECTIVE AFFILIATES, INCLUDING WARRANTIES OR REPRESENTATIONS RELATING
TO (1) THE COMPANY OR ANY SUBSIDIARY, (2) TITLE OF THE COMPANY OR ANY
SUBSIDIARY IN AND TO THE PROPERTIES, (3) THE CONDITION OF THE PROPERTIES,
(4) ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY OF THE PROPERTIES,
(5) ANY IMPLIED OR EXPRESS WARRANTY OF THE FITNESS OF THE PROPERTIES FOR A
PARTICULAR PURPOSE, (6) ANY IMPLIED OR EXPRESS WARRANTY OF CONFORMITY TO
MODELS OR SAMPLES OF MATERIALS, (7) ANY AND ALL OTHER IMPLIED WARRANTIES
EXISTING UNDER APPLICABLE LAW NOW OR HEREAFTER IN EFFECT, OR (8) ANY
IMPLIED OR EXPRESS WARRANTY REGARDING COMPLIANCE WITH ANY APPLICABLE
ENVIRONMENTAL LAWS, THE RELEASE OF MATERIALS INTO THE ENVIRONMENT, OR
PROTECTION OF THE ENVIRONMENT OR HEALTH. EXCEPT AS EXPRESSLY SET FORTH IN THE
TRANSACTION DOCUMENTS, IN CONSUMMATING THE MERGER BUYER ACCEPTS THE PROPERTIES “AS
IS,” “WHERE IS,” AND “WITH ALL FAULTS” AND IN THEIR PRESENT CONDITION AND STATE
OF REPAIR.


 


(B)           WITHOUT
LIMITING THE GENERALITY OF THE FOREGOING, EXCEPT AS SET FORTH IN THE
TRANSACTION DOCUMENTS, PFC, GP AND THE COMPANY MAKE NO REPRESENTATION OR
WARRANTY AS TO (1) THE AMOUNT, VALUE, QUALITY, QUANTITY, VOLUME, OR
DELIVERABILITY OF ANY OIL, GAS, OR OTHER MINERALS OR RESERVES IN, UNDER, OR
ATTRIBUTABLE TO THE OIL AND GAS PROPERTIES, (2) THE PHYSICAL, OPERATING,
REGULATORY COMPLIANCE, SAFETY, OR ENVIRONMENTAL CONDITION OF THE PROPERTIES,
(3) THE GEOLOGICAL OR ENGINEERING CONDITION OF THE OIL AND GAS PROPERTIES
OR ANY VALUE THEREOF OR (4) THE ACCURACY, COMPLETENESS, OR MATERIALITY OF
ANY DATA, INFORMATION, OR RECORDS FURNISHED TO BUYER IN CONNECTION WITH THE
PROPERTIES.


 


30

















 


(C)           BUYER
ACKNOWLEDGES AND AGREES TO THE FOREGOING DISCLAIMERS AND THAT THE FOREGOING
DISCLAIMERS ARE “CONSPICUOUS.”


 


4.28         Limitations
on Representations and Warranties.


 


Notwithstanding
anything in this Agreement to the contrary, the sole representations and
warranties of PFC and the Company with respect to:


 


(1)           Taxes
are as specifically set forth in Section 4.14;


 


(2)           employee
benefit related matters are as specifically set forth in Sections 3.8 and
4.25; and


 


(3)           environmental
matters are as specifically set forth in Section 4.21.


 


ARTICLE V

REPRESENTATIONS AND WARRANTIES OF BUYER


 


Buyer
represents and warrants to PFC and the Company as follows:


 


5.1           Organization. Buyer is a limited liability company duly organized, validly existing and in
good standing under the laws of the State of Delaware, Buyer has the requisite
power and authority to own, lease and operate its properties and to conduct its
business as it is now being conducted. Buyer is duly qualified or licensed to
do business and in good standing in each jurisdiction in which such
qualification is necessary under Applicable Law as a result of the conduct of
its business or the ownership or lease of its properties, except in such
jurisdictions where the failure to be so duly qualified or licensed and in good
standing would not prevent or materially delay the consummation of the
transactions contemplated by this Agreement.


 


5.2           Power
and Authority. Buyer has all requisite limited liability power and
authority to execute, deliver, and perform this Agreement and the other
Transaction Documents to which it is a party and to consummate the transactions
contemplated hereby and thereby. The execution and delivery by Buyer of this
Agreement and the other Transaction Documents to which it is a party and the
consummation by it of the transactions contemplated hereby and thereby have
been duly and validly authorized by all necessary action on the part of Buyer
and no other proceedings on the part of Buyer are necessary to authorize the
execution or delivery of such Transaction Documents or to consummate the
transactions contemplated hereby and thereby.


 


5.3           Valid and Binding Agreement. This Agreement has been duly
executed and delivered by Buyer and constitutes, and each other Transaction
Document executed or to be executed by Buyer in connection with the
transactions contemplated hereby and thereby to which it is a party has been,
or when executed will be, duly executed and delivered by Buyer, and
constitutes, or when executed and delivered will constitute, a valid and
legally binding obligation of Buyer, enforceable against it in accordance with
their respective terms, except as such enforceability may be limited by
bankruptcy, insolvency, moratorium or other similar laws affecting or relating
to the enforcement of creditors’ rights generally and the application of
general principles of equity (regardless of whether that enforceability is
considered in a proceeding at law or in equity).


 


31

















 


5.4           Non-Contravention. Neither the execution, delivery, and
performance by Buyer of this Agreement and each other Transaction Document
executed or to be executed by it in connection with the transactions
contemplated hereby and thereby, nor the consummation by Buyer of the transactions
contemplated hereby and thereby will (with or without the giving of notice or
the passage of time or both) (A) conflict with or result in a violation of
any provision of, or constitute a breach of or default under, or give rise to a
right to impose any fine or penalty, any right of termination, cancellation,
amendment, modification, payment or acceleration or the loss of a material
benefit, under any provision of any bond, debenture, note, mortgage, lease,
license, franchise, indenture, or any other Contract or other instrument or
obligation to which Buyer is a party or by which it or any of its properties
may be bound or subject, (B) conflict with or result in a violation of any
provision of the Governing Documents of Buyer, or (C) violate any Applicable
Law binding upon Buyer, other than, in the case of clauses (A) or (C)
above, any such conflict, violation, breach, default, loss or Lien as would not
prevent or materially delay the consummation of the transactions contemplated
by this Agreement.


 


5.5           Consents and Approvals. Except in connection with the filing
of a premerger notification report and any other filings required under the HSR
Act, the filing of the Merger Certificates, or the filing of the FCC Transfer
Applications, no consent, approval, order, or authorization of, or declaration,
filing, or registration with, any Governmental Entity or of any third party is
required to be obtained or made by Buyer in connection with the execution,
delivery, or performance by Buyer of this Agreement, and the other Transaction
Documents to which Buyer is a party or the consummation by Buyer of the
transactions contemplated hereby and thereby.


 


5.6           Proceedings. There are no Proceedings pending or, to Buyer’s Knowledge,
threatened, in which Buyer is or may be a party affecting the execution and
delivery of this Agreement by Buyer or the consummation of the transactions
contemplated hereby by Buyer.


 


5.7           Financing.
Buyer has obtained and previously provided to PFC the debt financing
commitment, which is in full force and effect as of the date hereof (the “Commitment”).


 


5.8           Investment Experience. Buyer acknowledges that it can bear
the economic risk of acquiring the Company and the Subsidiaries through the
Merger, and has such knowledge and experience in financial and business matters
that it is capable of evaluating the merits and risks of an investment in the
Company and Subsidiaries.


 


5.9           Accredited Investor; Investment Intent. Buyer is an accredited investor as
defined in Regulation D under the Securities Act. Buyer is acquiring the
Company and Subsidiaries through the Merger for its own account for investment
and not with a view to the sale or other distribution (within the meaning of
the Securities Act) of any Equity Interests of Buyer or Subsidiaries, except in
compliance with applicable federal and state securities laws.


 


5.10         Independent Evaluation. Buyer is an experienced and
knowledgeable investor in the oil and gas business and the business of owning
and operating oil, gas and mineral properties similar to the Oil and Gas
Properties and Midstream Assets owned by the Company and the Operating
Companies. Buyer has had access to the Properties and the Midstream Assets, the
officers, consultants and other representatives of the Company and the
Subsidiaries, and the


 


32

















 


books, records,
and files of the Company and the Subsidiaries relating to the Properties and
Midstream Assets. In making the decision to enter into this Agreement and to
consummate the transactions contemplated hereby, Buyer has relied only on
(i) the basis of its own independent due diligence investigation of the
Properties and Midstream Assets, and (ii) the representations and
warranties made by PFC, GP and the Company in Articles III and IV and
the other obligations of any such parties set forth in the Transaction
Documents and has been advised by and has relied solely on its own expertise
and legal, land, tax, reservoir engineering and other professional counsel
concerning this transaction, the Properties and Midstream Assets and the value
thereof. Nothing contained in Sections 5.8 through this 5.10 shall affect
any rights of Buyer under this Agreement or any other Transaction Document.


 


5.11         Brokers. No broker, investment banker, financial advisor or other Person
is entitled to any broker’s, finder’s, financial advisor’s or other similar fee
or commission in connection with the transactions contemplated by this
Agreement based upon arrangements made by or on behalf of Buyer which PFC or
any Related Affiliate may be obligated to pay.


 


ARTICLE VI

CONDUCT OF COMPANY AND THE SUBSIDIARIES PENDING CLOSING


 


6.1           Conduct and Preservation of Business.


 


Except as
expressly provided in this Agreement or to the extent that Buyer shall
otherwise consent during the period from the date hereof to the Closing, the
Company shall, PFC shall cause the Company to, and PFC and the Company shall
cause each Subsidiary to:


 


(A)          conduct its
operations in the Ordinary Course of Business and in compliance with all Applicable
Laws;


 


(B)           use
commercially reasonable efforts consistent with past practice to maintain and
to keep their properties and assets in good repair and condition, ordinary wear
and tear excepted; if there is any casualty loss or damage to any properties or
assets of the Company or any Subsidiary prior to Closing, to consult with Buyer
regarding the replacement or repair of such property or asset;


 


(C)           use
commercially reasonable efforts to keep in full force and effect insurance
applicable to it comparable in amount and scope of coverage to that currently
maintained;


 


(D)          (1) keep
and maintain accurate books, records and accounts; (2) pay or accrue all
Taxes, assessments and other governmental charges imposed upon any of its
assets or properties or with respect to its franchises, businesses, income or
assets when due and before any penalty or interest accrues thereon unless, if
due and payable, the validity is being contested in good faith by appropriate
legal proceedings and adequate reserves have been set aside; (3) pay all
claims and expenses (including claims and expenses for labor, services,
materials and supplies) when they become due and payable in accordance with
their terms unless contested in good faith; (4) pay all wages and other
compensation earned by their employees through the Closing Date when they
become due and payable in accordance with their obligations under any


 


33

















 


labor or employment practices and policies, or any
collective bargaining agreement or other labor contract or individual agreement
to which any may be a party or by which any may be bound or subject; and
(5) comply with and enforce the provisions of all Company Contracts and
all Oil and Gas Contracts, including paying in the Ordinary Course of Business
all Indebtedness, payables, rentals, royalties, expenses and other liabilities
relating to their business, assets or other properties;


 


(E)           operate in
compliance with the procedure and Project Plan and any amendment thereto
established pursuant to Section 7.18; and


 


(F)           at all
times, preserve and keep in full force and effect their corporate or other
legal existence.


 


6.2           Restrictions
on Certain Actions. Without limiting the generality of the foregoing, and
except as otherwise expressly provided in this Agreement, during the period
from the date hereof to the Closing, the Company shall not (and PFC shall cause
the Company not to, and PFC and the Company shall cause each Subsidiary, not
to) take, consent to or allow any of the following actions without the prior
written consent of Buyer:


 


(A)          amend its
Governing Documents;


 


(B)           issue,
sell, or deliver (whether through the issuance or granting of options,
warrants, commitments, subscriptions, rights to purchase, or otherwise) any
Equity Interests in the Company or any Subsidiary;


 


(C)           except for
the discharge of obligations reflected in the Financial Statements and
described on Company Schedule 6.2, (1) declare, set aside, or pay
any dividend or other distribution (whether in cash, stock, or property or any
combination thereof) in respect of its Equity Interests; (2) repurchase,
redeem, or otherwise acquire any of its Equity Interests or any Equity
Interests of any Subsidiary; (3) effect any reorganization or
recapitalization; (4) split, combine or reclassify any of its Equity
Interests; (5) adopt a plan of complete or partial liquidation or
resolutions providing for or authorizing a liquidation, dissolution, merger,
consolidation, conversion, restructuring, recapitalization, or other reorganization
of the Company or any Subsidiary; or (6) enter into any Contract to do any
of the foregoing;


 


(D)          except for
Permitted Indebtedness incurred in the Ordinary Course of Business:  (1) create or incur any Indebtedness;
make any loans, advances, or capital contributions to, or investments in, any
other Person; (2) pledge or otherwise encumber any Equity Interests in the
Company or any Subsidiary; (3) mortgage or pledge any of its assets,
tangible or intangible, or create or suffer to exist any Lien thereupon other
than Permitted Encumbrances; or (4) enter into any Contract with respect
to the foregoing;


 


(E)           (1) enter
into, adopt, or (except as may be required by law) amend, modify or terminate
any Plan (within the meaning of Section 3.8) or Benefit Program or
Agreement (within the meaning of Section 3.8) for the benefit or welfare
of any current or former director, officer, or employee; (2) increase in
any manner the compensation or fringe benefits of any current or former
director, officer, or employee or consultant; or (3) pay to any current or
former director, officer, or employee or consultant any benefit not required by
any Plan (within the


 


34

















 


meaning of Section 3.8) or Benefit Program or
Agreement (within the meaning of Section 3.8) as in effect on the date
hereof;


 


(F)           except as
set forth on Company Schedule 6.2, sell, assign, lease, sublease,
transfer, farm out or otherwise dispose of, directly or indirectly, or
mortgage, pledge or grant any right to any Person to acquire any interest in or
otherwise encumber any Property, Midstream Asset or any other asset, other than
(1) sales of Hydrocarbons in the Ordinary Course of Business, or
(2) sales of inventory and excess or obsolete assets in the Ordinary
Course of Business or personal property in the Ordinary Course of Business that
is either replaced by equivalent property or normally consumed in the operation
of the Company’s or Subsidiary’s business;


 


(G)           acquire
(by merger, consolidation, or acquisition of stock or assets or otherwise) any
corporation, partnership, or other business organization or division thereof;


 


(H)          except for
the payment, settlement, cancellation or satisfaction of the Intracompany
Obligations, as set forth on Company Schedule 6.2(H), pay, discharge, or
satisfy any claims, liabilities, or obligations (whether accrued, absolute,
contingent, unliquidated, or otherwise, and whether asserted or unasserted),
other than the payment, discharge, or satisfaction of obligations and liabilities
in the Ordinary Course of Business, or in accordance with their terms, of
liabilities reflected or reserved against in the Balance Sheet or that
otherwise have arisen or arise in the Ordinary Course of Business;


 


(I)            except as
set forth on Company Schedule 6.2(I) enter into any Contract or
series of related Contracts, (1) outside the Ordinary Course of Business,
or (2) for the sale, exchange, gathering, processing and transportation of
Hydrocarbons having a term of more than 60 days;


 


(J)            enter
into, amend, modify, or change in any material respect any Company Contract or
Oil and Gas Contract, other than in the Ordinary Course of Business or
consistent with the Project Plan or any amendments thereto pursuant to
Section 7.18;


 


(K)          change any
of the accounting principles or practices used by it, except for any change
required by reason of a concurrent change in GAAP and notice of which is given
in writing by the Company to Buyer;


 


(L)           except in
the Ordinary Course of Business, or if necessary to perpetuate any Lease, agree
or consent to the establishment of any pooled or field-wide unit or the change
in any existing pooled or field-wide unit (or any participating area therein);


 


(M)         make any
settlement of, or compromise, any Tax liability, enter into any closing
agreement, surrender any right to a refund of Taxes, consent to any waiver of
the limitation period applicable to any Tax claim or assessment, change in any
material respect any Tax election or Tax method of accounting or make any new
Tax election or adopt any new Tax method of accounting but only if, with
respect to each of the foregoing, doing so would increase the liability of the
Company or any of the Subsidiaries for Tax for any period after the Closing
Date; or


 


35

















 


(N)          authorize
or propose, or agree in writing or otherwise to take, any of the actions
described in this Section 6.2.


 


6.3           Conversion
of Vaughan. Prior to Closing, PFC will, or will cause the Company, Vaughan
or Winchester to, convert a portion of Vaughan’s ownership interest in
Winchester into limited partnership interest. The converted limited partnership
interest of Vaughan will be contributed to a newly formed Delaware limited
liability company. The newly formed Subsidiary will conduct no business other
than holding the interest contributed to it. If and when such conversion is
performed, the Recitals set forth in this Agreement will be deemed to be
automatically amended to take such conversion into account.


 


6.4           Retained
Legacy Hedges. With respect to the Retained Legacy Hedges, one of the
following alternatives shall occur prior to the Closing:


 


(A)          All of the
Retained Legacy Hedges shall be terminated and concurrently therewith, such
transactions shall be replaced with two new transactions whereby the Company
will enter into a hedging transaction (which such transaction is consistent
with the types of transactions set forth in the definition of “Hedge” herein),
with a third party that is not affiliated with either Company or Buyer (the “Third
Party”), and Progress Ventures, Inc. will enter into a hedging transaction
(which such transaction is consistent with the types of transactions set forth
in the definition of “Hedge” herein), with such Third Party, in each case,
under terms and conditions that are acceptable to the respective parties, and
with respect to the Third Party, such party shall be acceptable to both Company
and Buyer; or


 


(B)           In the
event that the alternative in clause (A) above cannot be effectuated for any
reason, then all of the Retained Legacy Hedges shall remain in place between
the Company and Progress Ventures, Inc. and Buyer shall provide to Progress
Energy, Inc. credit support in an amount and in a form that is acceptable to
Progress Ventures, Inc. in its reasonably exercised discretion and consistent
with industry standards, to cover Progress Ventures, Inc.’s potential exposure
arising under such transactions.


 


As soon as practicable after
the date of this Agreement, Buyer shall determine which one of the aforementioned
alternatives shall occur and, prior to the Closing, Company and Buyer shall
take all necessary actions to effectuate such alternative.


 


ARTICLE VII

ADDITIONAL AGREEMENTS OF THE PARTIES


 


7.1           Access. Subject to the terms of the Confidentiality Agreement and
Article VIII, and for the purpose of (A) conducting Buyer’s due
diligence investigation of the Properties, Midstream Assets and any other asset
or liability of the Company and the Subsidiaries, (B) identifying the
transition services to be provided pursuant to the Transition Services
Agreement, and (C) enabling EXCO Resources, Inc., the direct parent of
Buyer, to comply with its reporting and disclosure obligations under the
Exchange Act and the Securities Act, between the date hereof and the Closing,
PFC and the Company shall give (or cause the Subsidiaries to give) Buyer and
Buyer’s authorized representatives reasonable access to (D) the Company’s
and the Subsidiaries’ employees, offices, accounting and financial books,
records, files, operating


 


36

















 


data, and other
similar documents and materials to the extent in such Person’s possession,
custody or control; and (E) the Properties, the Midstream Assets, the
Contracts and any other asset of the Company or the Subsidiaries, to the extent
that any of such Persons has the right to grant such access (provided that if
none of such Persons has the right to grant such access, then PFC and Company
shall use their commercially reasonable efforts to cause such access right to
be granted to Buyer and its representatives from a Person who has the right to
do so but neither PFC nor the Company shall be obligated to pay any third party
money for any such consent or waiver).


 


7.2           Cooperation and Governmental Consents. Each party hereto agrees to
cooperate with each other and to use commercially reasonable efforts cause all
of the conditions precedent to Closing to be satisfied as promptly as
practicable, and to take all such commercially reasonable other actions as are necessary
or advisable in order to cause the consummation of the transactions
contemplated hereby. Except for the filings and notifications made in
connection with the HSR Act, to which Section 7.11 shall apply, and except
for the filings made in connection with the FCC Licenses, to which
Section 7.16 shall apply, promptly following the execution of this
Agreement, the parties shall proceed to prepare and file with the appropriate
Governmental Entities such applications for Consents as are necessary in order
to consummate the transactions contemplated by this Agreement (or, with respect
to any filing that will be a public document or otherwise result in public
notice,  shall do so after the public
announcement of this Agreement by PFC and Buyer) and shall diligently and
expeditiously prosecute, and shall cooperate fully with each other in the
prosecution of, such matters.


 


7.3           Notice of Litigation. Until the
Closing, (A) Buyer, upon learning of the same, shall promptly notify the
Company of any Proceeding which is commenced or threatened against Buyer or any
Affiliate thereof and which affects this Agreement or the transactions
contemplated hereby and (B) PFC and the Company, upon learning of the
same, shall promptly notify Buyer of any Proceeding which is commenced or
threatened against PFC, the Company, any Subsidiary or any Affiliate thereof
and which affects this Agreement or the transactions contemplated hereby and
any Proceeding which is commenced or threatened against the Company or any
Subsidiary and which would have been listed on Company Schedule 4.11 if
such Proceeding had arisen prior to the date hereof.


 


7.4           Notification
of Certain Matters. Between the date of this Agreement and the Closing
Date, PFC will promptly notify Buyer in writing if PFC, the Company or any
Subsidiary becomes aware of any fact or condition that causes or constitutes a
breach of any of PFC’s or the Company’s representations and warranties, or if
PFC, the Company or any Subsidiary becomes aware of the occurrence after the
date of this Agreement of any fact or condition that would (except as expressly
contemplated by this Agreement) cause or constitute a breach of any such
representation or warranty. Should any such fact or condition require any
change in the Schedules to this Agreement in order for such representation and
warranty to be true when made or as of the Closing Date, PFC will promptly
deliver to Buyer a new or revised Company Schedule specifying such change. PFC
will give prompt written notice to Buyer of the failure of PFC or the Company
to comply with or satisfy in any material respect any covenant to be complied
with or satisfied by such Person hereunder. PFC shall, and PFC shall cause the
Company to, and PFC and the Company shall cause each Subsidiary to, use its commercially
reasonable efforts to cure, before Closing, any such breach or failure
described in a notice given


 


37

















 


under this
Section 7.4. No such notification shall affect the representations or
warranties of PFC or the Company, or the conditions to Buyer’s obligations
hereunder, except as specifically provided in this Agreement in
Section 9.2(D) and Section 10.2(B).


 


7.5           Resignation of Officers and Directors. Each of PFC, the Company and the
Subsidiaries shall, and PFC
shall cause the Company to, and PFC and the Company shall cause each Subsidiary
to, cause the directors and officers of
the Company and the Subsidiaries, as applicable, set forth on Company
Schedule 7.5 to deliver their written resignations to Buyer, which
resignations shall be effective at the Closing and shall be in form and
substance satisfactory to Buyer.


 


7.6           Continued
Employment; Post-Closing Compensation and Benefits.


 


(A)          Company
Schedule 7.6(A) lists, as of the date hereof, all of the individuals
employed by the Company and the Subsidiaries and their respective job titles,
dates of hire, current compensation, scheduled or agreed-upon pay adjustments
or bonuses, service credited for purposes of any PFC Benefit Program or Agreement, and whether active or inactive
(the “Affected Employees”) and employees of PFC or a Related Affiliate that are
primarily involved in the business or operations of the Company and the
Subsidiaries, along with such employee’s job title (the “PFC and Service
Employees”). PFC shall inform Buyer of any changes to such list occurring prior
to the Closing Date.


 


(B)           Effective
at the Closing Date, each of the Affected Employees will become employed by, or
continue to be employed by EXCO or the Buyer or the Subsidiaries, as applicable.
Any Affected Employee who is on an authorized leave of absence shall not be
required to resume active employment until the cessation of such disability or
expiration of such leave. PFC agrees and consents that EXCO or Buyer may
interview any of the PFC and Service Employees at any time before the Closing
Date and make offers of employment to any one or more of them on such terms as
it desires. PFC agrees that the PFC and Service Employees may voluntarily
accept such offers but does not represent that any one or more of them will do
so. Nothing in this Agreement shall be construed to affect the eligibility or
lack thereof of any Affected Employee or PFC and Service Employee to severance
or similar payments from PFC or under any PFC Benefit Plan.


 


(C)           Notwithstanding
anything in this Agreement to the contrary, on or prior to the Closing Date,
PFC shall cause each Affected Employee who immediately prior to the Closing
Date is a participant in a PFC Benefit Plan
that is a defined contribution to become fully vested in all benefits and
amounts to which such Affected Employee had an unvested right as of immediately
prior to the Closing Date.


 


(D)          For a
period of 60 days following the
Closing Date, Buyer will pay or cause to be paid to the Affected Employees
salaries and wage levels that are no less favorable than the salaries and wage
levels of such employees immediately before the Closing Date. Thereafter, Buyer
will provide, or cause the Affected Employees to be provided with salaries and
wage levels that are within the salary and wage ranges established by Buyer for
similarly situated employees of Buyer and its Affiliates.


 


38

















 


(E)           Effective
from and after the Closing Date, Buyer shall provide or cause the Affected
Employees and PFC and Service Employees who accept employment with Buyer or its
Affiliates to be provided benefits under the Plans and Benefit Program or
Agreements of Buyer or its Affiliates that are at levels that are no less
favorable than benefits provided to similarly situated employees of Buyer or
its Affiliates. Without limiting the foregoing, each Affected Employee shall be
eligible to participate in each Plan and Benefit Program or Agreement of Buyer
or its Affiliates that is a pension plan beginning not later than the first day
of the first payroll period commencing after the Closing Date. Each Affected
Employee and each PFC and Service Employee who accepts employment with Buyer or
its Affiliates will receive full credit for eligibility and vesting purposes
for any years of service completed with PFC or any PFC ERISA Affiliate to the
same extent such service was recognized under the corresponding PFC Benefit
Plan immediately prior to the Closing Date; provided, however, that nothing in
this Agreement shall require Buyer or its Affiliates to grant benefit accrual
service under a defined benefit plan to any Affected Employee or any of the PFC
and Service Employees. PFC and its representatives shall fully and
promptly cooperate with Buyer and its representatives in connection with
this Section 7.6(E) by, among other things, (1) furnishing to
Buyer and its representatives any information reasonably requested by
Buyer or its representatives, and (2) doing such other acts and
things as Buyer or its representatives may reasonably request for the purpose
of carrying out the intent of this Section 7.6(E).


 


(F)           With
regard to the Plan and Benefit Program or Agreement of Buyer or its Affiliates that are welfare plans, each
Affected Employee will be eligible to participate in such plans effective at
the Closing Date. Buyer or its Affiliates shall cause its group medical plan to
credit Affected Employees and PFC and Service Employees who accept employment
with Buyer or its Affiliates with deductibles incurred under PFC’s group
medical plan for the year of transfer and shall cause its medical plan to waive
any otherwise applicable eligibility requirements, waiting period, or pre-existing
condition limitations except to the extent that such limitations applied under
PFC’s group medical plan and had not been satisfied as of the Closing Date (or
date of commencement of employment in the case of the PFC and Service
Employees). With regard to any other Plan and Benefit Program or Agreement of
Buyer now maintained or hereafter adopted by Buyer or its Affiliates, other
than with respect to any 401(k) plan of Buyer or its Affiliates, Affected
Employees and PFC and Service Employees who accept employment with Buyer or its
Affiliates will receive credit for service on the same basis as other,
similarly situated employees of Buyer or its Affiliates. As soon as practical
after the date hereof, PFC and Buyer shall identify to each other the privacy
officer designated by each of them under HIPAA. PFC shall cause its designated
privacy officer to provide to Buyer’s designated privacy officer such documents
and other information as may be necessary to facilitate the enrollment in Buyer’s
or its Affiliates’ health plans of the Affected Employees and any PFC and
Service Employees who accept employment with Buyer or its Affiliates.


 


(G)           PFC shall
be responsible for providing disability benefits to all Affected Employees
(1) who are receiving disability benefits prior to the Closing Date,
(2) with respect to whom an incident occurs prior to the Closing Date that
gives rise to a claim for disability benefits, regardless of whether such claim
for benefits is made prior to, on, or after the Closing Date, and (3) who
are otherwise eligible for such benefits.


 


39

















 


(H)          PFC shall
be responsible for any health care continuation coverage claims of Affected
Employees or their qualified beneficiaries who become entitled to health care
continuation coverage under Section 4980B of the Code and Title I,
Subtitle B, Part 6 of ERISA (“COBRA”), with respect to qualifying events
occurring prior to the Closing Date. Buyer shall be responsible for any such
health care continuation coverage claims of Affected Employees or their
qualified beneficiaries with respect to qualifying events occurring on or after
the Closing Date.


 


(I)            Prior to
the Closing Date, PFC will, and will cause the Company and Subsidiaries to, terminate the participation of the
Company and the Subsidiaries in any PFC
Benefit Plans effective not later than the Closing Date. Effective not
later than the Closing Date, Affected Employees and their beneficiaries and
dependents shall cease to participate in the applicable PFC Benefit Plan and
shall cease to be eligible to accrue further benefits under any PFC Benefit
Plan (except for disability benefits and COBRA to the extent applicable). No
liability arising under any such PFC Benefit Plan is assumed by Buyer.


 


(J)            Buyer or
its Affiliates shall include the service of each Affected Employee and each PFC
and Service Employee with PFC, any Related Affiliate, the Company and the
Subsidiaries to the same extent as PFC in determining the number of vacation
days to which each Affected Employee is entitled under the vacation policies of
Buyer and its Affiliates and in determining eligibility or entitlement to any
other fringe benefit or perquisite of employment to the extent based on
seniority.


 


(K)          Subject to
Section 7.6(D), nothing in this Agreement obligates Buyer or its
Affiliates to employ any Affected Employees after the Closing. Except as
provided in Company Schedule 4.25, neither the Company nor any of its
Subsidiaries is a party to any Contracts or subject to any requirement that in
any manner requires or may require Buyer or its Affiliates to employ any
Affected Employees or that are, in any way, inconsistent with such employees’
possible future status with Buyer or its Affiliates as employees-at-will who
may be terminated at any time without cause or notice, except as otherwise
provided by Applicable Law.


 


(L)           Effective
as of the Closing, PFC waives any claims against Buyer and its Affiliates and
the PFC and Service Employees to the extent arising from any employment
agreement, confidentiality or non-disclosure agreement or policy, or non-competition
agreement between any of the PFC and Service Employees and PFC or any Related
Affiliate insofar as it relates to the business of the Company and the
Subsidiaries. PFC shall cause the closing condition stated in
Section 9.2(O) to be satisfied.


 


7.7           Taxes.


 


(A)          Federal
Income Taxes in General.


 


(1)           The
income and other Tax items of the Company and the Subsidiaries for periods
ending on or before the Closing Date shall be included in the consolidated
federal income Tax Return of the affiliated group, within the meaning of
Section 1504(a) of the Code, of which PFC is a member (“PFC Group”). Except
as otherwise provided in this Section 7.7, PFC shall be


 


40

















 


responsible for and shall
indemnify and hold Buyer harmless from any federal income Taxes of the Company
and the Subsidiaries (including any amount payable by reason of Treasury
Regulation § 1.1502-6), to the extent not paid before Closing, and shall
be entitled to any reductions in such Taxes or refunds (including interest),
for taxable periods ending on or before or, with respect to the consolidated
federal income Tax Return of PFC Group, including the Closing Date. If Buyer or
the Subsidiaries receives any such refund, Buyer shall promptly pay (or cause
such Subsidiary to pay) the entire amount of the refund (including interest) to
PFC.


 


(2)           Buyer
and the Subsidiaries shall be responsible for and shall indemnify and hold PFC
and PFC Group harmless from all federal income Taxes of the Company and the
Subsidiaries for any taxable period beginning after the Closing Date and, with
respect to prior taxable periods, for all federal income Taxes resulting from
any of the following actions taken without PFC’s written consent by Buyer or
any of the Subsidiaries:  actions taken
outside the Ordinary Course of Business after the Closing but on the Closing
Date; the amendment or attempt to amend any income Tax Return for a period
ending on or before the Closing Date; or (except as permitted by
Section 10.4, subject to the last sentence of Section 7.7(H)) any
action with respect to any contest, audit, or other proceeding relating to
federal income Tax for any such period. Buyer and the Subsidiaries shall be
entitled to all refunds of such Taxes (including interest).


 


(B)           State
Income Taxes in General.


 


(1)           For
purposes of this Agreement, the term “State Income Tax” means any Tax, imposed
by a state or political subdivision of a state in the United States or by the
District of Columbia, that is based on or measured by net income (or is payable
pursuant to the same Tax Return as such a Tax based on or measured by net
income). PFC shall be responsible for preparing and filing the State Income Tax
Returns of the Company and the Subsidiaries for taxable periods ending on or
before the Closing Date. In the case of any such State Income Tax Return that
must be signed by an officer of the Company or one of the Subsidiaries who is
not then an employee of PFC or one of its Affiliates,  PFC shall provide a copy of such Tax Return
to Buyer for its review and comment not less than thirty (30) days prior to the
due date (including extensions) for the filing of such Tax Return. Any changes
requested as a result of such review may be rejected in PFC’s sole discretion,
except for changes reasonably necessary to permit the signing officer to sign
the Tax Return in good faith under penalty of perjury (or such other legal
standard as may be required under Applicable Law). Except as otherwise provided
in this Section 7.7, PFC shall indemnify and hold Buyer and the
Subsidiaries harmless from any State Income Taxes of the Company and the
Subsidiaries (including any amount payable by reason of any applicable
provision of state income Tax law similar to Treasury Regulation § 1.1502-6),
to the extent not paid before Closing, and shall be entitled to any reductions
in such Taxes or refunds (including interest) for such taxable periods;
provided, however, PFC shall not be entitled to any refund resulting from the


 


41

















 


carryback of any loss of
any Subsidiary from a taxable period ending after the Closing Date to any
taxable period beginning prior to the Closing Date. If Buyer or any the
Subsidiaries receives any such refund, Buyer shall promptly pay (or cause such
Subsidiary to pay) the entire amount of such refund (including interest) to
PFC.


 


(2)           Buyer
and the Subsidiaries shall be responsible for and shall indemnify and hold PFC
and PFC Group harmless from all State Income Taxes of the Subsidiaries for any
taxable period beginning after the Closing Date and, with respect to prior
taxable periods, for all State Income Taxes of the Company and the Subsidiaries
resulting from any of the following actions taken without PFC’s written consent
by Buyer or any of the Subsidiaries: 
actions taken outside the Ordinary Course of Business after the Closing
but on the Closing Date; the amendment or attempt to amend any income Tax
Return for a period ending on or before the Closing Date; or (except as
permitted by Section 10.4) any action with respect to any contest, audit,
or other proceeding relating to any State Income Tax for any such period. Buyer
and the Subsidiaries shall be entitled to all refunds of such Taxes (including
interest).


 


(3)           If
any of the Subsidiaries is required to file any State Income Tax Return for a
Straddle Period, Buyer shall cause such Tax Return to be filed and shall be
responsible for the payment of any Tax for such period. However, PFC shall pay
to Buyer or Buyer shall pay to PFC, as appropriate and as an adjustment to the
Purchase Price, the amount by which the State Income Tax attributable to the
period through the Closing Date exceeds or is less than the amount of such Tax
paid (including payments of estimated Tax) on or before the Closing Date. The
Tax attributable to the period through the Closing Date shall be determined
(i) as if that period were a separate taxable year, and (ii) except
as otherwise required by law, by using the Tax accounting methods and Tax
elections used by such Subsidiary before the Closing Date. PFC shall compute
the amount of the Tax attributable to the period through the Closing Date and
shall notify Buyer of such amount in writing no later than 180 days after the
Closing Date. Within 45 days after the date of such notification, PFC shall pay
to Buyer or Buyer shall pay to PFC, as appropriate, the difference between
(i) the amount of Tax determined by PFC as attributable to the portion of
the period through the Closing Date, and (ii) the amount of the Tax for the
taxable period that is paid (including payments of estimated Tax) on or before
the Closing Date, unless within 30 days after such notification date, Buyer
notifies PFC in writing that Buyer disagrees with the computation of any such
amount. In that case, PFC and Buyer shall proceed in good faith to determine
the correct amount, and PFC’s payment to Buyer, or Buyer’s payment to PFC,
shall be due the later of (i) the time specified in the immediately
preceding sentence or (ii) 10 days after PFC and Buyer agree to the amount
payable.


 


42

















 


(C)           Tax
Characterization of the Merger and Related Tax Transactions.


 


(1)           For
federal Tax purposes (a) the Company is taxable as a corporation,
(b) each of the Company Partners and all the Subsidiaries, except
Winchester, are disregarded entities, and (c) Winchester is currently
taxable as a corporation. At least one Business Day before the Closing Date,
Winchester will, and the Company will cause Winchester to, become a disregarded
entity for federal tax purposes by filing IRS Form 8832 (Entity Classification
Election) at least one business day before the Closing Date. Accordingly, the
parties intend that for federal Tax purposes, and for State Income Tax purposes
in any state that conforms to the federal Tax treatment, (e) Winchester
will be treated as completely liquidating in a nontaxable transaction pursuant
to Sections 332 and 337 of the Code, (f) the Merger will be treated as a
taxable sale of the assets of the Company (including the assets of Winchester
and the other Subsidiaries) to Buyer, and a purchase of the Company’s assets by
Buyer, for the Adjusted Purchase Price and the assumption of liabilities of the
Company (including liabilities of the Subsidiaries), followed by the nontaxable
distribution of the Adjusted Purchase Price by the Company to PFC in complete
liquidation of the Company pursuant to Section 332 of the Code, and
(g) this Agreement is a plan of complete liquidation of the Company for
purposes of Section 332 of the Code. The parties agree not to take any
position inconsistent with such intended federal Tax consequences and State
Income Tax consequences for any state that conforms to the federal Tax
treatment. The parties further agree that Section 7.7(A)(1) will apply to
the federal income Tax Return that will include the Company and the
Subsidiaries through the Effective Time; for such states,
Section 7.7(B)(1) will apply to the State Income Tax Returns of the
Company and of the Subsidiaries for the period through the Effective Time; and
for such states, there will be no State Income Tax Return to which
Section 7.7(B)(3) will apply.


 


(2)           The
parties further acknowledge that for Texas franchise Tax purposes (a) the
Company and all the Subsidiaries, except Vaughan and Garrison (each of which is
treated the same as a corporation for Texas franchise Tax purposes) are treated
as limited partnerships, (b) the change in the federal Tax classification
of Winchester from a corporation to a disregarded entity is intended to have no
Texas Tax consequence for the Company, Winchester, and the other Subsidiaries,
and (c) the Merger is intended to be treated as a sale of all the assets
of the Company (including its ownership interests in, but not the assets of,
Winchester and the other Subsidiaries) to Buyer, and a purchase of the Company’s
assets by Buyer, for the Adjusted Purchase Price and the assumption of
liabilities of the Company, followed by the nontaxable distribution of the
Adjusted Purchase Price by the Company to the Company Partners. The parties
agree not to take any position inconsistent with such intended Texas Tax
consequences.


 


(3)           Buyer
and PFC shall cooperate as provided in this Section 7.7(C)(3) to determine
(in accordance with all applicable Treasury Regulations promulgated under
Section 1060 of the Code) the allocation of the


 


43

















 


Adjusted Purchase Price
and, to the extent included in the amount realized for federal income Tax
purposes, liabilities of the Company (including liabilities of the
Subsidiaries) among the assets of the Company (including the assets of the
Subsidiaries) as a result of the Merger (the “Allocation”). No later than
Closing, Buyer and PFC shall agree on a preliminary Allocation. Buyer shall
propose (subject to PFC’s review and comment) the preliminary Allocation to PFC
no later than 5 Business Days before the Closing Date, and once agreed upon,
the preliminary Allocation shall be attached to this Agreement as Schedule
7.7(C)(3). Thereafter, Buyer shall propose a final Allocation in a writing
delivered to PFC (“Buyer’s Allocation Notice”) within 10 days after the final
determination of the Final Settlement Statement pursuant to Section 1.6. PFC
shall be deemed to have accepted such Allocation unless, within 30 days after
the date of Buyer’s Allocation Notice, PFC notifies Buyer in writing of
(i) each proposed item with which PFC disagrees, and (ii) for each
such item, the amount that PFC proposes be used in the Allocation. If PFC gives
Buyer such notice of objection, and if Buyer and PFC fail to resolve the issues
outstanding with respect to the Allocation within 30 days of Buyer’s receipt of
PFC’s objection notice, Buyer and PFC shall submit the issues remaining in
dispute to the Referral Firm for resolution. If issues remaining in dispute are
submitted to the Referral Firm for resolution, (i) Buyer and PFC shall
promptly furnish or cause to be furnished to the Referral Firm such work papers
and other documents and information relating to the disputed issues as the
Referral Firm may request and are available to that party or its agents and
shall be afforded the opportunity to present to the Referral Firm any material
relating to the disputed issues and to discuss the issues with the Referral
Firm; (ii) the determination by the Referral Firm, as set forth in a
notice to be delivered to both PFC and Buyer within 60 days of the submission
to the Referral Firm of the issues remaining in dispute, shall be final,
binding and conclusive on the parties and shall be used in the final
Allocation; and (iii) Buyer and PFC will each bear 50% of the fees and
costs of the Referral Firm for such determination. Neither Buyer nor PFC shall
take, nor shall they permit any affiliated person (including, without
limitation, the Company and the Subsidiaries) to take, any position for income
Tax purposes that is inconsistent with the Allocation as finally determined
hereunder; provided, however, that
(i) the basis of the assets to Buyer shall differ from the sales prices of
the assets for the Company to the extent necessary to reflect Buyer’s
capitalized transaction costs not included in the Allocation, and (ii) the
amount realized by the Company upon the sale of assets may differ from the
Allocation to reflect transaction costs that reduce the amount realized for
federal income Tax purposes.


 


(D)          Cooperation.


 


(1)           Buyer
agrees to cooperate and to cause the Company and the Subsidiaries to cooperate
with PFC to the extent reasonably required after the Closing Date in connection
with (i) the filing, amendment,
preparation and execution of all federal income Tax Returns and State Income
Tax Returns with respect to any taxable period of any of the Company and the
Subsidiaries ending on or before the Closing Date, (ii) contests concerning the federal or State Income


 


44

















 


Tax due for any such
period and (iii) audits and other
proceedings relating to income Taxes with respect to any such period. Buyer
will not (and will not cause or permit any of the Subsidiaries to) file any
amended, or attempt to amend any, federal income Tax Return or State Income Tax
Return with respect to any taxable period of any of the Company and the
Subsidiaries ending on or before the Closing Date or (except as permitted by
Section 10.4) take any action with respect to any contest, audit or
other proceeding relating thereto.


 


(2)           PFC
agrees to make available to Buyer and the Subsidiaries records in the custody
of PFC or of any member of PFC Group, to furnish other information and
otherwise to cooperate to the extent reasonably required in connection with the
filing or audit of or other proceeding with respect to Tax Returns relating to
any of Buyer and the Subsidiaries for any taxable period ending after the
Closing Date. However, no loss, credit or other item of any of Buyer and the
Subsidiaries may be carried back without PFC’s written consent, which PFC may
withhold in its absolute discretion, to a taxable period for which (i) any
of the Company and the Subsidiaries and (ii) PFC or any entity affiliated
with PFC (other than the Company and the Subsidiaries) filed a consolidated,
unitary, combined or similar Tax Return.


 


(3)           PFC
agrees to cooperate with Buyer, and Buyer agrees to cooperate (and cause the
Subsidiaries to cooperate) with PFC, to the extent necessary in connection with
the filing of any Tax Return relating to the transactions contemplated by this
Agreement.


 


(E)           Termination
of Tax-Sharing Agreement. After the Closing, this Section 7.7 shall
supersede any and all Tax-sharing or similar agreements to which (1) any
of the Company and the Subsidiaries, on the one hand, and (2) PFC or any
affiliated entity, on the other hand, are parties. Neither Buyer and the
Subsidiaries, on the one hand, nor PFC and any such affiliated entity, on the
other hand, shall have any obligation or right with respect to each other under
any such prior agreement after the Closing.


 


(F)           Other
Tax Returns and Taxes. Buyer and the Subsidiaries (and not PFC) shall be
responsible for preparing and filing all Tax Returns of the Company and the
Subsidiaries to be filed after the Closing Date other than those Tax Returns to
which Sections 7.7(A) through Section 7.7(C) apply (“Other Tax Returns”). Except
as otherwise required by Applicable Law or expressly agreed in writing by PFC
and Buyer, (i) each Other Tax Return filed after the Closing Date for any
period ending on or before or including the Closing Date shall be based on the
same accounting methods and Tax elections as used for the same type of Other
Tax Return filed most recently before the Closing Date, and (ii) no
amended Other Tax Return may be filed for a period ending on or before or
including the Closing Date.


 


(G)           Pro-ration
of Property Taxes.  The parties agree
that all property Taxes with respect to property owned by any of the Company
and the Subsidiaries at the Effective Time will be pro-rated (allocated equally
among the number of days in the relevant period for which a property Tax
applies) and that, notwithstanding any other provision of this Agreement, the
economic burden of any such property Tax will be borne by PFC for all periods
(or portions


 


45

















 


thereof) through the Closing Date and by Buyer for all
periods (or portions thereof) after the Closing Date. Closing Date Working
Capital is to reflect (i) prepaid property Taxes as an asset and
(ii) accrued property Taxes as a liability. Notwithstanding any other
provision of this Agreement, (i) if PFC or any of its Affiliates pays any property
Tax that is allocable to Buyer pursuant to this Section 7.7(G), Buyer will
reimburse PFC upon demand for the amount of such property Tax to the extent it
is not reflected as an asset in Closing Date Working Capital; and (ii) if
Buyer or any of its Affiliates pays any property Tax that is allocable to PFC
pursuant to this Section 7.7(G), PFC will reimburse Buyer upon demand for
the amount of such property Tax to the extent it is not reflected as a
liability in Closing Date Working Capital.


 


(H)          Relationship
of Section 7.7 to Article X. Any conditions or limitations set
forth in Article X with respect to monetary amount of claims or liability
shall not apply to any claim or liability to which this Section 7.7
applies or to any breach of any obligation under this Section 7.7. In the
event of any inconsistency between provisions of Article X and this
Section 7.7, this Section 7.7 
shall control. PFC shall have no liability under this Agreement for any
Taxes of any of the Company and the Subsidiaries except (1) as otherwise
expressly provided in this Section 7.7 with respect to certain federal
income Taxes, State Income Taxes, and property Taxes of the Company and the
Subsidiaries and (2) solely with respect to other Taxes, as provided in Article X
for inaccuracy or breach of a representation or warranty made by PFC in
Section 4.14 and as provided in Section 10.2(H). Section 10.4
shall apply to any Claim or demand by a third party for which one party may be
liable to indemnify another party pursuant to this Section 7.7; provided,
however, notwithstanding anything to the contrary in Section 10.4, only
PFC and its Affiliates (excluding the Company and the Subsidiaries) shall, and
shall have the right to, conduct and control any matter relating to an income
Tax Return (or the income Tax with respect thereto) filed on a consolidated,
unitary, combined or similar basis by PFC Group (or any portion of PFC Group)
for a period ending on or before or including the Closing Date, and Buyer and
its Affiliates shall have no right to conduct, control or participate in any
such matter.


 


(I)            Survival.
Notwithstanding any other provision of this Agreement, the covenants and
obligations set forth in this Section 7.7 shall survive until, and any
claim for indemnification with respect thereto must be made by sixty (60) days
following the expiration of the applicable statute of limitations with respect
to the underlying Tax claim (including any valid extensions).


 


7.8           Fees and Expenses.


 


(A)          Except as
otherwise expressly provided herein, all fees and expenses incurred in
connection with this Agreement by PFC, the Company and the Subsidiaries,
including professional expenses such as legal, accounting and engineering, in
connection with the negotiation, preparation, execution and delivery of this
Agreement prior to the Closing Date and the consummation of the transactions on
or before the Closing, will be borne by and paid by PFC (subject, however, to
the last sentence of Section 9.4). All amounts due and owing Petrie
Parkman & Co. by the Company and the Subsidiaries in respect of the
transactions hereunder will be borne by and paid by PFC. The Company and the
Subsidiaries shall assign all of their rights and obligations of the Company
and the Subsidiaries pursuant to the engagement letter


 


46

















 


between the Company and Petrie Parkman & Co. dated
as of June 8, 2006, to PFC prior to Closing.


 


(B)           Except as
otherwise expressly provided herein, all expenses incurred in connection with
this Agreement by Buyer will be borne by and paid by Buyer, regardless of
whether or not the transactions contemplated hereby are consummated (subject,
however, to the last sentence of Section 9.4).


 


7.9           Publicity. From the date of this Agreement until Closing, all general
notices, releases, statements and communications to suppliers, distributors and
customers of PFC, the Company, the Subsidiaries and their Affiliates, on the
one hand, or Buyer and its Affiliates, on the other hand, and to the general
public and the press relating to the transactions contemplated by this
Agreement shall be made only at such times and in such manner as may be
mutually agreed upon in advance by PFC and Buyer; provided, however, that any
party hereto or its Affiliates shall be entitled to make a public announcement
of the foregoing if, in the opinion of its legal counsel, such announcement is
required to comply with Applicable Law or any listing agreement with any
national or foreign securities exchange or inter-dealer quotation system and
if, to the extent practicable under the circumstances, such party first gives
prior written notice to the other parties hereto of its intention to make such
public announcement and provides the opportunity to review the content of such
disclosure.


 


7.10         Books and Records. Buyer will be entitled to the
originals of all books and records of the Company and all Subsidiaries, other
than those books and records identified as Tax records, the originals of which
will be retained by PFC. Buyer will be entitled to copies of all of such Tax
records. PFC shall be entitled to keep a copy or copies (electronic or
otherwise) of all such records, for archival purposes. Buyer will preserve the
books and records of the Company and all Subsidiaries for a period of six years
following the Closing and will allow PFC (or its representatives, consultants
and advisors) reasonable access to such records at all reasonable times for a
purpose reasonably related to (A) PFC’s indirect ownership of the
Interests or (B) the performance by PFC of its obligations, and the
enforcement by it of its rights, hereunder. If Buyer desires to dispose of any
such records prior to the expiration of the six-year period referenced above,
Buyer shall provide notice of same to PFC, and PFC shall have a period of 10
days to deliver written notice to Buyer that PFC elects to have such records
delivered to it (at PFC’s expense). If PFC fails to deliver such notice within
the 10-day period referenced above, Buyer shall the right to dispose of the
subject records.


 


7.11         HSR Act Filing. If compliance with
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR
Act”), is required in connection with the transactions contemplated under this
Agreement, as promptly as practicable and in any event not more than 10
Business Days following the date on which the parties hereto have executed this
Agreement, PFC, on behalf of Progress Energy, Inc., and Buyer will file with
the Federal Trade Commission and the Department of Justice, as applicable, the
required notification and report forms and will as promptly as practicable
furnish any supplemental information which may be requested in connection
therewith. PFC and Buyer will request expedited treatment (i.e., early
termination) of such filing. Buyer and PFC shall use commercially reasonable
efforts to make all other filings and submissions on a prompt and timely basis
in connection with the filings required by this Section. Each of PFC and Buyer
will bear its own costs and expenses relating to


 


47

















 


its compliance
with this Section; provided, however, that Buyer will pay the entire filing fee
required by the HSR Act.


 


7.12         No Amendment of Indemnification Provisions.
Buyer agrees to cause each Subsidiary (A) not to change, for six years
after the Closing Date, the indemnification provisions of its respective
certificate of formation or operating agreement or Governing Documents in
effect on the date hereof in each case relating to the indemnification of each
present and former manager, officer, employee or agent of such Subsidiary in a
manner that adversely affects the rights of such managers, officers, employees
or agents to indemnification thereunder and (B) to comply with the terms
thereof to provide such managers, officers, employees or agents with all rights
of indemnification thereunder.


 


7.13         Third
Party Consents. After the date hereof and prior to the Closing, each of
PFC, the Company and each Subsidiary shall, and PFC shall cause the Company to,
and each of PFC and the Company shall cause each Subsidiary to, use its
commercially reasonable efforts to promptly obtain the Consent from any party
to a Company Contract or Oil and Gas Contract identified on Company Schedule
4.5(B) as requiring the Consent of another party thereto; provided that PFC
is not required to pay money to any such counterparty obtain any such Consent. Notwithstanding
the foregoing, no later than 20 days prior to the Closing Date, Buyer will
inform PFC if Buyer desires to re-license the seismic licenses identified on Company
Schedule 4.5(B). If Buyer decides to re-license such licenses, Buyer will
pay any re-license fees charged by the licensors up to $93,000 in the aggregate
and PFC will reimburse Buyer for any re-license fee in excess of that amount. If
Buyer elects not to re-license a seismic license, Buyer will inform PFC and PFC
will terminate that license as of the Closing Date.


 


7.14         No
Solicitation of Transactions. PFC shall not, and PFC shall cause each of
its Affiliates (including, without limitation, the Company and the
Subsidiaries) and its and their respective Representatives (as defined below)
to not, directly or indirectly, initiate, solicit or encourage (including,
without limitation, by way of furnishing information or assistance), or take
any other action to facilitate, any inquiries or the making of any proposal or
offer that constitutes, or may lead to, any Acquisition Proposal (as defined
below) with any other Person other than Buyer or an Affiliate of Buyer, or enter
into or maintain or continue discussions or negotiate with any Person (other
than Buyer or an Affiliate of Buyer) in furtherance of such inquiries or for
the purpose of obtaining an Acquisition Proposal. PFC shall, and PFC shall
cause each of its Affiliates to, promptly, but in no event later than 24 hours,
notify Buyer after receipt by PFC or any of its Affiliates or any of their
respective Representatives, or after first becoming aware, of any such third-party
inquiries, offers or proposals relating to a potential Acquisition Proposal
that are received on or after the date hereof. Such notice shall be made both
orally and in writing and shall indicate in reasonable detail the identity of
the inquiring, offering or proposing party and the specific terms and
conditions of the Acquisition Proposal and shall include a copy of any written
Acquisition Proposal. PFC shall immediately cease and cause to be terminated,
and shall cause each of its Affiliates and its and their respective
Representatives to cease and terminate, any existing discussions or
negotiations with any third parties (other than Buyer or an Affiliate of Buyer)
conducted heretofore with respect to any Acquisition Proposal or related
transaction. For purposes of this Section 7.14, (a) ”Representatives”
shall mean officers, directors, partners, managers, stockholders, members,
representatives, agents, key employees, attorneys, accountants, auditors and
financial advisors of PFC, the Company, the Subsidiaries or any


 


48

















 


Affiliates
thereof, as applicable, and (b) ”Acquisition Proposal” shall mean any of
the following, directly or indirectly, involving or affecting the Company or
the Subsidiaries:  (i) any sale,
purchase or other transfer of Equity Interests or the issuance of any Equity
Interests; (ii) any merger, consolidation, exchange of Equity Interests,
recapitalization, business combination or other similar transaction;
(iii) any sale, lease, license, exchange, mortgage, pledge, transfer or
other disposition of all or any material portion of the business or assets
thereof, in a single transaction or series of transactions; (iv) any
tender offer or exchange offer for all or any portion of the outstanding Equity Interests of the Company or any
partner, direct or indirect holder of Equity Interests therein or other direct
or indirect owner thereof or any Subsidiary; or (v) any proposal, plan or
intention to do any of the foregoing or any agreement (whether or not announced
and whether or not in writing) to engage in any of the foregoing, except that
an Acquisition Proposal shall not include any proposal or discussion involving
a Related Affiliate that would not adversely effect, prevent or delay the
performance by PFC or the Company of any of its obligations under this
Agreement or the other Transaction Documents including the consummation of the
Merger.


 


7.15         Financing
Cooperation; Financial Information.


 


(A)          Each of
PFC, the Company and each Subsidiary shall, and PFC shall cause the Company to,
and each of PFC and the Company shall cause each Subsidiary to, at the sole
cost and expense of Buyer for out-of-pocket expenses paid to third parties
actually incurred by PFC, the Company or any Subsidiary, authorize its officers
and employees, and shall use its commercially reasonable efforts to cause its
accountants and other third parties to cooperate in all reasonable respects
with Buyer in connection with the financing pursuant to the Commitment and EXCO
Resources, Inc.’s reporting and disclosure obligations. Buyer shall be entitled
to provide all information provided to it pursuant to this Section 7.15(A)
to the lenders under the Commitment, solely for use in connection with such
proposed financing.


 


(B)           Between
the date of this Agreement and the Closing Date, the Company shall, and PFC
shall cause the Company to, not later than 15 days after the end of each month
commencing with the month ending July 31, 2006, prepare and deliver to
Buyer an unaudited consolidated balance sheet and related consolidated statement
of income of the Company and the Subsidiaries for each monthly and, as
applicable, quarterly period.


 


7.16         FCC
Filings.


 


(A)          Not later
than 5 Business Days following the date of this Agreement, Buyer and the
Company or any Subsidiary, as applicable, shall, and PFC shall cause the
Company, and each of PFC and the Company shall cause any applicable Subsidiary
to, file all appropriate applications with respect to the assignment to Buyer
of the FCC Licenses (the “FCC Transfer Applications”). The FCC Transfer
Applications and any supplemental information furnished in connection therewith
shall be in substantial compliance with the FCC Rules or be responsive to a
request of the FCC.


 


(B)           Buyer and
the Company or any Subsidiary, as applicable, shall, and PFC shall cause the
Company, and each of PFC and the Company shall cause any applicable Subsidiary
to, furnish to each other such necessary information and reasonable assistance
as the


 


49

















 


other may reasonably request in connection with the
preparation, filing and prosecution of the FCC Transfer Applications. Buyer and
the Company or any Subsidiary, as applicable, shall bear its own expenses in
connection with the preparation, filing and prosecution of the FCC Transfer
Applications, except that any filing or other fees imposed by the FCC will be
the responsibility of Buyer. Buyer and the Company or any Subsidiary, as
applicable, shall, and PFC shall cause the Company, and each of PFC and the
Company shall cause any applicable Subsidiary to, use its commercially
reasonable efforts to prosecute the FCC Transfer Applications and shall furnish
to the FCC any documents, materials, or other information reasonably requested
by the FCC. If after the FCC grants its consent to the FCC Transfer
Applications, any petitions for reconsideration, appeals or similar filings are
made seeking to overturn the grant of the FCC consent, or if the FCC seeks to
reconsider such grant on its own motion, then the parties shall use commercially
reasonable efforts to defend the applicable grants against such actions.


 


7.17         PFC
Guarantees.


 


(A)          PFC or one
or more of its Affiliates provide, on behalf of Company or one or more
Subsidiaries, the letters of credit, parental guaranties and surety bonds set
forth on Company Schedule 4.23 (the “PFC Guaranties” or each, a “PFC
Guaranty”).


 


(B)           Buyer
shall offer to cause itself to be substituted in all respects for PFC or
Affiliates of PFC, as the case may be, effective as of the Closing, in respect
of all PFC Guaranties, and shall request PFC and all Affiliates of PFC (other
than the Company and the Subsidiaries) to be released, as of the Closing Date,
from any and all obligations under the PFC Guaranties.


 


7.18         New
Projects and Capex Budget.


 


(A)          Pending the
Closing, PFC and the Company will provide to Buyer its plan for new projects
and the Company’s and Subsidiaries’ budgets for such projects (the “Project
Plan”), to be undertaken by the Company or Subsidiaries (including the
acquisition of new Oil & Gas Properties, the execution of new Oil & Gas
Contracts, and the drilling and completion of Wells). The initial Project Plan
is attached as Schedule 7.18. The Company shall submit weekly written
reports to Buyer to inform Buyer with respect to the status of the Project Plan.
The Company may suggest changes to a Project Plan, and after consultation with
the President of Buyer, any amended Project Plan shall be effective. Such
subsequent Project Plans will not be considered to be schedules to this
Agreement. The Company and the Subsidiaries shall conform to the requirements
of the then-effective Project Plan with respect to the activities conducted
prior to the Closing by the Company and the Subsidiaries and expenditure
maximums and limits established thereby. The Company shall make its officers
available to Buyer, at reasonable times and places each such week to discuss
the Project Plan and potential changes thereto, and to furnish such other
information concerning such projects as Buyer shall reasonably request.


 


7.19         PFC
Retained Environmental Responsibilities and Indemnification.


 


(A)          In
conjunction with the execution, delivery and performance of this Agreement and
the other Transaction Documents and the consummation of the transactions
contemplated hereby, PFC shall cooperate with the Buyer to effectuate the
transfer of any


 


50

















 


Environmental Permits held by the Company or any
Subsidiary under any Environmental Law, should notification, disclosure,
registration, reporting, filing, or investigation be required under any
Environmental Law. Any out-of-pocket expenses related to such transfer and for
the actions required for transfer shall be the responsibility of Buyer, except
with respect to actions required of PFC with respect to PFC Retained
Environmental Matters (as defined below).


 


(B)           Subject to
the terms and provisions of this Section 7.19 and Section 11.1, PFC
shall indemnify and hold harmless Buyer and its Affiliates from and against any
and all Losses arising under or relating to Environmental Laws made against or
incurred or suffered by Buyer or such Affiliate, on or after the Closing Date,
with respect to the matters identified under Item B(3) in Company Schedule
4.21 (“PFC Retained Environmental Matters”).


 


(C)           Company
Schedule 7.19 lists (1) the Properties owned or operated by the
Company or the Subsidiaries as to which Buyer has completed its environmental
investigations (the “Group A Properties”) and as to which Buyer asserts (as
described on such schedule) the existence of a violation of Environmental Law,
the presence of concentrations of Hazardous Materials in excess of amounts that
would customarily be considered addressed by ordinary compliance management by
a reasonably prudent operator of comparable properties in the applicable
jurisdiction (“Ordinary Compliance Management”), or otherwise reasonably may
give rise to liability under Environmental Law for investigation, remediation,
or other corrective action on or with respect to the Properties beyond Ordinary
Compliance Management (each such matter, an “Environmental Defect”), and
(2) those Properties on which Buyer will conduct further environmental
investigations following the date hereof to determine if Buyer will assert that
an Environmental Defect exists on such identified Properties (the “Group B
Properties”). By no later than August 15, 2006, Buyer shall complete its
investigation with respect to the Group B Properties, and by such date shall
provide PFC and Company with an amended Company Schedule 7.19 that
describes any Environmental Defects that Buyer asserts exist on or with respect
to the Group B Properties as evidenced by Buyer’s environmental investigation
test data.


 


(D)          If PFC
disagrees with any of Buyer’s assertions of the existence of an Environmental
Defect described on amended Company Schedule 7.19 with respect to the
Group B Properties, PFC and Buyer will attempt to resolve the dispute. If they
cannot do so they will resolve such dispute in accordance with
Section 11.1.


 


(E)           PFC will pursue
diligent efforts following the Closing to bring all PFC Retained Environmental
Matters and undisputed Environmental Defects (including disputed Environmental
Defects that are confirmed to exist pursuant to a proceeding under
Section 11.1) into material compliance with the Environmental Laws. PFC
shall retain control of and shall manage the resolution of all such PFC
Retained Environmental Matters and other Environmental Defects (including, as
applicable, remediation or other action necessary to bring a property into
material compliance with Environmental Laws), and Buyer, its Affiliates and
representatives will cooperate with and not interfere with PFC’s activities,
and provide PFC and its agents and representatives full access to the
Properties necessary for PFC’s performance of its obligations under this
Section. Buyer shall be responsible for (and, subject to Buyer’s review and
confirmation to Buyer’s reasonable satisfaction, shall reimburse PFC promptly
upon invoicing


 


51

















 


for) the first $2,500,000 of third-party out-of-pocket
expenses actually incurred by PFC in performing its obligations with respect to
Environmental Defects.


 


(F)           When
PFC considers a PFC Retained Environmental Matter or an Environmental Defect to
be in material compliance with Environmental Laws, PFC will provide written
notice to the Buyer indicating that PFC’s obligation with respect correction of
such item is complete (a “Notice of Completion”). If Buyer disagrees with such
Notice of Completion, it may notify PFC in writing within thirty (30) days that
it disputes PFC’s Assertion (a “Notice of Objection”). If Buyer issues a Notice
of Objection, PFC and Buyer will attempt to resolve the dispute. If they cannot
resolve the dispute within ninety (90) days from Buyer’s Notice of Objection,
Buyer may elect to initiate dispute resolution in accordance with
Section 11.1. If Buyer fails to notify PFC within thirty (30) days after
PFC provides the Notice of Completion or fails to initiate Section 11.1
proceedings within ninety (90) days of Buyer’s Notice of Objection, PFC shall be released from any liability to Buyer with
respect to such PFC Retained Environmental Matter or such Environmental Defect,
whether for site remediation, treatment, facility construction or similar
activities with respect to any such PFC Retained Environmental Matter or Environmental
Defect, and PFC shall be under no
obligation to Buyer to undertake any further remedial or other action with
respect to such PFC Retained Environmental Matter or Environmental Defect or to
indemnify Buyer with respect to further remedial or other action for such
completed matter. PFC shall indemnify Buyer for Losses resulting from
negligence in the performance by PFC or its contractors of PFC’s obligations
under this Section 7.19.


 


(G)           The only
obligations or liabilities of PFC or any Related Affiliate with respect to any
liability or obligation that Company or any Subsidiary has or might have
related to or arising under Environmental Laws are (i) PFC’s obligations
under this Section 7.19, and (ii) subject to and in accordance with
Article X, the indemnification by PFC for breach of the representations and
warranties of PFC and the Company in Section 4.21.


 


7.20         Cooperation
with Audits. Following the date of this Agreement and continuing on and
after the Closing Date, PFC shall, and PFC shall cause each of its Affiliates
to, cooperate with Buyer and its representatives (including counsel and
auditors) to the extent reasonably necessary for Buyer and its representatives
(including counsel and auditors) to commence and conduct a financial audit of
the Financial Statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States) and to enable EXCO to comply with
its reporting and disclosure obligations under the Exchange Act and the
Securities Act as such reporting obligations relate to the Company and the
Subsidiaries. Such cooperation shall consist of:  (i) providing Buyer and its
representatives (including counsel and auditors) with reasonable access, during
normal business hours, to the financial and accounting records, information,
officers, directors, employees, counsel, and auditors (including Deloitte &
Touche, LLP) of PFC and its Affiliates; (ii) causing the cooperation of
Robert M. Deacy and Kim Boyle in the performance of such audit and
(iii) causing all officers, directors, employees, counsel, and auditors
(including Deloitte & Touche, LLP) of PFC and its Affiliates (a) who
have historically participated in the compilation and preparation of the
financial statements of the Company and the Subsidiaries and the recordation of
transactions in the books and records of the Company and the Subsidiaries to
cooperate with and provide all reasonable assistance to Buyer and its
representatives (including counsel and auditors) in the performance of the
audit of the Financial Statements at the same level of service as such
officers, directors, employees, counsel, and


 


52

















 


auditors
(including Deloitte & Touche, LLP) have historically provided to PFC and
each of its Affiliates and (b) to cooperate with, and reasonably assist,
EXCO Resources, Inc. with its reporting and disclosure obligations under the
Exchange Act and the Securities Act as such reporting obligations relate to the
Company and the Subsidiaries. Robert M. Deacy’s and Kim Boyle’s cooperation
will consist of providing information and consulting with other employees of
PFC and Related Affiliates to assist in the conduct of the audit and the
compliance by EXCO with its reporting and disclosure obligations under the
Exchange Act and the Securities Act as such reporting obligations relate to the
Company and the Subsidiaries. The cooperation of employees of PFC and Related
Affiliates and specifically Robert M. Deacy and Kim Boyle with respect to the
audit of the Financial Statements is subject to:  (i) the completion of the audit of the
Financial Statements by no later than December 31, 2006; and (ii) the
continued employment of each by PFC or any Related Affiliate. Buyer shall bear
all of the third-party out-of-pocket costs and expenses actually incurred by
PFC or any Related Affiliate in connection with such audit of the Financial
Statements and in enabling EXCO to comply with its reporting and disclosure
obligations under the Exchange Act and the Securities Act.


 


7.21         Transition
Services; Horizon License.


 


(A)          As promptly
as reasonably practicable after the date hereof, but in no event later than 10
days prior to Closing, Buyer shall identify, and determine the duration of, the
transition services that will be required by Buyer following the Closing. PFC
shall, and shall cause all of its Affiliates to, cooperate with, and reasonably
assist, Buyer in promptly identifying such transition services. Buyer and PFC
shall negotiate in good faith and mutually agree on the amount of, or the basis
for determining, the fees payable for each transition service or related group
of transition services to be rendered by the Servicing Parties (as defined in
the Transition Services Agreement). The amount of, or basis for determining,
such fees shall be determined consistent with the terms of Section 2.1 of
the Transition Services Agreement. Buyer and PFC shall jointly prepare Annex A
to the Transition Services Agreement to memorialize the required transition
services and the mutually agreed on amount and/or basis for determining the
fees payable therefor. Unless otherwise specifically provided in the Transition
Services Agreement, the Servicing Parties (as such term will be defined in the
Transition Services Agreement) shall provide the required transition services
for a period of five months following the Closing Date. The Servicing Parties
shall provide the required transition services at the level and quality of
services that is no less than the level and quality of services provided by the
Servicing Parties and their respective Affiliates prior to the Merger (and in
accordance with the standards set forth in the Transition Services Agreement
subject to the limitations stated therein, such as the employees’ election to
continue employment with PFC or its Affiliate, and such required transition
services shall include, but not be limited to, the provision of reasonable
office space and building services, reasonably necessary IT services and
accounting, land production reporting and measurement systems, as will be more
particularly described on Annex A to the Transition Services Agreement.


 


(B)           Upon the
termination or expiration of the Transition Services Agreement, PFC shall cause
the Horizon License to be assigned to Buyer, as will be more particularly
described on Annex A to the Transition Services Agreement, without payment
therefor.


 


53

















 


7.22         PFC
Assets. Certain of the assets used by the Company and the Subsidiaries in
the operation of their business are owned or leased by PFC, including certain
computers and miscellaneous personal property. Prior to Closing, PFC will
transfer and assign title to such assets and such leases to Winchester and
shall provide Buyer with evidence reasonably satisfactory to Buyer of such
transfers and assignments.


 


7.23         Buyer
Put Option. Pursuant to the terms of this Section 7.23, Buyer shall have
the right and option (but not obligation) (the “Buyer Put Right”) to deliver a
Put Election Notice to PFC to require PFC and the Company to (i) cause the
transfer, assignment and conveyance of, the Properties related to the
Proceedings described in items 1 and 2 under the heading “Pending Litigation”
on Company Schedule 4.11 (the “Put Properties”) to PFC and (ii) cause to
be assumed by PFC,  all obligations and
liabilities associated with the Put Properties and such Proceedings (such
obligations and liabilities, the “Put Obligations”), in each case, to be
consummated by PFC and the Company prior to the Closing. If Buyer elects to
exercise the Buyer Put Right, Buyer shall deliver to PFC, on or before the
tenth (10th) Business Day prior to the Closing Date, a written notice
(the “Put Election Notice”) advising PFC that Buyer is exercising the Buyer Put
Right. Following receipt of the Put Election Notice, PFC and the Company shall
cause the consummation of the transfer, assignment and conveyance of the Put
Properties to, and the assumption of the Put Obligations by, PFC prior to the
Closing. All agreements, documents and instruments to be utilized by PFC and
the Company to give effect to such conveyance and assumption shall be subject
to the review and comments of, and must be in form and substance reasonably
satisfactory to, Buyer. As provided by Section 1.4(B)(7), the Base Purchase
Price shall be decreased by the aggregate amount of the Allocated Values
associated with the Put Properties if the Buyer Put Right is exercised by
delivery of the Put Election Notice. If the Buyer Put Right is exercised by
delivery of the Put Election Notice, the Buyer Indemnified Persons shall be
entitled to indemnification pursuant to Section 10.2(I) in accordance
with Article X, and PFC shall defend the Buyer Indemnified Persons pursuant to
and in accordance with Section 10.4 in regard to the Proceedings described in
items 1 and 2 under the heading “Pending Litigation” on Company Schedule
4.11 without any further requirement by Buyer to give notice of such
Proceedings as Third-Party Claims or by PFC to notify Buyer of its election to
defend the Buyer Indemnified Persons in connection with such Proceedings. If
the Buyer exercises the Buyer Put Right, PFC and Buyer agree to negotiate in
order to reach commercially reasonable agreements, with customary and market
terms, as might be reasonably required in order for the Put Properties to be
served by oil and gas gathering and other facilities of the Buyer and the
Subsidiaries after the Closing.


 


ARTICLE VIII

BUYER’S DUE DILIGENCE AND TITLE DEFECT PROCESS


 


8.1           Title
Due Diligence Examination.


 


(A)          From the
date of this Agreement until Closing (the “Examination Period”), PFC and the
Company shall afford to Buyer and its representatives reasonable access during
normal business hours to the offices, personnel and books and records of PFC,
Related Affiliates, the Company and the Subsidiaries in order for Buyer to
conduct a title examination as it may in its sole discretion choose to conduct
with respect to the Properties in order to determine whether Title Defects (as
defined below) exist. Buyer shall complete its review of the Company and the


 


54

















 


Subsidiaries’ title to Properties constituting at
least 80% of the aggregate Allocated Values of all Properties no later than the
end of the Examination Period. PFC, GP, and the Company and Buyer acknowledge
that drill site title opinions have not been obtained for certain Wells in
Louisiana including any Wells drilled subsequent to the date hereof and for
which drill site title opinions have not been obtained at least 5 Business Days
prior to the Closing Date (the “Drill Site Properties”). Buyer, PFC, GP and the
Company will cooperate to prepare title opinions on the Drill-Site Properties
during the Examination Period.


 


(B)           Buyer and
its representatives may examine all abstracts of title, title opinions, title
files, ownership maps, lease files, assignments, division orders, operating
records and agreements, well files, financial and accounting records,
geological, geophysical and engineering records, in each case insofar as the
same may now be in existence and in the possession of PFC, Related Affiliates,
the Company or any Subsidiary, provided, however, that PFC and the Company may
withhold access to any information that PFC, Related Affiliates, the Company or
any Subsidiary is prohibited from disclosing by bona fide, third party
confidentiality restrictions; provided that PFC and the Company shall use their
reasonable efforts to obtain a waiver of any such restrictions in favor of
Buyer. The cost and expense of Buyer’s review of the title to the Properties
shall be borne solely by Buyer. Buyer shall not contact any of the customers or
suppliers of the Company or its Working Interest co-owners, operators, lessors
or surface interest owners, in connection with the transactions contemplated
hereby, whether in person or by telephone, mail or other means of
communication, without the specific prior authorization of the Company, which
consent shall not be unreasonably withheld.


 


(C)           If Buyer
discovers any Title Defect affecting any of the Properties, Buyer may notify
PFC of such alleged Title Defect from time to time prior to the expiration of
the Examination Period. To be effective, such notice (“Title Defect Notice”)
must (i) be in writing, (ii) be received by PFC prior to the
expiration of the Examination Period, (iii) describe the Title Defect in
reasonable detail including the basis therefor (including any alleged variance
in the Net Revenue Interest or Working Interest and any supporting documents),
(iv) identify the specific Properties (including the specific Warranty
Wells, Leases or units listed on Buyer Schedule 8.1(F)(3) to which such
Title Defect relates, and (v) include the value of such Title Defect as
determined by Buyer in good faith.


 


(D)          Buyer
Schedule 8.1(D) sets forth a list of the Properties examined by Buyer as of
the date hereof, and the Title Defects, if any, associated with such Properties.
Buyer will update Buyer Schedule 8.1(D) at Closing, with:  (i) a list of all Properties the title
to which Buyer has examined as of Closing and the Title Defects, if any,
associated therewith; and (ii) a list of Drill-Site Properties for which
title opinions have not been obtained at least five Business Days prior to the
Closing Date (the “Closing Drill-Site Properties”). Following the date of this
Agreement, Buyer may not present further Title Defect Notices with respect to
the Properties set forth on Buyer Schedule 8.1(D) as of the date hereof.
At the end of the Examination Period, any matters that may otherwise constitute
a Title Defect, but of which PFC has not been specifically notified by Buyer in
accordance with the foregoing, shall be deemed to have been waived by Buyer for
all purposes. Notwithstanding the end of the Examination Period, Buyer may
continue to present Title Defect Notices with respect to the Closing Drill-Site
Properties until 5:00 p.m. Dallas, Texas, time on the date that is 30 days
following the Closing Date.


 


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(E)           Upon the
receipt of an effective Title Defect Notice from Buyer, PFC will have the
option, but not the obligation, to attempt to cure such Title Defect during the
Cure Period (as hereafter defined) at PFC’s sole cost and expense, and the
further option described in Section 8.1(G). A Property affected by such
Title Defect shall be a “Title Defect Property”.


 


(F)           As used in
this Section 8.1:


 


(1)           “Defensible
Title” means, as of the date of this Agreement and the Closing Date,


 


(a)           with
respect to the Warranty Wells and Leases described on Company Schedule 4.19
and with respect to any other real property (including the Easements but
excluding any portion of the Midstream Assets) included in the Properties, such
record title and ownership by the Company or a Subsidiary that:


 


(i)            entitles
the Company and/or a Subsidiary to receive and retain from such Warranty Well
or Lease, without reduction, suspension or termination, not less than the
percentage set forth on Company Schedule 4.19 as the Net Revenue
Interest of all Hydrocarbons produced, saved and marketed from such Warranty
Well or Lease;


 


(ii)           obligates
the Company and/or a Subsidiary to bear a percentage of the costs and expenses
relating to the maintenance, development and operation of such Warranty Well or
Lease that is not more than the Working Interest set forth for such Warranty
Well or Lease on Company Schedule 4.19, (unless such increase is
accompanied by a proportionate increase in the Net Revenue Interest applicable
to such Warranty Well or Lease); and


 


(iii)          except
with respect to any Warranty Well or Lease, is defensible; and


 


(iv)          is
free and clear of all Liens except Permitted Encumbrances.


 


(2)           “Permitted
Encumbrances” means:


 


(a)           Liens
for taxes which are not yet delinquent or which are being contested in good
faith and for which adequate reserves have been established on the Balance
Sheet;


 


(b)           normal
and customary Liens of co-owners under operating agreements, unitization
agreements, and pooling orders relating to the Properties, which obligations
are not yet due and pursuant to which neither the Company nor any Subsidiary is
in default;


 


56

















 


(c)           mechanic’s
and materialman’s Liens relating to the Properties, which obligations are not
yet due and pursuant to which neither the Company nor any Subsidiary is in
default;


 


(d)           minor
defects and irregularities in title or other restrictions on the use or
ownership of property (whether created by or arising out of joint operating
agreements, farm-out agreements, leases and assignments, Contracts for
purchases of Hydrocarbons or similar agreements, or otherwise in the Ordinary
Course of Business) that are of the nature customarily accepted by prudent
purchasers of oil and gas properties and do not decrease the Net Revenue
Interest set forth on Company Schedule 4.19, increase the Working
Interest (without a proportionate increase in the corresponding Net Revenue
Interest) set forth on Company Schedule 4.19 or materially affect the
value of any property encumbered thereby;


 


(e)           all
rights to consent by, required notices to, filings with, or other actions by
Governmental Entities in connection with the sale or conveyance of oil and gas
leases or interests therein if the same are customarily obtained routinely and
subsequent to such sale or conveyance;


 


(f)            preferential
rights to purchase and required third party consents to assignments and similar
agreements:


 


(i)            if
the same are not triggered by the consummation of the transactions contemplated
herein; or


 


(ii)           with
respect to which, prior to Closing, (X) waivers or consents are obtained
from the appropriate parties, (Y) the appropriate time period for
asserting such rights has expired without an exercise of such rights, or
(Z) arrangements can be made on terms satisfactory to Buyer to allow Buyer
to receive substantially the same economic benefits as if all such waivers and
consents had been obtained;


 


(g)           easements,
rights-of-way, servitudes, Permits, surface leases and other rights in respect
of surface operations, pipelines, grazing, logging, canals, ditches, reservoirs
or the like; and easements for streets, alleys, highways, pipelines, telephone
lines, power lines, railways and other easements and rights-of-way, on, over or
in respect of any of the Properties to the extent such matters do not
materially interfere with operations on the Properties;


 


(h)           rights
reserved to or vested in any municipality or governmental, statutory or public
authority to control or regulate any of the Properties in any manner, and all
Applicable Laws, rules and orders of any Governmental Entity; and


 


(i)            conventional
rights of reassignment normally actuated by an intent to abandon or release a
lease and requiring notice to the holders of such rights.


 


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(3)           “Title
Defect Amount” means, with respect to a Title Defect Property, the reduction in
the Allocated Value of a Property or an associated Property as a result of the
existence of one or more Title Defects, which amount shall be determined as
follows:


 


(a)           The
Title Defect Amount with respect to a Title Defect Property shall be determined
by taking into consideration the Allocated Value of the Property affected by
such Title Defect (or if the Title Defect Property does not have a specific
Allocated Value, then the Allocated Value thereof shall be derived from the
Allocated Value of the Lease, Warranty Well or unit associated therewith), the
portion of the Property subject to such Title Defect, and the legal effect of
such Title Defect on the Property affected thereby; provided, however, that:


 


(b)           if
such Title Defect is in the nature of the Net Revenue Interest in a Warranty
Well, Lease or unit being less than the Net Revenue Interest set forth on Company
Schedule 4.19 with respect thereto and the corresponding Working Interest
remains the same, then the Title Defect Amount will be the Allocated Value for
the relevant Warranty Well, Lease or unit multiplied by the percentage
reduction in such Net Revenue Interest as a result of such Title Defect;


 


(c)           if
such Title Defect is in the nature of a Lien, then the Title Defect Amount will
be the amount required to fully discharge such Lien; and


 


(d)           If
the Title Defect results from any matter not described in
Section 8.1(F)(3)(a), the Title Defect Amount shall be an amount equal to
the difference between the value of the Title Defect Property with such Title
Defect and the value of such Title Defect Property without such Title Defect
(taking into account the Allocated Value of the Title Defect Property).


 


(e)           “Title
Defect” means for each Property on Company Schedule 4.19, a defect
exists (i) that causes the Company and the Subsidiaries to not have
Defensible Title in such Warranty Well or Lease; (ii) that has a Title
Defect Amount attributable thereto in excess of $25,000; and (iii) for
which a Title Defect Notice has been timely and otherwise validly delivered;
and


 


(f)            Notwithstanding
the foregoing, any matters that would otherwise constitute a Title Defect will
not be a Title Defect if it is not reasonably likely to affect the economic
value to Buyer of the affected Oil and Gas Property based on the standards and
practices of reasonably prudent operators of oil and gas wells engaged in the
drilling of exploratory wells in the geographic region in which the Oil and Gas
Properties are located.


 


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(G)           (1)           If
PFC and Buyer are unable to reach an agreement as to whether a Title Defect exists
or, if it does exist, the Title Defect Amount attributable to such Title
Defect, then PFC, at its election, may either:


 


(a)           notify
Buyer that it will repurchase the Property that is the subject of the dispute
(a “Repurchase Property”), or


 


(b)           initiate
dispute resolution procedures under Section 11.1.


 


(2)           If
PFC elects to exercise its repurchase option under clause (G)(1)(a), above, PFC
shall notify Buyer in writing no later than 60 days after PFC’s receipt of
Buyer’s Title Defect Notice with respect to such Repurchase Property (a “Repurchase
Notice”). At a time mutually agreed by PFC and Buyer, but no later than 15
Business Days after Buyer’s receipt of the Repurchase Notice, Buyer will
reconvey the Repurchase Property by appropriate instrument, free of any Liens
created by or through Buyer between the Closing Date and the date of
reconveyance. In exchange for the Repurchase Property, PFC shall pay Buyer the
Allocated Value of the Repurchase Property as set forth on Buyer Schedule
8.1(F)(3).


 


(3)           If
PFC does not elect to issue a Repurchase Notice, as permitted by clause G(2),
PFC may elect to initiate dispute resolution procedures under Section 11.1.
In any such proceeding under Section 11.1, the provisions of
Section 11.1 shall be applicable, provided that the Title Defect Amounts
with respect to the Title Defects of the type described in
Sections 8.1(F)(3)(a), (b), (c) and (d), shall be calculated as provided
therein.


 


8.2           Environmental
Investigation.


 


Buyer and its
representatives may, at Buyer’s expense, conduct environmental investigations
of the Properties, provided neither Buyer nor its representatives materially
interfere with the use and enjoyment of the Properties by PFC. Such
investigations shall be during normal business hours and in a manner so as not
to interfere in any material respect with the normal operations of the Business.
PFC shall allow the Buyer and its representatives full and complete access
during normal business hours and upon reasonable notice to books, records,
documents, and facilities of PFC, Related Affiliates, the Company and the
Subsidiaries for the purpose of conducting environmental investigations. Except
as contemplated by Buyer Schedule 7.19, Buyer shall not conduct
environmental testing on the Property without the express permission from PFC,
which consent shall not be unreasonably withheld, conditional or delayed. Buyer’s
environmental investigations shall be complete on or before August 15,
2006.


 


8.3           Cure
of Certain Title Defects Post-Closing.


 


(A)          Any Title
Defect identified by Buyer prior to Closing that remains uncured at Closing,
and any Title Defect identified by Buyer after Closing will be referred to
herein as a “Post-Closing Defect.”


 


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(B)           Buyer and
the Company will act in good faith and reasonably cooperate with PFC after the
Closing for PFC to cure Post-Closing Defects. If, at the end of the 30-day
period commencing on the Final Settlement Date (the “Cure Period”), PFC has
been unable to cure a Post-Closing Defect (and there is no dispute as to
whether or not it has been cured), PFC will pay Buyer, within 10 Business Days, the Title Defect
Amount with respect to such Post-Closing Defect plus interest payable thereon
accruing at the Prime Rate from the Closing Date to the date on which the Title
Defect Amount is paid by PFC to Buyer (taking into account the value of the
results of any curative efforts made by or on behalf of PFC with respect to
such Post-Closing Defects). If, at the end of the Cure Period, PFC and Buyer
are unable to agree on whether there has been a satisfactory resolution of a
Post-Closing Defect, then such disagreement shall be resolved as provided in
Section 11.1.


 


8.4           Buyer
Indemnification. Buyer hereby indemnifies and shall defend and hold the
Company, PFC, Affiliates thereof, and their respective owners, officers,
directors, employees, agents, representatives, contractors, successors, and
assigns) harmless from and against any and all of the following claims arising
from Buyer’s inspecting and observing the Properties:  (A) claims for personal injuries to or
death of employees of Buyer, its contractors, agents, consultants, and
representatives, and damage to the property of Buyer or others acting on behalf
of Buyer, except for injuries or death caused by the gross negligence or
willful misconduct of the Company, PFC or any of their respective Affiliates,
employees, contractors, agents, consultants, or representatives; and
(B) claims for personal injuries to or death of employees of the Company
or third parties, and damage to the property of the Company or third parties,
to the extent caused by the negligence, gross negligence, or willful misconduct
of Buyer. TO THE EXTENT PROVIDED ABOVE, THE FOREGOING INDEMNITY INCLUDES, AND
THE PARTIES INTEND IT TO INCLUDE, AN INDEMNIFICATION OF THE INDEMNIFIED PARTIES
FROM AND AGAINST CLAIMS ARISING OUT OF OR RESULTING, IN WHOLE OR PART, FROM THE
CONDITION OF THE PROPERTY OR THE SOLE, JOINT, COMPARATIVE, OR CONCURRENT
NEGLIGENCE OR STRICT LIABILITY OF ANY OF THE INDEMNIFIED PARTIES. THE PARTIES
HERETO AGREE THAT THE FOREGOING COMPLIES WITH THE EXPRESS NEGLIGENCE RULE AND
IS CONSPICUOUS.


 


ARTICLE IX

CONDITIONS TO OBLIGATIONS OF THE PARTIES; TERMINATION


 


9.1           Conditions to Obligations of PFC, GP and the
Company. The
obligations of PFC, the GP and the Company to consummate the transactions
contemplated by this Agreement shall be subject to the fulfillment on or prior
to the Closing of each of the following conditions:


 


(A)          Each of the
representations and warranties of Buyer contained in this Agreement shall be
true and correct in all material respects (other than those representations and
warranties of Buyer that are qualified by materiality, which shall be true and
correct in all respects) as of the date of this Agreement and as of the Closing
as though made on and as of the Closing Date, except to the extent that any
such representation or warranty is made as of a specified date, in which case
such representation or warranty shall have been true and correct in all
material respects (other than those representations and warranties of Buyer
that are qualified by materiality, which shall be true and correct in all
respects) as of such specified date;


 


60

















 


(B)           Buyer shall
have performed and complied with in all material respects all covenants and
agreements required by this Agreement to be performed or complied with by Buyer
on or prior to the Closing;


 


(C)           PFC and
the Company shall have received a certificate executed by the Chief Executive
Officer of Buyer dated the Closing Date, representing and certifying that the
conditions set forth in Sections 9.1(A) and (B) have been satisfied;


 


(D)          No
Proceeding (excluding any Proceeding initiated by PFC, the Company, the Subsidiaries,
or any of their respective Affiliates) shall, on the Closing Date, be pending
or threatened seeking to restrain, prohibit, or obtain Losses or other relief
in connection with this Agreement or the consummation of the transactions
contemplated hereby;


 


(E)           No order,
writ, injunction or decree shall have been entered and be in effect by any
court or any Governmental Entity of competent jurisdiction, and no statute,
rule, regulation or other requirement shall have been promulgated or enacted
and be in effect, that on a temporary or permanent basis restrains, enjoins or
invalidates the transactions contemplated hereby;


 


(F)           All
documents, instruments, certificates or other items required to be delivered by
Buyer pursuant to Section 2.3 shall have been delivered;


 


(G)           All
Consents of or imposed by any Governmental Entity and all Consents set forth on
Company Schedule 3.6 necessary for the consummation of the transactions
contemplated by this Agreement and the other Transaction Documents shall have
been obtained, occurred or have been made (and the required waiting period, if
any, has expired), including those arising under the HSR Act and the rules and
regulations of the Federal Trade Commission and the Department of Justice;


 


(H)          Buyer shall
have completed its review, pursuant to Section 8.1, of the Company’s and
the Subsidiaries’ title to the Properties constituting at least 80% of the
aggregate Allocated Values of all Properties set forth on Buyer Schedule
8.1(F)(3); and


 


(I)            Buyer has
not identified Title Defects, the Title Defect Amounts of which, in the
aggregate, exceed 10% of the Base Purchase Price.


 


9.2           Conditions to Obligations of Buyer. The obligations of Buyer to
consummate the transactions contemplated by this Agreement shall be subject to
the fulfillment on or prior to the Closing Date of each of the following
conditions:


 


(A)          Each of the
representations and warranties of PFC and GP contained in this Agreement shall
be true and correct in all material respects (other than those representations
and warranties of PFC or GP that are qualified by materiality, which shall be
true and correct in all respects) as of the date of this Agreement and as of
the Closing as though made on and as of the Closing Date, except to the extent
that any such representation or warranty is made as of a specified date, in
which case such representation or warranty shall have been true and correct in
all material respects (other than those representations and warranties of PFC
or GP that are qualified by materiality, which shall be true and correct in all
respects) as of such specified date;


 


61

















 


(B)           Each of the
representations and warranties of the Company contained in this Agreement shall
be true and correct in all material respects (other than those representations
and warranties of the Company that are qualified by materiality or Material
Adverse Effect, which shall be true and correct in all respects) as of the date
of this Agreement and as of the Closing as though made on and as of the Closing
Date, except to the extent that any such representation or warranty is made as
of a specified date, in which case such representation or warranty shall have
been true and correct in all material respects (other than those
representations and warranties of the Company that are qualified by materiality
or Material Adverse Effect, which shall be true and correct in all respects) as
of such specified date;


 


(C)           Each of
PFC, GP and the Company and each Subsidiary shall have performed and complied
with in all material respects all covenants and agreements required by this
Agreement to be performed or complied with by it on or prior to the Closing;


 


(D)          Buyer shall
have received a certificate executed by the Chief Executive Officers of PFC, GP
and the Company dated the Closing Date, representing and certifying that the
conditions described in Section 9.2(A), (B) and (C) have been satisfied
except to the extent described on any supplements to the Company Schedules that
were delivered to Buyer prior to the Closing Date in accordance with
Section 7.4 and are specifically referred to as exceptions to such certificate,
with any such supplement not affecting whether or not the conditions described
in Sections 9.2(A), (B) and (C) have been satisfied and being included
solely for purposes of enabling PFC, GP and the Company to comply with
Section 9.2(D);


 


(E)           No
Proceeding (excluding any Proceeding initiated by Buyer or any of its
Affiliates) shall, on the Closing Date, be pending or threatened seeking to
restrain, prohibit, or obtain Losses or other relief in connection with this
Agreement or the consummation of the transactions contemplated hereby;


 


(F)           No order,
writ, injunction or decree shall have been entered and be in effect by any
court or any Governmental Entity of competent jurisdiction, and no statute,
rule, regulation or other requirement shall have been promulgated or enacted
and be in effect, that on a temporary or permanent basis restrains, enjoins or
invalidates the transactions contemplated hereby;


 


(G)           All
documents, instruments, certificates or other items required to be delivered by
PFC, GP and the Company pursuant to Section 2.2 shall have been delivered;


 


(H)          All
Consents of or imposed by any Governmental Entity necessary for the
consummation of the transactions contemplated by this Agreement and the other
Transaction Documents shall have been obtained, occurred or have been made (and
the required waiting period, if any, has expired), including those arising
under the HSR Act and the rules and regulations of the Federal Trade Commission
and the Department of Justice;


 


(I)            There
shall have been no Event since June 30, 2006, that, individually or in the
aggregate with all such other Events, has had or reasonably could be expected
to have a Material Adverse Effect;


 


62

















 


(J)            Buyer has
not identified Title Defects, the Title Defect Amounts of which, in the
aggregate, exceed 10% of the
Base Purchase Price;


 


(K)          Buyer shall
have received evidence reasonably acceptable to it of the Company’s and the
Subsidiaries’ assignment (without any further obligation or liability
thereafter to the Company or any Subsidiary) of all their rights and
obligations pursuant to the engagement letter between the Company and Petrie
Parkman & Co. dated as of June 8, 2006, to PFC;


 


(L)           The
Company and each applicable Subsidiary shall have obtained all Consents from
the other parties to the Contracts identified on Schedule 9.2(L) (each,
a “Required Third Party Consent”), and each Required Third Party Consent shall
be in full force and effect, shall not have been revoked, shall be in form and
substance reasonably satisfactory to Buyer, and a copy thereof shall have been
delivered to Buyer;


 


(M)         Buyer shall
have received evidence reasonably acceptable to it of the full payment,
settlement, cancellation or satisfaction of all Intracompany Obligations;


 


(N)          The FCC
Consent shall have been granted and become final. For purposes of this
Agreement, the term “final” shall mean that action shall have been taken by the
FCC (including action duly taken by the FCC’s staff, pursuant to delegated
authority) which shall not have been reversed, stayed, enjoined, set aside,
annulled or suspended; with respect to which no timely request for stay,
petition for rehearing, appeal or certiorari or sua sponte
action of the FCC with comparable effect shall be pending; and as to
which the time for filing any such request, petition, appeal, certiorari or for
the taking of such sua sponte action
by the FCC shall have expired or otherwise terminated;


 


(O)          PFC shall
have provided to Buyer the agreement of Progress Energy, Inc., for itself and
its Affiliates, waiving any claims against Buyer and its Affiliates and the PFC
and Service Employees to the extent arising from any employment agreement,
confidentiality or non-disclosure agreement or policy, or non-competition
agreement between any of the PFC and Service Employees and PFC or any Related
Affiliate insofar as it relates to the business of the Company and the
Subsidiaries; and


 


(P)           If the
Buyer Put Right is exercised by delivery of the Put Election Notice, the
transfer, assignment and conveyance of the Put Properties to PFC and the
assumption of the Put Obligations by PFC shall have been consummated in
accordance with Section 7.23.


 


9.3           Termination. This Agreement may be terminated and the transactions
contemplated hereby abandoned at any time prior to the Closing in the following
manner:


 


(A)          by mutual
written consent of PFC and Buyer; or


 


(B)           by either
PFC or Buyer, if:


 


(1)           the
Closing shall not have occurred on or before November 30, 2006 (the “Termination
Date”); provided, however, that the right to terminate this Agreement under
this Section 9.3(B)(1) shall not be available (a) to PFC, if any


 


63

















 


breach of this Agreement
by PFC, GP, the Company or any Subsidiary has been the cause of, or resulted
in, the failure of the Closing to occur on or before the Termination Date or
(b) to Buyer, if any breach of this Agreement by Buyer has been the cause
of, or resulted in, the failure of the Closing to occur on or before the Termination
date; or


 


(2)           there
shall be any statute, rule, or regulation that makes consummation of the
transactions contemplated hereby illegal or otherwise prohibited or a
Governmental Entity shall have issued an order, decree, or ruling or taken any
other action permanently restraining, enjoining, or otherwise prohibiting the
consummation of the transactions contemplated hereby, and such order, decree,
ruling, or other action shall have become final and non-appealable;


 


(C)           by PFC, if
(1) any of the representations and warranties of Buyer contained in this
Agreement shall not be true and correct in all material respects (provided that
any such representation or warranty that is qualified by a materiality standard
or a material adverse effect qualification shall not be further qualified by
materiality hereby); or (2) Buyer shall have failed to fulfill in any
material respect any of its obligations under this Agreement; and, in the case
of each of clauses (1) and (2), such failure, misrepresentation, or breach
of warranty (provided it can be cured) has not been cured within 30 days after
written notice thereof from the Company to Buyer (other than those set forth in
Section 5.7 for which no cure period shall be permitted); provided that
any cure period shall not extend beyond the Termination Date and shall not
extend the Termination Date;


 


(D)          by Buyer,
if (1) any of the representations and warranties of PFC, GP or the Company
contained in this Agreement shall not be true and correct in all material
respects (provided that any such representation or warranty that is qualified
by a materiality or Material Adverse Effect qualification shall not be further
qualified by materiality hereby); or (2) PFC, GP and the Company shall
have failed to fulfill in any material respect any of their respective
obligations under this Agreement, and, in the case of each of clauses (1) and
(2), such misrepresentation, breach of warranty or failure has not been cured
(provided it can be cured) within 30 days after written notice thereof from
Buyer to PFC; provided that any cure period shall not extend beyond the
Termination Date and shall not extend the Termination Date; or


 


(E)           by Buyer
if there shall have occurred since June 30, 2006, any Event or series of
Events that, individually or in the aggregate, have had or reasonably could be
expected to have, a Material Adverse Effect.


 


9.4           Effect
of Termination. In the event of the termination of this Agreement pursuant
to Section 9.3 by PFC or Buyer, written notice thereof shall forthwith be
given to the other party or parties specifying the provision hereof pursuant to
which such termination is made, and this Agreement shall become void and have
no effect, except that the agreements contained in this Article IX, in
Sections 7.8 (Fees), 7.9 (Publicity), 8.4 (Due Diligence Indemnity) and in
Articles XI (other than Section 11.1) and XII shall survive the
termination hereof. Nothing contained in this Section shall relieve any
party from liability for Losses actually incurred as a result of any breach of
this Agreement.


 


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9.5           Amendment. This Agreement may not be amended or modified except by an
instrument in writing signed by or on behalf of all the parties hereto.


 


9.6           Waiver. PFC, GP and the Company on the one hand, or Buyer, on the other,
may:  (A) waive any inaccuracies in
the representations and warranties of the other contained herein or in any
document, certificate, or writing delivered pursuant hereto, or (B) waive
compliance by the other with any of the other’s agreements or fulfillment of
any conditions to its own obligations contained herein, but such waiver or
failure to insist upon strict compliance with such obligation, covenant,
agreement or condition shall not operate as a waiver of, or estoppel with
respect to, any other failure. Any agreement on the part of a party hereto to
any such waiver shall be valid only if set forth in an instrument in writing
signed by or on behalf of such party. No failure or delay by a party hereto in
exercising any right, power, or privilege hereunder shall operate as a waiver
thereof nor shall any single or partial exercise thereof preclude any other or
further exercise thereof or the exercise of any other right, power, or
privilege.


 


ARTICLE X

SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS; INDEMNIFICATION


 


10.1         Survival.


 


(A)          Each of the
representations, warranties and covenants that are covered by the
indemnification agreements herein shall survive the Closing for the time
periods expressly set forth below (each such time period and the time period, a
“Survival Period”).


 


(B)           Representations
and Warranties.


 


(1)           each
of the representations and warranties of PFC, GP and the Company set forth in
Sections 3.1 (Organization), 3.2 (Title to Interests), 3.3 (Authority),
3.4 (Valid and Binding Agreement), 3.5 (Non-Contravention), 4.1 (Organization),
4.2 (Governing Documents), 4.3 (Capital Structure), 4.4 (Authority, Valid and
Binding Agreement), 4.5 (Non-Contravention, Consents and Approvals), 4.6
(Ownership; Capitalization of Subsidiaries), 4.14 (Taxes), 4.25 (Employee
Related Matters), and 4.26 (Brokers), shall survive the Closing until the
expiration of the applicable statute of limitations period (such
representations and warranties, the “Fundamental Company Representations”), and
all remaining representations and warranties set forth in Articles III and
IV shall terminate at 5:00 p.m., Dallas, Texas time on the date that is
the 90th day following the first anniversary of the Closing Date (the “Expiration
Date”); and


 


(2)           each
of the representations and warranties of Buyer set forth in Sections 5.1
(Organization), 5.2 (Power and Authority), 5.3 (Valid and Binding Agreement),
5.4 (Non-Contravention), 5.8 (Investment Experience), 5.9 (Accredited Investor;
Investment Intent), 5.10 (Independent Evaluation) and 5.11 (Brokers) shall
survive the Closing until the expiration of the applicable statute of
limitations period (such representations and warranties, the “Fundamental Buyer
Representations” and together with the Fundamental Company Representation,


 


65

















 


the “Fundamental
Representations”), and all remaining representations and warranties set forth
in Article V shall terminate at 5:00 p.m., Dallas, Texas time, on the
Expiration Date


 


(C)           Covenants.
All covenants and agreements contained in this Agreement required to be
performed or complied with before or at the Closing shall survive the Closing
until the Expiration Date unless expressly waived by Buyer in writing at the
Closing, and all covenants and agreements contained in this Agreement to be
performed or complied with after the Closing (including the covenants and
agreements contained in Sections 7.7, 7.8, 7.20, 8.3 and 8.4 and
Articles X and XI) shall survive the Closing until fully performed.


 


(D)          No party
hereto shall have any indemnification obligation pursuant to this
Article X or otherwise in respect of any representation, warranty or
covenant unless it shall have received from the party seeking indemnification
written notice (a “Claim Notice”) of the existence of the claim for or in
respect of which indemnification in respect of such representation, warranty or
covenant is being sought on or before the expiration of the applicable Survival
Period. If an Indemnified Party delivers a Claim Notice to an Indemnifying
Party before the expiration of the applicable Survival Period, then the
applicable representation, warranty or covenant shall survive until, but only
for purposes of, the resolution of the matter covered by such Claim Notice. A
Claim Notice shall set forth with reasonable specificity (1) the basis for
such claim under this Agreement, and the facts that otherwise form the basis of
such claim and (2) to the extent reasonably estimable, an estimate of the
amount of such claim (which estimate shall not be conclusive of the final
amount of such claim) and an explanation of the calculation of such estimate.


 


10.2         Indemnification by PFC. From and after the Closing, subject
to the terms and conditions of this Article X, PFC shall indemnify, defend
and hold harmless Buyer, the Company and the Subsidiaries and their respective
directors, officers, employees, agents, consultants, advisors and other
representatives (including legal counsel, accountants and financial advisors)
and Affiliates (collectively, the “Buyer Indemnified Persons”) from and against
any and all Losses asserted against, resulting, imposed upon, or incurred or
suffered by any Buyer Indemnified Person, directly or indirectly, by reason of,
resulting from, arising out of, relating to or in connection with:


 


(A)          any breach
of any representation or warranty of PFC, GP or the Company contained in
Article III or IV of this Agreement determined as of the date of this
Agreement or in any certificate furnished by or on behalf of PFC, GP or the
Company in connection with this Agreement, in each case, without giving effect
to any supplements to the Company Schedules delivered to Buyer pursuant to
Section 7.4 as though no such supplements were so delivered to Buyer;


 


(B)           any breach
of any representation or warranty made by PFC, GP or the Company in this
Agreement or in any certificate furnished by or on behalf of PFC, GP or the
Company in connection with this Agreement, as if such representation or
warranty were made on and as of the Closing Date, giving effect to any
supplement to the Company Schedules delivered to Buyer pursuant to
Section 7.4;


 


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(C)           any breach
or nonfulfillment of or failure to perform any covenant or agreement of PFC or
GP contained in this Agreement or in any certificate furnished by or on behalf
of PFC or GP to Buyer in connection with this Agreement;


 


(D)          any breach
or nonfulfillment of or failure to perform any covenant or agreement of the
Company contained in this Agreement that is required to be performed by the
Company prior to or at the Closing or in any certificate furnished by or on
behalf of the Company prior to or at the Closing to Buyer in connection with
this Agreement;


 


(E)           the
Proceedings described in item 3 under the heading “Pending Litigation” and item
6 under the heading “Potential Litigation” on Company Schedule 4.11;


 


(F)           any Third
Party Claims for personal injury or property damage related to the
environmental matters identified in item B(3) on Company Schedule 4.21;


 


(G)           any
regulatory non-compliance by the Company and the Subsidiaries in respect of the
Midstream Assets resulting from a matter referenced in or implied by items 1, 2
and 3 on Company Schedule 4.12;


 


(H)          the matters
identified in Item B on Company Schedule 4.14; and


 


(I)            if the
Put Election Notice is delivered to PFC in accordance with Section 7.23, the
Proceedings described in items 1 and 2 under the heading “Pending Litigation”
on Company Schedule 4.11.


 


10.3         Indemnification by Buyer.


 


(A)          From and
after the Closing, subject to the terms and conditions of this Article X,
Buyer shall indemnify, defend and hold harmless PFC and its directors,
officers, employees, agents, consultants, advisors and other representatives
(including legal counsel, accountants and financial advisors) and Affiliates
(collectively, the “PFC Indemnified Persons”) from and against any and all
Losses, asserted against, resulting from, imposed upon, or incurred or suffered
by any PFC Indemnified Person, directly or indirectly, by reason of, resulting
from, arising out of, relating to or in connection with:


 


(1)           any
breach of any representation or warranty of Buyer contained in Article V
or in any certificate furnished by or on behalf of Buyer to PFC in connection
with this Agreement;


 


(2)           any
breach or nonfulfillment of or failure to perform any covenant or agreement of
Buyer contained in this Agreement or any certificate furnished by or on behalf
of Buyer to PFC in connection with this Agreement; and


 


(3)           obligations
under the PFC Guaranties for which Buyer has not obtained the release of PFC or
a Related Affiliate to the extent that they arise out of performance under such
PFC Guaranty from and after Closing.


 


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(B)           On the
date hereof, Buyer has provided to PFC a guaranty reasonably acceptable to PFC
in form and substance issued by Buyer’s parent, EXCO Resources, Inc.,
guaranteeing the performance by Buyer of all covenants to be performed by Buyer
prior to Closing and the payment by Buyer, at Closing, of the Closing Payment
(the “Exco Guaranty”).


 


10.4         Indemnification Proceedings.


 


(A)          Third
Party Claims. In the event that any claim or demand for which PFC or Buyer
(such Person, an “Indemnifying Party”) may be liable to a Buyer Indemnified
Person under Section 10.2 or Section 7.7 or to a PFC Indemnified
Person under Section 10.3 or Section 7.7 (an “Indemnified Party”) is
asserted against or sought to be collected from an Indemnified Party by a third
party (a “Third-Party Claim,” which in the case of any matter that may be
indemnifiable under Section 7.7 or by reason of a breach or inaccuracy of
Section 4.14 shall include the commencement of any examination or other
proceeding, without regard to whether any liability is asserted, by a taxing
authority), the Indemnified Party shall with reasonable promptness (which shall
not exceed 14 Business Days in the case of any matter that may be indemnifiable
under Section 7.7 or by reason of a breach or inaccuracy of
Section 4.14) notify the Indemnifying Party of such Third-Party Claim by
delivery of a Claim Notice, provided that the failure or delay to so notify the
Indemnifying Party shall not relieve the Indemnifying Party of its obligations
under this Article X or Section 7.7 (as applicable), except (and
solely) to the extent that the Indemnifying Party demonstrates that the defense
of such Third-Party Claim is materially prejudiced thereby. The Indemnifying
Party shall have 30 days from
receipt of the Claim Notice from the Indemnified Party (in this
Section 10.4, the “Notice Period”) to notify the Indemnified Party whether
or not the Indemnifying Party desires, at the Indemnifying Party’s sole cost
and expense, to defend the Indemnified Party against such claim or demand;
provided, that the Indemnified Party is hereby authorized prior to and during
the Notice Period, and at the cost and expense of the Indemnifying Party, to
file any motion, answer or other pleading that it shall reasonably deem necessary
to protect its interests or those of the Indemnifying Party. The Indemnifying
Party shall have the right to assume the defense of such Third-Party Claim only
if and for so long as (i) the Indemnifying Party notifies the Indemnified
Party during the Notice Period that the Indemnifying Party is assuming the
defense of such Third-Party Claim and agrees that the Indemnified Party will be
indemnified against such Third-Party Claim in accordance with the terms and
limitations of this Article X, (ii) the Indemnifying Party uses
counsel of its own choosing that is reasonably satisfactory to the Indemnified
Party, and (iii) conducts the defense of such Third-Party Claim in an
active and diligent manner. If the Indemnifying Party is entitled to, and does,
assume the defense of any such Third-Party Claim, the Indemnified Party shall
have the right to employ separate counsel at its own expense and to participate
in the defense thereof; provided, however, that notwithstanding the foregoing,
the Indemnifying Party shall pay the reasonable attorneys’ fees of the
Indemnified Party if (a) the Indemnified Party shall have reasonably
concluded that there may be defenses available to such Indemnified Party that
are different from or additional to those available to the Indemnifying Party,
or (b) the Indemnified Party’s counsel shall have advised the Indemnified
Party that there is a conflict of interest that could make it inappropriate
under applicable standards of professional conduct to have common counsel for
the Indemnifying Party and the Indemnified Party (provided that the
Indemnifying Party shall not be responsible for paying for more than one
separate firm of attorneys and one local counsel to represent all of the
Indemnified Parties subject to such Third-Party Claim). If the Indemnifying
Party elects not to assume the defense of such


 


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Third-Party Claim (or fails to give notice to the
Indemnified Party during the Notice Period or otherwise is not entitled to
assume such defense), the Indemnified Party shall be entitled to assume the
defense of such Third-Party Claim with counsel of its own choice, at the
expense and for the account of the Indemnifying Party. If the Indemnifying
Party elects (and is entitled) to assume the defense of such Third-Party Claim,
(i) no compromise or settlement thereof or consent to any admission or the
entry of any judgment with respect to such Third-Party Claim may be effected by
the Indemnifying Party without the Indemnified Party’s written consent (which
shall not be unreasonably withheld, conditioned or delayed) unless the sole
relief provided is monetary damages that are paid in full by the Indemnifying
Party (and no injunctive or other equitable relief is imposed upon the
Indemnified Party) and there is an unconditional provision whereby the
plaintiff or claimant in such Third-Party Claim releases the Indemnified Party
from all liability with respect thereto and (ii) the Indemnified Party
shall have no liability with respect to any compromise or settlement thereof
effected without its written consent (which shall not be unreasonably
withheld).


 


(B)           Notwithstanding
the foregoing, the Indemnifying Party shall not be entitled to control (but
shall be entitled to participate at its own expense in the defense of), and the
Indemnified Party, at the expense of the Indemnifying Party, shall be entitled
to have sole control over, the defense or settlement, compromise, admission, or
acknowledgment of any Third-Party Claim (1) as to which the Indemnifying
Party fails to assume the defense during the Notice Period after the
Indemnified Party gives notice thereof to the Indemnifying Party or (2) to
the extent the Third-Party Claim seeks an order, injunction, or other equitable
relief against the Indemnified Party which, if successful, could materially
adversely affect the business, condition (financial or other), capitalization,
assets, liabilities, results of operations or prospects of the Indemnified
Party. The Indemnified Party shall make no settlement, compromise, admission,
or acknowledgment that would give rise to liability on the part of the
Indemnifying Party without the prior written consent of the Indemnifying Party
(which consent shall not be unreasonably withheld, conditioned or delayed).


 


(C)           Direct
Claims. In any case in which an Indemnified Party seeks indemnification
hereunder and no Third-Party Claim is involved, the Indemnified Party shall
deliver a Claim Notice to the Indemnifying Party. The failure or delay to so
notify the Indemnifying Party shall not relieve the Indemnifying Party of its
obligations under this Article X.


 


10.5         Exclusivity.


 


(A)          The parties
hereto agree that from and after the Closing, (1) the sole and exclusive
relief and remedy available to an Indemnified Party in respect of Losses
arising from the matters described in Sections 10.2 and 10.3 shall be the
rights of Indemnified Parties pursuant to this Article X and (2) the
sole and exclusive relief and remedy with respect to Title Defects shall be
pursuant to the provisions of Article VIII and Section 11.1, and
(3) the sole and exclusive relief and remedy with respect to PFC Retained
Environmental Matters and for Environmental Defect remediation and other
corrective measures with respect thereto shall be pursuant to the provisions of
Section 7.19 and Section 11.1; provided, however, that
notwithstanding any provision to the contrary contained herein (including the
foregoing), the liability of any party hereto under this Article X or
Article VIII, or Section 7.19 as applicable,


 


69

















 


shall be in addition to, and not exclusive of, any
other liability that such party may have at law or equity based on such party’s
fraudulent acts, fraudulent omissions, or intentional misrepresentations.


 


(B)           None of
the provisions set forth in this Agreement, including but not limited to the
provisions set forth in this Section 10.5, shall be deemed a waiver by any
party to this Agreement of any right or remedy that such party may have at law
or equity based on any other party’s fraudulent acts, fraudulent omissions, or
intentional misrepresentations nor shall any such provisions limit, or be
deemed to limit, (1) the amounts of recovery sought or awarded in any such
claim for fraud or intentional misrepresentation, (2) the time period
during which a claim for fraud or intentional misrepresentation may be brought,
or (3) the recourse that any such party may seek against another party
with respect to a claim for fraud or intentional misrepresentation; provided
that that with respect to such rights and remedies at law or equity, the
parties hereto further acknowledge and agree that none of the provisions of
this Section 10.5, nor any reference to this Section 10.5 throughout
this Agreement, shall be deemed a waiver of any defenses which may be available
in respect of actions or claims for fraud or intentional misrepresentation,
including defenses of statutes of limitations or limitations of damages.


 


10.6         Limitations on Indemnities.


 


(A)          Notwithstanding
the foregoing, (1) PFC shall not be obligated to indemnify Buyer for
Losses pursuant to Sections 10.2(A) or 10.2(B), and Buyer shall not be
obligated to indemnify PFC for Losses pursuant to Section 10.3(A)(1), in
each case, pursuant to this Article X unless and until the amount of all
Losses incurred by Buyer, or by PFC, as the case may be, exceeds, in the
aggregate, $18,000,000 (the “Deductible”),
in which event the party seeking indemnity may recover all Losses incurred in
excess of $12,000,000, and (2) PFC’s maximum liability for Losses
pursuant to Section 10.2(A) and
Section 10.2(B) and Buyer’s maximum liability for Losses pursuant
to Section 10.3(A)(1), in each case, shall be $600,000,000 (the “Maximum Indemnity Amount”); provided,
however, that, notwithstanding the foregoing, the Deductible and the Maximum
Indemnity Amount shall not apply to (and the Indemnified Parties shall be
entitled to be indemnified for all Losses relating to):


 


(a)           any
claims asserted under Section 10.2(A), 10.2(B), or 10.3(A)(1), as applicable,
insofar as such claims relate to any breach of Fundamental Representations or
any certificate to the extent based on any such Fundamental Representation; and


 


(b)           any
claims based on fraudulent acts, fraudulent omissions, or intentional misrepresentations.


 


(B)           The
indemnification obligations of the parties pursuant to this Article X
shall not include punitive Damages, provided that any punitive Damages
recovered by a third party (including a Governmental Entity, but excluding any
Affiliate of any party) against an Indemnified Party shall be included in the
Damages recoverable by such Indemnified Party pursuant to this Article X.


 


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(C)           For
purposes of this Article X, in determining if a breach of a representation
or warranty has occurred pursuant to which a Buyer Indemnified Person or a PFC
Indemnified Person is entitled to indemnification under Sections 10.2(A),
10.2(B) or 10.3(A)(1) and in determining the amount of Losses from such breach,
such determination shall be made without giving effect to any Material Adverse
Effect or other materiality qualifiers, including as expressed in accounting
concepts such as GAAP, that may be contained in the applicable representation
or warranty.


 


(D)          Buyer claims
for a breach of representation in Section 4.14 shall be submitted not more
frequently than once per quarter.


 


10.7         Indemnification
Despite Negligence. It is the express intention of the parties hereto that
each Indemnified Party shall be indemnified and held harmless from and against
all Losses as to which indemnity is provided for under this Article X,
notwithstanding that any such Losses arise out of or result from the ordinary,
strict, sole, or contributory negligence of such Person and regardless of
whether any other Person (including the other parties to this Agreement) is or
is not also negligent. The parties hereto acknowledge that the foregoing
complies with the express negligence rule and is conspicuous.


 


ARTICLE XI

MISCELLANEOUS


 


11.1         Dispute
Resolution.


 


(A)          Any and all
claims, disputes, controversies or other matters in question arising out of or
relating to matters under Sections 7.19, 8.1, 8.2 and 8.3 (and, to the
extent that interpretation of this Agreement is required, under
Section 1.6) (all of which are referred to herein as “Disputes”) that the
parties hereto are unable to resolve by mutual agreement shall be resolved by
final binding arbitration. The arbitration shall be administered by the
American Arbitration Association in accordance with its Commercial Arbitration
Rules, but only to the extent such rules do not conflict with the specific
provisions of this Section 11.1.


 


(B)           The
parties shall attempt in good faith to resolve any Dispute promptly by
negotiations between senior representatives of the parties who have authority
to settle the matter. Any party may give the other party written notice of the
Dispute. If a Dispute occurs that the senior representatives of the parties
responsible for the transaction contemplated by this Agreement have been
unable, in good faith, to settle or agree upon within a period of 15 days after
such Dispute arose, PFC shall nominate and commit one of its senior officers
and Buyer shall nominate and commit one of its senior officers, to meet at a
mutually agreed time and place not later than 15 days after the Dispute has
arisen to attempt to resolve such Dispute. If such senior officer intends to be
accompanied by an attorney, the other senior officers shall be given at least 3
Business Days prior notice of such intention and may be also accompanied by an
attorney. If such senior officers have been unable to resolve such Dispute
within a period of ten days after such meeting, or if such meeting has not
occurred within 30 days following such Dispute arising, then any party shall
have the right, by written notice to the other, to resolve the Dispute through
the relevant Independent Expert by arbitration pursuant to this
Section 11.1.


 


71

















 


(1)           Each
party shall have the right to submit Disputes to an independent expert
appointed in accordance with this Section 11.1 (each, an “Independent
Expert”), who shall serve as sole arbitrator. The Independent Expert shall be
appointed by mutual agreement of PFC and Buyer; provided, however, if PFC and Buyer are
unable to mutually agree on who will serve as the Independent Expert within ten days after the 30th day following when the Dispute arose,
the American Arbitration Association shall select an arbitrator, which shall be
the Independent Expert. The Independent Expert shall be selected from among
candidates with experience and expertise in the area that is the subject of
such Dispute, have general experience in the oil and gas and industry and/or
pipeline industry, as applicable, and is impartial and independent of the
parties.


 


(2)           The
parties, with the assistance of the American Arbitration Association, shall use
diligent efforts to have the Independent Expert appointed within 30 days after
a matter is submitted to arbitration. The arbitration shall be conducted within
90 days after the selection of the Independent Expert.


 


(3)           Any
arbitration hearing, if one is desired by the Independent Expert, shall be held
in Dallas, Texas. The Independent Expert may elect to conduct the proceeding by
written submissions from PFC and Buyer with exhibits, including
interrogatories, supplemented with appearances by Buyer and PFC, and
representatives of the Company or Subsidiaries, if necessary, as the
Independent Expert may desire. The arbitration proceeding, subject only to the
terms hereof, shall be conducted informally and expeditiously and in such a
manner as to result in a resolution as soon as reasonably possible under the
circumstances. The decision of the Independent Expert with respect to Disputes
shall be reduced to writing and shall be final and binding on the parties as to
the issue(s) submitted. Judgment upon the award(s) rendered by the Independent
Expert may be entered and execution had in any court of competent jurisdiction,
or application may be made to such court for a judicial acceptance of the award
and an order of enforcement. PFC and Buyer, respectively, shall bear their own
legal fees and other costs incurred in presenting their respective cases,
except that the charges and expenses of the Independent Expert shall be shared
equally by PFC and Buyer and the prevailing party shall be entitled to
reasonable attorneys’ fees in any contested court proceeding brought to enforce
or collect any award of judgment rendered by the Independent Expert.


 


(4)           The
Independent Expert may consult with and engage disinterested third parties to
advise the Independent Expert including, without limitation, geologists,
geophysicists, petroleum engineers, title and oil and gas lawyers, environmental
consultants and attorneys, accountants and consultants, and the fees and
expenses of such third parties shall be considered to be charges and expenses
of the Independent Expert.


 


(5)           Any
replacement Independent Expert, should one become necessary, shall be selected
in accordance with the procedure provided above for the initial selection of an
Independent Expert.


 


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(6)           No
lawsuit may be instituted by either Buyer or PFC with respect to the resolution
of Disputes, other than to compel proceedings pursuant to this
Section 11.1 or to enforce the award of the Independent Expert. Without
waiving the arbitration rights under this Agreement, notwithstanding anything
in this Section 11.1 to the contrary the parties may seek temporary and
preliminary injunctive relief and other emergency judicial relief from a
judicial court in Dallas, Texas pending a final resolution of the dispute by
arbitration. Alternatively, the parties at their election may seek emergency interim
relief pursuant to the Emergency Interim Relief Procedures of the AAA
Commercial Arbitration Rules.


 


(7)           All
privileges under state and federal law, including attorney-client and work-product
privileges, shall be preserved and protected to the same extent that such
privileges would be protected in a federal or state court proceeding applying
state or federal law, as the case may be. Except as required by Applicable Law,
all aspects of the arbitration shall be confidential, and the parties and
arbitrators shall not disclose to others, or permit disclosure of, any
information related to the proceedings, including but not limited to discovery,
testimony and other evidence, briefs and the award.


 


(8)           Notwithstanding
any other provision in this Agreement to the contrary, the parties expressly
agree that the arbitrators shall have absolutely no authority to award
consequential, incidental, special, treble, exemplary or punitive damages of
any type under any circumstances regardless of whether such damages may be
available under Texas law, or any other Applicable Law.


 


(C)           Tolling
and Performance. Except as otherwise provided in these procedures, all
applicable statutes of limitation and defenses based upon the passage of time
and all contractual limitation periods specified in this Agreement, if any,
will be tolled while the procedures specified herein are pending. The parties
will take all actions necessary to effectuate the tolling of any applicable
statutes of limitation or contractual limitation periods. All deadlines
specified herein may be extended by mutual written agreement of the parties. Each
party is required to continue to perform its obligations under this Agreement
pending final resolution of any Dispute, unless doing so would be impossible or
impracticable under the circumstances. Notwithstanding the foregoing, the
statute of limitations of the State of Texas applicable to the commencement of
a lawsuit will apply to the commencement of an arbitration under this
Agreement, except that no defenses will be available based upon the passage of
time during any negotiation or proceeding called for by these procedures.


 


11.2         Notices. All notices, requests, demands, and other communications
required or permitted to be given or made hereunder by any party hereto shall
be in writing and shall be deemed to have been duly given or made if
(i) delivered personally, (ii) transmitted by first class registered
or certified mail, postage prepaid, return receipt requested, (iii) sent
by a recognized prepaid overnight courier service (which provides a receipt),
or (iv) sent by telecopy or facsimile transmission (followed by delivery
under the methods provided in either clause (i) or (ii) above), with receipt
confirmed by telecopy machine, to the parties at the following addresses (or at
such other addresses as shall be specified by the parties by like notice):


 


73

















 


	
  If to PFC:

  	
  Progress
  Fuels Corporation

  Progress Energy Building

  100 East Davie, TPP-10

  Raleigh, North Carolina 27601

  Attention:  Pre-Closing: 
  Robert M. Deacy

      Post-Closing: 
  President

  Fax
  No.:  (919) 546-7480

  
	
   

  	
   

  
	
  With a copy
  to (which shall not

  constitute notice to PFC):

  	
  Progress
  Fuels Corporation

  410 S. Wilmington St., 17th Floor

  Raleigh, NC 27601

  Attn:  David Fountain

  Fax No.:  (919) 546-2920

  
	
   

  	
   

  
	
   

  	
  and

  
	
   

  	
   

  
	
   

  	
  Hunton &
  Williams LLP

  1601 Bryan St., 30th Floor

  Dallas, Texas 75201

  Attn:  Barry Thomas

  Fax No.:  (214) 880-0011

  
	
   

  	
   

  
	
   

  	
  Attn:  William M. Flynn (Raleigh)

  Fax No. (919) (833-6352)

  
	
   

  	
   

  
	
  If to Buyer:

  	
  Winchester
  Acquisition, LLC

  c/o EXCO Resources, Inc.

  12377 Merit Drive, Suite 1700

  Dallas, Texas 75251

  Attention:  William Boeing

  Fax No.:  (214) 706-3409

  
	
   

  	
   

  
	
  With a copy
  to (which shall not

  constitute notice to Buyer):

  	
  Vinson &
  Elkins L.L.P.

  2001 Ross Ave, Suite 3700

  Dallas, TX 75201

  Attn:  Jeffrey Chapman

  Fax No.:  (214) 999-7797

  Attn:  Greg Hidalgo

  Fax No.:  (214) 999-7959

  



 


Such notices,
requests, demands, and other communications shall be effective upon receipt.


 


11.3         Entire Agreement. This Agreement, together with the
Schedules, Exhibits, and the other certificates, documents, instruments and
writings referred to herein or delivered pursuant hereto and the
Confidentiality Agreement, constitute the entire agreement between the parties
hereto with respect to the subject matter


 


74

















 


hereof and
supersede all prior agreements and understandings, both written and oral,
between the parties with respect to the subject matter hereof. Each of the
parties acknowledges that no other party, nor any agent or attorney of any
other party, has made any promise, representation or warranty whatsoever not
contained herein, and that such party has not executed or authorized the
execution of this Agreement in reliance upon any such promise, representation
or warranty not contained herein.


 


11.4         Waiver
of Compliance. Except as expressly set forth in this Agreement, any failure
of any party to comply with any obligation, covenant, agreement, or condition
contained herein may be waived only if set forth in an instrument in writing
signed by the party or parties to be bound by such waiver, but such waiver or
failure to insist upon strict compliance with such obligation, covenant,
agreement or condition shall not operate as a waiver of, or estoppel with
respect to, any other failure.


 


11.5         Binding Effect; Assignment; No Third Party
Benefit. This
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective heirs, legal representatives, successors, and permitted assigns.
Except as otherwise expressly provided in this Agreement, neither this
Agreement nor any of the rights, interests, or obligations hereunder shall be
assigned by any of the parties hereto without the prior written consent of the
other parties, which consent may be withheld in such party’s sole judgment;
provided, however, that Buyer may collaterally assign this Agreement to any
sources of financing solely to secure Buyer’s obligations under any credit
arrangements entered into in connection with this Agreement (and any
refinancing or substitutions thereof). Any assignment in violation of the
foregoing shall be null and void. Except as provided in Section 8.4 and
Article X, nothing in this Agreement, express or implied, is intended to
or shall confer upon any Person other than the parties hereto, and their
respective heirs, legal representatives, successors, and permitted assigns, any
rights, benefits, or remedies of any nature whatsoever under or by reason of
this Agreement.


 


11.6         Severability. If any provision of this Agreement
is held to be invalid, illegal or unenforceable by any Applicable Law or public
policy, this Agreement shall be considered divisible and such provision shall
be deemed inoperative to the extent it is deemed unenforceable so long as the
legal substance of the transactions contemplated herein is not affected in any
manner materially adverse to any party hereto, and in all other respects this
Agreement shall remain in full force and effect; provided, however, that if any
such provision may be made enforceable by limitation thereof, then such
provision shall be deemed to be so limited and shall be enforceable to the
maximum extent permitted by Applicable Law.


 


11.7         Governing
Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO THE
PRINCIPLES OF CONFLICTS OF LAWS THEREOF.


 


11.8         Consent
to Jurisdiction; Venue.


 


(A)          Subject to
Section 11.1, the parties hereto submit to the exclusive personal jurisdiction
of the courts of the State of Texas and the Federal courts of the United States
sitting in Dallas County, and any appellate court from any such state or
Federal court, and hereby irrevocably and unconditionally agree that all
claims, actions and proceedings arising out of or relating to this Agreement
shall be heard and determined in such Texas court or, to the extent


 


75

















 


permitted by law, in such Federal court. The parties
hereto agree that a final judgment in any such claim, action or proceeding
shall be conclusive and may be enforced in any other jurisdiction by suit on
the judgment or in any other manner provided by law.


 


(B)           Each of
the parties hereto irrevocably and unconditionally waives, to the fullest
extent it may legally and effectively do so, any objection that it may now or
hereafter have to the laying of venue of any suit, action or proceeding arising
out of or relating to this Agreement or any related matter in any Texas state
or Federal court located in Dallas County and the defense of an inconvenient
forum to the maintenance of such claim in any such court.


 


11.9         Further Assurances. From time to time following the
Closing, at the request of any party hereto and without further consideration,
the other party or parties hereto shall execute and deliver to such requesting
party such instruments and documents and take such other action (but without
incurring any material financial obligation) as such requesting party may
reasonably request (and which is not specifically required hereby in another
provision) in order to consummate more fully and effectively the transactions
contemplated hereby.


 


11.10       Counterparts.
This instrument may be executed in any number of identical counterparts, each of
which for all purposes shall be deemed an original, and all of which shall
constitute collectively, one instrument. It is not necessary that each party
hereto execute the same counterpart so long as identical counterparts are
executed by each such party hereto. This instrument may be validly executed and
delivered by facsimile or other electronic transmission.


 


11.11       Injunctive Relief. The parties hereby acknowledge and
agree that the failure of any party to this Agreement to perform its
obligations hereunder in accordance with their specific terms or to otherwise
comply with such obligations, including its failure to take all actions as are
necessary on its part of the consummation of the transactions contemplated
hereby, could cause irreparable injury to the other parties to this Agreement
for which damages, even if available, would not be an adequate remedy. Accordingly,
each of the parties hereto hereby consents to the issuance of injunctive relief
by any court of competent jurisdiction to compel performance of any party’s
obligations, including an injunction to prevent breaches, and to the granting
by any such court of the remedy of specific performance of the terms and
conditions hereof to the fullest extent allowed by law.


 


11.12       Schedules. Nothing in the
Schedules is intended to broaden the scope of any representation or warranty
contained in the Agreement or to create any covenant unless clearly specified
to the contrary herein. The disclosures in Schedules must relate only to the
representations and warranties in the Section of the Agreement to which
they expressly relate and not to any other representation or warranty in this
Agreement, unless some other representation and warranty is specifically and
clearly referred to in such Schedule. Inclusion of any item in the Schedules
(a) does not represent a determination that such item is material nor
shall it be deemed to establish a standard of materiality; (b) does not
represent a determination that such item did not arise in the Ordinary Course
of Business; (c) does not represent a determination that the transactions
contemplated by the Agreement require the consent of third parties unless so
indicated and (d) shall not constitute, or be deemed to be, an admission
to any third party concerning such item. The Schedules include descriptions of
instruments or brief summaries of certain aspects of the Company, the
Subsidiaries and their business and operations.


 


76

















 


In the event of
any inconsistency between the statements in the body of this Agreement and
those in the applicable Schedule (other than an exception expressly set forth
as such in the applicable Schedule with respect to a specifically identified
representation or warranty), the statements in the body of this Agreement shall
control.


 


11.13       Time of Essence. With regard to
all dates and time periods set forth or referred to in this Agreement, time is
of the essence.


 


11.14       Confidentiality.
For a period of two years from and after the Closing:


 


(A)          in respect
of all confidential information that relates to the Company and the
Subsidiaries, the PFC shall use its commercially reasonable efforts to, and
shall cause each Related Affiliate to use its commercially reasonable efforts
to, treat all such confidential information as confidential, preserve the
confidentiality thereof and not disclose any confidential information, except
to its Affiliates who need to know such confidential information. If such
confidential information is disclosed in violation of this Section 11.14,
the PFC shall immediately notify Buyer in writing and, as applicable, take all
reasonable steps required to prevent further disclosure;


 


(B)           in
addition to all other remedies available to Buyer at law or in equity, the
parties agree that Buyer shall be entitled to equitable relief, including
injunctive relief and specific performance, in the event of any breach of this
Section 11.14; and


 


(C)           if PFC or
any Related Affiliate is requested or required (by oral questions,
interrogatories, requests for information or documents in legal proceedings,
subpoena, civil investigative demand or other similar process) or is required
by operation of law to disclose any confidential information, PFC shall provide
Buyer with prompt written notice of such request or requirement, which notice
shall, if practicable, be at least 48 hours prior to making such disclosure, so
that Buyer may seek a protective order or other appropriate remedy and/or waive
compliance with the provisions of this Section 11.14. If, in the absence
of a protective order or other remedy or the receipt of such a waiver, PFC or
its Related Affiliate is nonetheless, in the opinion of its counsel, legally
compelled to disclose confidential information, then such Person may disclose
that portion of the confidential information which such counsel advises is
legally required to be disclosed, provided that PFC uses its commercially
reasonable efforts to preserve the confidentiality of the confidential
information, whereupon such disclosure shall not constitute a breach of this
Section 11.14.


 


(D)          From and
after the Closing, the Confidentiality Agreement shall be superceded by this
Section 11.14 and will be of no further force or effect after Closing.


 


11.15       Affiliate
Liability. Each of the following is herein referred to, for purposes of
this Section 11.15, as a “Buyer Affiliate”:  (A) any direct or indirect holder of Equity
Interests or securities in either Buyer (whether limited or general partners,
members, shareholders or otherwise), and (B) any director, officer, manager,
employee, representative or agent of (1) either Buyer or (2) any Affiliate of
Buyer. Except to the extent that a Buyer Affiliate is an express signatory and
party thereto, no Buyer Affiliate shall have any liability or obligation of any
nature whatsoever in connection with or under this Agreement, any of the other
Transaction Documents


 


77

















 


or the
transactions contemplated herein or therein, and the Company hereby waives and
releases all claims of any such liability and obligation.


 


11.16       Waiver
of Jury Trial. EACH PARTY HEREBY IRREVOCABLY WAIVES AND COVENANTS THAT IT
WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE) ANY RIGHT TO
TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE, CLAIM, DEMAND, ACTION OR
CAUSE OF ACTION ARISING IN WHOLE OR IN PART UNDER, RELATED TO, BASED ON, OR IN
CONNECTION WITH, THIS AGREEMENT OR THE SUBJECT MATTER HEREOF, WHETHER NOW
EXISTING OR HEREAFTER ARISING AND WHETHER SOUNDING IN TORT OR CONTRACT OR
OTHERWISE. ANY PARTY HERETO MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS
SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF EACH SUCH PARTY TO
THE WAIVER OF ITS RIGHT TO TRIAL BY JURY.


 


ARTICLE XII

DEFINITIONS AND REFERENCES


 


12.1         Certain Defined Terms. When used in this Agreement, the
following terms shall have the respective meanings assigned to them in this
Section 12.1 or in the sections, subsections or other subdivisions
referred to below:


 


“Accounting
Principles” means the GAAP accounting principles utilized by the Company and
the Subsidiaries in the preparation of the Financial Statements.


 


“Acquisition
Proposal” is defined in Section 7.14.


 


“Adjusted
Interim EBITDA” means for the period commencing on the Valuation Date and ending
on the Closing Date, consolidated net income of the Company and the
Subsidiaries, excluding interest (whether expensed or capitalized), income
taxes, depreciation, depletion and amortization and general and administrative
expenses allocated to the Company and the Subsidiaries. Cash settlements
related to derivative contracts assumed by the Buyer shall be included in
Adjusted Interim EBITDA. Cash settlements related to derivative contracts not
assumed by the Buyer shall be excluded from Adjusted Interim EBITDA. All mark-to-market
adjustments related to derivative contracts, whether or not such contracts are
assumed by the Buyer shall be excluded from Adjusted Interim EBITDA.


 


“Adjusted
Purchase Price” is defined in Section 1.3.


 


“Affected
Employees” is defined in Section 7.6(A).


 


“Affiliate”
means, with respect to any Person, each other Person that directly or
indirectly (through one or more intermediaries or otherwise) controls, is
controlled by, or is under common control with such Person. The term “control” (including the terms “controlled by” and “under common control with”) means the
possession, directly or indirectly, of the actual power to direct or cause the
direction of the management policies of a Person, whether through the ownership
of stock, by contract, credit arrangement or otherwise. Following the Closing,
Buyer’s Affiliates shall include the Subsidiaries.


 


78

















 


“Agreement”
means this Agreement and Plan of Merger, as hereafter amended or modified in
accordance with the terms hereof.


 


“Allocated
Value” means the monetary amount for each Warranty Well, Lease or unit, set
forth on Buyer Schedule 8.1(F)(3), as determined by Buyer and agreed
upon by PFC, for purposes of determining Title Defect Amounts.


 


“Allocation”
is defined in Section 7.7(C)(3).


 


“Applicable
Law” means any statute, law, principle of common law, rule, regulation,
judgment, order, ordinance, requirement, code, writ, injunction, or decree of
any Governmental Entity in effect and applicable to (i) PFC, GP, the
Company, the Subsidiaries and any of their respective businesses generally or
(ii) this Agreement and the other Transaction Documents and the
transactions contemplated hereby and thereby.


 


“Balance Sheet”
is defined in Section 4.7(A).


 


“Base Purchase
Price” is defined in Section 1.3.


 


“Benefit
Program or Agreement” is defined in Section 3.8(A)(2).


 


“Business Day” means any day other than (i) a
Saturday or Sunday or (ii) a day on which commercial banks in New York, New
York or Dallas or Houston, Texas are authorized or required to be closed.


 


“Buyer” is
defined in the Introduction.


 


“Buyer
Affiliate” is defined in Section 11.15.


 


“Buyer
Allocation Notice” is defined in Section 7.7(C)(3).


 


“Buyer
Indemnified Persons” is defined in Section 10.2.


 


“Buyer Put
Right” is defined in Section 7.23.


 


“Buyer
Schedule” means the disclosure letter of even date with this Agreement from
Buyer to PFC and the Company delivered concurrently with the execution and
delivery of this Agreement.


 


“Claim Notice”
is defined in Section 10.1(D).


 


“Closing” is
defined in Section 2.1.


 


“Closing Date”
is defined in Section 2.1.


 


“Closing Date
Working Capital” means the Working Capital of the Company and the Subsidiaries,
on a consolidated basis, as of 11:59 p.m., Dallas Texas time, on the day
immediately prior to the Closing Date.


 


79

















 


“Closing Drill-Site
Properties” is defined in Section 8.1(D).


 


“Closing
Payment” is defined in Section 1.5(D).


 


“COBRA” is
defined in Section 7.6(H).


 


“Code” means
the Internal Revenue Code of 1986, or any successor statute thereto, as
amended.


 


“Commitment”
is defined in Section 5.7.


 


“Communications
Act” means the Communications Act of 1934, as amended, and all rules,
regulations and written policies of the FCC thereunder.


 


“Company” is
defined in the Introduction.


 


“Company
Contracts” is defined in Section 4.15(A).


 


“Company
Intellectual Property” is defined in Section 4.22(A).


 


“Company
Partners” is defined in the Recitals.


 


“Company Partnership
Agreement” means that certain Amended and Restated agreement of Limited
Partnership dated July 21, 2006, by and between GP and Holdco.


 


“Company
Schedule” means the disclosure letter of even date with this Agreement from
PFC, GP and the Company to Buyer delivered concurrently with the execution and
delivery of this Agreement.


 


“Confidentiality
Agreement” means that certain letter agreement dated as of November 4,
2005, by and between PFC and EXCO Resources, Inc.


 


“Consents” means all authorizations,
consents, orders or approvals of, or registrations, declarations, exemptions,
licenses, permits or filings with, or expiration of waiting periods imposed by,
any Governmental Entity, in each case that are necessary in order to consummate
the transactions contemplated by this Agreement and the other Transaction
Documents and all consents and approvals of third parties necessary to prevent
any conflict with, violation or breach of, or default under, any Contract.


 


“Contracts”
means all binding agreements, contracts, leases, commitments, consensual
obligations, arrangements, promises or understandings (whether written or oral
and whether express or implied).


 


“Cure Period”
is defined in Section 8.3(B).


 


“Deductible”
is defined in Section 10.6(A).


 


“Defensible Title”
is defined in Section 8.1(F)(1).


 


80

















 


“Delaware
Certificate of Merger” means the certificate of merger filed pursuant to the
DLLCA.


 


“Disputes” is
defined in Section 11.1(A).


 


“DLLCA” means
the Delaware Limited Liability Company Act.


 


“$” means U.S.
Dollars.


 


“Drill-Site
Properties” is defined in Section 8.1(A).


 


“Easements”
means the rights-of-way, easements, leases, servitudes, Permits, and licenses
of the Company and the Subsidiaries that are necessary or useful for the
location, operation, maintenance, repair, replacement, use or ownership of the
Oil and Gas Properties and related operations other than any portion of the
Midstream Assets.


 


“Effective
Date” is defined in Section 1.2(A).


 


“Effective Time”
is defined in Section 1.2(A).


 


“Environmental
Defect” is defined in Section 7.19(C).


 


“Environmental
Laws” means any and all Applicable Laws, regulations or other requirements
relating to the pollution or protection of the environment (including, without
limitation, ambient air, surface water, groundwater, land surface or subsurface
strata) including, without limitation, the Clean Air Act, the Comprehensive
Environmental Response Compensation and Liability Act (“CERCLA”), the Resource
Conservation and Recovery Act of 1976 (“RCRA”), the Toxic Substances Control
Act (“TSCA”), the Clean Water Act, the Safe Drinking Water Act, the Hazardous
Materials Transportation Act (“HMTA”), all as amended, and any state laws
implementing or analogous to the foregoing federal laws, and all other
Applicable Laws relating to or regulating emissions, discharges, releases, or
cleanup of pollutants, contaminants, chemicals, polychlorinated biphenyls (“PCBs”),
oil and gas exploration and production wastes, brine, solid wastes, or toxic
wastes.


 


“Environmental
Permits” means all permits, licenses, registrations, exemptions or approvals
issued by or obtained from a Governmental Entity that are required under
Environmental Laws.


 


“Equity
Interests” means (i) the equity ownership rights in a business entity,
whether a corporation, company, joint stock company, limited liability company,
general or limited partnership, joint venture, bank, association, trust, trust
company, land trust, business trust, sole proprietorship or other business
entity or organization, and whether in the form of capital stock, ownership
unit, limited liability company interest, membership interest, limited or
general partnership interest or any other form of ownership, and (ii) also
includes all rights, warrants, options, convertible securities or indebtedness,
exchangeable securities or other instruments, or other rights that are
outstanding and exercisable for or convertible or exchangeable into, directly
or indirectly, any Equity Interest described in the foregoing clause (i) at the
time of issuance or upon the passage of time or occurrence of some future
event.


 


81

















 


“ERISA” is
defined in Section 3.8(A)(1).


 


“Event” is
defined in the definition of Material Adverse Effect.


 


“Examination
Period” is defined in Section 8.1(A).


 


“Exchange Act”
means the Securities Exchange Act of 1934, as amended, together with the rules
and regulations of the Securities and Exchange Commission promulgated
thereunder.


 


“Expiration Date”
is defined in Section 10.1(B)(1).


 


“Extraordinary
Payments” means all payments or other distributions required to be made by the
Company or any Subsidiary, pursuant to any Contracts, to any directors,
managers, officers or employees of the Company or any Subsidiary as a result of
the transactions contemplated by this Agreement or any of the other Transaction
Documents, including all severance payments, termination payments or other
amounts payable (including the estimated costs of benefits required to be
provided) under the terms of any employment agreement determined as if the
employee’s employment with the Company or any Subsidiary was terminated after
the occurrence of a “change of control” or other similar event (whether such
payments or other distributions are paid on or before the Closing Date or are
payable after the Closing Date). Notwithstanding the foregoing, as used in this
Agreement, Extraordinary Payments will not include any current liabilities to
the extent that such current liabilities are included in the calculation of
Working Capital.


 


“FCC” means
the Federal Communications Commission.


 


“FCC Licenses”
has the meaning set forth in Section 4.13(A).


 


“FCC Rules”
means Title 47 of the Code of Federal Regulations, as amended from time to
time, and any policies or published decisions issued pursuant to such
regulations or the Communications Act.


 


“FCC Transfer
Applications” is defined in Section 7.16(A).


 


“Final
Objection Notice” is defined in Section 1.6(B).


 


“Financial
Statements” is defined in Section 4.7.


 


“Final
Settlement Statement” is defined in Section 1.6(A).


 


“Final
Settlement Date” is defined in Section 1.6(B).


 


“Fixtures,
Facilities and Equipment” means Wells, tubing, casing, downhole equipment,
wellhead equipment, pumping units, flowlines, tanks, buildings, injection
facilities, saltwater disposal facilities, compression facilities, gathering
systems, fixtures, machinery and equipment and all other personal property and
fixtures used on or in connection with the operation of the Oil and Gas
Properties and Easements other than the Midstream Assets.


 


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“Fundamental
Buyer Representations” is defined in Section 10.1(B)(2).


 


“Fundamental
Company Representations” is defined in Section 10.1(A).


 


“Fundamental
Representations” is defined in Section 10.1(B)(2).


 


“GAAP” means
generally accepted accounting principles in the United States of America as in
effect at the time a particular Financial Statement was prepared, applied on a
consistent basis.


 


“Garrison” is
defined in the Recitals.


 


“GP” is
defined in the Introduction.


 


“Governing
Documents” means, as applicable, the certificate of incorporation, articles of
incorporation, bylaws, certificate of limited partnership, partnership or
limited partnership agreement, certificate of formation, regulations, operating
agreement, joint venture agreement and each other Contract or instrument
(i) pursuant to which a Person is established and organized, or
(ii) which establishes the governance of such Person, and in each such
case, as amended, modified or restated.


 


“Governmental Entity” means any court or tribunal in any jurisdiction
(domestic or foreign) or any federal, state, county, municipal, or other
governmental or quasi-governmental body, agency, authority, department,
commission, board, bureau, or instrumentality (domestic or foreign), including
any arbitrator in any case that has jurisdiction over the Company, the
Subsidiaries or any of their respective properties or assets.


 


“Group A Properties” is defined in Section 7.1.9(C).


 


“Group B Properties” is defined in Section 7.19(C).


 


“Hazardous
Material” means (i) any “hazardous substance,” as defined by CERCLA,
(ii) any “hazardous waste” or “solid waste,” in either case as defined by
the Resource Conservation and Recovery Act, as amended, and any analogous state
statutes, and any regulations promulgated thereunder that are applicable to the
Company or any Subsidiary, (iii) any solid, hazardous, dangerous or toxic
chemical, material, waste or substance, within the meaning of and regulated by
any applicable Environmental Law, (iv) any radioactive material, including
any naturally occurring radioactive material, and any source, special or
byproduct material as defined in 42 U.S.C. 2011 et seq. and any amendments or
authorizations thereof, (v) any regulated asbestos-containing materials in
any form or condition, (vi) any regulated polychlorinated biphenyls in any
form or condition and (vii) petroleum, petroleum hydrocarbons or any
fraction or byproducts thereof. Notwithstanding the foregoing, no change in law
or regulation that is adopted or becomes effective after the Closing Date shall
alter the definition of Hazardous Material as defined or used in this
Agreement.


 


“Hedge” means
any future derivative, swap, collar, put, call, cap, option or other Contract
that is intended to benefit from, relate to, or reduce or eliminate the risk of
fluctuations in interest


 


83

















 


rates, basis risk or the price of
commodities, including Hydrocarbons or securities, to which the Company or any
Subsidiary is bound or subject.


 


“Holdco” is
defined in the Recitals.


 


“Horizon
License” means the license currently held by PFC or its Affiliates to use the
Horizon Accounting Software used by the Company and the Subsidiaries for the
administration of the Properties.


 


“HSR Act” is
defined in Section 7.11.


 


“Hydrocarbons”
means oil, condensate, gas, casinghead gas and other liquid or gaseous
hydrocarbons, or any of them or any combination thereof, and all products and
substances produced therewith, extracted, separated, processed and produced
therefrom.


 


“Imbalances”
means the quantity of natural gas owed to, or owed by, the Company or any
Subsidiary, but not paid for, as set forth on Company Schedule 4.17(B),
by reason of well, pipeline or processing imbalances.


 


“Indebtedness”
means, with respect to any Person, without duplication, (i) all
obligations of such Person for borrowed money (including all accrued and unpaid
interest and all prepayment penalties or premiums), (ii) all obligations
of such Person evidenced by bonds, debentures, notes or similar debt
instruments (including all accrued and unpaid interest and all prepayment
penalties or premiums) or reimbursement agreements in respect thereof,
(iii) all obligations of such Person under capitalized leases,
(iv) all obligations of others secured by any Lien on property owned or
acquired by such Person, whether or not the obligations secured thereby have
been assumed, (v) all letters of credit issued for the account of such
Person, (vi) obligations of such Person under conditional sale, title
retention or similar arrangements or other obligations to pay in respect of the
balance deferred and unpaid of the purchase price of any property, (vii) all
obligations in respect of currency, commodity or interest rate swap, hedge or
similar protection device, and (viii) all guarantees of or by such Person
of any of the matters described in clauses (i)-(vii) hereof. Indebtedness shall
include the current portion of Indebtedness.


 


“Indemnified
Party” is defined in Section 10.4(A).


 


“Indemnifying
Party” is defined in Section 10.4(A).


 


“Independent
Expert” is defined in Section 11.1(B)(1).


 


“Interests” is
defined in the Recitals.


 


“Interim Capital Costs” means the aggregate
amount of all costs relating to acquiring new Oil and Gas Properties,
preparing, drilling, equipping (including installing surface equipment) and
completing wells, gathering system capital, and capitalized pipeline
expenditures, as well as costs paid in connection with the plugging and
abandonment of Wells, as well as costs of title review, filing for permits,
surface damage and access payments, access road construction and site
preparation. These costs shall not include capitalized interest for the period
from the Valuation


 


84

















 


Date to the Closing Date. Such
additions to Base Purchase Price shall include cash expenditures for work
performed following the Valuation Date and actually paid by the Company or the
Subsidiaries prior to the Closing Date as well as amounts accrued as of the
Closing Date for work performed following the Valuation Date and prior to the
Closing Date, and in each case provided the costs are incurred in conformity
with Sections 6.1, 6.2 and the Project Plan.


 


“Intracompany
Obligations” means accounts and obligations: 
(i) owed by the Company to any of the Subsidiaries or to a Company
Partner or to PFC or any Related Affiliate, (ii) owed by any Subsidiary to
the Company, to another Subsidiary or to any Company Partner or PFC or any
Related Affiliate, or (iii) owed by a Company Partner or PFC or any
Related Affiliate to the Company or any of the Subsidiaries. The Intracompany
Obligations shall not include (i) the gas sale contract between the
Company and Progress Energy Ventures, Inc., identified as Item 9 in the Company
Schedule 4.5(B); or (ii) the ISDA Master Agreement identified as item
11 on Company Schedule 4.5(B).


 


“IRS” means
the Internal Revenue Service.


 


“Knowledge” of
a specified Person (or similar references to a Person’s knowledge) means,
without investigation or obligation of further inquiry, the information
actually known to (i) in the case of a Person who is an individual, such
Person, or (ii) in the case of a Person which is corporation or other
entity, the President and Vice President or executive officers of similar
responsibility with respect to such Person.


 


“Lease” or “Leases”
means oil, gas or mineral leases, leasehold estates, operating rights and other
rights authorizing the owner thereof to explore or drill for and produce
Hydrocarbons and other minerals, contractual rights to acquire any such of the
foregoing interests which have been earned by performance, and fee mineral,
royalty and overriding royalty interests, net profits interests, production
payments and other interests payable out of Hydrocarbon production, in each
case, in which the Company or a Subsidiary has an interest.


 


“Letter of
Acknowledgment” means the Letter to be executed by the Company Partners and
delivered by PFC and the Company at Closing, in the form attached hereto as Exhibit B.


 


“Lien” means
any claim, lien, mortgage, security interest, pledge, deposit, charge, option,
right of way, production payment, easement (but not easements that are part of
the Midstream Assets), encroachment or encumbrance of any kind.


 


“Losses” means
any and all debts, obligations and other liabilities (whether absolute,
accrued, contingent, fixed or otherwise, or whether known or unknown, or due or
to become due or otherwise), diminution in value, lost profits, monetary
damages of any type, fines, fees, Taxes, penalties, interest obligations,
deficiencies, losses and expenses (including amounts paid in settlement,
interest, court costs, costs of investigators, reasonable fees and expenses of
attorneys, accountants, financial advisors and other experts, and other actual
out-of-pocket expenses incurred in investigating and preparing for or in
connection with any claim, demand, charge, suit, litigation or proceeding).


 


“Material
Adverse Effect” means any change, inaccuracy, circumstance, effect, event,
result, occurrence, condition, change, or fact (each an “Event”) (whether or
not (i) foreseeable or


 


85

















 


known as of the date of this Agreement or
(ii) covered by insurance) affecting the business, condition (financial or
other), capitalization, assets, liabilities, or results of operations of the
Company and the Subsidiaries, taken as a whole, that, individually or in the
aggregate with any other Event, has resulted in or given rise to, or would
reasonably be expected to result in or give rise to, aggregate Losses of
$25,000,000 or more suffered or incurred, or being suffered or incurred, by one
or more of the Company and the Subsidiaries. Excluded from such Events for the
purpose of determining whether a Material Adverse Effect has occurred or would
reasonably be expected to occur are (A) Title Defects, (B) Events
arising from the public announcement of this Agreement and the transactions
contemplated hereby, and (C) Events that (i) affect generally the oil
and gas industry, such as fluctuations in the price of oil and gas, or
(ii) result from international, national, regional, state or local
economic conditions (in the case of clause (ii) above, however, such Events
shall be excluded only to the extent that such Events do not have a
disproportionate adverse effect on the Company and the Subsidiaries, taken as a
whole), and (iii) an adverse change in financial or banking markets.


 


“Maximum
Indemnity Amount” is defined in Section 10.6(A).


 


“Merger” is
defined in Section 1.2(B).


 


“Merger
Certificates” means the Texas Certificate of Merger and the Delaware
Certificate of Merger.


 


“Midstream
Assets” means all of the Midstream Companies’ right, title and interest in and
to the following:


 


(i)                                     The
pipelines, compressors, dehydration equipment, meter stations, and appurtenant
equipment and facilities, including any and all line pack, gas, gas
inventories, and other gaseous substances located in said pipelines, equipment
and facilities; provided, however, that PFC, GP and the Company make no
representation or warranty regarding the volume of gas that will exist in the
such pipelines, equipment and facilities at the time of Closing; and


 


(ii)                                  The
rights-of-way, fee interests, easements, leases, servitudes, Permits, and
licenses that are necessary or useful for the location, operation, maintenance,
repair, replacement, use or ownership of the Midstream Assets described in the
foregoing clause (i) of this definition.


 


“Midstream
Companies” is defined in Section 4.18(A).


 


“Net Revenue
Interest” means an interest (expressed as a percentage or decimal fraction) in
and to all Hydrocarbons produced and saved from or attributable to a Warranty
Well, Lease or unit.


 


“NGA” is
defined in Section 4.18(B).


 


“Non-Retained
Legacy Hedges” means (a) those Hedges entered into by the Company and
Progress Ventures, Inc., prior to June 29, 2006, which pertain to any
period after


 


86

















 


December 31, 2006, and (b) the Set-Aside
Hedges. A list of the Non-Retained Legacy Hedges is attached to

Company Schedule 4.15(A).


 


“Notice of
Completion” is defined in Section 7.19(F).


 


“Notice of
Objection” is defined in Section 7.19(F).


 


“Notice Period”
is defined in Section 10.4(A).


 


“Oil and Gas
Contracts” is defined in Section 4.15(B).


 


“Oil and Gas
Properties” means all right, title and interest of the Company and any
Subsidiary in and to a Lease or lands pooled therewith.


 


“Operating
Companies” is defined in the Recitals.


 


“Ordinary
Compliance Management is defined in Section 7.19(C).


 


“Ordinary
Course of Business” means the ordinary course of each of the Company’s and each
Subsidiary’s business, as applicable, consistent with past practice and custom
(including with respect to quantity and frequency).


 


“Permits”
means licenses, permits, waivers, franchises, consents, concessions, approvals,
variances, grants, exemptions, registrations, operating certificates, orders
and other authorizations of or from Governmental Entities, other than the FCC
Licenses.


 


“Permitted
Encumbrances” is defined in Section 8.1(F)(2).


 


“Permitted
Indebtedness” means the
Intracompany Obligations, the Retained Legacy Hedges, the Non-Retained Legacy
Hedges and the Winchester Hedges.


 


“Person” means
any individual, corporation, partnership, limited liability company, joint
venture, association, joint-stock company, trust, enterprise, unincorporated
organization, or Governmental Entity.


 


“PFC” is
defined in the Introduction.


 


“PFC Benefit
Plan” is defined in Section 3.8.


 


“PFC ERISA
Affiliate” is defined in Section 3.8(A).


 


“PFC
Guaranties” is defined in Section 7.17(A).


 


“PFC Group” is
defined in Section 7.7(A)(1).


 


“PFC
Indemnified Persons” is defined in Section 10.3(A).


 


“PFC Retained
Environmental Matters” is defined in Section 7.19(B).


 


87

















 


“PFC and
Service Employees” is defined in Section 7.6(A).


 


“Plan” is
defined in Section 3.8(A)(1).


 


“Post-Closing
Defect” is defined in Section 8.3(A).


 


“Preliminary
Objection” is defined in Section 1.5(B).


 


“Preliminary
Settlement Statement” is defined in Section 1.5(A).


 


“Prime Rate”
means the prime rate of interest report in the Wall Street Journal on
the Final Settlement Date or, if not published on such date, as most recently
published prior to the Final Settlement Date.


 


“Proceedings”
means all proceedings, litigation, arbitrations, actions, claims, suits,
investigations, and inquiries whether at law or equity, or civil or criminal in
nature, by or before any arbitrator or any Governmental Entity.


 


“Project Plan”
is defined in Section 7.18(A).


 


“Properties”
means the Oil and Gas Properties, Easements and the Fixtures, Facilities and
Equipment.


 


“Put Election
Notice” is defined in Section 7.23.


 


“Put
Obligations” is defined in Section 7.23.


 


“Put
Properties” is defined in Section 7.23.


 


“Referral Firm”
is defined in Section 1.6(D).


 


“Related
Affiliate” means any Affiliate of PFC other than the Company or a Subsidiary.


 


“Representatives”
is defined in Section 7.14.


 


“Repurchase
Notice” is defined in Section 8.1(G).


 


“Repurchase
Property” is defined in Section 8.1(G).


 


“Retained
Legacy Hedges” means those Hedges entered into by the Company and Progress
Ventures, Inc., prior to June 29, 2006, which pertain to periods in 2006,
but not including any Hedges covering production for periods after
December 31, 2006 and not including the Set-Aside Hedges. A list of the
Retained Legacy Hedges is attached to Company Schedule 4.15(A).


 


“Schedule” or “Schedules”
is defined in Section 12.2.


 


“Securities
Act” means the Securities Act of 1933, as amended.


 


88

















 


“Set-Aside
Hedges” means the set-aside Hedges entered into by the Company and Progress
Ventures, Inc, prior to June 29, 2006. A list of the Set-Aside Hedges is
attached to Company Schedule 4.15(A).


 


“State Income
Tax” is defined in Section 7.7(B)(1).


 


“Stations” is
defined in Section 4.13(B)(1).


 


“Straddle
Period” means any Tax period that begins before the Closing Date and ends after
the Closing Date.


 


“Subsidiaries”
is defined in the Recitals.


 


“Survival
Period” is defined in Section 10.1(A).


 


“Talco” is
defined in the Recitals.


 


“Tax” or “Taxes”
means any and all taxes, levies, imposts, duties, assessments, charges and
withholdings imposed or required to be collected by or paid over to any
Governmental Entity, including any interest, penalties, fines, assessments or
additions imposed in respect of the foregoing, or in respect of any failure to
comply with any requirement regarding Tax Returns.


 


“Tax Returns”
means any report, return, amended return, refund claim, information statement,
payee statement or other information provided or required to be provided to any
Governmental Entity, with respect to Taxes, including any return of an
affiliated, combined or unitary group.


 


“Termination
Date” is defined in Section 9.3(B)(1).


 


“Texas
Certificate of Merger” means the certificate of merger filed pursuant to the
TRLPA.


 


“TGG” is
defined in the Recitals.


 


“Third-Party
Claim” is defined in Section 10.4(A).


 


“Title Defect”
is defined in Section 8.1(F)(3)(e).


 


“Title Defect
Amount” is defined in Section 8.1(F)(3).


 


“Title Defect
Notice” is defined in Section 8.1(C).


 


“Title Defect
Property” is defined in Section 8.1(E).


 


“Third Party”
is defined in Section 6.4(A).


 


“Transaction
Costs” means the aggregate amount of all fees, costs and expenses of the
Company and the Subsidiaries (whether incurred by or on behalf of the Company
or any of the Subsidiaries or on behalf of PFC or any of its Affiliates)
incurred in connection with the


 


89

















 


structuring, negotiation, performance or
consummation of the transactions contemplated by the Transaction Documents
(whether incurred before or after the Closing Date), including, without
limitation, any investment banking, accounting, advisory, brokers, finders,
escrow agent or legal fees or fees paid to any Governmental Entity or third
party. Notwithstanding the foregoing, as used in this Agreement, Transaction
Costs will not include any current liabilities to the extent that such current
liabilities are included in the calculation of Working Capital.


 


“Transaction Documents” means this Agreement
and all other agreements and documents entered into by one or more of the
parties to this Agreement as contemplated by or in connection with this
Agreement, including without limitation the Transition Services Agreement, any
certificates and instruments required to be executed in connection with the
consummation of the transactions contemplated by this Agreement, or any other
Contract among the parties that is expressly agreed by the parties to
constitute a Transaction Document for purposes of this Agreement.


 


“Transition
Service Agreement” is defined in Section 2.2(A).


 


“Treasury” is
defined in Section 2.2(E).


 


“TRLPA” means
the Texas Revise Limited Partnership Act, Article 6132a-1, Texas Revised
Civil Statutes.


 


“Valuation
Date” means May 1, 2006.


 


“Valued Well”
means a well to be drilled in the future upon a Valued Well Location, which
(for the purposes of determining Defensible Title thereto and any Title Defects
associated therewith pursuant to this Agreement) shall be treated as if such
well had been drilled and completed and was in existence at or prior to the
date of this Agreement.


 


“Valued Well
Location” shall mean each drilling location identified on Buyer Schedule
8.1(F)(3) subject to any depth restriction set forth in such Schedule with
respect to such location.


 


“Vaughan” is
defined in the Recitals.


 


“Warranty Well”
shall mean a Well or a Valued Well, as the context requires.


 


“Well” means a
well drilled for the purpose of producing Hydrocarbons or disposing of fluids
produced in connection with the production of Hydrocarbons, associated with the
Company’s or any Subsidiaries’ interest in any Oil and Gas Property or lands
pooled therewith.


 


“Winchester”
is defined in the Recitals.


 


“Winchester
Hedges” means the Hedges put into place by Winchester on June 29, 2006. A
list of the Winchester Hedges is attached to Company Schedule 4.15(A).


 


“Working
Capital” means, as of a specific date, current assets minus current liabilities
as determined in accordance with this Agreement and GAAP applied consistently
with the application thereof in the preparation of the Financial Statements and
as adjusted to (i) exclude


 


90

















 


any inter-company receivables and payables
and Intracompany Obligations (such as checks outstanding on the Closing Date),
(ii) exclude accrued current and deferred income taxes (whether assets or
liabilities), (iii) exclude the current portion of hedge assets or
liabilities related to derivative contracts and (iv) exclude any
accounting reserves mutually agreed to by PFC and Buyer.


 


“Working
Interest” means the percentage of costs and expenses attributable to the
maintenance, development and operation of a Warranty Well, Lease or unit.


 


12.2         References
and Construction. All
references in this Agreement to articles, sections, subsections and other
subdivisions refer to corresponding articles, sections, subsections and other
subdivisions of this Agreement unless expressly provided otherwise. All
references to “Schedule”, “Schedules”, “Company Schedules” or “Buyer Schedules”
are to the Disclosure Schedules and other Schedules attached hereto.


 


(A)          Titles
appearing at the beginning of any of such subdivisions are for convenience only
and shall not constitute part of such subdivisions and shall be disregarded in
construing the language contained in such subdivisions.


 


(B)           The words “this
Agreement,” “this instrument,” “herein,” “hereof,” “hereby,” “hereunder” and
words of similar import refer to this Agreement as a whole and not to any
particular subdivision unless expressly so limited.


 


(C)           Words in
the singular form shall be construed to include the plural and vice  versa,
unless the context otherwise requires. Pronouns in masculine, feminine and
neuter genders shall be construed to include any other gender.


 


(D)          Examples
shall not be construed to limit, expressly or by implication, the matter they
illustrate.


 


(E)           Unless the
context otherwise requires or unless otherwise provided herein, the terms
defined in this Agreement which refer to a particular agreement, instrument or
document also refer to and include all renewals, extensions, modifications,
amendments or restatements of such agreement, instrument or document, provided
that nothing contained in this subsection shall be construed to authorize such
renewal, extension, modification, amendment or restatement.


 


(F)           The word “or”
is not intended to be exclusive and the word “includes” and its derivatives
means “includes, but is not limited to” and corresponding derivative
expressions.


 


(G)           Each of
the parties hereto acknowledges that it has been represented by independent
counsel of its choice throughout all negotiations that have preceded the
execution of this Agreement and that it has executed the same with consent and
upon the advice of said independent counsel. Each party and its counsel
cooperated in the drafting and preparation of this Agreement and the documents
referred to herein. Accordingly, any rule of law or any legal decision that
would require interpretation of any ambiguities in this Agreement against any
party that drafted it is of no application and is hereby expressly waived.


 


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(H)          Notwithstanding
anything contained in this Agreement to the contrary, except as otherwise
expressly provided in this Agreement, the parties hereto covenant and agree
that no amount shall be (or is intended to be) included, in whole or in part
(either as an increase or a reduction), more than once in the calculation of
any calculated amount pursuant to this Agreement if the effect of such additional
inclusion (either as an increase or a reduction) would be to cause such amount
to be over- or under-counted for purposes of the transactions contemplated by
this Agreement. The parties hereto further covenant and agree that if any
provision of this Agreement requires an amount or calculation to be “determined
in accordance with this Agreement and the Accounting Principles” (or words of
similar import), then to the extent that the terms of any provision of this
Agreement conflict with, or are inconsistent with, the Accounting Principles in
connection with such determination, the terms of this Agreement (other than
Schedules 1.4(D)(1) and 1.4(D)(2) hereto, which are attached hereto by way of
example only) shall control.


 


 


[Remainder of Page Intentionally Left Blank—Signature Pages Follow]


 


92

















 


IN WITNESS WHEREOF, this Agreement is
executed by the parties hereto as of the date set forth above.


 


	
   

  	
  PROGRESS FUELS CORPORATION

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Mark. F. Mulhern

  
	
   

  	
  Name: Mark F. Mulhern

  
	
   

  	
  Title: President

  
	
   

  	
   

  
	
   

  	
  COMPANY

  
	
   

  	
   

  
	
   

  	
  WINCHESTER ENERGY COMPANY, LTD.

  
	
   

  	
   

  
	
   

  	
   

  	
  By:    WGC Holdco, LLC,
  its general partner

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Robert M. Deacy

  
	
   

  	
  Name: Robert M. Deacy

  
	
   

  	
  Title: President

  
	
   

  	
   

  
	
   

  	
  WGC HOLDCO, LLC

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Robert M. Deacy

  
	
   

  	
  Name: Robert M. Deacy

  
	
   

  	
  Title: President

  



 


S-1

















 


	
   

  	
  BUYER:

  
	
   

  	
   

  
	
   

  	
  WINCHESTER ACQUISITION, LLC

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Douglas H. Miller

  
	
   

  	
  Name: Douglas H. Miller

  
	
   

  	
  Title: Chairman and Chief Executive Officer

  



 


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