The URL can be used to link to this page

Home My WebLink About13821 RES - 07/06/1977't`' - jkh:6- 8- 77;lst ,�< C RESOLUTION APPROVING THE JANUARY 24, 1977, SUMMARY OF SETTLE - MENT AND REORGANIZATION PLAN FOR COASTAL STATES GAS CORPORATION AND ITS SUBSIDIARIES AND STOCKHOLDERS AND THE CITY OF CORPUS CHRISTI AND OTHER CUSTOMERS OF i' LO -VACA GATHERING COMPANY AS THE BASIS FOR SETTLEMENT OF LITIGATION. WHEREAS, the Council now has before it for consideration the certain Plan of Settlement and Reorganization with Coastal States Gas Corporation dated January 24, 1977, attached hereto and more fully described therein; and WHEREAS, the City Council has followed the matter of settlement and is familiar with the proposal;and WHEREAS, briefings have been provided the City Council on this matter in Regular public meetings by independent accountants and consult- ants over the past year as the various terms and conditions were negotiated; and WHEREAS, due notice of this meeting having been given, and after careful consideration of the Plan: NOW, THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF CORPUS CHRISTI, TEXAS: That said Plan of Settlement and Reorganization dated January 24, 1977, be and the same is hereby approved by the City Council of the City of Corpus Christi, as being not only in the best interests of the City of Corpus Christi and its gas rate payers, but also in the public interest of the citizens of Corpus Christi and of the State of Texas, generally; and That the City Manager is hereby authorized and directed to work with other interested customers of Lo -Vaca in the general implementation and consummation of the Plan, including preparation and execution of all documents ancillary to °said Settlement Plan with the exception of the final closing papers which shall be approved by the Council at the appropri- ate time and prior to the execution thereof. 13821 MICROFILMED "JUL 071980 That the foregoing ordinance was //read for t e first time and passed to its second reading on this the .22)714day of , 19'77 , by the following vote: Jason Luby Eduardo de Ases David Diaz Ruth Gill Bob Gulley Gabe Lozano, Sr. Edward L. Sample That the foregoing ordinance waft read for third reading on this the '9 day of following vote: Jason Luby Eduardo de Ases David Diaz Ruth Gill Bob Gulley Gabe Lozano, Sr. Edward L. Sample second time and passed to its , 1977 , by the That the foregoj,ng ordinance as read for the third time and passed finally on this the b ► day of , 19 77 ; by the following vote: Jason Luby Eduardo de Ases ' David Diaz Ruth Gill Bob Gulley Gabe Lozano, Sr. Edward L. Sample PASSED AND APPROVED, this the day of , 19 % 7 ATTEST: City Secretary J. BRUCE AYCOCK, CITY ATTORNEY By Assistant 1 ttorney MAYOR THE CITY OF CORPUS CHRISTI, TEXAS :h is ordinance is in effect and •c-? ce with or without the ::gnature of the Mayor, in accordance with Article II . etion 6 of the City Charter. 1 3821_ _ yl JANUARY 1977. SETTLEi4ENT PROPOSAL The settlement proposal under consideration takes the basic July 14, 1976, settlement proposal and includes improvements re- .quested at a meeting of the major customers including members of governing bodies and management officials in Austin in August .of 1976. Coastal States Gas Producing Company and certain of its sub- sidiaries will be restructured into a new company totally independm ent from Coastal States Gas Corporation and Oscar Wyatt.` A.settlement trust for the benefit of the settling customers: and administered by an independent trustee will receive in partial settlement of claims: (1): Approximately 1.5 million shares of Coastal States Gas Corporation Common Stock. . (2) $115,000,000 par value of the new company Preferred Stock. (3) Approximately 3.6 million shares of new company Common Stock. - The gas search requires an expenditure of from $180,000,000 ' to $230,000,000 and has a benefit to the customers which 'varies with success possibilities but various computer studies show that the median valuation of this to the customer group would be .$331.8 million. .f l An injunction, enforceable by contempt proceedings, will be entered, prohibiting Oscar Wyatt and Coastal from ever voluntarily acquiring any legal interest in any securities of new company or any presently outstanding debt securities of Producing or Lo Vaca. The benefits to the settling customer will be allocated on the basis of their 1975 volumes of Lo -Vaca gas.. Under this allocation the City of Corpus Christi will receive 1.24 percent of the benefits. This method will not be used for the litigation expenses which will. be shared on the basis of the actual expenditures of the various customers. Various customer representatives and accountants in attempting"- - to evaluate the July 14th Settlement Package placed on it a value of $354.1 million. Based on this same system, the January 1977 proposal is valued at $492.6 million. That estimate is determined as follows: New Company Preferred Stock $115,000,000.00 Litigation Expenses $ 3,000,000.00 Gas Search Program $331,800,000.00 Gas Corporation Stock $ 19,240,000.00 ; New Company Common Stock $ 9,820,000.00 New Company Common from Oscar Wyatt $ 13,740,000.00 Total $492,600,000.00 • Our percentage of this based on our 1975 volumes would be $5.98 million. This compares with the same percentage of -the July 14th proposal resulting in a recovery of $4.39 million. It is the feeling of all parties involved that the negotiations subsequent to the meeting of August of 1976 have resulted in sub- - stantial additional benefits which were even in excess of those re- quirements outlined by Mayor Cockrell at the meeting in Austin. • _ • MEMORANDUM OF UNDERSTANDING RE PLAN OF SETTLEMENT AND REORGANIZATION - - The attached. "Surnrary of Settlement and Reorganization Plan for Lo -Vaca Gathering Company, Coastal. States Gas Producing Company, Coastal States Gas Corporation, Oscar S. Wyatt, Jr_, and the Customers of Lo -Vacs Gathering Company,^ - dated January 24, 1977, has been jointly evolved by represen- tatives of certain customers of Lo Vaca_.Gathering-Company - (and /or Coastal States Gas Producing Company) on the one " '.. • hand, and by representatives of Coastal States Gas Corpora- tion on the other hand_ - The undersigned hereby agree to submit the.attached Settlement and Reorganization Plan for the consideration of and necessary approvals :by the principals and,governing bodies indicated as promptly as possible and to use their • best efforts to obtain the necessary approvals by other - customers as well as by the principals indicated below. It is' further agreed that upon formal. approval of:the attached Plan of Settlement and Reorganization and execution thereof by the appropriate parties, the signed Plan itself will become the Letter of Intent contemplated in the Plan, which, in turn, will trigger the agreed "stay of litigation" • provided for in said Plan, with the further understanding, however, that upon the execution of this Memorandum of - Understanding,'the•parties hereto may, with respective court approvals, suspend any pending court proceedings pending execution of such Letter of Intent_ Dated this 24th day of January, 1977. ,col dam¢ f//r, �. Cerck.vj it 1-t! �1 s th t & &n_ -. 5 6 'cnrj' • • -2- srm - /y%lOurt/ 4, a tter,e/ -3- Fr, vj January 24, 1977 SUMMARY OF SETTLEMENT AND REORGANIZATION PLAN FOR LO -VACA GATHERING COMPANY, .COASTAL STATES GAS PRODUCING COMPANY, COASTAL STATES GAS CORPORATION, OSCAR S. WYATT, JR. AND THE CUSTOMERS OF LO -VACA GATHERING COMPANY Part On Introduction_ Lo -Vaca Gathering Company (Lo-Vaca), a wholly . owned subsidiary of Coastal .States Gas Producing Company (Producing), owns and operates an intrastate pipeline system . and related facilities in Texas for the gathering, transporta- tion and sale at wholesale of natural gas to electric and gas distribution utilities, other intrastate pipelines and ' industrial users in Texas. Lo -Vaca has'not in recent years provided its customers with the quantities of natural gas they have bargained for at the prices they bargained to pay. Court actions have been brought or are threatened by various Lo -Vasa customers against Lo -Vaca, Producing, Producing's parent, Coastal States Gas Corporation (Coastal), and the Chairman and principal stockholder of Coastal, Oscar S. Wyatt, Jr. (Wyatt). Enormous damages are claimed in these actions. _ _ • Any negotiated settlement of the Lo -Vaca situation . must resolve in a satisfactory manner, in the public'interest, - the basic issues presented. The settlement summarized hereinafter is designed to resolve and dispose of these issues in a fair, equitable and feasible manner in the public interest_ Part Two. Dimensions of the Settlement: The settlement strives for a balance between the consumer, Coastal and those whose interests fall in between_ Because the settlement would be an overall agreed resolution of a number of concerns, it cannot be segregated into separate elements and correlated to isolated concerns. In general, however, the basic elements of the settlement are as follows: I. Capitalization :of New Company, Transfers of Stock and Assets and Termination of Affiliation with Coastal and Wyatt • • (A) Organization and Business of New Company. Coastal,' will cause Producing and certain of its subsidiaries, including Lo -Vaca, to be restructured into a totally independent new com- pany (New Company). New Company will own all the Texas gas pipe -. line assets now owned by Producing and its subsidiaries. It will also own Coastal's present Rio Grande Valley Gas Company division, Coastal's present lignite leases in Bastrop, Fayette and Washington Counties and certain other assets_ Specifically, - New Company will own, as subsidiaries or divisions, 100% of the'following corporations or divisions which are presently - owned, directly or indirectly, by Coastal: (1) Lo -Vaca, (2) South Texas Natural Gas Gathering Company, (3) Texas Southeastern _• Gas Company, (4) Rio Grande Valley Gas Company, -(5) Petroleum - Tower, Inc., (6) a new Lignite Subsidiary which will own the- lignite properties in Texas to be transferred from Coastal and its subsidiaries as hereinafter provided and (7) a new Gas • Plant Subsidiary of New Company which will own the gas processing plants owned by Lo -Vaca and Producing.. New Company will:be either a newly formed corporation which will have the present Producing as a wholly owned subsidiary - or will-be Producing as restructured in accordance with the terms of the settlement. (B) Transfers of Stock and Separation of New Company From Coastal and Wyatt. A trust (Settlement Trust), to be established .for the benefit -of Lo- Vaca's settling customers' and administered by an independent trustee (Settlement Trustee), will receive, in partial settlement of claims, (1) approximately 1.5 million shares of Coastal Common Stock, (2) $115 million par value of New Company Preferred ' Stock and (3) approximately 3.6 million shares of New Company Common Stock. The numbers of shares of Coastal and New Company Common Stock are stated subject to the following provisions hereof. (1) Coastal Common Stock. The Settlement Trust will receive, subject to equitable adjustment in the event of stock -2- dividends,. stock splits, combinations of shares and other changes in capitalization, approximately 1.5 million shares of Coastal Common Stock (the precise number of shares to be that number which yields as of the effective date of the Settle- ment the same aggregate book value as 1.5 million shares de- termined as of September 30, 1976 after giving effect to the pro forma adjustments necessary to reflect consummation of the Settlement).. All this stock will be received prior to the distribution of New Company Common Stock, so that the Settlement Trustee; as a Coastal stockholder, will be entitled to receive its proportionate part of the New Company Common Stock. The Settlement Trustee will sell the Coastal Common. Stock held in the Settlement Trust, and the proceeds will be de- livered to the beneficiaries of the Settlement Trust. Sales of this stock by the Settlement Trustee will be subject to conditions designed to provide for an orderly distribution and no undue ad- verse market effect, and Coastal will have a right of first:refusal- to purchase Coastal Common Stock from the Settlement Trust at the market value thereof. The Coastal Coxivaon Stock will, so long as it is held by the Settlement Trustee, not be voted. (2) New Company Preferred Stock. The Settlement Trust will receive New Company Preferred Stock having an aggregate par value of $115 million, an aggregate liquidation preference of $115 million plus accrued and unpaid dividends, a cumula- tive 8 -1/2% dividend, payable quarterly as and to the extent earned, yielding an aggregate initial annual dividend .of $9.775 million and the other general characteristics out- lined in Section II(C) of Part.Three hereof. In order to assure an actual cash realization by- the Settlement Trust of at least $115 million from the -. Preferred Stock, the Coastal promissory notes will, .as. described below, be subject to an escrow agreement, and .payments made by Coastal on the notes will be available to provide the minimum $115 million to the beneficiaries of the Settlement Trust. The proceeds derived from the sale and /or redemption of the New Company Preferred Stock held by the Settlement Trustee (together with dividends paid thereon) will be allocated among the Settlement,Trust beneficiaries in accordance with the terms of the Settlement Trust described - beLow. (3) New Company Common Stock. The Settlement Trust will receive, subject to equitable adjustment in the event of stock dividends,. stock splits, combinations of shares and other • • -3- • changes in capitalization (and in the further event that New Com- pany Common Stock is distributed to Coastal stockholders on other than a 1 -for -1 basis), approximately 3.6 million shares of New Company Common Stock. Part of these shares (approximately 2.1 million) represent the shares that would otherwise be attributable to Wyatt's equity interest in Coastal. The balance of these shares would be received by the Settlement Trustee as a stock- holder entitled to participate in the distribution of New . Company Common Stock to Coastal stockholders. The Settlement Trustee will sell the New Company Common Stack held in the Settlement Trust, and the proceeds will be delivered to the beneficiaries of the Settlement Trust. Sales of this stock by the Settlement Trustee will be subject to conditions designed to provide for an orderly distribution and no undue adverse market effect, and New Company will have a right of first refusal to purchase New Company Common Stock from - the Settlement Trustee at the market value thereof. (4), Separation of New Company from Coastal. The New Company Common Stock will be spun off by Coastal to the holders of the Coastal Common Stock of record on a date on which the .Settlement Trustee is a holder of record of Coastal Common Stock as provided in (1) above. Neither Wyatt nor Coastal will, upon • consummation of the Settlement, own any equity interest in New Company. The court order effectuating the Settlement will include. an injunction, enforceable by contempt proceedings, prohibiting Wyatt and Coastal from ever voluntarily acquiring any legal or beneficial interest in any securities of New Company or any . presently outstanding debt-securities of Producing or Lo -Vaca (other :than those to be assumed as obligations by Coastal pur- suant to the Settlement). (C) Means of Accomplishment_ The formation of New Company as a viable, on -going gas utility company will require a reorganization and rearrangement of assets and associated debt currently held in numerous Coastal subsidiaries. In order to accomplish the results desired by the settling Lo -Vaca custo- mers, the following inter - company transactions are deemed necessary. (1) Debt Rearrangement. Lo -Vaca will write off certain accounts receivable representing amounts allegedly due for gas from certain customers (approximately $23 million)_ Coastal will (1) assume $105.2 million of Producing's current debt and (2) pay New Company approximately $113.1 million plus interest over not more than 15 years. In addition, as described below, Coastal will assume Producing's oil and gas properties subject to $51.0 million in production payments_ {The amounts of debt and production payments in the preceding sentences are stated as of September 30, 1976.] The Coastal payment obligation will be represented by Coastal's promissory notes, payable to the order of New Company, bearing interest at a rate per annum equal to a designated commercial prime rate plus 1 -1/2% but not less than 8 -1/8% nor more than 10% and due in consecutive serial annual installments beginning _ one year from the date of Closing (Coastal Notes), subject to final payment at the end of 10 years under certain circum- stances. The aggregate principal amount of the Coastal Notes is subject to adjustment to provide New Company's minimum working capital at $35 million'as provided in paragraph (2) below. - In order to assure an actual cash realization by :. the beneficiaries of the Settlement Trust of at least $115 million from the Preferred Stock, the Coastal Notes would be subject to the escrow provisions described in Section IV(B) of Part Three hereof. If the Gas Search Program has been terminated by-the dedication of 450 Bcf at Gas Search Program prices as provided - below, the Coastal Notes otherwise payable in the eleventh and later years after the effective date of the Settlement will be payable in full at the close of 10 years from such date.-__ Appropriate negative covenants will provide that except for such encumbrances as may be created for the purpose of consummating the proposed restructuring or for future purchase money liens for financing of new facilities (including encumbrances on realty upon which such new facilities may be located), no mortgage will be placed on the fixed assets of the refinery and related properties being transferred to Coastal as provided in paragraph (6) below and that any fixed assets which are sold or disposed of in excess of an aggregate amount of $2 million in net book value per year _ will be replaced by fixed assets of equal value or, at Coastal's option, payment of a sum equal to the net book value of such assets sold or disposed of in excess of $2 million annually may be applied to reduce the principal of the Coastal Notes. (2) Minimum Working Capital. Coastal will assure that the initial working capital (excluding stated current _ maturities of long -term debt) of New Company as of the date of spin -off is not less than $35 million. (3) Dedication of Explored Oil and Gas Properties. Coastal will Cause the gas from all explored Texas oil and oi gas properties (in Lo- Vaca's service area) presently owned by Coastal, Gas Producing Enterprises and any other Coastal subsidiary and not presently dedicated to others to be • dedicated for the life of the gas reserves, or the life of the lease if shorter, to Lo -Vaca. - (4) Transfer of.Oi1 and Gas Properties. The oil and gas properties of Producing will be transferred to Coastal. In consideration for this transfer, Coastal will assume deferred tax liability of approximately $36.3 million and the $51.0 million of production payments to which most of the transferred prop- erties are subject,' and the Coastal Notes otherwise payable will be increased by approximately $32.9 million (the foregoing figures all being as of September 30, 1976). In addition, Lo -Vaca will be granted a price reduction on gas attributable to Coastal's -- interest and produced from present wells and purchased from -Coastal by Lo -Vaca from the transferred properties equal to 50% of future price. increases after the effective date of the Settlement_- This price reduction will become effective on gas delivered after the production payments are discharged in accord--" ante with the present terms thereof (approximately 1980) and Coastal has recovered from production any cost deficits attributable to such discharge. • (5) Transfer of Lignite Properties and -Right of First Refusal on Other Lignite and Coal. Coastal will cause all its Bastrop and Fayette - Washington County lignite properties *(having some 150 million tons, more or less) to be transferred to a wholly owned subsidiary of New Company (to be formed). In addition, such New Company subsidiary will also receive a right of first refusal to purchase (1) all lignite and coal from Texas leases acquired through 1985 by Coastal and /or its subsidiaries and (2) all Texas lignite and coal leases and • other Texas coal or lignite properties acquired through 1985 by Coastal and/or. its subsidiaries. Such New Company subsidiary will also have the option for 60 days,'on 120 days' notice to it, to' cause any lignite properties proposed to be abandoned by Coastal to be assigned to such subsidiary at no cost, provided that if such option is not exercised, Coastal can dispose of such prop- erties, by sale or abandonment, within the next 60 days in its - discretion. If disposal is by sale, such sale would be subject• to the right'of first refusal, unless sold subject to the same - terms and conditions existing during the option period. . During the two -year period beginning on the effective- date of the settlement,' the following Lo -Vaca customers (which • -6- are electric utilities or suppliers of major electric utilities), namely -- Central Power & Light Company (CP&L), City of Austin, Lower Colorado River Authority, Lone Star Gas Company (Lone Star), San Antonio City - Public Service Board and United Texas Transmission Company (United Texas) (lignite customers) shall have an option, singly or in any combination, to purchase for cash from the New Company subsidiary at the New Company subsidiary's recorded book value the lignite properties acquired by the New "Company subsidiary on the effective date or during such period pursuant to the above- mentioned right of first refusal; provided, that such option may not be exercised unless either (1) each lignite customer shall join in the exercise of such option or•(2) the New Company subsidiary ' shall receive from each lignite customer not joining in the exercise of such option a release in form and substance satisfactory to the New Company subsidiary of such nonjoining lignite customer's right to join in the exercise of such- option.. (6)' Transfer of Refinery and Related Operations_ The refinery and related operations of Producing -will be transferred to Coastal for full value as provided herein. New Company and Coastal will negotiate a capacity rights agreement to afford New Company and Lo -Vaca use of the liquids pipeline' and fractionation facilities (or a purchase agreement to pro- vide the economic benefits of fractionation). (7) Transfer of Lo -Vaca Headquarters. Lo -Vaca will relocate its headquarters operations from Houston, Texas to either San Antonio or Corpus Christi, with the decision to be made by the first board of the New Company. (8) Transfer of Rio Grande. Coastal will trans -" fer its Rio Grande Valley Gas Company division to New Company. Rio Grande will operate as a division of New Company so as to avoid registration and regulation under the Public Utility - Holding Company Act_• If New Company cannot obtain a"declaration from the Securities and Exchange Commission (SEC) that it• would not be a "gas utility company" for purposes of that . Act, the settlement outlined herein might have to be re- " structured to avoid regulation of any customer or customer trustee as a public utility holding noripany by the SEC. (9) Allocation of Certain Benefits and Risks. The tax deduction and benefits attributable to the delivery of the Preferred Stock to the Settlement Trust will (the present value of which will be limited to the maximum dividend otherwise payable (as o£ the Closing) pursuant to the Producing First Mortgage Bond Indenture) accrue to Coastal, and Coastal and Producing will enter into a tax allocation and tax dividend agreement for that purpose. This proposal will be subject to a favorable Internal Revenue Service ruling, -and it is understood that if such ruling is not favorable to such agreement, a dividend credit would not be applied to the Coastal Notes, but the tax credit would be paid in cash to Coastal by New Company to the extent and as tax benefit is realized. - It is agreed that the net income or loss subsequent .- to March 31, 1976 of the operations to be retained by New Com- pany (specifically Lo -Vaca, South Texas, Texas Southeastern, Petroleum Tower and the Producing -owned gas plants) will be allocated to New Company. The remaining net income or loss of Producing will be allocated to Coastal subsequent to March 31, 1976 and will not increase or decrease the transfer price for the assets being transferred. For this purpose, the $105.2 • million of debt to be assumed by Coastal will be considered. debt of Coastal States Petroleum Company_ The net amount of income or loss to be allocated to either New Company or Coastal cannot be greater than the consolidated Producing net income or loss. II. Coastal Gas Search Program (A) $230 Million Gas Search_. Coastal will commit to expend $180 million to develop new gas reserves which will be sold to Lo -Vaca. If such expenditures are not timely made, up to $180.mi1°lion will be refunded by Coastal - to the Settlement Trustee for distribution to the beneficiaries of the °Settlement Trust. In addition, Coastal will commit to expend up to an additional $50 million (the precise amount to depend on the quantity of oil reserves discovered with the $180 million undertaking) to develop new gas reserves. which will also be sold to Lo -Vaca. - (B) 350 Bcf Reserve Dedication_ Coastal will commit to dedicate or cause to be dedicated at least 350 Bcf of developed new gas reserves to be sold to Lo -Vaca, of which at least 225 Bcf will be dedicated at the applicable Gas Search Program price for gas developed through the Gas Search Program as provided in (C) below. If within the initial period of the Gas Search Program (1) at least 225 Bcf of developed new gas reserves is not dedicated at Gas Search Program prices or (2) at least 300 Bcf of developed new gas reserves is not dedicated under the Gas Search Program (including gas dedicated at Gas Search Program prices), Coastal will, at its option, either (a) refund to -8- • • the Settlement Trustee, for distribution to the beneficiaries of the Settlement Trust, that amount which is equal to the sum of (i) the lesser of $37.5 million or the product of 50¢ multiplied by the number of Mcf's of short -fall, if any, below the minimum 300 Bcf dedication level, plus (ii) the product of 50¢ multiplied by the number of Mcf's of short- fall, if any, below the minimum 225 Bcf dedication level or (b) incur additional Qualified Expenditures in an amount equal to 150% of the total-amount which would be required to be refunded pur- suant to option (a). If Coastal opts to refund, such refund shall be nade'in installments of no less than. $10 million annually until payment is made in full, and the unpaid balance of such refund shall bear interest, payable quarterly, at a rate equal to a designated commercial prime rate. If Coastal opts to incur ad- ditional Qualified Expenditures, such expenditures shall be in- curred at a rate of not less than $10 million per annum, and all gas attributable to such additional expenditures shall be priced ' and sold in accordance with the Gas Search Program_ Accordingly, if no new gas reserves are dedicated under the Gas Search Program, $150 million would be required to be refunded or an additional _ $225 million would be required to be spent under the foregoing provisions. - ' Coastal will commit to dedicate up to an additional' 80 Bcf of developed new gas reserves (the precise amount to ' depend upon the amount of the incremental expenditure under- taking referred to in (A) above) to be sold to Lo -Vaca at the applicable Gas Search Program price for gas developed through the Gas Search Program. rr In addition to, but not in lieu of, the other pro- - - visions hereof relating to termination of the Gas Search Pro- gram, it is agreed that, in the event (1) Coastal shall have,-. dedicated at least 450 Bcf to be sold to Lo -Vaca at Gas - Search-Program prices and shall have expended at least $75 million during the first 5 years of the Gas Search Program and (2) Coastal shall have spent $41.1 thousand for each day. of the Gas Search Program after the elapse of the first 5 years thereof and prior to the date the 450 Bcf dedication is reached, Coastal will have no. further expenditure or reserve - dedication obligations under the Gas Search Program. (C) Price. All gas attributable to Coastal's interest which is developed under the Gas Search Program and additional gas, if any, used to satisfy Coastal's basic 225 Bcf and incremental reserve dedication undertakings will be priced as provided in Part Three hereof_ These provisions •are to the following general effects: (1) all Coastal -owned gas developed • • under the Gas Search Program and other gas, if any, used to satisfy Coastal's basic 225 Bcf and incremental reserve dedica- tion undertakings will be sold under fixed price contracts - which provide for 1¢ per year escalations to cover increased operating costs and for reductions in the fixed base price per r]NBtu in the events described below. (2) If Coastal's level of expenditures over the first four years of the Gas 'Search Pro- • gram are at the rate of $15 million per year, the initial fixed base price for gas dedicated in the first four.years will be as follows: - -- • Year Price Per MMBtu 1 $1.50 2 77.5% of market value (MV) 3 80.0% of MV - • 4 _ 82.5° %,of MV In the fifth and succeeding years, the initial fixed based price will be 85.0% of MV until such time as, Coastal has recovered, ' from the proceeds of gas sales under the Gas Search Program, the ' amount necessary to "pay out" the $180 million expenditure com- mitment or the expenditures actually made, if greater, and to cover operating costs of Gas Search Program properties. From that time and until Coastal has recovered, from the proceeds of gas sales under the Gas Search Program, the amount necessary to double the "payout" and cover operating costs of Gas Search Program properties, all gas sold at fixed Gas Search Program prices will.be sold at a fixed base price of 75.0% of MV or the initial fixed base price, if that is lower. From the time . "double payout" is achieved, all gas sold at fixed Gas Search Program prices will be sold at a fixed -base price of- 60_0% of MV or the initial fixed base price, if that is lower, for so long as production continues. (4) "MV" means, for any gas to be sold at Gas Search Program prices, the average of the three highest prices paid by bona fide pipeline purchasers in the Railroad Commission district in Texas in which the well producing such gas is located on the date such well is completed. (5) The fixed base price for gas dedicated pursuant to Coastal's incremental undertaking will be 85.0% of MV until "payout" of such undertaking (including operating costs), 75.0% of MV after such "payout" and until "double payout" and 60.0% of MV after "double payout." (6) Gas (other than gas attributable to Coastal's interest) which is utilized to satisfy Coastal's basic 350 Bcf reserve dedication undertaking) shall be. - priced in accordance with the terms of a contract negotiated subject to the terms of the Gas Availability Agreement referred to in Section (V)(C) of Part Three hereof_ -10- As described in Section V(A)(5)(b) of Part•Three hereof, the Gas Search Program will contain certain provisions to accommo- date situations, if any, in which gas production has ceased to be commercial (i.e., in paying quantities) by reason of the appli -. cable fixed Gas Search Program price. • (D) Payments to Settlement Trust. The actual cost to Lo -Vaca of gas purchased under the Program from Coastal, or others on the terms applicable to Coastal, which shall be fully recoverable in Lo- Vaca's rates to its customers, shall be the market price of such gas as of the date the well producing such gas is completed, determined as provided • above, subject to escalation (limited to actual market price increases) at 1¢ per year. The spread between the actual cost to Lo -Vaca for such gas and the net amount received therefor by Coastal shall be transferred monthly to the Settlement Trustee for monthly distribution to the beneficiaries of the Settlement Trust. (E) Effect of Gas Price - Regulation. In the event . producer wellhead gas prices for intrastate Texas producer sales are regulated at a price below $1.50 per MMBtu during the first five years of the Gas Search Program, Coastal's expenditure and reserve dedication obligations will be suspended until the regulated price is $1:50 per MIYIBtu or more, provided Coastal satisfies the four conditions set forth in'Section V(A)(7) of Part Three hereof. In the event such price regulation occurs after the first five years of the Program, the suspension and reinstatement of such obligations will be keyed to regulation below the Program price applicable at the effective date of such regulation. •• III.. Financial Viability and Stability of Lo -Vaca, New Company, Rio Grande and Coastal The rates of Lo -Vaca and Rio_Grande will'be estab- lished by the Railroad Commission_ In this connection, it is contemplated that the rates established contemporaneously with the consummation of the settlement will, under then existing and reasonably foreseen conditions, be :adequate to enable these companies to finance their present and future service at reasonable costs so that they will be able to compete for available gas supplies and, in addition to provide for the flow - through of the dollar savings resulting from the Gas Search Program to the settling customers. It will also be-provided that customers of Lo -Vaca who purchase gas from Lo -Vaca for resale will be entitled to pass through as part of their purchased gas costs the amounts paid by them to Lo -Vaca provided they have complied with and paid pursuant to past and future Railroad Commission orders. Customers of Lo -Vaca, however, will not be foreclosed from contesting future rate increase applications by Lo -Vaca. New Company should not be impaired in its ability to raise capital. The ability to raise capital requires that New Company be permitted to earn a £air =and reasonable return on investment. In•addition, Coastal should not be so impaired that'it becomes unable to perform its various undertakings . -- _ The parties are well aware of the present status of Gas Utilities Docket No. 583 before the Texas Railroad Commission. It will be a condition of the settlement transferring the Rio Grande properties to New Company that the Commission's resolu- tion of that proceeding be one with which New Company could "live" and make a reasonable rate of return on the Rio Grande- properties involved. If the final order of .the Railroad Com- mission in that - proceeding is completely unacceptable to the ' management of Coastal or the management of New Company, then the parties to the settlement shall have the option to with- . ' draw therefrom, if in a good -faith effort the parties hereto are not able to work out an alternative satisfactory solution of this problem. • IV.' The Settlement Trust The settling customers of Lo -Vaca, other than affili- ates of Coastal, will be the beneficiaries of the Settlement Trust. In this connection, it is not necessary for a bene - ficiary to have a damage claim presently pending in court against Lo -Vaca and /or Coastal. Beneficial interests in the Settlement- - Trust will be determined on the basis of the total volume of gas -- sold and delivered by Lo -Vaca to settling nonaffiliated customers during 1975. Each settling customer will be entitled to a beneficial interest in the proceeds of stock sales by the Settlement Trustee, dividends and other payments on stock held by the Settlement Trustee and cash payments and refunds (if any) under the Gas Search Program. This beneficial , interest, expressed as a percentage, shall be the total -volume of gas sold and delivered to such customer by Lo -Vaca during 1975 divided by the total volume gas sold and. delivered . by Lo -Vaca to settling nonaffiliated customers during-1975; provided, however, that the beneficial interest of Lone Star shall be as follows: on the assumption that the beneficial interest of Lone Star, determined in accordance with the next preceding sentence, would be 16.72 %, but for the following -12-- provisions hereof,. (1) the beneficial interest of Lone Star in the proceeds of sale of the New Company Preferred Stock, and in any dividends paid on or redemption made of the New Company Preferred Stock, will be 33.44 %; (2) the beneficial interest of Lone star in the proceeds of sale of the Coastal, Common Stock, and in any dividends paid on or distributions or other payments made in respect of the coastal Common Stock, will be 33.44% of the first 1 million shares and 16.72% of the balance; (3) the beneficial interest of Lone Star in the proceeds of sale of the New.Company Common Stock. (assuming 3.6 million shares), and in any dividends paid on or distributions or other payments made in respect of the New Company Common Stock, will be 33.44% of the first 3_1 million shares and 16.72% of the balance; and (4) the beneficial ' interest of Lone Star in the cash payments and refunds (if any) under the Gas Search Program will be 0 %; and provided further, that the beneficial interest of any settling customer (other than Lone Star) in the proceeds and payments referred to - in. clauses (1) -(4) of the immediately preceding proviso, or:in any other Settlement benefits, shall not be affected by the immediately preceding proviso without its assent. Should the foregoing assumptions require adjustment, such percentage, interests will be adjusted accordingly_ Any customer who is.not a signatory to the definitive Settlement Agreement contemplated hereby and is• not bound there- by at the effective date thereof who becomes a signatory . within 2 years after such date shall be entitled to all bene- . fits of the Settlement Trust if such action is taken within 6 months after such date and to all prospective benefits if . such action is taken from 6 months to 2 years after such date. V. Dismissal or Release of Claims, Payment of Legal Expenses, Supervision of the Settlement and Other Matters (A) Dismissal or Release of Claims_ In consideration for the foregoing, the damage -claim litigation and threatened damage claims against Coastal, Wyatt, Producing and Lo -Vaca will be released or dismissed with prejudice. The Agreed Judgment previously entered into in the 200th District Court in Travis County, Texas shall remain in effect (and changed only to the extent necessary to give effect to the terms and provisions of the settlement) until the full and complete Settlement is closed. (B) Enforcement of Settlement. The Settlement shall be effected in such a way, through Railroad Commission order and -13- Court order, that the obligations undertaken by the parties to the Settlement will be subject to direct enforcement by the Court or Commission. All the terms of the Settlement Agreement, ex- cept such as may fall within the exclusive jurisdiction of the Railroad Commission, will be contained in an agreed final judgment to be entered by the 200th District Court, which shall have continuing supervisory. and enforcement jurisdiction thereof, including but not limited to contempt proceedings. (C) Payment of Legal Expenses. New Company will pay a lump- sum'amount, not to exceed $3 million; to reimburse the settling Lo -Vaca customers for their attorneys' fees. This amount will be placed in escrow at the Closing for division among such customers on some mutually agreeable basis. (D) Other Matters. This proposal is made subject to the understanding that a letter of intent would first be entered into by and between the parties and that the litigation would be temporarily stayed by agreement until a Settlement Agreement had been prepared, executed and approved by the necessary parties hereto and their governing bodies. After entering into the Settlement Agreement and the appropriate approvals of the same, then the litigation would be stayed until Closing, with the litigation dismissed at that time. This proposal is made subject to the further understanding 'that New Company will not pay any dividends or transfer any assets to Coastal pending the consummation of the settlement or its abandonment, that the various values on which the proposal is based are verified and that Coastal, New Company and Lo -Vaca will take no action which will render them • unable''to perform as provided herein. The parties will be permitted to revise, adjust and modify the formal aspects of securing implementation provided for under this proposal so long as the substantive end results contemplated hereby are preserved without detriment to any party. Part Three. Outline of Certain Terms of Proposal: I. Organization of New Company: A. Corporate Structure ' and Business: . -14- New ;Company will be a publicly owned corporation engaging, directly or through its wholly owned subsidiaries, in the gathering, transporting, processing and marketing of B. Subsidiaries and Divisions of New Company: -15- natural gas and natural gas liquids and the mining and /or marketing of lignite and lignite properties. 1) Lo -Vaca will engage in its present utility busi- nesses. 2) New Lignite Subsidiary ..of New Company will be the corporate successor to the lignite properties to be transferred by Coastal and the holder of :the right of first refusal on other - Coastal lignite..,, -- 3) South Texas Natural Gas ' Gathering Company will - continue its present • ,gathering operations., 4) Texas Southeastern Gas Company will continue its present transmission operations. 5) Rio Grande Valley Gas Company, a division of New Company, will succeed to the business of Rio Grande Valley Gas Company, a division of Coastal. - Petroleum Tower, Inc. may reacquire the Corpus. Christi office building, or be paid therefor. 7) New Gas Plant Subsidiary of New Company to own and ;operate the gas processing - plants owned by Lo -Vaca and Producing. II. Transfers of Stock and Separation of New Company From Coastal and - Wyatt: .A. Coastal Common Stock:. The Settlement Trustee will receive, subject to equitable adjustment in the event of stock dividends, stock splits, combinations of • shares and other changes in - capitalization, approximately 1.5 million shares of Coastal Common Stock (the precise number of shares to be that number which _ yields the same aggregate book value as of the effective date of the Settlement as 1.5 million shares determined as of September 30, 1976 after giving effect to • the pro forma adjustments necessary - to reflect consummation of the . Settlement). All this stock will be received prior to the distribution of New Company •- . Common Stock provided for in . E(2) below, so that the Settle- ment Trustee, as a Coastal • stockholder, will be entitled . to receive its proportionate •, part of the New Company Common Stock_ B. Disposition of Coastal 1) The Settlement Trustee will Common Stock Received sell the Coastal Common Stock ' by the Settlement held in the Settlement Trust Trustee: - by public or private sale, and the proceeds will be - delivered to the beneficiaires of the Settlement Trust. Sales of this stock by the Settlement Trustee will be subject to conditions designed to provide for an orderly distribution and no undue adverse market effect, and Coastal will have a right of first refusal to purchase Coastal Common Stock from the Settlement Trustee at -16- the market value thereof. The expense of registering such stock for sale under the Securities Act of 1933 and providing the • initial regis- tration statement therefor would be borne by Coastal_ The beneficiaries of the Settlement -Trust will agree not to purchase Coastal Common Stock from the Settlement 'Trustee. The Coastal Common' Stock will, so long as it is held by the settlement Trustee, - not be voted_ 2) All proceeds from the sale of Coastal Common Stock held in the Settlement Trust, and dividends paid thereon, would be held by the Settlement ' Trustee in interest- bearing accounts approved by the 200th District Court until the proceeds have been dis- tributed; and as soon as practicable after the end of each year the Settlement Trustee shall make a pro rata distribution of all cash on hand to the beneficiaries of the Settlement Trust. C. New Company Preferred The Settlement Trust will receive Stock: New company'Preferred Stock having the following general charac- teristics: • -(1) an aggregate par value of $115 million;. (2) an aggregate liquidation preference of $115 million plus accrued and unpaid dividends; (3) a cumulative 8 -1/2% dividend, payable cuarterly as and to the extent earned, yield- ing an aggregate initial annual dividend of $9.775 million; (4) ordinary voting rights which, when added to the voting rights of the New Company Common Stock held by -17- the Settlement Trustee, shall ap- proximate 20% of the voting power of New Company at the Closing Date, pro- vided that, if and so long as Pre- ferred Stock dividends are in arrears for six quarterly periods or more, the holders of the Preferred Stock shall have special voting power to assure adequate board representation consistP„t with making the Preferred Stock a marketable security and permitting future financing by New . Company; (5) entitled to the bene fits of a mandatory sinking fund beginning in the 8th year at the rate of 5% of the original issue per year (or $5.75 million per year) at a sinking fund redemption price of 100% of the par value:plus accrued and unpaid dividends; and (6) subject to optional redemption at any time at an optional. re- demption price of 110% of par value during the first -7 years, de- clining to 109.5% of par in the 8th year and by 1/2% of par each year thereafter, plus accrued and un- paid dividends in each case_ The Preferred Stock will not have any preemptive or conversion rights. Payment of dividends on and re- demption of the Preferred Stock will be subject to the then earnings and working capital tests of the First Mortgage Bond Indenture of Producing. D. Disposition of New 1) Company Preferred • Stock Received by the Settlement Trustee: -18- The Settlement Trustee will sell the Preferred Stock held in the Settlement Trust by public or private sale, and the proceeds will be delivered to the beneficiaries of the Settlement Trust. Subject to market conditions, the Settle- ment Trustee would attempt to effect an orderly sale of all the Preferred Stock in whole or in part from time to time In this connection, the Settle- ment Trustee would be in- structed and authorized to sell .and dispose of the stock over a period of 7 years. The ex- pense of registering such stock for sale under the Se- curities Act of 1933 and pro- viding the initial registra- tion statement therefor would be borne by Coastal. New Company will have a right of first refusal to purchase any shares of Preferred Stock proposed to be sold by the Settlement Trustee at less than par at the proposed sales price, and not more than i 20% of the Preferred stock can be sold during any of the first 3 years unless such stock -can be sold for at least 85 %, of par value_ 2) All proceeds from the sale or redemption of the Preferred Stock, and dividends paid thereon, would be held by the Settlement Trustee in interest- bearing accounts approved by the 200th District Court until the proceeds have been distributed; and as soon as practicable after the end of each year the Settlement Trustee shall make a pro rata distribution of all cash on hand to the beneficiaries of the Settlement Trust. 3) s In order to assure an actual cash realization by the bene- ficiaries of the Settlement . Trust of at least $115 million from the Preferred Stock, the Coastal promissory notes . will, as described below, be -19- E. New Company Common Stock: -20- subject to an escrow agreement, and payments made by Coastal on the notes will be available - to provide the minimum $115 - million to the beneficiaries of the Settlement Trust. 1) ' The pro forma aggregate stock-• - holders' equity of New Company as of the Closing Date for consummation of the Settle-..."- ment will not be less than - $240 million, of which $115 million will be represented - by the New Company Preferred Stock and the balance will be „_ represented by the New . pany Common Stock. . - - 2) The New Company Common Stock will be distributed in a to the',holders of Coastal Common Stock of record -• on a date on which the Settle- ment Trustee-is a holder of record of Coastal Common Stock as provided in Para - - graph A above. The shares of New Company Common Stock to which Wyatt would be entitled as a holder of record of Coastal Common Stock will be transferred to the Settle-- • ment Trustee. Accordingly, - `. the Settlement Trustee will ' receive, subject to equitable - adjustment in the event of stock dividends, stock splits, combinations of shares and - other changes in capitalize- tion (and in the further event 'that New Company Common Stock is distributed to Coastal stockholders on other than a 1 -for -1 basis), approximately 3.6 million shares of New - Company Common Stock_ - F. Disposition of New Company Common Stock Received by the Settle- ment Trustee: -21- 1) The Settlement Trustee will sell the New Company Common Stock held in the Settlement Trust by public or private sale, and the.proceeds will, be delivered to the bene- ficiaries of the Settlement Trust. Sales of this stock - by the Settlement Trustee will be subject to conditions de- • • signed to provide for an - - orderly distribution and no '. _ undue adverse market effect, and New Company will have a :right of first refusal.to pur- chase New Company Common Stock . from the Settlement Trustee - at the market value thereof. The-expense of registering such stock for sale under the Securities Act of 1933 and • providing the initial regis- tration statement therefor - would be borne by New Company..- The beneficiaries of the . Settlement Trust will agree not to purchase New Company Common Stock from the Settle- ment Trustee. • 2) All proceeds from the sale of New Company Common Stock held ` in the Settlement Trust, and * ' dividends paid thereon, would ,be held by the Settlement • Trustee in interest - bearing accounts approved by the 200th . District Court until the pro- .,. ceeds have been distributed; and as soon as practicable after the end of each year the Settlement Trustee shall make . a pro rata distribution of all cash on hand to the bene- ficiaries of the Settlement Trust. Selection of Settle- ment Trustee: The Settlement Trustee (and any successor thereto) will be appointed by the Judge of the 200th District Court_ ' H. New Management of 1) The new management of New Company: New Company will be selected by the Board of Directors_ It is generally contemplated that the current members . of Lo -Vaca management will • :be among the new management of New Company. To ensure . stability, the Board of Directors will be classified, - with directors having staggered . three -year terms. - Assuming such persons are available and willing to serve, the majority of the Board of Directors initially should be.com- prised of prominent busi- nessmen from the various principal cities served by Lo -Vaca who have no business connection with . or employment by Lo -Vaca customers. The Board will also include the President of Lo -Vaca, the Supervisor- Manager and the present . independent members of the.. Lo -Vaca Board, in each case . if he desires to serve on ' the New Company Board_ . (Note_ - The members of the Board of Directors are to be selected, prior to the execution of the definitive Settlement Agree- ment contemplated by this Settlement Proposal.] I. Voting Trust for New A voting trust will be estab- -- Company Common Stock: lished to guarantee insulation of New Company from any control -22- by Coastal or its management, un- less such voting trust will render the spin -off taxable, in which event the trust will not be imple- mented. This would be accomplished in two ways, as follows: . 1) Officers and directors of Coastal or any Coastal affili- • ate and members of their -immediate family and any per -. - -son (other than the Settle- ment Trustee) who owns more than 1/2 of 1% of Coastal Com- mon Stock would receive Participation Certifi- cates representing their - shares of New Company Common''' Stock: Any holder of a Participation Certificate would be entitled to exchange` it for the shares underlying , such Certificate only if he certifies that he is not. an officer or director of Coastal or any Coastal affiliate and is not in the immediate family of any such person, does not own more than 1/2 of 1% of Coastal • Common Stock and is not in the immediate family of any other person who owns more than 1/2 of 1% of Coastal Common Stock. . 2) The Voting Trustee will be designated by the . Board of Directors of New Company and will- vote all shares in the voting trust as directed by the Board of Directors of New Company. J. Injunction Against Neither Wyatt nor Coastal will, Coastal and Wyatt: upon consummation of the Settlement, -23- own any equity interest in New Company. The court order effect- uating the Settlement will include . an injunction, enforceable by con- tempt proceedings, prohibiting • Wyatt and Coastal from ever volun- tarily. acquiring any legal or beneficial interest in any securi- ties of New Company. or any pres- ently outstanding debt securities of Producing or Lo -Vaca. III. Agreements'Relating to Producing Debt Rearrangement: A. $80,000,000 8 -1/8% • Notes due December - 15, 1977 -87: B. $25,200,000 5 -3/8% Convertible sub- ordinated Notes due 1976 -85: Coastal will assume these ob -. ligations from Producing with- out recourse to.Producing or New Company by any noteholder. ; Coastal will assume these ob- ligations from Producing with- out recourse to Producing'or New Company by any debentureholder. IV. Agreements Relating to Other Financial Matters: A. Write -off of Certain Lo -Vaca Receivables: B. Coastal Notes due New Company: -24- Lo -Vaca will write off certain accounts receivable representing amounts presently claimed by Lo- Vaca to be due from certain custo- mers, or approximately $23 million. Such writeoff will release such customers from any claim by Lo -Vaca for the amounts written off.. Coastal will deliver.to New Company its promissory notes (Coastal Notes). The Coastal Notes will bear interest at the rate of 1 -1/2% over a de- • fined commercial prime per annum, but not less than 8 -1/8% nor more than 10 %, and may be prepaid with- out premium or penalty. The aggre- gate principal amount of the, -25- Coastal Notes is subject to ad- justment to provide New Company's minimum working capital at $35 million as provided in paragraph C below. The Coastal Notes will be comprised of separate $8 million principal amount notes having consecutive serial annual maturities commencing one year from the effective date of the Settle- ment (in the event the aggregate principal amount of the Coastal Notes is not divisible-by 8, all notes but the last due will be for $8 million and the last due will be • for the balance, and in the event the aggregate principal amount of the Coastal Notes exceeds $120 million, there shall be a maximum . of 15 consecutive serial notes). Subject to adjustment in order to assure an actual cash'realization by the beneficiaries of the Settlement Trust of at least $115 million from the Preferred Stock, the Coastal - Notes payable in the first 5'years (and in the next succeeding years to the extent not necessary to provide. the security contemplated hereby) would be held by and principal and interest paid to New Company, and the notes payable in the remaining years would be held by and interest paid to an escrow agent, subject to the Settlement Trustee realizing $115 million on the Preferred - Stock. Upon receipt of payment of these notes (interest or prin- cipal) from Coastal, the es- ' crow agent would release such pay- ments to New Company so long as total principal and future interest through 7 years from the effective date of the Settlement, on the notes held by the escrow agent, equaled .• or exceeded $115 million less the sum of dividends, redemption pro- ceeds and sales proceeds realized. • . Such payments would be retained by . the escrow agent to the extent principal and future interest through 7 years from the effective date of the Settlement did not exceed this amount. The prin- cipal payments on the notes held by the escrow agent would accelerate in inverse order, to the extent necessary to make up any deficiency between the $115 million and the sum of dividends, redemption pro -- ceeds and sale proceeds, at the end of 7 years after the effective date of the Settlement, to be paid with- ' in 18 months thereafter. To the extent not accelerated, said notes would then be delivered to New Com- pany_ If the Gas Search' Program has been terminated by the dedication of r150 Bcf at Gas Search Program prices as provided below, the Coastal Notes otherwise payable in , the eleventh and later years after the effective date of the Settle- ment will be payable in full at the close of 10 years from such date. Appropriate negative covenants will provide that except.for such en- - cumbrances as may be created for the purpose of consummating the pro posed restructuring or for future -- purchase money liens for financing - of new facilities (including en- cumbrances on realty upon which such new facilities may be lo- cated), no mortgage will be placed on the fixed assets of the re- finery and related properties being transferred to Coastal as provided below and that any fixed assets which are sold or disposed,of in excess of an aggregate amount of $2 million in net book value per year will be replaced by fixed - assets of equal value or, at Coastal's option, payment of a sum equal to the net book value of such -26- C. Initial New Company ' Working Capital:! assets sold or disposed of in'ex- cess of $2 million annually may be applied to reduce the principal of the Coastal Notes. Coastal will assure that New Com- pany's working capital as of the date of the Closing is not less _ than $35 million (working capital being the excess of current assets , over current liabilities other than normal stated current. maturities of long -term debt)_ V Agreements Relating to Lo -Vaca Gas Supply:. A. Coastal Gas Search Programs 1) Basic Undertaking -27- $180 million of Qualified Expenditures (as-defined)` over a 15 -year period on- shore in Texas (or in Qualified Projects (as defined)-in off- shore Texas state waters) in an effort to develop new gas re- serves. Of the total, at least $75 million will be expended during the first 5 years and $127.5 million will be expended during the first 10 years.., b) If Qualified Expenditures are not made timely, the - amount of any short -fall will be refunded by Coastal to the Settlement Trustee for - the benefit of the bene- . ficiaries of the Settlement Trust. c) 11 Coastal will commit to dedi- cate at least 350 Bcf of de- veloped new gas reserves to be sold to Lo -Vaca, of which at least 225 Bc£ will be dedi- cated at the applicable Gas • -28- Search Program price as pro- vided in A(5) below. If within the initial period of the Gas Search Program (1) at least 225 Bcf of developed new gas re- serves is not dedicated at Gas Search Program prices or (2) at least 300 Bcf of developed new gas reserves is not dedicated under the Gas Search Program (including gas dedicated at Gas Search Program prices), Coastal will, at its option, either (a). refund to the Settlement. Trustee for distribution to the bene- ficiaries of the Settlement Trust, that amount which is _ equal to the sum of (i) the lesser of $37.5 million or the - product of 50¢ multiplied by the number of Mcf's of short- - fall, if.any, below the minimum 300 Bcf dedication level, plus (ii) the product of 50¢ multi- plied by the number of Mcf's F.. of short -fall, if any, below the minimum 225 Bcf dedication level or (b) incur additional Qualified Expenditures in an amount equal to 150% of the total amount which would be required to be refunded pursuant to option (a). If Coastal opts to refund, such refund shall be made in installments of no less than $10 million annually until payment is made in full, and the unpaid balance of such re- - fund shall bear interest, pay- able quarterly, at a rate equal to a designated commercial prime rate. If Coastal opts.to incur additional Qualified Ex- penditures, such expenditures . shall be incurred at a rate of not less than $10 million per annum, and all gas attributable to such additional expenditures shall be priced and sold in accordance with the Gas Search Program. Incremental. Under- a) Coastal will also commit taking to expend onshore in'Texas (or in Qualified Projects (as defined) in offshore Texas state waters) $1 of Qualified Expendi- tures for each barrel of oil reserves, up to a maximum of $50 million, discovered as a result of the $180 million undertaking in an effort to develop new " ' gas reserves up to 80 Bcf, . or 1.6 Mcf for each barrel . of oil reserves discovered:-' The incremental undertaking :resulting from oil reserves - discovered as a result of -. . • the $180 million.undertaking . during the first.15 years shall be expended during the next succeeding 3 -year period_ b) Any amount not expended or expended timely will be - . refunded to the Settlement: Trustee for distribution to the beneficiaries of the Settle- ment Trust.. -29- If 80 Bcf of gas (or such lesser amount as shall equal 1.6 Mcf x the amount of the in- cremental undertaking) has not been sold or dedicated.•• ' - to Lo -Vaca at Program prices at the end of the 3 -year period, Coastal will continue to make Qualified Expendi- tures at the rate per year of $10 million or 25% of the amount refundable by reason of the short -fall as provided below, whichever is greater, until such amount of gas has been sold or dedicated at Pro- gram prices or, at its option, refund to the Settlement Trustee for distribution to the beneficiaries o£ the , Settlement Trust 50¢ for each Mcf of short -fall. Qualified Expendi- a) Include direct costs, including tures direct overhead, of lease ac- quisition, exploration (in- • cluding geophysical) and development (including normal wellhead equipping for the production of merchantable• quality gas) and indirect costs allocable to the Program up • to 5% of direct costs but exclude (i) costs incurred.- prior to the effective date of the Program, (ii) costs in- curred in readying for pro- duction of oil.deposits un- accompanied by gas, in commer cial quantities or the prepa- ration of merchantable quality hydrocarbons from oil wells unaccompanied by gas in com- mercial quantities, (iii) . . operating and capital costs of processing and liquids extrac- - tion plants, (iv) direct lease operating expenses, -(v) inter- '. est costs and (vi) lease -- . acquisition costs attributable to leases not actually drilled or evaluated under the Program_ or at any. time ever owned by - Producing (lease acquisition costs for any lease to be ' counted only after a well has been drilled on such lease and completed or abandoned or such lease has been evaluated and abandoned). b) Subject to the provisions of A(10) below, no expenditure -30- will count toward fulfillment of Coastal's undertakings un- less it has been checked by independent public accountants of recognized standing the fees and expenses of which shall be borne by Coastal and the gas, if any, to which such expendi- ture relates is sold and (or) dedicated under contract to Lo -Vaca. Independent public accountants retained by Lo- Vaca shall be entitled, at Lo Vaca's option and expense, to verify such expenditures. ' Subject to the provisions of . A(10),below, no expenditures will count toward fulfillment of Coastal undertakings unless it has been qualified in one of two ways. _First, expendi- tures attributable to Quali- fied Projects (as defined) will become 'qualified. In addition, if Coastal offers proved gas reserves to Lo -Vaca - from other than Qualified Projects and Lo -Vaca deter- mines, after reviewing the - expenditures involved, that it will purchase the gas, such " expenditures will become qualified. • 4) Qualified Projects' a) A project which (1) presents a reasonable prospect for the dis- covery or development, as the case may be, of gas reserves in commercial quantities and is not primarily an oil prospect and . (2) is of the type which might reasonably be undertaken by a prudent oil and gas operator in the conduct of its own • _ affairs. -31- b) With respect to lessees' in- terests in acreage located in Texas state offshore waters, - the tern "Qualified Project," at any particular date, shall mean a project respecting any such interest which shall have been the subject of a qualified .- petroleum engineer's certificate .delivered at any time to Lo -Vaca after the commencement of the Gas Search Program to the effect that, .as of the date of such certificate, such project (1) presents a reasonable prospect. for the discovery or develop- ment, as the case may be, of gas reserves in commercial •' quantities. and is not primarily an oil prospect and (2) is of the type which might reasonably be undertaken by a prudent oil . and gas operator in the coa- _duct of its own affairs. At such time as Coastal desires to qualify an offshore project on the basis of a qualified petroleum engineer's certi£i -- - . cate, Coastal shall give such • = qualified petroleum engineer. and Lo -Vaca written notice of • the project desired. to be . qualified and shall furnish . to such qualified petroleum - engineer, subject to such rea- -sonahle requirements of con- fidentiality and secrecy as Coastal may specify, all geo- logical and geophysical data ' in Coastal's possession which is relevant to such project,. • the location and depth of the well or wells, if any, drilled or proposed to be drilled as a part of such project, a budget for such project or the expendi- tures incurred and estimated -32- thereafter to be incurred, in- cluding lease bonuses, and such other data and other in- formation as such qualified petroleum engineer may reason- ably request. Each and every qualified petroleum engineer's certificate on the basis of which a project is qualified shall be binding and conclusive as to the fact and propriety of such qualification_ The term "qualified petroleum engineer's certificate," as used herein, shall mean a certificate or opinion signed by a firm en- gaged in petroleum engineering work which has. been appointed - .by Coastal and approved by Lo- Vaca, - which approval shall not unreasonably be' withheld. To the extent any such certificate - requires comparative judgment,. the qualified petroleum engineer giving. the certificate shall,' assume that the same general economic conditions, including prevailing market conditions, are applicable to the matters being compared. , • Pricing of Gas a) Gas developed through the Sold or Dedicated undertakings and attributable: to Coastal's interests will be sold to Lo -Vaca at fixed con- tract prices (determined as set forth below) with annual escalation of l¢ per Mcf for operating costs. , The Gas Search Program prices shall be determined as follows: - b) -33- For gas attributable to the basic $180 million undertaking and wells com- pleted in Period The initial fixed contract price per MMEtu, subject to 1¢ per year escalation to cover increased operating costs, shall be as follows P1 - $1.50 P2 77.5% of MV P 80.0% of MV P3 82.5% of MV P5 85.0% of MV P 75.0% of MV P7 60.0% of MV, During Period the the fixed contract price per NMBtu for all gas subject to sale at Program prices as a result of the basic $180 million undertaking shall be the lower of the initial fixed con- . tract price for such gas as set forth above or 75.0% of MV (plus the cumulative 16 per year escalations)_ During Period P ,:the fixed contract price per MMBtu for all; gas subject to salee at Program prices as a result of the basic $180 million undertaking shall be the lower of the initial fixed contract price for such gas as set forth above or 60.0% of MV (plus the cumulative 1¢ per year escalations). • The symbols used above have the following meanings: • P1 = The period extending from the inception of the Pro- gram until the last to occur of the elapse of 12 • • months or $15 million of Qualified Expenditures have been made (of which at least $12 million is expended in drilling) . = The period extending from the end of Period P until the last to occur of the elapse of 24 months lsince • the inception of the Program or $30 million of Qualified Expenditures have been made (of which at ' .least $18 million is expended in. drilling)_ = The period extending from the end of Period P until the first to occur of the elapse of 36 months since the inception of the Program, or $45 million of Qualified Expenditures have been made. P4 = The period extending from the end of Period P3 until the first to occur of the elapse of 48 months since the inception of the Program or $60 million of Qualified Expenditures have been made. -34- • P5 = The period extending from the end of Period P4 until such date as Coastal shall have recovered from sales of gas to Lo -Vaca under the Program the sum of (1) $180 million or aggregate Qualified Expenditures incurred to such date, if greater (or the amount of Qualified Expenditures incurred to the date 450 Bcflof gas is dedicated by Coastal at Program prices in accordance with A(9) below, if lower)-and (2) operating costs (including workovers, repairs, etc.) incurred to such date under the Program. P6 = The period extending from the end of Period P until - " such date as Coastal shall have recovered from sales of gas to Lo -Vaca under the Program the sum of - (1) twice $180 million or aggregate Qualified Expenditures incurred to such date, if greater (or - the amount of Qualified Expenditures incurred to - the date 450 Bcf of gas is dedicated by Coastal at Program prices in accordance with A(9) below, if lower) and (2) operating costs (including workovers, repairs, etc.) incurred to such date -under the Program.• = The period extending from the end of Period P and so long as gas attributable to Qualified Expenditures is produced. - MV = For gas attributable to a well drilled with Qualified ' Expenditures, the average of the three highest separately negotiated prices paid by bona fide pipe- line purchasers in the Railroad Commission district in Texas in which such well is located on the date such well is completed. For gas attributable to the incremental $50 million (maximum) undertaking, the initial fixed contract price per MMBtu, subject to 1¢ per year escalation to cover increased operating costs, shall be 85.0% of MV until such date as Coastal shall have recovered from sales of such gas to Lo -Vaca the sum of (1) the amount of such undertaking and (2) operating costs (including workovers, repairs, etc.) incurred with respect to wells drilled pursuant to the incremental undertaking; from such date, the fixed contract price per MMBtu for such gas shall be 75.0% of MV (plus the cumulative 1¢ per year escalations) until such date as Coastal shall have recovered from sales of such gas to Lo -Vaca the sum of (1) twice the amount of such undertaking and (2) operating costs (including workovers, repairs, etc.) incurred with respect to wells drilled pursuant to such undertaking, after which date the - fixed contract price per Mr'IBtu for such gas shall be 60.0% of MV (plus the cumulative 1¢ per year escalations)_ -35- The Gas Search Program will contain mutually agreeable provisions to accommodate situations, if any, in which gas pro- duction under the Gas Search Program has ceased to be commer- cial (i.e., in paying quantities) by reason of the applicable • fixed Gas Search Program price. These provisions will, in gen- eral, be to the effect that the fixed Gas Search Program price applicable to particular gas production will be subject to up- ward adjustment to the extent, but only to the extent, necessary to maintain such production in paying quantities measured in the light of the reasonable operating costs properly allocable to such production, and any such adjustment will be effected only for so long as' is necessary for this purpose. So long as any such adjustment results in a price per MMBtu which represents a dis- count from then current market value, then such adjustment shall be made, but if any such adjustment would result in a price per ' NNNBtu in excess of then current market value, then Lo -Vaca shall have the option to decline to pay any price in excess of such - current market value. 6) Exclusion of Gas a) Pursuant to Paragraph. Sold to Texas D_II.(1) of an instrument. Utilities dated September 21, 1970 entitled "Agreement be-- . tween Lo -Vaca Gathering Company and Texas Utili- ties services Inc_ ", as amended, [the "Agreement "], 50% of all new gas con- tracted by Lo -Vaca in the - Permian.Basin area of West Texas (as defined by the . Agreement) must be- tendered to a subsidiary of Texas Utilities [Texas Utilities] under the same terms and . conditions as set forth in the gas purchase con,- tracts_ The Agreement will be amended to provide that 50% of all gas developed . by the Coastal Gas Search Program in the Permian Basin area (as defined) will be tendered by Coastal to Texas Utilities, under ._ separate gas purchase con- tract, at the then pre- vailing intrastate market - -36- 7) Effect of Gas Price Regulation -37- c) price for gas of like quali- ty in the field or area. Such tender by Coastal shall relieve Lo -Vaca of its tender obligations under the Agreement with respect to all gas developed:by the Coastal Gas Search Program and purchased by Lo -Vacs. The volumes of gas reserves attributable to each such gas purchase contract entered into with Texas Utilities shall not be applied to re- duce Coastal's Bcf reserve dedication obligation above. For purposes of calculating the amount of Qualified - Expenditures made by Coastal above, the total expenditures incurred in any project which would otherwise be included as Qualified Expenditures as defined above shall, in the case of projects which result in gas production, be reduced by the same proportion that the total volume'of reserves contracted for by Texas Utilities from such projects pursuant to A(6)(a) above bears to the total volume of reserves developed in such projects, and in the ,case of projects which do not result in gas production, by 50 %.. a) If producer wellhead gas prices applicable to gas reserves to be developed under the Program and sold intrastate Texas are regu- lated at prices below $1.50 per M3tu (or the then ap- plicable Program price in the event the below - defined regulation date occurs more than 5 years after the begin -. ring of the Program): - (i) Coastal shall diligently complete all drilling work and development work in progress on the effective date on which producer - wellhead prices applicable' to gas reserves to be developed under the Pro- gram and sold intrastate . are regulated at prices below $1.50 per MMBtu (or the then applicable Pro -. gram price in the event such date occurs more than 5 years after the' beginning of the Program) (regulation date); • (ii) Unless the total amount of Qualified Expenditures in- curred from the inception of the Program; to the reg- ulation date equals $41.1 thousand multiplied by' - the number of days elapsed from the inception of the Program to such reg- ulation date (the minimum required expenditure), Coastal will incur addi- tional Qualified Expendi- tures, at an annual rate no lower than $15 million, until the total amount of Qualified Expenditures shall equal the minimum required expenditure; (iii) Unless the total amount of reserves developed and /or -38- -39- • dedicated to sale to Lo- Vaca at a Program price, determined as of the regu- lation date, shall equal that number of Mcf ob- tained by dividing the - minimum required expendi- ture by .80 (minimum re- serve dedication), Coastal will incur additional Qualified Expenditures, at an annual rate no lower than $15 million, until- - the. total amount of re-' " serves so developed and /or, dedicated shall equal the •.' :minimum reserve dedica- tion, or Coastal, at its - option, will within 30 days after the regulation . date, refund to the Settlement Trustee for • distribution to the bene ficiaries of the Settle- - ment Trust 50¢ for each Mcf of short -fall below the minimum re- . serve dedication; - (iv)" For each dollar Coastal , shall spend for gas ex- - ploration and /or develop- meet outside the . Lo -Vaca service area • subject to the same -- producer wellhead gas • price regulation applic -- •able to gas reserves • to be developed under the Program or for oil exuloration and /or de- velopment subject to pro- ducer wellhead oil price regulation providing, on ' a Btu basis, for equiva- lent producer prices for oil and gas,'otherwise - than pursuant to the -40- Colorado Interstate Gas• Search Program as in effect at January 1, 1976, which would constitute a Quali- fied Expenditure if ex- pended in the Lo -Vaca - service area, Coastal shall incur one dollar of-Quali- fied Expenditures in the - same year such other dollar is spent; and-. • • (vi Subject to the fulfillment. by Coastal of its oblige -- tions under (i), (ii), (iii) and (iv) above, •Coastal's expenditure and- reserve dedication obli gations under:the Program shall be suspended from the regulation date to' such date, if ever, as either producer wellhead _- price regulation shall•- - cease to be applicable to gas reserves to be de- . veloped under the Program - or such regulated prices. - shall exceed $1.50• per MMBtu (or the Program • price applicable at the: regulation date,if the regulation date occurs more than 5 years after . - the beginning of the Program), whereupon such_ obligations shall be fully reinstated. , Gas sold by Coastal at regu- lated prices may serve to re- duce the Bc£_ guarantee under. •the Program if within one year of regulation or the completion of the well, the gas is com- • mitted to Lo -Vaca at the Pro- gram price in the event of - deregulation or an.increase 8) Take or Pay ' Provisions; Other Contract Terms -al- , in regulated prices above the Program price_. If regulation permits Coastal to apply for prices higher than basic regulated prices (based on cost justification or other procedures) on wells drilled during or prior to regulation, Coastal will make every effort • to obtain the higher prices • (up to the applicable Program price)• and the average regu- lated prices actually being received by Coastal for sales _ to Lo -Vaca of gas from wells . . drilled after January 1, 1976 . shall be utilized to determine whether regulated prices •exceed $1.50 per NNBtu (or the- Program price applicable • at the regulation date if the regulation date occurs more . than 5 years after the begin ning of the Program). a) All gas covered by the Pro- gram would be committed under - contract to Lo -Vaca for the life of the leases, which con- tract or contracts would pro- vide for the prices herein elsewhere set out and with 80% annual and 50% monthly take provisions (based on de -- liverability, as defined) Frith - 2- year makeup provisions_ • • b) Each gas sales contract re- lating to gas sold to Lo -Vaca under the Gas Search Program shall be for a term equal to the life of the reserves (sub- ject to the lease terms) to be sold pursuant thereto, shall contain the pricing and take - or -pay provisions established by the Gas Search Program and shall contain other terms and conditions in accordance with the following: the terms and . conditions of each gas sales contract (other than the terms and conditions relating to term of contract, price and take -or -pay) shall be no less favorable, from a producer's standpoint, than such terms and conditions which are available (at the time such gas sales - contract is to be executed) as - evidenced by a representative arms' length gas sale contract entered into within the pre - vious twelve months for a term of one year or more between a bona fide intrastate pipeline company and a producer un- affiliated with it relating to the sale in the Texas intra- state market of gas produced in the same Railroad' Commission district as the Gas Search Program gas in question; pro - vided, that Lo -Vaca shall in no event be required to make .: any payment or advance in the nature of an advance payment for lease acquisition, ex- ploration or development. Termination of In the event (i) Coastal shall have Program Under dedicated at least 450 Bcf-to be Certain Con- sold to Lo -Vaca at Gas Search Pro - ditions - gram Prices and shall have expended at least $75 million of Qualified - Expenditures during the first 5 years of the Gas Search Program and (ii) the total amount of Qualified Expenditures incurred to the date such 450 Bcf was dedicated equals at least the minimum required expenditure (as defined above) de -. termined as of such date, then Coastal shall have no further expenditure or reserve dedication -a2- 10) Miscellaneous -a3- obligations under the Gas Search Program. a) Coastal shall make gas avail- able to Lo -Vaca on no more .limited a basis than an entire ' - individual Qualified Project basis. Lo -Vaca and Coastal ' shall negotiate a gas sales contract with respect to any such gas so made available un- less, in the exercise of pru- dent pipeline operations (to be defined) without considera- tion of short -term supply cir- cumstances, the gas so made available is not•of sufficient . quantity, deliverability and quality to justify the con - nection of necessary facilities customarily utilized by bona fide pipeline company pur- -' - chasers of gas under gas sales- contracts. Upon any notice-by Lo -Vaca to that effect, (1) .' Lo -Vaca shall be under no ob- - ligation to purchase such gas -, (2) Coastal shall be under no obligation to continue.to make - . such gas available to Lo -Vaca, (3) no expenditures incurred by Coastal after receipt of such notice shall count under the - Gas Search Program, but all -- Qualified Expenditures in- curred with respect to'the - project to which such gas is- attributable prior to such re- ceipt shall continue to count under the Gas Search Pro- gram, and (4) the proved and developed reserves of gas - attributed to such project at the time such notice is given by Lo -Vaca shall count as re- serves under the Program. b) The Gas Search Program shall be conducted in a Coastal subsidiary. Oscar S. Wyatt, Jr. shall hold no office or directorship in, nor be employed by or participate in. the operation of such sub- sidiary, and Coastal shall be unconditionally liable for the performance of the as - Search Program in accordance with its terms.. c) Coastal shall make appropriate annual reports to the Texas Railroad Commission as to the - results of the Gas Search - Program, the expenditures made and the reserves proved. . d) It shall be 'provided in the. Gas Search Program that if - Coastal is able, through ex-: change or other agreements in- volving gas developed by Coastal outside Texas, to cause-gas from Texas wells developed by third parties to be dedicated to Lo -Vaca at Gas Search Pro- gram prices, then the gas so dedicated shall be credited against Coastal's reserve dedi- cation obligations set out in A(1)(c) or A(2)(c), as the case- may be, above -. In the event - that gas is so dedicated to Lo -Vaca, then Coastal's related expenditure undertakings set out in A(1)(a) or A(2)(a) above, as the case may be, shall-.be - credited as follows_ (1) if such exchange or other agree- ment be made between Coastal and an affiliated third party, then Coastal's expenditure undertakings shall be credited with the actual expenditures of such third party, in the nature • -44- of Qualified Expenditures, in- . curred in developing such gas dedicated to Lo -Vaca, or (2) if such exchange or other agree- ment be made between Coastal and an unaffiliated third party, then Coastal's expenditure undertakings shall be credited with the lesser of (a) the expenditures of such third party, in the nature of Quali- fied Expenditures, incurred in developing such gas dedicated' : to Lo -Vaca, or (b) the ex- penditures of Coastal, in the nature of Qualified Expendi- tures,: incurred in developing • the gas exchanged for-such - Texas gas; provided, however,'::;` that the amount of credit so allowed against Coastal's.ex- penditure undertakings shall in no event exceed that amount . determined by multiplying the total number of Mcf of gas so•• - dedicated to Lo -Vaca by such - third party times Coastal's ,Average Program Finding Cost. For purposes of this section, the term Coastal's Average . Program Finding Cost shall mean. - that figure determined to be the Texas industry average finding cost for .gas in the • next preceding calendar year: Coastal's right to satisfy any of its obligations under the Gas search Program through any such exchange or other agree- ment as contemplated by this section, however, shall be . contingent upon Coastal's ob- taining such rulings or assur- ances as may be required by Lo -Vaca to satisfy its manage- ment that the implementation of any such agreement could not subject Lo - Vaca -to the -45- B. Producing Webb- Zapata County and other Texas leases owned by Coastal .and Gas Producing En- terprises: C. Gas Availability: Agreement: , VI. Agreements Relating to Coal jurisdiction of the Federal Power Commission nor to any other regulatory jurisdiction or sanctions which Lo- Vaca's management, in its sole dis- cretion, believes could have an adverse affect on Lo -Vacs_ Coastal will cause its gas which may be produced from or attribu- table to all these leases to be dedicated to sale to Lo -Vacs . under gas purchase contracts extending for the life of the - reserves, or the life of the leases, whichever is shorter. , , Subject to. presently existing contractual commitments, Coastal • will not, and will not permit any subsidiary or affiliate to, sell gas to any person -other than Lo -Vaca from leases or fee prop- erties now owned or acquired through 1985 in..Texas-(in Lo-Vaca's supply area) or in state or Federal waters offshore Texas, unless such gas has first been offered for sale to Lo -Vaca on terms no less favor- able to the seller than the seller could obtain from another buyer. and Lignite: A. Transfer of Bastrop and Fayette - Washington County Lignite Prop- erties: B. 'Undertaking by New Company Subsidiary: -46- Coastal will cause all the so- called Bastrop and Fayette - Washington County lignite properties (approxi- mately 150 million tons more or. less) which are owned by it or any Coastal subsidiary to be transferred to a wholly owned - subsidiary of New Company (to be established) at Coastal's carried book cost. The New Company subsidiary will : undertake, to the same extent C. that an ordinary and prudent operator would do so under the circumstances, to exploit the leases, either through the de- velopment thereof for marketing, sale of the leases or otherwise. Coal and Lignite Subject to presently existing Availability contractual commitments, Coastal Agreement: will. not, and will not permit any subsidiary or affiliate to, sell coal or lignite to any per- son other than the New Company sub - sidiary from leases or fee prop- erties acquired through 1985 in Texas or sell Texas coal or lignite leases or fee properties acquired through 1985 to any person other than the-New Company subsidiary, unless such coal or lignite or leases or properties,, as the case may be, has first been offered for sale to the New Company subsidiary on terms no less favor- able to the seller than the seller could obtain from another buyer. Such subsidiary will also have the option for 60 days, on 120 days' notice to it, to cause any lignite properties proposed to be abandoned by Coastal to be assigned to such subsidiary at no cost, provided that if such option is not exer- cised, Coastal can dispose of such properties, by sale or abandonment, within the next 60 days in its dis -. cretion_ If disposal is by sale, . such sale would be subject to the • right of first refusal, unless sold subject to the same terms and con- ditions existing during the option period. D. Option for Certain Lignite Customers_ -47- During the two -year period beginning on the effective date of the settle- ment, Central Power & Light Company, City of Austin, Lower Colorado River Authority, San Antonio Public Service Board, Lone Star Gas - Company and United Texas Transmission Com- pany (lignite customers) shall have an option, singly or in any com- bination, to purchase for cash from the New Company subsidiary at the New Company subsidiary's re- corded book value the lignite properties acquired by the New Company subsidiary on the effective. date or during such period pur- suant to the above- mentioned right ' of first refusal; provided, that such option may not be exercised unless either (1) each lignite customer shall join in the exer -' . cise of such.option or (2) the New - Company subsidiary shall receive from each lignite customer not • joining in the exercise of such - a release in form and sub- . stance satisfactory to'the New Com- pany subsidiary of such nonjoining lignite customer's right to join in the exercise of such option. Sub- ject to the release, exercise or lapse of such option; the New Com- pany subsidiary shall have no obli- gation pursuant to its above under- taking with respect to the properties subject thereto_. VII. Agreements Relating to Assets of Coastal States Petroleum Company: ' A. • Transfer of Corpus ' Christi Refinery and Related Operations to Coastal: B. Agreement Relating to Use of Liquids Pipe- lines and Fractionation Plant: -48- Producing will cause the refinery and related operations to be trans- ferred to Coastal. This will be accomplished through the transfer of the stock of Coastal States Petroleum Company (C /S Petroleum) to Coastal_ The transfer will be made for full value. New Company and Coastal will nego- - tiate an agreement relating to New Company's right to capacity in the liquids pipelines and • 'fractionation plant or to the eco- nomic benefits of having such capacity. VIII. General: A. Indemnification : - Coastal will indemnify Producing and New Company against all pending claims and contingent liabilities relating to or arising out of the ownership and (or) operation of • the properties transferred -from Producing to Coastal, including all present and future FEA claims. B. Fair and Reasonable This settlement proposal is subject Rate: to the entry by the Railroad Com- mission of a permanent rate order -for sales of gas from the Lo -Vaca "system providing for a fair and reasonable rate for Lo -Vaca as con- templated by Section III of Part Two hereof_ Customers which have not or do not pay pursuant to Railroad Commission orders should have their service from Lo -Vaca terminated under appropriate orders. C. Other Indemnities: New Company will indemnify Coastal for any liability to parties not - bound by the settlement growing out. of the Lo -Vaca write -off of certain Lo -Vaca receivables. In this con- nection, it is understood that if New Company incurs any net monetary - (net of taxes) liability under this indemnification, then 1/2 thereof ' would he a proper credit against any unpaid dividend due on the Preferred Stock while still in the hands of the Settlement Trustee. D. Approvals: -49- This settlement proposal is subject• to appropriate approvals by the governing bodies of each party joining herein and, where neces- - ary, approval by security and 't • E. Appraisal Rights: -50- debt holders and regulatory author- ities. With respect to customer approval, it is agreed that the proposed Settlement shall be binding upon Coastal, Myatt and all customers who agree thereto on or before the Closing Date ' - for the transactions contemplated hereby, provided _ of the total value of customer claims so agree on or before the Closing Date. - [Note: The percentage left blank above, as well as the method of .. determining the total value of customer claims, will have to be have to be mutually agreed upon .-- on or before the execution of - . the definitive Settlement Agree- ment contemplated by this • Settlement Proposal.] Any cus tomer who is not a signatory - to the Settlement and is not bound • thereby at the effective date • . thereof who becomes a signatory within 2 years after such date shall be entitled to all benefits of the Settlement Trust if such action is taken within 6 months after such date and to all prospective benefits if such action is taken from 6 months to 2 years after such date. This proposal is further subject to - appropriate IRS and SEC rulings with respect to, among other things,' the distribution of the New Company . stock to the Coastal shareholders being approved as a "tax free". distribution. • Customer representatives have - examined, and upon being furnished with a signed .copy thereof, would be willing to accept, without fur- ther appraisal, the April 1975 fair market value appraisal by Purvin and Gertz of the Refinery and Related Properties being transferred to Coastal. This• appraisal shows a F. Other Matters total market value (exclusive of working capital items) of $147.9 million as against a book value of $141.2 million at March 31, 1976, exclusive of the same kind of items. With.respect to the equity in the oil and gas properties being trans- ferred at a net book value of ap- proximately $24 million at March 31, 1976, each side of the proposed - settlement will have the option of obtaining an independent appraisal of present fair market value, and- - would use its best efforts to ob- tain the services of a firm accept- able to both sides. If either side opts for such appraisal and if the same is had, and if the results of that appraisal on oil and gas • properties and of the Purvin and- . Gertz appraisal on the refinery and - related properties, show total - present market values for:both to • be within $15 million of aggregate' book value of both (as of March 31, 1976), then book value of each shall continue to be used in, de- tern+h ni ng equity values involved in the settlement; otherwise either • side to the settlement agreement • shall be entitled to withdraw there- from or to adjust the equity and_ resulting Coastal Note or Notes accordingly by agreement. . a) It is recognized as being in the public interest that all liti- gation involving the Lo -Vaca . - situation be settled so that - Lo-Vaca or its successor will be able to render reliable natural gas service throughout Texas at fair and reasonable rates com- mensurate with prevailing cir • cumstances, and that the Texas consumers should be the princi- pal beneficiaries of the ren- dition of such public utility- -52- service by Lo -Vaca and the . longer term availability of natural gas to then. Accord- • ingly, the principal benefits to be forthcoming from this settle- ment will flow to the ultimate consumer. These include the es- tablishment of a viable gas supplier in Lo -Vaca or its suc- . cessor which is able to compete for much needed new gas sup- • plies at reasonable costs. These also include under the Gas Search Program the avail- ability of gas under long -term - fixed price contracts not sub- - .jeCt to customary price re- determination, favored nations - provisions or substantial es- calation. In the case of Lone Star, it is itself a public . utility and thus'is and was - committed to rendering re- -- liable gas service to its cus -' ' tomers. In this connection it ' is Lone Stares position'that,:, it was required in the public interest to make major capital outlays and other substantial payments for which it was not' • compensated as a result of the . • failure of Lo -Vaca to deliver -. to it contract quantities of gas at contract rates. It is also Lone Star's position that such expenditures precluded Lone Star from earning returns to which it otherwise would have been entitled, thereby dimin- ishing its capital and requiring it to finance its public utility operations at higher. costs. Therefore, under these circumstances Lone Star believes that it should retain, as a part of the final Settlement,, the other proceeds of such Settlement to which its per- centage interest entitles it as partial compensation for ' earlier expenditures made in the r -53- public interest and for which it has not been reimbursed, in order to strengthen its capital - structure and thus enable - - it to more effectively carry' on its public utility operations. ' In this connection it is con- templated by Lone Star that contemporaneously with the con- . summation of this Settlement - - the Railroad Commission will - enter such lawful orders as are necessary to accomplish this result_ This subparagraph a) - does not reflect any statement , of position of Coastal, any of its subsidiaries or Wyatt, nor does it reflect any, statement. of position of any. other settling customer on the allo- cation, if any, 'of benefits to which it'may be directly en- .'titled as a customer of Lo- . Vaca nor does it preclude ap propriate regulatory action by applicable regulatory author- ities_ b) It is recognized that the dis- putes regarding the so- called . ' buy -sell arrangements and the lawsuit brought by United Texas Transmission Company, for it - self and as a class action, against a Texas Utilities subsidiary and others will have to be resolved in such manner, • or otherwise dealt with in such . way, that neither Coastal nor New Company shall be subject to. any substantial risk of a lia- bility as a result of the final outcome of these disputes and such lawsuit. Annex A NEW COMPANY AND CONSOLIDA LD SUBSIDIARIES PRO FORMA CONDENSED BALANCE SHEET September 30 1976 (Unaudited) . (Expressed in Thousands) - ASSETS PROPERTY,' PLANT AND EQUIPMENT at.cost; net -'$363,200 - INVESTMENTS: Notes due from Coastal States Gas Corporation 1130,100. 0- CURRENT ASSETS , 119000 14,500 ' $609,800.• OTHER ASSETS • • Total CAPITALIZATION AND LIABILITIES CAPITALIZATION: Preferred Stock - Common Stock and Surplus Long -term Debt (including amount due in one year) 197, 560 ".. - Total 437,50q ' CURRENT LIABILITIES DEFERRED 1EDERAL INCOME TAX 64,000 �. DEFERRED CREDITS 64,000 24,300 -.1\ �' $609,800 \ • $115,000 • 125,000 240,000 - -54-