Document:

exv10wxay

 

Exhibit 10(a)

SECOND AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT

AGREEMENT

          This SECOND AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT (“Amendment”), dated as
of February 15, 2008, among PULTE HOMES, INC., a Michigan corporation (the “Borrower”), the Lenders
that are identified on the signature pages hereto and JPMORGAN CHASE BANK, N.A., as Administrative
Agent (the “Administrative Agent”).

RECITALS

          WHEREAS, the Borrower, the Lenders identified on the signature pages hereto, certain other
Lenders and Administrative Agent are parties to that certain Third Amended and Restated Credit
Agreement dated as of June 20, 2007 (as amended by First Amendment to Third Amended and Restated
Credit Agreement dated November 21, 2007 and as it may be further amended, renewed and restated
from time to time, the “Credit Agreement”) (all capitalized terms not defined herein shall have the
meanings given such terms in the Credit Agreement);

          WHEREAS, the Borrower and the Lenders desire to amend the Credit Agreement for the purposes
hereinafter set forth;

          NOW, THEREFORE, for good and valuable consideration, the parties hereto hereby agree as
follows:

     1. Aggregate Commitment. Effective as of the date hereof, the Aggregate Commitment is
hereby reduced to $1,600,000,000 and Schedule 1.1(a) of the Credit Agreement is amended and
restated in its entirety and replaced by Schedule 1.1(a) attached hereto.

     2. Definitions. (a) The following definition in Section 1.1 of the Credit Agreement
is hereby amended and restated in its entirety as follows:

     “Debt to Capitalization Ratio” means, as of any date, the ratio (stated as a
percentage) of (a) Indebtedness of the Credit Parties (other than to the REITs, provided
such REIT has complied with Section 6.1(h)) less (i) 50% of Qualified
Subordinated Debt and (ii) all Unrestricted Cash held by the Credit Parties in excess of
$25,000,000 but not to exceed $300,000,000 to (b) Capitalization.

     (b) The following defined terms are added to Section 1.1 of the Credit Agreement:

     “Deferred Tax Valuation Allowance” means any valuation allowance applied to
deferred tax assets as determined in accordance with GAAP and shown on the financial
statements of the Borrower.

     “Unrestricted Cash” means cash and Cash Equivalents of the Credit Parties that
are free and clear of all Liens (other than Liens securing the Credit Party Obligations) and
not subject to any restrictions on the use thereof to pay Indebtedness and other obligations
of the Credit Parties.

 

 

     3. Permitted Debt to Capitalization Ratio. Notwithstanding anything to the contrary
contained in Section 5.2(a) of the Credit Agreement, if the first fiscal quarter of the Borrower in
which the Permitted Debt to Capitalization Ratio would, pursuant to the provisions of Section
5.2(a)(i), decrease is either the first or second fiscal quarter of 2008 (such quarter, whether the
first or second quarter of 2008, but not both, being the “Affected Quarter”), such decrease
shall not occur with respect to the Affected Quarter, and the Permitted Debt to Capitalization
Ratio shall remain unchanged until the first fiscal quarter (if any) after the Affected Quarter in
which the Permitted Debt to Capitalization Ratio would decrease pursuant to the provisions of
Section 5.2(a)(i).

     4. Tangible Net Worth. Section 5.2(b) of the Credit Agreement is hereby
amended and restated in its entirety as follows:

     (b) Tangible Net Worth. As of the last day of each fiscal quarter of the
Borrower (beginning with the fiscal quarter ended December 31, 2007), Tangible Net Worth
shall be greater than or equal to the following (the “Minimum Tangible Net Worth”): the sum
of (i) $4,000,000,000, plus (ii) 50% of the cumulative Net Income of the Borrower and its
Subsidiaries (without deduction for losses and excluding the effect of any decrease in any
Deferred Tax Valuation Allowance) earned for each completed fiscal quarter subsequent to
December 31, 2007 to the date of determination, minus (iii) the cumulative net amount of any
Deferred Tax Valuation Allowance as of the date of determination; provided, however, that in
no event shall the Minimum Tangible Net Worth be less than $2,900,000,000.

     5. Conditions Precedent. This Amendment shall be effective as of the date (“Amendment
Effective Date”) upon which the following conditions are satisfied:

     (a) The Administrative Agent shall have received from the Borrower and the Required Lenders a
counterpart of this Amendment signed on behalf of each such party.

     (b) The Administrative Agent shall have received from the Guarantors the Consent and Agreement
substantially in the form attached hereto as Exhibit A.

     (c) The Administrative Agent shall have received such documents and certificates as the
Administrative Agent or its counsel may reasonably request relating to the organization or
formation, existence and good standing of the Borrower, the authorization of this Amendment and any
other legal matters relating to the Borrower, the Agreement or this Amendment, all in form and
substance satisfactory to the Administrative Agent and its counsel.

     (d) The Administrative Agent shall have received all fees and other amounts due and payable on
or prior to the Amendment Effective Date, including reimbursement or payment of all out-of-pocket
expenses required to be reimbursed or paid by the Borrower hereunder.

          The Administrative Agent shall notify the Borrower and the Lenders of the Amendment Effective
Date, and such notice shall be conclusive and binding.

     6. Representations and Warranties. The Borrower hereby represents and warrants that
as of the date hereof:

2

 

     (a) The representations and warranties of the Borrower and the other Credit Parties in the
Credit Agreement and the other Credit Documents are true and correct in all material respects.

     (b) There exists no Default or Event of Default.

     7. Ratification. The Credit Agreement, as amended hereby, is hereby ratified and
remains in full force and effect.

     8. Counterparts. This Amendment may be executed in any number of counterparts, all of
which taken together shall constitute one agreement and any of the parties hereto may execute this
Amendment by signing any such counterpart.

     9. Choice of Law. This Amendment and the other Credit Documents shall be construed in
accordance with the internal laws (but without regard to the conflict of laws provisions other than
Section 5-1401 of the New York General Obligations Law ) of the State of New York, but giving
effect to federal laws applicable to national banks.

3

 

          IN WITNESS WHEREOF, the Borrower and the undersigned Lenders have caused this Amendment to be
duly executed as of the date first above written.

	 	 	 	 	 
	 	Borrower:

PULTE HOMES, INC.

 	 
	 	By:  	/s/ Bruce E. Robinson
 	 
	 	 	Vice President and Treasurer 	 
	 	 	 	 

 

 

	 	 	 	 	 

SIGNATURE PAGE TO SECOND AMENDMENT TO THIRD AMENDED AND

RESTATED CREDIT AGREEMENT WITH PULTE HOMES, INC.

	 	 	 	 	 
	 	Lenders:

JPMORGAN CHASE BANK, N.A.,

As Lender and Administrative Agent

 	 
	 	By:  	/s/ Kimberly Turner
 	 
	 	 	Executive Director 	 
	 	 	 	 

 

 

	 	 	 	 	 

SIGNATURE PAGE TO SECOND AMENDMENT TO THIRD AMENDED AND

RESTATED CREDIT AGREEMENT WITH PULTE HOMES, INC.

	 	 	 	 	 
	 	CITICORP NORTH AMERICA, INC.

 	 
	 	By:  	/s/ Marni Mcmanus
 	 
	 	 	Vice President 	 
	 	 	 	 

 

 

	 	 	 	 	 

SIGNATURE PAGE TO SECOND AMENDMENT TO THIRD AMENDED AND

RESTATED CREDIT AGREEMENT WITH PULTE HOMES, INC.

	 	 	 	 	 
	 	BANK OF AMERICA, N.A.

 	 
	 	By:  	/s/ Eyal Namordi
 	 
	 	 	Senior Vice President 	 
	 	 	 	 
	 

 

 

SIGNATURE PAGE TO SECOND AMENDMENT TO THIRD AMENDED AND

RESTATED CREDIT AGREEMENT WITH PULTE HOMES, INC.

	 	 	 	 	 
	 	BARCLAYS BANK PLC

 	 
	 	By:  	/s/ Nicholas Bell
 	 
	 	 	Director 	 
	 	 	 	 

 

 

	 	 	 	 	 

SIGNATURE PAGE TO SECOND AMENDMENT TO THIRD AMENDED AND

RESTATED CREDIT AGREEMENT WITH PULTE HOMES, INC.

	 	 	 	 	 
	 	BNP PARIBAS

 	 
	 	By:  	/s/ Berangere Allen
 	 
	 	 	Vice President 	 
	 	 	 	 
	 
	 	 	 
	 	By:  	                          /s/ Melissa Balley
 	 
	 	 	Vice President 	 
	 	 	 	 

 

 

	 	 	 	 	 

SIGNATURE PAGE TO SECOND AMENDMENT TO THIRD AMENDED AND

RESTATED CREDIT AGREEMENT WITH PULTE HOMES, INC.

	 	 	 	 	 
	 	CALYON NEW YORK BRANCH

 	 
	 	By:  	/s/ Robert S. Smith
 	 
	 	 	Managing Director 	 
	 	 	 	 
	 
	 	 	 
	 	By:  	                       /s/ Brian Myers
 	 
	 	 	Managing Director 	 
	 	 	 	 

 

 

	 	 	 	 	 

SIGNATURE PAGE TO SECOND AMENDMENT TO THIRD AMENDED AND

RESTATED CREDIT AGREEMENT WITH PULTE HOMES, INC.

	 	 	 	 	 
	 	COMERICA BANK

 	 
	 	By:  	/s/ Charles Weddell
 	 
	 	 	Vice President 	 
	 	 	 	 

 

 

	 	 	 	 	 

SIGNATURE PAGE TO SECOND AMENDMENT TO THIRD AMENDED AND

RESTATED CREDIT AGREEMENT WITH PULTE HOMES, INC.

	 	 	 	 	 
	 	DEUTSCHE BANK TRUST COMPANY 

AMERICAS

 	 
	 	By:  	/s/ Omayra Laucella
 	 
	 	 	Vice President 	 
	 	 	 	 
	 
	 	 	 
	 	By:  	                                      /s/ Erin Morrissey
 	 
	 	 	Vice President 	 
	 	 	 	 

 

 

	 	 	 	 	 

SIGNATURE PAGE TO SECOND AMENDMENT TO THIRD AMENDED AND

RESTATED CREDIT AGREEMENT WITH PULTE HOMES, INC.

	 	 	 	 	 
	 	THE ROYAL BANK OF SCOTLAND PLC

 	 
	 	By:  	/s/ William McGinty
 	 
	 	 	Senior Vice President 	 
	 	 	 	 

 

 

	 	 	 	 	 

SIGNATURE PAGE TO SECOND AMENDMENT TO THIRD AMENDED AND

RESTATED CREDIT AGREEMENT WITH PULTE HOMES, INC.

	 	 	 	 	 
	 	UBS LOAN FINANCE LLC

 	 
	 	By:  	/s/ Irja R. Otsa
 	 
	 	 	Associate Director 	 
	 	 	 	 
	 
	 	 	 
	 	By:  	                       /s/ Mary E. Evans
 	 
	 	 	Associate Director 	 
	 	 	 	 
	 

 

 

SIGNATURE PAGE TO SECOND AMENDMENT TO THIRD AMENDED AND

RESTATED CREDIT AGREEMENT WITH PULTE HOMES, INC.

	 	 	 	 	 
	 	COUNTRYWIDE BANK, F.S.B.

 	 
	 	By:  	/s/      Douglas Dixon
 	 
	 	 	Senior Vice President 	 
	 	 	 	 

 

 

	 	 	 	 	 

SIGNATURE PAGE TO SECOND AMENDMENT TO THIRD AMENDED AND

RESTATED CREDIT AGREEMENT WITH PULTE HOMES, INC.

	 	 	 	 	 
	 	MERRILL LYNCH BANK USA

 	 
	 	By:  	/s/      Derek Befus
 	 
	 	 	Vice President 	 
	 	 	 	 

 

 

	 	 	 	 	 

SIGNATURE PAGE TO SECOND AMENDMENT TO THIRD AMENDED AND

RESTATED CREDIT AGREEMENT WITH PULTE HOMES, INC.

	 	 	 	 	 
	 	THE BANK OF TOKYO-MITSUBISHI UFJ,

LTD.

 	 
	 	By:  	/s/      Thomas Danielson
 	 
	 	 	Authorized Signatory 	 
	 	 	 	 

 

 

	 	 	 	 	 

SIGNATURE PAGE TO SECOND AMENDMENT TO THIRD AMENDED AND

RESTATED CREDIT AGREEMENT WITH PULTE HOMES, INC.

	 	 	 	 	 
	 	GUARANTY BANK

 	 
	 	By:  	/s/      Ross Evans
 	 
	 	 	Vice President 	 
	 	 	 	 

 

 

	 	 	 	 	 

SIGNATURE PAGE TO SECOND AMENDMENT TO THIRD AMENDED AND

RESTATED CREDIT AGREEMENT WITH PULTE HOMES, INC.

	 	 	 	 	 
	 	LLOYDS TSB BANK PLC

 	 
	 	By:  	/s/         Nicholas J. Bruce
 	 
	 	 	Vice President 	 
	 	 	 	 
	 
	 	 	 
	 	By:  	                    /s/         Jonathan Smith
 	 
	 	 	Assistant Vice President 	 
	 	 	 	 

 

 

	 	 	 	 	 

SIGNATURE PAGE TO SECOND AMENDMENT TO THIRD AMENDED AND

RESTATED CREDIT AGREEMENT WITH PULTE HOMES, INC.

	 	 	 	 	 
	 	MIZUHO CORPORATE BANK, LTD.

 	 
	 	By:  	/s/             Noel Purcell
 	 
	 	 	Authorized Signatory 	 
	 	 	 	 

 

 

	 	 	 	 	 

SIGNATURE PAGE TO SECOND AMENDMENT TO THIRD AMENDED AND

RESTATED CREDIT AGREEMENT WITH PULTE HOMES, INC.

	 	 	 	 	 
	 	PNC BANK, NATIONAL ASSOCIATION

 	 
	 	By:  	/s/      Luis Donoso
 	 
	 	 	Vice President 	 
	 	 	 	 

 

 

	 	 	 	 	 

SIGNATURE PAGE TO SECOND AMENDMENT TO THIRD AMENDED AND

RESTATED CREDIT AGREEMENT WITH PULTE HOMES, INC.

	 	 	 	 	 
	 	NATIXIS (f/k/a NATEXIS BANQUES

POPULAIRES)

 	 
	 	By:  	/s/              Marie-Edith Dugény
 	 
	 	 	Managing Director 	 
	 	 	 	 
	 
	 	 	 
	 	By:  	                    /s/              Timothée Delpont
 	 
	 	 	Associate 	 
	 	 	 	 

 

 

	 	 	 	 	 

SIGNATURE PAGE TO SECOND AMENDMENT TO THIRD AMENDED AND

RESTATED CREDIT AGREEMENT WITH PULTE HOMES, INC.

	 	 	 	 	 
	 	WASHINGTON MUTUAL BANK

 	 
	 	By:  	/s/          John L. Thomas
 	 
	 	 	Vice President 	 
	 	 	 	 

 

 

	 	 	 	 	 

SIGNATURE PAGE TO SECOND AMENDMENT TO THIRD AMENDED AND

RESTATED CREDIT AGREEMENT WITH PULTE HOMES, INC.

	 	 	 	 	 
	 	FIFTH THIRD BANK, a Michigan Banking Corporation

 	 
	 	By:  	/s/      Brian Jelinski
 	 
	 	 	Assistant Vice President 	 
	 	 	 	 
	 

 

 

SIGNATURE PAGE TO SECOND AMENDMENT TO THIRD AMENDED AND

RESTATED CREDIT AGREEMENT WITH PULTE HOMES, INC.

	 	 	 	 	 
	 	REGIONS BANK

 	 
	 	By:  	/s/ Daniel McClurkin
 	 
	 	 	Assistant Vice President 	 
	 	 	 	 

 

 

	 	 	 	 	 

SIGNATURE PAGE TO SECOND AMENDMENT TO THIRD AMENDED AND

RESTATED CREDIT AGREEMENT WITH PULTE HOMES, INC.

	 	 	 	 	 
	 	CITY NATIONAL BANK

 	 
	 	By:  	/s/ Xavier Barrera
 	 
	 	 	Vice President 	 
	 	 	 	 

 

 

	 	 	 	 	 

SIGNATURE PAGE TO SECOND AMENDMENT TO THIRD AMENDED AND

RESTATED CREDIT AGREEMENT WITH PULTE HOMES, INC.

	 	 	 	 	 
	 	COMPASS BANK, an Alabama banking corporation

 	 
	 	By:  	/s/ Steven J. Heslep
 	 
	 	 	Senior Vice President 	 
	 	 	 	 

 

 

	 	 	 	 	 

SIGNATURE PAGE TO SECOND AMENDMENT TO THIRD AMENDED AND

RESTATED CREDIT AGREEMENT WITH PULTE HOMES, INC.

	 	 	 	 	 
	 	COMMERCE BANK, N.A.

 	 
	 	By:  	/s/      Seth Mackler
 	 
	 	 	Vice President 	 
	 	 	 	 

 

 

	 	 	 	 	 

SIGNATURE PAGE TO SECOND AMENDMENT TO THIRD AMENDED AND

RESTATED CREDIT AGREEMENT WITH PULTE HOMES, INC.

	 	 	 	 	 
	 	BANK OF HAWAII, a Hawaii corporation

 	 
	 	By:  	/s/                 Brian H. Uemori
 	 
	 	 	Vice President 	 
	 	 	 	 

 

 

	 	 	 	 	 

SIGNATURE PAGE TO SECOND AMENDMENT TO THIRD AMENDED AND

RESTATED CREDIT AGREEMENT WITH PULTE HOMES, INC.

	 	 	 	 	 
	 	CALIFORNIA BANK & TRUST, a California 

Banking
Corporation

 
	 	By:  	/s/      Stephanie Lantz
 	 
	 	 	Vice President 	 
	 	 	 	 

 

 

	 	 	 	 	 

SIGNATURE PAGE TO SECOND AMENDMENT TO THIRD AMENDED AND

RESTATED CREDIT AGREEMENT WITH PULTE HOMES, INC.

	 	 	 	 	 
	 	MALAYAN BANKING BERHAD, NEW YORK BRANCH

 	 
	 	By:  	/s/      Fauzi Zulkifli
 	 
	 	 	General Manager 	 
	 	 	 	 
	 

 

 

SCHEDULE 1.1(a)

	 	 	 	 	 
	Lender	 	Commitment
	JPMorgan Chase Bank, N.A.
	 	$	86,021,505.38	 
	Citicorp North America, Inc.
	 	 	86,021,505.38	 
	Bank of America, N.A.
	 	 	86,021,505.38	 
	Barclays Bank PLC
	 	 	86,021,505.38	 
	BNP Paribas
	 	 	86,021,505.38	 
	Calyon New York Branch
	 	 	86,021,505.38	 
	Comerica Bank
	 	 	86,021,505.38	 
	Deutsche Bank Trust Company Americas
	 	 	86,021,505.38	 
	The Royal Bank of Scotland PLC
	 	 	86,021,505.38	 
	SunTrust Bank
	 	 	86,021,505.38	 
	UBS Loan Finance LLC
	 	 	86,021,505.38	 
	Wachovia Bank, National Association
	 	 	86,021,505.38	 
	Countrywide Bank, F.S.B.
	 	 	64,516,129.03	 
	Merrill Lynch Bank USA
	 	 	64,516,129.03	 
	The Bank of Tokyo-Mitsubishi UFJ, Ltd.
	 	 	47,311,827.96	 
	Guaranty Bank
	 	 	43,010,752.69	 
	Lloyds TSB Bank PLC
	 	 	43,010,752.69	 
	Mizuho Corporate Bank, Ltd.
	 	 	43,010,752.69	 
	PNC Bank, National Association
	 	 	43,010,752.69	 
	Natixis
	 	 	34,408,602.15	 
	Washington Mutual Bank
	 	 	34,408,602.15	 
	Fifth Third Bank, a Michigan Banking Corporation
	 	 	30,107,526.88	 
	Regions Bank
	 	 	30,107,526.88	 
	City National Bank
	 	 	21,505,376.34	 
	Compass Bank
	 	 	21,505,376.34	 
	Commerce Bank, N.A.
	 	 	17,204,301.08	 
	Bank of Hawaii, a Hawaii corporation
	 	 	12,903,225.81	 
	California Bank & Trust, a California Banking Corporation
	 	 	12,903,225.81	 
	Malayan Banking Berhad, New York Branch
	 	 	4,301,075.27	 
	 
	 	 	 	 
	TOTAL
	 	$	1,600,000,000	 

 

 

Exhibit A

CONSENT AND AGREEMENT OF GUARANTORS

     THIS CONSENT AND AGREEMENT OF GUARANTORS (“Consent”) is executed and delivered as of
___, 2008, by the undersigned (the “Guarantors”), in favor of the “Lenders” under that
certain Third Amended and Restated Credit Agreement dated as of June 20, 2007, among Pulte Homes,
Inc., the Lenders from time to time parties thereto and JPMorgan Chase Bank, N.A., in its capacity
as Administrative Agent. Such Third Amended and Restated Credit Agreement, as it has been and may
be amended, modified or supplemented from time to time, is hereinafter referred to as the “Credit
Agreement.” Unless otherwise defined herein, capitalized terms used herein shall have the meanings
ascribed to them in the Credit Agreement.

W I T N E S S E T H:

     WHEREAS, the Guarantors have executed and delivered a Guaranty dated June 20, 2007 in favor of
the Lenders under the Credit Agreement (the “Guaranty”); and

     WHEREAS, the Borrower, the Administrative Agent and the Required Lenders have entered into
that certain Second Amendment to Third Amended and Restated Credit Agreement of even date herewith
amending the Credit Agreement (the “Amendment”); and

     WHEREAS, it is a condition to the Amendment that the Guarantors shall have executed this
Consent;

     NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the Guarantors hereby consent to the Amendment and agree that the Guaranty
continues in full force and effect with respect to the undersigned Guarantors.

 

 

     IN WITNESS WHEREOF, this Consent has been duly executed by the Guarantors as of the day and
year first set forth above.

[Guarantors]exv10w28

 

Exhibit 10.28

JOINT VENTURE AGREEMENT

HAGERMAN GAS GATHERING SYSTEM

A Joint Venture Formed By

FEAGAN GATHERING COMPANY

PARALLEL PETROLEUM CORPORATION

and

CAPSTONE OIL & GAS COMPANY, L.P.

 

 

INDEX

	 	 	 	 	 	 	 
	Article 1
	 	Formation of Joint Venture	 	 	 	 
	 
	 	 	 	 	 	 
	1.1
	 	Formation of Joint Venture	 	 	1	 
	 
	 	 	 	 	 	 
	Article 2
	 	Definitions	 	 	 	 
	 
	 	 	 	 	 	 
	2.1
	 	Definitions	 	 	1	 
	2.2
	 	Terms Generally	 	 	3	 
	 
	 	 	 	 	 	 
	Article 3
	 	The Joint Venture	 	 	 	 
	 
	 	 	 	 	 	 
	3.1
	 	Name, Assumed Name Certificates	 	 	4	 
	3.2
	 	Joint Venture Office and Principal Place of Business	 	 	4	 
	3.3
	 	Purpose	 	 	4	 
	3.4
	 	Other Activities	 	 	4	 
	 
	 	 	 	 	 	 
	Article 4
	 	Ownership and Availability of the System	 	 	 	 
	 
	 	 	 	 	 	 
	4.1
	 	Ownership of Joint Venture Facilities	 	 	5	 
	4.2
	 	Availability of the System	 	 	5	 
	 
	 	 	 	 	 	 
	Article 5
	 	Representations and Warranties	 	 	 	 
	 
	 	 	 	 	 	 
	5.1
	 	Representations, Warranties and Covenants of Parties	 	 	5	 
	 
	 	 	 	 	 	 
	Article 6
	 	Capital Contributions and Ownership	 	 	 	 
	 
	 	 	 	 	 	 
	6.1
	 	Initial Capital Contribution and Ownership	 	 	6	 
	6.2
	 	Additional Capital Contributions	 	 	7	 
	6.3
	 	Payment of Capital Contributions	 	 	7	 
	6.4
	 	Carried Capital Contribution	 	 	8	 
	6.5
	 	Option to Purchase Additional Interest	 	 	8	 
	6.6
	 	Voluntary Contributions	 	 	8	 
	 
	 	 	 	 	 	 
	Article 7
	 	Allocations and Capital Accounts	 	 	 	 
	 
	 	 	 	 	 	 
	7.1
	 	Allocations; Capital Accounts	 	 	9	 

i 

 

	 	 	 	 	 	 	 
	Article 8
	 	Distributions and Reimbursements	 	 	 	 
	 
	 	 	 	 	 	 
	8.1
	 	Distributions	 	 	11	 
	8.2
	 	Reimbursement of Expenses	 	 	12	 
	 
	 	 	 	 	 	 
	Article 9
	 	Accounting; Books and Records; Taxes	 	 	 	 
	 
	 	 	 	 	 	 
	9.1
	 	Fiscal Year	 	 	12	 
	9.2
	 	Location of Records	 	 	12	 
	9.3
	 	Books of Account	 	 	12	 
	9.4
	 	Financial Statements	 	 	12	 
	9.5
	 	Taxation and Reports	 	 	13	 
	9.6
	 	Governmental Reports and Compliance with Laws	 	 	13	 
	9.7
	 	Inspection of Facilities and Records	 	 	14	 
	9.8
	 	Deposit of Funds	 	 	14	 
	9.9
	 	Tax Matters Partner	 	 	14	 
	 
	 	 	 	 	 	 
	Article 10
	 	Management; Operator and Conduct of Operations	 	 	 	 
	 
	 	 	 	 	 	 
	10.1
	 	Management of the Joint Venture	 	 	15	 
	10.2
	 	Operator	 	 	15	 
	10.3
	 	Composition of Management Committee	 	 	15	 
	10.4
	 	Authority of the Management Committee	 	 	15	 
	10.5
	 	Approval Requirements; Limitation on Voting Rights	 	 	17	 
	10.6
	 	Meetings	 	 	17	 
	10.7
	 	Appointment of Operator; Construction and Operation of the System	 	 	17	 
	10.8
	 	Conduct of Operations	 	 	17	 
	10.9
	 	Expenses	 	 	18	 
	10.10
	 	Personnel	 	 	18	 
	10.11
	 	Discharge of Expenses	 	 	18	 
	10.12
	 	Ad Valorem Taxes	 	 	18	 
	10.13
	 	Rights of Way	 	 	18	 
	10.14
	 	Removal and Replacement of Operator	 	 	19	 
	 
	 	 	 	 	 	 
	Article 11
	 	Liability and Indemnification of Joint Venturers; Insurance	 	 	 	 
	 
	 	 	 	 	 	 
	11.1
	 	Limitation of Liability of Joint Venturers	 	 	19	 
	11.2
	 	Insurance	 	 	20	 
	11.3
	 	Claims	 	 	20	 
	11.4
	 	Contractors and Subcontractors	 	 	21	 

ii 

 

	 	 	 	 	 	 	 
	Article 12
	 	Assignments	 	 	 	 
	 
	 	 	 	 	 	 
	12.1
	 	Limitation of Rights to Transfer Joint Venturers' Interests	 	 	21	 
	12.2
	 	Permitted Transfers by Joint Venturers	 	 	22	 
	12.3
	 	Effect of Permitted Transfers	 	 	22	 
	12.4
	 	Effects of Prohibited Transfers	 	 	22	 
	 
	 	 	 	 	 	 
	Article 13
	 	Term; Termination and Winding Up	 	 	 	 
	 
	 	 	 	 	 	 
	13.1
	 	Term	 	 	23	 
	13.2
	 	Voluntary Withdrawal of a Joint Venturer	 	 	23	 
	13.3
	 	Automatic Termination	 	 	23	 
	13.4
	 	Removal for Default	 	 	25	 
	13.5
	 	Remedies of Non-Withdrawing Party	 	 	26	 
	13.6
	 	Buy-Sell Procedures	 	 	26	 
	13.7
	 	Appraisal Procedure	 	 	28	 
	13.8
	 	Termination and Winding Up	 	 	29	 
	13.9
	 	Effect of Termination or Withdrawal	 	 	31	 
	 
	 	 	 	 	 	 
	Article 14
	 	Salvage	 	 	 	 
	 
	 	 	 	 	 	 
	14.1
	 	Abandonment	 	 	31	 
	 
	 	 	 	 	 	 
	Article 15
	 	Confidentiality	 	 	 	 
	 
	 	 	 	 	 	 
	15.1
	 	Confidentiality	 	 	32	 
	 
	 	 	 	 	 	 
	Article 16
	 	Miscellaneous	 	 	 	 
	 
	 	 	 	 	 	 
	16.1
	 	Notice	 	 	32	 
	16.2
	 	Further Assurance	 	 	33	 
	16.3
	 	Amendment	 	 	33	 
	16.4
	 	Waiver	 	 	33	 
	16.5
	 	Exhibits	 	 	33	 
	16.6
	 	Applicable Laws	 	 	34	 
	16.7
	 	Counterparts	 	 	34	 
	16.8
	 	Headings	 	 	34	 
	16.9
	 	Section Numbers	 	 	34	 
	16.10
	 	Entirety	 	 	34	 
	16.11
	 	Severability	 	 	34	 
	16.12
	 	Binding Effect; Joinder of Additional Parties	 	 	34	 

iii 

 

	 	 	 	 	 	 	 
	Article 17
	 	Arbitration	 	 	 	 
	 
	 	 	 	 	 	 
	17.1
	 	General	 	 	34	 
	17.2
	 	Procedures	 	 	35	 
	17.3
	 	Specific Enforcement	 	 	36	 
	 
	 	 	 	 	 	 
	Exhibit A
	 	Construction and Operating Agreement	 	 	 	 
	 
	 	 	 	 	 	 
	Exhibit B 
	 	Project Area	 	 	 	 
	 
	 	 	 	 	 	 
	Exhibit C 
	 	Gas Gathering Agreement	 	 	 	 
	 
	 	 	 	 	 	 
	Exhibit D 
	 	Insurance	 	 	 	 

iv  

 

HAGERMAN GAS GATHERING SYSTEM

JOINT VENTURE AGREEMENT

     THIS JOINT VENTURE AGREEMENT (this “Agreement”), dated as of January 16, 2007, to be effective
from and after April 1, 2006, is made by and among Feagan Gathering Company, a Texas corporation
(“Feagan”), Parallel Petroleum Corporation, a Delaware corporation (“Parallel”), and Capstone Oil
& Gas Company, L.P., a Texas limited partnership (“Capstone”). Feagan, Parallel and Capstone are
hereinafter sometimes referred to collectively as “Joint Venturers”, and each, individually, as a
“Joint Venturer”.

WITNESSETH:

     WHEREAS, Feagan, Parallel and Capstone desire to join together for the purposes of
constructing, managing, owning, leasing and operating a natural gas pipeline located in Chaves
County, New Mexico, and further desire to set forth the terms and conditions upon which such
activities will be conducted;

     NOW, THEREFORE, in consideration of the mutual covenants set forth herein, Feagan, Parallel
and Capstone hereby agree as follows:

ARTICLE 1

FORMATION OF JOINT VENTURE

     1.1 Formation of Joint Venture. Feagan, Parallel and Capstone hereby enter into and
form a joint venture for the limited purposes and scope set forth herein. Except as expressly
provided for herein to the contrary, the rights and obligations of the Joint Venturers and the
administration and termination of the Joint Venture shall be governed by the Texas General
Partnership Law (the “TGPL”), part of the Texas Business Organizations Code. A Joint Venturer’s
interest in the Joint Venture shall be personal property for all purposes. All real and other
property owned by the Joint Venture shall be deemed owned by the Joint Venture as an entity, and no
Joint Venturer, individually shall have any direct ownership in such property.

ARTICLE 2

DEFINITIONS

     2.1 Definitions. In addition to the terms defined elsewhere in this Agreement, the
following terms shall have the respective meanings set forth below:

 

 

     Capital Contribution. The capital contributed to the Joint Venture by a Joint
Venturer pursuant to Article 6 of this Agreement.

     Code. The Internal Revenue Code of 1986, as amended from time to time, and any
successor statute or statutes.

     Construction and Operating Agreement. The Construction and Operating Agreement
between the Joint Venture and the Person designated as Operator in accordance herewith, the form
of which is attached hereto as Exhibit “A”.

     Cost of a Joint Venture Expansion. All costs, expenses and liabilities incurred or
paid by the Joint Venture for the real and personal property acquisitions, planning, design,
engineering and construction of a Joint Venture Expansion, and securing necessary governmental
authorizations and approvals therefor.

     Cost of the System. All cost, expenses and liabilities incurred or paid by the Joint
Venture for the real property (excluding the Project Area) and personal property acquisitions,
planning, design, engineering and construction of the System, and securing necessary governmental
authorizations and approvals therefor.

     Gas. Natural gas having the physical and chemical qualities required for acceptance
by the Joint Venture.

     Joint Venture. The entity created by this Agreement, which the parties agree is a
joint venture.

     Joint Venture Expansion. Any pipelines and appurtenances together with related
facilities and properties (including, but not limited to, rental compression facilities), which
expand the System.

     “Joint Venture Nonrecourse Liabilities” shall have the meaning assigned to the term
“nonrecourse liabilities” in Treasury Regulation section 1.752-1(a)(2).

     Joint Venturer(s). The collective or individual reference, as the case may be, to
each of the Joint Venturers executing this Agreement and any Joint Venturer admitted to the Joint
Venture or substituted in place of an original Joint Venturer pursuant to Article 12; provided,
however, that the term Joint Venturer shall not include any Person who shall be deemed to have
withdrawn from the Joint Venture pursuant to Section 13.3(b).

     Joint Venture Percentage Interest. For each Joint Venturer, the percentage ownership
of the Joint Venture based upon the proportion that such Joint Venturer’s

2

 

Capital Contributions bears to the total Capital Contributions made by all Joint Venturer’s,
including, in the case of Feagan, the Carried Capital Contribution provided for in Section 6.4.

     “Joint Venturer Nonrecourse Debt” shall have the meaning assigned to the term “partner
nonrecourse debt” in Treasury Regulation section 1.704.2(b)(4).

     “Joint Venturer Nonrecourse Deductions” shall have the meaning assigned to the term
“partner nonrecourse deductions” in Treasury Regulation section 1.704-2(i).

     Management Committee. The Management Committee provided for in Section 10.3.

     “Minimum Gain” shall have the meaning assigned to that term in Treasury Regulation
section 1.704-2(d) and section 1.704-2(i)(3), as applicable.

     Operator. The Operator provided for in Section 10.2.

     Person. An individual, a corporation, voluntary association, joint stock company,
business trust, partnership or other entity.

     Project Area. The leasehold acreage situated in Chaves County, New Mexico that is
subject, from time to time, to the area of mutual interest contained in that certain Exploration
Agreement, dated as of March 1, 2004, between Parallel and Capstone and that is owned beneficially
or of record by Parallel and Capstone and dedicated by Parallel and Capstone to the System, as
further described on Exhibit “B” attached hereto and made a part hereof.

     System. The pipeline and appurtenant and related facilities owned by the Joint
Venture, including any Joint Venture Expansion.

     “Treasury Regulations” (or any abbreviation thereof used herein) shall mean temporary
or final regulations promulgated under the Code.

     2.2 Terms Generally. The definitions of terms herein shall apply equally to the
singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall
include the corresponding masculine, feminine and neuter forms. The words “include”, “includes” and
“including” shall be deemed to be followed by the phrase “without limitation”. The word “will”
shall be construed to have the same meaning and effect as the word “shall”. Unless the context
requires otherwise (a) any definition of or reference to any agreement, instrument or other
document herein shall be construed as referring to such agreement, instrument or other document as
from time to time amended, supplemented or otherwise modified (subject to any restrictions on such
amendments,

3

 

supplements or modifications set forth herein), (b) any reference herein to any Person shall be
construed to include such Person’s successors and assigns, provided such successors and assigns are
permitted by this Agreement, (c) the words “herein”, “hereof” and “hereunder”, and words of similar
import, shall be construed to refer to this Agreement in its entirety and not to any particular
provision hereof, and (d) all references herein to Articles, Sections, exhibits and schedules shall
be construed to refer to Articles and Sections of, and exhibits and schedules to, this Agreement.

ARTICLE 3

THE JOINT VENTURE

     3.1 Name; Assumed Name Certificates. The name of the Joint Venture shall be Hagerman
Gas Gathering System. The Joint Venturers shall execute all assumed or fictitious name certificates
required by law to be filed in connection with the formation of the Joint Venture and the conduct
of its business and shall cause such certificates to be filed in the applicable records of each
state where the Joint Venture conducts business.

     3.2 Joint Venture Office and Principal Place of Business. The principal offices and
principal place of business of the Joint Venture shall be located at 1004 N. Big Spring, Suite 400,
Midland, Texas 79701.

     3.3 Purpose. The purpose of the Joint Venture shall be to plan, design, obtain any
necessary governmental approval for, construct, own and operate the System for the purchase and
sale or transport of Gas produced from the Project Area.

     3.4 Other Activities. Nothing contained in this Agreement shall be construed to
prohibit any Joint Venturer or any firm or corporation controlled by or controlling any Joint
Venturer from owning, operating or investing in any natural gas pipeline other than the System or
from engaging in any business similar to or in competition with the Joint Venture. Each Joint
Venturer agrees that the other Joint Venturers or any affiliate thereof may engage in or possess
any interest in any other business venture or ventures of any nature and description independently
or with others, including, but not limited to, the sale and purchase of natural gas, the ownership,
financing, leasing, construction, operation, sale, maintenance, management, syndication, brokerage
and development of natural gas pipeline systems and no Joint Venturer shall have any rights by
virtue of this Agreement in and to said other business venture or ventures or the income or profits
derived therefrom.

4

 

ARTICLE 4

OWNERSHIP AND AVAILABILITY OF THE SYSTEM

     4.1 Ownership of Joint Venture Facilities. Title to Joint Venture property, whether
real, personal or mixed and whether tangible or intangible, shall be deemed to be owned by the
Joint Venture as an entity, and no Joint Venturer, individually or collectively, shall have any
ownership interest in such Joint Venture property or any portion thereof. Title to any or all of
the Joint Venture property may be held in the name of the Joint Venture or one or more nominees, as
the Management Committee may determine. Upon the withdrawal or removal of any Joint Venturer or as
soon thereafter as practicable, the withdrawing or removed Joint Venturer holding title to any
Joint Venture property as nominee for the Joint Venture shall transfer to the Joint Venture record
title to such property and, prior to any such transfer, will provide for the use of such assets in
a manner satisfactory to the Joint Venture. All Joint Venture property shall be recorded as the
property of the Joint Venture in its books and records, irrespective of the name in which record
title to such Joint Venture property is held. Although the Project Area is dedicated to the
facilities included in the System, ownership of the Project Area shall remain the sole property of
each respective Joint Venturer having record or beneficial ownership thereof, subject to each such
Joint Venturer’s right to sell, transfer and convey all or any portion of the Project Area owned by
such Joint Venturer, at any time and from time to time. As natural gas reserves are developed in
the Project Area by the Joint Venturers or by third parties, the Joint Venturers anticipate that
gathering lines will need to be constructed from time to time to connect the producing areas within
the Project Area. Such facilities are contemplated by the Joint Venturers to be part of the System.
If any such facilities are acquired or constructed by the Joint Venture, the same will thereupon
become a part of the System. No other facilities, whether existing facilities owned by any of the
Joint Venturers or subsequently acquired or constructed by any of the Joint Venturers are or shall
be the subject of this Agreement, except for those which are located within the Project Area.

     4.2 Availability of the System. First priority to the availability and capacity of
the System shall be given to the Gas produced in the Project Area by Parallel and Capstone, and
their respective successors and assigns, and gathered pursuant to that certain Gas Gathering
Agreement, dated or to be dated of even date herewith, among Parallel, Capstone and the Joint
Venture, and being in substantially the form attached hereto as Exhibit “C”.

ARTICLE 5

REPRESENTATIONS AND WARRANTIES

     5.1 Representations, Warranties and Covenants of Parties. Each Joint Venturer
represents and warrants to the other, and agrees that:

5

 

     (a) It is a corporation or limited partnership duly organized and validly existing under the
laws of its jurisdiction of organization.

     (b) If it is organized under the laws of a jurisdiction other than Texas, it is duly qualified
or authorized to do business in Texas.

     (c) It will not cause a dissolution or termination of the Joint Venture by reason of the
failure to maintain its corporate or partnership existence, except as otherwise permitted herein.

     (d) The execution and delivery of this Agreement has been duly authorized, and this Agreement,
when executed and delivered, will be valid and binding on it.

     (e) The execution and delivery of this Agreement, the formation of the Joint Venture and the
performance hereof will not contravene any provision of, or constitute a default under, any
indenture, mortgage or other material agreement to which it is a party or by which its assets may
be bound, or any order of any court, commission or governmental agency having jurisdiction.

     (f) The Joint Venture is an “intrastate pipeline”, as defined in the Natural Gas Policy Act of
1978, as hereto or hereafter amended, and will not, through any act or omission, cause or
contribute to causing itself, the Joint Venture, or any other Joint Venturers, or any of the
facilities of any of them to become subject in whole or in part to the jurisdiction of the Federal
Energy Regulatory Commission or any successor thereto, under the Federal Energy Regulatory
Commission’s jurisdiction under the Natural Gas Policy Act of 1978 and the Natural Gas Act, as
hereto or hereafter amended.

     (g) There are no claims for brokerage or other commission or finder’s or other similar fees in
connection with the transactions covered by this Agreement insofar as such claims may be based on
arrangements or agreements made by or on its behalf, and each Joint Venturer hereby agrees to
indemnify and hold harmless the other from and against all liabilities, costs, damages and expenses
from any such claims.

ARTICLE 6

CAPITAL CONTRIBUTIONS AND OWNERSHIP

     6.1 Initial Capital Contribution and Ownership. Promptly after receipt of a written
request from the Operator given in accordance with Section 6.3, each Joint Venturer shall make its
respective initial Capital Contribution to the Joint Venture, including each Joint Venturer’s
obligation to contribute a total amount equal to its Joint Venture Percentage Interest of
$5,500,000. Subject to Section 6.5 hereof, the Joint Venture Percentage Interest of each Joint
Venturer is as follows:

6

 

	 	 	 	 	 
	Feagan
	 	 	10.00	%
	Parallel
	 	 	76.50	%
	Capstone
	 	 	13.50	%

     6.2 Additional Capital Contributions. From time to time, whenever any part of the
System or a Joint Venture Expansion shall be authorized by the Management Committee, each Joint
Venturer shall contribute additional capital to the Joint Venture in an amount equal to its Joint
Venture Percentage Interest of the Cost of the System or the Cost of a Joint Venture Expansion, as
the case may be. Each Joint Venturer shall be obligated to make such additional Capital
Contributions in the amount set forth in construction fund schedules prepared from time to time by
the Operator and approved by the Management Committee in connection with the System and each Joint
Venture Expansion pursuant to Section 10.4 hereof. Additional Capital Contributions to be made
pursuant to this Section 6.2 shall be made in accordance with Section 6.3 hereof.

     6.3 Payment of Capital Contributions. Except as may be otherwise determined by the
Management Committee:

     (a) The Operator shall issue or cause to be issued a written request for payment of each
Capital Contribution to be made in accordance with Sections 6.1 and 6.2, at such times and in such
incremental amounts as may be requested by the Operator from time to time, but only after approval
of the Management Committee.

     (b) Each written request issued pursuant to this Section 6.3 shall contain the following
information:

	 	(i)	 	the amount of the Capital Contribution requested from each
Joint Venturer, which amount shall equal such Joint Venturer’s Percentage of
the total Capital Contributions then requested of the Joint Venturers;
	 
	 	(ii)	 	the purposes for which the Capital Contributions are to be
applied; and
	 
	 	(iii)	 	the date on which the Capital Contributions shall be made
(which shall not be less than thirty (30) days following the date the request
is made) and the method of payment, such date and method to be identical for
all of the Joint Venturers.

7

 

     (c) Each Joint Venturer agrees to make payment of its respective Capital Contributions in
accordance with the requests made by the Operator pursuant to this Agreement.

     6.4 Carried Capital Contribution. Subject to the last sentence of this Section 6.4,
Parallel and Capstone shall pay, or “carry”, for the benefit of Feagan a portion of the Capital
Contribution that would otherwise be required to be made by Feagan under the terms of this
Agreement. The amount required to be paid, or “carried”, by Parallel and Capstone shall be an
amount equal to fifty percent (50.0%) of the Capital Contributions that would otherwise be required
to be made by Feagan under the terms of this Agreement (the “Carried Capital Contribution”). The
Carried Capital Contribution provided for in this Section 6.4 shall be allocated between Parallel
and Capstone based upon their respective Joint Venture Percentage Interests (with Parallel
initially paying for eighty five percent (85%) of such Carried Capital Contribution and Capstone
initially paying for the remaining fifteen percent (15%) of such Carried Capital Contribution).
The obligation of Parallel and Capstone to fund and pay for the Carried Capital Contribution shall
be limited to the first ten million dollars ($10,000,000.00) of capital expenditures made by the
Joint Venture in connection with this Agreement.

     6.5 Option to Purchase Additional Interest. Until the close of business on March 31,
2007, Feagan shall have a one-time option to purchase from Parallel and Capstone a five percent
(5%) interest in the Joint Venture. If Feagan elects to exercise such option, it shall give written
notice thereof to Parallel and Capstone on or before the close of business on March 31, 2007. The
total purchase price for such interest shall be equal to the sum of (a) (i) the aggregate Capital
Contributions attributable to a five percent (5.0%) ownership interest (the “Option Purchase
Price”) in the Joint Venture up to and including the date of exercise of the option, and (ii) an
additional five and one-half percent (5.5%) of the Option Purchase Price, less (b) the amount of
any distributions made by the Joint Venture to Feagan prior to the date of exercise of the option.
The purchase price shall be paid within ten (10) days after Feagan gives notice to Parallel and
Capstone of its election to exercise such option. The five percent (5%) ownership interest in the
Joint Venture that is subject to the option provided for in this Section 6.5 shall be allocated
between Parallel and Capstone based upon their respective Joint Venture Percentage Interests (with
Parallel initially being obligated to deliver and convey eighty five percent (85%) of the five
percent (5%) interest and Capstone being obligated to deliver and convey the remaining fifteen
percent (15%) of the five percent (5%) interest).

     6.6 Voluntary Contributions. No Joint Venturer shall make any Capital Contributions
to the Joint Venture except pursuant to a request of the Operator given in accordance with Section
6.3.

8

 

ARTICLE 7

ALLOCATIONS AND CAPITAL ACCOUNTS

     7.1 Allocations; Capital Accounts.

     (a) For accounting and federal and state income tax purposes, except as herein otherwise
specifically provided, or as may be required by Section 704(c) of the Code and Treasury Regulation
section 1.704-1(b)(2)(iv)(f)(4), all costs, expenditures, income, deductions, credits, gains and
losses of the Joint Venture shall be allocated to the Joint Venturers in accordance with their
respective Joint Venture Percentage Interest. Any item which is stipulated to be an expense of the
Joint Venture under the terms of this Agreement or which would be so treated in accordance with
generally accepted accounting principles shall be treated as an expense of the Joint Venture for
all purposes, whether or not such item is deductible for purposes of computing net income for
federal income tax purposes. Neither the allocations referred to in this Section 7.1 nor the
utilization of varying tax bases as herein provided shall have any effect whatsoever upon any Joint
Venturer’s Joint Venture Percentage Interest.

     (b) Notwithstanding any of the foregoing provisions of this Section 7.1 to the contrary:

     (i) If during any fiscal year of the Joint Venture there is a net increase in Minimum
Gain attributable to a Joint Venturer Nonrecourse Debt that gives rise to Joint Venturer
Nonrecourse Deductions, each Joint Venturer bearing the economic risk of loss for such Joint
Venturer Nonrecourse Debt shall be allocated items of Joint Venture deductions and losses
for such year (consisting first of cost recovery or depreciation deductions with respect to
property that is subject to such Joint Venturer Nonrecourse Debt and then, if necessary, a
pro rata portion of the Joint Venture’s other items of deductions and losses, with any
remainder being treated as an increase in Minimum Gain attributable to Joint Venturer
Nonrecourse Debt in the subsequent year) equal to such Joint Venturer’s share of Joint
Venturer Nonrecourse Deductions, as determined in accordance with applicable Treasury
Regulations.

     (ii) If for any fiscal year of the Joint Venture there is a net decrease in Minimum
Gain attributable to Joint Venture Nonrecourse Liabilities, each Joint Venturer shall be
allocated items of Joint Venture income and gain for such year (consisting first of gain
recognized from the disposition of Joint Venture property subject to one or more Joint
Venture Nonrecourse Liabilities and then, if necessary, a pro rata portion of the Joint
Venture’s other items of income and gain, and then, if necessary, for subsequent years)
equal to such Joint Venturer’s share

9

 

of such net decrease (except to the extent such Joint Venturer’s share of such net decrease
is caused by a change in debt structure with such Joint Venturer commencing to bear the
economic risk of loss as to all or part of any Joint Venture Nonrecourse Liability or by
such Joint Venturer contributing capital to the Joint Venture that the Joint Venture uses to
repay a Joint Venture Nonrecourse Liability), as determined in accordance with applicable
Treasury Regulations.

     (iii) If for any fiscal year of the Joint Venture there is a net decrease in Minimum
Gain attributable to a Joint Venturer Nonrecourse Debt, each Joint Venturer bearing the
economic risk of loss for such Joint Venturer Nonrecourse Debt shall be allocated items of
Joint Venture income and gain for such year (consisting first of gain recognized from the
disposition of Joint Venture property subject to Joint Venturer Nonrecourse Debt, and then,
if necessary, a pro rata portion of the Joint Venture’s other items of income and gain, and
if necessary, for subsequent years) equal to such Joint Venturer’s share of such net
decrease (except to the extent such Joint Venturer’s share of such net decrease is caused by
a change in debt structure or by the Joint Venture’s use of capital contributed by such
Joint Venturer to repay the Joint Venturer Nonrecourse Debt) as determined in accordance
with applicable Treasury Regulations.

     (c) The losses and deductions allocated pursuant to this Article 7 shall not exceed the
maximum amount of losses and deductions that can be allocated to a Joint Venturer without causing
or increasing a deficit balance in the Joint Venturer’s adjusted capital account. If, at the end of
any fiscal year, as a result of the allocations otherwise provided for in this Section 7.1, the
adjusted capital account balance of any Joint Venturer shall become negative, items of deduction
and loss otherwise allocable to such Joint Venturer for such year, to the extent such items would
have caused such negative balance, shall instead be allocated to Joint Venturers having positive
adjusted capital account balances remaining at such time in proportion to such balance.

     (d) If a Joint Venturer unexpectedly receives any adjustment, allocation or distribution
described in Treasury Regulations section 1.704-1(b)(2)(ii)(d)(4)-(6) that causes or increases a
deficit balance in such Joint Venturer’s adjusted capital account, items of Joint Venture income
and gain shall be allocated to that Joint Venturer in an amount and manner sufficient to eliminate
the deficit balance as quickly as possible.

     (e) The allocations set forth in subsections (b), (c) (last sentence), and (d) (collectively,
the “Regulatory Allocations”) are intended to comply with certain requirements of the Treasury
Regulations. It is the intent of the Joint Venturers that, to the extent possible, all Regulatory
Allocations that are made be offset either with other Regulatory Allocations or with special
allocations pursuant to this Section 7.1(g).

10

 

Therefore, notwithstanding any other provisions of this Article 7 (other than the Regulatory
Allocations), Parallel shall make such offsetting special allocations in whatever manner it
determines appropriate so that, after such offsetting allocations are made, each Joint Venturer’s
adjusted capital account balance is, to the extent possible, equal to the adjusted capital account
balance such Joint Venturer would have had if the Regulatory Allocations were not part of this
Agreement and all Joint Venture items were allocated pursuant to the remaining sections of this
Article 7.

     (f) In accordance with Section 704(c) of the Code and the Treasury Regulations thereunder,
income and deductions with respect to any property carried on the books of the Joint Venture at an
amount that differs from such property’s adjusted tax basis shall, solely for federal income tax
purposes, be allocated among the Joint Venturers in a manner to take into account any variation
between the adjusted tax basis of such property to the Joint Venture and such book value. In making
such allocations, Parallel shall use the “traditional method with curative allocations” pursuant to
Treasury Regulations Section 1-704-3(c).

     (g) All items of income, gain, loss, deduction, and credit allocable to any Joint Venture
Percentage Interest that may have been transferred shall be allocated between the transferor and
transferee based on the portion of the calendar year during which each was recognized as owning
those Joint Venture Percentage Interests, without regard to whether cash distributions were made to
the transferor or the transferee during that calendar year; provided, however, that this allocation
must be made in accordance with a method permissible under section 706 of the Code and the
applicable Treasury Regulations.

     (h) A capital account shall be maintained for each Joint Venturer, which account shall be
increased (credited) by (i) the cash and adjusted tax basis of property contributed by it to the
Joint Venture (net of liabilities assumed by the Joint Venture and liabilities to which such
contributed property is subject), and (ii) the distributive share of net income and gain (including
income exempt from tax) allocated to such Joint Venturer, and shall be decreased (debited) by (iii)
the cash and the Joint Venture’s adjusted tax basis of property distributed to such Joint Venturer
(net of liabilities assumed by such Joint Venturer and liabilities to which such distributed
property is subject), (iv) the amount of net loss allocated to such Joint Venturer, and (v) such
Joint Venturer’s distributive share of expenditures of the Joint Venture.

ARTICLE 8

DISTRIBUTIONS AND REIMBURSEMENTS

     8.1 Distributions. Distributions of excess cash to the Joint Venturers shall only be
made to the Joint Venturers simultaneously in such aggregate amounts and at such

11

 

times as determined by the Management Committee from time to time. Distributions of cash shall be
made to the Joint Venturers in the same manner that items of cost, expenditure, income, gain, loss,
deduction and credit are allocated to the Joint Venturers under Section 7.1.

     8.2 Reimbursement of Expenses. The Joint Venture shall pay or reimburse the Joint
Venturers all reasonable direct and indirect costs incurred by them in managing and conducting the
business and affairs of the Joint Venture, including, without limitation, (i) all costs and
expenses incurred in any business of the Joint Venture, (ii) secretarial, telephone, office rent
and other office expenses, (iii) salaries and other compensation expenses of employees of any Joint
Venturer, (iv) other administrative expenses, (v) travel expenses, (vi) legal and accounting costs
and expenses, and (vii) expenses incurred in providing or obtaining such other professional,
technical, administrative services and advice as the Management Committee may deem necessary or
desirable. The Management Committee shall determine in good faith which expenses are allocable to
the Joint Venture in a manner which is fair and reasonable to the Joint Venture.

ARTICLE 9

ACCOUNTING; BOOKS AND RECORDS; TAXES

     9.1 Fiscal Year. The fiscal year of the Joint Venture shall be the calendar year.

     9.2 Location of Records. The books and records of the Joint Venture shall be kept and
maintained at the Joint Venture’s office.

     9.3 Books of Account. The books of account for the Joint Venture shall be kept and
maintained at the principal place of business of Parallel. The books of account shall be
maintained on an accrual basis in accordance with generally accepted accounting principles,
consistently applied, and shall show all items of income and expense.

     9.4 Financial Statements. Parallel shall prepare and furnish or cause to be prepared
and furnished to the Joint Venturers, within forty (40) days after the close of each fiscal quarter
of the Joint Venture, financial statements showing the financial condition and results of
operations of the Joint Venture for such fiscal quarter, which statements shall include the balance
in each Joint Venturer’s Capital Account, the unpaid balance due under all obligations of the Joint
Venture, a statement of profit and loss and all other information, financial or otherwise, as may
be necessary for any Joint Venturer to comply with various reporting and disclosure requirements of
governmental agencies to which it may be subject, and all other information reasonably requested by
a Joint Venturer. Parallel shall cause to be prepared and furnished, at the expense of the Joint
Venture, to each of the Joint Venturers within seventy-five (75) days after the end of each

12

 

fiscal year, financial statements showing the financial condition and results of operations of the
Joint Venture as of and for the twelve (12) month period ending on the last day of December of each
year, which year-end statements may, at the sole election of Parallel, be audited by such
independent registered public accounting firm as Parallel may engage for and on behalf of the Joint
Venture and certified by such independent registered public accounting firm as having been prepared
in accordance with generally accepted accounting principles consistently applied.

     In addition, Parallel will cause to be prepared and furnished to each Joint Venturer such
other accounting and tax information as shall be necessary for the preparation by each Joint
Venturer of its income tax returns for each fiscal year.

     9.5 Taxation and Reports.

     (a) Any provision hereof to the contrary notwithstanding, solely for United States federal
income tax purposes, each of the Joint Venturers hereby recognizes that the Joint Venture will be
subject to all provisions of Subchapter K of Chapter 1 of Subtitle A of the Code; provided,
however, the filing of U.S. Partnership Returns of Income shall not be construed to extend the
purposes of the Joint Venture or expand the obligations or liabilities of the Joint Venturers. At
the request of any Joint Venturer, the Joint Venture shall file an election under Section 754 of
the Code.

     (b) Parallel shall prepare or cause to be prepared all federal and state income tax returns
and related schedules and statements, and cause to be made all elections, if any, which must be
filed on behalf of the Joint Venture with any taxing authority and shall submit such returns and
related schedules and statements to all the Joint Venturers for their approval on or about March 15
of each year, and, upon approval thereof by all the Joint Venturers, make timely filing thereof.

     9.6 Governmental Reports and Compliance with Laws.

     (a) The Operator shall be responsible for all reports required of it by state and federal
authorities on account of operations related to the System. However, each Joint Venturer shall be
and remains solely responsible for all reports and accounts required by state and federal
authorities on account of production delivered by it to the System, and for the payment of all
royalties, overriding royalties, or payments from production with respect to all production owned
by it and delivered to or handled by the System, and Operator shall have no rights or duties in
connection therewith.

     (b) The Operator, on behalf of the Joint Venture, shall obtain such permits and approvals
from governmental authorities having jurisdiction over the business and affairs

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of the Joint Venture as may be necessary or advisable to construct and operate the System and to
transport Gas.

     (c) The Operator shall at all times comply with all applicable rules, regulations, laws,
orders, ordinances, decrees or other matters promulgated or administered by any governmental or
quasi-governmental body with jurisdiction over the System or the ownership or operation thereof.

     9.7 Inspection of Facilities and Records. Each Joint Venturer shall have the right
at all reasonable times during usual business hours to inspect the facilities of the Joint Venture
and to examine, audit and make copies of the books of account and other records of the Joint
Venture. Such right may be exercised through any agent or employee of a Joint Venturer designated
in writing by it or by an independent public accountant, petroleum engineer, attorney or other
consultant designated by such Joint Venturer. Each Joint Venturer shall bear all costs and
expenses incurred in any inspection, examination or audit made for such Joint Venturer’s account.

     9.8 Deposit of Funds. The funds of the Joint Venture shall be deposited in a separate
account with such banks or other financial institutions as may be designated from time to time by
the Management Committee. The Management Committee from time to time shall authorize signatories
for such accounts.

     9.9 Tax Matters Partner. Parallel shall act as the “tax matters partner” under Section
6231 of the Code (Parallel, in this Section, being called the “tax matters partner”). The tax
matters partner shall promptly notify the Joint Venturers if any tax return or report of the Joint
Venture is audited or if any adjustments are proposed by any governmental body. In addition, the
tax matters partner shall promptly furnish to the Joint Venturers all notices concerning
administrative or judicial proceedings relating to federal income tax matters as required under the
Code. During the pendency of any such administrative or judicial proceeding, the tax matters
partner shall furnish to the Joint Venturers periodic reports, not less often than monthly,
concerning the status of any such proceeding. Without the consent of the Management Committee, the
tax matters partner shall not extend the statute of limitations, file suit concerning any tax
refund or deficiency relating to any Joint Venture administrative adjustment or enter into any
settlement agreement relating to any Joint Venture item of income, gain, loss, deduction or credit
for any fiscal year of the Joint Venture.

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ARTICLE 10

MANAGEMENT; OPERATOR AND CONDUCT OF OPERATIONS

     10.1 Management of the Joint Venture. The overall management and control of the
business and affairs of the Joint Venture shall be vested in the Joint Venturers and, except where
herein expressly provided to the contrary, all decisions with respect to the management and control
of the Joint Venture shall be made and approved by the Management Committee as provided in Section
10.4 below.

     10.2 Operator. The Operator of the System shall devote such time to the Joint
Venture’s business as it deems necessary to manage and supervise the System in an efficient manner.
The Operator shall, subject to the control and direction of the Management Committee, be
responsible for the implementation of the decisions of and actions approved by the Management
Committee, and in general supervise and control the System and perform all duties and exercise all
powers as the Management Committee may delegate to the Operator from time to time, subject to the
provisions of applicable law, this Agreement and the Construction and Operating Agreement. In
addition, and subject to the provisions hereof, the Operator shall have and perform the duties and
obligations specified in the Construction and Operating Agreement.

     10.3 Composition of Management Committee. The members of the Management Committee
shall consist of one representative appointed by each Joint Venturer. Each Joint Venturer shall
designate in writing its representative to serve on the Management Committee. If any
representative appointed by a Joint Venturer fails, refuses or is unable to serve on the Management
Committee for any reason, then the Joint Venturer that appointed such representative may appoint
and designate an alternate representative who shall serve on the Management Committee in place of
the previously appointed representative. Any Joint Venturer may at any time, by written notice to
each other Joint Venturer, remove its representative on the Management Committee and appoint a new
representative.

     10.4 Authority of the Management Committee. Except as otherwise expressly provided in
this Agreement, the approval of the Management Committee shall be necessary before any action can
be taken by the Joint Venture or any Joint Venturer (including the Operator) on behalf of the Joint
Venture. Without limiting the generality of the foregoing, the Management Committee shall approve
in advance:

     (a) the design of the System, any Joint Venture Expansion or any segment of the foregoing, and
the construction, capital and operating budgets and construction fund schedules for the System, any
Joint Venture Expansion or any segment of the foregoing;

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     (b) any modification to an approved budget or construction fund schedule provided for in
Section 6.2 hereof;

     (c) the establishment of any requirement for Capital Contributions outside the scope and
coverage of an approved budget and construction fund schedule as specified in paragraph (a) or
paragraph (b) of this Section 10.4;

     (d) a Joint Venture Expansion;

     (e) the transfer by a Joint Venturer of all or any part of its Joint Venture Percentage
Interest, other than as permitted without Management Committee or Joint Venturer approval pursuant
to Article 12 hereof;

     (f) gas contracts and transportation agreements;

     (g) the timing and amounts of distributions to Joint Venturers pursuant to Section 8.1 hereof;

     (h) engaging in any business other than as contemplated by this Agreement;

     (i) the selection of a successor Operator;

     (j) the sale of all or substantially all of the business and assets of the Joint Venture;

     (k) any modification to the Construction and Operating Agreement; and

     (l) rules of the Management Committee and any amendments or supplements thereto concerning the
conduct of the business and affairs of the Joint Venture.

     Notwithstanding anything in this Section 10.4 or elsewhere in this Agreement to the contrary,
advance approval of the Management Committee shall not be required for the Operator to make any
single expenditure (or series of related expenditures) less than $20,000 during any month. In
addition, and notwithstanding anything herein to the contrary, in cases of emergency, the Operator
may proceed with required maintenance or repair work when necessary in the Operator’s judgment to
keep the System operating or to restore the facilities to operating condition or to minimize
damages without prior necessity for submitting same to the Management Committee. In such event, the
Operator shall as soon as practicable notify the other Joint Venturers of the existence of
occurrence of the emergency, which notice shall set forth the nature of the emergency, the
corrective action taken or proposed to be taken, and the estimated cost of such corrective action;

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provided that the Operator shall not be required to give such notice when the cost of the
corrective action is reasonably estimated to be less than $20,000.

     10.5 Approval Requirements; Limitation on Voting Rights. Except as otherwise
expressly provided by this Agreement, the business of the Joint Venture presented at any meeting of
the Management Committee shall be decided by a vote of members of the Management Committee
representing a majority of the Joint Venture Percentage Interests, plus one other member of the
Management Committee. However, any member of the Management Committee representing a Joint Venturer
who is in default in the payment of any Capital Contribution required to be made to the Joint
Venture in accordance with this Agreement shall not have the right to vote on any matter unless and
until such default is remedied. In addition, if an Affiliate of a Joint Venturer also owns a Joint
Venture Percentage Interest, such Affiliate shall not be entitled to vote on any matter; provided,
however, this limitation on the right to vote shall not apply to any Affiliate of Parallel,
Capstone or Feagan. As used in this Section 10.5, “Affiliate” means a person that directly, or
indirectly through one or more intermediaries, controls or is controlled by, or is under common
control with, the person specified.

     10.6 Meetings. The Management Committee may hold such meetings at such place and at
such time as it may determine. No notice shall be required of a regular meeting if the time and
place of such meetings are fixed by the Management Committee. Notice of a special meeting shall be
served not less than twenty-four (24) hours before the date and time fixed for such meeting by
confirmed facsimile or other written communication or not less than three (3) days prior to such
meeting if notice is provided by overnight delivery service. A special meeting of the Management
Committee may be called by any Joint Venturer. Any member of the Management Committee may
participate in a meeting by conference telephone or similar communications equipment. Any action
required or permitted to be taken by the Management Committee may be taken without a meeting if
such action is evidenced in writing and signed by the same number of members of the Management
Committee required for a valid act of the Management Committee as set forth herein.

     10.7 Appointment of Operator; Construction and Operation of the System. The Joint
Venturers have selected and designated Feagan as Operator of the System in accordance with the
terms and conditions herein and in the Construction and Operating Agreement.

     10.8 Conduct of Operations. The Operator shall conduct all operations in a careful,
diligent, prudent and workmanlike manner, but the Operator shall never be liable to any party for
any acts done or omitted in good faith in the performance of any of the

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provisions of this Agreement, except for acts or omissions resulting from Operator’s gross
negligence, willful misconduct, breach of fiduciary duty or breach of this Agreement.

     10.9 Expenses. Subject to the provisions hereof, the Operator shall purchase or cause
to be purchased for the Joint Venture necessary materials and supplies and incur such expenses and
enter into necessary commitments, including, but not limited to,

     (a) contracts for any approved additions to and replacements for the System,

     (b) contracts for power, fuel, other utilities and communications facilities as may be
necessary in connection with the proper operation and maintenance of same; and

     (c) contracts for gathering of Gas for and through the System and the downstream redelivery or
resale thereof.

     10.10 Personnel. Subject to the provisions hereof, the Operator shall employ such
personnel as may be necessary to efficiently operate and maintain the System, all of which persons
shall either be employees of the Operator or an affiliate of the Operator or independent
contractors. To the extent possible, the Operator shall utilize its own employees or those of its
affiliates; provided, however, that the Operator may engage the services of such independent
contractors as may be necessary to carry out the terms hereof.

     10.11 Discharge of Expenses. Subject to the provisions hereof, the Operator shall
promptly pay and discharge, or cause the Joint Venture to promptly pay and discharge, all expenses,
costs and liabilities incurred in operating and maintaining the System, and shall be fully
responsible for any liens or other encumbrances which the Operator causes or allows to be affixed
or assessed against the said property and shall fully satisfy same (other than liens and
encumbrances approved in advance by the Management Committee).

     10.12 Ad Valorem Taxes. The Operator shall render, or cause the Joint Venture to
render, for ad valorem tax purposes, all real or personal property jointly owned hereunder, or such
part thereof as may be under existing laws or may become under future laws subject to ad valorem
taxation, and shall pay, or cause the Joint Venture to pay, all such taxes at the time and in the
manner required by law. All taxes so paid by the Operator or the Joint Venture shall be charged to
the Joint Venturers according to their respective Joint Venture Percentage Interests at the time of
assessment.

     10.13 Rights of Way. The Operator shall acquire in the name of the Joint Venture the
necessary rights-of-way, easements and permits required for the ownership and operation of the
System and any other facilities comprising a portion thereof. To the

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extent possible, all such rights-of-way, easements and permits shall be acquired in such form as
may allow assignment to the Joint Venturers. The costs of such rights-of-way, easements and permits
shall be charged to the account of each of the Joint Venturers in accordance with their respective
Joint Venture Percentage Interests. To the extent that any Joint Venturer (or their affiliates) has
or owns rights of way, easements or other permits associated with the Project Area which may be
assigned to or held on behalf of the Joint Venture such as would assist the Joint Venture in
constructing, owning and operating the System, such Joint Venturer shall use its best efforts to
transfer such rights to the Joint Venture and shall be reimbursed by the Joint Venture for any
direct costs related thereto.

     10.14 Removal and Replacement of Operator. In addition to, but separate and apart
from, the right of a Non-Defaulting Party (as defined in Section 13.4(a) hereof) to remove the
Operator as a Joint Venturer from the Joint Venture pursuant to the provisions of Section 13.4
hereof, the Operator may be removed from the office of Operator (without being removed as a Joint
Venturer) after written notice thereof to the Operator by any Joint Venturer in accordance with
Section 9.2 of the Construction and Operating Agreement. If the Operator is removed from the
office of Operator, the Management Committee (excluding the Operator) shall select a successor
Operator.

ARTICLE 11

LIABILITY AND INDEMNIFICATION OF JOINT VENTURERS; INSURANCE

     11.1 Limitation of Liability of Joint Venturers. The Joint Venturers, the Management
Committee, the members of the Management Committee and their respective affiliates, and their
partners, officers, directors, employees and agents, shall not be liable, responsible or
accountable in damages or otherwise to the Joint Venture or the other Joint Venturers for any acts
or omissions that do not constitute recklessness, gross negligence, willful misconduct, a breach of
fiduciary duty or a breach of the express terms of this Agreement, and the Joint Venture shall
indemnify and save harmless the Joint Venturers, the Management Committee and the members of the
Management Committee and their respective affiliates, and their partners, officers, directors,
employees and agents (individually, “Indemnitee”) from all liabilities for which indemnification is
not prohibited by the TGPL. Any act or omission performed or omitted by an Indemnitee on advice of
legal counsel or a qualified independent consultant who has been employed or retained by the Joint
Venture shall be presumed to have been performed or omitted in good faith without gross negligence
or willful misconduct. THE PARTIES RECOGNIZE THAT THIS PROVISION SHALL RELIEVE ANY SUCH INDEMNITEE
FROM ANY AND ALL LIABILITIES, OBLIGATIONS, DUTIES, CLAIMS, ACCOUNTS AND CAUSES OF ACTION WHATSOEVER
ARISING OR TO ARISE OUT OF ANY ORDINARY NEGLIGENCE BY ANY SUCH

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INDEMNITEE, AND SUCH INDEMNITEE SHALL BE ENTITLED TO INDEMNIFICATION FROM ACTS OR OMISSIONS THAT
MAY CONSTITUTE ORDINARY NEGLIGENCE.

     11.2 Insurance.

     (a) The Operator shall, either in its own name and for the benefit of all Joint Venturers or
in the name of the Joint Venture, secure and maintain in force the policies of insurance covering
the System as set out in Exhibit “D” hereto, or as may otherwise be authorized and directed by the
Management Committee from time to time. The premiums for all such insurance so carried shall be
paid by the Operator or the Joint Venture, as the case may be, and charged to the Joint Venturers
in accordance with their respective Joint Venture Percentage Interests. Such insurance shall name
each Joint Venturer as an additional assured.

     (b) Notwithstanding the foregoing, each Joint Venturer, at its own expense, shall have the
right to obtain and maintain for its own account and without naming any other party as an insured,
during the term of this Agreement, insurance to protect such Joint Venturer from claims. Such
insurance may be for such coverages and in such amounts as each Joint Venturer shall determine.

     11.3 Claims. The administrative responsibility for handling claims, whether or not
covered by insurance carried by the Operator or the Joint Venture, and the administrative
responsibility for handling litigation, including the employment of attorneys for the System,
shall, but only with the unanimous concurrence of the Joint Venturers parties hereto, belong to the
Operator; provided, however, that any Joint Venturer may have counsel of its own choice to defend
its own interest. Each Joint Venturer who receives any claim or demand shall promptly give notice
of same to the Operator and provide the Operator full and complete information with respect
thereto. The Operator shall promptly give each other Joint Venturer written notice of any such
claim or demand. The Operator may not settle any losses, damages and claims, whether or not covered
by insurance, without the prior written consent of all Joint Venturers.

     All costs of handling, settling or otherwise discharging such claim or suit shall be charged
to the Joint Venturers according to their respective Joint Venture Percentage Interests. The
Operator shall at any time requested furnish any Joint Venturer with full information concerning
the kind, character and amounts of insurance carried. The Operator shall promptly notify the Joint
Venturers of any loss, damage or claim not covered by insurance carried by the Operator or the
Joint Venture and of any loss, damage or claim that might be considered or assumed to be in excess
of the insurance coverage provided by the Operator or the Joint Venture for the benefit of the
Joint Venturers.

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     11.4 Contractors and Subcontractors. The Operator shall require its contractors and
subcontractors conducting operations on the System to carry insurance of the types set out above
and in the amounts applicable to the contractor’s and subcontractor’s operations, and such other
insurance in amounts deemed adequate by the Operator for any particular contract. The Operator
shall require all contractors employed as provided herein, insofar as possible, to indemnify and
hold the Operator and the other Joint Venturers hereto harmless from and against all claims,
demands or causes of action arising out of the performance of contractor’s work.

ARTICLE 12

ASSIGNMENTS

     12.1 Limitation of Right to Transfer Joint Venturers’ Interests. Each Joint Venturer
may sell, assign or otherwise transfer in any manner all or any part of its Joint Venture
Percentage Interest in the Joint Venture and in this Agreement without the consent of the
Management Committee or the other Joint Venturers, but the other Joint Venturers shall have a
right, but not the obligation, to sell, assign or transfer a like percentage of their respective
Joint Venture Percentage Interests on the same terms which the transferring Joint Venturer proposes
to sell, assign or otherwise transfer; provided, however, a merger, consolidation, reorganization
or other acquisition of a Joint Venturer shall not be deemed to be a sale, assignment or transfer
of a Joint Venture Percentage Interest for purposes of this Section 12.1. In such event, the
transferring Joint Venturer shall promptly give written notice to the other Joint Venturers of its
desire to sell, assign or otherwise transfer its Joint Venture Percentage Interest, furnishing full
information concerning the proposed sale, assignment or transfer, including the name and address of
the prospective transferee (who shall be ready, willing and able to comply with all terms of the
proposed sale, assignment or transfer), the purchase price and other consideration, and all terms
of the offer made by the prospective transferee. Each non-transferring Joint Venturer shall then
have an optional prior right, for a period of fifteen (15) days after its receipt of notice from
the transferring Joint Venturer, to accept in writing and sell, assign or transfer a like
percentage of its Joint Venture Percentage Interest upon the same terms and conditions which the
transferring Joint Venturer proposes to sell, assign or otherwise transfer its Joint Venture
Percentage Interest. Upon completion of the sale, assignment or transfer of a Joint Venturer’s
Joint Venture Percentage Interest pursuant to this Section 12.1, the transferee shall be admitted
as a Joint Venturer. Notwithstanding any other provision of this Section 12.1, no Joint Venture
Percentage Interest or other interest in the profits and losses of the Joint Venture may be
transferred if such transfer would result in the Joint Venture or any Joint Venturer becoming
subject to the Public Utility Holding Company Act of 1935. In addition, and notwithstanding
anything herein to the contrary, the provisions of this Section 12.1 shall not apply to the
transfer or pledge of an interest in the Joint Venture made pursuant to Section 12.2 below.

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     12.2 Permitted Transfers by Joint Venturers. Subject to the penultimate sentence of
Section 12.1, nothing in this Agreement shall prevent or require the consent of any Joint Venturer
for:

     (a) the transfer at any time by any Joint Venturer of all its right, title and interest in the
Joint Venture (including indebtedness thereof) and in this Agreement if all of such right, title
and interest is transferred to another Person by merger, reorganization, consolidation or sale of
all or substantially all of its assets, or a sale or transfer of the stock or other voting
securities of such Joint Venturer, or the sale or transfer of the interest in the Joint Venture to
a subsidiary or parent company, or a subsidiary of a parent company, or to any company in which the
transferring Joint Venturer (or an affiliate) owns a majority of the voting securities; provided
that the transferee assumes by operation of law or express agreement with the Joint Venture (in
form and substance reasonably satisfactory to the other Joint Venturers) all of the obligations of
the transferor under this Agreement and that no such transfer (other than pursuant to a merger,
reorganization, consolidation or other combination wherein all obligations and liabilities of the
Joint Venturer are assumed by the successor by operation of law) shall relieve the transferor of
its obligations under this Agreement without the written approval of the other Joint Venturers, and
provided, further, that upon such transfer the transferee shall be admitted as a Joint Venturer in
substitution of the Joint Venturer which was the transferor; or

     (b) an assignment, pledge or other transfer at any time creating a security interest (and any
transfer made in foreclosure or other enforcement of such security interest) in all or any portion
of a Joint Venturer’s interest in or distributions from the Joint Venture (as opposed to a pledge
or mortgage of Joint Venture property) under any pledge or other security agreement created by any
Joint Venturer; provided, however, that such assignee, pledgee, or secured party (i) shall hold the
same subject to all the terms of this Agreement and (ii) shall not have any voice in the management
of the Joint Venture as a result of any such assignment, pledge or other transfer.

     12.3 Effect of Permitted Transfers. No assignment, pledge or other transfer pursuant
to Section 12.2 shall give rise to a right in any Joint Venturer to wind up the Joint Venture.
Except as provided in Section 12.1 and in Section 12.2(a), no assignment, pledge or other transfer
shall give rise to a right in any transferee to become a Joint Venturer in the Joint Venture,
unless approved by the Management Committee.

     12.4 Effects of Prohibited Transfers. Any transfer or attempted transfer of an
interest in the Joint Venture by a Joint Venturer in violation of the terms of this Agreement shall
be void ab initio and shall not bind or be recognized by the Joint Venture or the Joint Venturers.

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ARTICLE 13

TERM; TERMINATION AND WINDING UP

     13.1 Term. The Joint Venture shall be in effect for a term beginning on the date of
this Agreement and shall continue until terminated and wound up in accordance with the provisions
hereof. All provisions of this Agreement relative to termination and winding up shall be
cumulative; that is, the exercise or use of one of the provisions hereof shall not, unless the
context requires, preclude the exercise or use of any other provision hereof.

     13.2 Voluntary Withdrawal of a Joint Venturer. Any Joint Venturer shall have the
right to withdraw from the Joint Venture on the last day of any fiscal year of the Joint Venture by
giving the other Joint Venturers written notice of intent to withdraw. Such notice shall be given
not less than 60 days prior to the last day of any fiscal year.

     13.3 Automatic Termination.

	 	(a)	 	If any of the following shall occur:

	 	(1)	 	the Joint Venturers agree unanimously in writing to terminate
and wind up the Joint Venture; or
	 
	 	(2)	 	an event which makes it unlawful for the business of the Joint
Venture to be carried on; or
	 
	 	(3)	 	the sale or abandonment of all or substantially all of the
Joint Venture’s business and assets; or
	 
	 	(4)	 	the tenth anniversary of the date of this Agreement;

then the Joint Venture and its business shall be promptly wound up, terminated and liquidated.

	 	(b)	 	If any of the following events of withdrawal shall occur:

	 	(1)	 	the voluntary withdrawal of a Joint Venturer in accordance with
Section 13.2; or
	 
	 	(2)	 	the commencement by any Joint Venturer of a voluntary case
under the federal bankruptcy laws, as now constituted or hereafter amended, or
any other applicable federal or state bankruptcy, insolvency or other similar
law, or the consent by any Joint Venturer to, or acquiescence in, the
appointment of or taking possession by a

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	 	 	 	receiver, liquidator, assignee, trustee, custodian, sequestrator (or other
similar official) of said Joint Venturer or for all or any substantial part
of its property or its interest in the Joint Venture (the term
“acquiescence” being deemed to include, but not limited to, the failure to
file a petition or motion to vacate or discharge any order, judgment or
decree providing for such appointment within ten (10) days after the
appointment); or
	 
	 	(3)	 	the entry of a decree or order for relief by a court having
jurisdiction in the premises in respect of any Joint Venturer in an involuntary
case under the federal bankruptcy laws, as now or hereafter constituted, or any
other applicable federal or state bankruptcy, insolvency, or other similar law,
or appointing a receiver, liquidator, assignee, custodian trustee, sequestrator
(or similar official) of the Joint Venturer or for any substantial part of its
property or its interest in the Joint Venture, or ordering the winding up or
liquidation of the affairs of said Joint Venturer, and said Joint Venturer
shall acquiesce in the entry of such decree or order (the term “acquiesce”
being deemed to include, but not limited to, the failure to file a petition or
motion to vacate such order or decree within ten (10) days of the entry
thereof) or any such order or decree shall continue unstayed and unvacated for
a period of sixty (60) consecutive days from the date of entry thereof; or
	 
	 	(4)	 	the failure or inability of any Joint Venturer generally to pay
its debts as such debts become due; or
	 
	 	(5)	 	any Joint Venturer shall give notice to any governmental body
of insolvency or pending insolvency, or suspension or pending suspension of
operations; or
	 
	 	(6)	 	any Joint Venturer shall make an assignment for the benefit of
creditors or take any other similar action for the protection or benefit of
creditors; or

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	 	(7)	 	any Joint Venturer shall sell or otherwise dispose of all or
substantially all of its assets (other than by reason of a transaction
described in Section 12.2(a)); or
	 
	 	(8)	 	any Joint Venturer shall take any action in furtherance or
confirmation of the events mentioned in (2) through (7) above; or
	 
	 	(9)	 	the death of any Joint Venturer; or
	 
	 	(10)	 	the removal of a Joint Venturer from the Joint Venture in
accordance with Section 13.4,

then the Joint Venture and its business shall be promptly wound up, terminated and liquidated and:

	 	(i)	 	the Joint Venturer as to whom an event described above has
occurred (the “Withdrawing Party”) shall immediately cease to be a Joint
Venturer; and
	 
	 	(ii)	 	the Joint Venture and its business shall be wound up and
terminated, unless the remaining Joint Venturers (the “Non-Withdrawing
Parties”) shall elect unanimously in writing to continue the business of the
Joint Venture.

     13.4 Removal for Default.

     (a) If any Joint Venturer fails to observe or perform any of its obligations, covenants or
agreements hereunder or set forth herein, then in such event, any other Joint Venturer
(“Non-Defaulting Party”) shall have the right to give such party (“Defaulting Party”) a notice of
default (“Notice of Default”). The Notice of Default shall set forth the nature of the obligation
which the Defaulting Party has not observed or performed.

     (b) If within the thirty (30) day period following receipt of the Notice of Default, the
Defaulting Party in good faith commences to perform such obligation and cure such default and
thereafter prosecutes to completion with diligence and continuity the curing thereof and cures such
default within a reasonable time, it shall be deemed that the Notice of Default was not given and
the Defaulting Party shall lose no rights hereunder. If, within such thirty (30) day period, the
Defaulting Party does not commence in good faith the curing of such default or does not thereafter
prosecute to completion with diligence and continuity the curing thereof, any Non-Defaulting Party
shall have the right to remove the Defaulting Party from the Joint Venture by giving the Defaulting
Party and all other Joint Venturers written notice thereof.

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     (c) The foregoing cure provisions of this Section 13.4 shall not apply to any default with
respect to the payment of any sums of money by or to any Joint Venturer, which sums of money shall
be paid within thirty (30) days after receipt of a Notice of Default with respect thereto. If such
sums are not so paid within such thirty (30) day period, any Non-Defaulting Party shall have the
right to remove the Defaulting Party from the Joint Venture by giving the Defaulting Party and all
other Joint Venturers written notice thereof.

     13.5 Remedies of Non-Withdrawing Party.

     (a) If the Non-Withdrawing Parties continue the business of the Joint Venture as contemplated
by Section 13.3(b)(ii) hereof, they shall promptly institute the procedures set forth in Section
13.6 hereof (the “Buy-Sell Procedures”).

     (b) The rights of a Non-Withdrawing Party under this Article 13 shall not be the exclusive
remedies of the Non-Withdrawing Party, except in the case of a voluntary termination under Section
13.2, but shall be in addition to all other rights and remedies, if any, available to the
Non-Withdrawing Party at law or in equity.

     13.6 Buy-Sell Procedures.

     (a) Upon the event specified in Section 13.5(a), the Non-Withdrawing Party(s) shall give
written notice of the institution of the Buy-Sell Procedures to the Withdrawing Party within thirty
(30) days after the event specified in Section 13.3(b). Within thirty (30) days after receipt of
such notice, the Withdrawing Party shall deliver to each Non-Withdrawing Party an offer (“Offer”)
in writing, stating the cash purchase price under which the Withdrawing Party is willing to
purchase the interest in the Joint Venture of each Non-Withdrawing Party. Such price shall be
stated in terms of the price attributable to 100% of the Joint Venture. The Non-Withdrawing
Party(s) then shall be obligated either to elect:

	 	(1)	 	to purchase the interest of the Withdrawing Party in the Joint
Venture for cash at a price equal to the 100% price stated in the Offer
multiplied by the Withdrawing Party’s Joint Venture Percentage Interest (in the
event that more than one Non-Withdrawing Party elects to purchase the interest
of a Withdrawing Party hereunder, then each Non-Withdrawing Party so electing
shall purchase a fraction of the Withdrawing Party’s Joint Venture ownership
interest equal to that Non-Withdrawing Party’s interest in the Joint Venture
divided by the interest of all Non-Withdrawing Parties in the Joint Venture
electing to purchase the interest of the Withdrawing Party); or

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	 	(2)	 	to sell to the Withdrawing Party the interest of the
Non-Withdrawing Party in the Joint Venture for cash at a price equal to the
100% price stated in the Offer multiplied by the Non-Withdrawing Party’s Joint
Venture Percentage Interest.

The Non-Withdrawing Parties shall exchange written notices with all other Non-Withdrawing Parties
of such election within thirty (30) days after receipt of the Offer. After receipt of any notice
from another Non-Withdrawing Party, a Non-Withdrawing Party may change its election but must notify
all other Non-Withdrawing Parties in writing of its change prior to notifying the Withdrawing
Party. After final notification to all other Non-Withdrawing Parties, but not later than one
hundred eighty (180) days after receipt of the Offer, a Non-Withdrawing Party shall give written
notice of its election to the Withdrawing Party. Failure of the Non-Withdrawing Party to give all
Non-Withdrawing and Withdrawing Parties notice that the Non-Withdrawing Party has elected under
Subsection (1) above shall be conclusively deemed to be an election under Subsection (2) above.

     (b) The closing of a purchase pursuant hereto shall be held at a mutually acceptable place on
a mutually acceptable date not more than thirty (30) days after receipt by the Withdrawing Party of
the written notice of all Non-Withdrawing Parties’ election under Section 13.6(a) hereof. At such
closing, the selling party shall assign to the purchasing party the interest in the Joint Venture
so sold free and clear of all liens, claims, and encumbrances and, at the request of the purchasing
party, in order to properly set forth the record title to the assets of the Joint Venture, shall
convey and transfer to the purchasing party, with covenants of special warranty, an undivided
percentage interest in the assets of the Joint Venture owned by it and execute all other documents
that may be necessary to effectuate the purpose of this Agreement and the purchasing party shall
pay the purchase price therefor in cash or by a cashier’s or certified check from a bank acceptable
to the selling party. The purchasing party shall assume the obligations of the selling party under
this Agreement and under the Joint Venture. As a condition for purchase, the seller may demand, and
shall be entitled, to be indemnified by the Joint Venture from and against any and all obligations,
costs, or expense relating to or arising under any financing agreement to which the Joint Venture
is a party.

     (c) If the Withdrawing Party fails to make an Offer pursuant to Section 13.6(a) hereof, or if
either the Withdrawing Party or Non-Withdrawing Party elects pursuant to Section 13.6(a), but
thereafter does not close the purchase of such interest pursuant hereto, then the party so failing
shall be deemed to be a non-performing party (“Non-Performing Party”) and the other party
(“Electing Party”), in addition to its other rights and remedies, may (1) continue the Joint
Venture, (2) purchase the interest in the Joint Venture of the Non-Performing Party at the purchase
price determined by multiplying the Non-Performing Party’s Joint Venture Percentage Interest by the
purchase price

27

 

attributable to 100% of the Joint Venture as set forth in the Offer (if one was so made), or (3)
purchase the interest in the Joint Venture of the Non-Performing Party pursuant to Section 13.7.

     13.7 Appraisal Procedure.

     (a) If an election is made under Section 13.6(c) to proceed under this Section 13.7 to
purchase the interest of the Non-Performing Party in and to the Joint Venture at the Appraised
Value (hereinafter defined) thereof, the Electing Party shall give the Non-Performing Party written
notice thereof within thirty (30) days after such default, and in such notice shall designate the
first appraiser (“First Appraiser”).

     (b) Within fifteen (15) days after the service of notice referred to in Section 13.7(a)
hereof, the Non-Performing Party shall give written notice to the Electing Party designating the
second appraiser (“Second Appraiser”). If the Non-Performing Party fails to designate the Second
Appraiser within ten (10) days, then the Electing Party shall designate the Second Appraiser. The
First and Second Appraisers so designated shall meet within ten (10) days after the Second
Appraiser is appointed and if, within thirty (30) days after the Second Appraiser is appointed, the
First and Second Appraisers do not agree upon Appraised Value, they shall, within fifteen (15)
days, appoint a third appraiser (“Third Appraiser”). In the event of the failure or inability of
the First and Second Appraisers to appoint a Third Appraiser within such fifteen (15) day period,
then the Electing Party shall designate the Third Appraiser. In the event of the failure, refusal
or inability of any appraiser to act, a new appraiser shall be appointed in his stead, which
appointment shall be made by the party that initially designated such appraiser so failing,
refusing or being unable to act. Each party shall pay an equal share of the fees and expenses of
the appraisers. Any appraiser designated to serve in accordance with the provisions of this
Agreement shall be disinterested and shall be qualified to appraise property of the type owned by
the Joint Venture.

     (c) The appraisers shall determine the value of one hundred percent (100%) of the Joint
Venture, which shall be the amount by which the fair market value, at the time such appraisal is
made, of all the assets of the Joint Venture exceeds all liabilities of the Joint Venture,
including, but not limited to, liabilities for the repayment of all loans to the Joint Venture
(“Appraised Value”). If the First Appraiser and the Second Appraiser do

28

 

not agree upon the Appraised Value within the thirty (30) day period set forth above, the Third
Appraiser shall determine the Appraised Value of the Joint Venture within thirty (30) days after
his appointment. In such event, the Appraised Value of the Joint Venture for purposes of this
Agreement shall be the value determined by the First Appraiser or the Second Appraiser which is
closest to the Appraised Value determined by the Third Appraiser; provided, however, that if the
Appraised Values of the First and Second Appraisers differ from the Appraised Value established by
the Third Appraiser by the same amount, the Appraised Value established by the Third Appraiser
shall be the Appraised Value of the Joint Venture for purposes of this Agreement. After reaching a
decision, the appraisers shall give written notice thereof to all the Joint Venturers.

     (d) The Electing Party may purchase the Non-Performing Party’s interest in the Joint Venture
for a cash price equal to the Appraised Value multiplied by the Joint Venture Percentage Interest
of the Non-Performing Party. The closing of such purchase shall occur at a mutually acceptable time
within thirty (30) days after notice of the decision of the appraisers has been delivered to the
Joint Venturers, and otherwise shall be conducted in accordance with Section 13.6(b) hereof.

     (e) If the appraisers fail to reach a decision within ninety (90) days after the appointment
of the Third Appraiser, the Electing Party shall have the right to withdraw its election to
purchase the Withdrawing Party’s interest in the Joint Venture pursuant to this Section 13.7.

     13.8 Termination and Winding Up.

     (a) As expeditiously as possible following the occurrence of an event giving rise to a
termination and winding up of the Joint Venture pursuant to the terms hereof, the Management
Committee shall designate a “Liquidating Trustee” who shall promptly proceed to wind up and
terminate the business and affairs of the Joint Venture. Subject to the direction and control of
the Management Committee, the Liquidating Trustee shall have such powers as may be necessary during
the period of winding up to continue operating the System in the normal course to the extent
appropriate for the purpose of winding up the business and affairs of the Joint Venture and
liquidating the assets thereof in an orderly manner, but the Joint Venture shall not engage in any
new business during the period of winding up. In winding up the Joint Venture, the Liquidating
Trustee shall distribute the assets of the Joint Venture as described below:

	 	(i)	 	debts of the Joint Venture, other than to the Joint Venturers,
shall be paid (or adequate provision shall be made for the payment thereof);
then

	 	(ii)	 	debts owed by the Joint Venture to the Joint Venturers shall be
paid; then

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	 	(iii)	 	all remaining assets of the Joint Venture shall be distributed to the
Joint Venturers as follows:

	 	(1)	 	all cash on hand representing unexpended
Capital Contributions by any Joint Venturer shall be returned to the
contributor, then
	 
	 	(2)	 	the Liquidating Trustee may sell any or all
Joint Venture property and any resulting gain or loss from each sale
shall be computed and allocated to the capital accounts of the Joint
Venturers as provided in Section 7.1;
	 
	 	(3)	 	with respect to all Joint Venture property that
has not been sold, the fair market value of that property shall be
determined and the capital accounts of the Joint Venturers shall be
adjusted to reflect the manner in which the unrealized income, gain,
loss, and deduction inherent in property that has not been reflected in
the capital accounts previously would be allocated among the Joint
Venturers under Section 7.1 if there were a taxable disposition of that
property for the fair market value of that property on the date of
distribution; and
	 
	 	(4)	 	Joint Venture property shall be distributed
among the Joint Venturers in the amounts specified in Section 8.1.

All distributions in kind to the Joint Venturers shall be valued for purposes of determining each
Joint Venturer’s interest therein at its fair market value at the time of such distribution, and
such distributions shall be made subject to the liability of each distributee for costs, expenses,
and liabilities theretofore incurred or for which the Joint Venture has committed prior to the date
of termination, and those costs, expenses, and liabilities shall be allocated to the distributee
pursuant to this Section 13.8. It is intended that the foregoing distributions to each Joint
Venturer will be equal to each Joint Venturer’s respective positive capital account balance as
determined after giving effect to the foregoing adjustments and to all adjustments attributable to
allocations of items of income, gain, loss and deduction realized by the Joint Venture during the
taxable year in question and all adjustments attributable to contributions and distributions of
money and property effected prior to such distribution. To the extent that any such Joint
Venturer’s positive capital account balance does not correspond to such distribution, the
allocations provided for in Section 7.1 shall be adjusted, to the least extent necessary, to
produce a capital account balance for the Joint Venturer which corresponds to the amount of such
distribution. Any distribution to the Joint Venturers in liquidation of the Joint Venture shall be
made by the later of the end of the taxable year in which the liquidation occurs or 90 days after
the date of such liquidation. For purposes of the preceding sentence, the

30

 

term “liquidation” shall have the same meaning as set forth in Treasury Regulation
§1.704-1(b)(2)(ii). The distribution of cash and/or property to a Joint Venturer in accordance with
the provisions of this Section 13.8 constitutes a complete return to the Joint Venturer of its
Capital Contribution and a complete distribution to the Joint Venturers of its Joint Venture
Percentage Interest and all the Joint Venture’s property and constitutes a compromise to which all
Joint Venturers have consented. To the extent that a Joint Venturer returns funds to the Joint
Venture, it has no claim against any other Joint Venturer for those funds.

     (b) Notwithstanding anything to the contrary contained in this Agreement, and notwithstanding
any custom or rule of law to the contrary, no Joint Venturer shall be obligated to restore a
deficit balance in its capital account at any time.

     (c) All assignments under this Section 13.8 shall be by special warranty. Such assignments
shall be made subject to the liability of each assignee for costs, expenses and liabilities
theretofore incurred or for which a commitment has been made by the Joint Venture prior to the date
of termination, and such costs, expenses and liabilities shall be allocated to such assignee
pursuant to this Agreement.

     13.9 Effect of Termination or Withdrawal. No termination of the Joint Venture shall
relieve a Joint Venturer from any obligation accruing or accrued to the date of such termination or
deprive a Joint Venturer not in default hereunder of any remedy otherwise available to it.
Withdrawal by a Joint Venturer pursuant to Section 13.3(b) shall terminate such Withdrawing Joint
Venturer’s status as a Joint Venturer, forfeit its voting rights in Joint Venture affairs and
terminate its representation on the Management Committee. In addition, a Joint Venturer’s
withdrawal shall not affect any obligations or liabilities incurred by such Joint Venturer prior to
withdrawal, nor shall such withdrawal affect any other Joint Venturer’s right to seek damages that
it may have incurred as a result of such withdrawal.

ARTICLE 14

SALVAGE

     14.1 Abandonment. It is agreed that, upon abandonment of the System or any portion
thereof, the cost of the salvage of the line so abandoned shall be borne by the Joint Venturers in
accordance with their respective Joint Venture Percentage Interests. Credits derived from salvaged
material shall be distributed to the Joint Venturers in accordance with their respective Joint
Venture Percentage Interests. If the cost of salvage is more than the credits possible of being
received therefrom, salvage operations shall be limited to those required by the governmental
regulations then in effect and applicable to the System.

31

 

ARTICLE 15

CONFIDENTIALITY

     15.1 Confidentiality. Except as may be required or advisable under applicable law or
valid subpoena or other lawful process or other regulatory requirements, each Joint Venturer agrees
that it will (consistent with its reasonable practices and procedures adopted in good faith for
handling confidential information) keep confidential all Joint Venture information relating to the
Joint Venture’s properties and assets, and the Joint Venture’s financial information, and will not
disclose any such information to any Person whatsoever (other than such Joint Venturer’s officers,
directors, employees, beneficial owners, attorneys, accountants, advisors or potential transferees
(provided each of such Persons is informed of the confidential nature of such information) or to
another Joint Venturer and its representatives); provided, however, that the foregoing covenant of
each Joint Venturer shall not apply to any information that (a) was or becomes generally available
to the public other than as a result of disclosure by such Joint Venturer, (b) becomes available to
such Joint Venturer from a source other than the Joint Venture, provided that such source is not
(to the knowledge of such Joint Venturer) bound by a confidentiality agreement with the Joint
Venture, (c) such Joint Venturer can establish was within its possession prior to it being
furnished to such Joint Venturer by or on behalf of the Joint Venture, provided that the source of
such information was not (to the knowledge of such Joint Venturer) bound by a confidentiality
agreement with the Joint Venture in respect thereof, or (d) is necessary to be made in connection
with any financing or investment activity permitted by this Agreement.

ARTICLE 16

MISCELLANEOUS

     16.1 Notice. Any notice, request or other communication required by this Agreement
shall be in writing and shall be deemed to have been given on the third day following the day of
mailing, if the same shall be mailed by certified or registered mail, return receipt requested,
postage prepaid, addressed to:

     (a) each Joint Venturer at the address designated from time to time by such Joint Venturer by
written notice to the Joint Venture, and

     (b) the Joint Venture at its principal office specified in Section 3.2 or such other address
as may be designated from time to time by written notice to each of the Joint Venturers.

     Until changed by notice pursuant hereto, the address of each party for purposes of this
Agreement is as follows:

32

 

Parallel Petroleum Corporation

1004 N. Big Spring, Suite 400

Midland, Texas 79701

Attn: John S. Rutherford

Feagan Gathering Company

130 Spring Park Drive, Suite 105

Midland, Texas 79705

Attn: Joe Feagan

Capstone Oil & Gas Company, L.P.

P.O. Box 10187

Midland, Texas 79702

Attn: Dale Douglas

     16.2 Further Assurance. Each of the Joint Venturers agrees to execute and deliver all
such other and additional instruments and documents and to do such other acts and things as may be
reasonably necessary to effectuate this Agreement and the Joint Venture created thereby and to
carry on the business of the Joint Venture in accordance with this Agreement.

     16.3 Amendment This Agreement may be amended, supplemented or restated only with the
written consent of all the Joint Venturers.

     16.4 Waiver. No waiver by any Joint Venturer or any default by any other Joint
Venturer in the performance of any provision, condition or requirement herein shall be deemed to be
a waiver of, or in any manner release the other Joint Venturers from performance of any other
provision, condition or requirement herein; nor deemed to be a waiver of, or in any manner a
release of the other Joint Venturers from future performance of the same provision, condition or
requirement. Any delay or omission of any Joint Venturer to exercise any right hereunder shall not
impair the exercise of any such right, or any like right, accruing to it thereafter. No waiver of
a right created by this Agreement by one Joint Venturer shall constitute a waiver of such right by
the other Joint Venturers except as may otherwise be hereto.

     16.5 Exhibits. The exhibits, annexes and schedules attached to this Agreement are
incorporated herein and shall be considered a part of this Agreement for the purposes stated
herein, except that in the event of any conflict between any of the provisions of such exhibits,
annexes and schedules and the provisions of this Agreement, the provisions of this Agreement shall
prevail; provided, however, the fact that any term, condition or covenant contained in such
exhibits, annexes and schedules is not contained herein shall not be, or be deemed to be, a
conflict. All capitalized terms used in such exhibits, annexes

33

 

and schedules, but not defined therein, shall have the same meanings as given to such terms in this
Agreement.

     16.6 Applicable Laws. This Agreement shall be governed by and interpreted in
accordance with the laws of the State of Texas.

     16.7 Counterparts This Agreement may be executed in any number of separate
counterparts, each of which shall be deemed an original, but all of which taken together shall
constitute one and the same instrument.

     16.8 Headings. The headings contained in this Agreement are for reference purposes
only and shall not affect the meaning or interpretation of this Agreement.

     16.9 Entirety. As to matters covered by this Agreement, this Agreement constitutes
the entire agreement of the parties hereto and is the complete and final expression of such
agreement.

     16.10 Severability. If one or more of the provisions contained herein shall, for any
reason, be held invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this Agreement.

     16.11 Binding Effect; Joinder of Additional Parties. Subject to the restrictions on
dispositions and transfers set forth herein, this Agreement shall be binding upon and shall inure
to the benefit of the Joint Venturers parties hereto, as well as their respective heirs, legal
representatives, successors and assigns.

     16.12 Third Party Beneficiaries. Except as otherwise provided in Article 11, it is
the intent of the Joint Venturers parties hereto that no third-party beneficiary rights be created
or deemed to exist in favor of any Person not a party to this Agreement, unless otherwise expressly
agreed to in writing by the Joint Venturers.

ARTICLE 17

ARBITRATION

     17.1 General. The Joint Venturers acknowledge and agree that any claim or controversy
arising out of or relating to this Agreement, or the breach of this Agreement, or any other dispute
arising out of or relating to the relationships among the Joint Venturers, shall be settled by
final and binding arbitration in the City of Midland, Texas in accordance with the Expedited
Procedures and Commercial Arbitration Rules of the American Arbitration Association in effect on
the date the claim or controversy arises.

     17.2 Procedures. Any arbitration called for by this Article 17 shall be conducted in
accordance with the following procedures:

34

 

     (a) The Joint Venture or any Joint Venturer (the “Requesting Party”) may demand arbitration at
any time by giving written notice of such demand (the “Demand Notice”) to all other Joint Venturers
and (if the Requesting Party is not the Joint Venture) to the Joint Venture, which Demand Notice
shall describe in reasonable detail the nature of the claim, dispute or controversy.

     (b) Within 15 days after the giving of a Demand Notice, the Requesting Party, on the one hand,
and each of the other Joint Venturers and/or the Joint Venture against whom the claim has been made
or with respect to which a dispute has arisen (collectively, the “Responding Party”), on the other
hand, shall together select and designate in writing to the other party one reputable,
disinterested individual (a “Qualified Individual”), willing to act as an arbitrator of the claim,
dispute or controversy in question. Each of the Requesting Party and the Responding Party shall use
their best efforts to select an arbitrator licensed to practice law in the State of Texas and
having no affiliation with any of the parties as their respective Qualified Individual. Within 15
days after the foregoing selections have been made, the arbitrators so selected shall jointly
select an arbitrator licensed to practice law in the State of Texas having no affiliation with any
of the parties as the third Qualified Individual willing to act as an arbitrator of the claim,
dispute or controversy in question. If the two arbitrators initially selected are unable to agree
on a third arbitrator within the second 15-day period referred to above, then, on the application
of either party, the American Arbitration Association shall promptly select and appoint an
arbitrator licensed to practice law in the State of Texas having no affiliation with any of the
parties as the Qualified Individual to act as the third arbitrator. The three arbitrators selected
pursuant to this subsection (b) shall constitute the arbitration panel for the arbitration in
question.

     (c) The presentations of the parties hereto in the arbitration proceeding shall be commenced
and completed within 60 days after the selection of the arbitration panel pursuant to subsection
(b) above, and the arbitration panel shall render its decision in writing within 30 days after the
completion of such presentations. Any decision concurred in by any two of the arbitrators shall
constitute the decision of the arbitration panel, and unanimity shall not be required.

     (d) The arbitration panel shall have the discretion to include in its decision a direction
that all or part of the attorneys’ fees and costs of any party or parties and/or the costs of such
arbitration be paid by any other party or parties. On the application of a party before or after
the initial decision of the arbitration panel, and proof of its attorneys’ fees and costs, the
arbitration panel shall order the other party to make any payments directed pursuant to the
preceding sentence.

     (e) Any decision rendered by the arbitration panel shall be final and binding on the parties
hereto, and judgment thereon may be entered by any state or federal court of competent
jurisdiction.

35

 

     (f) Arbitration shall be the exclusive method available for resolution of claims, disputes and
controversies described in Section 17.1, and the Joint Venture and its Joint Venturers stipulate
that the provisions hereof shall be a complete defense to any suit, action, proceeding in any court
or before any administrative or arbitration tribunal with respect to any such claim, controversy or
dispute. The provisions of this Article 17 shall survive the dissolution of the Joint Venture.

     (g) Nothing contained herein shall be deemed to give the arbitrators any authority, power or
right to alter, change, amend, modify, add to or subtract from any of the provisions of this
Agreement.

     17.3 Specific Enforcement. The Joint Venturers acknowledge and agree that the
arbitration provisions in Sections 17.1 and 17.2 may be specifically enforced by any Joint
Venturer, and submission to arbitration proceedings compelled, by any court of competent
jurisdiction. The Joint Venturers further acknowledge and agree that the decision of the
arbitrators may be specifically enforced by any Joint Venturer in any court of competent
jurisdiction.

[Remainder of page left blank intentionally]

36

 

     IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed by
its respective duly authorized officer as of the date first written above, to be effective from and
after April 1, 2006.

	 	 	 	 	 
	 	FEAGAN GATHERING COMPANY

 	 
	 	By:  	/s/ Mike Feagan
 	 
	 	 	Mike Feagan, President 	 
	 	 	 	 
	 
	 	PARALLEL PETROLEUM CORPORATION

 	 
	 	By:  	/s/ John S. Rutherford
 	 
	 	 	John S. Rutherford, Vice President of 	 
	 	 	Land and Administration 	 
	 
	 	CAPSTONE OIL & GAS COMPANY, L.P.

By:  Capstone Investments, Inc., its

          general partner

 	 
	 	By:  	/s/ Dale Douglas
 	 
	 	 	Dale Douglas, President 	 
	 	 	 	 

37

 

	 	 	 	 	 

Exhibit “A”

to

Joint Venture Agreement

CONSTRUCTION AND OPERATING AGREEMENT

     This Construction and Operating Agreement, dated as of January 16, 2007, to be effective from
and after April 1, 2006, is between Hagerman Gas Gathering System, a joint venture organized under
the laws of Texas (the “Joint Venture”), and Feagan Gathering Company, a Texas corporation
(the “Operator”).

WITNESSETH:

     Whereas, the Joint Venture has been formed by Parallel Petroleum Corporation, a Delaware
corporation, Capstone Oil & Gas Company, L.P., a Texas limited partnership, and Feagan Gathering
Company, a Texas corporation (collectively, the “Joint Venturers,” and individually, a
“Joint Venturer”) pursuant to that certain Joint Venture Agreement, dated as of January 16,
2007, among the Joint Venturers; and

     Whereas, Operator is engaged in the business of designing and constructing facilities of the
nature as that desired by the Joint Venture, and Operator represents that it has at this time an
adequate, competent and fully-trained organization together with access to necessary tools,
machinery and equipment with which it desires to perform such work for the Joint Venture; and

     Whereas, Feagan Gathering Company has been designated as Operator of a pipeline and
appurtenant facilities owned or to be owned by the Joint Venture and located in Chaves County, New
Mexico; and

     Whereas, Operator and the Joint Venture desire to enter into this Agreement for the work to be
done under the terms and conditions as hereinafter provided.

     NOW, THEREFORE, for and in consideration of the mutual covenants and agreements herein
contained to be done, paid and performed, Operator and the Joint Venture agree as follows:

 

 

ARTICLE 1

Definitions

          1.1 Defined Terms.

          (a) Capitalized terms used herein which are defined in the Joint Venture Agreement and not
otherwise defined herein shall have the meanings specified in the Joint Venture Agreement.

          (b) The words “hereof”, “herein” and “hereunder” and words of similar import when used in this
Agreement shall refer to this Agreement as a whole and not to any particular provision of this
Agreement.

          (c) In addition to the terms defined in the preamble and the recitals of this Agreement, and
in the Joint Venture Agreement, the following terms shall have the following meanings:

          “Agreement” means this Construction and Operating Agreement, as the same may be
amended from time to time.

          “Joint Venture Agreement” means that certain Joint Venture Agreement, dated as of
January 16, 2007, by and among Parallel Petroleum Corporation, Capstone Oil & Gas Company, L.P. and
Feagan Gathering Company, as the same may be amended from time to time.

ARTICLE 2

Operator

          2.1 Designation of Operator. In accordance with Section 10.2 and Section 10.7 of the
Joint Venture Agreement, Feagan has been designated as Operator of the System.

          2.2 Duties of Operator. In addition to the duties of the Operator as set forth in
the Joint Venture Agreement, Operator shall recommend the design, construction, operation,
maintenance, replacement, removal and improvement of the System and shall do and perform, for and
on behalf of the Joint Venture, any and all acts and things necessary, requisite or proper in
connection therewith or in carrying out Operator’s duties and obligations pursuant to the
directions of the Management Committee.

          2.3 Reports. Operator shall report to the Management Committee on all matters
pertaining to the planning, design, construction and operation of the System. During the
construction of the System, Operator shall report to the Management Committee not less frequently
than one time each week. After the construction of the

2

 

System, and throughout the operation of the System, Operator shall report to the Management
Committee not less frequently than one time each month.

          2.4 Limitations. The rights, duties, obligations and responsibilities of Operator
under this Agreement shall be subject in all respects to the provisions of the Joint Venture
Agreement as they relate to Operator.

ARTICLE 3

Conduct of Operations

          3.1 Standard of Care. Operator shall perform its services and carry out its
responsibilities under this Agreement (i) in accordance with the standards set forth in the Joint
Venture Agreement, (ii) in accordance with all applicable laws, rules, orders and regulations of
governmental authorities and (iii) with due diligence and in accordance with engineering practices
customarily accepted for work similar to that contemplated by this Agreement. In performing its
duties and obligations under this Agreement, Operator shall act fairly and impartially, and shall
not favor any one Joint Venturer and shall act as an independent contractor and not an employee or
agent of the Joint Venture or the Joint Venturers.

          3.2 Turnover of Property. If Operator receives any monies or other property properly
owing or belonging to the Joint Venture or any Joint Venturer, such monies or other property shall
be delivered forthwith by Operator to the Joint Venture or Joint Venturer, as the case may be, in
the form received, except for the addition of any endorsement or assignment necessary to effect a
transfer of all rights therein to the Joint Venture or Joint Venturer. The Joint Venture and each
Joint Venturer is irrevocably authorized to supply any required endorsement or assignment which may
have been omitted. Until so delivered, any such monies or other property shall be held by Operator
in trust for the Joint Venture or Joint Venturer, as the case may be, and shall not be commingled
with other funds or property of Operator.

          3.3 Scope of Operator’s Responsibility. Operator agrees to furnish or cause to be
furnished, subject to the conditions and provisions contained herein and in the Joint Venture
Agreement, all process and engineering services, drawings, materials, superintendence, labor,
equipment, tools and machinery required for the design, construction and installation of the System
and agrees to design, construct and install the System in accordance with the Management
Committee’s specifications and proposals. The completed System shall be free and clear of all liens
and encumbrances for labor and materials used thereon. Upon request by the Joint Venture from time
to time, Operator shall submit to the Joint Venture evidence reasonably satisfactory to the Joint
Venture of payment of all debts, taxes, liens, claims, charges and obligations arising out of the
purchase of equipment, material, supplies or labor for use in the work hereunder.

3

 

ARTICLE 4

Work Inspection

          4.1 Right to Inspect. The Joint Venturers shall be entitled to have their respective
inspectors or designees present at any times during the progress of the work to be performed by
Operator, subcontractors, vendors or fabricators hereunder, and these parties shall furnish access
to any of such work to such inspectors or designees at all times. If any work to be performed by
these parties hereunder is found by such inspectors or designees to be unsatisfactory and not in
accordance with the governing plans and specifications or drawings previously approved by the
Management Committee, then Operator shall, upon written notice from the Management Committee,
promptly revise such work in such manner as to conform with said specifications or drawings. It is
further agreed that if such revisions are not promptly made, the Management Committee may, upon
written notice to Operator require Operator to suspend all work until such revisions have been
made.

ARTICLE 5

Personnel

          5.1 Supervision and Compensation of Personnel. Subject to the terms and provisions of
the Joint Venture Agreement, Operator shall employ and have supervision over the personnel
(including outside consultants and professional, service or other organizations) required by
Operator to perform its duties and responsibilities under this Agreement in an efficient and
economically prudent manner. Subject to the provisions of Section 3 of the Accounting Procedures
attached hereto as Exhibit A, the Joint Venture shall pay all reasonable expenses of such
personnel, including compensation, salaries, wages, expenses, social security taxes, worker’s
compensation insurance, retirement and insurance benefits and other such expenses.

ARTICLE 6

Method of Payment

          6.1 Direct Payment by Joint Venture and Reimbursement of Operator’s Costs. During the
progress of the work to be performed hereunder by Operator, all equipment, materials and machinery
which are to be incorporated into and become a component part of the System shall be purchased
either directly by the Joint Venture or by the Operator for and on behalf of the Joint Venture. In
addition, all labor, tools and supplies necessary to diligently and properly perform the work and
complete the construction required hereunder shall be furnished or cause to be furnished by
Operator for the benefit of the Joint Venture, and such labor, tools and supplies shall be
purchased and paid for either directly by the Joint Venture or by the Operator for and on behalf of

4

 

the Joint Venture. If the Joint Venture has not directly paid for any equipment, materials,
machinery, labor, tools and supplies in connection with the work herein provided, then upon the
furnishing by Operator of proof satisfactory to the Joint Venture that any bills and expenses for
any such labor, tools, material, equipment, machinery and supplies have been paid and fully
discharged by Operator, the Joint Venture shall promptly pay and reimburse Operator an amount equal
to the total of such payments as may have been made by Operator. Without limiting the foregoing,
Operator shall also be reimbursed by the Joint Venture for all other reasonable and proper costs,
expenses and expenditures incurred by Operator within the scope of its responsibilities under this
Agreement, including the reimbursable costs described in Exhibit A hereto, in each case in
accordance with the billing and payment procedures set forth in the Accounting Procedures attached
hereto as Exhibit A. Operator shall keep a full and complete account of all costs, expenses and
expenditures incurred by it in connection with (i) the design, construction, operation, maintenance
and other improvement of the System, including any Joint Venture Expansion, and (ii) all other
reimbursable costs.

          6.2 Expenditure Approvals. All construction, operating, maintenance and other
expenditures, and the approvals therefor, shall be subject to the terms and provisions of the Joint
Venture Agreement.

          6.3 Audit. The Joint Venture shall at all times, upon five (5) day’s prior notice in
writing to Operator, have the right during normal business hours to audit, at its own expense, the
books and records of Operator as they relate to the Joint Venture and the System and all books and
records supporting costs incurred by Operator pursuant to this Agreement.

ARTICLE 7

Indemnity, Administration of Claims and Insurance

          7.1 Indemnity.

               (a) The Joint Venture hereby agrees to indemnify and hold harmless Operator, when acting in
its capacity as Operator, and its officers, agents and employees, from and against any loss, claim,
damage and liability, joint or several, and any action in respect thereof, insofar as such loss,
claim, damage, liability or action arises out of, or is based upon, its duties as Operator,
including, without limitation, the design, construction, operation, upkeep, repair, replacement,
removal and improvement of the System and any Joint Venture Expansion, and including any loss,
claim, damage or liability, joint or several, and any action in respect thereof, arising out of the
negligent conduct (but not recklessness, gross negligence or willful misconduct) of Operator, its
officers, agents or employees. The Joint Venture agrees to promptly reimburse Operator, its
officers, agents and employees, for any legal and other expenses reasonably incurred by Operator

5

 

investigating or defending or preparing to defend against any such loss, claim, damage,
liability or action. Indemnification pursuant to this Section 7.1(a) shall be available only to
the extent that policies of insurance carried pursuant to Section 7.3 hereof cover such loss,
claim, damage, liability or action.

               (b) Operator agrees that it will indemnify and hold the Joint Venture and the Joint Venturers
harmless from any and all claims, liens, liabilities or losses arising out of or from Operator’s or
any subcontractor’s or materialman’s failure to fully pay all liens, charges, claims, encumbrances
and obligations arising by operation of law or otherwise out of Operator’s or any subcontractor’s
or materialman’s performance of the work hereunder or the furnishing of any labor, material,
equipment, supplies or other items for use in the construction of the System.

          7.2 Administration. Responsibility for the administration of any claims and litigation
arising out of the design, construction, operation, maintenance, upkeep, repair, replacement,
removal and improvement of the System and any Joint Venture Expansion, or any other matter, shall
be as provided for in Section 11.3 of the Joint Venture Agreement. Upon written request from any
Joint Venturer, Operator will provide true and complete copies of all documents relating to any
claims or litigation and the defense thereof.

          7.3 Insurance. Operator shall carry and maintain in force for the benefit of the
Joint Venture and the Joint Venturers insurance of the types and in the amounts required by the
Joint Venture Agreement. Upon request by the Joint Venture from time to time, Operator shall
furnish certificates to the Joint Venture evidencing that such insurance is in force and that
thirty (30) days advance written notice will be given to the Joint Venture prior to any change,
non-renewal or cancellation thereof.

ARTICLE 8

Taxes

          8.1 Taxes. Except as provided in Section 9.5(b) and Section 10.12 of the Joint
Venture Agreement, the Joint Venture, acting pursuant to the directions of the Management
Committee, shall file all tax returns and shall handle all audits related thereto and render and
pay with funds provided by the Joint Venture (prior to delinquency) all taxes (except income,
excess profits and surcharges thereon, presently and hereinafter enacted) attributable to or
arising from the operation, repair and maintenance of the System or the transportation of Gas
through the System.

6

 

ARTICLE 9

Term, Termination by Default and Preservation of Rights

          9.1 Term. This Agreement shall continue in force and effect until (i) terminated
pursuant to Section 9.2, Section 9.3 or Section 9.4 hereof, (ii) the Joint Venture is dissolved
and terminated pursuant to the terms of the Joint Venture Agreement or (iii) the tenth anniversary
of this Agreement. whichever shall first occur.

          9.2 Removal of Operator. If Operator defaults in the performance of its duties or
obligations under this Agreement, the Joint Venture Agreement or any policies, procedures or rules
adopted by the Management Committee in connection with the work to be performed hereunder, the
Joint Venture or any Joint Venturer shall have the right to give Operator a notice of default (the
“Notice of Default”), which shall set forth the nature of the duty or obligation which
Operator has not observed or performed. Upon receipt of any such Notice of Default, Operator shall
have the right and be given the opportunity to review and discuss with the Joint Venturers any such
Notice of Default. If within the forty (40) day period following receipt of the Notice of Default,
the Operator in good faith commences to perform such duty or obligation and cure such default and
thereafter prosecutes to completion with diligence and continuity the curing thereof and cures such
default within a reasonable time, it shall be deemed that the Notice of Default was not given and
the Operator shall not be removed from the office of Operator and shall lose no rights hereunder.
If, within such forty (40) day period, the Operator does not commence in good faith the curing of
such default or does not thereafter prosecute to completion with diligence and continuity the
curing thereof, any Joint Venturer shall have the right to remove the Operator from the office of
Operator and terminate this Agreement by giving the Operator and all other Joint Venturers written
notice thereof. In the event of its removal, Operator shall have no further responsibility or
authority pursuant to this Agreement, except that related to the transfer of responsibility to any
successor Operator. Subject to Section 6.1 of this Agreement, Operator shall be reimbursed by the
Joint Venture for all expenses it may have reasonably incurred in fulfilling its responsibilities
under this Agreement prior to its removal.

          9.3 Withdrawal of Operator. If the Operator is a Joint Venturer, and if the Operator
withdraws from the Joint Venture pursuant to any of the provisions set forth in Section 12.2 or
Section 12.3 of the Joint Venture Agreement, any Joint Venturer shall then have the right and
option to terminate this Agreement upon written notice to the Operator. In the event of its
withdrawal, Operator shall have no further responsibility or authority pursuant to this Agreement,
except that related to the transfer of responsibility to any successor Operator. Subject to Section
6.1 of this Agreement, Operator shall be reimbursed by the Joint Venture for all expenses it may
have reasonably incurred in fulfilling its responsibilities under this Agreement prior to its
withdrawal.

7

 

          9.4 Resignation of Operator. At any time after July 31, 2007, Operator may resign as
Operator at any time upon sixty (60) days prior written notice to the Joint Venture. In the event
of its resignation, Operator shall have no further responsibility or authority pursuant to this
Agreement, except that related to the transfer of responsibility to any successor Operator. Subject
to Section 6.1 of this Agreement, Operator shall be reimbursed by the Joint Venture for all
expenses it may have reasonably incurred in fulfilling its responsibilities under this Agreement
prior to its resignation.

          9.5 Preservation of Rights. The termination of this Agreement as a result of the
removal, withdrawal or resignation of the Operator (whether in its capacity as a Joint Venturer,
Operator only, or both) pursuant to the terms and provisions of the Joint Venture Agreement or this
Agreement shall be without prejudice to any other right or remedy the Joint Venture or any Joint
Venturer may have as a result of Operator’s removal or withdrawal under the Joint Venture Agreement
or this Agreement, or Operator’s resignation under this Agreement.

ARTICLE 10

Laws and Regulations

          10.1 Compliance with Laws. This Agreement and the rights and obligations of the Joint
Venture and Operator hereunder shall be subject to all applicable laws, rules, orders and
regulations of governmental authorities having jurisdiction, and in the event of conflict, said
laws, rules, orders and regulations of governmental authorities having jurisdiction shall control.
Operator agrees that it will operate the System as an “intrastate pipeline”, as such term is
defined in Section 2(16) of the Natural Gas Policy Act of 1978; and that Operator will not, through
any act or omission, cause or contribute to causing the Joint Venture or any Joint Venturer, or any
facilities thereof, to become subject in whole or in part of the jurisdiction of the Federal Energy
Regulatory Commission or any successor thereto under the Natural Gas Act of 1938, as heretofore or
hereafter amended.

          Operator agrees to comply with all applicable laws, rules, regulations, ordinances and
requirements of federal, state and local governmental or regulatory bodies having jurisdiction over
any aspect of the work performed hereunder. Operator shall indemnify and hold the Joint Venture and
the Joint Venturers, and their respective officers, directors, agents and employees, and their
respective subsidiary and affiliated companies, and their respective directors, officers, agents
and employees, harmless from and against all fines, penalties, expenses or claims resulting from
Operator’s failure to abide by any and all applicable laws, rules, regulations, ordinances or
requirements of governmental or regulatory bodies having jurisdiction.

8

 

ARTICLE 11

Patents

          11.1 Limitation on License and Royalty Fees. No patented article, method or device
which involves or requires the payment of any license fee or royalty in addition to the purchase
price shall be used in connection with the work under this Agreement without prior approval of the
Management Committee.

ARTICLE 12

Safety

          12.1 Standards. Operator shall comply with the Joint Venture’s safety standards and
shall be subject to periodic safety inspections conducted by the Joint Venture. Operator shall also
report to the Joint Venture any injury requiring hospitalization or any fatality as soon as
practical after the incident. The Joint Venture reserves the right to suspend all work (with or
without terminating this Agreement) without penalty if Operator fails to comply with these safety
requirements.

ARTICLE 13

Subcontracts

          13.1 Required Approvals. None of the work to be done by the Operator shall be
subcontracted without the prior approval of the Management Committee and no approval by the
Management Committee to subcontract any portion of such work shall relieve Operator of its primary
obligation to the Joint Venture to properly perform such work in accordance with this Agreement.

ARTICLE 14

Force Majeure

          14.1 Force Majeure. If either Operator or the Joint Venture is rendered unable,
wholly or in part, by force majeure to carry out its obligations under this Agreement, it is agreed
that on such party’s giving notice and reasonable full particulars of such force majeure in writing
to the other party as soon as possible after the occurrence of the cause relied on, the obligations
of the party giving such notice, so far as to the extent that they are affected by such force
majeure, shall be suspended during the continuance of any inability so caused but for no longer
period, and such cause shall so far as possible be remedied with all reasonable dispatch.

9

 

     The term “force majeure” as used herein shall mean acts of God, strikes, lockouts or other
industrial disturbances, acts of terrorism and the public enemy, wars, blockages, insurrections,
riots, epidemics, landslides, lightning, earthquakes, fires not resulting from Operator’s
negligence, storms, floods, washouts, laws, rules and regulations, arrests and restraints of
government, either federal or state, civil or military, civil disturbances, inability of either
party to obtain necessary materials, and any other cause, whether of the kind herein enumerated or
otherwise, which is not reasonably within the control of the party claiming suspension. Rain, snow,
ice or other adverse weather conditions shall not be considered force majeure. It is understood and
agreed that the settlement of strikes or lockouts shall be entirely within the discretion of the
party having the difficulty, and that the above requirement that any force majeure shall be
remedied with all reasonable dispatch shall not require the settlement of strikes or lockouts by
acceding to the demands of an opposing party when such course is inadvisable in the discretion of
the party having the difficulty.

ARTICLE 15

Miscellaneous

          15.1 Applicable Laws. This Agreement shall be deemed to be a contract made under, and
shall be construed in accordance with, and governed by, the laws of the state of Texas; provided,
however, that the rights provided in any other agreement entered into in connection herewith with
reference to properties covered thereby that are situated in other states may be governed by the
laws of such other states.

          15.2 Further Assurances. The Joint Venture and the Operator each hereby agree to
execute and deliver such further documents and to do such other acts and things as either other
party hereto may reasonably request in order to more fully effect the purposes of this Agreement.

          15.3 Waiver. The parties hereto may (a) mutually agree in writing to extend the time
for the performance of any of the obligations or other acts of the other parties hereto, and (b)
waive performance of any of the covenants or agreements, or satisfaction of any of the conditions,
contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall
be valid only if set forth in a written instrument signed on behalf of such party. Except as
provided in this Agreement, no action taken pursuant to this Agreement, including any investigation
by or on behalf of any party, shall be deemed to constitute a waiver by the party taking such
action of compliance with any covenants or agreements contained in this Agreement. The waiver by
any party hereto of a breach of any provision hereof shall not operate or be construed as a waiver
of any prior or subsequent breach of the same or any other provisions hereof.

10

 

          15.4 Assignment. Operator shall not assign this Agreement or its rights and
obligations hereunder without the prior written approval of the Management Committee.

          15.5 Notices. All notices and other communications given or made pursuant to this
Agreement shall be in writing and shall be deemed to have been given or made (i) the third business
day after the date of mailing, if delivered by registered or certified mail (postage prepaid,
return receipt requested), (ii) upon delivery or refusal of delivery, if sent by hand delivery,
(iii) upon delivery or refusal of delivery, if sent by prepaid courier (with record of receipt or
refusal), or (iv) upon confirmed transmission, if sent by telecopier (with a copy simultaneously
sent by certified mail, postage prepaid, return receipt requested), to the parties at the following
addresses:

If to Parallel Petroleum Corporation:

Parallel Petroleum Corporation

1004 N. Big Spring, Suite 400

Midland, Texas 79701

Attention: John S. Rutherford

Telecopy: 432-684-3905

If to Capstone Oil & Gas Company, L.P.:

Capstone Oil & Gas Company, L.P.

P.O. Box 10187

Midland, Texas 79702

Attention: Dale Douglas

Telecopy: 432-682-4498

If to Feagan Gathering Company:

Feagan Gathering Company

130 Spring Park Drive, Suite 105

Midland, Texas 79705

Attention: Joe Feagan

Telecopy: (432) 683-5442

          15.6 Amendment. This Agreement may be amended, supplemented or restated only by a
written instrument signed by the Joint Venture and the Operator.

          15.7 Conflict. If there is a conflict between any of the terms, conditions,
representations, warranties or covenants contained in this Agreement and the terms, conditions,
representations, warranties or covenants in the Joint Venture Agreement, the provisions of the
Joint Venture Agreement shall govern and control; provided, however,

11

 

the fact that any term, condition, representation, warranty or covenant contained herein is
not contained in the Joint Venture Agreement shall not be or be deemed to be, a conflict.

          15.8 Headings. The headings of Articles and Sections contained in this Agreement are
provided for reference and convenience only and shall not affect the meaning or interpretation of
this Agreement.

          15.9 Counterparts. This Agreement may be executed in any number of counterparts
(including by facsimile transmission), each of which shall be an original, but all of which
together shall constitute but one and the same instrument. Neither the Joint Venture nor the
Operator shall be bound hereby until a counterpart of this Agreement has been executed by both of
them.

          15.10 Limitation of Liability. The claims of Operator under this Agreement, if any,
shall be limited to the assets of the Joint Venture, and Operator hereby waives any and all rights
it may have to proceed against the Joint Venture or the Joint Venturers individually.

          15.11 Entire Agreement; No Third Party Beneficiaries. This Agreement, the Joint
Venture Agreement and the documents and instruments to be delivered by the parties in connection
with this Agreement and the Joint Venture Agreement (a) constitute the entire agreements and
supersede all other prior agreements and understandings, both written and oral, among the parties
with respect to the subject matter hereof and the Joint Venture Agreement; and (b) except as
otherwise specifically provided herein, are solely for the benefit of the parties hereto and their
respective permitted successors, legal representatives and assigns and does not confer on any other
person any rights or remedies hereunder.

          15.12 Fair Construction. This Agreement shall be deemed to be the joint work product
of the Joint Venture and Operator without regard to the identity of the draftsperson, and any rule
or construction that a document shall be interpreted or construed against the drafting party shall
not be applicable.

          15.13 Severability. If any term, provision, covenant or restriction of this Agreement
is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of
the terms, provisions, covenants and restrictions shall remain in full force and effect and shall
in no way be affected, impaired or invalidated. It is hereby stipulated and declared to be the
intention of the parties that they would have executed the remaining terms, provisions, covenants
and restrictions without including any of such which may be hereafter declared invalid, void or
unenforceable.

12

 

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written
above, to be effective from and after April 1, 2006.

	 	 	 	 	 
	THE JOINT VENTURE
	 	

HAGERMAN GAS GATHERING SYSTEM

By Each of Its Joint Venturers Named Below

PARALLEL PETROLEUM CORPORATION

 	 
	 	By:  	/s/ John S. Rutherford
 	 
	 	 	John S. Rutherford, Vice President of 	 
	 	 	Land and Administration 	 
	 
	 	CAPSTONE OIL & GAS COMPANY, L.P.

By:  Capstone Investments, Inc., its

          general partner

 	 
	 	By:  	/s/ Dale Douglas
 	 
	 	 	Dale Douglas, President 	 
	 	 	 	 
	 
	 	FEAGAN GATHERING COMPANY

 	 
	 	By:  	/s/ Mike Feagan
 	 
	 	 	Mike Feagan, President 	 
	 	 	 	 
	THE
OPERATOR

	 	

FEAGAN GATHERING COMPANY

 	 
	 	By:  	/s/ Joe Feagan
 	 
	 	 	Joe Feagan, Vice President 	 
	 	 	 	 

13

 

	 	 	 	 	 

Exhibit A

to

Construction and Operating Agreement

Accounting Procedures

     Section 1. Billing and Payment Procedures. On or before the fifteenth
(15th) day of each month, the Operator shall deliver to the Joint Venture a detailed
invoice or request for reimbursement for all costs incurred by or on behalf of the Joint Venture
during the previous month and the Joint Venture shall pay such invoice or request for reimbursement
within ten (10) days of its receipt thereof. If (i) the Joint Venture is unable to timely pay the
full amount of any such invoice or request for reimbursement due to a lack of sufficient funds
maintained by the Joint Venture, and (ii) the Operator, for and on behalf of the Joint Venture,
pays all or any part of such invoice or request for reimbursement that remains unpaid by the Joint
Venture (the “Deficiency Amount”), then the Joint Venture shall be liable to the Operator for the
Deficiency Amount, plus interest thereon at the rate of ten percent (10.00%) per annum, commencing
on the date such amount is paid by Operator and continuing until the Joint Venture has paid the
Deficiency Amount to Operator.

     Section 2. Adjustments. Payment of invoices or requests for reimbursement
hereunder shall not prejudice the right of the Joint Venture or any Joint Venturer to protest the
correctness thereof; provided, however, all bills and statements rendered during any calendar year
shall be presumed to be true and correct after twenty-four (24) months following the end of any
such calendar year, unless prior to the end of such period the Joint Venture or any Joint Venturer
takes exception thereto and makes a written claim for adjustment by written notice to the Operator
and the Joint Venture.

     Section 3. Reimbursable Costs. Operator shall be entitled to be reimbursed
for the following costs and expenses:

          (a) Operator’s Direct General and Administrative Costs. Salaries and wages of
employees of Operator during the construction, operation, maintenance and improvement of the
System, including customary benefits paid to such employees, payroll taxes and insurance, which are
directly allocable to time spent on Joint Venture affairs. Allocable time shall be limited to field
activities carried out directly on or at the physical System.

          (b) Monthly Management Fee in Lieu of Operator’s Indirect General and Administrative
Costs. In lieu of all of Operator’s indirect general and administrative

 

 

costs, which are those general and administrative costs that are not directly allocable to time
spent on Joint Venture affairs, including, but not limited to, executive, clerical, secretarial,
personnel, office service, purchasing, gas accounting, gas procurement and sales, engineering and
operations personnel, the Joint Venture shall pay to the Operator a management fee in an amount
equal to Nine Thousand Five Hundred and No/100 Dollars ($9,500.00) per month. On May 1, 2007, or
as soon thereafter as practicable, the Management Committee and the Operator shall meet for the
purpose of reviewing and reconsidering the amount of the monthly management fee payable to the
Operator under this Section 3(b). The Management Committee and the Operator shall, acting in good
faith and in cooperation with each other, use their best efforts to agree upon (i) whether the
monthly management fee should be maintained at the rate of $9,500.00 per month or (ii) whether the
monthly management fee should be adjusted upward or downward in order to more accurately reflect
the then existing circumstances surrounding the Operator’s services to the Joint Venture.

          (c) Third Party Expenses of Employees. Direct, out of pocket third party expenses
incurred by employees whose time is allocable to the Joint Venture under Section 3(a) above,
detailed in properly approved expense reports as to meals, lodging, transportation and other
related miscellaneous expenses.

          (d) Materials and Supplies. Net cost to Operator, including transportation costs, of
new materials and supplies. Used materials or materials employed as substitutes shall be charged
at an amount commensurate with their depreciated value (in the case of used items) or the value of
the item replaced.

          (e) Fabrication and Inspection Costs. Costs incurred in fabricating materials placed
in service on the System and inspection services performed by independent contractors.

          (f) Construction Contractors. Costs incurred for construction contractors. Operator
shall employ competitive bidding, unless otherwise directed by the Management Committee. Operator
shall obtain the prior approval of the Management Committee before committing to pay amounts to a
contractor over and above contract prices, provided that extra work not contemplated in the
construction contract shall be paid for as set forth in such contract or a written amendment
thereto. Bids shall be obtained whenever practical on all construction projects.

          (g) Routine Expenses. All other expenses incurred by Operator for and on behalf of
the Joint Venture pursuant to the duties and responsibilities of Operator described herein,
including permits, licenses, right-of-way damages, inspection, maintenance, support contractors,
routine legal, equipment rentals and field costs.

 

 

Exhibit “B”

to

Joint Venture Agreement

All of the following leasehold acreage located in Chaves County, New Mexico in the lands described
below owned by Parallel or Capstone as of the date of this Agreement, and all leasehold acreage
located in Chaves County, New Mexico in the lands described below hereafter acquired by Parallel or
Capstone, whether by renewal, extension or new lease taken, but only insofar as such renewal,
extension or new lease is made or taken on or before March 1, 2009 (in each case, whether jointly
or individually owned of record or beneficially by Parallel or Capstone).

Township 12 South, Range 28 East, NMPM: All Sections

Township 12 South, Range 29 East, NMPM: All Sections

Township 13 South, Range 27 East, NMPM: Sections 19 through and including Section 36

Township 13 South, Range 28 East, NMPM: All Sections

Township 13 South, Range 29 East, NMPM: Sections 1 through and including Section 18

Township 14 South, Range 28 East, NMPM: Sections 1 through and including Section 18

Township 14 South, Range 27 East, NMPM: Sections 1 through and including Section 3,

Sections 10 through and including Section 15, Sections 22 through and including Section 27, and

Sections 34 through and including Section 36

Township 14 South, Range 25 East, NMPM: All Sections

Township 14 South, Range 26 East, NMPM: All Sections

Township 14 South, Range 27 East, NMPM: Sections 4 through and including Section 9, Sections

16 through and including Section 21 and Sections 28 through and including Section 33

Township 15 South, Range 24 East, NMPM: Sections 1 through and including Section 3,

Sections 10 through and including Section 15, Sections 22 through and including Section 27, and

Sections 34 through and including Section 36

Township 15 South, Range 25 East, NMPM: Sections 1 through and including Section 31, and

Section 36

Township 15 South, Range 26 East, NMPM: All Sections

Township 15 South, Range 27 East, NMPM: Sections 6 and 7

Gas is committed for all depths.

 

 

Exhibit “C”

to

Joint Venture Agreement

GAS GATHERING AGREEMENT

Among

PARALLEL PETROLEUM CORPORATION

and

CAPSTONE OIL AND GAS COMPANY, L.P.

as Producer

and

HAGERMAN GAS GATHERING SYSTEM

as Gatherer

 

 

TABLE OF CONTENTS

	 	 	 	 	 	 	 
	ARTICLE	 	 	 	PAGE
	 
	 	 	 	 	 	 
	I

	 	Definitions
	 	 	2	 
	 
	 	 	 	 	 	 
	II

	 	Scope of Agreement
	 	 	4	 
	 
	 	 	 	 	 	 
	III

	 	Quantity
	 	 	5	 
	 
	 	 	 	 	 	 
	IV

	 	Agreement Implementation
	 	 	7	 
	 
	 	 	 	 	 	 
	V

	 	Points of Delivery and Redelivery
	 	 	9	 
	 
	 	 	 	 	 	 
	VI

	 	Pressure
	 	 	10	 
	 
	 	 	 	 	 	 
	VII

	 	Gathering, Compression and
Transportation Fees
	 	 	12	 
	 
	 	 	 	 	 	 
	VIII

	 	Quality — Treating and Dehydration Fee
	 	 	13	 
	 
	 	 	 	 	 	 
	IX

	 	Measurement
	 	 	15	 
	 
	 	 	 	 	 	 
	X

	 	Term
	 	 	19	 
	 
	 	 	 	 	 	 
	XI

	 	Taxes
	 	 	19	 
	 
	 	 	 	 	 	 
	XII

	 	Pipeline Operation
	 	 	20	 
	 
	 	 	 	 	 	 
	XIII

	 	Billing and Payments
	 	 	20	 
	 
	 	 	 	 	 	 
	XIV

	 	Right-of-Way
	 	 	22	 
	 
	 	 	 	 	 	 
	XV

	 	Warranty of Title
	 	 	22	 
	 
	 	 	 	 	 	 
	XVI

	 	Regulation
	 	 	23	 
	 
	 	 	 	 	 	 
	XVII

	 	Force Majeure
	 	 	24	 
	 
	 	 	 	 	 	 
	XVIII

	 	Notices and Payments
	 	 	25	 
	 
	 	 	 	 	 	 
	XIX

	 	Relationship of the Parties
	 	 	26	 
	 
	 	 	 	 	 	 
	XX

	 	Insurance During Transportation
	 	 	27	 
	 
	 	 	 	 	 	 
	XXI

	 	Governmental Authority
	 	 	27	 
	 
	 	 	 	 	 	 
	XXII

	 	Priority and Termination of Joint Venture
	 	 	28	 
	 
	 	 	 	 	 	 
	XXIII

	 	General
	 	 	28	 
	 
	 	 	 	 	 	 
	 

	 	Exhibit “A”	 	 	 	 

 

 

GAS GATHERING AGREEMENT

     This Gas Gathering Agreement (hereinafter referred to as the “Agreement”), dated as of
January 16, 2007, to be effective from and after April 1, 2006, is made by and among Parallel
Petroleum Corporation, a Delaware corporation, and Capstone Oil and Gas Company, L.P. (collectively
referred to as “Producer”), and Hagerman Gas Gathering System, a joint venture organized
under the laws of Texas (“Gatherer”). Producer and Gatherer are collectively referred to as
the “parties” and individually as a “party”.

WITNESSETH:

     WHEREAS, Gatherer is engaged or intends to engage in the business of gathering, compressing,
treating, dehydrating, processing for liquefiable hydrocarbon recovery and transporting natural gas
in Chaves County, New Mexico; and

     WHEREAS, Producer desires, on behalf of itself and the other owners of the jointly owned wells
located on the lands within the Contract Area (as defined in Paragraph 3.1 hereof), to have certain
wells connected to Gatherer’s pipeline system for the purpose of, among other things, transporting
Producer’s natural gas; and

     WHEREAS, Gatherer has constructed, or will cause to be constructed, the necessary pipelines
extending from Producer’s wells to points on Gatherer’s pipeline; and

     WHEREAS, such points may require further construction on Gatherer’s facilities, the cost of
which will be borne by Gatherer.

 

 

     NOW, THEREFORE, in consideration of the premises and of the mutual agreements herein
contained, Gatherer and Producer agree as follows:

ARTICLE I

DEFINITIONS

     1.1 In addition to the terms defined elsewhere in this Agreement, the following terms shall
have the respective meanings set forth below:

     “Btu” means British thermal unit, which is the quantity of heat required to raise the
temperature of one pound of water one (1) degree Fahrenheit at or near 39.2 degrees Fahrenheit.

     “casinghead gas” means gas produced with oil from a well that is classified as an oil well
under applicable laws or by ruling, order, or designation of the Oil Conservation Division of the
Energy and Minerals Department of the State of New Mexico (the “OCD”).

     “cubic foot of gas” means the quantity of gas contained in one (1) cubic foot of space at a
pressure of fourteen and seventy-three hundredths (14.73) psia and at a temperature of sixty
degrees (60o) Fahrenheit.

     “day” means a period of twenty-four (24) consecutive hours commencing at 9:00 a.m. on one
calendar day and ending at 9:00 a.m. on the following calendar day.

     “gas” means natural gas produced from gas wells and casinghead gas produced in association
with oil and residue gas resulting from processing for liquefiable hydrocarbon recovery both gas
well gas and casinghead gas.

2

 

     “gas well gas” means all natural gas that is not casinghead gas.

     “Heating Value” means the gross number of Btus produced by combustion, at a constant pressure,
of the amount of dry gas which would occupy a volume of one (1) cubic foot at a temperature of
sixty degrees Fahrenheit and a pressure of 14.73 psia, with air of the same temperature and
pressure of the gas, when the products of combustion are cooled to the initial temperature of the
gas and air and the water formed by combustion is condensed to the liquid state, adjusted from
ideal to real conditions, and further adjusted to reflect the water vapor content at delivery
conditions.

     “liquefiable hydrocarbons” means ethane, propane, isobutane, normal butane and natural
gasoline separated or recovered at Gatherer’s plant facilities.

     “Mcf” means one thousand (1,000) cubic feet of gas.

     “month” means a period beginning at 9:00 a.m. on the first day of a calendar month and ending
at 9:00 a.m. on the first day of the succeeding calendar month.

     “psia” means pounds per square inch absolute.

     “psig” means pounds per square inch gauge.

     “well” means any well classified as a gas well or as an oil well by the OCD or any other
governmental authority having jurisdiction.

     “year” means the period beginning at 9:00 a.m. on the first day of a calendar year and ending
at 9:00 a.m. on the first day of the succeeding calendar year; provided that the first year of this
Agreement shall commence on the effective date hereof and end on the next succeeding December 31st
and the last year of this Agreement shall end at the “termination” hereof.

3

 

ARTICLE II

SCOPE OF AGREEMENT

     2.1 Pursuant to the terms hereof, Gatherer agrees to (i) operate and maintain its natural gas
pipeline system and any additions thereto (collectively, the “System”) which shall extend
from the Delivery Point(s) at or near Producer’s wells to the pipeline owned by
Transwestern Pipeline Company (“Transwestern”) or other pipeline company designated by
Producer at the Point(s) of Redelivery (as defined in Paragraph 5.2), and (ii) receive, gather,
dehydrate, treat for CO2, process for recovery of liquefiable hydrocarbons, compress, transport and
redeliver any and all gas committed to this Agreement as provided for herein. To expedite
connecting Gatherer’s facilities to Transwestern, Producer agrees to pay to Gatherer in advance the
estimated cost of connecting Gatherer’s facilities to Transwestern (including rights-of-way,
surveying and similar customary charges) prior to the time any wells drilled by the Producer on or
before the date of this Agreement and located in the Contract Area (as defined in Paragraph 3.1)
are connected to the System and initial deliveries made. Gatherer will thereafter invoice
Producer for the actual cost of such construction (which amounts will be offset by Producer’s prior
estimated payments). Producer shall not be obligated to pay for any construction costs associated
with the connection of any additional wells to the System which are drilled in the Contract Area
(as defined in Paragraph 3.1) after the date of this Agreement.

4

 

ARTICLE III

QUANTITY

     3.1 Producer hereby dedicates and commits for the term of this Agreement all its interest in
the gas produced and sold from Producer’s wells located on the lands described in Exhibit A
attached hereto (the “Contract Area”), subject, however, to the limitations set forth
herein and in the preamble of Exhibit A. This Agreement shall not imply or require any
leasehold preservation, drilling or development obligations on the part of Producer. Subject to the
terms and conditions hereof, Gatherer hereby covenants and agrees that commencing on the date of
first deliveries hereunder and continuing until termination of this Agreement, Gatherer will
receive all gas tendered by Producer at the Delivery Point(s) under this Agreement. Producer agrees
to notify Gatherer in writing when initial deliveries of gas are expected to commence and the
expected deliverability rates from each well.

     3.2 If Gatherer fails to connect any well within sixty (60) days from the date Gatherer
receives written notification as provided for in Article 3.1, then Producer shall have the right,
but not the obligation, to withdraw any such well from the terms of this Agreement and, upon
Gatherer’s receipt of written notice from Producer withdrawing any such well, such well shall
automatically, and without any further action on the part of Producer or Gatherer, be released from
the terms of this Agreement without further obligation or liability of Producer of any kind with
respect to such well.

     3.3 Producer expressly reserves for itself, its successors and assigns, the following prior
rights with respect to the gas subject hereto:

5

 

          (a) The right to deliver to lessors under any of the leases subject hereto gas required in
kind to meet the requirements of lessee’s obligations under such leases to furnish gas to such
lessors.

          (b) The right to use gas reasonably required to develop and operate Producer’s properties in
the Contract Area, including, but not limited to, use of gas for drilling, reworking, operating,
treating, gas lift and compression fuel.

          (c) Subject to the other provisions of this Agreement, the control, management and operation
of the properties subject to this Agreement shall be and remain the exclusive right of Producer.
Producer may, in its sole uncontrolled discretion and as it deems advisable, drill new wells,
repair or rework old wells, renew or extend in whole or in part any lease or unit, and abandon any
well or surrender, terminate or release all or any part of any lease not deemed by Producer capable
under normal production methods of producing gas in commercial quantities.

          (d) The right from time to time to alter any gas unit by increasing or decreasing the surface
acreage contained therein or to pool or combine any lease or unit or any part thereof with other
properties or to include in any unit any interest in lands covered by such unit not theretofore
included in such unit; and in the event of any pooling, unitization or change in any unit, this
Agreement shall apply only to the interest of Producer in the unit or units and the gas
attributable thereto but only insofar as such interest is attributable to the lands and leases
committed hereunder.

6

 

     3.4 Gatherer shall have the right to process, or cause to be processed by others, all gas
hereunder for the recovery of liquefiable hydrocarbons prior to the delivery of such gas to
Gatherer at the Delivery Point(s) hereunder; provided, however, that the Gatherer shall be
obligated to accept the residue gas resulting therefrom in accordance with the terms and provisions
hereof.

ARTICLE IV

AGREEMENT IMPLEMENTATION

     4.1 All facilities provided by Gatherer shall be of sufficient design, capacity and capability
for receiving, gathering, compressing, dehydrating, treating for CO2, processing for the recovery
of liquefiable hydrocarbons, transporting and redelivering the gas subject hereto and shall be
provided by Gatherer in accordance with the following:

     (a) volumes of gas transported hereunder shall be redelivered at uniform hourly and daily
rates of flow subject to the needs of Producer or its designee at the Point(s) of Redelivery;

     (b) subject to all other provisions of this Agreement, Gatherer shall each day redeliver to
Producer or Producer’s designee such daily quantities of gas as are available and tendered by
Producer during such day (less fuel, shrinkage and losses) with all deliveries and
redeliveries hereunder to be balanced monthly on an MMBtu basis. For each Point of Delivery,
Gatherer will allocate to Producer its proportionate share of gas in MMBtus at the Points of
Redelivery by multiplying the total MMBtus at the Point of Redelivery (obtained by multiplying the
Heating Value by the Mcf at the Redelivery Point) times a ratio, the numerator of which is the
MMBtus at that Point of Delivery

7

 

(obtained by multiplying the Heating Value by the Mcf at the Delivery Point) and the denominator of
which is the MMBtus from all Points of Delivery delivering gas into Gatherer’s System; and

     (c) Unless Producer elects to take in kind its share of liquefied hydrocarbons saved and sold
(at Producer’s sole cost and expense), Gatherer will allocate to Producer its proportionate share
of liquefied hydrocarbons saved and sold at Gatherer’s plant facilities. Allocations will be made
on the same basis as in Article 4.1(b).

ARTICLE V

POINTS OF DELIVERY AND REDELIVERY

     5.1 The point of delivery for measurement, allocation and transfer of possession of gas
received by Gatherer hereunder shall be at the inlet flange of Gatherer’s meter station
located immediately downstream of Producer’s separation facilities (the “Point(s) of
Delivery” or “Delivery Point(s)”).

     5.2 The point of redelivery for measurement, allocation and transfer of possession of gas from
Gatherer to Producer shall be at the inlet flange of the existing meter located at a point of
interconnection of Gatherer’s System and Transwestern Pipeline Company’s meter site located in
Section 23, T-14S, R-27E, Chaves County, New Mexico (the “Point(s) of Redelivery” or
“Redelivery Point(s)”). One or more additional Points of Redelivery may be designated from
time to time by mutual consent of the parties.

     5.3 As between Producer and Gatherer, Producer shall be in control and possession of the gas
delivered hereunder until the same shall have been delivered to

8

 

Gatherer at the Point of Delivery, and Producer shall also be liable and responsible for any
damages or injuries resulting from the delivery of the gas until Producer shall have delivered the
same to Gatherer at the Point of Delivery, except for damages and injuries which result solely and
proximately from Gatherer’s negligence. From and after the Point of Delivery, Gatherer shall be in
control and possession of the gas and Gatherer shall be liable and responsible for any leaks,
blowouts, damages or injuries caused thereby until the same shall have been redelivered to Producer
or Producer’s designee at the Point of Redelivery; provided, however, title to all liquefiable
hydrocarbons and gas transported hereunder shall at all times remain in and with Producer.

     5.4 If in Gatherer’s reasonable good faith judgment it becomes commercially unprofitable for
Gatherer to maintain and operate a connection at any Point of Delivery, then Gatherer may elect to
terminate this Agreement as it applies to any such Point of Delivery by giving Producer one hundred
eighty (180) days prior written notice of such election.

ARTICLE VI

PRESSURE

     6.1 The pressure at which Producer shall deliver, or cause to be delivered, gas at each Point
of Delivery shall be sufficient to enter Gatherer’s pipeline at each such Point of Delivery from
time to time; provided, however, Gatherer’s pressure at the Point(s) of Delivery shall not exceed
400 psig.

     6.2 If any of Producer’s wells become incapable of delivering gas into Gatherer’s pipeline,
neither party shall have an obligation to compress, but each party

9

 

shall have the option to do so. If Gatherer elects not to compress within a reasonable time after
the need for compression appears, Producer may, by written notice to Gatherer, request that
Gatherer either provide compression or release the affected gas sources as to the then-producing
formations from commitment under this Agreement. If Producer requests that Gatherer provide
compression, Gatherer shall promptly arrange for providing compression and upon installation of the
necessary compression equipment the price to be paid by Gatherer for Producer’s gas shall be
increased by a mutually agreeable compression fee that will allow Gatherer to recover its related
fuel costs and reasonably compensate Gatherer for such additional costs and services.

     6.3 Producer will furnish and cause to be installed at Producer’s expense, in accordance with
customary industry standards, over-pressure protection devices which will control the pressure of
gas being delivered to a pressure not in excess of 500 psig. Gatherer shall not be responsible for
any gas lost as a result of the failure of the operation of any such pressure devices.

     6.4 If Gatherer’s pressure exceeds 400 psig at the Point of Delivery, Producer may give
Gatherer written notice of Gatherer’s breach of this Agreement and Gatherer shall have ninety (90)
days after receipt of any such notice to take, at Gatherer’s expense, such actions as may be
necessary to cure any such breach of this Agreement. If Gatherer does not cure such breach within
the time provided for in this Paragraph 6.4, upon Gatherer’s receipt of written notice from
Producer withdrawing such Point of Delivery and the associated gas, such Point of Delivery and
associated gas shall automatically, and without any further action on the part of Producer or
Gatherer, be released from the terms

10

 

of this Agreement without further obligation or liability of Producer of any kind with respect to
such Point of Delivery and associated gas.

ARTICLE VII

GATHERING, COMPRESSION AND TRANSPORTATION FEES

     7.1 Producer will use its best efforts to deliver a daily volume of 2,000 Mcf to Gatherer at
the Point(s) of Delivery for a period of twelve months beginning from the date of first delivery of
gas under this Agreement. Producer agrees to pay Gatherer a fee per Mcf measured at the Delivery
Point(s) as follows:

     (a) Gathering Fee — Producer will pay a gathering fee of $.25 per Mcf for metering at the
Point of Delivery, gathering and delivering gas to a central field point;

     (b) Compression Fee — Producer will pay a compression fee of $.15 per Mcf for compressing
gas to a pressure sufficient to enable delivery of gas into Transwestern at the Redelivery Point at
approximately 1050 psig, and Producer shall bear its proportionate share of compression fuel; and

     (c) Transportation Fee — Producer will pay a transportation fee in the amount of $.20 per Mcf
for the delivery of gas from a central field point through a sixteen inch pipeline to the Points of
Redelivery.

11

 

ARTICLE VIII

QUALITY — TREATING AND DEHYDRATION FEE

     8.1 Producer’s gas shall comply at all times with the following specifications: the gas

     (a) shall be commercially free from objectionable odors, objectionable liquid and solid
matters, dust, gums, and gum forming constituents, or any other substance which interferes with the
intended purpose of merchantability of the gas, or causes interference with the proper and safe
operation of the lines, meters, regulators or other appliances through which it may flow;

     (b) shall contain no hydrocarbons in liquid form at the temperature and pressure at which the
gas is delivered into the System;

     (c) shall contain not more than 0.2% by volume of oxygen;

     (d) shall contain not more than 2.0% by volume of carbon dioxide;

     (e) shall contain not more than a combined total of 3.0% by volume of carbon dioxide plus
nitrogen;

     (f) shall contain not more than one quarter (1/4) grain of hydrogen sulfide;

     (g) shall contain not more than 0.3 grains of mercaptan sulfur per one hundred (100) cubic
feet of gas;

     (h) shall contain not more than 0.75 grains of total sulfur per one hundred (100) cubic feet
of gas;

12

 

     (i) shall not contain any toxic or hazardous substance in concentrations which, in the normal
use of the gas, may be hazardous to health, injurious to pipeline facilities or limit
merchantability or be contrary to applicable government standards;

     (j) shall have a minimum total Heating Value of not less than nine hundred seventy (970) Btu
per cubic foot; and

     (k) shall have a temperature of not less than forty (40) degrees Fahrenheit, and not more than
one hundred twenty (120) degrees Fahrenheit.

     8.2 If any of the gas delivered by Producer fails in any material respect to meet the quality
specifications set forth in Paragraph 8.1, Gatherer may at its option either (i) accept delivery of
the gas or (ii) discontinue or curtail taking gas at any Point of Delivery. If Gatherer elects to
accept delivery of “off specification” gas and incurs any incremental costs relating to its
acceptance and delivery of “off specification” gas into the System, Gatherer shall be entitled to
charge Producer an additional fee of $.21 per Mcf.

ARTICLE IX

MEASUREMENT

     9.1 Measurement facilities at the Point(s) of Delivery shall be installed, owned, maintained
and operated by Gatherer or its agent. Producer may, at its option and expense, install check
measuring and testing equipment for checking the accuracy of the equipment at any Point of
Delivery; provided, however, any check measuring and testing equipment installed by Producer shall
not interfere with the operation and use of Gatherer’s facilities at the Point of Delivery.

13

 

     9.2 Gatherer will use its best efforts to cause Transwestern to install, maintain and operate
at Transwestern’s expense, at the Points of Redelivery, measuring equipment of a type acceptable to
both Gatherer and Producer and of ample size and proper type for the accurate measurement of the
gas delivered hereunder, and shall cause said measuring equipment to be read at regular periods
which are consistent with accurate measurement. If Transwestern fails or refuses to install,
maintain and operate such measuring equipment, then Gatherer shall do so at its sole expense. The
location and installation of such measuring equipment shall be such as to prevent, so far
as is reasonably possible, pulsations of compressors from interfering with accurate measurement. If
at any time or from time to time Gatherer commingles gas from a Point of Delivery with gas from a
source other than a Point of Delivery under this Agreement, then Gatherer shall measure such other
gas prior to its entering Gatherer’s System.

     9.3 The unit of volume for measurement of gas delivered hereunder shall be one (1) cubic foot
of gas. All measurement of gas hereunder shall be determined by calculation in terms of such unit.
All fundamental constants, observations, records and procedures utilized in determining or
verifying the volume and quality of gas delivered hereunder shall be in accordance with the
standards prescribed in aga3 ANSI/API 2530, as now in effect and as hereafter amended or
supplemented from time to time.

     9.4 Gatherer, or its designee shall operate the measuring stations located at each Point of
Delivery. The reading of electronic flow meters and the calculation of volumes therefrom shall
be the responsibility of the Gatherer. The calibration and

14

 

adjustment of such meters shall be made or arranged for by the parties hereto in compliance with
the terms and provisions hereof.

     9.5 The specific gravity of gas committed to this Agreement shall be determined with accuracy
to the nearest one thousandth (0.001) by taking samples of the gas at the Point of Delivery at such
times as may be designated by any party hereto, but no less often than two (2) times per year. The
specific gravity of the gas shall be determined by gas chromatography. The specific gravity
determined by any test shall apply from the first day of the month following the date the test was
taken until the first day of the month following the next test.

     9.6 Each party shall be given reasonable and sufficient prior notice and shall have the right
to be present at the time of installing, reading, cleaning, changing, repairing, inspecting,
testing, calibrating or adjusting measuring and testing equipment used by the other party in
connection with the delivery of gas hereunder. The records from measuring equipment shall remain
the property of the owner of such equipment, but upon request, each party will submit to the other
its records and charts, together with calculations therefrom, which shall be returned to the owner
within fifteen (15) days after receipt thereof. Test data and other similar records pertaining to
the delivery and transportation of gas hereunder shall be retained by the party owning such records
for a period of not less than two (2) years.

     9.7 At least once every three (3) months, the Gatherer shall calibrate and adjust meters at
the Delivery Points or cause the same to be calibrated and adjusted. The Gatherer shall give
Producer sufficient notice in advance of such tests so that Producer

15

 

may be present to observe the calibration and adjustments, if any, which are made. For purposes of
measurement and meter calibrations hereunder, the atmospheric pressure shall be assumed to be
fourteen and sixty-five hundredths (14.65) psia, irrespective of variations in natural atmospheric
pressure from time to time. Gatherer shall, upon written request of Producer, conduct tests of
Gatherer’s measuring equipment; provided, however, in no event shall Gatherer be required to test
its measuring equipment more frequently than once each month. All tests of measuring equipment
shall be made at Gatherer’s expense, except that Producer shall bear the expense of tests made at
its request if the inaccuracy is found to be less than two percent (2.00%).

     9.8 If at any time the metering equipment at the Point of Redelivery is found to be inaccurate
by a margin of two percent (2.00%) or more, registration thereof and any payment based upon such
registration shall be corrected at the rate of such inaccuracy for any period of inaccuracy which
is definitely known or agreed upon, or if not known or agreed upon, then for a period extending
back one-half (1/2) of the time elapsed since the last day of calibration. Following any test, any
metering equipment found to be inaccurate to any degree shall be adjusted immediately to measure
accurately. If, for any reason, any meter at a Point of Delivery is out of service or out of
repair so that the quantity of gas delivered through such meter cannot be ascertained or computed
from the readings thereof, the quantity of gas delivered during the period the meter is out of
service or out of repair shall be estimated and agreed upon by the parties upon the basis of the
best available data using one of the following methods which the parties deem to be the most
feasible:

16

 

     (a) by using the registration of any check metering equipment if installed and registering
properly;

     (b) by correcting the error if the percentage of error is ascertainable by calibration, test
or mathematical calculation; or

     (c) by estimating the quantity or quality of deliveries by deliveries made during preceding
periods under similar conditions when the meter was registering accurately.

ARTICLE X

TERM

     10.1 Subject to the other terms and provisions hereof, this Agreement shall be effective from
the date hereof and shall thereafter continue and remain in full force and effect for an initial
term of ten (10) years and shall continue year-to-year thereafter until either party gives written
notice of termination of this Agreement to the other party not less than 60 days prior to any
anniversary date of this Agreement.

ARTICLE XI

TAXES

     11.1 Commencing on the effective date hereof, each of the parties hereto shall be solely
responsible for and agrees to hold the other party harmless from the payment of any and all taxes
or charges of every kind applicable to the gas hereunder or to the transportation hereof pursuant
to statutes or orders of governmental authorities having jurisdiction. Neither party shall be
responsible or liable for any taxes or other statutory

17

 

charges levied or assessed against the facilities of the other party used for the purpose of
carrying out the provisions of this Agreement.

ARTICLE XII

PIPELINE OPERATION

     12.1 Throughout the term of this Agreement, Gatherer shall have and retain full and continuing
responsibility for the care, maintenance and condition of Gatherer’s System and Producer does not
assume, nor shall it have any responsibility, obligation or liability for, the care, maintenance
and condition of the System. Gatherer shall at all times operate the System, or cause the System to
be operated, in a reasonable and prudent manner consistent with customary industry standards and
practices pertaining to the gathering and transportation of gas. Gatherer agrees to indemnify and
hold harmless Producer from and against any and all loss, costs, claims, damages and expense
resulting from Gatherer’s failure to operate the System in accordance with the standards set forth
in this Paragraph 12.1.

ARTICLE XIII

BILLINGS AND PAYMENTS

     13.1 Gatherer shall deliver to Producer, no later than fifteen (15) days after the end of each
month, a statement and billing of the total quantities of gas received and redelivered hereunder
during the preceding month.

     13.2 Producer shall pay to Gatherer on or before the expiration of twenty (20) days after
Producer’s receipt of the statement and billing provided for in Paragraph 13.1

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above, all charges, costs and fees billed by Gatherer to Producer in accordance with the provisions
of this Agreement.

     13.3 Each party shall have the right to examine at any reasonable time all books, records and
measurement data of the other party to the extent necessary to verify the accuracy of any statement
or computation made under or pursuant to the provisions of this Agreement.

     13.4 If Producer fails to pay all or any part of any billing for services rendered by Gatherer
hereunder or any other charges payable hereunder, interest on the undisputed unpaid amount shall
accrue at a rate per annum which is two percent (2.00%) above the prime rate of interest of Wells
Fargo Bank Texas, N.A. as announced or published by such bank from time to time (adjusted from time
to time to reflect any changes in such rate determined hereunder).

     13.5 If presentation of a bill by Gatherer is delayed to a date after the fifteenth (15th) day
of a production month, then the time for payment of such bill shall be extended for a period of
time equivalent to the period of delay.

     13.6 If an error is discovered in the amount billed in any statement rendered by Gatherer to
Producer, such error shall be adjusted without interest or penalty as soon as reasonably possible,
but in any event no later than three (3) months after written notice of such error (the “Notice of
Error”) has been given by one party to the other. The computation of fees, and the computation and
allocation of MMBtus received at the Delivery Point and redelivered at the Redelivery Point shall
be deemed to be correct unless the written Notice of Error is given within two (2) years after the
month in which the gas was produced.

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ARTICLE XIV

RIGHT-OF-WAY

     14.1 Insofar as each party is contractually and legally able to do so, each party hereby
grants (the “granting party”) to the other party the right to install, operate and maintain
equipment utilized hereunder on the property of the granting party and the right of free access to
such equipment for purposes relating to this Agreement; but only to the extent such access does not
interfere with the granting party’s rights of ownership, operation, use or enjoyment of the
property, whether under the terms of this Agreement or otherwise.

ARTICLE XV

WARRANTY OF TITLE

     15.1 Producer warrants title (by, through and under Producer, but not otherwise) to its gas
delivered by it hereunder, and warrants that it has the right to deliver the same free from liens
and adverse claims of every kind. Each party will indemnify and hold the other party harmless from
and against any and all loss, costs, claims, demands, damages and expense of every character with
respect to gas delivered by it on account of royalties, taxes, payments or other charges applicable
before or upon delivery of the gas.

     15.2 Producer agrees to indemnify and hold Gatherer harmless from and against any and all
loss, costs, claims, demands, damages and expense on account of any damage to property or injury to
persons arising or resulting from (i) any breach by Producer of its covenants and agreements
contained herein or arising or resulting from (ii) Producer’s operations hereunder, unless caused
by Gatherer’s negligence or willful misconduct.

20

 

     15.3 Gatherer agrees to indemnify and hold Producer harmless from and against any and all
loss, costs, claims, demands, damages and expense on account of any damage to property or injury to
persons arising or resulting from (i) any breach by Gatherer of its covenants and agreements
contained herein or arising or resulting from (ii) Gatherer’s operations hereunder, unless caused
by Producer’s negligence or willful misconduct.

ARTICLE XVI

REGULATION

     16.1 This Agreement shall be interpreted, governed and construed in accordance with the laws
of the State of Texas.

     16.2 Both parties represent that all of the gas hereunder will be produced and transported in
the State of New Mexico, except as to any transportation of gas authorized to be made pursuant to
enabling legislation or regulations of the U.S. Federal Energy Regulatory Commission
(“FERC”) which do not subject gas to any increased jurisdiction of FERC and each party
recognizes that the other party has entered into this Agreement based upon such representation, and
further recognizes that such other party would have been unwilling to enter into this Agreement in
the absence of such representation. If either party voluntarily undertakes any course of action
that is not required by any governmental agency or law and which results in any portion of the gas
delivered hereunder being sold, transported, used, consumed or commingled in such a manner as to
increasingly subject such gas to the jurisdiction of FERC or any successor agency, then this
Agreement shall be deemed to have terminated by its own terms on the day prior to the date of such
occurrence.

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ARTICLE XVII

FORCE MAJEURE

     17.1 If either party is rendered unable, wholly or in part, by events of “force majeure” to
carry out its obligations under this Agreement, other than the obligation to make monetary
payments, that party shall give to all other parties prompt written notice of the force majeure
event with reasonably full particulars. After such notice has been given, the obligations of the
party giving such notice, so far as they are affected by the event of force majeure, shall be
suspended during, but no longer than, the continuance of the force majeure event, and the affected
party shall use all reasonable diligence to remedy the force majeure event with all reasonable
diligence. The term “force majeure” as used herein shall mean all acts of God, strikes, lockouts
or other industrial disturbances, acts of terrorism and the public enemy, wars, blockages,
insurrections, public riots, lightning, earthquakes, fires not resulting from a party’s negligence,
storms, floods, washouts, explosions, inability of either party to obtain necessary materials,
supplies, rights-of-ways, permits or labor, and any other cause, whether of the kind specifically
enumerated above or otherwise, which is not reasonably within the control of and could not
reasonably have been avoided by the party claiming suspension in the exercise of ordinary
diligence. It is understood and agreed that the settlement of strikes or lockouts shall be
entirely within the discretion of the party involved, and that the above requirement that any force
majeure event shall be remedied with all reasonable diligence shall not require the settlement of
strikes or lockouts by the party involved.

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ARTICLE XVIII

NOTICES AND PAYMENTS

     18.1 All notices and other communications given or made pursuant to this Agreement shall be in
writing and shall be deemed to have been given or made (i) the third business day after the date of
mailing, if delivered by registered or certified mail (postage prepaid, return receipt requested),
(ii) upon delivery or refusal of delivery, if sent by hand delivery, (iii) upon delivery or refusal
of delivery, if sent by prepaid courier (with record of receipt or refusal), or (iv) upon confirmed
transmission, if sent by telecopier (with a copy simultaneously sent by certified mail, postage
prepaid, return receipt requested), to the parties at the following addresses:

If to the Producer:

Parallel Petroleum Corporation

1004 N. Big Spring, Suite 400

Midland, Texas 79701

Attention: John S. Rutherford

Telecopy: (432) 684-3905

Capstone Oil & Gas Company, L.P.

P.O. Box 10187

Midland, Texas 79702

Attention: Dale Douglas

Telecopy: (432) 683-4498

If to the Gatherer:

Hagerman Gas Gathering System

P.O. Box 50307

Midland, Texas 79710-0307

Attention: Joe Feagan

Telecopy: (432) 683-5442

23

 

or at such address as either party may from time to time designate as the address for such purpose
by notice similarly given.

ARTICLE XIX

RELATIONSHIP OF THE PARTIES

     19.1 The parties agree that Producer will tender gas which is owned by Producer for
transportation by Gatherer and that gas owned by Producer shall be subject only to the fees and
expenses set forth herein. Title to all gas owned by Producer shall remain vested in Producer when
delivered to Gatherer for transportation and redelivery hereunder.

     19.2 The relationship of the parties hereto is solely that of Producer and Gatherer setting
forth in writing their agreement with respect to the gathering, transportation and delivery of
Producer’s gas as set forth herein, and nothing herein shall be construed or deemed to create or
constitute any joint venture, partnership or agency between the parties or to authorize either
party to bind the other in any manner to any third party whatsoever. The duties, obligations and
liabilities of the parties hereto are separate and not joint or collective, and nothing contained
herein shall be construed as an obligation of guaranty or indemnification for any indebtedness
incurred by the other party in connection with such other party’s performance of its obligations
under this Agreement.

ARTICLE XX

INSURANCE DURING TRANSPORTATION

     20.1 As among the parties hereto, it is agreed that Gatherer will obtain insurance against
damages or injuries incurred by Producer from and after the Point(s) of Delivery

24

 

and prior to redelivery of such gas at the Redelivery Point(s). In any event, Producer shall not be
responsible for such gas after delivery to Gatherer at the Delivery Point(s) or liable for any
damages or injuries incurred during the subsequent gathering, dehydration, treating for CO2,
processing for recovery of liquefiable hydrocarbons, compression, transportation and redelivery
thereof.

ARTICLE XXI

GOVERNMENTAL AUTHORITY

     21.1 This Agreement and the rights and obligations of the parties hereunder shall be subject
to all applicable federal, state and municipal laws, rules, regulations and orders of governmental
authorities having jurisdiction. If any provision of this Agreement is abrogated or modified by
lawful governmental action, this Agreement shall continue in full force and effect as modified by
said governmental action, provided that either party may thereafter, upon ninety (90) days prior
written notice to the other party, elect to terminate this Agreement.

ARTICLE XXII

PRIORITY AND TERMINATION OF JOINT VENTURE

     22.1 All gas produced by Parallel Petroleum Corporation and Capstone Oil & Gas Company, L.P.,
and their respective successors and assigns, and dedicated by them to this Agreement shall have
first priority to the availability and capacity of the System, and such gas shall remain subject to
and continue to be bound by this Agreement notwithstanding the earlier termination and winding up
of the Hagerman Gas Gathering System Joint Venture created by that certain Hagerman Gas Gathering
System Joint

25

 

Venture Agreement, dated as of January 16, 2007, by and among Feagan Gathering Company, Parallel
Petroleum Corporation and Capstone Oil & Gas Company, L.P.

ARTICLE XXIII

GENERAL

     23.1 The terms, covenants and conditions hereof shall be binding and inure to the benefit of
the parties hereto and their respective successors and assigns.

     23.2 Assignment of this Agreement or any duty hereunder may be made by either party hereto
without the prior written consent of the other; provided, however, that no assignment shall have
the effect of relieving the assigning party of any liabilities hereunder, past, present or future,
unless agreed to in writing by the non-assigning party.

     23.3 The waiver by either party hereto of any breach by the other party of any provision of
this Agreement shall not constitute a continuing waiver of such breach or a waiver of any other
breach of any other provision of this Agreement.

     23.4 This Agreement may be executed in any number of counterparts (including by facsimile
transmission), each of which shall be an original, but all of which together shall constitute but
one and the same instrument. Neither party shall be bound hereby until a counterpart of this
Agreement has been executed by the other party.

     23.5 Whenever the word “herein” is used in this Agreement, the intended reference is to the
entire document, including, without limitation, the paragraph in which such word appears.

26

 

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written
above, to be effective from and after April 1, 2006.

	 	 	 	 	 
	 	HAGERMAN GAS GATHERING SYSTEM

 	 
	 	By:  	Feagan Gathering Company, Operator

 	 
	 	By:  	/s/ Joe Feagan
 	 
	 	 	Joe Feagan,  Vice President 	 
	 	 	 	 
	 	PARALLEL PETROLEUM CORPORATION

 	 
	 	By:  	/s/ John S. Rutherford
 	 
	 	 	John S. Rutherford, Vice President 	 
	 	 	of Land and Administration 	 
	 
	 	CAPSTONE OIL AND GAS COMPANY, L.P.

 	 
	 	By:  	Capstone Investments, Inc., its general partner

 	 
	 	By:  	/s/ Dale Douglas
 	 
	 	 	Dale Douglas, President 	 
	 	 	 	 

27

 

	 	 	 	 	 

EXHIBIT “A”

to

Gas Gathering Agreement

All of the following leasehold acreage located in Chaves County, New Mexico in the lands described
below owned by Parallel or Capstone as of the date of this Agreement, and all leasehold acreage
located in Chaves County, New Mexico in the lands described below hereafter acquired by Parallel or
Capstone, whether by renewal, extension or new lease taken, but only insofar as such renewal,
extension or new lease is made or taken on or before March 1, 2009 (in each case, whether jointly
or individually owned of record or beneficially by Parallel or Capstone).

Township 12 South, Range 28 East, NMPM: All Sections

Township 12 South, Range 29 East, NMPM: All Sections

Township 13 South, Range 27 East, NMPM: Sections 19 through and including Section 36

Township 13 South, Range 28 East, NMPM: All Sections

Township 13 South, Range 29 East, NMPM: Sections 1 through and including Section 18

Township 14 South, Range 28 East, NMPM: Sections 1 through and including Section 18

Township 14 South, Range 27 East, NMPM: Sections 1 through and including Section 3,

      Sections 10 through and including Section 15, Sections 22 through and including Section 27, and

      Sections 34 through and including Section 36

Township 14 South,   Range 25 East, NMPM: All Sections

Township 14 South, Range 26 East, NMPM: All Sections

Township 14 South, Range 27 East, NMPM: Sections 4 through and including Section 9,

      Sections 16 through and including Section 21 and Sections 28 through and including Section 33

Township 15 South, Range 24 East, NMPM: Sections 1 through and including Section 3,

     Sections 10 through and including Section 15, Sections 22 through and including Section 27, and

     Sections 34 through and including Section 36

Township 15 South, Range 25 East, NMPM: Sections 1 through and including Section 31, and

     Section 36

Township 15 South, Range 26 East, NMPM: All Sections

Township 15 South, Range 27 East, NMPM: Sections 6 and 7

Gas is committed to all depths.

 

 

Exhibit “D”

to

Joint Venture Agreement

Insurance Requirements

(Minimum Requirements)

	1.	 	At all times during the conduct of operations hereunder, Operator shall maintain in force, in
accordance with the terms of the Hagerman Gas Gathering System Joint Venture
	 
	 	 	Agreement (the “Agreement”), the following minimum limits of insurance at the expense of and
for the benefit of the Joint Venture:

	 	(a)	 	Workers’ Compensation Insurance in accordance with the laws of the state(s) in
which operations are covered under the Agreement; and
	 
	 	(b)	 	Employer’s Liability Insurance with a minimum limit of $1,000,000.

	2.	 	In addition to the above, the Operator shall provide and maintain in force the following
minimum limits of insurance, at the expense of and for the benefit of the Joint Venture,
covering operations on lands subject to the Agreement:

	 	(a)	 	Commercial General Liability Insurance with a combined single limit of
$1,000,000 per occurrence; and
	 
	 	(b)	 	Automobile Liability Insurance covering owned, non-owned and hired automobiles
with a combined single limit of $1,000,000 per accident.

	3.	 	Any party may at its own expense acquire such other insurance as it deems proper to protect
itself against any claims, losses, damages or destruction arising out of operations under the
Agreement.

	4.	 	Operator shall require all contractors and subcontractors working on or performing services
under the Agreement to comply with applicable Workers’ Compensation and Employer’s Liability
laws, both state and federal, and to carry Commercial General Liability and such other
insurance as Operator deems necessary.

	5.	 	Operator may include Workers’ Compensation and Employer’s Liability Insurance risks under its
qualified self-insurance program, provided Operator complies with all applicable laws. In such
event, Operator shall charge the Joint Venture with an amount

 

 

	 	 	that shall not exceed the amount of the premium that would be charged at the manual rate
effective for insurance coverage as if Operator were a purchaser of such coverage from an
insurance company or companies.

	6.	 	In connection with all losses, Operator shall (i) furnish copies of accident reports on a
prompt basis; (ii) give written notification of the service of all summons and legal
processes; (iii) provide information as to the status of any claim or suit of any payment made
in connection therewith; and (iv) furnish any other available information required for the
purpose of fixing or adjusting premiums or to support any claims.

	7.	 	Operator and each Joint Venturer agree to mutually waive subrogation in favor of each other
on all insurance carried by each party and/or obtain such waiver from the insurance carrier if
so required by the insurance contract. If such waiver is not obtained, the party failing to do
so shall indemnify the other party for any claim by an insurance carrier arising out of
subrogation.

2

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