Document:

EX-10.12

 

EXHIBIT 10.12

FORM OF

AGREEMENT OF LIMITED PARTNERSHIP OF

NGAS PARTNERS ______, LTD

     This AGREEMENT OF LIMITED PARTNERSHIP of NGAS Partners ___, Ltd., a Kentucky
limited partnership (the “Partnership”), is entered into as of ___, 200___by and
among the Partnership, Daugherty Petroleum, Inc., a Kentucky corporation (“DPI”),
as the managing general partner (the “Managing General Partner”), ___, as the
original and withdrawing limited partner (the “Initial Limited Partner”), the persons
listed in Schedule A, as limited partners (the “LP Unitholders”), and the persons listed in
Schedule B, as non-managing general partners (the “GP Unitholders” and,
collectively with the LP Unitholders, the “Unitholders”).

RECITALS

     A. The Partnership has been formed as a Kentucky limited partnership to invest, through an
operating general partnership with DPI (the “Program”), in a in a portfolio of natural gas
development wells (“Project Wells”) to be drilled by DPI on drilling sites (the
“Prospects”) located in the southern portion of the Appalachian basin (the “Project
Areas”).

     B. The Program will acquire its interests in the Prospects within each Project Area (the
“Program Position”) under an assignment of drilling rights from DPI of even date herewith
(the “Prospect Assignment”), providing for DPI to maintain a ___% working interest the
Project Wells (the “DPI Position”), with the balance of the Program Position to be
maintained by the Partnership (the “Partnership Position”), subject to proportionate
reduction of the Program Position in Project Wells with third-party participation (the
“Participating Interests”) and certain other adjustments.

     C. The Project Wells will be drilled by DPI under a joint drilling and operating agreement
with the Program of even date herewith (the “Project JOA”), providing for DPI to use its
best efforts to drill all of the Project Wells to total depth by the end of ___ 200___and to
install production lines and associated compression and dehydration equipment for connecting
completed Project Wells to its existing gathering systems as expeditiously as possible, based on
projected drilling and completion costs (the “AFEs”) to be specified by DPI for each
Project Well under the terms of the Project JOA.

     D. The Program will participate in the Project Wells on a “cost-plus” 30% basis, entitling DPI
to payments from the Program under the Project JOA in an amount equal to 130% of the AFEs for the
Program Position in the Project Wells, to be shared in proportion to the DPI Position and the
Partnership Position in the underlying Prospects, and the Program is being capitalized by DPI and
the Partnership proportionately in accordance with the terms of the Partnership Agreement of the
Program of even date herewith (the “Program Agreement”).

     E. The Partnership is being capitalized through a private placement (the “Private
Placement”) of a minimum of ___ units of general and limited partner interests
(“Units”) at a subscription price of $  per Unit for $___(the “Minimum
Offering”) and a maximum of ___ Units for $___(the “Maximum Offering”), on the
terms described in a Private Placement Memorandum of the Partnership dated ___200___(the
“PPM”).

     F. DPI will maintain a 1% general partner interest in the Partnership, though a proportionate
capital contribution either in cash or in kind, and will serve as managing general partner of the
Partnership hereunder and as managing partner of the Program in accordance with the terms of the
Program Agreement.

     G. The parties desire to enter into this Agreement to memorialize their arrangements for the
conduct of the Partnership’s business.

     Accordingly, the parties hereby agree as follows:

 

 

ARTICLE 1 – DEFINITIONS

     1.1 Definitions. As used in this Agreement, the following terms have the respective meanings
set forth below:

     “AFE” stands for “authorization for expenditure” and means the projected costs for
drilling and completing a Project Well and furnishing all labor, well equipment and production
facilities necessary to produce the well to sales through DPI’s field-wide gathering systems.

     The term “affiliate” means any Person directly or indirectly controlling or controlled
by or under direct or indirect common control with a specified Person, and “control” when
used with respect to any specified Person means the power to direct the management and policies of
that Person, directly or indirectly, whether through the ownership of voting securities, by
contract or otherwise.

     “Agreement” means this Agreement, as amended and or supplemented from time to time.

     “Allocable Portion” means, as to each GP Unitholder, the number of GP Units owned by
that GP Unitholder at the time that any Excess Payment is made, divided by the total number of GP
Units outstanding at that time.

     “Book Value” means, with respect to any Partnership asset, the carrying value of the
asset on the books and records of the Partnership, determined in accordance with the provisions of
Treasury Regulation § 1.704-1(b)(2)(iv) and Article III.

     “Capital Account” means the capital account established for each Partner and
maintained pursuant to the terms of this Agreement in accordance with the provisions of Treasury
Regulation § 1.704-1(b)(2)(iv).

     “Capital Contribution” means the capital contribution made to the Partnership by a
Partner pursuant to Section 2.3.

     “Closing” means the Initial Closing or any Incremental Closing.

     “Code” means the Internal Revenue Code of 1986, as amended.

     “Depreciation” means the depreciation, amortization or other cost recovery expense of
the Partnership, determined in accordance with Section 6.1.

     “DPI” means Daugherty Petroleum, Inc., a Kentucky corporation, and its successors and
assigns.

     “DPI Position” means the working interest of DPI in the Project Wells, subject
adjustments for the Participating Interests and for the reversionary interest of DPI in each
Project Area after Payout and to certain true-up adjustments under the terms of the Program
Agreement.

     “Excess Payment” has the meaning set forth in Section 5.7(a).

     “Gross Fair Market Value” means the fair market value of an asset, determined without
taking into account any liabilities secured by the asset or otherwise associated with the asset.

     “GP Unitholders” means the Persons listed on Schedule B and their permitted
assigns, to the extent joined as substituted Partners in accordance with Article VII.

     “GP Units” means the units of general partner interests in the Partnership issued to
investors in the Private Placement.

     “IDC” stands for intangible drilling costs and means expenditures incurred for items
having no salvage value and for labor, fuel, repairs, hauling and supplies used in (i) preparing
the surface prior to drilling oil and gas wells, (ii) drilling, treating and cleaning oil and gas
wells and (iii) preparing oil and gas wells for production, all

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within the meaning of Treasury Regulation § 1.612-4(a).

     “Incremental Closing” means a partial closing of the offering and sale of Units to be
held after the Initial Closing if the Maximum Offering is reached prior to the termination of the
Private Placement.

     “Indemnified Parties” has the meaning set forth in Section 4.11(b).

     “Initial Closing” means the first closing of the Private Placement, held on the date
hereof, for not less than the Minimum Offering.

     “Kentucky Act” means the Kentucky Uniform Revised Limited Partnership Act, as amended.

     The term “leasehold acquisition costs” mean the costs of acquiring an oil and gas
leasehold or the rights to drill on property subject to an oil and gas leasehold or farmout.

     “LP Unitholders” means the Persons listed on Schedule A and their permitted
assigns, to the extent joined as substituted Partners in accordance with Article VII.

     “LP Units” means the units of limited partner interests in the Partnership issued to
investors in the Private Placement.

     “Majority in Interest” means the Unitholders, at the time of a Unitholder vote,
holding at least a majority of the outstanding Units held by all the Unitholders.

     “Managing General Partner” means DPI in its capacity as managing general partner of
the Partnership.

     “Maximum Offering,” “Minimum Offering,” “PPM” and “Private
Placement” have the respective meanings set forth in Recital E.

     “Minimum Gain” means the aggregate amount of gain (of whatever character), computed
with respect to each property of the Partnership that secures a Third Party Nonrecourse Liability
of the Partnership, that would be recognized by the Partnership if, in a taxable transaction, the
Partnership were to dispose of the property in full satisfaction of the Third Party Nonrecourse
Liability, determined in accordance with the provisions of Treasury Regulation § 1.704-2.

     “Net Fair Market Value” means, in connection with the contribution of an asset to the
Partnership by a Partner or the distribution of an asset by the Partnership to a Partner, the Gross
Fair Market Value of the asset, reduced by any liabilities (i) assumed by that Partner or the
Partnership or (ii) subject to which the Partner or the Partnership acquires the asset.

     “Net Losses” and “Net Profits” have the respective meanings ascribed to them
in Section 6.1.

     “Nonrecourse Deduction” means an allocation of loss or expense attributable to Third
Party Nonrecourse Liabilities, determined in accordance with the provisions of Treasury
Regulation § 1.704-2(b)(1).

     “Participating Interests” has the meaning set forth in Recital D.

     “Partner” means the Managing General Partner, the Unitholders or any of their
respective successors or assignees in their capacity as a partner of the Partnership.

     “Partner Nonrecourse Deduction” means an allocation of loss or expense attributable to
Partner Nonrecourse Liabilities, determined in accordance with the provisions of Treasury
Regulation § 1.704-2(i)(2).

     “Partner Nonrecourse Liabilities” means liabilities of the Partnership that are
nonrecourse debt, as defined in Treasury Regulation § 1.704-2(b)(3), but with respect to which one
or more Partners (or the affiliate of any Partner) bears the economic risk of loss, as defined in
Treasury Regulation § 1.752-2(a).

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     “Partner Nonrecourse Liability Minimum Gain” means the aggregate amount of gain, of
whatever character, computed with respect to each property of the Partnership that secures a
Partner Nonrecourse Liability of the Partnership, that would be recognized by the Partnership if,
in a taxable transaction, the Partnership were to dispose of the property in full satisfaction of
the Partner Nonrecourse Liability, determined in accordance with the provisions of Treasury
Regulation § 1.704-2(i).

     “Partnership” means NGAS Partners ___, Ltd., a Kentucky limited partnership among
DPI and the Unitholders.

     “Partnership Position” means the working interest of the Partnership in Project Wells
drilled in each of the Project Areas, established under the Prospect Assignment at ___%, subject
adjustments for the Participating Interests in Leatherwood, for AFE variances under the True-Up
Account in each Project Area and for the reversionary interest of DPI in each Project Area after
Payout under the terms of the Program Agreement.

     “Person” means an individual, any form of business enterprise, including a
corporation, limited liability company, partnership or limited partnership, and any other juridical
entity or its representative, including a trust, estate, custodian, administrator, personal
representative, nominee or any other entity acting on its own behalf or in a representative
capacity.

     “Program” means a NGAS Partners ___Drilling Program, a Kentucky general
partnership formed under the Program Agreement between the Partnership and DPI.

     “Program Agreement” means the Partnership Agreement between the Partnership and DPI in
substantially the form of Exhibit A to the PPM, and “Program Agreements” means,
collectively, this Agreement, the Program Agreement, the Prospect Assignment and any other
agreements DPI deems necessary or desirable to protect or further the best interests and purposes
of the Partnership and the Program, or to satisfy any requirements, conditions or guidelines
contained in any order, ruling or regulation of the Securities and Exchange Commission, the Service
or any other federal or state governmental authority or agency, or to comply with any applicable
federal or state law, rule or regulation or any judgment, decree, writ, injunction or order of any
court, administrative agency, arbitrator or governmental authority, together with any and all other
instruments required or permitted to be executed by the Partnership or the Program thereunder.

     “Program Position” means the DPI Position and the Partnership Position in each Project
Well, depending [on the Project Area and] the level of Participating Interests in Project Wells.

     “Project Area” has the meaning set forth in Recital A.

     “Project JOA” means the Joint Drilling and Operating Agreement in substantially the
form of Exhibit D to the PPM, as supplemented at any Incremental Closing, providing for
DPI’s drilling and completion of the Project Wells and its operation of completed Project Wells.

     “Project Well” has the meaning set forth in Recital A..

     “Proportionate Share” of a Partner means (i) for the Managing General Partner, 1%, and
(ii) for a Unitholder, at any particular time, 99% multiplied by the number of Units owned by that
Unitholder divided by the total number of Units outstanding at that time.

     “Prospect” has the meaning set forth in Recital A.

     “Prospect Assignment” means Assignment of Drilling Rights in substantially the form of
Exhibit C to the PPM, as supplemented at any Incremental Closing, providing for DPI’s
assignment to the Program of its rights to participate in the Project Wells drilled on the
Prospects specified therein.

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

     “Service” means the Internal Revenue Service.

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     “Simulated Basis” has the meaning set forth in Section 6.1(h).

     “Simulated Depletion” has the meaning set forth in Section 6.1(h)(i).

     “Special Partner” means (i) DPI to the extent it owns any Units and (ii) any
Unitholder who is an affiliate of DPI or any member of the affiliate’s family (within the meaning
of the attribution rules of Code § 38).

     “Start-Up Costs” means sales commission, due diligence fees, offering expenses, legal
and accounting fees and other costs for the organization of the Partnership and the Program.

     “Supermajority in Interest” means the Unitholders, at the time of a Unitholder vote,
holding at least 75% of the outstanding Units held by all the Unitholders.

     “Tax Matters Partner” means DPI in its capacity as the Partnership’s tax matters
partner, as defined in Code § 6231 (a)(7).

     “Third Party Nonrecourse Liabilities” means liabilities of the Partnership that are
nonrecourse debt, as defined in Treasury Regulation § 1.704-2(b)(3), and that are not Partner
Nonrecourse Liabilities.

     “Total Minimum Gain” means the aggregate of the Minimum Gain and the Partner
Nonrecourse Liability Minimum Gain.

     “Treasury Regulations” means the Treasury Regulations adopted by the Service under the
Code.

     “True-Up Account” means an account to be maintained by DPI under the terms of the
Prospect Assignment, reflecting a credit for the Partnership’s proportionate share of any AFEs for
Project Wells in excess of their actual drilling and completion costs and a debit for its share of
any drilling and completion costs for Project Wells in excess of their AFEs, with any net credit
balance for all Project to be applied to proportionately increase the working interests of the
Partnership in the last 30% of the Project Wells and any net deficit balance for all Project Wells
to be borne by DPI and applied to proportionately increase its working interests in the last 30% of
the Project Wells.

     “Unitholder” means the holder of one or more Units in the Partnership.

     “Units” means the units of general partner interests and limited partner interests in
the Partnership issued to investors in the Private Placement.

     The term “working interest” means an interest in an oil and gas leasehold or well
entitling the holder to receive a specified percentage of the sale proceeds from oil or gas
produced from the leasehold or well and obligating the holder to bear a specified percentage of the
costs of drilling, completing and operating the well.

     1.2 Construction. Whenever the context requires, the gender of all words used in this
Agreement includes the masculine, feminine and neuter. Unless otherwise expressly provided herein,
all references to Recitals, Articles, Sections and Schedules refer to recitals, articles and
sections of this Agreement and schedules to this Agreement.

ARTICLE II – ORGANIZATIONAL MATTERS

     2.1 Partnership Name and Principal Office. The name of the Partnership shall be “NGAS
Partners ___, Ltd.” The principal address of the Partnership shall be c/o Daugherty Petroleum,
Inc., 120 Prosperous Place, Suite 201, Lexington, Kentucky 40509, or any other address that may be
designated for that purpose by the Managing General Partner.

     2.2 Character of the Business. The principal business of the Partnership shall be its
participation, through its interests in the Program, in drilling and producing Project Wells on
Prospects assigned to the Program by DPI under the Prospect Assignment.

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     2.3 Capital Contributions of the Partners.

          (a) Capital Contributions of the Unitholders. The Unitholders shall contribute to the
capital of the Partnership, in cash upon their admission to the Partnership at a Closing,
$___.___for each Unit (or a proportionate amount for any fractional Unit) set forth opposite
their respective names in Schedule A or Schedule B.

          (b) Capital Contribution of the Managing General Partner. The Managing General
Partner has heretofore contributed $___in cash to the capital of the Partnership. In exchange for
its 1% general partner interest in the Partnership, the Managing General Partner shall contribute
additional capital to the Partnership, in cash at the rate of $___.___for each Unit issued by the
Partnership, representing 1% of the Partnership’s total capital, or in kind at the same rate per
Unit, at its election, payable at each Closing at which the Units are issued and sold. Any Capital
Contribution made by the Managing General Partner in kind shall be in the form of a portion of its
retained working interests in Prospects assigned to the Program, based on the value of those
working interests as determined in good faith by the Managing General Partner.

          (c) Contribution and Withdrawal of the Initial Limited Partner. The Initial Limited
Partner has contributed $100 to the capital of the Partnership, which shall be returned to him at
the Initial Closing. Upon the return of his contribution, the Initial Limited Partners shall
withdraw from the Partnership.

     2.4 Term of the Partnership. The term of this Partnership commenced upon the filing of its
Certificate of Limited Partnership under the Kentucky Act and shall continue until dissolved or
terminated pursuant to Article IX.

ARTICLE III – CAPITAL ACCOUNTS

     3.1 Capital Accounts. A Capital Account shall be established and maintained for each Partner
in compliance with the provisions of Treasury Regulation § 1.704-1(b)(2)(iv). The Capital Accounts
shall be maintained as set forth in this Article III.

          (a) General Rules. Each Partner’s Capital Account shall be (i) credited with the
amount of money and the Net Fair Market Value of any property contributed by the Partner to the
Partnership, (ii) credited or debited, as the case may be, with the Partner’s allocation of income,
gain, loss and expense and (iii) debited with the amount of cash and the Net Fair Market Value of
property distributed to the Partner.

          (b) Special Rules. If a Partner’s interest in the Partnership is sold or liquidated,
the following special rules shall apply when determining the Capital Account balances of any new or
remaining Partners:

               (i) If the sale or exchange (together with any other sales or exchanges of interests in the
Partnership that occur during any relevant accounting period) causes a termination of the
Partnership within the meaning of Code § 708(b)(1)(B), the Capital Accounts of the Partners shall
be redetermined in accordance with this Section 3.1 as though its property is deemed to be
distributed to a new partnership in exchange for its partnership interests and a deemed
distribution is made to the partners of the new partnership interests.

               (ii) If the sale or exchange does not cause a termination of the Partnership within the
meaning of Code § 708(b)(1)(B) and if the Partnership has, at the time of the sale or exchange, an
effective election under Code § 754, the Capital Account of the selling or exchanging Partner shall
be carried over to the transferee Partner, and there shall not be made to the Capital Account of
the Partner who receives the special tax basis adjustment under Code § 743 a corresponding
adjustment except to the extent a special tax basis adjustment would be reflected in a Partners
respective Capital Account pursuant to Treasury Regulation § 1.704-1 (b)(2)(iv)(m).

               (iii) If the sale or exchange is not subject to the provisions of Section 3.1(b)(i) or
Section 3.1(b)(ii), the Capital Account of the selling or exchanging Partner shall be
carried over to the transferee Partner.

               (iv) If a Partner’s interest in the Partnership is repurchased by the Partnership through a
distribution in complete liquidation of the interest, except as provided in Section 3.1(a),
the Capital Accounts of the remaining Partner shall be adjusted only to the extent required by
Treasury Regulation § 1.704-1(b)(2)(iv)(m).

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     3.2 Determination of and Adjustments to Book Value and Capital Accounts. When determining the
Book Value of the assets of the Partnership and the appropriate balance in each Partner’s Capital
Account resulting from any adjustments to Book Value in accordance with the provisions of Treasury
Regulation § 1.704-1(b)(2)(iv), the following accounting rules shall apply:

          (a) Contributed Property. The initial Book Value of any asset contributed by a
Partner to the Partnership shall be its Gross Fair Market Value on the date of contribution.

          (b) Timing of Adjustments. The Book Values of all Partnership assets shall be
adjusted to equal their respective Gross Fair Market Values, as of the following times:

               (i) The acquisition of an interest (including an additional interest) in the Partnership by
any new or existing Partner in exchange for more than a de minimis capital contribution to the
Partnership;

               (ii) The distribution by the Partnership to a Partner or withdrawing Partner of more than a de
minimis (as determined by the Managing General Partner) amount of money or other property as
consideration for its interest in the Partnership; and

               (iii) The liquidation of the Partnership.

          (c) Book Value Adjustments. The Book Value of Partnership assets shall not be
increased or decreased to reflect any adjustments to the adjusted tax basis of the assets pursuant
to Code § 734(b) or Code § 743(b), except to the extent that the adjustments are taken into account
in determining and maintaining capital accounts pursuant to Treasury
Regulation § 1.704(b)(2)(iv)(m); provided, however, that Book Value shall not be adjusted pursuant
to this Section 3.2(c) to the extent that the adjustment was previously reflected in the
Book Value of the Partnership’s assets.

          (d) Reductions for Depreciation. If the Book Value of an asset has been determined or
adjusted pursuant to the foregoing provision of this Section 3.2, the Book Value shall
thereafter be reduced by the Depreciation taken into account with respect to the asset for purposes
of computing the Net Profits and the Net Losses of the Partnership under Article VI.

ARTICLE IV – RIGHTS AND OBLIGATIONS OF THE MANAGING GENERAL PARTNER

     4.1 Management and Control of the Partnership.

          (a) General. The Managing General Partner shall have the full and exclusive right and
authority to manage and control the business and affairs of the Partnership and to make all
decisions incident thereto; provided that the Managing General Partner shall be prohibited from
taking any action (or causing the Partnership to take any action) that would be prohibited under
the Program Agreements or failing to take any actions (or causing the Partnership to fail to take
any actions) that are required to be taken under the Program Agreements.

          (b) Specific Rights and Powers of the Managing General Partner. In addition to any
other rights and powers that the Managing General Partner may possess under this Agreement, the
other Program Agreements and applicable law, the Managing General Partner shall, except to the
extent otherwise provided herein, have all specific rights and powers required or appropriate to
its management of the Partnership’s business, which include the rights and powers to:

               (i) Execute the Program Agreements in the name and on behalf of the Partnership and to cause
the Partnership perform its obligations thereunder;

               (ii) Enter into any amendments to the Program Agreements, in the name and on behalf of the
Partnership, to the extent deemed necessary or desirable to protect or further the best interests
and purposes of the Partnership;

               (iii) On behalf of the Partnership, exercise the rights and fulfill the obligations of the

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working interest owner under the Project JOA;

               (iv) Protect and preserve the title and interest of the Partnership in the assets of the
Partnership, collect all amounts due the Partnership and otherwise enforce all rights of the
Partnership and, in that connection, retain counsel and institute suits or proceedings in the name
and on behalf of the Partnership or, if the Managing General Partner shall so determine, in the
name of the Managing General Partner;

               (v) Employ or engage on a temporary or continuing basis any accountants, attorneys,
consultants and other professionals on terms that the Managing General Partner deems advisable;

               (vi) Pay all debts and obligations of the Partnership and make distributions to the Partners
in accordance with the provisions of this Agreement, to the extent assets of the Partnership are
available therefor;

               (vii) Maintain such insurance for the Partnership as a reasonably prudent oil and gas operator
would maintain, require all contractors engaged in work for the Partnership to comply with the
worker’s compensation law of the state where operations are being conducted and maintain any other
insurance that may be required, and require any contractor employed for the Partnership to submit
to it properly executed certificates of insurance issued by approved insurers before work
contemplated in any contract is begun;

               (viii) Establish any reserves the Managing General Partner deems appropriate for the purposes
of the Partnership, including future costs of plugging and abandoning Wells, and withhold
distribution of cash flow in order to fund the reserves, in the amounts and at the times the
Managing General Partner, in its sole discretion, deems to be in the best interest of the
Partnership;

               (ix) Arrange to prosecute, defend, settle or compromise actions at law or in equity at the
expense of the Partnership as may be necessary to enforce or protect Partnership interests; and

               (x) Satisfy any claim against or liability of the Partnership or any judgment, decree or
settlement binding on the Partnership, first out of any available insurance proceeds, next out of
Partnership revenues and then, if necessary, from the sale of Partnership assets.

          (c) Duties of the Managing General Partner. The Managing General Partner shall devote
to the Partnership such time as it shall deem necessary to conduct the Partnership’s business and
affairs in the best interest of the Partnership and its Partners. The Managing General Partner
shall take all action that may be necessary or appropriate for the Partnership’s performance of the
Program Agreements, which shall include the duty to:

               (i) Review status reports and cost billings for the drilling and completion of the Project
Wells;

               (ii) Receive and review all operating reports, production payments and invoices for operating
costs, and arrange for the timely payment of amounts due;

               (iii) Prepare or cause to be prepared, at the expense of the Partnership, and to file on or
before the due date (or any extension thereof) all federal, state or local tax returns required to
be filed by the Partnership, and to timely furnish each Partner all necessary tax reporting
information in connection therewith;

               (iv) Prepare or cause to be prepared, at the expense of the Partnership, and to timely file
all certificates, documents or other instruments required by any government agency or authority
pertaining to the business and operations of the Partnership;

               (v) Maintain and preserve during the term of the Partnership and for six years thereafter all
accounts, books and other relevant Partnership documents; and

               (vi) Distribute to the Partners, not less than quarterly, proceeds from the Partnership’s
interest in Program operations that have not been set aside as reserves pursuant to
Section 4.1(b)(viii).

     4.2 Agency Powers of the Managing General Partner. Any document executed by the Managing

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General Partner in the name and on behalf of the Partnership shall be deemed to be the action
of the Partnership. Any Person dealing with the Partnership or the Managing General Partner may
rely upon a certificate signed by the Managing General Partner as to (a) the identity of the
Managing General Partner or the Partnership, (b) the existence or nonexistence of any fact or facts
that constitute conditions precedent to acts by the Managing General Partner or that are in any
other manner germane to the affairs of the Partnership, (c) the Persons who are authorized to
execute and deliver any instrument or document on behalf of the Partnership and (d) any act or
failure to act by the Partnership with respect to any other matter whatsoever involving the
Partnership or its Partners.

     4.3 Limitations on Authority of the Managing General Partner. Without the consent of a
Majority in Interest of the Unitholders, the Managing General Partner shall not (a) use any assets
of the Partnership for any purpose other than the payment of operating expenses of the Partnership
and the conduct of its business in the ordinary course, (b) sell all or substantially all the
assets of the Partnership or any of the major assets of the Partnership or (c) accept any offer to
exchange the securities of any Person for the assets of the Partnership or for all or a majority of
the interests in the Partnership.. In the event the Partnership consummates a sale or exchange
offer transaction described in clause (b) or (c) of this Section 4.3, the Partnership shall
pay the Managing General Partner a fee equal to 3% of the consideration sale proceeds or exchange
value of assets sold or exchanged in the transaction.

     4.4 Other Business of DPI. DPI and any of its affiliates may engage in or possess any
interest in other business ventures of any kind, nature or description, independently or with
others, including the acquisition, operation or development of oil and gas properties and the
acquisition, financing, ownership, leasing, operation, management and syndication of other oil and
gas drilling enterprises, for its own account or for the account of others. Neither the
Partnership nor the Unitholders shall have any rights or obligations in or to such independent
ventures or the income, profits or losses derived therefrom.

     4.5 Nonrecourse Borrowings. The Managing General Partner shall have authority to cause the
Partnership to borrow funds from any bank or other lending institution located in the United States
for the conduct of the Partnership’s business and, in connection therewith, to mortgage, pledge,
encumber and hypothecate Partnership assets, including its share of any production payments from
Wells.

     4.6 Tax Matters Partner. DPI shall be the “Tax Matters Partner” of the Partnership for the
purposes of Code § 6231(a)(7). In the event of any inquiry or controversy with the or other taxing
authority involving the Partnership, the Managing General Partner shall act as the agent of the
Partnership to resolve the matter and may, on behalf of the Partnership, incur any expenses it
deems necessary or advisable in the interest of the Partners in connection therewith, including
professional fees and court or administrative costs incurred in the prosecution thereof or appeals
therein.

     4.7 Tax Elections. The Managing General Partner shall take all actions required for the
Partnership to make a timely election to deduct IDC on its federal income tax return. In the event
of the transfer of an interest in the Partnership, or in the event of any distribution of
Partnership property to a Partner, the Partnership may, in the sole discretion the Managing General
Partner, file an election under Code § 754 to cause the basis of the Partnership’s assets to be
adjusted for federal income tax purposes as provided by Code § 734 and Code § 743. The Managing
General Partner shall not make any election for the Partnership to be excluded from the provisions
of Subchapter K of the Code.

     4.8 Start-Up Costs. DPI shall be responsible for the payment of all Start Up Costs incurred
by or for the benefit of the Partnership.

     4.9 Expense Reimbursement. The Partnership shall reimburse the Managing General Partner for
all out-of-pocket expenses incurred for or on behalf of the Partnership, including fees and
expenses of accountants, petroleum engineers, attorneys and insurance brokers for professional
services rendered to the Partnership, but excluding any Start-Up Costs.

     4.10 Right of the Managing General Partner to Resign. DPI shall not resign as Managing
General Partner except in accordance with Section 7.1.

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     4.11 Exculpation and Indemnification of the Managing General Partner.

          (a) Liabilities of the Managing General Partner. The Managing General Partner shall
exercise ordinary and prudent judgment in conducting and managing the affairs of the Partnership.
The Managing General Partner and its affiliates shall not be liable or obligated to the Partnership
or the Program for any mistake of fact or judgment made by the Managing General Partner in
operating the affairs and business of the Partnership or the Program, provided the Managing General
Partner acted in good faith and in a manner believed to be in the best interests of the Partnership
and the mistake of fact or judgment did not constitute gross negligence or willful misconduct.

          (b) Indemnification of Managing General Partner. The Partnership shall indemnify and
hold harmless the Managing General Partner and any of its affiliates performing services on behalf
of the Partnership (collectively, “Indemnified Parties”) as follows:

               (i) In any action, suit or proceeding to which an Indemnified Party was or is a party by
reason of the fact that it was acting as the Managing General Partner or was an affiliate of the
Managing General Partner performing services on behalf of the Partnership, involving an alleged
cause of action arising from the activities of the Indemnified Party under this Agreement, the
other Program Agreements or otherwise in the management of the affairs of the Partnership, or which
relates to the Partnership, its property, business or affairs, the Partnership shall indemnify the
Indemnified Party against expenses, including attorneys’ fees, judgments, fines and amounts paid in
settlement actually and reasonably incurred by the Indemnified Party in connection with the action,
suit or proceeding, if the Indemnified Party acted in good faith and in a manner believed to be in
the best interests of the Partnership and if the Indemnified Party’s conduct does not constitute
gross negligence or willful misconduct. The termination of a proceeding by judgment, order,
settlement or conviction or upon a plea of nolo contendere, or its equivalent, shall not, of
itself, create a presumption that an Indemnified Party did not act in good faith and in the best
interests of the Partnership.

               (ii) Expenses (including legal fees and expenses) incurred in defending any proceeding shall
be paid by the Partnership in advance of the final disposition of the proceeding if (A) the
Partnership has received an undertaking by or on behalf of the Indemnified Party to repay the
amount, with interest at a market rate from the date of the advance, if it shall ultimately be
determined, by a court of competent jurisdiction or otherwise, that the Indemnified Party is not
entitled to be indemnified by the Partnership as authorized hereunder and (B) the proceeding
relates to the performance of duties or services by the Indemnified Party on behalf of the
Partnership.

               (iii) Any indemnification under this Section 4.11, unless ordered by a court, shall be
made by the Partnership only as authorized in the specific case and only upon a determination by a
majority vote of a quorum of all directors of the Managing General Partner, that indemnification of
an Indemnified Party is proper. Any indemnification shall be made only out of the assets or
insurance coverage of the Partnership. In any claim for indemnification for federal or state
securities law violations, the party seeking indemnification shall place before the court the
position of the Securities and Exchange Commission with respect to indemnification for securities
law violations.

               (iv) The indemnification provided by this Section 4.11 shall be in addition to any
other rights to which an Indemnified Party may be entitled under any agreement or as a matter of
law, both as to action in the Indemnified Party’s capacity as the Managing General Partner or an
affiliate of the Managing General Partner and as to action in another capacity, shall continue as
to an Indemnified Party who has ceased to serve in that capacity and shall inure to the benefit of
the heirs, successors, assigns and administrators of the Indemnified Party.

               (v) To the extent commercially reasonable, the Partnership may purchase and maintain insurance
on behalf of the Managing General Partner and its affiliates against any liability that may be
asserted against or expense that may be incurred by that Person in connection with the
Partnership’s activities, whether or not the Partnership has indemnified that Person against
liability under the provisions of this Agreement. The Partnership shall not bear any additional
cost of the insurance attributable to coverage for liabilities for which the Partnership would not
have the power to indemnify under the provisions of this Agreement.

               (vi) The provisions of this Section 4.11 are for the benefit of Indemnified Parties
and shall not be deemed to create any rights for the benefit of any other Persons.

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ARTICLE V – RIGHTS OF THE UNITHOLDERS

     5.1 Limited Liability of LP Unitholders. No LP Unitholder (a) shall be required to contribute
any capital to the Partnership in excess of his Capital Contribution or (b) shall have any personal
liability (i) for contribution to any GP Unitholder who is held personally liable for any debt of
the Partnership or (ii) for satisfaction of any Partnership or Program obligation.

     5.2 Rights of LP Unitholders Under the Kentucky Act. To the extent not otherwise set forth
herein and except as modified hereby, each LP Unitholder shall have the rights of a limited partner
under the Kentucky Act.

     5.3 Right to Examine Partnership Records. Each Unitholder, upon reasonable prior notice to
the Managing General Partner, shall have the right to examine the books and records of the
Partnership at its principal address during regular business hours and to make reasonable inquiries
about the business and affairs.

     5.4 Voting Rights of Unitholders.

          (a) Unitholder Majority Voting Rights. Subject to the other provisions of this
Section 5.4, the Unitholders, by affirmative vote of a Majority in Interest, shall have the
right, with the concurrence of the Managing General Partner, to:

               (i) approve the sale, exchange, lease or other transfer of all or substantially all of the
assets of the Partnership or the Program as provided in Section 4.3;

               (ii) approve the resignation of the Managing General Partner and appointment of a successor
managing general partner as provided in Section 7.1; and

               (iii) approve an amendment to this Agreement other than amendments referred to in
Section 5.4(b).

          (b) Unitholder Supermajority Voting Rights. Subject to the other provisions of this
Section 5.4, the Unitholders, by affirmative vote of a Supermajority in Interest of the
Unitholders, shall have the right to:

               (i) remove the Managing General Partner and continue the business of the Partnership with a
substitute managing general partner as provided in Section 7.2;

               (ii) dissolve the Partnership as provided in Article IX;

               (iii) approve the sale, exchange, lease or other transfer of all or substantially all of the
assets of the Partnership or the Program without the consent of the Managing General Partner; and

               (v) approve an amendment to this Agreement without the consent of the Managing General
Partner, provided that the consent of the Managing General Partner shall be required for any
amendment to Article VII, governing transfers of interests in the Partnership, and the
consent of all the Partners shall be required for any amendment referred to in
Section 5.4(c).

          (c) Restrictions on Unitholder Voting Rights. The exercise of any right of the
Unitholders to vote upon an action provided for in this Section 5.4 shall be canceled upon
the Partnership’s receipt of a written opinion of its counsel to the effect that either (i) the
action in question may not be taken without the concurrence of all Partners of the Partnership,
(ii) the exercise of that right may result in the loss of the LP Unitholders’ limited liability or
(iii) the exercise of that right will adversely affect the tax status of the Partnership; provided
that (A) the Managing General Partner shall notify the Unitholders promptly after the receipt by
the Partnership of an opinion to the foregoing effect, and (B) any amendment to this Agreement that
would result in the loss of any LP Unitholder’s limited liability or the loss of the Partnership’s
status as a partnership for federal income tax purposes may be approved only by unanimous vote of
the Unitholders and the Managing General Partner.

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          (d) Limitation of Voting Rights of Special Partners. No Special Partner shall
exercise any of the voting rights otherwise available to the Unitholders under this Agreement,
unless the Partnership receives a written opinion of its counsel to the effect that the exercise of
those rights will not adversely affect the tax status of the Partnership.

          (e) Meeting of Partners. Either DPI or the Unitholders holding not less than a
Majority in Interest of the Units then outstanding may, by written notice to the Partners, call for
a meeting of the Partners to consider the adoption of an amendment to this Agreement or any other
action set forth in the notice. The notice shall state the purpose of the meeting specifying a
reasonable time and place and a date, not less than 30 days nor more than 60 days thereafter, at
which the meeting shall be held. Whenever, by any provision of the Kentucky Act or this Agreement,
the vote of the Partners at a meeting thereof is required or permitted to be taken in connection
with any matter or action, the meeting may be dispensed with if a consent in writing, setting forth
the action so taken, shall be signed by the Partners whose affirmative votes would be sufficient to
determine the outcome of the matter or action at a meeting of the Partners.

     5.5 Outside Activities. A Unitholder may have business interests and engage in business
activities in addition to those relating to the Partnership, including business interests and
activities in direct competition with the Program. Neither the Partnership nor any of the Partners
shall have any rights by virtue of this Agreement in any independent business venture of any other
Unitholder.

     5.6 No Management Authority.

          (a) Prohibited Activity. No Unitholder shall (i) take part in the management or
control of the Partnership or any aspects of its business, (ii) purport to transact any business
for or on behalf of the Partnership or (iii) have any authority to sign any instrument for or on
behalf of the Partnership or any power to bind the Partnership.

          (b) Liquidated Damages. Any GP Unitholder who breaches the provisions of
Section 5.6(a) shall be liable to the Partnership for liquidated damages in the amount of
$10,000, and the Partnership shall have the right to offset those damages against amounts otherwise
distributable to the GP Unitholder hereunder.

     5.7 Contribution among GP Unitholders.

          (a) Contribution. In the event that a GP Unitholder satisfies any part of a judgment
entered in any action, suit or proceeding for payment of any liabilities (including tort
liabilities), debts or obligations of the Partnership or the Program in excess of his Allocable
Portion thereof (an “Excess Payment”), he shall promptly notify the Managing General
Partner, and each other GP Unitholder will be responsible for and will contribute his Allocable
Portion of the Excess Payment. The Managing General Partner shall promptly provide notice to all
GP Unitholders with respect to the nature and amount of their respective contribution obligations
hereunder, and payments thereof shall be made within 30 days thereafter in accordance with the
instructions set forth in such notice.

          (b) No Third Party Beneficiaries. The provisions of this Section 5.7 are for
the benefit of the GP Unitholders and shall not be deemed to create any rights for the benefit of
any other Persons.

     5.8 Conversion of GP Units into LP Units. At the time that all Wells have been drilled and
completed, the Managing General Partner shall take all actions and file all instruments required,
in the name and on behalf of the GP Unitholders, to convert each GP Units then outstanding into an
LP Unit. The conversion shall change the status of each GP Unitholder to the status of an limited
partner of the Partnership for partnership liability and federal income tax purposes from an after
the effective date of conversion but shall not change the Proportionate Share of any Unitholder.

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ARTICLE VI – ALLOCATIONS AND DISTRIBUTIONS

     6.1 Determination of Net Profits and Net Losses. For purposes of computing the amount of any
items of income, gain, loss or expense to be reflected in the Capital Accounts (the net thereof
hereinafter referred to as “Net Profits” or “Net Losses”), the determination,
recognition and classification thereof shall be the same as their determination, recognition and
classification for federal income tax purposes, with the following modifications:

          (a) Depreciation, Amortization or Other Cost Recovery. Any item of expense
attributable to depreciation, amortization or other cost recovery with respect to any asset of the
Partnership shall be in an amount that bears the same ratio to the Book Value of the asset at the
beginning of the applicable period as the federal income tax deduction for depreciation,
amortization or other cost recovery with respect to the asset for the fiscal year or other period
bears to the adjusted tax basis of the asset at the beginning of the applicable period, provided
that if the federal income tax deduction attributable to depreciation, amortization or other cost
recovery for the fiscal year or other period with respect to any asset is zero, the item of expense
attributable to depreciation, amortization or other cost recovery with respect to the asset for the
applicable period shall be determined with reference to the Book Value of the asset as of the
beginning of the applicable period using any reasonable method selected by the Managing General
Partner.

          (b) Taxable Dispositions. Any item of income, gain, loss or expense attributable to
the taxable disposition of any property with an adjusted tax basis that is different from the Book
Value of the property shall be determined as if the adjusted tax basis of the property as of the
date of disposition were equal in amount to the Book Value of the property.

          (c) Investment Tax Credits. If the Partnership’s adjusted tax basis in an item of
depreciable property is adjusted pursuant to the Code to reflect any investment tax credit
available with respect to the asset, the amount of the adjustment shall be treated as a Partnership
expense and shall be allocated in the ratio in which the investment tax credit (or qualified
investment in Code § 38 property) that gave rise to the basis adjustment is allocated. Any
restoration of the adjusted tax basis occurring as the result of any recapture of previously
allowed investment tax credit with respect to any Partnership property shall be treated as
Partnership income and shall be allocated in the same ratio in which the investment tax credit (or
qualified investment in Code § 38 property the disposition of which gave rise to the restoration of
adjusted tax basis) was allocated.

          (d) Nondeductible Expenditures. All expenditures of the Partnership not deductible in
computing its taxable income and not properly chargeable to any Capital Account and any otherwise
nondeductible organizational and syndication expenses of the Partnership (as described in
Code § 709) shall be treated as Partnership expenses.

          (e) Exempt Revenue. Revenue of the Partnership which is exempt from federal income
tax shall be included in Net Profits or Net Losses.

          (f) Guaranteed Payments. Any payments made to a Partner that are treated for federal
income tax purposes as guaranteed payments pursuant to Code § 707(c) shall be treated as
Partnership expenses.

          (g) Book Value Adjustments. In the event the Book Value of any Partnership asset is
adjusted pursuant to Section 3.2, the amount of the adjustment shall be treated as gain or
loss, as appropriate, from a sale of the asset.

          (h) Simulated Basis. The Partnership shall establish records of the aggregate
adjusted depletable basis of all Partners in each oil and gas property (as defined in Code § 614)
at the time the property is acquired by the Partnership (the “Simulated Basis”), and the
Simulated Basis for each property shall be adjusted from time to time, in the same manner as if the
Simulated Basis was the Partnership’s adjusted basis in the property, to reflect (i) additions to
basis and (ii) Simulated Depletion as provided in Section 6.1(h)(i), and the Simulated
Basis, as adjusted, shall be utilized to determine simulated gain or simulated loss, as provided in
Section 6.1(h)(ii).

               (i) The Partnership shall compute a depletion allowance (“Simulated Depletion”) for
each taxable year based on the Simulated Basis, as theretofore adjusted, equal to either the (A)
cost depletion or (B)

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percentage depletion at the rate specified in Code § 613A(c)(5) (but otherwise computed
without regard to the limitations that theoretically could apply to less than all the Partners)
attributable to each oil or gas property, with the method of depletion, cost or percentage, being
determined on a property by property basis in the first Partnership’s taxable year for which it is
relevant for the property, with the treatment being binding for all Partnership taxable years
during which the oil and gas property is held by the Partnership, and the Simulated Depletion
allowance with respect to each oil or gas property shall be treated as an expense of the
Partnership and shall be allocated among the Partners pursuant to Section 6.2, provided
that in no event shall the aggregate Simulated Depletion allowances with respect to an oil or gas
property exceed the Partnership’s Simulated Basis of the property.

               (ii) The Partnership shall compute gain or loss attributable to the sale or other taxable
disposition of an oil or gas property by the Partnership based on the difference between the amount
realized from the disposition and the Simulated Basis of the property, as theretofore adjusted.

     6.2 Allocation of Net Profits and Net Loss From Operations. For purposes of maintaining the
Capital Accounts of the Partners and determining the rights of the Partners in the assets of the
Partnership, the Net Profit or Net Loss for each accounting period shall be allocated among the
Partners in the order of priority set forth below. Each item of income, gain, loss or expense
giving rise to the Net Profit or Net Loss shall be allocated among the Partners in the same
proportion that the Net Profit or Net Loss is allocated. Except as otherwise provided in this
Agreement, Net Profits or Net Losses shall be allocated among the Partners as follows:

          (a) Allocation of Net Profits. Net Profit for any accounting period shall be
allocated among the Partners in accordance with their respective Proportionate Shares in effect
during the accounting period.

          (b) Allocation of Net Loss. Net Loss for any accounting period shall be allocated
among the Partners with positive balances in their respective Capital Accounts in the same amounts
and in the same proportions as the net positive balances in the respective Capital Accounts of the
Partners. Any remaining Net Loss shall be allocated among the Partners in accordance with their
respective Proportionate Shares in effect during the accounting period.

          (c) Allocation of Tax Credits. Any tax credits available to the Partnership and any
tax credit recaptures for any accounting period shall be allocated among the Partners in accordance
with their respective Proportionate Shares in effect during the accounting period.

     6.3 Functional Allocations. Notwithstanding anything to the contrary in this Agreement, all
IDC claimed as expenses by the Partnership shall be allocated in full to the Unitholders, in
accordance with their Proportionate Shares. Any allocation not permitted under Treasury
Regulation § 1.704-1(b) or other applicable law shall be reallocated among Partners in compliance
therewith.

     6.4 Leasehold Acquisition and Start Up Costs. All Leasehold Acquisition Costs and all Start
Up Costs of the Partnership shall be allocated to DPI.

     6.5 Allocations to Comply with Regulations. In order to comply with the provisions of
Treasury Regulation §§ 1.704-1(b), 1.704-lT and 1.704-2, the following special allocations of
income, gain, loss and expense shall be made, notwithstanding the provisions of
Section 6.2.

          (a) Deficit Capital Account Allocations. Subject to the other provisions of this
Section 6.5, in accordance with Treasury Regulation § 1.704-1(b)(2)(ii)(d), no allocation
of expenses or losses shall be made pursuant to Section 6.2 to the extent that, as of the
end of the period to which the allocation relates, the allocation would cause or increase a net
deficit balance in a Partner’s Capital Account in excess of any dollar amount of the net deficit
balance that the Partner is obligated to restore under this Agreement. The expenses and losses
shall instead be allocated to any other Partner not subject to this limitation. For purposes of
this Section 6.5(a), each Partner’s Capital Account balance shall be determined by:

               (i) Adding to the Capital Account balance the amount of the Partner’s share (as determined
pursuant to Treasury Regulation § 1.704-2) of the Total Minimum Gain of the Partnership as of the
end of the period for which the determination is being made; and

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               (ii) Subtracting from the Capital Account balance (A) adjustments that are reasonably expected
to be made to the Partner’s Capital Account as of the end of the taxable year for depletion
allowances, loss or distribution of Code § 751 property or otherwise as provided in Treasury
Regulation § 1.704-1(b)(2)(d)(5), and (B) an amount equal to the excess of any distributions that,
as of the end of the period, reasonably are expected to be made to the Partner in any future period
over the Net Profits reasonably expected to be allocated to the Partner during (or prior to) the
period for which the distributions are expected to be made.

          (b) Qualified Income Offset Provision. If a Partner unexpectedly receives an
adjustment, allocation or distribution under this Agreement that causes or increases a net deficit
balance in the Partner’s Capital Account as of the end of the period to which the adjustment,
allocation or distribution relates in excess, of any dollar amount of the net deficit balance that
the Partner is obligated to restore under this Agreement, the Partner will be allocated items of
income (including gross income) and gain in an amount and manner sufficient to eliminate the net
deficit balance as quickly as possible. The provisions of Section 6.5(a) shall apply for
purposes of determining whether any adjustment, allocation or distribution would cause or increase
a net deficit balance in a Partner’s Capital Account.

          (c) Special Allocations of Nonrecourse Deductions. Notwithstanding any provision of
Section 6.2, Section 6.5(a) and Section 6.5(b), in compliance with Treasury
Regulation § 1.704-2, allocations of Nonrecourse Deductions shall be made among the Partners in the
same manner as Net Losses are allocated under Section 6.2.

          (d) Minimum Gain Chargeback. If there is a net decrease in the Minimum Gain of the
Partnership during any period, as determined pursuant to Treasury Regulation § 1.704-2(f), then
each Partner shall be allocated items of income and gain in accordance with the provisions of
Treasury Regulation § 1.704-2(g).

          (e) Special Allocations of Partner Nonrecourse Deductions. Notwithstanding any
provision of Section 6.2, Section 6.5(a) and Section 6.5(b), in compliance
with Treasury Regulation § 1.704-2(b), allocations of Partner Nonrecourse Deductions shall be made
among the Partners in accordance with the ratios in which the Partners or their affiliates share
the economic risk of loss with respect to the Partner Nonrecourse Liabilities to which the Partner
Nonrecourse Deductions are attributable.

          (f) Partner Nonrecourse Liability Minimum Gain Chargeback. If there is a net decrease
in the Partner Nonrecourse Liability Minimum Gain during any period, as determined pursuant to
Treasury Regulation § 1.704-2(i), then each Partner shall be allocated items of income and gain in
accordance with the provisions of Treasury Regulation § 1.704-2(i).

          (g) Subsequent Allocations. Any special allocations of items of income, gain, loss or
expense made pursuant to this Section 6.5 shall be taken into account in computing
subsequent allocations of income, gain, loss and expense pursuant to Section 6.2, so that
the net amount of any item of income, gain, loss and expense allocated to each Partner pursuant to
Section 6.2 and this Section 6.5 shall, to the extent possible, be equal to the
amount of the items of income, gain, loss and expense that would have been allocated to the Partner
pursuant to Section 6.2 if the special allocations of income, gain, loss or expense
required by this Section 6.5 had not been made.

          (h) Interpretation of Regulatory Allocations. The provisions of this
Section 6.5 are intended to comply with the requirements of Treasury
Regulation §§ 1.704-1(b), 1.704-1 T and 1.704-2 and shall be interpreted consistently therewith.

     6.6 Federal Income Tax Allocations. The allocations of income, gain, loss and expense made
pursuant to Section 6.2 through Section 6.5 are allocations of book income to be
made for accounting purposes to determine the respective balances in the Capital Accounts of the
Partners and to establish the rights of the Partners between themselves in the assets of the
Partnership. These allocations may be different from the allocations among the Partners of the
income, gain, loss, deduction, tax preference and tax credits of the Partnership for federal income
tax purposes. Allocations of income, gain, loss, deduction, tax preference and tax credits of the
Partnership for federal income tax purposes for each taxable year shall be made among the Partners
as follows:

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          (a) General Rules for Allocating Income, Loss, Etc. In general, all items of income,
gain, loss, deduction and tax preference of the Partnership for each taxable year shall be
allocated among the Partners for federal income tax purposes in the same manner as the book items
that give rise to the tax items are allocated among the Partners pursuant to Section 6.2
through Section 6.5.

          (b) Special Rules Where Tax Basis Differs From Book Value. If the Partnership’s
adjusted tax basis for federal income tax purposes in any of its property differs from the Book
Value of the property at the beginning of any taxable year, in determining each Partner’s
distributive share of the taxable income or loss (or items thereof) of the Partnership, each item
of income, gain, loss or deduction with respect to the property shall be allocated among the
Partners in a manner that takes into account the difference between the adjusted tax basis for
federal income tax purposes of the property and its Book Value, all as of the beginning of the
taxable year, as required by Code § 704(c) and any applicable Treasury Regulations thereunder or by
Treasury Regulation § 1.704-1(b)14)(i).

     6.7 Allocation of Profits, Losses and Tax Credits Upon Transfer of Partnership Interest. The
items of income, gain, loss, expense, deduction, tax preference and tax credit allocable under any
provisions of Section 6.2 through Section 6.6 to any interest in the Partnership
which may have been transferred during any period shall be allocated among the Persons who were the
holders of the interest during the period in a manner that takes into account the varying interests
of the Partners in the Partnership during the period, all in accordance with any Treasury
Regulations promulgated under Code § 706(d); provided that the allocation of gain or loss on the
disposition of any property in which the Partnership has a direct or indirect interest shall, to
the extent not prohibited under those regulations, be allocated among the Persons who are Partners
in the Partnership on the date the event giving rise to the gain or loss occurs in accordance with
the provisions of Section 6.2 through Section 6.6.

     6.8 Special Tax Audit Allocations. Notwithstanding anything contained in this Agreement to
the contrary, in the event that the federal taxable income of the Partnership (or any item thereof)
is adjusted as the result of an audit by the Service, the Partners’ Capital Accounts shall be
adjusted in a manner that reflects the adjustments as though corresponding book adjustments had
been originally reflected in the Net Profits or Net Losses of the Partnership determined pursuant
to Section 6.1.

     6.9 Interest. If, pursuant to applicable law, a portion of the amounts paid with respect to
any Partner’s capital contribution to the Partnership shall be deemed to constitute interest rather
than principal for federal income tax purposes, the interest income attributable thereto shall be
allocated to the Partner who shall have made the deemed interest payments, and the amount of the
interest income shall be taken into account in determining the amount of capital contribution made
by the Partner to the Partnership.

     6.10 Income Tax Effect. The Partners acknowledge the income tax consequences of the
allocations made by this Article VI and hereby agree to be bound by those provisions in
reporting their shares of Partnership profits and losses for federal income tax purposes.

     6.11 Distribution of Cash. Any cash of the Partnership that is not required to meet the
obligations of the Partnership or to maintain any reserves established pursuant to
Section 4.1(b)(viii) shall be distributed not less than quarterly to the Partners in
accordance with their Proportionate Shares. Pending distribution of funds, the Managing General
Partner may, but shall not be required to, invest the funds for the account of the Partnership in
savings accounts, money market accounts, prime commercial paper or U.S. government obligations.

ARTICLE VII – TRANSFER OF PARTNERS’ INTERESTS

     7.1 Withdrawal or Assignment by the Managing General Partner. The Managing General Partner
may not at any time resign or withdraw from the Partnership as the Managing General Partner, or at
any time assign or transfer all or any part of its interest as Managing General Partner, unless (a)
a Majority in Interest of the Unitholders shall have consented thereto, (b) the Managing General
Partner shall have provided an additional or successor managing general partner satisfactory to a
Majority in Interest of the Unitholders and (c) the Partnership shall have received a written
opinion of its counsel to the effect that the resignation, withdrawal, assignment or transfer would
not result in the Partnership being classified for federal income tax purposes as an association
taxable as a corporation and not as a partnership. Nothing contained herein shall not restrict or
prohibit a collateral assignment or pledge by the Managing General Partner of its economic rights
as a general partner in the Partnership,

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including its right to receive distributions of cash and properties.

     7.2 Removal of the Managing General Partner. At any time, a Majority in Interest of the
Unitholders may propose that the Managing General Partner be removed, with or without cause.
Within 30 days after receipt of any such proposal, the Managing General Partner shall call a
meeting of all Unitholders for the purpose of voting on the proposal. At the meeting, the
Unitholders, upon the affirmative vote of a Supermajority of the Unitholders, may remove the
Managing General Partner and continue the business of the Partnership and the Program with a
substitute managing general partner of the Partnership and substitute manager of the Program,
provided that the Managing General Partner shall receive, upon and as a condition to its removal,
in exchange for its interest in the Partnership and the Program, an undivided working interest in
the Project Wells equal to the combined Proportionate Shares in the Partnership and the Program.

     7.3 Restrictions on Transfer of Units. Except as provided in this Article VII, Units
of any Unitholder may not be transferred in whole or in part. Any transfer or purported transfer
of Units not made in accordance with this Article VII shall be null and void, and neither
the Partnership nor the Managing General Partner shall have any liability for any payments or
allocations in respect thereof to any Person who may have an interest in that payment or allocation
by reason of an attempted transfer or otherwise unless the transfer is made in accordance with this
Article VII. No foreclosure of a Partner’s interest in the Partnership by a creditor of
that Partner shall operate as a dissolution of the Partnership or release that Partner from any
obligations hereunder, and the Person acquiring any interest in the Partnership upon foreclosure
shall not thereby become a Partner or have any rights of a Partner hereunder, other than the right
to receive the Proportionate Share of that Partner in the Partnership items under
Article VI.

     7.4 Transfer of Units. Units may not be transferred except upon death, by operation of law or
by a natural person by gift to direct family members or to a trust for the benefit of direct family
members, provided that the transfer or assignment complies with applicable securities laws and does
not cause the Partnership to be treated as an association or a publicly traded partnership taxable
as a corporation for federal income tax purposes. Any transfer or assignment by a Unitholder shall
not confer upon the transferee or assignee any right to become a substituted Unitholder, except as
provided in this Section 7.4 and in Section 7.7, or release the assignor Unitholder
from his obligations under this Agreement. Subject to those restrictions, the Managing General
Partner will recognize an assignment of Units as of the last day of the calendar month following
receipt of notice of the assignment and all required documentation. If requested, the transferee
of Units may become a substituted Unitholder with the consent of the Managing General Partner.
Each Partner hereby consents to the execution on its behalf by the Managing General Partner of an
amendment hereto and any other instruments required for the purpose of admitting a transferee or
assignee of any interest in the Partnership as a substituted Partner hereunder.

     7.5 Documents Required. No sale or assignment of Units by a Unitholder shall be effective
until the assignor and assignee execute all certificates and other documents and perform all acts
that the Managing General Partner may deem appropriate, in its sole and absolute discretion, to
preserve the limited liability of LP Unitholders and the tax status of the Partnership after the
completion of the sale or assignment and to assure compliance with all applicable federal and state
securities laws. The costs and expenses of the Partnership and the Managing General Partner in
connection with any assignment shall be borne by the Assignee.

     7.6 Incapacity of Unitholders. If a Unitholder dies, his executor, administrator or trustee
or, if he is adjudicated incompetent, his committee, guardian or conservator or, if he becomes
bankrupt, the trustee or receiver of his estate, shall have all the rights of a Unitholder for the
purpose of settling or managing his estate and such power as the incapacitated Unitholder possessed
to assign the Units held by him and to join with an assignee in satisfying conditions precedent to
the assignee becoming a substituted Unitholder. The incapacity of a Unitholder by death,
incompetency or bankruptcy shall not dissolve the Partnership.

     7.7 Substituted Unitholders. No Unitholder shall have the right to substitute a purchaser,
assignee, transferee, donee, heir, legatee or other recipient of Units as a Unitholder in his
place. Any such purchaser, assignee, transferee, donee, legatee, distributee or other recipient of
Units shall be admitted to the Partnership as a substituted Unitholder only with the consent of the
Managing General Partner. If given, the consent by the Managing General Partner shall be binding
and conclusive without the consent of any Unitholder and may be evidenced by the execution by the
Managing General Partner of a certificate evidencing the admission of such Person as a substituted
Unitholder.

17

 

ARTICLE VIII – ACCOUNTING MATTERS

     8.1 Books and Records. During the term of the Partnership and for four years thereafter, the
Managing General Partner shall keep, or cause to be kept, full, accurate, complete and proper books
and accounts of all operations of the Partnership. The books shall be kept on an accrual
basis-calendar year. All Partners shall have access to the Partnership’s books and records at the
Partnership’s principal place of business during regular business hours and shall have the right to
review and copy all or part of them, except that any the audit shall be at the sole expense of the
Partner or Partners requesting same unless the audit is requested by the Partnership by vote of a
majority-in-interest of the Unitholders.

     8.2 Accounting Basis for Tax Reporting Purposes. The books and records and the financial
statements and reports of the Partnership shall be kept on the accrual basis.

     8.3 Elections. The Managing General Partner may cause the Partnership to make any elections
required or permitted to be made by the Partnership under the Code and not otherwise expressly
provided for in this Agreement in the manner that the Managing General Partner believes will be
most advantageous to the Partners.

     8.4 Bank Accounts. All funds of the Partnership shall be deposited in an account or accounts
at a bank or other financial institution selected by the Managing General Partner. No funds of the
Partnership shall be commingled with the funds of any other Person. All withdrawals from any such
account or accounts shall be made only upon a check or draft signed by the Managing General Partner
or by such Person or Persons as may be designated from time to time by the Managing General
Partner.

ARTICLE IX – DISSOLUTION AND LIQUIDATION

     9.1 Dissolution. The Partnership shall be dissolved and shall terminate and wind up its
affairs upon the first to occur of the following:

          (a) a determination by the Managing General Partner that the Partnership should terminate, and
the concurrence in that determination by a Majority in Interest of the Unitholders;

          (b) the sale, exchange, forfeiture or other disposition of all or substantially all the
properties of the Partnership;

          (c) the bankruptcy, insolvency or liquidation of any Partner, unless the other Partner elects
to continue the Partnership;

          (d) 30 years from the date of this Agreement; or

          (e) any event that results in the dissolution of the Partnership under the applicable law,
unless the Managing General Partner and a Majority in Interest of the Unitholders elect to continue
the Partnership.

     9.2 Liquidation.

          (a) Appointment of Liquidator. If the Partnership is dissolved upon the occurrence of
any of the circumstances described in Section 9.1, no further business shall thereafter be
conducted by the Partnership except for taking any action deemed necessary by the Managing General
Partner for winding up of the affairs of the Partnership and distributing its assets to the
Partners pursuant to the provisions of this Article IX. Upon the Partnership’s
dissolution, the Managing General Partner shall act as liquidator or, if it is unable to act in
that capacity, it shall appoint one or more liquidators, any of whom shall have full authority to
wind up the affairs of the Partnership and to make final distributions as provided herein.

          (b) Steps to Be Taken by Liquidator. Upon the dissolution of the Partnership, the
liquidator shall take the following steps:

               (i) Determine the interest of the Partners in the assets of the Partnership;

18

 

               (ii) Determine which Partnership assets should be retained or abandoned, and dispose of all
other Partnership properties and assets at the best cash price obtainable therefor:

               (iii) Pay all Partnership debts and liabilities, or otherwise make adequate provision
therefor;

               (iv) Determine the fair market value of any remaining Partnership assets based on estimates to
be conducted by an independent appraiser, using appropriate appraisal techniques and taking into
account the nature of the appraised property interests and the recovery of any associated oil and
gas reserves by primary, secondary and tertiary techniques, to the extent deemed feasible in
accordance with industry standards;

               (v) Adjust the Capital Account of each Partner, consistent with Section 9.2(b)(vi), to
reflect the fair market value of the Partner’s interest in any unliquidated assets of the
Partnership, by crediting or charging the Partner’s Capital Account with the amount that would have
been credited or charged to the Partner’s Capital Account if the Partnership’s properties and
assets to be distributed in kind had been sold at their fair market value immediately prior to the
distribution;

               (vi) Prepare a final statement of accounts showing the status of each Partner’s Capital
Account, as adjusted, and the amount, if any, owed by each Partner to the Partnership; and

               (vii) Distribute to each of the Partners the balance, if any, then remaining in its Capital
Account, as adjusted in accordance with this Section 9.2, provided that the distribution
may be made in cash or in kind as provided in Section 9.2(c), and the proportion of the
distribution made in cash to the Partners may vary as determined by the liquidator in its sole
discretion.

          (c) Distributions in Kind. In the event the Partnership properties are not adequately
divisible to effect full repayment of the Capital Account balances of the Partners, then the
liquidator shall transfer to the Partners all of the cash of the Partnership, and shall convey and
assign to the Partners the remaining Partnership assets to be held by the Partners as tenants in
common, in either case in proportion to the balances in their respective Capital Accounts.

          (d) Payment of a Partner’s Indebtedness. Notwithstanding the foregoing provisions of
this Section 9.2, if any Partner shall be indebted to the Partnership, then, until payment
of the indebtedness by that Partner, the liquidator shall retain the Partner’s distributive share
of Partnership properties and assets and, after applying the cost of operation of the properties
and assets during the period of the liquidation against the income therefrom, the balance of the
income and any cash assets shall be applied in liquidation of the indebtedness of the Partner, and
if the amount has not been paid or otherwise liquidated in full, the liquidator may sell the
remaining assets allocable to the Partner at public or private sale at the best price immediately
obtainable, as determined in the sole judgment of the liquidator. The proceeds of the sale that
are necessary to liquidate the Partner’s indebtedness shall then be so applied, and the balance of
the proceeds, if any, shall be distributed to the Partner, reduced by the amount of any debit
balance in its Capital Account.

          (e) Termination of the Partnership. The liquidator shall otherwise comply with all
requirements of the Kentucky Act, or other applicable law, pertaining to the winding up of a
general partnership. Upon completion of the liquidation procedures, the Partnership shall be
terminated.

     9.3 Compliance With Regulations.

          (a) Timing. In the event the Partnership is liquidated within the meaning of Treasury
Regulation § 1.704-1(b)(2)(ii)(g), the liquidator shall arrange for distributions to be made to the
Partners who have positive Capital Account balances, in compliance with Treasury
Regulation § 1.704-1(b)(2)(ii)(b)(2), before the later of the last day of the Partnership’s taxable
year in which the liquidation occurred or the 90th day following the date of the
liquidation.

          (b) Distributions in Trust. In the discretion of the Managing General Partner,
distributions pursuant to Section 9.3(a) may be made to a trust established for the benefit
of the Partners for the purposes of liquidating Partnership assets, collecting amounts owed to the
Partnership and paying any contingent or unforeseen

19

 

liabilities or obligations of the Partnership or of the Partners, provided it receives an
opinion of counsel to the effect that the trust will not be taxed as an association taxable as a
corporation. The assets of the trust shall be distributed to the Partners from time to time, in
the reasonable discretion of the trustee of the trust, in the same proportions as the amount
distributed to the trust by the Partnership would otherwise have been distributed to the Partners
pursuant to this Agreement; and a portion or all of the assets may be withheld by the trustee of
the trust to provide a reasonable reserve for liabilities and expenses.

     9.4 Return of Capital Contributions Solely Out of Partnership Assets. A Partner shall look
solely to the properties and assets of the Partnership for the return of its capital contribution
and, if the properties and assets of the Partnership remaining after the payment or discharge of
the debts and liabilities of the Partnership are insufficient to return its capital contribution,
it shall have no recourse against the Managing General Partner, its affiliates or any other Partner
or Person for that purpose.

     9.5 Dissolution Followed by Continuation. In the event that the Partnership shall be
dissolved by reason of the occurrence of any of the circumstances described in Section 9.1
or for any other reason, if the Managing General Partner and a Majority in Interest of the
Unitholders shall agree thereto, the Partnership shall not terminate and wind up its affairs
pursuant to Section 9.2 but shall be modified upon the terms mutually agreed to by those
Partners and, as so modified, shall continue its business as if the dissolution had not occurred.

ARTICLE X – MISCELLANEOUS PROVISIONS

     10.1 Notices. Notices, requests, reports or other communications required to be given or made
hereunder shall be in writing and shall be deemed to be delivered when delivered by hand or when
properly addressed and posted by U.S. mail, postage prepaid, return receipt requested, to the
Person being given the notice at its last known address. Any notice to the Partnership or to the
Managing General Partner shall be given at the address shown as the Partnership’s principal office.

     10.2 Nature of Interest of Partners. The interest of each Partner in the Partnership shall be
deemed to be personal property.

     10.3 Waiver of Right to Partition. Each Partner waives the benefit of any provisions of law
that may provide for partition of real or personal property and agrees that it will not resort to
any action at law or equity to partition any property subject to this Agreement. The foregoing
waiver shall survive the termination and dissolution of the Partnership

     10.4 Governing Law. This Agreement shall be construed in accordance with and governed in all
respects by the laws of the Commonwealth of Kentucky.

     10.5 Successors in Interest. Each and all of the covenants, agreements, terms and provisions
of this Agreement shall be binding on and inure to the benefit of the parties hereto and, to the
extent permitted by this Agreement, their respective successors and assigns.

     10.6 Integration. This Agreement constitutes the entire agreement among the parties
pertaining to the subject matter hereof and supersedes all prior and contemporaneous agreements and
understandings of the parties in connection herewith, except that each Unitholder hereby makes, for
the benefit of the Partnership and the Managing General Partner, each and every representation and
warranty of that Unitholder in his Subscription Agreement in the form attached as Exhibit H
to the PPM, as fully as though set forth herein.

     10.7 Amendments. Any amendment or supplement to this Agreement shall be in writing and shall
be signed by or on behalf of each of the parties. Except as otherwise provided in
Section 4.1(b), Section 5.4(a),
Section 5.4(b) and Section 7.3, any
amendment to this Agreement shall be effective only if concurred in by all of the Partners.

     10.7 Severability. If for any reason any provision of this Agreement that is not material to
the purpose or business of the Partnership is determined to be invalid and contrary to any existing
or future law, the invalidity shall not impair the operation of or affect those portions of this
Agreement that are not determined to be invalid.

20

 

     10.8 Headings. The headings in this Agreement are inserted for descriptive purposes only and
shall not control or alter the meaning of any provision hereof.

     10.9 Rights and Remedies Cumulative. The rights and remedies provided under this Agreement
are cumulative, and the use of any one right or remedy by a Partner shall not preclude or waive its
right to use any or all other remedies, whether provided for herein, by law or otherwise.

     IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the
day and year first above written.

	 	 	 	 	 	 	 
	 	 	PARTNERSHIP:
	 
	 	 	 	 	 	 
	 	 	NGAS Partners ______, Ltd.
	 
	 	 	 	 	 	 
	 	 	By:	 	Daugherty Petroleum, Inc.,
	 	 	 	 	Managing General Partner
	 
	 	 	 	 	 	 
	 

	 	 	 	By:	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	 	 	William S. Daugherty,
	 

	 	 	 	 	 	Chairman of the Board
	 
	 	 	 	 	 	 
	 	 	MANAGING GENERAL PARTNER:
	 
	 	 	 	 	 	 
	 	 	Daugherty Petroleum, Inc.
	 
	 	 	 	 	 	 
	 

	 	By	 	 	 	 
	 	 	 	 	 
	 	 	 	 	William G. Barr III,

	 	 	 	 	Chief Executive Officer
	 
	 	 	 	 	 	 
	 	 	INITIAL LIMITED PARTNER:
	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	 
	 	 	James W. Howes
	 
	 	 	 	 	 	 
	 	 	UNITHOLDERS:
	 
	 	 	 	 	 	 
	 	 	By:	 	 Daugherty Petroleum, Inc.
	 	 	 	 	As Attorney-in-Fact for the Unitholders

	 	 	 	 	Listed on Schedule A and Schedule B hereto
	 
	 	 	 	 	 	 
	 

	 	By	 	 	 	 
	 	 	 	 	 
	 	 	 	 	William G. Barr III,

	 	 	 	 	Chief Executive Officer

21EX-10.13

 

Exhibit 10.13

FORM OF

ASSIGNMENT OF DRILLING RIGHTS

     This ASSIGNMENT OF DRILLING RIGHTS is entered into as of ___, 200___by and between
NGAS Partners ___Drilling Program, a Kentucky general partnership (the
“Program”), and Daugherty Petroleum, Inc., a Kentucky corporation (“DPI”).

RECITALS

     A. DPI has organized NGAS Partners ___, Ltd., a Kentucky limited partnership (the
“Partnership”), to invest, through the Program, in a portfolio of natural gas development
wells (“Project Wells”) to be drilled by DPI on drilling sites located in the southern
portion of the Appalachian basin (the “Project Areas”).

     B. The Partnership is being capitalized through a private placement of a minimum of ___ units
of general and limited partner interests (“Units”) at a subscription price of $  per
Unit for $___and a maximum of ___ Units for $___(the “Private Placement”), on
the terms described in a Private Placement Memorandum of the Partnership dated ___ 200___(the
“PPM”).

     C. The Program is being capitalized under the terms of a partnership agreement of even date
herewith between DPI and the Partnership (the “Program Agreement”), providing for the
Partnership’s contribution of subscription proceeds from each incremental closing of Units in the
Private Placement (each, a “Closing”), and for DPI’s proportionate contribution of $___
for each Unit issued at that Closing, representing ___% of total Program capital for Project Wells.

     D. The Program has engaged DPI to drill and operate the Project Wells under the terms of a
joint drilling and operating agreement of even date herewith (the “Project JOA”), providing
for DPI to use its best efforts to drill all of the Project Wells to total depth by the end of
___ 200___and to install production lines and associated compression and dehydration equipment for
connecting completed Project Wells to its existing gathering systems as expeditiously as possible,
based on projected drilling and completion costs (the “AFEs”) to be specified by DPI for
each Project Well under the terms of the Project JOA.

     E. The Project JOA provides for the Program’s participation in the Project Wells on a
“cost-plus” 30% basis, entitling DPI to payments from the Program in an amount equal to 130% of the
AFEs attributable to the Programs working interests in the Project Wells (the “Program
Position”), which will be subject to proportionate reduction for Project Wells in Leatherwood
upon exercise of third-party participation rights under the farmout covering DPI’s interests in
that Project Area (the “Participating Interests”).

     F. The parties desire to enter into this Assignment of Drilling and Operating Rights (the
“Agreement”) to provide for DPI’s assignment to the Program of drilling and operating
rights on the drilling sites designated and to be designated herein, depending on the number of
Units sold in the Private Placement (the “Prospects”).

     Accordingly, in consideration of their mutual promises and intending to be legally bound, the
parties hereby agree as follows:

AGREEMENT

     1. Construction and Definitions. Unless otherwise expressly provided herein, all references
to Recitals, Sections and Schedules refer to recitals, sections and schedules of this Agreement.
As used in this Agreement, the following terms have the respective meanings set forth below:

     “AFE” stands for “authorization for expenditure” and means the projected costs for
drilling and completing a Project Well and furnishing all labor, well equipment and production
facilities necessary to produce the well to sales through DPI’s field-wide gathering systems.

 

 

     “Agreement” means this Assignment of Drilling Rights, as amended and or supplemented
from time to time.

     “Closing” has the meaning set forth in Recital C.

     “DPI” means Daugherty Petroleum, Inc., a Kentucky corporation, and its successors and
assigns.

     “DPI Position” means the working interest of DPI in Project Wells drilled in the
Project Areas, as established under the Program Agreement and as adjusted for Participating
Interests, for AFE variances under the True-Up Account to be maintained hereunder and for the
reversionary interest of DPI in each Project Area after Payout under the terms of the Program
Agreement.

     “Participating Interests” has the meaning set forth in Recital E.

     “Partnership Position” means the working interest of the Partnership in Project Wells
drilled in the Project Areas, as established under the Program Agreement and as adjusted for
Participating Interests, for AFE variances under the True-Up Account to be maintained hereunder and
for the reversionary interest of DPI in each Project Area after Payout under the terms of the
Program Agreement.

     “Partnership” means a NGAS Partners ___, Ltd., a Kentucky limited partnership, and
its successors and assigns.

     “Payout” means the point when each holder of Units has received cumulative
distributions from the Partnership aggregating 110% of the Unit subscription price or $  per
Unit.

     “Private Placement,” “PPM” and “Units” have the respective meanings
set forth in Recital B.

     “Program” means a NGAS Partners ___Drilling Program, a Kentucky general
partnership, and its successors and assigns.

     “Program Agreement” has the meaning set forth in Recital C.

     “Program Position” has the meaning set forth in Recital E.

     “Project Areas” and “Project Wells” have the respective meanings set forth in
Recital A.

     “Project JOA” has the meaning set forth in Recital D.

     “Prospects” has the meanings set forth in Recital F.

     “True-Up Account” has the meaning set forth in Section 2.

     The term “working interest” means an interest in an oil and gas leasehold or well
entitling the holder to receive a specified percentage of the sale proceeds from oil or gas
produced from the leasehold or well and obligating the holder to bear a specified percentage of the
costs of development, operation and production, including the operating costs and expenses
attributable to the underlying royalty and overriding royalty interests.

     1. Assignment of Drilling Rights.

          (a) Initial Assignment. DPI hereby assigns and conveys to the Program, on the terms
and conditions of this Agreement, all of its right, title and interest in and to the Program
Position in the specific Prospects identified in Schedule A, representing the right to
participate as a working interest owner of the Project Wells drilled thereon, at the working
interest percentages attributable to the Program Position in the specified Prospects, and the
Program hereby assumes the obligations of DPI as a working interest owner of the Program Position
in those Project Wells under the Project JOA.

2

 

          (b) Incremental Assignments. At any incremental Closing after the date hereof, DPI
shall contemporaneously assign and convey to the Program, on the terms and conditions of this
Agreement, of all its right, title and interest in and to the Program Position in the Prospects to
be identified by supplement to Schedule A, representing the right to participate as a
working interest owner of the Project Wells drilled thereon, at the working interest percentages
attributable to the Program Position in the specified Prospects, and the Program hereby assumes the
obligations of DPI as a working interest owner of the Program Position in those Project Wells under
the Project JOA.

          (c) Prospect Selection. By its acceptance of the assignments hereunder, the Program
acknowledges that DPI will have broad discretion on the selection of the Prospect locations within
the Project Areas and the timing of their selection, based on a variety of criteria that may
include potential spacing requirements on available Prospects, timely approval of permits by state
agencies, updated review of the latest geological and geophysical data from its recent drilling
initiatives in or near the Project Areas and any drilling commitments under oil and gas leases or
farmouts covering the Project Areas.

          (d) Participating Interests. By its acceptance of the assignments hereunder, the
Program acknowledges that the owners of any Participating Interests will be entitled to all the
right, title and interest attributable thereto under the leases and farmouts for certain Project
Areas, subject to their proportionate share of all drilling and completion costs and operating
expenses attributable thereto.

          (e) Royalty Interests. By its acceptance of the assignments hereunder, the Program
acknowledges that the Prospects are subject to the terms and conditions of the Project JOA and the
oil and gas leases or farmouts covering the Project Areas, including all mineral, royalty and
overriding royalty interests provided therein.

     2. True-Up Account. DPI will maintain an account hereunder (the “True-Up Account”),
reflecting a credit for the Partnership’s proportionate share of any AFEs for Project Wells in
excess of their actual drilling and completion costs and a debit for its share of any drilling and
completion costs for Project Wells in excess of their AFEs. Any net credit balance in the True-Up
Account for all Project Wells will be applied to proportionately increase the Partnership Position
in the last Project Wells, with a corresponding decrease in the DPI Position in those Project
Wells. Any net deficit balance in the True-Up Account for all Project Wells will be borne by DPI
and applied to proportionately increase the DPI Position in the last Project Wells, with a
proportionate decrease in the Partnership Position in those Project Wells. Adjustments under the
True-Up Account in any Project Area will be applied on a field-wide basis to 30% of the Project
Wells last drilled on the underlying Prospects. Any variation between anticipated and actual
Participating Interests shall also be reflected in proportionate adjustments to the Partnership
Position and the DPI Position in those Project Wells.

     3. Miscellaneous Provisions.

          (a) Notices. Any notice given under this Agreement shall be made in writing and shall
be deemed to have been duly given or made if delivered personally, mailed with postage prepaid by
registered or certified mail or sent by courier or facsimile to a party at its address set forth or
provided below. Any notice so sent shall be deemed to have been given or delivered (a) at the time
that it is personally delivered, (b) within two business days after the date deposited in the
United States mail or one business day after deposit with an overnight courier if sent by mail or
courier or (c) when receipt is acknowledged, if sent by facsimile. A party may change its address
by giving notice in writing, stating its new address, to the other party.

     If to DPI:

Daugherty Petroleum, Inc.

120 Prosperous Place — Suite 201

Lexington, Kentucky 40509

Attention: William G. Barr III, CEO

Fax: (859) 263-4228

     If to the Program:

NGAS Partners ______ Drilling Program

3

 

c/o Daugherty Petroleum, Inc.

120 Prosperous Place — Suite 201

Lexington, Kentucky 40509

Attention: William S. Daugherty, Chairman

Fax:: (859) 263-4228

          (b) Governing Law. This Agreement shall be construed in accordance with and governed
in all respects by the laws of the Commonwealth of Kentucky.

          (c) Successors in Interest. Each and all of the covenants, agreements, terms and
provisions of this Agreement shall be binding on and inure to the benefit of the parties hereto
and, to the extent permitted by this Agreement, their respective successors and assigns.

          (d) Integration. This Agreement, including the Schedule hereto, constitutes the
entire agreement between the parties pertaining to the subject matter hereof and supersedes all
prior and contemporaneous agreements and understandings of the parties in connection herewith.

          (e) Amendments. Any amendment or supplement to this Agreement shall be in writing and
shall be signed by or on behalf of each of the parties.

          (f) Headings. The headings in this Agreement are inserted for descriptive purposes
only and shall not control or alter the meaning of any provision hereof.

     IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the
day and year first above written.

	 	 	 	 	 	 	 
	 	 	NGAS Partners ______ Drilling Program
	 
	 	 	 	 	 	 
	 	 	By:	 	Daugherty Petroleum, Inc.,
	 	 	 	 	Program Manager
	 
	 	 	 	 	 	 
	 

	 	 	 	By:	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	 	 	William S. Daugherty,

Chairman of the Board
	 
	 	 	 	 	 	 
	 	 	Daugherty Petroleum, Inc.
	 
	 	 	 	 	 	 
	 

	 	By	 	 	 	 
	 	 	 	 	 
	 	 	 	 	William G. Barr III,

	 	 	 	 	Chief Executive Officer

4

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