-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A5wlSwCDnDWkCvTcHUXw2/PVadPUfT48h8Sd2k7iD0A0Y4ZSBgePmVtXLEMM0cMP pcrgRS6ujCWydnUIetpppg== 0000858470-99-000006.txt : 19990326 0000858470-99-000006.hdr.sgml : 19990326 ACCESSION NUMBER: 0000858470-99-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990325 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CABOT OIL & GAS CORP CENTRAL INDEX KEY: 0000858470 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 043072771 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10447 FILM NUMBER: 99572084 BUSINESS ADDRESS: STREET 1: 15375 MEMORIAL DR CITY: HOUSTON STATE: TX ZIP: 77079 BUSINESS PHONE: 2815894600 10-K 1 CABOT OIL & GAS CORPORATION - 12/31/98 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal year ended DECEMBER 31, 1998 Commission File Number 1-10447 CABOT OIL & GAS CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 04-3072771 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 15375 MEMORIAL DRIVE, HOUSTON, TEXAS 77079 (Address of principal executive offices including Zip Code) (281) 589-4600 (Registrant's telephone number) Securities registered pursuant to Section 12(b) of the Act: Name of eahc exchange Title of each class on which registered CLASS A COMMON STOCK, PAR VALUE $.10 PER SHARE NEW YORK STOCK EXCHANGE RIGHTS TO PURCHASE PREFERRED STOCK NEW YORK STOCK EXCHANGE Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [__]. The aggregate market value of Class A Common Stock, par value $.10 per share ("Common Stock"), held by non-affiliates (based upon the closing sales price on the New York Stock Exchange on February 26, 1999), was approximately $265,000,000. As of February 26, 1999, there were 24,665,455 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held May 11, 1999 are incorporated herein by reference in Items 10, 11, 12, and 13 of Part III of this report. 1 TABLE OF CONTENTS
PART I PAGE ITEMS 1 and 2 Business and Properties 3 ITEM 3 Legal Proceedings 17 ITEM 4 Submission of Matters to a Vote of Security Holders 17 Executive Officers of the Registrant 18 PART II ITEM 5 Market for Registrant's Common Equity and Related Stockholder Matters 19 ITEM 6 Selected Historical Financial Data 19 ITEM 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 20 ITEM 8 Financial Statements and Supplementary Data 33 ITEM 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 58 PART III ITEM 10 Directors and Executive Officers of the Registrant 58 ITEM 11 Executive Compensation 58 ITEM 12 Security Ownership of Certain Beneficial Owners and Management 58 ITEM 13 Certain Relationships and Related Transactions 58 PART IV ITEM 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 59
-------------------------- The statements regarding future financial performance and results and market prices and the other statements which are not historical facts contained in this report are forward-looking statements. The words "expect," "project," "estimate," "believe," "anticipate," "intend," "budget," "plan," "forecast," "predict" and similar expressions are also intended to identify forward-looking statements. These statements involve risks and uncertainties, including, but not limited to, market factors, market prices (including regional basis differentials) of natural gas and oil, results for future drilling and marketing activity, future production and costs and other factors detailed in this document and in the Company's other Securities and Exchange Commission filings. If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, actual outcomes may vary materially from those included in this document. 2 PART I ITEM 1. BUSINESS GENERAL Cabot Oil & Gas Corporation (the "Company") explores for, develops, produces, stores, transports, purchases and markets natural gas and, to a lesser extent, produces and sells crude oil. Substantially all of the Company's operations are in the Appalachian Region of West Virginia and Pennsylvania, in the Western Region, including the Anadarko Basin of southwestern Kansas, Oklahoma and the Texas Panhandle and the Green River Basin of Wyoming, and in the Gulf Coast Region, including South Texas and South Louisiana. At December 31, 1998, the Company had 1,042.8 Bcfe of total proved reserves, 96% of which was natural gas. Most of the Company's natural gas reserves are located in long-lived fields with extensive production histories. The Company was organized in 1989 as the successor to the oil and gas business of Cabot Corporation ("Cabot"), which was begun in 1891. In 1990, the Company completed its initial public offering of approximately 18% of its outstanding Common Stock. Cabot distributed the remaining Common Stock of the Company to Cabot shareholders in 1991. The Company is publicly traded on the New York Stock Exchange. Unless otherwise specified, all references to the Company include Cabot Oil & Gas Corporation, its predecessors and subsidiaries. All references to wells are gross, unless otherwise stated. The following table summarizes certain information, at December 31, 1998, regarding the Company's proved reserves, productive wells, developed and undeveloped acreage, and infrastructure. Summary of Reserves, Production, Acreage and Other Information by Areas of Operation (1)
Total Appalachian Western Gulf Coast Company Region Region Region - -------------------------------------------------------------------------------- Reserves/Production: Proved reserves Developed (Bcfe) 823.3 364.1 381.7 77.5 Undeveloped (Bcfe) 219.5 72.3 99.2 48.0 -------- --------- ------- ------- Total (Bcfe) 1,042.8 436.4 480.9 125.5 ======== ========= ======= ======= Daily production (Mmcfe) net 187.9 62.8 92.5 32.6 Gross productive wells 4,671 3,027 1,198 446 Net productive wells 3,795 2,831 695 269 Percent of wells operated 83.9% 96.5% 63.4% 53.6% Acreage: Net acreage Developed acreage 1,100,112 776,843 267,944 55,325 Undeveloped acreage 516,618 366,364 100,176 50,078 --------- --------- -------- ------- Total 1,616,730 1,143,207 368,120 105,403 ========= ========= ======== =======
- ---------- (1) As of December 31,1998. For additional information regarding the Company's estimates of proved reserves and other data, see "Business--Reserves," and the "Supplemental Oil and Gas Information" to the Consolidated Financial Statements. 3 EXPLORATION, DEVELOPMENT AND PRODUCTION The Company is one of the largest producers of natural gas in the Appalachian Basin, where it has operated for more than a century. Cabot Oil & Gas has operated in the Anadarko Basin for over 60 years. The Company acquired its operations in the Rocky Mountains and the Gulf Coast after acquiring Washington Energy Resources Company in May 1994. Historically, its reserve base has been maintained through low-risk development drilling and strategic acquisitions, and recently the Company has increased its emphasis on exploration. The Company continues to focus its operations in the Appalachian, Western and Gulf Coast Regions through development drilling, acquisition of oil and gas producing properties, and new exploration opportunities. While continuing its strong development drilling program, the Company has significantly expanded its exploration program in the last three years. The Company experienced a 69% gross success rate for its exploratory drilling program in 1998, based on participation in 39 exploratory wells. A large part of the exploration activity has been focused in the Gulf Coast Region, where the 1998 gross success rate was 88%. Also in 1998, reserves in the Gulf Coast Region grew from 56.5 Bcfe to 125.5 Bcfe, an increase of 122%, due primarily to the Company's exploratory drilling program combined with its acquisition strategy. When combining the exploration and development programs, the overall gross success rate for 1998 was 89%. APPALACHIAN REGION The Company's exploration, development and production activities in the Appalachian Region are concentrated in Pennsylvania, Ohio, West Virginia, and Virginia. Operations are managed by a regional office in Pittsburgh. At December 31, 1998, the Company had 436.4 Bcfe of proved reserves (substantially all natural gas) in the Appalachian Region, constituting 42% of the Company's total proved reserves. The Company has 3,027 productive wells (2,831.1 net), of which 2,920 wells are operated by the Company. There are multiple producing intervals that include the Upper Devonian, Oriskany, Berea, and Big Lime trend formations at depths primarily ranging from 1,500 to 9,000 feet. Average net daily production in 1998 was 62.8 Mmcfe. While natural gas production volumes from Appalachian reservoirs are relatively low on a per-well basis compared to other areas of the United States, the productive life of Appalachian reserves is relatively long. In 1998, the Company drilled 109 wells (90.2 net) in the Appalachian Region, of which 83 were development wells (74.2 net). Capital and exploration expenditures, including pipeline expenditures, were $43.2 million for the year. In the 1999 drilling program year, the Company has plans to drill 8 wells in the region. At December 31, 1998, the Company had 1,143,207 net acres in the region, including 776,843 net developed acres. At year end, the Company had identified 218 proved undeveloped drilling locations. The Company owns and operates two natural gas storage fields in West Virginia with a combined working gas capacity of 4 Bcf. Ancillary to its exploration and production operations, the Company owns and operates two brine treatment plants that process and treat waste fluid generated during the drilling, completion and subsequent production of oil and gas wells. The first plant, near Franklin, Pennsylvania, which began operating in 1985, provides services to the Company and certain other oil and gas producers in southwestern New York, eastern Ohio and western Pennsylvania. In April 1998, the Company acquired a second brine treatment plant in Indiana, Pennsylvania that had been in existence since 1987. The Company believes that it gains operational efficiency in the Appalachian Region because of its large acreage position, high concentration of wells, natural gas gathering and pipeline systems and storage capacity. 4 WESTERN REGION The Company's exploration, development and production activities in the Western Region are primarily focused in the Anadarko Basin in southwestern Kansas, Oklahoma and the panhandle of Texas and in the Green River Basin of Wyoming. Operations for the Western Region are managed from a regional office in Denver. At December 31, 1998, the Company had 480.9 Bcfe of proved reserves (96.1% natural gas) in the Western Region, constituting 46% of the Company's total proved reserves. ANADARKO The Company has 743 productive wells (488.5 net) in the Anadarko area, of which 543 wells are operated by the Company. Principal producing intervals in Anadarko are in the Chase, Morrow, Red Fork and Chester formations at depths ranging from 1,500 to 13,000 feet. Average net daily production in 1998 was 42.2 Mmcfe. In 1998, the Company drilled 23 wells (13.5 net) in Anadarko, including 20 development and extension wells (11.4 net). Capital and exploration expenditures for the year were $20.2 million. In the 1999 drilling program year, the Company has plans to drill 3 wells in the area. At December 31, 1998, the Company had approximately 230,256 net acres, including approximately 194,130 net developed acres. At year end, the Company had identified 65 proved undeveloped drilling locations. ROCKY MOUNTAINS The Company has 455 productive wells (206.1 net) in the Rocky Mountains area, of which 216 wells are operated by the Company. Principal producing intervals in the Rocky Mountains area are in the Frontier and Dakota formations at depths ranging from 9,000 to 13,000 feet. Average net daily production in 1998 was 50.2 Mmcfe. In 1998, the Company drilled 56 wells (30.4 net) in the Rocky Mountains, including 54 development and extension wells (29.9 net). Capital and exploration expenditures for the year were $32.3 million. In the 1999 drilling program year, the Company has plans to drill 9 wells in the area. At December 31, 1998, the Company had approximately 137,864 net acres, including approximately 73,814 net developed acres. At year end, the Company had identified 71 proved undeveloped drilling locations. GULF COAST REGION The Company's exploration, development and production activities in the Gulf Coast Region are concentrated in South Louisiana and South Texas. A regional office in Houston manages operations. At December 31, 1998, the Company had 125.5 Bcfe of proved reserves (80.8% natural gas) in the Gulf Coast Region, constituting 12% of the Company's total proved reserves. The Company has 446 productive wells (269.0 net) in the Gulf Coast Region, of which 239 wells are operated by the Company. The Company is in the process of evaluating approximately 150 of the Southern Louisiana wells that were acquired in December from Oryx Energy Company. Principal producing intervals in the Gulf Coast are in the Wilcox and Vicksburg formations in Texas, and Miocene age formations in Louisiana at depths ranging from 3,000 to 18,000 feet. Average net daily production in 1998 was 32.6 Mmcfe. In 1998, the Company drilled 17 wells (9.6 net) in the Gulf Coast Region, including 9 development wells (4.0 net). Capital and exploration expenditures for the year were $128.7 million, including $70.1 million for Southern Louisiana properties acquired from Oryx Energy Company. (See further discussion in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.) In the 1999 drilling program year, the Company has plans to drill 9 wells in the region. At December 31, 1998, the Company had approximately 105,403 net acres, including approximately 55,325 net developed acres. At year end, the Company had identified 20 proved undeveloped drilling locations. 5 GAS MARKETING The Company is engaged in a wide array of marketing activities offering its customers long-term, reliable supplies of natural gas. Utilizing its pipeline and storage facilities, gas procurement ability and transportation, and natural gas risk management expertise, the Company provides a menu of services that includes gas supply and transportation management, short-term and long-term supply contracts, capacity brokering and risk management alternatives. The marketing of natural gas has changed significantly as a result of FERC Order 636 ("Order 636"), which was issued by the Federal Energy Regulatory Commission in 1992. Order 636 required pipelines to unbundle their gas sales, storage and transportation services. As a result, local distribution companies and end-users separately contract these services from gas marketers and producers. Order 636 has had the effect of creating greater competition in the industry while also providing the Company the opportunity to serve broader markets. Since Order 636 was issued, there has been an increase in the number of third-party producers that use the Company to market their gas. Additionally, as a result of Order 636, the Company has experienced increased competition for markets which has placed pressure on the premiums it has received. APPALACHIAN REGION The Company's principal markets for its Appalachian Region natural gas are in the northeastern United States. The Company's marketing subsidiary, Cabot Oil & Gas Marketing Corporation, purchases the Company's natural gas production in the Appalachian Region as well as production from local third-party producers and other suppliers to aggregate larger volumes of natural gas for resale. This marketing subsidiary sells natural gas to industrial customers, local distribution companies ("LDCs") and gas marketers both on and off the Company's pipeline and gathering system. Most of the Company's natural gas sales volume in the Appalachian Region is being sold at market-responsive prices under contracts with a term of one year or less. Of these short-term sales, spot market sales are made under month-to-month contracts, while industrial and utility sales generally are made under year-to-year contracts. Approximately 10% of Appalachian production is sold on fixed price contracts which typically renew annually. The Company's Appalachian natural gas production is generally sold at a higher realized price (a "premium") compared to production from other producing regions due to its close proximity to eastern markets. While year-to-year fluctuations in that premium are normal due to changes in market conditions, this premium has typically been in the range of $0.40 to $0.50 per Mmbtu above the Henry Hub cash price throughout the 1990's. In 1998, the premium averaged approximately $0.40 per Mmbtu. Ancillary to its exploration and production operations, the Company operates a number of gas gathering and transmission pipeline systems, made up of approximately 2,850 miles of pipeline with interconnects to three interstate pipeline systems and five LDCs. The majority of the Company's pipeline infrastructure in West Virginia is regulated by the FERC. As such, the transportation rates and terms of service of the Company's pipeline subsidiary, Cranberry Pipeline Corporation, are subject to the rules and regulations of the FERC. The Company's natural gas gathering and transmission pipeline systems enable the Company to connect new wells quickly and to transport natural gas from the wellhead directly to interstate pipelines, LDCs and industrial end-users. Control of its gathering and transmission pipeline systems also enables the Company to purchase, transport and sell natural gas produced by third parties. In addition, the Company can take part in development drilling operations without relying upon third parties to transport its natural gas while incurring only the incremental costs of pipeline and compressor additions to its system. The Company has two natural gas storage fields located in West Virginia, with a combined working capacity of approximately 4 Bcf of natural gas. The Company uses these storage fields to take advantage of the seasonal variations in the demand for natural gas and the higher prices typically associated with winter natural gas sales, while maintaining production at a nearly constant rate throughout the year. The storage fields also enable the Company to periodically increase the volume of natural gas that it can deliver by more than 40% above the volume that it could deliver solely from its production in the Appalachian Region. The pipeline systems and storage fields are fully integrated with the Company's producing operations. 6 WESTERN REGION The Company's principal markets for Western Region natural gas are in the northwestern, midwestern, and northeastern United States. The Company's marketing subsidiary purchases all of the Company's natural gas production in the Western Region. The marketing subsidiary sells the natural gas to cogenerators, natural gas processors, LDCs, industrial customers and marketing companies. Currently, most of the Company's natural gas production in the Western Region is sold primarily under contracts with a term of one year or less at market-responsive prices. Approximately 20% of the Western Region's production is sold under a 15-year cogeneration contract with 9 1/2 years remaining that escalates 5% in price per year. The Western Region properties are connected to the majority of the Midwestern, Northwestern, and Gulf Coast interstate and intrastate pipelines, affording the Company access to multiple markets. The Company also produces and markets approximately 1,200 barrels a day of crude oil/condensate in the Western Region at market-responsive prices. GULF COAST REGION The Company's principal markets for Gulf Coast Region natural gas are in the industrialized Gulf Coast areas and the northeastern United States. The Company's marketing subsidiary purchases all of the Company's natural gas production in the Gulf Coast Region. The marketing subsidiary sells the natural gas to intrastate pipelines, natural gas processors and marketing companies. Currently, all of the Company's natural gas sales volumes in the Gulf Coast Region are being sold at market-responsive prices under contracts with terms of one to three years. The Gulf Coast Region properties are connected to various processing plants in Texas and Louisiana with multiple interstate and intrastate deliveries, affording the Company access to multiple markets. The Company also produces and markets approximately 1,500 barrels a day of crude oil/condensate in the Gulf Coast Region at market-responsive prices. This amount includes volumes attributable to the December acquisition of Southern Louisiana properties from Oryx Energy Company. RISK MANAGEMENT In 1998, the Company used certain financial instruments, called "derivatives", to manage price risks associated with its production and brokering activities. The impact of these derivatives on the Company's financial results was not material. While there are many different types of derivatives available, the Company used natural gas price swap agreements ("price swaps") to attempt to manage price risk more effectively and improve the Company's realized natural gas prices. These price swaps call for payments to (or to receive payments from) counterparties based on the differential between a fixed and a variable gas price. The Company will continue to evaluate the benefit of this strategy in the future. See the Overview section of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, and Note 11. of the Notes to the Consolidated Financial Statements for further discussion. 7 RESERVES CURRENT RESERVES The following table sets forth information regarding the Company's estimates of its net proved reserves at December 31, 1998.
Natural Gas (Mmcf) Liquids(1) (Mbbl) Total(2) (Mmcfe) - ------------------------------------------------------------------------------------------------------------------ Developed Undeveloped Total Developed Undeveloped Total Developed Undeveloped Total - ------------------------------------------------------------------------------------------------------------------ Appalachia 360,903 72,295 433,198 532 0 532 364,093 72,295 436,388 West 366,301 95,907 462,208 2,579 549 3,128 381,776 99,203 480,979 Gulf Coast 61,186 40,164 101,350 2,711 1,306 4,017 77,452 48,000 125,452 ------- ------- ------- ----- ----- ----- ------- ------- --------- Total 788,390 208,366 996,756 5,822 1,855 7,677 823,321 219,498 1,042,819 ======= ======= ======= ===== ===== ===== ======= ======= =========
- ---------- (1) Liquids include crude oil, condensate and natural gas liquids (Ngl). (2) Natural Gas Equivalents are determined using the ratio of 6.0 Mcf of natural gas to 1.0 Bbl of crude oil, condensate or natural gas liquids. The proved reserve estimates presented here were prepared by the Company's petroleum engineering staff and reviewed by Miller and Lents, Ltd., independent petroleum engineers. For additional information regarding the Company's estimates of proved reserves, the review of such estimates by Miller and Lents, Ltd., and other information about the Company's oil and gas reserves, see the Supplemental Oil and Gas Information to the Consolidated Financial Statements included in Item 8. A copy of the review letter by Miller and Lents, Ltd., has been filed as an exhibit to this Form 10-K. The Company's estimates of proved reserves in the table above do not differ materially from those filed by the Company with other federal agencies. The Company's reserves are sensitive to natural gas sales prices and their effect on economic producing rates. The Company's reserves are based on oil and gas prices in effect for December 1998. There are a number of uncertainties inherent in estimating quantities of proved reserves, including many factors beyond the control of the Company and, therefore, the reserve information in this Form 10-K represents only estimates. Reserve engineering is a subjective process of estimating underground accumulations of crude oil and natural gas that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. As a result, estimates of different engineers often vary. In addition, results of drilling, testing and production subsequent to the date of an estimate may justify revising the original estimate. Accordingly, reserve estimates are often different from the quantities of crude oil and natural gas that are ultimately recovered. The meaningfulness of such estimates depends primarily on the accuracy of the assumptions upon which they were based. In general, the volume of production from oil and gas properties owned by the Company declines as reserves are depleted. Except to the extent the Company acquires additional properties containing proved reserves or conducts successful exploration and development activities or both, the proved reserves of the Company will decline as reserves are produced. 8 HISTORICAL RESERVES The following table presents the Company's estimated proved reserves for the periods indicated.
Natural Gas (Mmcf) Total (Mmcfe)(1) - ------------------------------------------------------------------------------------------------------------------------ APP WEST GULF TOTAL APP WEST GULF TOTAL - ------------------------------------------------------------------------------------------------------------------------ DECEMBER 31, 1995 515,556 350,873 23,420 889,849 516,869 377,806 27,032 921,707 Revisions of prior estimates (487) 2,110 1,151 2,774 (501) 1,139 1,342 1,980 Extensions, discoveries and other additions 40,703 25,786 3,219 69,708 41,526 27,269 3,231 72,026 Production (26,783) (27,041) (4,938) (58,762) (26,910) (29,768) (5,667) (62,345) Purchases of reserves in place 21,207 15,494 696 37,397 21,255 15,980 1,450 38,685 Sales of reserves in place (23,337) (1,732) (281) (25,350) (23,377) (1,758) (307) (25,442) ------- ------- ------- ------- ------- ------- ------- --------- DECEMBER 31, 1996 526,859 365,490 23,267 915,616 528,862 390,668 27,081 946,611 ------- ------- ------- ------- ------- ------- ------- --------- Revisions of prior estimates 2,929 (1,419) 5,234 6,744 3,327 (2,392) 6,401 7,336 Extensions, discoveries and other additions 42,609 36,062 30,520 109,191 43,493 37,384 33,079 113,956 Production (25,340) (30,104) (8,445) (63,889) (25,628) (32,780) (9,255) (67,663) Purchases of reserves in place 5,355 68,480 1 73,836 5,366 72,034 1 77,401 Sales of reserves in place (137,194) (457) (419) (138,070) (137,520) (680) (798) (138,998) ------- ------- ------- ------- ------- ------- ------- --------- DECEMBER 31, 1997 415,218 438,052 50,158 903,428 417,900 464,234 56,509 938,643 ------- ------- ------- ------- ------- ------- ------- --------- Revisions of prior estimates(2) (3,279) (2,273) (7,545) (13,097) (3,578) (10,167) (9,218) (22,963) Extensions, discoveries and other additions 42,310 36,058 16,524 94,892 43,164 38,869 17,871 99,904 Production (22,684) (30,863) (10,620) (64,167) (22,918) (33,755) (11,911) (68,584) Purchases of reserves in place 2,167 21,234 52,833 76,234 2,354 21,798 72,201 96,353 Sales of reserves in place (534) 0 0 (534) (534) 0 0 (534) ------- ------- ------- ------- ------- ------- ------- --------- DECEMBER 31, 1998 433,198 462,208 101,350 996,756 436,388 480,979 125,452 1,042,819 ======= ======= ======= ======= ======= ======= ======= ========= Proved Developed Reserves: December 31, 1995 430,165 298,768 18,302 747,235 431,477 324,115 21,464 777,056 December 31, 1996 434,558 311,585 21,955 768,098 436,560 334,069 25,577 796,206 December 31, 1997 343,718 354,030 41,016 738,764 346,400 375,606 45,913 767,919 December 31, 1998 360,903 366,301 61,186 788,390 364,093 381,776 77,452 823,321
- ---------- APP = Appalachian Region WEST = Western Region GULF = Gulf Coast Region (1) Includes natural gas and natural gas equivalents determined by using the ratio of 6.0 Mcf of natural gas to 1.0 Bbl of crude oil, condensate or natural gas liquids. (2) The total revision of 22,963 Mmcfe includes a 14,309 Mmcfe revision due to lower year-end pricing in 1998 compared to 1997. 9 VOLUMES AND PRICES; PRODUCTION COSTS The following table presents historical information regarding the Company's sales and production volumes and average sales prices received for, and average production costs associated with, its sales of natural gas and crude oil, condensate and natural gas liquids (Ngl) for the periods indicated.
Year Ended December 31, 1998 1997 1996 - -------------------------------------------------------------------------------- Net Wellhead Sales Volume: Natural Gas (Bcf)(1) Appalachian Region (2) 22.7 25.3 26.2 Western Region 30.9 30.2 27.7 Gulf Coast Region 10.6 8.4 4.9 Crude/Condensate/Ngl (Mbbl) Appalachian Region 39 48 21 Western Region 482 447 463 Gulf Coast Region 215 135 113 Produced Natural Gas Sales Price ($/Mcf)(3) Appalachian Region $ 2.53 $ 3.00 $ 2.72 Western Region $ 1.90 $ 2.14 $ 1.96 Gulf Coast Region $ 2.15 $ 2.52 $ 2.34 Weighted Average $ 2.16 $ 2.53 $ 2.34 Crude/Condensate Sales Price ($/Bbl)(3) $13.06 $20.13 $21.14 Production Costs ($/Mcfe)(4) $ 0.57 $ 0.58 $ 0.56
- ---------- (1) Equal to the aggregate of production and the net changes in storage and exchanges. (2) The decline in the Appalachian Region natural gas sales volume is attributed to the sale of the Meadville properties sold effective September 1, 1997. Prior to the sale, these properties produced 3.6 Bcf, or 14.7 Mmcf per day, during the eight-month period ending August 31, 1997. (3) Represents the average sales prices for all production volumes (including royalty volumes) sold by the Company during the periods shown net of related costs (principally purchased gas royalty, transportation and storage). (4) Production costs include direct lifting costs (labor, repairs and maintenance, materials and supplies), and the costs of administration of production offices, insurance and property and severance taxes but is exclusive of depreciation and depletion applicable to capitalized lease acquisition, exploration and development expenditures. ACREAGE The following tables summarize the Company's gross and net developed and undeveloped leasehold and mineral acreage at December 31, 1998. Acreage in which the Company's interest is limited to royalty and overriding royalty interests is excluded. 10 LEASEHOLD ACREAGE
At December 31, 1998 Developed Undeveloped Total - -------------------------------------------------------------------------------- Gross Net Gross Net Gross Net - -------------------------------------------------------------------------------- State Alabama -- -- 312 312 312 312 Arkansas -- -- 240 6 240 6 Colorado 20,911 19,120 20,219 19,011 41,130 38,131 Indiana 739 369 49,307 24,427 50,046 24,796 Kansas 31,467 28,850 798 798 32,265 29,648 Kentucky 2,680 990 10,630 5,180 13,310 6,170 Louisiana 45,987 34,679 98,096 32,681 144,083 67,360 Michigan 784 176 2,877 712 3,661 888 Montana 397 210 680 303 1,077 513 New York 2,737 1,098 37,812 19,222 40,549 20,320 North Dakota 160 20 870 96 1,030 116 Ohio 5,372 2,027 33,618 26,723 38,990 28,750 Oklahoma 177,742 123,646 48,348 29,883 226,090 153,529 Pennsylvania 136,282 85,888 52,233 38,600 188,515 124,488 Texas 81,420 48,138 62,467 21,788 143,887 69,926 Utah 1,740 530 20,653 17,274 22,393 17,804 Virginia 22,189 20,079 13,852 6,900 36,041 26,979 West Virginia 607,775 572,501 227,467 186,584 835,242 759,085 Wyoming 104,126 53,934 53,712 27,291 157,838 81,225 --------- ------- ------- ------- --------- --------- Total 1,242,508 992,255 734,191 457,791 1,976,699 1,450,046 ========= ======= ======= ======= ========= =========
MINERAL FEE ACREAGE
At December 31, 1998 Developed Undeveloped Total - -------------------------------------------------------------------------------- Gross Net Gross Net Gross Net - -------------------------------------------------------------------------------- State Colorado -- -- 160 6 160 6 Kansas 160 128 -- -- 160 128 Montana -- -- 589 75 589 75 New York -- -- 4,281 1,070 4,281 1,070 Oklahoma 16,888 13,987 400 76 17,288 14,063 Pennsylvania 86 86 2,367 1,296 2,453 1,382 Texas 27 27 662 654 689 681 Virginia 17,817 17,817 100 34 17,917 17,851 West Virginia 93,906 75,812 56,577 55,616 150,483 131,428 --------- -------- ------- ------- --------- --------- Total 128,884 107,857 65,136 58,827 194,020 166,684 ========= ======== ======= ======= ========= ========= Aggregate Total 1,371,392 1,100,112 799,327 516,618 2,170,719 1,616,730 ========= ======== ======= ======= ========= =========
11 TOTAL NET ACREAGE BY AREA OF OPERATION
At December 31, 1998 Developed Undeveloped Total - ---------------------------------------------------------------------------- Appalachian Region 776,843 366,364 1,143,207 Western Region 267,944 100,176 368,120 Gulf Coast Region 55,325 50,078 105,403 --------- ------- --------- Total 1,100,112 516,618 1,616,730 ========= ======= =========
PRODUCTIVE WELL SUMMARY(1) The following table reflects the Company's ownership at December 31, 1998 in natural gas and oil wells in the Appalachian Region (consisting of various fields located in West Virginia, Pennsylvania, New York, Ohio, Virginia and Kentucky), in the Western Region (consisting of various fields located in Oklahoma, Kansas, Colorado and Wyoming), and in the Gulf Coast Region (consisting of various fields located in Louisiana and Texas).
Natural Gas Oil Total Gross Net Gross Net Gross Net - ------------------------------------------------------------------------------- Appalachian Region 3,006.0 2,821.5 21.0 9.6 3,027.0 2,831.1 Western Region 1,101.5 640.9 96.5 53.7 1,198.0 694.6 Gulf Coast Region 260.0 211.5 186.0 57.5 446.0 269.0 ------- ------- ----- ----- ------- ------- Total 4,367.5 3,673.9 303.5 120.8 4,671.0 3,794.7 ======= ======= ===== ===== ======= =======
- ---------- (1) "Productive" wells are producing wells and wells capable of production in which the Company has a working interest. DRILLING ACTIVITY The Company drilled, participated in the drilling of, or acquired wells presented in the table below for the periods indicated:
Year Ended December 31, 1998 1997 1996 Gross Net Gross Net Gross Net - ----------------------------------------------------------------------------- Appalachian Region: Development Wells Successful 77 69.4 82 73.7 86 82.6 Dry 6 4.8 5 5.0 12 12.0 Extension Wells Successful 0 0.0 0 0.0 0 0.0 Dry 0 0.0 0 0.0 0 0.0 Exploratory Wells Successful 18 11.0 25 11.8 15 5.9 Dry 8 5.0 8 6.3 10 5.2 --- ---- --- ---- --- ----- Total 109 90.2 120 96.8 123 105.7 === ==== === ==== === ===== Wells Acquired(1) 5 4.2 1 40.0 15 11.8 Wells in Progress at End of Period 1 0.5 4 3.1 2 1.5
12
Year Ended December 31, 1998 1997 1996 Gross Net Gross Net Gross Net - ----------------------------------------------------------------------------- Western Region: Development Wells Successful 64 36.2 66 29.7 33 26.5 Dry 4 1.9 4 3.1 13 8.7 Extension Wells Successful 5 2.2 9 8.6 13 8.4 Dry 1 0.9 2 1.0 1 1.9 Exploratory Wells Successful 2 0.7 1 1.0 0 0.6 Dry 3 2.0 3 0.9 3 2.4 -- ---- -- ---- -- ---- Total 79 43.9 85 44.3 63 48.5 == ==== == ==== == ==== Wells Acquired(1) 13 3.9 65 18.7 27 11.7 Wells in Progress at End of Period 4 1.8 6 3.3 4 1.5
Year Ended December 31, 1998 1997 1996 Gross Net Gross Net Gross Net - ----------------------------------------------------------------------------- Gulf Coast Region: Development Wells Successful 9 4.0 7 3.5 7 4.2 Dry 0 0.0 1 0.6 1 0.6 Extension Wells Successful 0 0.0 3 2.6 0 0.0 Dry 0 0.0 0 0.0 0 0.0 Exploratory Wells Successful 7 4.6 5 1.6 1 0.6 Dry 1 1.0 4 2.0 1 0.0 -- --- -- ---- -- --- Total 17 9.6 20 10.3 10 5.4 == === == ==== == === Wells Acquired(1) 219 204.2 0 0.0 1 0.6 Wells in Progress at End of Period 5 4.2 0 0.0 0 0.0
- ---------- (1) Includes the acquisition of net interest in certain wells in 1998, 1997 and 1996 in which the Company already held an ownership interest. COMPETITION Competition in the Company's primary producing areas is intense. Competition is affected by price, contract terms, and quality of service, including pipeline connection times, distribution efficiencies and reliable delivery record. The Company believes that its extensive acreage position and existing natural gas gathering and pipeline systems and storage fields give it a competitive advantage over certain other producers in the Appalachian Region which do not have such systems or facilities in place. The Company believes that its competitive position in the Appalachian Region is enhanced by the lack of significant competition from major oil and gas companies. The Company also actively competes against other companies with substantially larger financial and other resources, particularly in the Western and Gulf Coast Regions. The Company believes that marketing its own gas through the operation of Cabot Oil & Gas Marketing Corporation enhances its competitive position. 13 OTHER BUSINESS MATTERS MAJOR CUSTOMER The Company had no sales to any customer that exceeded 10% of the Company's total gross revenues in 1998 or 1997. SEASONALITY Demand for natural gas has historically been seasonal, with peak demand and typically higher prices during the colder winter months. REGULATION OF OIL AND NATURAL GAS PRODUCTION The Company's oil and gas production and transportation activities are subject to federal, state and local regulations. These regulations are not only statutory, but include rules and regulations issued by numerous governmental departments and agencies. Because these statutes, rules and regulations undergo constant review and often are amended, expanded and reinterpreted, the Company is unable to predict the future cost or impact of regulatory compliance. The regulatory burden on the oil and gas industry increases its cost of doing business and, consequently, affects its profitability. The Company, however, does not believe it is affected materially differently by these regulations than others in the industry. EXPLORATION AND PRODUCTION The exploration and production operations of the Company are subject to various types of regulation at the federal, state and local levels. Such regulation includes requiring permits to drill wells, maintaining bonding requirements to drill or operate wells, and regulating the location of wells, the method of drilling and casing wells, the surface use and restoration of properties on which wells are drilled and the plugging and abandoning of wells. The Company's operations are also subject to various conservation laws and regulations. These include the regulation of the size of drilling and spacing units or proration units and the density of wells which may be drilled in a given field and the unitization or pooling of oil and natural gas properties. Some states allow the forced pooling or integration of tracts to facilitate exploration while other states rely on voluntary pooling of lands and leases. In addition, state conservation laws establish maximum rates of production from oil and natural gas wells, generally prohibit the venting or flaring of natural gas, and impose certain requirements regarding the ratability of production. The effect of these regulations is to limit the amounts of oil and natural gas the Company can produce from its wells, and to limit the number of wells or the locations at which the Company can drill. NATURAL GAS MARKETING, GATHERING AND TRANSPORTATION Federal legislation and regulatory controls have historically affected the price of the natural gas produced by the Company and the manner in which such production is transported and marketed. Under the Natural Gas Act of 1938, the Federal Energy Regulatory Commission regulates the interstate transportation and the sale in interstate commerce for resale of natural gas. The FERC's jurisdiction over interstate natural gas sales was substantially modified by the Natural Gas Policy Act, under which the FERC continued to regulate the maximum selling prices of certain categories of gas sold in "first sales" in interstate and intrastate commerce. Effective January 1, 1993, however, the Natural Gas Wellhead Decontrol Act (the "Decontrol Act") deregulated natural gas prices for all "first sales" of natural gas, including all sales by the Company of its own production. As a result, all of the Company's produced natural gas may now be sold at market prices, subject to the terms of any private contracts which may be in effect. The FERC's jurisdiction over natural gas transportation was not affected by the Decontrol Act. 14 The Company's natural gas sales are affected by intrastate and interstate gas transportation regulation. Beginning in 1985, the FERC adopted regulatory changes that have significantly altered the transportation and marketing of natural gas. These changes were intended by the FERC to foster competition by, among other things, transforming the role of interstate pipeline companies from wholesaler marketers of gas to the primary role of gas transporters. All gas marketing by the pipelines was required to be divested to a marketing affiliate, which operates separately from the transporter and in direct competition with all other merchants. As a result of the various omnibus rulemaking proceedings in the late 1980s and the individual pipeline restructuring proceedings of the early to mid-1990s, the interstate pipelines are now required to provide open and nondiscriminatory transportation and transportation-related services to all producers, gas marketing companies, local distribution companies, industrial end users and other customers seeking service. Through similar orders affecting intrastate pipelines that provide similar interstate services, the FERC expanded the impact of open access regulations to intrastate commerce. More recently, the FERC has pursued other policy initiatives that have affected natural gas marketing. Most notable are (i) the large-scale divestiture of interstate pipeline-owned gas gathering facilities to affiliated or non-affiliated companies, (ii) further development of rules governing the relationship of the pipelines with their marketing affiliates, (iii) the publication of standards relating to the use of electronic bulletin boards and electronic data exchange by the pipelines to make available transportation information on a timely basis and to enable transactions to occur on a purely electronic basis, (iv) further review of the role of the secondary market for released pipeline capacity and its relationship to open access service in the primary market and (v) development of policy and promulgation of orders pertaining to its authorization of market-based rates (rather than traditional cost-of-service based rates) for transportation or transportation-related services upon the pipeline's demonstration of lack of market control in the relevant service market. It remains to be seen what effect the FERC's other activities will have on access to markets, the fostering of competition and the cost of doing business. As a result of these changes, sellers and buyers of gas have gained direct access to the particular pipeline services they need and are better able to conduct business with a larger number of counterparties. The Company believes these changes generally have improved the Company's access to markets while, at the same time, substantially increasing competition in the natural gas marketplace. The Company cannot predict what new or different regulations the FERC and other regulatory agencies may adopt, or what effect subsequent regulations may have on the Company's activities. In the past, Congress has been very active in the area of gas regulation. However, as discussed above, the more recent trend has been in favor of deregulation and the promotion of competition in the gas industry. Thus, in addition to "first sale" deregulation, Congress also repealed incremental pricing requirements and gas use restraints previously applicable. There are other legislative proposals pending in the Federal and state legislatures which, if enacted, would significantly affect the petroleum industry. At the present time, it is impossible to predict what proposals, if any, might actually be enacted by Congress or the various state legislatures and what effect, if any, such proposals might have on the Company. Similarly, and despite the trend toward federal deregulation of the natural gas industry, whether or to what extent that trend will continue, or what the ultimate effect will be on the Company's sales of gas, cannot be predicted. The Company's pipeline systems and storage fields are regulated for safety compliance by the U.S. Department of Transportation, the West Virginia Public Service Commission, and the Pennsylvania Department of Natural Resources. The Company's pipeline systems in each state operate independently and are not interconnected. 15 ENVIRONMENTAL REGULATIONS General. The Company's operations are subject to extensive federal, state and local laws and regulations relating to the generation, storage, handling, emission, transportation and discharge of materials into the environment. Permits are required for the operation of various Company facilities. These permits can be revoked, modified or renewed by issuing authorities. Governmental authorities enforce compliance with their regulations, with violations subject to fines, injunctions or both. Such government regulation can increase the cost of planning, designing, installing and operating oil and gas facilities. In most cases, the regulatory requirements impose water and air pollution control measures. Although the Company believes that compliance with environmental regulations will not have a material adverse effect on the Company, risks of substantial costs and liabilities related to environmental compliance issues are part of oil and gas production operations. No assurance can be given that significant costs and liabilities will not be incurred. Also, it is possible that other developments, such as stricter environmental laws and regulations, and claims for damages to property or persons resulting from oil and gas production would result in substantial costs and liabilities to the Company. Solid and Hazardous Waste. The Company currently owns or leases, and has in the past owned or leased, numerous properties used for the production of oil and gas for many years. Although the Company utilized operating and disposal practices that were standard in the industry at the time, hydrocarbons or other solid wastes may have been disposed of or released on or under the properties owned or leased by the Company. In addition, many of the properties were operated by third parties. The Company had no control over other parties' treatment of hydrocarbons or other solid wastes and the way such substances may have been disposed or released. State and federal laws applicable to oil and gas wastes and properties have gradually become stricter over time. Under these new laws, the Company could be required to remove or remediate previously disposed wastes (including wastes disposed or released by prior owners and operators) or property contamination (including groundwater contamination by prior owners or operators) or to perform remedial plugging operations to prevent future contamination. The Company generates some wastes that are subject to the Federal Resource Conservation and Recovery Act ("RCRA") and comparable state statutes. The Environmental Protection Agency ("EPA") has limited the disposal options for certain "hazardous wastes." It is possible that certain wastes currently exempt from treatment as "hazardous wastes" may in the future be designated as "hazardous wastes" under RCRA or other applicable statutes, and therefore be subject to more rigorous and costly disposal requirements. Superfund. The Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), also known as the "Superfund" law, imposes liability, without regard to fault or the legality of the original conduct, on certain classes of persons with respect to the release of a "hazardous substance" into the environment. These persons include the owner and operator of a site and any party that disposed of or arranged for the disposal of the hazardous substance found at a site. CERCLA also authorizes the EPA, and in some cases, third parties, to respond to threats to the public health or the environment. The EPA and third parties are also authorized to try to recover the costs of such action from the responsible parties. In the course of business, the Company has generated and will continue to generate wastes that may fall within CERCLA's definition of "hazardous substances." The Company may also be an owner of sites on which "hazardous substances" have been released. As a result, the Company may be responsible under CERCLA for all or part of the costs to clean up sites where such wastes have been disposed. Oil Pollution Act. The Oil Pollution Act of 1990 (the "OPA") and resulting regulations impose a variety of terms on "responsible parties" related to the prevention of oil spills and liability for damages resulting from such spills in "waters of the United States." The term "waters of the United States" has been broadly defined to include inland water bodies, including wetlands and intermittent streams. The OPA assigns liability to each responsible party for oil removal costs and a variety of public and private damages. Clean Water Act. The Federal Water Pollution Control Act ("FWPCA" or "Clean Water Act") and resulting regulations also govern discharge of certain contaminants to "waters of the United States." Sanctions for failure to comply strictly with the Clean Water Act requirements are generally resolved by payment of fines and correction of any identified deficiencies, but regulatory agencies could require the Company to cease construction or operation of certain sources of water discharges. The Company believes that it complies with the Clean Water Act and implementing federal and state regulations in all material respects. 16 Air Emissions. The Company's operations are subject to local, state and federal laws and regulations to control emissions from sources of air pollution. Payment of fines and correction of any identified deficiencies generally resolve penalties for failure to comply strictly with air regulations or permits. Regulatory agencies could also require the Company to cease construction or operation of certain air emission sources. The Company believes that it substantially complies with the emission standards under local, state, and federal laws and regulations. EMPLOYEES The Company had 365 active employees as of December 31, 1998. The Company believes that its relations with its employees are satisfactory. The Company has not entered into any collective bargaining agreements with its employees. In January 1999, the Company instituted a reorganization plan that resulted in a 6% reduction in the number of active employees. OTHER The Company's profitability depends on certain factors that are beyond its control, such as natural gas and crude oil prices. The nature of the oil and gas business involves a variety of risks, including the risk of experiencing certain operating hazards such as fires, explosions, blowouts, cratering, oil spills, and encountering formations with abnormal pressures, the occurrence of any of which could result in substantial losses to the Company. The Company conducts operations in shallow offshore areas, which are subject to additional hazards of marine operations, such as capsizing, collision and damage from severe weather. The Company's operation of natural gas gathering and pipeline systems also involves certain risks, including the risk of explosions and environmental hazards caused by pipeline leaks and ruptures. The proximity of pipelines to populated areas, including residential areas, commercial business centers and industrial sites, could exacerbate such risks. At December 31, 1998, the Company owned or operated approximately 2,850 miles of natural gas gathering and transmission pipeline systems. As part of its normal maintenance program, the Company has identified certain segments of its pipelines which may require repair, replacement or additional maintenance. According to customary industry practices, the Company maintains insurance against some, but not all, of these risks. ITEM 2. PROPERTIES See Item 1. Business. ITEM 3. LEGAL PROCEEDINGS The Company and its subsidiaries are defendants or parties in numerous lawsuits or other governmental proceedings arising in the ordinary course of business. The Company is also involved in various gas contract issues. In the opinion of the Company, final judgments or settlements, if any, which may be awarded in connection with any one or more of these suits and claims could be significant to the results of operations and cash flows of any period but would not have a material adverse effect on the Company's financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the period from October 1, 1998 to December 31, 1998. 17 EXECUTIVE OFFICERS OF THE REGISTRANT The following table shows certain information about the executive officers of the Company as of March 1, 1999, as such term is defined in Rule 3b-7 of the Securities Exchange Act of 1934, and certain other officers of the Company.
Officer Name Age Position Since - -------------------------------------------------------------------------------- Ray R. Seegmiller 63 President and Chief Executive Officer 1995 James M. Trimble 50 Senior Vice President 1987 H. Baird Whitehead 48 Senior Vice President 1987 J. Scott Arnold 45 Vice President, Land and Associate General Counsel 1998 Paul F. Boling 45 Vice President, Finance 1996 Robert G. Drake 50 Vice President, Information Systems 1998 Abraham D. Garza 51 Vice President, Human Resources 1998 Jeff W. Hutton 43 Vice President, Marketing 1995 Lisa A. Machesney 43 Vice President, Managing Counsel and Corporate Secretary 1995 Scott C. Schroeder 36 Vice President and Treasurer 1997 Michael B. Walen 50 Vice President and Regional Manager 1998 Henry C. Smyth 52 Controller 1998
All officers are elected annually by the Company's Board of Directors. Except for the following, all executive officers of the Company have been employed by the Company for at least the last five years. Ray R. Seegmiller joined the Company as Vice President, Chief Financial Officer and Treasurer in August 1995. Mr. Seegmiller served in this position until March 1997 when he was promoted to Executive Vice President, Chief Operating Officer. In September 1997, Mr. Seegmiller was promoted to President and Chief Operating Officer and was elected as a Director. Mr. Seegmiller replaced Charles Siess as Chief Executive Officer upon the retirement of Mr. Siess in May 1998. From May 1988 until 1993, Mr. Seegmiller served as President and Chief Executive of Terry Petroleum Company. Prior to that, Mr. Seegmiller held various officer positions with Marathon Manufacturing Company. Abraham D. Garza joined the Company in August 1995 as Director, Human Resources. He was named to his current position as Vice President, Human Resources in May 1998. Prior to joining the Company, Mr. Garza served as Human Resources Director at Texfield, Inc., and in various management positions of increasing responsibility at Marathon Manufacturing Company. Scott C. Schroeder has been Vice President and Treasurer since April 1998. From May 1997 to that time he served as Treasurer. From October 1995 to May 1997, Mr. Schroeder served as Assistant Treasurer. Prior to joining the Company, Mr. Schroeder held various managerial positions with Pride Petroleum Services (now known as Pride International). Prior to that, Mr. Schroeder served as Manager, Treasury Operations and Planning of DeKalb Energy Company. Henry C. Smyth has been Controller of the Company since September 1998. From November 1996 to that time, he served as Manager of Business Analysis. From January 1996 to November 1996, Mr. Smyth acted in an analytical role evaluating business opportunities. From September 1994 to December 1995, Mr. Smyth served as Director of Internal Audit for the Company. Prior to that, Mr. Smyth was associated with Mark Resources Corporation, where he served in various positions including Vice President of Operations and Controller. 18 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Stock is listed and principally traded on the New York Stock Exchange under the ticker symbol "COG". The following table presents the high and low sales prices per share of the Common Stock during certain periods, as reported in the consolidated transaction reporting system. Cash dividends paid per share of the Common Stock are also shown:
Cash High Low Dividends - ----------------------------------------------------- 1998 First Quarter $22.63 $17.06 $0.04 Second Quarter 23.88 18.06 0.04 Third Quarter 20.44 12.75 0.04 Fourth Quarter 18.13 13.38 0.04 1997 First Quarter $19.75 $15.88 $0.04 Second Quarter 18.88 15.50 0.04 Third Quarter 23.69 17.38 0.04 Fourth Quarter 25.06 16.50 0.04
As of January 31, 1999, there were 1,267 registered holders of the Common Stock. Shareholders include individuals, brokers, nominees, custodians, trustees, and institutions such as banks, insurance companies and pension funds. Many of these hold large blocks of stock on behalf of other individuals or firms. ITEM 6. SELECTED HISTORICAL FINANCIAL DATA The following table summarizes selected consolidated financial data for the Company for the periods indicated. This information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations, and the Consolidated Financial Statements and related Notes.
Year Ended December 31, (In thousands, except per share amounts) 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------- INCOME STATEMENT DATA: Net Operating Revenues $159,606 $185,127 $163,061 $121,083 $140,295 Income (Loss) from Operations 27,403 63,852 48,787 (116,758) 15,013 Net Income (Loss) Applicable to Common Stockholders 1,902 23,231 15,258 (92,171) (5,444) BASIC EARNINGS (LOSS) PER SHARE APPLICABLE TO COMMON STOCKHOLDERS(1) $0.08 $1.00 $0.67 $(4.05) $(0.25) DIVIDENDS PER COMMON SHARE $0.16 $0.16 $0.16 $ 0.16 $ 0.16 BALANCE SHEET DATA: Properties and Equipment, Net $629,908 $469,399 $480,511 $474,371 $634,934 Total Assets 704,160 541,805 561,341 528,155 688,352 Long-Term Debt 327,000 183,000 248,000 249,000 268,363 Stockholders' Equity 182,668 184,062 160,704 147,856 243,082
- ---------- (1) See "Earnings per Common Share" under Note 15 of the Notes to the Consolidated Financial Statements. 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following review of operations should be read in conjunction with 0the Consolidated Financial Statements and the accompanying Notes included elsewhere. The Company operates in one segment, natural gas and oil exploration and exploitation. In previous years, the Company operated as two regions: the Appalachian Region and the Western Region, which included the Anadarko, Rocky Mountains and Gulf Coast areas. Beginning in 1998, a third region was created with the formation of the Gulf Coast Region, leaving the Anadarko and Rocky Mountains areas in the Western Region. For purposes of the comparisons below, prior period results have been restated to conform to the new three-region structure. OVERVIEW Despite the low commodity prices realized throughout the energy industry this year, the Company reported earnings of $0.08 per share, or $1.9 million. The decline in results from the record earnings and operating cash flow reported in 1997 was due largely to a $0.37 per Mcf decline in realized natural gas prices caused mainly by unseasonably warm temperatures for much of the United States in 1998. Operating results for 1998 included the following: o The average produced natural gas price was $2.16 per Mcf, down 15% compared to 1997, resulting in a $23.5 million decrease in produced natural gas revenue. Natural gas production was up 0.3 Bcf, or 0.4%, compared to 1997, resulting in a $0.7 million increase to revenue. In addition, the average realized oil price was $13.06 per Bbl, down 35% from 1997, resulting in a $4.5 million reduction to oil revenue. The volume of oil sales was up 76 Mbbls, resulting in an increase to oil revenue of $1.5 million from 1997. o Brokered natural gas margin increased $1.4 million as a result of an increase in volume of 9 Bcf. o In an effort to provide future growth opportunities, the Company increased its exploration spending by $5.7 million, or 41%, over 1997. The Company expanded its seismic program and added to its exploration staff. Higher dry hole cost also contributed to this increase. o In December 1998, the Company recognized a $0.9 million reorganization charge. The reorganization involved the reduction of employment levels by 6%, and is expected to result in future annual savings of $1.5 million. The 1998 income statement reflects the components of this charge in the line items that will show the benefit in future years. Direct operating expense related to the reorganization charge was $0.4 million, the exploration charge was $0.3 million, and $0.2 million was recognized in general and administrative. o In December 1998, the Company purchased producing oil and gas properties and other assets located in Southern Louisiana from Oryx Energy Company for $70.1 million (the "Southern Louisiana properties"). These Southern Louisiana properties include interests in ten fields covering 34,345 net acres with 68 producing wells. The acquisition also included a 3-D seismic inventory. Proved reserves acquired were approximately 72 Bcfe. Due to the timing of the purchase, the impact on 1998 production was not significant, adding 11.5 Mmcfe to December's daily production rate. The Company plans to increase production by reworking certain non-producing wells, and commencing an exploratory and development drilling program. Operating cash flows were $87.2 million, down $7.8 million, or 8%, from 1997's record level. The significant reduction in commodity prices was the primary factor in the lower net cash flow level realized in 1998. Operating cash flows, in combination with the increase in borrowings from the revolving credit facility, funded the $223.2 million capital and expenditure program, including the $70.1 million acquisition of oil and gas properties located in Southern Louisiana from Oryx Energy Company in December 1998. 20 The Company drilled 143.7 net wells with a net success rate of 89% compared to 151.4 net wells and a net 88% success rate in 1997. The Company replaced 112% of production through drilling additions and revisions, versus a 179% production replacement in 1997. Reserve replacement from all sources in 1998 was 253%, compared to 294% in 1997. In 1999, the Company plans to drill 29 gross wells (15.3 net) and spend $44.9 million in capital and exploration expenditures, down from 1998 spending in reaction to continued low energy commodity price expectations. Price volatility in the gas market remains prevalent as it has over the past few years and management cannot predict natural gas price levels for the remainder of 1999 and beyond. Consequently, the Company will adjust, when necessary, its 1999 spending plan in accordance with material changes in, among other things, realized natural gas prices and discretionary cash flows. Total equivalent production was 68.6 Bcfe, an increase of 1.3% over 1997. The Company's 1998 drilling program in the Gulf Coast Region experienced some mechanical failures resulting in redrills as well as drilling difficulties causing 1998 production to be 1.9 Bcfe lower than expected. Certain of these wells commenced production later than anticipated in 1998 or will come on line in 1999. The Company's strategic pursuits are sensitive to energy commodity prices, particularly the price of natural gas. The unseasonably lower natural gas prices that were seen at the close of 1997 have remained soft through most of the 1998 winter period. Despite a spring that brought improved seasonal prices, the balance of 1998 saw prices well below those of the most recent preceding years. The unseasonably mild winter throughout much of the country has kept prices low into 1999. The Company remains focused on its strategies to grow through the drill bit, through acquisitions and through greater emphasis on marketing. Additionally, the Company will continue to capitalize on the opportunities its expanded exploration efforts have provided. The Company believes that these strategies remain appropriate in the current industry environment and establish a firm base that will enable the Company to create shareholder value over the long-term. The success of these strategies is measured by the achievement of three goals. The first of these goals is to increase cash flow from both increased production and reduced costs. Although 1998 production increased only slightly from 1997, the newly acquired Gulf Coast properties are expected to boost 1999 production by approximately 5 Bcfe. The benefits of the 1998 reorganization will help to lower costs in 1999 and beyond. The second goal is to maintain reserves per share while increasing production to protect long-term shareholder value. Excluding revisions, reserve additions from the 1998 drilling program replaced 146% of production. Additionally, the Company acquired reserves during the year through asset purchases. Most significantly, the Company purchased approximately 72 Bcfe of proved reserves from Oryx Energy Company in December 1998. As a result, the total proved reserve levels increased in 1998 to 1.04 Tcfe, the highest level in the Company's history. Finally, the Company strives to reduce debt as a percentage of total capitalization ("debt-to-capital percentage") without diluting shareholder value. However, the acquisition of growth-oriented opportunities such as the December 1998 Southern Louisiana properties acquisition, along with the partial funding of the 1998 drilling program, increased the Company's debt, resulting in an increase in the debt-to-capital percentage from 51.9% in 1997 to 65.2% in 1998. While the debt-to-capital percentage has increased, the Company's debt to discretionary cash flow ratio is 3.7x compared to the reserve life index (14.2 years, calculated as year-end reserves divided by annual production). These debt to discretionary cash flow and reserve life index amounts have been normalized to exclude the impact of the Southern Louisiana properties acquisition since the $65.6 million of related debt incurred is disproportionate to the one month of discretionary cash flows from these acquired properties. Excluding the normalization, debt to discretionary cash flow is 4.6x and the reserve life ratio is 15.2. For a three-year comparison, refer to the table on page 24. The preceding paragraphs, discussing the Company's strategic pursuits and goals, contain forward-looking information. See Forward-Looking Information on page 28. 21 FINANCIAL CONDITION CAPITAL RESOURCES AND LIQUIDITY The Company's capital resources consist primarily of cash flows from its oil and gas properties and asset-based borrowing supported by its oil and gas reserves. The Company's level of earnings and cash flows depend on many factors, including the price of oil and natural gas and its ability to control and reduce costs. Demand for oil and gas has historically been subject to seasonal influences characterized by peak demand and higher prices in the winter heating season. However, unseasonably warm temperatures remained into the winter of 1998/1999, bringing with it the continuation of lower energy commodity prices. Natural gas prices were generally down in 1998 compared to 1997, resulting in lower operating cash flows than in the previous year. The primary sources of cash for the Company during 1998 were from funds generated from operations and increased borrowings on the revolving line of credit. Primary uses of cash were funds used in operations, exploration and development expenditures, acquisitions (including $70.1 million for the purchase of the Southern Louisiana properties from Oryx Energy Company), dividends on preferred and common stock and repayment of debt. The Company had a net cash inflow of $0.4 million in 1998. Net cash inflow from operating and financing activities totaled $222.5 million, funding the capital and exploration expenditures of $222.1 million, net of the $1.1 million in net proceeds from the sale of assets.
(In millions) 1998 1997 1996 - ------------------------------------------------------------------------------ Cash Flows Provided by Operating Activities $ 87.2 $ 95.0 $ 75.5
Cash flows provided by operating activities in 1998 were $7.8 million lower than in 1997 due predominantly to lower natural gas and oil prices, partially offset by a significant increase in the accounts payable balance resulting mainly from higher fourth quarter drilling expenditures. Cash flows provided by operating activities in 1997 were substantially higher, increasing $19.5 million over 1996, due primarily to higher natural gas prices and production, and a significant reduction in trade receivables.
(In millions) 1998 1997 1996 - ------------------------------------------------------------------------------ Cash Flows Used by Investing Activities $(222.1) $(38.4) $(67.6)
Cash flows used by investing activities in 1998 were $183.7 million higher than in 1997 due primarily to the capital and exploration expenditures that increased $135.8 million over 1997, and in part to $47.7 million in net proceeds from the Meadville sale in 1997. These 1998 expenditures included (1) the $70.1 million purchase of the Southern Louisiana properties from Oryx Energy Company in December, (2) the $6.6 million spent as part of the joint exploration agreement with Union Pacific Resources Group, Inc. ("UPR"), and (3) the $12.0 million used to acquire 21.8 Bcfe of proved reserves in the Anadarko and Rocky Mountains areas of the Western Region. 22 Cash flows used by investing activities in 1997 were $29.2 million lower than in 1996 due to net proceeds of $47.7 million received from the Meadville/Green River property transaction, partially offset by the expenses of the stronger 1997 drilling program.
(In millions) 1998 1997 1996 - ------------------------------------------------------------------------------ Cash Flows Provided (Used) by Financing Activities $ 135.3 $(56.2) $ (9.6)
Cash flows provided by financing activities in 1998 were increases in borrowings on the revolving credit facility related to the 1998 drilling program and $83.6 million in property acquisitions. Financing activities in 1998 also included the payment of stock dividends and the purchase of treasury stock. Cash flows used by financing activities from 1997 consist primarily of the $49.0 million net reduction in borrowings on the revolving credit facility as well as dividend payments. The 1996 activity was mostly attributable to dividend payments, but also included a $1.0 reduction in debt under the credit facility. The Company's available credit line under the revolving credit facility was $235 million from June 1995 until November 1997. In November 1997, the Company issued $100 million in 7.19% Notes (See Note 5. of the Notes to the Consolidated Financial Statements for further discussion) and reduced the available credit line to $135 million. In December 1998, the revolving credit facility was increased to include five additional banks. The new agreement gives the Company the ability to borrow up to $250 million in addition to its other long-term debt. The Company's outstanding indebtedness under the revolving credit facility was $179 million at December 31, 1998. The available credit line is subject to adjustment on the basis of the projected present value of estimated future net cash flows from proved oil and gas reserves (as determined by the banks' petroleum engineer) and other assets. Accordingly, oil and gas prices are an important part of this computation. Oil and gas prices also effect the calculation of the financial ratios for debt covenant compliance. While the Company does not currently believe that its credit availability is likely to be significantly reduced, management cannot predict how current price levels may change the banks' long-term price outlook and, therefore, can give no assurance that the Company's available credit line will not be adversely impacted in 1999 or as to the amount of credit that will continue to be available under this facility. To reduce the impact of such a redetermination, the Company strives to manage its debt at a level below the available credit line in order to maintain excess borrowing capacity. At year end, this excess capacity totaled $57 million, or 14% of the total available credit line. See Note 5. Debt and Credit Agreements for further discussion. In the event that the available credit line is adjusted below the outstanding level of borrowings, the Company has a period of 180 days to reduce its outstanding debt to the adjusted credit line. The Revolving Credit Agreement also includes a requirement to pay down half of the debt in excess of the adjusted credit line within the first 90 days of such an adjustment. The Company's 1999 interest expense is projected to be approximately $27 million. A principal payment of $16 million on the 10.18% private placement of senior notes is due in the second quarter of 1999. 23 Capitalization information on the Company is as follows:
(In millions) 1998 1997 1996 ------------------------------------------------------------------- Long-Term Debt $327.0 $183.0 $248.0 Current Portion of Long-Term Debt 16.0 16.0 -- ------ ------ ------ Total Debt 343.0 199.0 248.0 ------ ------ ------ Stockholders' Equity Common Stock (net of Treasury) 126.0 127.4 69.4 Preferred Stock 56.7 56.7 91.3 ------ ------ ------ Total Equity 182.7 184.1 160.7 ------ ------ ------ Total Capitalization $525.7 $383.1 $408.7 ====== ====== ====== Debt to Capitalization 65.2% 51.9% 60.7% ------ ------ ------
The Company's debt, discretionary cash flow and reserve life index are comprised as follows:
(In millions) 1998 1997 1996 ------------------------------------------------------------------- Total Debt $343.0 $199.0 $248.0 Discretionary Cash Flow ("DCF") (1) $ 74.3 $ 98.4 $ 83.7 Debt to DCF Coverage 3.7x(3) 2.0x 3.0x Reserve Life Index (in years) (2) 14.2(4) 13.9 15.2
---------- (1) Discretionary cash flow is defined as net income plus non-cash charges and exploration expense less preferred dividends. Excludes net proceeds on property sales. (2) Reserve life index is year-end reserves divided by annual production. (3) The Debt to DCF Coverage ratio was normalized to exclude the impact of the December 1998 Southern Louisiana properties acquisition since the ratio was disproportionately impacted by the full inclusion of the $65.6 million in related debt incurred compared to the one month of discretionary cash flows from these acquired properties. Before the normalization,Debt to DCF coverage is 4.6x. (4) Amount normalized to exclude the reserves purchased in the December 1998 Southern Louisiana properties acquisition. Including these reserves, the reserve life index is 15.2. GAS PRICE SWAPS From time to time, the Company enters into natural gas swap agreements ("price swaps"), a type of derivative instrument, with counterparties to hedge price risk associated with a portion of the Company's production. Under these price swaps, the Company receives a fixed price ("fixed price swaps") on a notional quantity of natural gas in exchange for paying a variable price based on a market-based index, such as the Nymex gas futures. Notional quantities of natural gas are used in each price swap, since no physical exchange or delivery of natural gas is involved. During 1998 and 1997, the Company entered into no fixed price swaps to hedge natural gas prices on its production. In 1996, the prices received on fixed price swaps ranged from $1.02 to $2.54 per Mmbtu on total notional quantities of 17,600,000 Mmbtu, representing 27% of 1996 production. 24 In addition, the Company uses price swaps to hedge the natural gas price risk on brokered transactions. Typically, the Company enters into contracts to broker natural gas at a variable price based on the market index price. However, in some circumstances, some of the Company's customers or suppliers request that a fixed price be stated in the contract. After entering into these fixed price contracts to meet the needs of its customers or suppliers, the Company may use price swaps to effectively convert these fixed price contracts to market-sensitive price contracts. These price swaps are held by the Company to their maturity and are not held for trading purposes. During 1998, the Company entered into price swaps with total notional quantities of 2,226,000 Mmbtu related to its brokered activities, representing less than 5% of the Company's total volume of brokered natural gas sold. A pre-tax loss of $0.3 million was recorded from these price swaps in 1998. In 1997 and 1996, these price swaps had total notional quantities of 1,416,000 Mmbtu and 1,002,000 Mmbtu related to brokered transactions, and represented approximately 4% and 3%, respectively, of the Company's total volume of brokered natural gas sold. At December 31, 1998, the Company had open price swaps with notional quantities of 1,730,000 Mmbtu and an unrealized loss of $0.2 million on these open contracts. See Note 11. Financial Instruments for further discussion. The Company is exposed to market risk on these open contracts to the extent of changes in market prices for natural gas. However, the market risk exposure on these hedged contracts is generally offset by the gain or loss recognized upon the ultimate sale of the natural gas that is hedged. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires all derivatives to be recognized in the statement of financial position as either assets or liabilities and measured at fair value. In addition, all hedging relationships must be designated, reassessed and documented pursuant to the provisions of SFAS 133. This statement is effective for financial statements for fiscal years beginning after June 15, 1999. The Company has not yet completed its evaluation of the impact of the provisions from SFAS 133 on its financial position or operations. At December 31, 1998, the Company had entered into natural gas price swap contracts that remain open at year end as follows:
Swap Purchases Volume in Weighted Average Period MMBtu Contract Price ------------------------------------------------------------ Full Year 1999 1,280,000 $2.03 1st Quarter 2000 450,000 2.13
YEAR 2000 Many computer systems have been built using software that processes transactions using two digits to represent the year. This type of software will generally require modifications to function properly with dates after December 31, 1999. The same issue applies to microprocessors embedded in machinery and equipment, such as gas compressors and pipeline meters. The impact of failing to identify and correct this problem could be significant to the Company's ability to operate and report results, as well as potentially exposing the Company to third-party liability. The Company has begun making necessary modifications to its computer systems and embedded microprocessors in preparation for the Year 2000. These projects are on schedule and the Company believes that the total related costs will be approximately $2.1 million, funded by cash from operations or short-term borrowings, when completed in 1999. Of the total cost, $1.8 million is attributable to the purchase of new software and equipment which will be capitalized. The remaining $0.3 million is being expensed over 1998 and 1999, and will not have a material impact on the Company's financial position or operating results. Actual costs through 1998 were $0.6 million, $0.4 million of which has been capitalized and $0.2 million of which has been expensed. 25 The Company has begun reviewing the compliance of field equipment including compressor stations, gas control systems and data logging equipment. Most equipment reviewed was found to be compliant, and, where necessary, microprocessor chip replacements are scheduled to be complete in the first quarter of 1999 at a cost less than $0.1 million. Additionally, the Company is in the process of contacting its significant customers and suppliers in order to determine the Company's exposure to their potential failure to become Year 2000 compliant. Although the Company is not aware of any Year 2000 compliance problems with any of its customers or suppliers, there can be no guarantee that the systems of these companies will operate without interruption in the new millennium. The Company has formed an internal committee to not only identify and respond to these issues, but also to develop a contingency plan in the event that a problem arises after the turn of the century. Management expects the contingency plan to be substantially complete by mid 1999. Additionally, the Company has engaged outside consultants to review the Company's plans and periodically update the status of the plan implementation. At this time, the Company does not anticipate that the arrival of the Year 2000 will materially impact its financial position or results of operations. The project costs and timetable for Year 2000 compliance are based on management's best estimates. In developing these estimates, assumptions were made regarding future events including, among other things, the availability of certain resources and the continued cooperation of the Company's customers and suppliers. Actual costs and timing may differ from management's estimates due to unexpected difficulties in obtaining trained personnel, locating and correcting relevant computer code and other factors. CAPITAL AND EXPLORATION EXPENDITURES The following table lists capital and exploration expenditures for the three years ended December 31, 1998.
(In millions) 1998 1997 1996 --------------------------------------------------------------------- Capital Expenditures: Drilling and Facilities $ 99.0 $ 68.2 $ 42.7 Leasehold Acquisitions 15.6 4.3 4.3 Pipeline and Gathering 5.3 6.1 6.3 Other 2.8 2.0 0.7 ------ ------ ------ 122.7 80.6 54.0 ------ ------ ------ Proved Property Acquisitions 83.6 (3) 45.6 (2) 6.6 WERCO Acquisition -- -- (5.3) (1) ------ ------ ------ 83.6 45.6 1.3 ------ ------ ------ Exploration Expenses 19.6 13.9 12.6 ------ ------ ------ Total $225.9 $140.1 $ 67.9 ====== ====== ======
- ---------- (1) An adjustment to the $40.2 million non-cash component relating to deferred taxes for the difference between the tax and book bases of the acquired properties, as required by SFAS 109, "Accounting for Income Taxes", of the Washington Energy Resources Company ("WERCO") acquisition as a result of the $8.4 million valuation adjustment received in 1995. (2) Includes $45.2 million in oil and gas properties acquired from Equitable Resources Energy Company in a like-kind exchange transaction with a portion of the assets sold in the Meadville property sale. (3) Includes $70.1 million in oil and gas properties acquired from Oryx Energy Company in December 1998. 26 The Company generally funds its capital and exploration activities, excluding major oil and gas property acquisitions, with cash generated from operations. The Company budgets such capital expenditures based upon projected cash flows, exclusive of acquisitions. Planned expenditures for 1999 have been reduced 68% compared with 1998, excluding proved property acquisitions. The Company intends to review and adjust the capital and exploration expenditures planned for 1999 as industry conditions dictate. Currently, the Company projects $44.9 million in capital and exploration expenditures for 1999, including $33.4 million for the drilling and exploration program. The Company plans to drill 29 wells (15.3 net), compared with 205 wells (143.7 net) drilled in 1998. In addition to the drilling and exploration program, other 1999 capital expenditures are planned primarily for lease acquisitions and for gathering and pipeline infrastructure maintenance and construction. During 1998, dividends were paid on the Company's Common Stock totaling $4.0 million and on the 6% convertible redeemable preferred stock totaling $3.4 million. The Company has paid quarterly Common Stock dividends of $0.04 per share since becoming publicly traded in 1990. The amount of future dividends is determined by the Board of Directors and is dependent upon a number of factors, including future earnings, financial condition, and capital requirements. OTHER ISSUES AND CONTINGENCIES Corporate Income Tax. The Company generates tax credits for the production of certain qualified fuels, including natural gas produced from tight sands formations and Devonian Shale. The credit for natural gas from a tight sands formation ("tight gas sands") amounts to $0.52 per Mmbtu for natural gas sold prior to 2003 from qualified wells drilled in 1991 and 1992. A number of wells drilled in the Appalachian Region during 1991 and 1992 qualified for the tight gas sands tax credit. The credit for natural gas produced from Devonian Shale is approximately $1.07 per Mmbtu in 1998. In 1995 and 1996, the Company completed three transactions to monetize the value of these tax credits, resulting in revenues of $2.7 million in 1998 and approximately $11.1 million over the remaining four years. See Note 13 of the Notes to the Consolidated Financial Statements for further discussion. The Company has benefited in the past and may benefit in the future from the alternative minimum tax ("AMT") relief granted under the Comprehensive National Energy Policy Act of 1992. The Act repealed provisions of the AMT requiring a taxpayer's alternative minimum taxable income to be increased on account of certain intangible drilling costs ("IDC") and percentage depletion deductions. The repeal of these provisions generally applies to taxable years beginning after 1992. The repeal of the excess IDC preference cannot reduce a taxpayer's alternative minimum taxable income by more than 40% of the amount of such income determined without regard to the repeal of such preference. Regulations. The Company's operations are subject to various types of regulation by federal, state and local authorities. See "Regulation of Oil and Natural Gas Production and Transportation" and "Environmental Regulations" in the Other Business Matters section of Item 1. Business for a discussion of these regulations. Restrictive Covenants. The Company's ability to incur debt, to pay dividends on its common and preferred stock, and to make certain types of investments is subject to certain restrictive covenants in the Company's various debt instruments. Among other requirements, the Company's Revolving Credit Agreement and 7.19% Notes specify a minimum annual coverage ratio of operating cash flow to interest expense for the trailing four quarters of 2.8 to 1.0. At December 31, 1998, the calculated ratio for 1998 was 5.4 to 1. In the unforeseen event that the Company fails to comply with these covenants, it may apply for a temporary waiver with the bank, which, if granted, would allow the Company a period of time to remedy the situation. See further discussion in Item 7. Capital Resources and Liquidity and Note 5. Debt and Credit Agreements. 27 CONCLUSION The Company's financial results depend upon many factors, particularly the price of natural gas and its ability to market its production on economically attractive terms. The realized natural gas sales price decreased 15% compared to 1997, while production volumes increased less than 1%. As a result, the Company experienced a lower level of earnings and operating cash flow than its record highs in 1997. Price volatility in the gas market has remained prevalent in the last few years, as demonstrated most recently in the first and last quarters of 1998 and the beginning of 1999, with monthly natural gas prices dropping to levels substantially below the prices of the corresponding months of the prior year. Given this continued price volatility, management cannot predict with certainty what pricing levels will be for the rest of 1999 and beyond. Because future cash flows and earnings are subject to such variables, there can be no assurance that the Company's operations will provide cash sufficient to fully fund its capital requirements if commodity prices should become substantially more depressed. While the Company's 1999 plans include approximately $45 million in capital spending, the Company will periodically assess industry conditions and will adjust its 1999 spending plan to ensure the adequate funding of its capital requirements, including, among other things, reductions in capital expenditures or common stock dividends. The Company believes its capital resources, supplemented, if necessary, with external financing, are adequate to meet its current capital requirements. The preceding paragraphs contain forward-looking information. See Forward-Looking Information on the following page. * * * FORWARD-LOOKING INFORMATION The statements regarding future financial performance and results and market prices and the other statements which are not historical facts contained in this report are forward-looking statements. The words "expect," "project," "estimate," "believe," "anticipate," "intend," "budget," "plan," "forecast," "predict" and similar expressions are also intended to identify forward-looking statements. Such statements involve risks and uncertainties, including, but not limited to, market factors, market prices (including regional basis differentials) of natural gas and oil, results for future drilling and marketing activity, future production and costs and other factors detailed herein and in the Company's other Securities and Exchange Commission filings. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated. RESULTS OF OPERATIONS For the purpose of reviewing the Company's results of operations, "Net Income" is defined as net income available to common stockholders. 28 SELECTED FINANCIAL AND OPERATING DATA
(In millions except wehre specified) 1998 1997 1996 - ------------------------------------------------------------------------- Net Operating Revenues $159.6 $185.1 $163.1 Operating Expenses 132.7 121.3 116.0 Interest Expense 18.6 18.0 17.4 Net Income 1.9 23.2 15.3 Earnings Per Share - Basic $ 0.08 $ 1.00 $ 0.67 Earnings Per Share - Diluted $ 0.08 $ 0.97 $ 0.66 Natural Gas Production (Bcf) Appalachia 22.7 25.3 26.8 West 30.9 30.2 27.1 Gulf Coast 10.6 8.4 4.9 ------ ------ ------ Total Company 64.2 63.9 58.8 ====== ====== ====== Produced Natural Gas Sales Price ($/Mcf) Appalachia $ 2.53 $ 3.00 $ 2.72 West $ 1.90 $ 2.14 $ 1.96 Gulf Coast $ 2.15 $ 2.52 $ 2.34 Total Company $ 2.16 $ 2.53 $ 2.34 Crude/Condensate Volume (Mbbl) 650 574 520 Price ($/Bbl) $13.06 $20.13 $21.14
1998 AND 1997 COMPARED Net Income and Revenues. The Company reported net income in 1998 of $1.9 million, or $0.08 per share, down $21.3 million, or $0.92 per share, compared to 1997. Net operating revenue of $159.6 million was down $25.5 million, or 14% from 1997. Natural gas sales of $138.9 million accounted for 87% of net operating revenue in 1998. The decrease in net operating revenue was a result of a 15% decline in realized natural gas prices and a 35% reduction in realized oil prices. Operating income and net income were similarly impacted by the decrease in energy commodity prices along with higher expenses attributable to the Company's increased exploration program. Natural gas production volumes were down 2.6 Bcf, or 10%, to 22.7 Bcf in the Appalachian Region due to the September 1997 sale of producing properties located in Northwest Pennsylvania (the "Meadville properties"). Natural gas production volumes in the Western Region were up 0.7 Bcf, or 2%, to 30.9 Bcf due to increases in Rocky Mountains area production. This increase was a result of both the 1997 purchase of oil and gas producing properties located in the Green River Basin of Wyoming (the "Green River properties") and new wells brought on line. In the Gulf Coast Region, natural gas production volumes were up 2.2 Bcf, or 26%, to 10.6 Bcf due to results of the 1997 and 1998 drilling programs and in part to the December 1998 purchase of the Southern Louisiana properties. While production increased over 1997 levels, the region did experience drilling delays and mechanical failures in a significant field that deferred production into 1999, but left the field's total reserves substantially unchanged. The average natural gas sales price decreased $0.47 per Mcf, or 16%, to $2.53 in the Appalachian Region, decreasing net operating revenues by approximately $10.7 million on 22.7 Bcf of production. In the Western Region, the average natural gas sales price decreased $0.24 per Mcf, or 11%, to $1.90, decreasing net operating revenues by $7.4 million on 30.9 Bcf of production. The average natural gas sales price in the Gulf Coast Region decreased $0.37 per Mcf, or 15%, to $2.15, reducing net operating revenue by $3.9 million on 10.6 Bcf of production. The overall weighted average natural gas production sales price decreased $0.37 per Mcf, or 15%, to $2.16. Crude oil and condensate sales increased by 76 Mbbl, or 13%, increasing revenue by $1.5 million over 1997. This increase was due to new production brought on line, combined with the December production of the newly acquired Southern Louisiana properties. However, the 1998 average crude oil price declined 35%, reducing oil revenue by $4.5 million. 29 Brokered natural gas margin was up $1.4 million to $5.5 million due to a 26% volume increase over 1997, combined with a $0.01 per Mcf increase in the net margin to $0.13 per Mcf. Operating Expenses. Total operating expenses increased $11.3 million, or 9%, to $132.7 million. In December 1998, the Company recognized a $0.9 million reorganization charge designed to reduce future operating expenses. The reorganization charge was comprised of $0.4 million in direct operating expense, $0.3 million in exploration expense and $0.2 million in general and administrative expense. The reorganization reduced the number of Company employees by 6%. The significant changes in operating expenses are explained as follows: o Direct operations expense increased $0.9 million, or 3%, due primarily to the $0.4 million direct operations component of the reorganization charge in the fourth quarter and $0.5 million in higher workover costs incurred primarily in the Gulf Coast Region. o Exploration expense increased $5.7 million, or 41%, due to (1) a $1.5 million increase in geological and geophysical activity including seismic data purchases and consulting fees, (2) a $2.3 million increase in dry hole cost, resulting from the Company's expanded drilling efforts in the Gulf Coast where wells are generally drilled at higher costs, (3) a $1.4 million increase in exploration personnel- related expenses such as salaries, benefits, and relocation associated with the increase in the exploration program, and (4) $0.3 million for the exploration expense component of the reorganization that was expensed in December 1998. o Depreciation, depletion, amortization and impairment expense increased $2.1 million, or 5%, primarily due to the amortization of a lease option purchased in the second quarter of 1998 related to a joint venture with UPR in the Gulf Coast Region. Additionally, this expense increased in part due to higher units of production expense in connection with increased production. o General and administrative expense increased $2.2 million primarily due to (1) $0.5 million due to staffing increases in the third and fourth quarters of 1997, (2) $0.7 million for non-cash stock compensation for stock awards, (3) $0.5 million for certain executive retirement and severance packages accrued in 1998, (4) $0.3 million due to higher relocation and travel expenses, and (5) $0.2 million that was recorded for the general and administrative component of the reorganization in December 1998. Interest expense increased $0.6 million, or 4%, due to higher levels of debt outstanding on the revolving credit facility. Income tax expense was down $14.1 million due to the comparable decrease in earnings before income tax. Included in income tax expense is the interest charged by the Internal Revenue Service on a deferred tax gain related to the monetization of the Section 29 credits. This interest amount was $0.3 million in 1998 and $0.5 million in 1997. 1997 AND 1996 COMPARED Net Income and Revenues. The Company reported net income in 1997 of $23.2 million, or $1.00 per share, up $10.7 million, or $0.45 per share, compared to 1996, excluding the impact of an income tax refund. The $2.8 million income tax refund, or $0.12 per share, in 1996 related to a $1.8 million tax refund for percentage depletion claimed for certain periods prior to 1990 and $1.7 million of interest income ($1.0 million after tax) earned on the refund amount. Excluding these pre-tax effects of the income tax refund, 1997 operating income and net operating revenues increased $15.1 million and $22.1 million, respectively. Natural gas sales comprised 87%, or $161.7 million, of net operating revenue in 1997. The increase in net operating revenue was a result of both an 8% increase in the produced natural gas sales price and an 8.5% increase in equivalent production. Operating income and net income were similarly impacted by the increases in natural gas prices and equivalent production along with lower depreciation, depletion and amortization expense and interest expense. 30 Effective September 1, 1997, the Company sold the Meadville properties for $92.9 million to Lomak Petroleum Incorporated (now known as Range Resources Corporation). The properties sold included 912 wells, producing approximately 15 Mmcfe net per day primarily from the Medina formation. A portion of these assets were replaced, in a like-kind exchange transaction, with the Green River properties purchased for $45.2 million in a transaction with Equitable Resources Energy Company which closed on October 3, 1997. The purchased properties added an estimated 72 Bcfe of reserves, interests in 63 wells with estimated daily net production of 10 Mmcfe and 74 potential drilling locations to the Western Region. This acquisition increased the Company's presence in the Rocky Mountains area by 46%. Natural gas production volumes were down 1.5 Bcf, or 6%, to 25.3 Bcf in the Appalachian Region as a result of the September sale of the Meadville properties which were estimated to have produced 1.7 Bcfe in 1997 after the sale. Natural gas production volumes were up 3.1Bcf, or 11%, to 30.2 Bcf in the Western Region due largely to new production from wells drilled and put on line in the Rocky Mountains area during the last half of 1996 and in 1997, and from the acquired Green River properties which produced 1.9 Bcfe. Natural gas production volumes were up 3.5 Bcf, or 71%, to 8.4 Bcf in the Gulf Coast Region due largely to new production from wells drilled and put on line during the last half of 1996 and in 1997. In the Appalachian Region, the average natural gas production sales price increased $0.28 per Mcf, or 10%, to $3.00, increasing net operating revenues by approximately $7.1 million on 25.3 Bcf of production. The average Western Region natural gas production sales price increased $0.18 per Mcf, or 9%, to $2.14, increasing net operating revenues by approximately $5.4 million on 30.2 Bcf of production. In the Gulf Coast Region, the average natural gas production sales price increased $0.18 per Mcf, or 8%, to $2.52, increasing net operating revenues by approximately $1.5 million on 8.4 Bcf of production. The overall weighted average natural gas production sales price increased $0.19 per Mcf, or 8%, to $2.53. Crude oil and condensate sales increased by 54 Mbbl, or 10%, primarily due to new production brought on by the higher rate of drilling activity in 1996 and 1997 compared to 1995 levels. Brokered natural gas margin was down $1.5 million to $4.1 million due primarily to a $0.03 per Mcf decrease in the net margin to $0.12 per Mcf and in part to a brokered volume decrease of 8% from 1996. Operating Expenses. The total operating expenses increased $5.3 million, or 5%, to $77.9 million. The significant changes are explained as follows: o Direct operation expense increased $1.0 million, or 4%, due to office consolidation costs in the Western Region and the 8.5% increase in equivalent production. Direct operating costs per Mcfe declined, however, from $0.45 to $0.43 due in part to the sale of the higher cost Meadville properties and the addition of new lower cost production. o Exploration expense increased $1.3 million primarily due to a $0.9 million rise in geological and geophysical expenses and a $0.3 million increase in contract labor services related to the increased drilling and exploration program in 1997. o Depreciation, depletion, amortization and impairment expense decreased $1.9 million, or 4%, due to the benefit of the Meadville/Green River like-kind exchange transaction in the third quarter and due to the decline in the Western Region DD&A rate related to the addition of new lower cost production to existing fields. o Taxes other than income increased $2.0 million, or 16%, due to the increase in natural gas production revenues. o General and administrative expense increased $2.9 million, or 17%, due primarily to higher incentive and stock compensation expenses related to the Company's marked improvement in earnings performance. Interest expense, excluding the 1996 income tax refund, declined $1.1 million, or 6%, due to a reduction in the Company's long-term debt level. 31 Income tax expense, excluding the $2.8 million refund, was up $5.2 million due to the comparable increase in earnings before income tax. The Company's effective tax rate declined slightly due to a 0.2% reduction in the effective state tax rate combined with a $0.2 million refund received on the prior year percentage depletion claim. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page - --------------------------------------------------------------- Report of Independent Accountants 33 Consolidated Statement of Operations 34 Consolidated Balance Sheet 35 Consolidated Statement of Cash Flows 36 Consolidated Statement of Stockholders' Equity 37 Notes to Consolidated Financial Statements 38 Supplemental Oil & Gas Information (Unaudited) 56 Quarterly Financial Information (Unaudited) 58
REPORT OF MANAGEMENT The management of Cabot Oil & Gas Corporation is responsible for the preparation and integrity of all information contained in the annual report. The consolidated financial statements and other financial information are prepared in conformity with generally accepted accounting principles and, accordingly, include certain informed judgments and estimates of management. Management maintains a system of internal accounting and managerial controls and engages internal audit representatives who monitor and test the operation of these controls. Although no system can ensure the elimination of all errors and irregularities, the system is designed to provide reasonable assurance that assets are safeguarded, transactions are executed in accordance with management's authorization and accounting records are reliable for financial statement preparation. An Audit Committee of the Board of Directors, consisting of directors who are not employees of the Company, meets periodically with management, the independent accountants and internal audit representatives to obtain assurances to the integrity of the Company's accounting and financial reporting and to affirm the adequacy of the system of accounting and managerial controls in place. The independent accountants and internal audit representatives have full and free access to the Audit Committee to discuss all appropriate matters. We believe that the Company's policies and system of accounting and managerial controls reasonably assure the integrity of the information in the consolidated financial statements and in the other sections of the annual report. Ray Seegmiller President and Chief Executive Officer March 3, 1999 32 REPORT OF INDEPENDENT ACCOUNTANTS TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF CABOT OIL & GAS CORPORATION: In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations and stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Cabot Oil & Gas Corporation and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Houston, Texas February 26, 1999 33 CABOT OIL & GAS CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31, (In thousands, except per share amounts) 1998 1997 1996 - ------------------------------------------------------------------------------- NET OPERATING REVENUES Natural Gas Production $138,903 $161,737 $137,482 Crude Oil and Condensate 8,486 11,443 10,992 Brokered Natural Gas Margin 5,547 4,113 5,619 Other 6,670 7,834 8,968 -------- -------- -------- 159,606 185,127 163,061 OPERATING EXPENSES Direct Operations 30,250 29,380 28,361 Exploration 19,564 13,884 12,559 Depreciation, Depletion and Amortization 41,186 40,598 42,689 Impairment of Unproved Properties 4,402 2,856 2,701 General and Administrative 21,950 19,744 16,823 Taxes Other Than Income 15,324 14,874 12,826 -------- -------- -------- 132,676 121,336 115,959 Gain on Sale of Assets 473 61 1,685 -------- -------- -------- INCOME FROM OPERATIONS 27,403 63,852 48,787 Interest Expense 18,598 17,961 17,409 -------- -------- -------- Income Before Income Tax Expense 8,805 45,891 31,378 Income Tax Expense 3,501 17,557 10,554 -------- -------- -------- NET INCOME 5,304 28,334 20,824 Dividend Requirement on Preferred Stock 3,402 5,103 5,566 -------- -------- -------- Net Income Available to Common Stockholders $ 1,902 $ 23,231 $ 15,258 ======== ======== ======== Basic Earnings per Share Available to Common Stockholders $ 0.08 $ 1.00 $ 0.67 ======== ======== ======== Diluted Earnings per Share Available to Common Stockholders $ 0.08 $ 0.97 $ 0.66 ======== ======== ======== Average Common Shares Outstanding 24,733 23,272 22,807 ======== ======== ========
- ---------- The accompanying notes are an integral part of these consolidated financial statements. 34 CABOT OIL & GAS CORPORATION CONSOLIDATED BALANCE SHEET
December 31, (In thousands) 1998 1997 - ------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash and Cash Equivalents $ 2,200 $ 1,784 Accounts Receivable 55,799 59,672 Inventories 9,312 6,875 Other 3,804 2,202 -------- -------- Total Current Assets 71,115 70,533 PROPERTIES AND EQUIPMENT (Successful Efforts Method) 629,908 469,399 OTHER ASSETS 3,137 1,873 -------- -------- $704,160 $541,805 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current Portion of Long-Term Debt $ 16,000 $ 16,000 Accounts Payable 66,628 52,348 Accrued Liabilities 16,406 17,524 -------- -------- Total Current Liabilities 99,034 85,872 LONG-TERM DEBT 327,000 183,000 DEFERRED INCOME TAXES 85,952 80,108 OTHER LIABILITIES 9,506 8,763 COMMITMENTS AND CONTINGENCIES (Note 8) STOCKHOLDERS' EQUITY Preferred Stock: Authorized -- 5,000,000 Shares of $0.10 Par Value -- 6% Convertible Redeemable Preferred; $50 Stated Value; 1,134,000 Shares Outstanding in 1998 and 1997 113 113 Common Stock: Authorized -- 40,000,000 Shares of $0.10 Par Value Issued and Outstanding -- 24,959,897 Shares and 24,667,262 Shares at December 31, 1998 and 1997, respectively 2,496 2,467 Class B Common Stock: Authorized -- 800,000 Shares of $0.10 Par Value No Shares Issued -- -- Additional Paid-in Capital 252,073 247,033 Accumulated Deficit (67,630) (65,551) Less Treasury Stock, at cost: 302,600 Shares in 1998, No Shares in 1997 (4,384) -- -------- -------- Total Stockholders' Equity 182,668 184,062 -------- -------- $704,160 $541,805 ======== ========
- ---------- The accompanying notes are an integral part of these consolidated financial statements. 35 CABOT OIL & GAS CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31, (In thousands) 1998 1997 1996 - -------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 5,304 $ 28,334 $ 20,824 Adjustments to Reconcile Net Income to Cash Provided by Operations: Depletion, Depreciation and Amortization 41,186 40,598 42,689 Impairment of Long-Lived Assets -- -- -- Impairment of Unproved Properties 4,402 2,856 2,701 Deferred Income Tax Expense 5,844 10,681 12,017 Gain on Sale of Assets (473) (61) (1,685) Exploration Expense 19,564 13,884 12,559 Other 1,834 1,419 176 Changes in Assets and Liabilities: Accounts Receivable 3,873 8,137 (25,796) Inventories (2,437) 1,922 (3,201) Other Current Assets (1,602) (539) 46 Other Assets (1,264) (680) 243 Accounts Payable and Accrued Liabilities 10,263 (10,541) 11,199 Other Liabilities 743 (970) 3,713 -------- -------- -------- Net Cash Provided by Operations 87,237 95,040 75,485 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Capital Expenditures (203,632) (73,476) (60,719) Proceeds from Sale of Assets 1,054 48,916 5,725 Exploration Expense (19,564) (13,884) (12,559) -------- -------- -------- Net Cash Used by Investing (222,142) (38,444) (67,553) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Increase in Debt 217,000 11,000 6,000 Decrease in Debt (73,000) (60,000) (7,000) Exercise of Stock Options 3,589 2,197 613 Treasury Stock Purchases (4,384) -- -- Preferred Dividends Paid (3,402) (5,644) (5,566) Common Dividends Paid (3,974) (3,732) (3,649) Increase in Debt Issuance Cost and Other (508) -- 8 -------- -------- -------- Net Cash Provided/(Used) by Financing 135,321 (56,179) (9,594) -------- -------- -------- Net Increase (Decrease) in Cash and Cash Equivalents 416 417 (1,662) Cash and Cash Equivalents, Beginning of Year 1,784 1,367 3,029 -------- -------- -------- Cash and Cash Equivalents, End of Year $ 2,200 $ 1,784 $ 1,367 ======== ======== ========
- ---------- The accompanying notes are an integral part of these consolidated financial statements. 36 CABOT OIL & GAS CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Retained Common Preferred Treasury Paid-In Earnings (In thousands) Stock Stock Stock Capital (Deficit) Total - ----------------------------------------------------------------------------------------- Balance at December 31, 1995 $2,278 $183 $242,058 $(96,663) $147,856 --------------------------------------------------------- Net Income 20,824 20,824 Exercise of Stock Options 6 607 613 Preferred Stock Dividends (5,566) (5,566) Common Stock Dividends at $0.16 Per Share (3,649) (3,649) Stock Grant Vesting 618 618 Other 8 8 --------------------------------------------------------- Balance at December 31, 1996 $2,284 $183 $243,283 $(85,046) $160,704 ========================================================= Net Income 28,334 28,334 Exercise of Stock Options 14 2,183 2,197 Preferred Stock Dividends (5,103) (5,103) Common Stock Dividends at $0.16 Per Share (3,732) (3,732) Stock Grant Vesting 1,662 1,662 Conversion of $3.125 Preferred Stock to Common Stock 165 (70) (95) 0 Other 4 (4) 0 --------------------------------------------------------- Balance at December 31, 1997 $2,467 $113 $247,033 $(65,551) $184,062 ========================================================= Net Income 5,304 5,304 Exercise of Stock Options 21 3,568 3,589 Preferred Stock Dividends (3,402) (3,402) Common Stock Dividends at $0.16 Per Share (3,974) (3,974) Stock Grant Vesting 8 1,472 1,480 Treasury Stock Repurchase $(4,384) (4,384) Other (7) (7) --------------------------------------------------------- Balance at December 31, 1998 $2,496 $113 $(4,384) $252,073 $(67,630) $182,668 =========================================================
- ---------- The accompanying notes are an integral part of these consolidated financial statements. 37 CABOT OIL & GAS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION Cabot Oil & Gas Corporation and its subsidiaries (the "Company") are engaged in the exploration, development, production and marketing of natural gas and, to a lesser extent, crude oil and natural gas liquids. The Company also transports, stores, gathers and purchases natural gas for resale. The Company operates in one segment, natural gas and oil exploration and exploitation. The consolidated financial statements contain the accounts of the Company after eliminating all significant intercompany balances and transactions. PIPELINE EXCHANGES Natural gas gathering and pipeline operations normally include exchange arrangements with customers and suppliers. The volumes of natural gas due to or from the Company under exchange agreements are recorded at average selling or purchase prices, as the case may be, and are adjusted monthly to reflect market changes. The net value of exchanged natural gas is included in inventories in the consolidated balance sheet. PROPERTIES AND EQUIPMENT The Company uses the successful efforts method of accounting for oil and gas producing activities. Under this method, acquisition costs for proved and unproved properties are capitalized when incurred. Exploration costs, including geological and geophysical costs, the costs of carrying and retaining unproved properties and exploratory dry hole drilling costs, are expensed. Development costs, including the costs to drill and equip development wells, and successful exploratory drilling costs to locate proved reserves, are capitalized. The impairment of unamortized capital costs is measured at a lease level and is reduced to fair value if it is determined that the sum of expected future net cash flows is less than the net book value. The Company determines if an impairment has occurred through either adverse changes or a review of all fields each year. Capitalized costs of proved oil and gas properties, after considering estimated dismantlement, restoration and abandonment costs, net of estimated salvage values, are depreciated and depleted on a field basis by the unit-of-production method using proved developed reserves. The costs of unproved oil and gas properties are generally combined and amortized over a period that is based on the average holding period for such properties and the Company's experience of successful drilling. Properties related to gathering and pipeline systems and equipment are depreciated using the straight-line method based on estimated useful lives ranging from 10 to 25 years. Certain other assets are also depreciated on a straight-line basis. Future estimated plug and abandonment cost is accrued over the productive life of the oil and gas properties on a units of production basis. The accrued liability for plug and abandonment cost is included in accumulated depreciation, depletion and amortization. Costs of retired, sold or abandoned properties, which make up a part of an amortization base, are charged to accumulated depreciation, depletion and amortization. Accordingly, a gain or loss, if any, is recognized only when a group of proved properties (or field), that make up the amortization base, has been retired, abandoned or sold. REVENUE RECOGNITION AND GAS IMBALANCES The Company applies the sales method of accounting for natural gas revenue. Under this method, revenues are recognized based on the actual volume of natural gas sold to purchasers. Natural gas production operations may include joint owners who take more or less than the production volumes entitled to them on certain properties. Production volume is monitored to minimize these natural gas imbalances. A natural gas imbalance liability is recorded in other liabilities in the consolidated balance sheet if the Company's excess takes of natural gas exceed its estimated remaining recoverable reserves for these properties. 38 INCOME TAXES The Company follows the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recorded for the estimated future tax consequences attributable to the differences between the financial carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the tax rate in effect for the year in which those temporary differences are expected to turn around. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the year of the enacted rate change. NATURAL GAS MEASUREMENT The Company records estimated amounts for natural gas revenues and natural gas purchase costs based on volumetric calculations under its natural gas sales and purchase contracts. Variances or imbalances resulting from such calculations are inherent in natural gas sales, production, operation, measurement, and administration. Management does not believe that differences between actual and estimated natural gas revenues or purchase costs attributable to the unresolved variances or imbalances are material. ACCOUNTS PAYABLE This account includes credit balances to the extent that checks issued have not been presented to the Company's bank for payment. These credit balances included in accounts payable were approximately $9.1 million and $5.5 million at December 31, 1998 and 1997, respectively. RISK MANAGEMENT ACTIVITIES From time to time, the Company enters into derivative contracts, such as natural gas price swaps, as a hedging strategy to manage commodity price risk associated with its inventories, production or other contractual commitments. Gains or losses on these hedging activities are generally recognized over the period that the inventory, production or other underlying commitment is hedged as on offset to the specific hedged item. The cash flows related to any recognized gains or losses associated with these hedges are reported as cash flows from operations. If the hedge is terminated prior to expected maturity, gains or losses are deferred and included in income in the same period that the underlying production or other contractual commitment is delivered. Unrealized gains or losses associated with any derivative contracts not considered a hedge are recognized currently in the results of operations. A derivative instrument qualifies as a hedge if: (1) the item to be hedged exposes the Company to price risk; (2) the derivative reduces the risk exposure and is designated as a hedge at the time the derivative contract is entered into; and (3) at the inception of the hedge and throughout the hedge period there is a high correlation of the changes in the market value of the derivative instrument and the fair value of the underlying item being hedged. When the designated item associated with a derivative instrument matures, is sold, extinguished or terminated, derivative gains or losses are recognized as part of the gain or loss on the sale or settlement of the underlying item. When a derivative instrument is associated with an anticipated transaction that is no longer expected to occur or if correlation no longer exists, the gain or loss on the derivative is recognized currently in the results of operations to the extent the market value changes in the derivative have not been offset by the effects of the price changes on the hedged item since the inception of the hedge. See Note 11. Financial Instruments for further discussion. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires all derivatives to be recognized in the statement of financial position as either assets or liabilities and measured at fair value. In addition, all hedging relationships must be designated, reassessed and documented pursuant to the provisions of SFAS 133. This statement is effective for financial statements for fiscal years beginning after June 15, 1999. The Company has not yet completed its evaluation of the impact of the provisions from SFAS 133 on its financial position or operations. 39 CASH EQUIVALENTS The Company considers all highly liquid short-term investments with original maturities of three months or less to be cash equivalents. At December 31, 1998 and 1997, the majority of cash and cash equivalents is concentrated in one financial institution. The Company periodically assesses the financial condition of the institution and believes that any possible credit risk is minimal. USE OF ESTIMATES Preparing financial statements that conform with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company's most significant financial estimates are based on the remaining proved oil and gas reserves (see Supplemental Oil and Gas Information). Actual results could differ from those estimates. 2. PROPERTIES AND EQUIPMENT Properties and equipment are comprised of the following:
December 31, (In thousands) 1998 1997 - -------------------------------------------------------------------- Proved Oil and Gas Properties $ 921,463 $744,381 Unproved Oil and Gas Properties 42,426 24,618 Gathering and Pipeline Systems 121,999 116,360 Land, Building and Improvements 4,200 3,896 Other 20,468 17,525 ---------- -------- 1,110,556 906,780 Accumulated Depreciation, Depletion and Amortization (480,648) (437,381) ---------- -------- $ 629,908 $469,399 ========== ========
As a component of accumulated depreciation, depletion and amortization, total future plug and abandonment cost, accrued on a units of production basis, was $11.6 million and $13.1 million at December 31, 1998 and 1997, respectively. The Company believes that this accrual method adequately provides for its estimated future plug and abandonment cost over the reserve life of the oil and gas properties. 40 3. ADDITIONAL BALANCE SHEET INFORMATION Certain balance sheet amounts are comprised of the following:
December 31, (In thousands) 1998 1997 - -------------------------------------------------------------------------- Accounts Receivable Trade Accounts $41,397 $49,315 Joint Interest Accounts 6,712 4,843 Insurance Recoveries 5,539 3,043 Current Income Tax Receivable 502 1,291 Other Accounts 2,123 1,719 ------- ------- 56,273 60,211 Allowance for Doubtful Accounts (474) (539) ------- ------- $55,799 $59,672 ======= ======= Accounts Payable Trade Accounts $13,229 $ 6,209 Natural Gas Purchases 17,031 12,120 Wellhead Gas Imbalances 1,945 1,871 Royalty and Other Owners 8,987 11,995 Capital Costs 20,165 12,936 Dividends Payable 851 851 Taxes Other Than Income 1,017 1,478 Drilling Advances 900 2,333 Other Accounts 2,503 2,555 ------- ------- $66,628 $52,348 ======= ======= Accrued Liabilities Employee Benefits $ 4,479 $ 6,067 Taxes Other Than Income 7,357 8,314 Interest Payable 2,406 2,147 Other Accrued 2,164 996 ------- ------- $16,406 $17,524 ======= ======= Other Liabilities Postretirement Benefits Other Than Pension $ 316 $ 992 Accrued Pension Cost 4,941 3,742 Taxes Other Than Income and Other 4,249 4,029 ------- ------- $ 9,506 $ 8,763 ======= =======
4. INVENTORIES Inventories are comprised of the following:
December 31, (In thousands) 1998 1997 - -------------------------------------------------------------------------- Natural Gas in Storage $ 7,524 $ 6,322 Tubular Goods and Well Equipment 1,714 1,663 Pipeline Exchange Balances 74 (1,110) ------- ------- $ 9,312 $ 6,875 ======= =======
41 5. DEBT AND CREDIT AGREEMENTS 10.18% NOTES In May 1990, the Company issued an aggregate principal amount of $80 million of its 12-year 10.18% Notes (the "10.18% Notes") to a group of nine institutional investors in a private placement offering. The 10.18% Notes require five annual $16 million principal payments each May starting in 1998. The payment due in May 1999, classified as "Current Portion of Long-Term Debt", is a current liability on the Company's Consolidated Balance Sheet. The Company may prepay all or any portion of the debt at any time with a prepayment penalty. The 10.18% Notes contain restrictions on the merger of the Company or any subsidiary with a third party except under certain limited conditions. There are also various other restrictive covenants customarily found in such debt instruments, including a restriction on the payment of dividends and a required asset coverage ratio (present value of proved reserves to debt and other liabilities) that must be at least 1.5 to 1.0. 7.19% NOTES In November 1997, the Company issued an aggregate principal amount of $100 million of its 12-year 7.19% Notes (the "7.19% Notes") to a group of six institutional investors in a private placement offering. The 7.19% Notes require five annual $20 million principal payments starting in November 2005. The Company may prepay all or any portion of the indebtedness on any date with a prepayment penalty. The 7.19% Notes contain restrictions on the merger of the Company or any subsidiary with a third party other than under certain limited conditions. There are also various other restrictive covenants customarily found in such debt instruments, including a required asset coverage ratio (present value of proved reserves to debt and other liabilities) that must be at least 1.5 to 1.0; and a minimum annual coverage ratio of operating cash flow to interest expense for the trailing four quarters of 2.8 to 1.0. REVOLVING CREDIT AGREEMENT In November 1998, the Company replaced its $135 million Revolving Credit Agreement that utilized five banks with a new $250 million Revolving Credit Agreement (the "Credit Facility") with ten banks. The term of the credit facility is five years and expires on December 17, 2003. The available credit line is subject to adjustment from time-to-time on the basis of the projected present value (as determined by the banks' petroleum engineer) of estimated future net cash flows from certain proved oil and gas reserves and other assets of the Company. While the Company does not expect a change in the available credit line, in the event that it is adjusted below the outstanding level of borrowings, the Company has a period of 180 days to reduce its outstanding debt to the adjusted credit line. The Revolving Credit Agreement also includes a requirement to pay down half of the debt in excess of the adjusted credit line within the first 90 days of such an adjustment. Interest rates are principally based on a reference rate of either the rate for certificates of deposit ("CD rate") or LIBOR, plus a margin, or the prime rate. For CD rate and LIBOR borrowings, interest rates are subject to increase if the indebtedness under the Credit Facility is either greater than 60% or 80% of the Company's debt limit of $400 million, as shown below.
Debt Percentage Lower than 60% 60% - 80% Higher than 80% - ---------------------------------------------------------------------------- LIBOR margin 0.750% 1.00% 1.250% CD margin 0.875% 1.125% 1.375% Commitment fee rate 0.250% 0.3750% 0.3750%
The Credit Facility provides for a commitment fee on the unused available balance at an annual rate 1/4 of 1% and 3/8 of 1% depending on the level of indebtedness as indicated above. The Company's effective interest rates for the Credit Facility in the years ended December 31, 1998, 1997 and 1996 were 6.8%, 6.6% and 6.6%, respectively. The Credit Facility contains various customary restrictions, including (i) prohibiting the merger of the Company or any subsidiary with a third party except under certain limited conditions, (ii) prohibiting the sale of all or substantially all of the Company's or any subsidiary's assets to a third party, and (iii) requiring a minimum annual coverage ratio of operating cash flow to interest expense for the trailing four quarters of 2.8 to 1.0. 42 6. EMPLOYEE BENEFIT PLANS PENSION PLAN The Company has a non-contributory, defined benefit pension plan for all full-time employees. Plan benefits are based primarily on years of service and salary level near retirement. Plan assets are mainly fixed income investments and equity securities. The Company complies with the Employee Retirement Income Security Act of 1974 and Internal Revenue Code limitations when funding the plan. The Company has a non-qualified equalization plan to ensure payments to certain executive officers of amounts to which they are already entitled under the provisions of the pension plan, but which are subject to limitations imposed by federal tax laws. This plan is unfunded. Net periodic pension cost of the Company for the years ended December 31, 1998, 1997 and 1996 are comprised of the following:
(In thousands) 1998 1997 1996 - -------------------------------------------------------------------------- Qualified: Current Year Service Cost $ 853 $ 753 $ 737 Interest Accrued on Pension Obligation 945 810 744 Actual Return on Plan Assets (1,434) (1,129) (948) Net Amortization and Deferral 706 491 448 Recognized Gain (20) -- -- ------ ------ ------ Net Periodic Pension Cost $1,050 $ 925 $ 981 ====== ====== ====== Non-Qualified: Current Year Service Cost $ 81 $ 28 $ 90 Interest Accrued on Pension Obligation 45 6 6 Net Amortization 54 27 34 Recognized Loss 20 -- -- Settlement Charge 213 -- -- ------ ------ ------ Net Periodic Pension Cost $ 413 $ 61 $ 130 ====== ====== ======
The following table illustrates the funded status of the Company's pension plans at December 31, 1998 and 1997, respectively:
1998 1997 Non- Non- (In thousands) Qualified Qualified Qualified Qualified - -------------------------------------------------------------------------------- Actuarial Present Value of: Accumulated Benefit Obligation $10,552 $438 $ 8,669 $363 Projected Benefit Obligation $15,491 $959 $12,772 $668 Plan Assets at Fair Value 10,344 -- 8,890 -- ------- ---- ------- ---- Projected Benefit Obligation in Excess of Plan Assets 5,147 959 3,882 668 Unrecognized Net Gain (Loss) 657 (537) 1,527 (436) Unrecognized Prior Service Cost (774) (784) (862) (349) Adjustment to Recognize Minimum Liability -- 801 -- 480 ------- ---- ------- ---- Accrued Pension Cost $ 5,030 $439 $ 4,547 $363 ======= ==== ======= ====
43 In February 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits ("SFAS 132"). The Company has adopted this statement effective December 31, 1998. SFAS 132 standardizes the disclosure requirements for pensions and other postretirement benefits as contained below. This is a presentation requirement only and does not have an effect on the financial position or operating results of the Company. The change in the combined projected benefit obligation of the Company's qualified and non-qualified pension plans during the last three years is explained as follows:
(In thousands) 1998 1997 1996 - ------------------------------------------------------------------------------ Beginning of Year $13,441 $11,041 $10,153 Service Cost 935 781 827 Interest Cost 990 817 750 Plan Amendments 488 - - Actuarial Loss (Gain) 1,803 1,192 (256) Benefits Paid (1,208) (390) (433) ------- ------- ------- End of Year $16,449 $13,441 $11,041 ======= ======= =======
The change in the combined plan assets at fair value of the Company's qualified and non-qualified pension plans during the last three years is explained as follows:
(In thousands) 1998 1997 1996 - ------------------------------------------------------------------------------ Beginning of Year $ 8,890 $ 7,074 $ 6,417 Actual Return on Plan Assets 1,608 1,305 1,113 Employer Contribution 1,227 1,077 142 Benefits Paid (1,208) (390) (433) Expenses Paid (173) (176) (165) ------- ------- ------- End of Year $10,344 $ 8,890 $ 7,074 ======= ======= =======
The reconciliation of the combined funded status of the Company's qualified and non-qualified pension plans at the end of the last three years is explained as follows:
(In thousands) 1998 1997 1996 - ------------------------------------------------------------------------------ Funded Status $ 6,105 $ 4,550 $ 3,967 Unrecognized Gain 121 1,091 1,890 Unrecognized Prior Service Cost (1,558) (1,211) (1,336) ------- ------- ------- Net Amount Recognized $ 4,668 $ 4,430 $ 4,521 ======= ======= ======= Accrued Benefit Liability - Qualified Plan $ 5,030 $ 4,547 $ 4,686 Accrued Benefit Liability - Non-Qualified Plan 439 363 81 Intangible Asset (801) (480) (246) ------- ------- ------- Net Amount Recognized $ 4,668 $ 4,430 $ 4,521 ======= ======= =======
44 Assumptions used to determine benefit obligations and pension costs are as follows:
1998 1997 1996 - ------------------------------------------------------------------------------- Discount Rate 7.00%(1) 7.50% 7.50% Rate of Increase in Compensation Levels 4.00% 4.50% 4.50% Long-Term Rate of Return on Plan Assets 9.00% 9.00% 9.00%
- ---------- (1) Represents the rate used to determine the benefit obligation. A 7.5% discount rate was used to compute pension costs. SAVINGS INVESTMENT PLAN The Company has a Savings Investment Plan (the "SIP") which is a defined contribution plan. The Company matches a portion of employees' contributions. Participation in the SIP is voluntary and all regular employees of the Company are eligible to participate. The Company charged to expense plan contributions of $0.8 million, $0.6 million and $0.6 million in 1998, 1997 and 1996, respectively. The Company's Common Stock is an investment option within the SIP. DEFERRED COMPENSATION PLAN In 1998, the Company established a deferred compensation plan. This plan is available to officers of the Company and acts as a supplement to the savings investment plan. The Company matches a portion of the employee's contribution and those assets are invested in instruments selected by the employee. Unlike the SIP, the deferred compensation plan does not have dollar limits on tax deferred contributions. However, the assets of this plan are held in a rabbi trust and are subject to additional risk of loss in the event of bankruptcy or insolvency of the Company. At December 31, 1998, the balance in deferred compensation plan's rabbi trust was $0.9 million. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS In addition to providing pension benefits, the Company provides certain health care and life insurance benefits ("postretirement benefits") for retired employees, including their spouses, eligible dependents and surviving spouses ("retirees"). Most employees become eligible for these benefits if they meet certain age and service requirements at retirement. The Company was providing postretirement benefits to 251 retirees and 259 retirees at the end of 1998 and 1997, respectively. When the Company adopted SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions", in 1992, it began amortizing the $16.9 million accumulated postretirement benefit (the "Transition Obligation") over a period of 20 years. The amortization benefit of the unrecognized Transition Obligation in 1998, 1997 and 1996, presented in the table below, is due to a cost-cutting amendment to the postretirement medical benefits in 1993. The amendment prospectively reduced the unrecognized Transition Obligation by $9.8 million and was amortized over a 5.75 year period beginning in 1993 and ending in 1998. Postretirement benefit costs recognized in the years ended December 31, 1998, 1997 and 1996 are as follows:
(In thousands) 1998 1997 1996 - -------------------------------------------------------------------------------- Service Cost of Benefits Earned During the Year $ 190 $ 168 $ 99 Interest Cost on the Accumulated Postretirement Benefit Obligation 525 519 522 Amortization Benefit of the Unrecognized Gain (165) (181) (163) Amortization Benefit of the Unrecognized Transition Obligation (435) (808) (807) ----- ----- ----- Total Postretirement Benefit Cost (Benefit) $ 115 $(302) $(349) ===== ===== =====
45 The health care cost trend rate used to measure the expected cost in 1998 for medical benefits to retirees over age 65 was 8.1%, graded down to a trend rate of 0% in 2001. The health care cost trend rate used to measure the expected cost in 1998 for retirees under age 65 was 8.2%, graded down to a trend rate of 0% in 2001. Provisions of the plan should prevent further increases in employer cost after 2001. The weighted average discount rate used to determine the actuarial present value of the benefit obligation was 7.0% at December 31, 1998 and 7.5% at December 31, 1997. A one-percentage-point increase in health care cost trend rates for future periods would increase the accumulated net postretirement benefit obligation by approximately $105 thousand and, accordingly, the total postretirement benefit cost recognized in 1998 would have also increased by approximately $12 thousand. Similarly, a one-percentage-point decrease in health care cost trend rates for future periods would decrease the accumulated net postretirement benefit obligation by approximately $144 thousand and, accordingly, the total postretirement benefit cost recognized in 1998 would have also decreased by approximately $13 thousand. The funded status of the Company's postretirement benefit obligation at December 31, 1998 and 1997 is comprised of the following:
(In thousands) 1998 1997 - ------------------------------------------------------------------------------ Plan Assets at Fair Value $ -- $ -- Accumulated Postretirement Benefits Other Than Pensions 7,693 7,303 Unrecognized Cumulative Net Gain 2,086 2,429 Unrecognized Transition Obligation (8,883) (8,395) ------- ------- Accrued Postretirement Benefit Liability $ 896 $ 1,337 ======= =======
The change in the accumulated postretirement benefit obligation during the last three years is explained as follows:
(In thousands) 1998 1997 1996 - ----------------------------------------------------------------------------- Beginning of Year $7,303 $7,207 $7,234 Service Cost 190 168 99 Interest Cost 526 519 522 Amendments 0 0 0 Actuarial Loss/(Gain) 230 3 (231) Benefits Paid (556) (594) (417) ------ ------ ------ End of Year $7,693 $7,303 $7,207 ====== ====== ======
46 7. INCOME TAXES Income tax expense (benefit) is summarized as follows:
Year Ended December 31, (In thousands) 1998 1997 1996 - ------------------------------------------------------------------- Current: Federal $ 317 $ 5,210 $(1,229) State 65 1,089 316 ------- ------- ------- Total 382 6,299 (913) ------- ------- ------- Deferred: Federal 2,856 9,382 9,756 State 263 1,876 1,711 ------- ------- ------- Total 3,119 11,258 11,467 ------- ------- ------- Total Income Tax Expense $ 3,501 $17,557 $10,554 ======= ======= =======
Total income taxes were different than the amounts computed by applying the statutory federal income tax rate as follows:
Year Ended December 31, (In thousands) 1998 1997 1996 - ----------------------------------------------------------------------------- Statutory Federal Income Tax Rate 35% 35% 35% Computed "Expected" Federal Income Tax $ 3,081 $16,062 $10,982 State Income Tax, Net of Federal Income Tax 352 1,927 1,317 Other, Net 68 (432) (1,745) ------- ------- ------- Total Income Tax Expense $ 3,501 $17,557 $10,554 ======= ======= =======
Income taxes for the year ended December 31, 1996 were decreased by $1.8 million due to a federal income tax refund in connection with percentage depletion claimed in certain periods prior to the Company's IPO in 1990. The Company also received $1.7 million of interest income in connection with the income tax refund. The tax effects of temporary differences that resulted in significant portions of the deferred tax liabilities and deferred tax assets as of December 31, 1998 and 1997 were as follows:
(In thousands) 1998 1997 - ---------------------------------------------------------------------------- Deferred Tax Liabilities: Property, Plant and Equipment $137,061 $115,808 -------- -------- Deferred Tax Assets: Alternative Minimum Tax Credit Carryforwards 7,241 9,674 Net Operating Loss Carryforwards(1) 25,663 6,749 Note Receivable on Section 29 Monetization(2) 12,320 13,933 Items Accrued for Financial Reporting Purposes 5,885 5,344 -------- -------- 51,109 35,700 -------- -------- Net Deferred Tax Liabilities $ 85,952 $ 80,108 ======== ========
- ---------- (1) The 1998 amount includes the effect of $2.7 million in income tax refunds received in 1998 that applied to a net operating loss carryback to 1992 and an overpayment of 1997 federal income tax. (2) As a result of the monetization of Section 29 tax credits in 1996 and 1995, the Company recorded an asset sale for tax purposes in exchange for a long-term note receivable which will be repaid through 100% working and royalty interest in the production from the sold properties. 47 At December 31, 1998, the Company has a net operating loss carryforward for regular income tax reporting purposes of $64.2 million that will begin expiring in 2011. In addition, the Company has an alternative minimum tax credit carryforward of $7.2 million which does not expire and can be used to offset regular income taxes in future years to the extent that regular income taxes exceed the alternative minimum tax in any year. 8. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS The Company leases certain transportation vehicles, warehouse facilities, office space and machinery and equipment under cancelable and non-cancelable leases. Most of the leases expire within five years and may be renewed. Rent expense under such arrangements totaled $4.3 million, $4.1 million and $4.8 million for the years ended December 31, 1998, 1997 and 1996, respectively. In 1998, the Company entered into a ten-year lease agreement for office space in Houston, Texas intended to house the corporate offices and the Gulf Coast Region offices. This new office space is currently under construction and the Company expects to begin leasing the space in mid to late 1999. The lease for the existing office space will expire in the fourth quarter of 1999. Future minimum rental commitments under non-cancelable leases in effect at December 31, 1998 are as follows:
(In thousands) ----------------------------------- 1999 $ 3,440 2000 3,890 2001 3,784 2002 3,679 2003 2,468 Thereafter 12,327 ------- $29,588 =======
Minimum rental commitments are not reduced by minimum sublease rental income of $1.4 million due in the future under non-cancelable subleases. CONTINGENCIES The Company is a defendant in various lawsuits and is involved in other gas contract issues. In the Company's opinion, final judgments or settlements, if any, which may be awarded in connection with any one or more of these suits and claims could have a significant impact on the results of operations and cash flows of any period. However, there would not be a material adverse effect on the Company's financial position. 9. CASH FLOW INFORMATION Cash paid for interest and income taxes is as follows:
Year Ended December 31, (In thousands) 1998 1997 1996 --------------------------------------------------------------- Interest $18,341 $18,001 $17,105 Income Taxes $ 827 $ 8,980 $ 873
At December 31, 1998 and 1997, the Accounts Payable balance on the Consolidated Balance Sheet included payables for capital expenditures of $20.2 million and $12.9 million, respectively. 48 10. CAPITAL STOCK INCENTIVE PLANS On May 12, 1998, the Amended and Restated 1994 Long-Term Incentive Plan and the Amended and Restated 1994 Non-Employee Director Stock Option Plan were approved by the shareholders. The Company has two other stock option plans - the 1990 Incentive Stock Option Plan and the 1990 Non-Employee Director Stock Option Plan. Under these four plans (the "Incentive Plans"), incentive and non-statutory stock options, stock appreciation rights ("SARs") and stock awards may be granted to key employees and officers of the Company, and non-statutory stock options may be granted to non-employee directors of the Company. A maximum of 3,860,000 shares of Common Stock, par value $0.10 per share, may be issued under the Incentive Plans. All stock options have a maximum term of five or ten years from the date of grant, with most vesting over time. The options are issued at market value on the date of grant. The minimum exercise period for stock options is six months from the date of grant. No SARs have been granted under the Incentive Plans. Information regarding the Company's Incentive Plans is summarized below:
December 31, 1998 1997 1996 - -------------------------------------------------------------------------------- Shares Under Option at Beginning of Period 1,404,877 1,532,353 1,310,318 Granted 355,000 82,500 311,750 Exercised 152,917 139,836 41,094 Surrendered or Expired 49,024 70,140 48,621 --------- --------- --------- Shares Under Option at End of Period 1,557,936 1,404,877 1,532,353 ========= ========= ========= Weighted Average Option Price $ 13.25 - $ 13.25 - $ 13.25 - 22.75 26.00 26.00 Options Exercisable at End of Period 1,092,295 1,071,923 1,021,362 ========= ========= =========
Under the Amended and Restated 1994 Long-Term Incentive Plan, the Compensation Committee of the Board of Directors may grant awards of performance shares of stock to members of the executive management group. Each grant of performance shares has a three-year performance period, measured as the change from July 1 of the initial year of the performance period to June 30 of the third year. The number of shares of Common Stock received at the end of the performance period is based mainly on the relative stock price growth between the two measurement dates of Common Stock compared to that of a group of peer companies. The performance shares that were granted on July 1, 1994 expired on June 30, 1997 without issuing any Common Stock of the Company. Performance shares granted in July 1995 were converted to 21,692 shares of the Company's Common Stock in 1998. Performance shares granted in July 1996 may be converted to shares of Common Stock, depending upon the Company's relative performance to the peer group measured on June 30, 1999. Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation", outlines a fair value based method of accounting for stock options or similar equity instruments. The Company has opted to continue using the intrinsic value based method, as recommended by Accounting Principles Board ("APB") Opinion No. 25, to measure compensation cost for its stock option plans. If the Company had adopted SFAS 123, the pro forma results of operations would be net income of $1.6 million, $22.9 million and $14.8 million, or $0.06 , $0.98 and $0.65 per share, in 1998, 1997 and 1996, respectively. Under the fair value based method, the weighted average fair values of options granted during 1998, 1997 and 1996 were $6.21, $4.26 and $5.51, respectively. The fair value of stock options was calculated using a Black-Scholes stock option valuation model with the following weighted average assumptions for grants in 1998, 1997 and 1996: stock price volatility of 26.1, 27.8 and 25.9 percent, respectively; risk free rate of return of 5.63, 6.34 and 6.24 percent, respectively; dividend rate of $0.16 per year; and an expected term of three to four years. The fair value of stock options included in the pro forma results for each of the three years is not necessarily indicative of future effects on net income and earnings per share. 49 DIVIDEND RESTRICTIONS The Board of Directors of the Company determines the amount of future cash dividends, if any, to be declared and paid on the Common Stock depending on, among other things, the Company's financial condition, funds from operations, the level of its capital and exploration expenditures, and its future business prospects. The Company's 10.18% Note Agreement restricts certain payments ("Restricted Payments," as defined in the Note Agreement) associated with (i) purchasing, redeeming, retiring or otherwise acquiring any capital stock of the Company or any option, warrant or other right to acquire such capital stock or (ii) declaring any dividend, if immediately prior to or after making payments, the dividend exceeds consolidated net cash flow (as defined) and the ratio of proved reserves to debt is less than 1.7 to 1, or there has been an event of default under the Note Agreement. As of December 31, 1998, these restrictions did not impact on the Company's ability to pay regular dividends. The 7.19% Note Agreement issued in 1997 does not have a restricted payment provision. TREASURY STOCK In August 1998, the Board of Directors authorized the Company to repurchase up to two million shares of outstanding Common Stock at market prices. The timing and amount of these stock purchases are determined at the discretion of management. The Company may use the repurchased shares to fund stock compensation programs presently in existence, or for other corporate purposes. As of December 31, 1998, the Company had repurchased 302,600 shares, or 15% of the total authorized number of shares, for a total cost of approximately $4.4 million. The stock repurchase plan was funded with cash from increased borrowings on the revolving credit facility. No treasury shares were delivered or sold by the Company during the year. PURCHASE RIGHTS On January 21, 1991, the Board of Directors adopted the Preferred Stock Purchase Rights Plan and declared a dividend distribution of one right for each outstanding share of Common Stock. Each right becomes exercisable, at a price of $55, when any person or group has acquired, obtained the right to acquire or made a tender or exchange offer for beneficial ownership of 15 percent or more of the Company's outstanding Common Stock. An exception to the right occurs following a tender or exchange offer for all outstanding shares of Common Stock determined to be fair and in the best interests of the Company and its stockholders by a majority of the independent Continuing Directors (as defined in the plan). Each right entitles the holder, other than the acquiring person or group, to purchase one one-hundredth of a share of Series A Junior Participating Preferred Stock ("Junior Preferred Stock"), or to receive, after certain triggering events, Common Stock or other property having a market value (as defined in the plan) of twice the exercise price of each right. The rights become exercisable if the Company is acquired in a merger or other business combination in which it is not the survivor, or 50 percent or more of the Company's assets or earning power are sold or transferred. Once it becomes exercisable, each right entitles the holder to purchase common stock of the acquiring company with a market value (as defined in the plan) equal to twice the exercise price of each right. At December 31, 1998 and 1997, there were no shares of Junior Preferred Stock issued. The rights, which expire on January 21, 2001, and the exercise price are subject to adjustment and may be redeemed by the Company for $0.01 per right at any time before they become exercisable. Under certain circumstances, the Continuing Directors may opt to exchange one share of Common Stock for each exercisable right. PREFERRED STOCK At December 31, 1998 and 1997, 1,134,000 shares of 6% convertible redeemable preferred stock ("6% preferred stock") were issued and outstanding. Each share has voting rights equal to approximately 1.7 shares of Common Stock and a stated value of $50. At any time, the stock is convertible by the holder into Common Stock at a conversion price of $28.75 per share. While the 6% preferred stock does not have a mandatory redemption requirement, it is redeemable, starting after May 1, 1998, at the Company's option ("redemption option"). During the first year of the redemption option, the Company may redeem the 6% preferred stock at $50 per share, payable in Common Stock, using an average market price of the Common Stock for a 30 day period as defined in the agreement, plus a cash payment for the accrued dividends due on the shares redeemed. After the first year of the redemption option, the $50 per share redemption price is payable in cash, plus a cash payment for accrued dividends due on the shares redeemed. 50 Prior to the Company converting these shares into 1,648,664 shares of Common Stock in October 1997, 692,439 shares of the Company's $3.125 cumulative convertible preferred stock ("$3.125 preferred stock") were issued and outstanding. Each share had a stated value of $50 and could be converted any time by the holder into Common Stock at a conversion price of $21 per share. While there was no mandatory requirement, these shares could also be redeemed under certain provisions and fixed redemption prices. The Company had the option to convert the $3.125 preferred stock into shares of Common Stock valued at the conversion price if the closing price of the Common Stock was at least equal to the conversion price for 20 consecutive trading days. 11. FINANCIAL INSTRUMENTS The estimated fair value of financial instruments is the amount at which the instrument could be exchanged currently between willing parties. The carrying amounts reported in the consolidated balance sheet for cash and cash equivalents, accounts receivable, and accounts payable approximate fair value. The Company uses available marketing data and valuation methodologies to estimate fair value of debt.
December 31, 1998 December 31, 1997 Carrying Estimated Carrying Estimated (In thousands) Amount Fair Value Amount Fair Value - -------------------------------------------------------------------------------- Debt: 10.18% Notes $ 64,000 $ 68,185 $ 80,000 $ 86,555 7.19% Notes 100,000 93,145 100,000 102,693 Credit Facility 179,000 179,000 19,000 19,000 -------- -------- -------- -------- $343,000 $340,330 $199,000 $208,248 ======== ======== ======== ======== Other Financial Instruments: Gas Price Swaps -- $(231) -- $(350)
LONG-TERM DEBT The fair value of long-term debt is the estimated cost to acquire the debt, including a premium or discount for the difference between the issue rate and the year-end market rate. The fair value of the 10.18% Notes and the 7.19% Notes is based on interest rates currently available to the Company. The Credit Facility approximates fair value because this instrument bears interest at rates based on current market rates. GAS PRICE SWAPS From time to time, the Company enters into natural gas swap agreements ("price swaps"), a type of derivative instrument, with counterparties to hedge price risk associated with a portion of the Company's production. Under these price swaps, the Company receives a fixed price ("fixed price swaps") on a notional quantity of natural gas in exchange for paying a variable price based on a market-based index, such as the Nymex gas futures. Notional quantities of natural gas are used in each price swap, since no physical exchange or delivery of natural gas is involved. During 1998 and 1997, the Company entered into no fixed price swaps to hedge natural gas prices on its production. In 1996, the prices received on fixed price swaps ranged from $1.02 to $2.54 per Mmbtu on total notional quantities of 17,600,000 Mmbtu, representing 27% of 1996 production. 51 In addition, the Company uses price swaps to hedge the natural gas price risk on brokered transactions. Typically, the Company enters into contracts to broker natural gas at a variable price based on the market index price. However, in some circumstances, some of the Company's customers or suppliers request that a fixed price be stated in the contract. After entering into these fixed price contracts to meet the needs of its customers or suppliers, the Company may use price swaps to effectively convert these fixed price contracts to market-sensitive price contracts. These price swaps are held by the Company to their maturity and are not held for trading purposes. During 1998, the Company entered into price swaps with total notional quantities of 2,226,000 Mmbtu related to its brokered activities, representing less than 5% of the Company's total volume of brokered natural gas sold. A pre-tax loss of $0.3 million was recorded from these price swaps in 1998. In 1997 and 1996, these price swaps had total notional quantities of 1,416,000 Mmbtu and 1,002,000 Mmbtu related to brokered transactions, and represented approximately 4% and 3%, respectively, of the Company's total volume of brokered natural gas sold. At December 31, 1998, the Company had open price swaps with notional quantities of 1,730,000 Mmbtu and an unrealized loss of $0.2 million on these open contracts. The estimated fair value of price swaps in the table above are for hedged transactions in which gains or losses are recognized in results of operations over the periods that production or purchased gas is hedged. See Risk Management Activities under Note 1 and the Capital Resources and Liquidity section of Item 7. The Company is exposed to market risk on these open contracts to the extent of changes in market prices for natural gas. However, the market risk exposure on these hedged contracts is generally offset by the gain or loss recognized upon the ultimate sale of the natural gas that is hedged. CREDIT RISK Although notional contract amounts are used to express the volume of natural gas price agreements, the amounts that can be subject to credit risk in the event of non-performance by third parties are substantially smaller. The Company does not anticipate any material impact on its financial results due to non-performance by the third parties. 12. OIL AND GAS PROPERTY TRANSACTIONS The Company acquired oil and gas producing properties in Oklahoma during the second quarter of 1998 for $6.6 million. Included in the purchase were 9.3 Bcfe of proved reserves, ten wells and undeveloped acreage. In the fourth quarter of 1998, the Company purchased oil and gas producing properties in the Lookout Wash Unit of Wyoming from Oxy USA, Inc. for $5.2 million. The properties acquired included 11.2 Bcfe of proved reserves and more than ten potential drilling locations. Effective December 1, 1998, the Company purchased onshore Southern Louisiana properties and 3-D seismic inventory from Oryx Energy Company for approximately $70.1 million. The purchased assets included ten fields covering over 34,000 net acres with 68 producing wells. Total proved reserves are approximately 72 Bcfe. This transaction was funded by the Company's newly expanded revolving line of credit. See discussion in Note 5. Debt and Credit Agreements. In the fourth quarter of 1997, the Company closed two notable asset transactions. Properties in Northwest Pennsylvania (the "Meadville properties"), including 912 wells and 15 Mmcfed of production were sold to Lomak Petroleum Incorporated (now known as Range Resources Corporation) for $92.9 million. In a like-kind exchange transaction, the Company matched a portion of the Meadville properties sold with approximately $45 million in oil and gas producing properties acquired from Equitable Resources Energy Company, including 63 wells and 10 Mmcfed of production. The Company sold various non-core oil and gas properties in the Appalachian Region for $4.6 million in 1996. 52 13. OTHER REVENUE The Company completed two transactions in September and November 1995 and a third transaction in August 1996 to monetize the value of Section 29 tax credits from most of its qualifying Appalachian and Rocky Mountain properties. The transactions provided up-front cash of $2.8 million in 1995 and $0.6 million in 1996. This income was recorded as a reduction to the net book value of natural gas properties. Revenue from these transactions was $2.7 million in 1998, $3.6 million in 1997 and $3.4 million in 1996. These transactions are expected to generate additional future revenues through 2002 of $11.1 million related to the value of future Section 29 tax credits attributable to these properties. Using a volumetric production payment structure, the production, revenues, expenses and proved reserves for these properties will continue to be reported by the Company as Other Revenue until the production payment is satisfied. 14. SUPPLEMENTAL FULL COST ACCOUNTING INFORMATION U.S. oil and gas producing entities may utilize one of two methods of financial accounting: successful efforts or full cost. Given the current composition of the Company's properties, management considers the successful efforts method to be more appropriate than the full cost method primarily because the successful efforts method results in moderately better matching of costs and revenues. It has come to management's attention that certain users of the Company's financial statements believe that information about the Company prepared under the full cost method would also be useful. As a result, the following supplemental full cost information is also included. Successful efforts methodology is explained in Note 1. Summary of Significant Accounting Policies. Under the full cost method of accounting, all costs incurred in the acquisition, exploration and development of oil and gas properties are capitalized. These capitalized costs and estimated future development and dismantlement costs are amortized on a unit-of-production method based on proved reserves. Net capitalized costs of oil and gas properties are limited to the lower of unamortized cost or the cost center ceiling, defined as: (1) the present value (10% discount rate) of estimated unescalated future net revenues from proved reserves, plus (2) the cost of properties not being amortized, plus (3) the lower of cost or estimated fair value of unproved properties included in the costs being amortized, minus (4) the deferred tax liabilities for the temporary differences between the book and tax basis of oil and gas properties. Proceeds from the sale of oil and gas properties are applied to reduce the costs in the cost center unless the sale involves a significant quantity of reserves in relation to the cost center. In this case, a gain or loss is recognized. Unevaluated properties and associated costs not currently being amortized and included in oil and gas properties totaled $42.4 million, $24.6 million, and $15.7 million at December 31, 1998, 1997, and 1996, respectively. Because of the capital cost limitations, described above, full cost entities are not subject to the impairment test prescribed by SFAS 121.
1998 1997 1996 ------------------ ------------------ ----------------- Successful Full Successful Full Successful Full (In thousands, except per share amounts) Efforts Cost Efforts Cost Efforts Cost - ------------------------------------------------------------------------------------------------------- BALANCE SHEET: Properties and Equipment, Net $629,907 $816,759 $469,399 $651,739 $480,511 $657,957 Stockholders' Equity 182,668 297,583 184,062 296,201 160,704 269,833 INCOME STATEMENT: Depreciation, Depletion, Amortization and Unproved Property Impairment $ 45,588 $ 60,165 $ 43,454 $ 52,383 $ 45,390 $ 50,769 Net Income Available to Common Stockholders 1,902 4,676(1) 23,231 26,240(1) 15,258 18,637(1) Basic Earnings Per Share $ 0.08 $ 0.19 $ 1.00 $ 1.13 $ 0.67 $ 0.82
- ---------- (1) Supplementary full cost information does not include the effect of allowable capitalization of general and administrative, region office and interest expense. Pretax capitalizable administrative expenses were $4.6 million in 1998, $4.2 million in 1997, and $3.7 million in 1996. Pretax capitalizable interest expense was $2.0 million in 1998, $1.4 million in 1997 and $1.1 million in 1996. 53 15. EARNINGS PER COMMON SHARE Basic earnings per share for the Company were $0.08, $1.00, and $0.67 in 1998, 1997 and 1996, respectively, and were based on the weighted average shares outstanding of 24,733,465 in 1998, 23,272,432 in 1997, and 22,806,516 in 1996. Diluted earnings per share for the Company were $0.08, $0.97, and $0.66 in 1998, 1997 and 1996, respectively. The diluted earnings per share amounts are based on weighted average shares outstanding plus common stock equivalents. Common stock equivalents include both stock awards and stock options, and totaled 372,937 in 1998, 649,632 in 1997, and 186,000 in 1996. Both the $3.125 cumulative convertible preferred stock and the 6% convertible redeemable preferred stock ("preferred stock") issued May 1993 and May 1994, respectively, had an antidilutive effect on earnings per common share. The preferred stock was determined not to be a common stock equivalent when it was issued. As such, no adjustments were made to reported net income in the computation of earnings per share. The Company, under the provisions of the stock, converted the $3.125 cumulative convertible preferred stock to Common Stock in October 1997. See Note 10. Capital Stock for further discussion. CABOT OIL & GAS CORPORATION SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED) OIL AND GAS RESERVES Users of this information should be aware that the process of estimating quantities of "proved" and "proved developed" natural gas and crude oil reserves is very complex, requiring significant subjective decisions in the evaluation of all available geological, engineering and economic data for each reservoir. The data for a given reservoir may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions. As a result, material revisions to existing reserve estimates may occur from time to time. Although every reasonable effort is made to ensure that reserve estimates reported represent the most accurate assessments possible, the subjective decisions and variances in available data for various reservoirs make these estimates generally less precise than other estimates included in the financial statement disclosures. Proved reserves represent estimated quantities of natural gas, crude oil and condensate that geological and engineering data demonstrate, with reasonable certainty, to be recoverable in future years from known reservoirs under economic and operating conditions in effect when the estimates were made. Proved developed reserves are proved reserves expected to be recovered through wells and equipment in place and under operating methods used when the estimates were made. Estimates of proved and proved developed reserves at December 31, 1998, 1997 and 1996 were based on studies performed by the Company's petroleum engineering staff. The estimates were reviewed by Miller and Lents, Ltd., who indicated in their letter dated February 9, 1999 that, based on their investigation and subject to the limitations described in their letter, they believe that the results of those estimates and projections were reasonable in the aggregate. No major discovery or other favorable or unfavorable event after December 31, 1998 is believed to have caused a material change in the estimates of proved or proved developed reserves as of that date. The following table illustrates the Company's net proved reserves, including changes, and proved developed reserves for the periods indicated, as estimated by the Company's engineering staff. All reserves are located in the United States. 54
Natural Gas ----------------------------- December 31, (Millions of cubic feet) 1998 1997 1996 - ------------------------------------------------------------------------------- PROVED RESERVES Beginning of Year 903,429 915,617 889,850 Revisions of Prior Estimates (13,097) 6,744 2,774 Extensions, Discoveries and Other Additions 94,891 109,191 69,708 Production (64,167) (63,889) (58,762) Purchases of Reserves in Place 76,234 73,836 37,397 Sales of Reserves in Place (534) (138,070) (25,350) ------- ------- ------- End of Year 996,756 903,429 915,617 ======= ======= ======= PROVED DEVELOPED RESERVES 788,390 738,764 768,097 ======= ======= =======
Liquids ----------------------------- December 31, (Thousands of barrels) 1998 1997 1996 - ------------------------------------------------------------------------------- PROVED RESERVES Beginning of Year 5,869 5,166 5,310 Revisions of Prior Estimates (1,644) 99 (132) Extensions, Discoveries and Other Additions 835 794 386 Production (736) (629) (597) Purchases of Reserves in Place 3,353 594 215 Sales of Reserves in Place -- (155) (16) ----- ----- ----- End of Year 7,677 5,869 5,166 ===== ===== ===== PROVED DEVELOPED RESERVES 5,822 4,859 4,685 ===== ===== =====
CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING ACTIVITIES The following table illustrates the total amount of capitalized costs relating to natural gas and crude oil producing activities and the total amount of related accumulated depreciation, depletion and amortization.
Year Ended December 31, (In thousands) 1998 1997 1996 - ------------------------------------------------------------------------------- Aggregate Capitalized Costs Relating to Oil and Gas Producing Activities $1,107,877 $904,669 $997,531 Aggregate Accumulated Depreciation, Depletion and Amortization $ 478,766 $435,502 $517,249
COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION, EXPLORATION AND DEVELOPMENT ACTIVITIES Costs incurred in property acquisition, exploration and development activities were as follows: 55
Year Ended December 31, (In thousands) 1998 1997 1996 - -------------------------------------------------------------------------- Property Acquisition Costs - Proved $ 83,584 $ 45,573 $ 6,637 Property Acquisition Costs - Unproved 15,587 4,302 4,355 Exploration and Extension Well Costs 36,310 28,633 14,192 Development Costs 82,235 53,441 41,036 -------- -------- -------- Total Costs $217,716 $131,949 $ 66,220 ======== ======== ========
HISTORICAL RESULTS OF OPERATIONS FROM OIL AND GAS PRODUCING ACTIVITIES The results of operations for the Company's oil and gas producing activities were as follows:
Year Ended December 31, (In thousands) 1998 1997 1996 - ----------------------------------------------------------------------------- Operating Revenues $147,856 $173,865 $150,096 Costs and Expenses Production 38,802 39,068 35,161 Other Operating 20,070 18,017 15,155 Exploration 19,564 13,884 12,559 Depreciation, Depletion and Amortization 43,127 39,485 40,810 -------- -------- -------- Total Cost and Expenses 121,563 110,454 103,685 -------- -------- -------- Income Before Income Taxes 26,293 63,411 46,411 Provision for Income Taxes Expense 9,203 22,194 16,244 -------- -------- -------- Results of Operations $ 17,090 $ 41,217 $ 30,167 ======== ======== ========
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES The following information has been developed utilizing SFAS 69 procedures and based on natural gas and crude oil reserve and production volumes estimated by the Company's engineering staff. It can be used for some comparisons, but should not be the only method used to evaluate the Company or its performance. Further, the information in the following table may not represent realistic assessments of future cash flows, nor should the Standardized Measure of Discounted Future Net Cash Flows be viewed as representative of the current value of the Company. The Company believes that the following factors should be taken into account when reviewing the following information: (i) future costs and selling prices will probably differ from those required to be used in these calculations; (ii) due to future market conditions and governmental regulations, actual rates of production in future years may vary significantly from the rate of production assumed in the calculations; (iii) selection of a 10% discount rate is arbitrary and may not be a reasonable measure of the relative risk that is part of realizing future net oil and gas revenues; and (iv) future net revenues may be subject to different rates of income taxation. Under the Standardized Measure, future cash inflows were estimated by applying year-end oil and gas prices, adjusted for fixed and determinable escalations, to the estimated future production of year-end proved reserves. The average prices related to proved reserves at December 31, 1998, 1997 and 1996 were for natural gas ($/Mcf) $2.26, $2.62 and $3.77, respectively, and for oil ($/Bbl) $10.23, $19.02 and $22.86, respectively. Future cash inflows were reduced by estimated future development and production costs based on year-end costs to arrive at net cash flow before tax. Future income tax expense was computed by applying year-end statutory tax rates to future pretax net cash flows, less the tax basis of the properties involved. SFAS 69 requires the use of a 10% discount rate. 56 Management does not use only the following information when making investment and operating decisions. These decisions are based on a number of factors, including estimates of probable as well as proved reserves, and varying price and cost assumptions considered more representative of a range of anticipated economic conditions. Standardized Measure is as follows:
Year Ended December 31, (In thousands) 1998(1) 1997(1) 1996(1) - ------------------------------------------------------------------------------- Future Cash Inflows $2,382,860 $2,539,287 $3,528,558 Future Production and Development Costs (780,705) (686,689) (773,631) ---------- ---------- ---------- Future Net Cash Flows Before Income Taxes 1,602,155 1,852,598 2,754,927 10% Annual Discount for Estimated Timing of Cash Flows (863,226) (1,013,837) (1,589,290) ---------- ---------- ---------- Standardized Measure of Discounted Future Net Cash Flows Before Income Taxes 738,929 838,761 1,165,637 Future Income Tax Expenses, Net of 10% Annual Discount (2) (144,851)(4) (227,796) (331,331) ---------- ---------- ---------- Standardized Measure of Discounted Future Net Cash Flows(3) $ 594,078 $ 610,965 $ 834,306 ========== ========== ==========
- ---------- (1) Includes the future cash inflows, production costs and development costs, as well as the tax basis, relating to the properties included in the transactions to monetize the value of Section 29 tax credits. See Note 13. of the Notes to the Consolidated Financial Statements. (2) Future income taxes before discount were $446,980, $582,639 and $887,583 for the years ended December 31, 1998, 1997 and 1996, respectively. (3) The change in discounted future cash flows from 1996 to 1997 is primarily a result of the $1.15 per Mcf decrease in average natural gas price. (4) Future income tax expense decreased as a result of tax benefits realized on property acquisitions and drilling activity late in 1998. CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES The following is an analysis of the changes in the Standardized Measure:
Year Ended December 31, (In thousands) 1998 1997 1996 - ------------------------------------------------------------------------------ Beginning of Year $610,965 $834,306 $512,948 Discoveries and Extensions, Net of Related Future Costs 72,275 113,032 99,983 Net Changes in Prices and Production Costs (195,554) (367,112) 416,042 Accretion of Discount 83,876 116,564 66,530 Revisions of Previous Quantity Estimates, Timing and Other (1) (36,522) (10,798) (7,874) Development Costs Incurred 20,236 17,435 10,294 Sales and Transfers, Net of Production Costs (109,054) (138,274) (114,935) Net Purchases (Sales) of Reserves in Place 64,911 (57,723) 30,293 Net Change in Income Taxes 82,945 103,535 (178,975) -------- -------- -------- End of Year $594,078 $610,965 $834,306 ======== ======== ========
- ---------- (1) Includes the effect of a 14.3 Bcfe downward revision in 1998 due to lower year-end pricing. 57 CABOT OIL & GAS CORPORATION SELECTED DATA (UNAUDITED) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(In thousands except per share amounts) First Second Third Fourth Total - -------------------------------------------------------------------------------- 1998 Net Operating Revenues $40,791 $41,667 $37,386 $39,762 $159,606 Operating Income 10,714 9,876 1,701 5,112 27,403 Net Income/(Loss) 2,993 2,283 (2,524) (850) 1,902 Basic Earnings/(Loss) Per Share $ 0.12 $ 0.09 $ (0.10) $ (0.03) $ 0.08 Diluted Earnings/(Loss) Per Share $ 0.12 $ 0.09 $ (0.10) $ (0.03) $ 0.08 1997 Net Operating Revenues $52,792 $39,407 $40,773 $52,155 $185,127 Operating Income 22,715 10,013 10,830 20,294 63,852 Net Income 9,692 1,955 2,289 9,295 23,231 Basic Earnings Per Share $ 0.42 $ 0.09 $ 0.10 $ 0.39 $ 1.00 Diluted Earnings Per Share $ 0.41 $ 0.08 $ 0.10 $ 0.38 $ 0.97
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information under the caption "Election of Directors" in the Company's definitive proxy statement ("Proxy Statement") in connection with the 1999 annual stockholders meeting is incorporated by reference. ITEM 11. EXECUTIVE COMPENSATION The information under the caption "Executive Compensation" in the Proxy Statement is incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information under the captions "Beneficial Ownership of Over Five Percent of Common Stock" and "Beneficial Ownership of Directors and Executive Officers" in the Proxy Statement is incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 58 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K A. INDEX 1. Consolidated Financial Statements See Index on page 33. 2. Financial Statement Schedules None. 3. Exhibits The following instruments are included as exhibits to this report. Those exhibits below incorporated by reference herein are indicated as such by the information supplied in the parenthetical thereafter. If no parenthetical appears after an exhibit, copies of the instrument have been included herewith. Exhibit Number Description - -------------------------------------------------------------------------------- 3.1 Certificate of Incorporation of the Company (Registration Statement No. 33-32553). 3.2 Amended and Restated Bylaws of the Company adopted August 5, 1994. 4.1 Form of Certificate of Common Stock of the Company (Registration Statement No. 33-32553). 4.2 Certificate of Designation for Series A Junior Participating Preferred Stock (Form 10-K for 1994). 4.3 Rights Agreement dated as of March 28, 1991, between the Company and The First National Bank of Boston, as Rights Agent, which includes as Exhibit A the form of Certificate of Designation of Series A Junior Participating Preferred Stock (Form 8-A, File No. 1-10477). (a) Amendment No. 1 to the Rights Agreement dated February 24, 1994 (Form 10-K for 1994). 4.4 Certificate of Designation for 6% Convertible Redeemable Preferred Stock (Form 10-K for 1994). 4.5 Amended and Restated Credit Agreement dated as of May 30, 1995, among the Company, Morgan Guaranty Trust Company, as agent and the banks named therein. (a) Amendment No. 1 to Credit Agreement dated September 15, 1995 (Form 10-K for 1995). (b) Amendment No. 2 to Credit Agreement dated December 24, 1996 (Form 10-K for 1996). 4.6 Note Purchase Agreement dated May 11, 1990, among the Company and certain insurance companies parties thereto (Form 10-Q for the quarter ended June 30, 1990). (a) First Amendment dated June 28, 1991 (Form 10-K for 1994). (b) Second Amendment dated July 6, 1994 (Form 10-K for 1994). 4.7 Note Purchase Agreement dated November 14, 1997, among the Company and the purchasers named therein (Form 10-K for 1997). 10.1 Supplemental Executive Retirement Agreement between the Company and Charles P. Siess, Jr. (Form 10-K for 1995). 10.2 Form of Change in Control Agreement between the Company and Certain Officers (Form 10-K for 1995). 10.3 Letter Agreement dated January 11, 1990, between Morgan Guaranty Trust Company of New York and the Company (Registration Statement No. 33-32553). 10.4 Form of Annual Target Cash Incentive Plan of the Company (Registration Statement No. 33-32553). 10.5 Form of Incentive Stock Option Plan of the Company (Registration Statement No. 33-32553). (a) First Amendment to the Incentive Stock Option Plan (Post-Effective Amendment No. 1 to S-8 dated April 26, 1993). 10.6 Form of Stock Subscription Agreement between the Company and certain executive officers and directors of the Company (Registration Statement No. 33-32553). 10.7 Transaction Agreement between Cabot Corporation and the Company dated February 1, 1991 (Registration Statement No. 33-37455). 10.8 Tax Sharing Agreement between Cabot Corporation and the Company dated February 1, 1991 (Registration Statement No. 33-37455). 59 10.9 Amendment Agreement (amending the Transaction Agreement and the Tax Sharing Agreement) dated March 25, 1991 (incorp. by ref. from Cabot Corporation's Schedule 13E-4, Am. No. 6, File No. 5-30636). 10.10 Savings Investment Plan & Trust Agreement of the Company (Form 10-K for 1991). (a) First Amendment to the Savings Investment Plan dated May 21, 1993 (Form S-8 dated November 1, 1993). (b) Second Amendment to the Savings Investment Plan dated May 21, 1993 (Form S-8 dated November 1, 1993). (c) First through Fifth Amendments to the Trust Agreement (Form 10-K for 1995). (d) Third through Fifth Amendments to the Savings Investment Plan (Form 10-K for 1996). 10.11 Supplemental Executive Retirement Agreements of the Company (Form 10-K for 1991). 10.12 Settlement Agreement and Mutual Release (Tax Issues) between Cabot Corporation and the Company dated July 7, 1992 (Form 10-Q for the quarter ended June 30, 1992). 10.13 Agreement of Merger dated February 25, 1994 among Washington Energy Company, Washington Energy Resources Company, the Company and COG Acquisition Company (Form 10-K for 1993). 10.14 1990 Nonemployee Director Stock Option Plan of the Company (Form S-8 dated June 23, 1990). (a) First Amendment to 1990 Nonemployee Director Stock Option Plan (Post-Effective Amendment No. 2 to Form S-8 dated March 7, 1994). (b) Second Amendment to 1990 Nonemployee Director Stock Option Plan (Form 10-K for 1995). 10.15 Amended and Restated 1994 Long-Term Incentive Plan of the Company. 10.16 Amended and Restated 1994 Non-Employee Director Stock Option Plan. 10.17 Employment Agreement between the Company and Ray R. Seegmiller dated September 25, 1995 (Form 10-K for 1995). 10.18 Form of Indemnity Agreement between the Company and Certain Officers. (Form 10-K for 1997) 10.19 Deferred Compensation Plan of the Company. 10.20 Trust Agreement dated August 1998 between Bankers Trust Company and the Company. 10.21 Lease Agreement between the Company and DNA COG, Ltd. dated April 24, 1998. 10.22 Credit Agreement dated as of December 17, 1998 between the Company and the banks named therein. 21.1 Subsidiaries of Cabot Oil & Gas Corporation. 23.1 Consent of PricewaterhouseCoopers LLP. 23.2 Consent of Miller and Lents, Ltd. 27 Financial Data Schedule. 28.1 Miller and Lents, Ltd. Review Letter dated February 9, 1999. B. REPORTS ON FORM Form 8-K Item 5 Form 8-K filed on January 27, 1999. 60 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Houston, State of Texas, on the 19 of March 1999. CABOT OIL & GAS CORPORATION By: /s/ Ray Seegmiller --------------------------------- Ray Seegmiller President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.
Signature Title Date - -------------------------------------------------------------------------------- /s/ Ray R. Seegmiller President, Chief Executive March 19, 1999 - --------------------------- Officer and Director Ray R. Seegmiller (Principal Executive Officer) /s/ Paul F. Boling Vice President, Finance March 19, 1999 - --------------------------- (Principal Financial Officer) Paul F. Boling /s/ Henry C. Smyth Controller March 19, 1999 - --------------------------- (Principal Accounting Officer) Henry C. Smyth /s/ Charles P. Siess, Jr. Chairman of the Board March 19, 1999 - --------------------------- Charles P. Siess, Jr. /s/ Robert F. Bailey Director March 19, 1999 - --------------------------- Robert F. Bailey /s/ Samuel W. Bodman Director March 19, 1999 - --------------------------- Samuel W. Bodman /s/ Henry O. Boswell Director March 19, 1999 - --------------------------- Henry O. Boswell /s/ John G. L. Cabot Director March 19, 1999 - --------------------------- John G. L. Cabot /s/ William R. Esler Director March 19, 1999 - --------------------------- William R. Esler /s/ William H. Knoell Director March 19, 1999 - --------------------------- William H. Knoell 61 /s/ C. Wayne Nance Director March 19, 1999 - --------------------------- C. Wayne Nance /s/ P. Dexter Peacock Director March 19, 1999 - --------------------------- P. Dexter Peacock /s/ William P. Vititoe Director March 19, 1999 - --------------------------- William P. Vititoe
62 INDEX TO EXHIBITS
Exhibit Number Description - -------------------------------------------------------------------------------- 3.1 Certificate of Incorporation of the Company (Registration Statement No. 33-32553). 3.2 Amended and Restated Bylaws of the Company adopted August 5, 1994. 4.1 Form of Certificate of Common Stock of the Company (Registration Statement No. 33-32553). 4.2 Certificate of Designation for Series A Junior Participating Preferred Stock (Form 10-K for 1994). 4.3 Rights Agreement dated as of March 28, 1991, between the Company and The First National Bank of Boston, as Rights Agent, which includes as Exhibit A the form of Certificate of Designation of Series A Junior Participating Preferred Stock (Form 8-A, File No. 1-10477). (a) Amendment No. 1 to the Rights Agreement dated February 24, 1994 (Form 10-K for 1994). 4.4 Certificate of Designation for 6% Convertible Redeemable Preferred Stock (Form 10-K for 1994). 4.5 Amended and Restated Credit Agreement dated as of May 30, 1995, among the Company, Morgan Guaranty Trust Company, as agent and the banks named therein. (a) Amendment No. 1 to Credit Agreement dated September 15, 1995 (Form 10-K for 1995). (b) Amendment No. 2 to Credit Agreement dated December 24, 1996 (Form 10-K for 1996). 4.6 Note Purchase Agreement dated May 11, 1990, among the Company and certain insurance companies parties thereto (Form 10-Q for the quarter ended June 30, 1990). (a) First Amendment dated June 28, 1991 (Form 10-K for 1994). (b) Second Amendment dated July 6, 1994 (Form 10-K for 1994). 4.7 Note Purchase Agreement dated November 14, 1997, among the Company and the purchasers named therein (Form 10-K for 1997). 10.1 Supplemental Executive Retirement Agreement between the Company and Charles P. Siess, Jr. (Form 10-K for 1995). 10.2 Form of Change in Control Agreement between the Company and Certain Officers (Form 10-K for 1995). 10.3 Letter Agreement dated January 11, 1990, between Morgan Guaranty Trust Company of New York and the Company (Registration Statement No. 33-32553). 10.4 Form of Annual Target Cash Incentive Plan of the Company (Registration Statement No. 33-32553). 10.5 Form of Incentive Stock Option Plan of the Company (Registration Statement No. 33-32553). (a) First Amendment to the Incentive Stock Option Plan (Post-Effective Amendment No. 1 to S-8 dated April 26, 1993). 10.6 Form of Stock Subscription Agreement between the Company and certain executive officers and directors of the Company (Registration Statement No. 33-32553). 10.7 Transaction Agreement between Cabot Corporation and the Company dated February 1, 1991 (Registration Statement No. 33-37455). 10.8 Tax Sharing Agreement between Cabot Corporation and the Company dated February 1, 1991 (Registration Statement No. 33-37455). 10.9 Amendment Agreement (amending the Transaction Agreement and the Tax Sharing Agreement) dated March 25, 1991 (incorp. by ref. from Cabot Corporation's Schedule 13E-4, Am. No. 6, File No. 5-30636). 10.10 Savings Investment Plan & Trust Agreement of the Company (Form 10-K for 1991). (a) First Amendment to the Savings Investment Plan dated May 21, 1993 (Form S-8 dated November 1, 1993). (b) Second Amendment to the Savings Investment Plan dated May 21, 1993 (Form S-8 dated November 1, 1993). (c) First through Fifth Amendments to the Trust Agreement (Form 10-K for 1995). (d) Third through Fifth Amendments to the Savings Investment Plan (Form 10-K for 1996). 10.11 Supplemental Executive Retirement Agreements of the Company (Form 10-K for 1991).
63
10.12 Settlement Agreement and Mutual Release (Tax Issues) between Cabot Corporation and the Company dated July 7, 1992 (Form 10-Q for the quarter ended June 30, 1992). 10.13 Agreement of Merger dated February 25, 1994 among Washington Energy Company, Washington Energy Resources Company, the Company and COG Acquisition Company (Form 10-K for 1993). 10.14 1990 Nonemployee Director Stock Option Plan of the Company (Form S-8 dated June 23, 1990). (a) First Amendment to 1990 Nonemployee Director Stock Option Plan (Post-Effective Amendment No. 2 to Form S-8 dated March 7, 1994). (b) Second Amendment to 1990 Nonemployee Director Stock Option Plan (Form 10-K for 1995). 10.15 Amended and Restated 1994 Long-Term Incentive Plan of the Company. 10.16 Amended and Restated 1994 Non-Employee Director Stock Option Plan. 10.17 Employment Agreement between the Company and Ray R. Seegmiller dated September 25, 1995 (Form 10-K for 1995). 10.18 Form of Indemnity Agreement between the Company and Certain Officers. (Form 10-K for 1997) 10.19 Deferred Compensation Plan of the Company. 10.20 Trust Agreement dated August 1998 between Bankers Trust Company and the Company. 10.21 Lease Agreement between the Company and DNA COG, Ltd. dated April 24, 1998. 10.22 Credit Agreement dated as of December 17, 1998 between the Company and the banks named therein. 21.1 Subsidiaries of Cabot Oil & Gas Corporation. 23.1 Consent of PricewaterhouseCoopers LLP. 23.2 Consent of Miller and Lents, Ltd. 27 Financial Data Schedule. 28.1 Miller and Lents, Ltd. Review Letter dated February 9, 1999.
64 EX-10.15 2 LONG-TERM INCENTIVE PLAN OF THE COMPANY Exhibit 10.15 EXHIBIT A AMENDED AND RESTATED 1994 LONG-TERM INCENTIVE PLAN of CABOT OIL & GAS CORPORATION 1. Objectives. The Cabot Oil & Gas Corporation 1994 Long-Term Incentive Plan (the "Plan") is designed to retain key executives and other selected employees and reward them for making major contributions to the success of Cabot Oil & Gas Corporation, a Delaware corporation (the "Company"), and its Subsidiaries (as hereinafter defined). These objectives are to be accomplished by making awards under the Plan and thereby providing Participants (as hereinafter defined) with a proprietary interest in the growth and performance of the Company and its Subsidiaries. 2. Definitions. As used herein, the terms set forth below shall have the following respective meanings: "Award" means the grant of any form of stock option, stock appreciation right, stock award or cash award, whether granted singly, in combination or in tandem, to a Participant pursuant to any applicable terms, conditions and limitations as the Committee may establish in order to fulfill the objectives of the Plan. "Award Agreement" means a written agreement between the Company and a Participant that sets forth the terms, conditions and limitations applicable to an Award. "Board" means the Board of Directors of the Company. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Committee" means such committee of the Board as is designated by the Board to administer the Plan. "Common Stock" means the Class A Common Stock, par value $.10 per share, of the Company. "Director" means an individual serving as a member of the Board. "Fair Market Value" means, as of a particular date, (i) if the shares of Common Stock are listed on a national securities exchange, the average between the highest and lowest sales price per share of Common Stock on the consolidated transaction reporting system for the principal such national securities exchange on that date, or, if there shall have been no such sale so reported on that date, on the last preceding date on which such a sale was so reported, (ii) if the shares of Common Stock are not so listed but are quoted in the NASDAQ National Market System, the average between the highest and lowest sales price per share of Common Stock on the NASDAQ National Market System on that date, or, if there shall have been no such sale so reported on that date, on the last preceding date on which such a sale was so reported or (iii)if the Common Stock is not so listed or quoted, the average between the closing bid and asked price on that date, or, if there are no quotations available for such date, on the last preceding date on which such quotations shall be available, as reported by NASDAQ, or, if not reported by NASDAQ, by the National Quotation Bureau, Inc. "Participant" means an employee of the Company or any of its Subsidiaries to whom an Award has been made under this Plan. 65 "Subsidiary" means any corporation of which the Company directly or indirectly owns shares representing more than 50% of the voting power of all classes or series of capital stock of such corporation which have the right to vote generally on matters submitted to a vote of the stockholders of such corporation. 3. Eligibility. Employees of the Company and its Subsidiaries are eligible for an Award under this Plan. 4. Common Stock Available for Awards. There shall be available for Awards granted wholly or partly in Common Stock (including rights or options which may be exercised for or settled in Common Stock) during the term of this Plan an aggregate of 2,500,000 shares of Common Stock of which no more than 750,000 shares will be used for Stock Awards. The Board of Directors and the appropriate officers of the Company shall from time to time take whatever actions are necessary to file required documents with governmental authorities and stock exchanges and transaction reporting systems to make shares of Common Stock available for issuance pursuant to Awards. Common Stock related to Awards that are forfeited or terminated, expire unexercised, are settled in cash in lieu of Stock or in a manner such that all or some of the shares covered by an Award are not issued to a Participant, or are exchanged for Awards that do not involve Common Stock, shall immediately become available for Awards hereunder. The Committee may from time to time adopt and observe such procedures concerning the counting of shares against the Plan maximum as it may deem appropriate. 5. Administration. This Plan shall be administered by the Committee, which shall have full and exclusive power to interpret this Plan and to adopt such rules, regulations and guidelines for carrying out this Plan as it may deem necessary or proper, all of which powers shall be exercised in the best interests of the Company and in keeping with the objectives of this Plan. The Committee may, in its discretion, provide for the extension of the exercisability of an Award, accelerate the vesting or exercisability of an Award, eliminate or make less restrictive any restrictions contained in an Award, waive any restriction or other provision of this Plan or an Award or otherwise amend or modify an Award in any manner that is either (i) not adverse to the Participant holding such Award or (ii) consented to by such Participant. The Committee may correct any defect or supply any omission or reconcile any inconsistency in this Plan or in any Award in the manner and to the extent the Committee deems necessary or desirable to carry it into effect. Any decision of the Committee in the interpretation and administration of this Plan shall lie within its sole and absolute discretion and shall be final, conclusive and binding on all parties concerned. No member of the Committee or officer of the Company to whom it has delegated authority in accordance with the provisions of Paragraph 6 of this Plan shall be liable for anything done or omitted to be done by him or her, by any member of the Committee or by any officer of the Company in connection with the performance of any duties under this Plan, except for his or her own willful misconduct or as expressly provided by statute. The Committee shall establish the vesting schedule, if any, for each award. It is the intent of this Plan that any stock option grants will never be repriced or reissued. 6. Delegation of Authority. The Committee may delegate to the Chief Executive Officer and to other senior officers of the Company its duties under this Plan pursuant to such conditions or limitations as the Committee may establish. 7. Awards. The Committee shall determine the type or types of Awards to be made to each Participant under this Plan. Each Award made hereunder shall be embodied in an Award Agreement, which shall contain such terms, conditions, performance requirements and limitations as shall be determined by the Committee in its sole discretion and shall be signed by the Participant and by the Chief Executive Officer, the Chief Operating Officer, or any Vice President of the Company for and on behalf of the Company. Awards may consist of those listed in this Paragraph 7 and may be granted singly, in combination or in tandem. Awards may also be made in combination or in tandem with, in replacement of, or as alternatives to, grants or rights under this Plan or any other employee plan of the Company or any of its Subsidiaries, including the plan of any acquired entity. An Award may provide for the granting or issuance of additional, replacement or alternative Awards upon the occurrence of specified events, including the exercise of the original Award. Notwithstanding anything herein to the contrary, no Participant may be granted, during any calendar year, Awards consisting of stock options or stock appreciation rights on more than 500,000 shares of Common Stock. 66 (a) Stock Option. An Award may consist of a right to purchase a specified number of shares of Common Stock at a specified price that is not less than the greater of (i) the Fair Market Value of the Common Stock on the date of grant and (ii) the par value of the Common Stock on the date of grant. A stock option may be in the form of an incentive stock option ("ISO") which, in addition to being subject to applicable terms, conditions and limitations established by the Committee, complies with Section 422 of the Code. (b) Stock Appreciation Right. An Award may consist of a right to receive a payment, in cash or Common Stock, equal to the excess of the Fair Market Value or other specified valuation of a specified number of shares of Common Stock on the date the stock appreciation right ("SAR") is exercised over a specified strike price as set forth in the applicable Award Agreement. (c) Stock Award. An Award may consist of Common Stock or may be denominated in units of Common Stock. All or part of any stock award may be subject to conditions established by the Committee, and set forth in the Award Agreement, which may include, but are not limited to, continuous service with the Company and its Subsidiaries, achievement of specific business objectives, increases in specified indices, attaining specified growth rates and other comparable measurements of performance. Such Awards may be based on Fair Market Value or other specified valuations. The certificates evidencing shares of Common Stock issued in connection with a stock award shall contain appropriate legends and restrictions describing the terms and conditions of the restrictions applicable thereto. (d) Cash Award. An Award may be denominated in cash with the amount of the eventual payment subject to future service and such other restrictions and conditions as may be established by the Committee, and set forth in the Award Agreement, including, but not limited to, continuous service with the Company and its Subsidiaries, achievement of specific business objectives, increases in specified indices, attaining specified growth rates and other comparable measurements of performance. 8. Payment of Awards. (a) General. Payment of Awards may be made in the form of cash or Common Stock or combinations thereof and may include such restrictions as the Committee shall determine, including in the case of Common Stock, restrictions on transfer and forfeiture provisions. As used herein, "Restricted Stock" means Common Stock that is restricted or subject to forfeiture provisions. (b) Deferral. With the approval of the Committee, payments may be deferred, either in the form of installments or a future lump sum payment. The Committee may permit selected Participants to elect to defer payments of some or all types of Awards in accordance with procedures established by the Committee. Any deferred payment, whether elected by the Participant or specified by the Award Agreement or by the Committee, may be forfeited if and to the extent that the Award Agreement so provides. (c) Dividends and Interest. Dividends or dividend equivalent rights may be extended to and made part of any Award denominated in Common Stock or units of Common Stock, subject to such terms, conditions and restrictions as the Committee may establish. The Committee may also establish rules and procedures for the crediting of interest on deferred cash payments and dividend equivalents for deferred payment denominated in Common Stock or units of Common Stock. (d) Substitution of Awards. At the discretion of the Committee, a Participant may be offered an election to substitute an Award for another Award or Awards of the same or different type. 67 9. Stock Option Exercise. The price at which shares of Common Stock may be purchased under a stock option shall be paid in full at the time of exercise in cash or, if permitted by the Committee, by means of tendering Common Stock or surrendering another Award, including Restricted Stock, valued at Fair Market Value on the date of exercise, or any combination thereof. The Committee shall determine acceptable methods for tendering Common Stock or other Awards to exercise a stock option as it deems appropriate. If permitted by the Committee, payment may be made by successive exercises by the Participant. The Committee may provide for loans from the Company to permit the exercise or purchase of Awards and may provide for procedures to permit the exercise or purchase of Awards by use of the proceeds to be received from the sale of Common Stock issuable pursuant to an Award. Unless otherwise provided in the applicable Award Agreement, in the event shares of Restricted Stock are tendered as consideration for the exercise of a stock option, a number of the shares issued upon the exercise of the stock option, equal to the number of shares of Restricted Stock used as consideration therefor, shall be subject to the same restrictions as the Restricted Stock so submitted as well as any additional restrictions that may be imposed by the Committee. 10. Tax Withholding. The Company shall have the right to deduct applicable taxes from any Award payment and withhold, at the time of delivery or vesting of cash or shares of Common Stock under this Plan, an appropriate amount of cash or number of shares of Common Stock or a combination thereof for payment of taxes required by law or to take such other action as may be necessary in the opinion of the Company to satisfy all obligations for withholding of such taxes. The Committee may also permit withholding to be satisfied by the transfer to the Company of shares of Common Stock theretofore owned by the holder of the Award with respect to which withholding is required. If shares of Common Stock are used to satisfy tax withholding, such shares shall be valued based on the Fair Market Value when the tax withholding is required to be made. 11. Amendment, Modification, Suspension or Termination. The Board may amend, modify, suspend or terminate this Plan for the purpose of meeting or addressing any changes in legal requirements or for any other purpose permitted by law except that (i) no amendment or alteration that would impair the rights of any Participant under any Award previously granted to such Participant shall be made without such Participant's consent and (ii) no amendment or alteration shall be effective prior to approval by the Company's stockholders to the extent such approval is then required by applicable legal requirements. 12. Termination of Employment. Upon the termination of employment by a Participant, any unexercised, deferred or unpaid Awards shall be treated as provided in the specific Award Agreement evidencing the Award. In the event of such a termination, the Committee may, in its discretion, provide for the extension of the exercisability of an Award, accelerate the vesting or exercisability of an Award, eliminate or make less restrictive any restrictions contained in an Award, waive any restriction or other provision of this Plan or an Award or otherwise amend or modify the Award in any manner that is either (i) not adverse to such Participant or (ii) consented to by such Participant. 13. Assignability. Unless otherwise determined by the Committee and provided in the Award Agreement, no Award or any other benefit under this Plan constituting a derivative security within the meaning of Rule 16a-1(c) under the Exchange Act shall be assignable or otherwise transferable except by will or the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act, or the rules thereunder. The Committee may prescribe and include in applicable Award Agreements other restrictions on transfer. Any attempted assignment of an Award or any other benefit under this Plan in violation of this Paragraph 13 shall be null and void. 68 14. Adjustments. (a) The existence of outstanding Awards shall not affect in any manner the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the capital stock of the Company or its business or any merger or consolidation of the Company, or any issue of bonds, debentures, preferred or prior preference stock (whether or not such issue is prior to, on a parity with or junior to the Common Stock) or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding of any kind, whether or not of a character similar to that of the acts or proceedings enumerated above. (b) In the event of any subdivision or consolidation of outstanding shares of Common Stock or declaration of a dividend payable in shares of Common Stock or capital reorganization or reclassification or other transaction involving an increase or reduction in the number of outstanding shares of Common Stock, the Committee may adjust proportionally (i) the number of shares of Common Stock reserved under this Plan and covered by outstanding Awards denominated in Common Stock or units of Common Stock; (ii) the exercise or other price in respect of such Awards; and (iii)the appropriate Fair Market Value and other price determinations for such Awards. In the event of any consolidation or merger of the Company with another corporation or entity or the adoption by the Company of a plan of exchange affecting the Common Stock or any distribution to holders of Common Stock of securities or property (other than normal cash dividends or dividends payable in Common Stock), the Committee shall make such adjustments or other provisions as it may deem equitable, including adjustments to avoid fractional shares, to give proper effect to such event. In the event of a corporate merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation, the Committee shall be authorized to issue or assume stock options, regardless of whether in a transaction to which Section 424(a) of the Code applies, by means of substitution of new options for previously issued options or an assumption of previously issued options, or to make provision for the acceleration of the exercisability of, or lapse of restrictions with respect to, Awards and the termination of unexercised options in connection with such transaction. 15. Restrictions. No Common Stock or other form of payment shall be issued with respect to any Award unless the Company shall be satisfied based on the advice of its counsel that such issuance will be in compliance with applicable federal and state securities laws. Certificates evidencing shares of Common Stock delivered under this Plan may be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations and other requirements of the Securities and Exchange Commission, any securities exchange or transaction reporting system upon which the Common Stock is then listed and any applicable federal and state securities law. The Committee may cause a legend or legends to be placed upon any such certificates to make appropriate reference to such restrictions. 16. Unfunded Plan. Insofar as it provides for Awards of cash, Common Stock or rights thereto, this Plan shall be unfunded. Although bookkeeping accounts may be established with respect to Participants who are entitled to cash, Common Stock or rights thereto under this Plan, any such accounts shall be used merely as a bookkeeping convenience. The Company shall not be required to segregate any assets that may at any time be represented by cash, Common Stock or rights thereto, nor shall this Plan be construed as providing for such segregation, nor shall the Company nor the Board nor the Committee be deemed to be a trustee of any cash, Common Stock or rights thereto to be granted under this Plan. Any liability or obligation of the Company to any Participant with respect to a grant of cash, Common Stock or rights thereto under this Plan shall be based solely upon any contractual obligations that may be created by this Plan and any Award Agreement, and no such liability or obligation of the Company shall be deemed to be secured by any pledge or other encumbrance on any property of the Company. Neither the Company nor the Board nor the Committee shall be required to give any security or bond for the performance of any obligation that may be created by this Plan. 69 17. Governing Law. This Plan and all determinations made and actions taken pursuant hereto, to the extent not otherwise governed by mandatory provisions of the Code or the securities laws of the United States, shall be governed by and construed in accordance with the laws of the State of Delaware. 18. Effective Date of Plan. This amended and restated Plan shall be effective as of the date (the "Effective Date") it is approved by the Board of Directors of the Company. Notwithstanding the foregoing, the adoption of this Plan is expressly conditioned upon the approval by the holders of a majority of shares of Common Stock present, or represented, and entitled to vote at a meeting of the Company's stockholders held on or before December 31, 1998. If the stockholders of the Company should fail to approve this amended and restated Plan prior to such date, this amended and restated Plan shall revert to the provisions of the prior Plan and all grants of Awards hereunder in excess of the Plan limitations shall be null and void. 70 EX-10.16 3 1994 NONEMPLOYEE DIRECTOR STOCK OPTION PLAN Exhibit 10.16 EXHIBIT B AMENDED AND RESTATED 1994 NONEMPLOYEE DIRECTOR STOCK OPTION PLAN of CABOT OIL & GAS CORPORATION 1. Purpose of the Plan. This Nonemployee Director Stock Option Plan (the "Plan") is intended as an incentive to retain and attract persons of training, experience and ability to serve as independent directors on the Board of Directors of Cabot Oil & Corporation, a Delaware corporation (the "Company"), to encourage the sense of proprietorship of such persons and to stimulate the active interest of such persons in the development and financial success of the Company. It is further intended that the options granted pursuant to this Plan (the "Options") will be nonqualified options within the meaning of Section 83 of the Internal Revenue Code of 1986, as amended (the "Code"). 2. Stockholder Approval. All Options granted pursuant to this Plan are subject to, and may not be exercised before, the approval of this Plan by the affirmative vote of the holders of a majority of the outstanding shares of the Class A Common Stock, par value $.10 per share (the "Common Stock"), of the Company that are present, or represented, and entitled to vote at a meeting of the Company's stockholders. 3. Designation of Participants; Automatic Grant of Options. Each director of the Company who is not an employee of the Company or any Subsidiary (as hereinafter defined) of the Company (any such director being hereinafter referred to as a "Nonemployee Director") shall be granted Options as described hereunder. Each individual who becomes a Nonemployee Director after the Effective Date shall automatically be granted Options to purchase 10,000 shares of Common Stock (subject to adjustment as provided in Paragraph 10) on the date such person first becomes a Nonemployee Director. Furthermore, at each annual meeting of stockholders (other than when the director's status as such terminates at such meeting), each Nonemployee Director shall automatically be granted Options to purchase an additional 5,000 shares of Common Stock (subject to adjustment as provided in Paragraph 10) on such date. Notwithstanding the foregoing, in the case of any grant of Options made on a date subsequent to the Effective Date, such grant shall only be made if the number of shares subject to future grant under this Plan is sufficient to make all automatic grants required to be made pursuant to this Plan on such date of grant. As used herein, the term "Subsidiary" of the Company shall mean any corporation of which the Company directly or indirectly owns shares representing more than 50% of the voting power of all classes or series of capital stock of such corporation which have the right to vote generally on matters submitted to a vote of the stockholders of such corporation. 4. Option Agreement. Each Option granted hereunder shall be embodied in a written option agreement ("Option Agreement"), which shall be subject to the terms and conditions set forth herein and shall be signed by the Optionee and by the Chief Executive Officer, the Chief Operating Officer, or any Vice President of the Company for and on behalf of the Company. 5. Common Stock Reserved for the Plan. Subject to adjustment as provided in Paragraph 10 hereof, a total of 300,000 shares of Common Stock shall be reserved for issuance upon the exercise of Options granted pursuant to this Plan. The shares subject to the Plan shall consist of unissued shares or previously issued shares reacquired and held by the Company, or any parent or subsidiary of the Company, in its treasury. The Board of Directors and the appropriate officers of the Company shall from time to time take whatever actions are necessary to execute, acknowledge, file and deliver any documents required to be filed with or delivered to any governmental authority or any stock exchange or transaction reporting system on which shares of Common Stock are listed or quoted in order to make shares of Common Stock available for issuance to an Optionee (as hereinafter defined) 71 pursuant to this Plan. Common Stock subject to Options that are forfeited or terminated or expire unexercised in such a manner that all or some of the shares subject thereto are not issued to an Optionee shall immediately become available for the granting of Options. As used herein, the term "Optionee" shall mean any Nonemployee Director to whom Options are granted hereunder. 6. Option Price. (a) The purchase price of each share of Common Stock that is subject to an Option granted pursuant to this Plan shall be 100% of the Fair Market Value of such share of Common Stock on the date the Option is granted. (b) The Fair Market Value of a share of Common Stock on a particular date shall be deemed to be (i) if the shares of Common Stock are listed on a national securities exchange, the average of the highest and lowest sales price per share of Common Stock on the principal such national securities exchange on that date, or, if there shall have been no such sale so reported on that date, on the last preceding date on which such a sale was so reported, (ii) if the shares of Common Stock are not so listed but are quoted in the NASDAQ National Market System, the average of the highest and lowest sales price per share of Common Stock on the NASDAQ National Market System on that date, or, if there shall have been no such sale so reported on that date, on the last preceding date on which such a sale was so reported or (iii) if the Common Stock is not so listed or quoted, the average of the closing bid and asked price on that date, or, if there are no quotations available for such date, on the last preceding date on which such quotations shall be available, as reported by NASDAQ, or, if not reported by NASDAQ, by the National Quotation Bureau, Inc. 7. Option Period. Each Option granted pursuant to this Plan shall terminate and be of no force and effect with respect to any shares of Common Stock not purchased by the Optionee upon the earliest to occur of the following: (a) the expiration of five years following the date upon which the Option is granted; (b) the expiration of one year following the date upon which the Optionee ceases to be a Nonemployee Director by reason of death, disability or mandatory retirement; or (c) the expiration of three months following the date on which the Optionee ceases to be a Nonemployee Director for any reason other than death, disability or mandatory retirement. 8. Exercise of Options. (a) Options granted pursuant to this Plan shall be exercisable, on a cumulative basis, as follows: (i) with respect to 33 1/3% of the total number of shares of Common Stock initially subject to any Option, such Option shall be exercisable on the first anniversary of the date of grant; and (ii) with respect to the remaining shares of Common Stock subject to any Option, such Option shall be exercisable with respect to an additional 33 1/3% of the total number of shares initially subject thereto as of the second and third anniversaries of the date of the grant. (b) An Option may be exercised solely by the Optionee during his lifetime or after his death by the person or persons entitled thereto under his will or the laws of descent and distribution. (c) In the event that an Optionee ceases to serve as a Nonemployee Director for any reason other than death, disability or mandatory retirement, an Option granted to such Optionee may be exercised only to the extent such Option was exercisable at the time he ceased to serve in such capacity. (d) In the event that an Optionee ceases to serve as a Nonemployee Director by reason of death, disability or mandatory retirement, at a time when an Option granted hereunder is still in force and unexpired under the terms of Paragraph 7 hereof, each such unmatured Option shall be accelerated. Such acceleration shall be effective as of the date of death, disability or retirement, as appropriate, and each Option so accelerated shall be exercisable in full for so long as it is still in force and unexpired under the terms of Paragraph 7 hereof. 72 (e) The purchase price of the shares as to which an Option is exercised shall be paid in full at the time of the exercise. Such purchase price shall be payable in cash or by means of tendering theretofore owned Common Stock which has been held by the Optionee for more than six months, valued at Fair Market Value on the date of exercise, or any combination thereof. An Optionee may also exercise an Option by use of the proceeds to be received from the sale of Common Stock issuable pursuant to the Option. No holder of an Option shall be, or have any of the rights or privileges of, a stockholder of the Company in respect of any shares subject to any Option unless and until certificates evidencing such shares shall have been issued by the Company to such holder. 9. Assignability. No Option shall be assignable or otherwise transferable except by will or the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act, or the rules thereunder. Any attempted assignment of an Option in violation of this Paragraph 9 shall be null and void. 10. Adjustments. (a) The existence of outstanding Options shall not affect in any manner the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalization, reorganizations or other changes in the capital stock of the Company or its business or any merger or consolidation of the Company, or any issue of bonds, debentures, preferred or prior preference stock (whether or not such issue is prior to, on a parity with or junior to the Common Stock) or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding of any kind, whether or not of a character similar to that of the acts or proceedings enumerated above. (b) In the event of any subdivision or consolidation of outstanding shares of Common Stock or declaration of a dividend payable in shares of Common Stock or capital reorganization or reclassification or other transaction involving an increase or reduction in the number of outstanding shares of Common Stock, the Board of Directors may adjust proportionally (i) the number of shares of Common Stock reserved under these Options; and (ii) the exercise price of such Options. In the event of any consolidation or merger of the Company with another corporation or entity or the adoption by the Company of a plan of exchange affecting the Common Stock or any distribution to holders of Common Stock of securities or property (other than normal cash dividends or dividends payable in Common Stock), the Board of Directors shall make such adjustments or other provisions as it may deem equitable, including adjustments to avoid fractional shares, to give proper effect to such event. In the event of a corporate merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation, the Board of Directors shall be authorized to issue or assume stock options, regardless of whether in a transaction to which Section 424(a) of the Code applies, by means of substitution of new options for previously issued options or an assumption of previously issued options, or to make provision for the acceleration of the exercisability of, or lapse of restrictions with respect to, the termination of unexercised options in connection with such transaction. (c) An Option shall become fully exercisable upon a Change in Control (as hereinafter defined) of the Company. For purposes of this Plan, a "Change of Control" shall be conclusively deemed to have occurred if (and only if) any of the following events shall have occurred: (a) there shall have occurred an event required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item on any similar schedule or form) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not the Company is then subject to such reporting requirement; (b) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) shall have become the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding voting 73 securities without prior approval of at least two-thirds of the members of the Board of Directors in office immediately prior to such person's attaining such percentage interest; (c) the Company is a party to a merger, consolidation, sale of assets or other reorganization, or a proxy contest, as a consequence of which members of the Board of Directors in office immediately prior to such transaction or event constitute less than a majority of the Board of Directors thereafter or (d) during any period of two consecutiveyears, individuals who at the beginning of such period constituted the Board of Directors (including for this purpose any new director whose election or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board of Directors. 11. Purchase for Investment. Unless the Options and shares of Common Stock covered by this Plan have been registered under the Securities Act of 1933, as amended, each person exercising an Option under this Plan may be required by the Company to give a representation in writing in form and substance satisfactory to the Company to the effect that he is acquiring such shares for his own account for investment and not with a view to, or for sale in connection with, the distribution of such shares or any part thereof. 12. Taxes. The Company may make such provisions as it may deem appropriate for the withholding of any taxes that it determines is required in connection with any Options granted to any Optionee hereunder. 13. Amendments or Termination. The Board of Directors of the Company may amend, alter or discontinue this Plan, except that (a) no amendment or alteration that would impair the rights of any Optionee under any Option that he has been granted shall be made without his consent and (b) no amendment or alteration shall be effective prior to approval by the Company's stockholders to the extent such approval is then required. 14. Government Regulations. This Plan, and the granting and exercise of Options hereunder, and the obligation of the Company to sell and deliver shares of Common Stock under such Options, shall be subject to all applicable laws, rules and regulations, and to such approvals on the part of any governmental agencies or national securities exchanges or transaction reporting systems as may be required. 15. Governing Law. This Plan and all determinations made and actions taken pursuant hereto, to the extent not otherwise governed by mandatory provisions of the Code or the securities laws of the United States, shall be governed by and construed in accordance with the laws of the State of Delaware. 16. Effective Date of Plan. This amended and restated Plan shall be effective as of the date (the "Effective Date") it is approved by the Board of Directors of the Company. Notwithstanding the foregoing, the adoption of this amended and restated Plan is expressly conditioned upon the approval by the holders of a majority of shares of Common Stock present, or represented, and entitled to vote at a meeting of the Company's stockholders held on or before December 31, 1998. If the stockholders of the Company should fail so to approve this amended and restated Plan prior to such date, this amended and restated Plan shall revert to the provisions of the prior plan and all grants of options hereunder in excess of The Plan's limitations shall be null and void. 17. Miscellaneous. The granting of any Option shall not impose upon the Company, the Board of Directors of the Company or any other directors of the Company any obligation to nominate any Optionee for election as a director and the right of the stockholders of the Company to remove any person as a director of the Company shall not be diminished or affected by reason of the fact that an Option has been granted to such person. 74 EX-10.19 4 DEFERRED COMPENSATION PLAN Exhibit 10.19 CABOT OIL & GAS CORPORATION DEFERRED COMPENSATION PLAN WHEREAS, Cabot Oil & Gas Corporation (the "Company") desires to establish Cabot Oil & Gas Corporation Deferred Compensation Plan to provide supplemental retirement income benefits for a select group of management and highly compensated employees of the Company and certain of its subsidiary or related companies through deferrals of salary, bonus, Company contributions of matching amounts which cannot be made to the Company 401 (k) plan due to Internal Revenue Code limitations, and Company discretionary contributions effective as of June 1, 1998; and WHEREAS, the Company wants to allow such employees, upon their retirement from the Company, to defer receipt of the benefits hereunder in order to provide a regular stream of income during retirement; NOW, THEREFORE, effective as of June 1, 1998, the Plan is hereby adopted to read as follows: ARTICLE I TITLE AND DEFINITIONS I.1 Title. This Plan shall be known as Cabot Oil & Gas Corporation Deferred Compensation Plan. I.2 Definitions. Whenever the following words and phrases are used in this Plan, with the first letter capitalized, they shall have the meanings specified below. (a) "Account" or "Accounts" shall mean a Participant's Deferral Account and Company Contribution Account. (b) "Base Salary" shall mean a Participant's annual base salary, excluding bonus, incentive and all other remuneration for services rendered to Company and prior to reduction for any salary contributions to a plan established pursuant to Section 125 of the Code or qualified pursuant to Section 401(k) of the Code. (c) "Beneficiary" or "Beneficiaries" shall mean the person or persons, including a trustee, personal representative or other fiduciary, last designated in writing by a Participant in accordance with procedures established by the Committee to receive the benefits specified hereunder in the event of the Participant's death. No beneficiary designation shall become effective until it is filed with the Committee. Any designation shall be revocable at any time through a written instrument filed by the Participant with the Committee with or without the consent of the previous Beneficiary. However, no designation of a Beneficiary other than the Participant's spouse shall be valid unless consented to in writing by such spouse. If there is no such designation or if there is no surviving designated Beneficiary, then the Participant's surviving spouse shall be the Beneficiary. If there is no surviving spouse to receive any benefits payable in accordance with the preceding sentence, the duly appointed and current personal representative of the Participant's estate (which shall include either Participant's probate estate or living trust) shall be the Beneficiary. In any case where there is no such personal representative of the Participant's estate duly appointed and acting in that capacity within 90 days after the Participant's death (or such extended period as the Committee determines is reasonably necessary to allow such personal representative to be appointed, but not to exceed 180 days after the Participant's death), then Beneficiary shall mean the person or persons who can verify by affidavit or court order to 75 the satisfaction of the Committee that they are legally entitled to receive the benefits specified hereunder. In the event any amount is payable under the Plan to a minor, payment shall not be made to the minor, but instead be paid (a) to that person's living parent(s) to act as custodian, (b) if that person's parents are then divorced, and one parent is the sole custodial parent, to such custodial parent, or (c) if no parent of that person is then living, to a custodian selected by the Committee to hold the funds for the minor under the Uniform Transfers or Gifts to Minors Act in effect in the jurisdiction in which the minor resides. If no parent is living and the Committee decides not to select another custodian to hold the funds for the minor, then payment shall be made to the duly appointed and currently acting guardian of the estate for the minor or, if no guardian of the estate for the minor is duly appointed and currently acting within 60 days after the date the amount becomes payable, payment shall be deposited with the court having jurisdiction over the estate of the minor. Payment by Company pursuant to any unrevoked Beneficiary designation, or to the Participant's estate if no such designation exists, of all benefits owed hereunder shall terminate any and all liability of Company. (d) "Board of Directors" or "Board" shall mean the Board of Directors of Cabot Oil & Gas Corporation. (e) "Bonuses" shall mean the annual bonuses earned as of the last day of the Plan Year, provided a Participant is in the employ of Company on the last day of the Plan Year. (f) "Code" shall mean the Internal Revenue Code of 1986, as amended. (g) "Committee" shall mean the Committee appointed by the Board to administer the Plan in accordance with Article VII. (h) "Company" shall mean Cabot Oil & Gas Corporation and any successor corporations. Company shall include each corporation which is a member of a controlled group of corporations (within the meaning of Section 414(b) of the Code) of which Cabot Oil & Gas Corporation is a component member, if the Board provides that such corporation shall participate in the Plan. (i) "Company Contribution Account" shall mean the bookkeeping account maintained by the Company for each Participant that is credited with an amount equal to the applicable of the following: the Company Discretionary Contribution Amount, Matching Contributions, the Company SERP Contribution Amount, and earnings and losses pursuant to Section 4.2. (j) "Company Discretionary Contribution Amount" shall mean, if contributed by the Company for each Participant for a Plan Year, an additional discretionary amount allocated to a Participant under this Plan as determined by the Company. Such amount may differ from Participant to Participant both in amount, including no contribution, and as a percentage of Compensation. (k) "Company SERP Contribution Amount" shall mean the amount of the benefit provided the Participant under the terms of the supplemental employee retirement plan ("SERP") agreement between the Company and the Participant with relation to the Company's Pension Plan, provided that the Participant elects to defer such amount on a form provided by the Committee prior to the date of Participant's Retirement and the Company agrees to contribute such amount to the Company Contribution Account maintained for the Participant. (l) "Compensation" shall mean Base Salary and Bonuses that the Participant is entitled to receive for services rendered to the Company. (m) "Deferral Account" shall mean the bookkeeping account maintained by the Committee for each Participant that is credited with amounts equal to (1) the portion of the Participant's Compensation that he or she elects to defer and (2) earnings and losses pursuant to Section 4.1. 76 (n) "Disability" shall mean the Participant's inability to perform each and every duty of his or her occupation or position of employment due to illness or injury as determined in the sole and absolute discretion of the Committee. (o) "Distributable Amount" shall mean the vested balance in the Participant's Deferral Account and Company Contribution Account. (p) "Early Distribution" shall mean an election by a Participant in accordance with Section 6.2 to receive a withdrawal of amounts from his or her Deferral Account and Company Contribution Account prior to the time in which such Participant would otherwise be entitled to such amounts. (q) "Effective Date" shall mean June 1, 1998. (r) "Eligible Employee" shall mean members of the Company's executive management group. (s) "401 (k) Plan" shall mean the retirement plan maintained by the Company on the Effective Date that is intended to qualify under Sections 401 (a) and 401 (k) of the Code and any successor or replacement plan. (t) "Fund" or "Funds" shall mean one or more of the investment funds selected by the Committee pursuant to Section 3.2(b). (u) "Future Date Withdrawal" shall mean the distribution date elected by the Participant for an in-service withdrawal of all amounts of Compensation, vested Matching Contributions and vested Company Discretionary Contribution Amounts deferred in a given Plan Year, and earnings and losses attributable thereto, as set forth on the election form for such Plan Year. (v) "Hardship Distribution" shall mean a severe financial hardship to the Participant resulting from a sudden and unexpected illness or accident of the Participant or of his or her Dependent (as defined in Section 152(a) of the Code), loss of a Participant's property due to casualty or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. The circumstances that would constitute an unforeseeable emergency will depend upon the facts of each case, but in any case a Hardship Distribution may not be made to the extent that such hardship is or may be relieved (1) through reimbursement or compensation by insurance or otherwise, (2) liquidation of the Participant's assets, to the extent the liquidation of such assets would not itself cause severe financial hardship, or (3) by cessation of deferrals under this Plan. (w) "Initial Election Period" for an Eligible Employee shall mean the 30-day period prior to June 30, 1998, or the 30-day period following the time an employee shall be designated by the Company as an Eligible Employee. (x) "Interest" shall mean, for each Fund, an amount equal to the net rate of gain or loss on the assets of such Fund during each month. (y) "Investment Fund Subaccount" means one of the separate subaccounts into which a Participant's Deferral Account is divided pursuant to a Participant's election under Section 3.2(a). (z) "Matching Contribution" means, for a given Plan Year, 4% of Compensation minus the actual amount of matching contributions made to the Company's 401(k) plan by the Company provided, however, that in no event shall the Matching Contribution exceed the excess of the dollar limit imposed by Code Section 402(g) over the actual amount of matching contribution made to the 401 (k) Plan by the Company. (aa) "Participant" shall mean any Eligible Employee who becomes a Participant in this Plan in accordance with Section 2.1. 77 (bb) "Payment Date" shall mean the time as soon as practicable after (1) the first day of the month following the end of the calendar quarter in which the Participant's employment terminates for any reason or (2) the Future Date Withdrawal, if later. (cc) "Plan" shall mean Cabot Oil & Gas Corporation Deferred Compensation Plan set forth herein, now in effect, or as amended from time to time. (dd) "Plan Year" shall mean the initial period beginning on June 1, 1998, and ending on December 31, 1998, and thereafter the 12 consecutive month period beginning on each January 1 and ending on December 31. (ee) "Retirement" shall mean the termination of employment by the Participant at or after the attainment of age 55 with 10 years of active service with the Company or at or after attainment of age 65 with five years of active service with the Company. (ff) "Trust" shall mean Cabot Oil & Gas Corporation Deferred Compensation Plan Trust. ARTICLE II PARTICIPATION An Eligible Employee shall become a Participant in the Plan by filing election forms prescribed by the Committee. An Eligible Employee may elect to defer a portion of his or her Compensation in accordance with Section 3.1 of the Plan or of his or her Company SERP Contribution in accordance with Section 1.2(k). An Eligible Employee who completes the requirements of this paragraph shall commence participation in this Plan as of the first day of the month following receipt by the Company of the completed forms. ARTICLE III DEFERRAL ELECTIONS III.1 Elections to Defer Compensation. (a) Initial Election Period. Subject to the provisions of Article II, each Eligible Employee may elect to defer Base Salary and Bonus by filing with the Committee an election that conforms to the requirements of this Section 3.1, on a form provided by the Committee, no later than the last day of his or her Initial Election Period. (b) General Rule. The amount of Compensation which Employee may elect to defer is such Compensation earned on or after the Eligible Employee elects to defer in accordance with Sections 1.2(w) and 3.1(a) and shall be a flat dollar amount or percentage which shall not exceed 100% of the Eligible Employee's Base Salary and 100% of the Eligible Employee's Bonus, provided that the total amount deferred by a Participant shall be limited in any calendar year, if necessary, to satisfy Social Security tax (including Medicare), income tax and employee benefit plan withholding requirements as determined in the sole and absolute discretion of the Committee. The minimum contribution which may be made in any Plan Year by an Eligible Employee shall not be less than $5,000, provided such minimum contribution can be satisfied from either Base Salary and/or Bonuses. Notwithstanding the previous sentence, the minimum contribution for the first Plan Year shall be $2,500. (c) Duration of Compensation Deferral Election. With respect to an employee who is an Eligible Employee as of the Effective Date, such Eligible Employee's initial election to defer Base Salary and Bonuses must be filed on or before June 30, 1998, and is to be effective with respect to Base Salary and Bonuses received after such deferral election is processed. A Participant may increase, decrease or terminate a deferral election with respect to Base Salary or Bonus for any subsequent Plan Year by filing a new election before December 15, which election shall be effective on the first day of the next following Plan Year, provided such election shall apply to Bonuses payable on the last day of the next following Plan Year. Any subsequent election with respect to Base Salary and Bonus must be 78 filed prior to December 15 to be effective for the first pay period beginning in the next following Plan Year. In the case of an employee who becomes an Eligible Employee after the Effective Date, such Eligible Employee shall have 30 days from the date he or she has become an Eligible Employee to make an Initial Election with respect to Base Salary and Bonus. Such election shall be for the remainder of the Plan Year, in the event the Plan Year has commenced. (d) Elections other than Elections during the Initial Election Period. Subject to the limitations of Section 3.1 (b) above, any Eligible Employee who has terminated a prior Compensation deferral election may elect to again defer Compensation, by filing an election, on a form provided by the Committee, to defer Compensation as described in Sections 3.1 (b) and 3.1 (c) above. An election Compensation must be filed in a timely manner in accordance with Section 3.1(c). III.2 Investment Elections. (a) At the time of making the deferral elections described in Section 3.1, the Participant shall designate, on a form provided by the Committee, the types of Funds the Participant's Account will be deemed to be invested in for purposes of determining the amount of Interest to be credited to that account. In making the designation pursuant to this Section 3.2, the Participant may specify that all or any multiple of his or her Account be deemed to be invested in one or more of the types of Funds provided under the Plan as communicated from time to time by the Committee. Effective as of the end of any calendar month, a Participant may change the designation made under this Section 3.2 by filing an election, on a form provided by the Committee, at least five days prior to the end of such month. If a Participant fails to elect a type of fund under this Section 3.2, he or she shall be deemed to have elected the Money Market type of Fund. (b) Although the Participant may designate the type of investments, the Committee shall not be bound by such designation. The Committee, from time to time, in its sole discretion, may designate commercially available investments of each of the types communicated by the Committee to the Participant pursuant to Section 3.2(a) above to be the Funds. The interest rate of each such commercially available Fund shall be used to determine the amount of earnings or losses to be credited to Participant's Account under Article IV. ARTICLE IV DEFERRAL ACCOUNTS AND TRUST FUNDING IV.1 Deferral Accounts. The Committee shall establish and maintain a Deferral Account for each Participant under the Plan. Each Participant's Deferral Account shall be further divided into separate Investment Fund Subaccounts, each of which corresponds to a Fund elected by the Participant pursuant to Section 3.2(a). A Participant's Deferral Account shall be credited as follows: (a) On an annual basis during each Plan Year, the Committee shall credit the Investment Fund Subaccounts of the Participant's Deferral Account with an amount equal to Compensation deferred by the Participant during each pay period ending in that month in accordance with the Participant's election under Section 3.2(a); that is, the portion of the Participant's deferred Compensation that the Participant has elected to be deemed to be invested in a certain type of Fund shall be credited to the Investment Fund Subaccount corresponding to that Fund; and (b) As of the last day of each month, each Investment Fund Subaccount of a Participant's Deferral Account shall be credited with Interest in an amount equal to that determined by multiplying the balance credited to such Investment Fund Subaccount as of the last day of the preceding month plus contributions during the current month commencing on the date such contributions are credited to Investment Fund Subaccount by the Interest Rate for the corresponding Fund selected by the Company pursuant to Section 3.2(b); and 79 (c) In the event that a Participant elects for a given Plan Year's deferral of Compensation to have a Future Date Withdrawal, all amounts attributed to the deferral of Compensation for such Plan Year shall be accounted for in a manner which allows separate accounting for the deferral of Compensation and investment gains and loses associated with such Plan Year's deferral of Compensation. IV.2 Company Discretionary Contribution Account. The Committee shall establish and maintain a Company Contribution Account for each Participant under the Plan. Each Participant's Company Contribution Account shall be further divided into separate Investment Fund Subaccounts corresponding to the Fund elected by the Participant pursuant to Section 3.2(a). A Participant's Company Contribution Account shall be credited as follows: (a) On an annual basis during each Plan Year, the Committee shall credit the Investment Fund Subaccounts of the Participant's Company Contribution Account with an amount equal to the Company Discretionary Contribution Amount, if any, and Matching Contribution Amount, if any, applicable to that Participant that is the proportion of the Company Discretionary Contribution Amount, if any, and matching Contribution Amount, if any, which the Participant elected to be deemed to be invested in a certain type of Fund; and (b) As soon as practicable following the Retirement date of a Participant, the Committee shall credit the Investment Fund Subaccounts of the Participant's Company Contribution Account with an amount equal to the Company SERP Contribution Amount, if any, applicable to that Participant that is the proportion of the Company SERP Contribution Amount which the Participant elected to be deemed to be invested in a certain type of Fund; and (c) As of the last day of each month, each Investment Fund Subaccount of a Participant's Company Contribution Account shall be credited with Interest in an amount equal to that determined by multiplying the balance credited to such Investment Fund Subaccount as of the last day of the preceding month plus contributions during the current month commencing on the date such contributions are credited to the Investment Fund Subaccount by the interest rate for the Corresponding Fund selected by the Company pursuant to Section 3.2(b). IV.3 Trust Funding. The Company has created a Trust with BANKERS TRUST COMPANY, a New York Banking Corporation serving as initial trustee. The Company shall cause the Trust to be funded each year. The Company shall contribute to the Trust an amount equal to the amount deferred by each Participant for the Plan Year. The Company may also contribute such additional amounts as it shall deem necessary or appropriate. Although the principal of the Trust and any earnings thereon shall be held separate and apart from other funds of Company and, except as provided below, shall be used exclusively for the uses and purposes of Plan Participants and Beneficiaries as set forth therein, neither the Participants nor their Beneficiaries shall have any preferred claim on, or any beneficial ownership in, any assets of the Trust prior to the time such assets are paid to the Participants or Beneficiaries as benefits and all rights created under this Plan shall be unsecured contractual rights of Plan Participants and Beneficiaries against the Company. Any assets held in the Trust will be subject to the claims of Company's general creditors under federal and state law in the event of insolvency defined in the Trust. Except as provided above, assets of the Plan and Trust shall never inure to the benefit of the Company and the same shall be held for the exclusive purpose of providing benefits to Participants and their Beneficiaries and deferring reasonable expenses of administering the Plan and Trust. 80 ARTICLE V VESTING A Participant's Deferral Account and the Company SERP Contribution allocated to a Participant's Company Contribution Account shall be 100% vested at all times. The Matching Contributions allocated to a Participant's Company Contribution Account shall be vested in accordance with the vesting schedule contained in the 401(k) Plan. The Company shall determine the vesting schedule for Company Discretionary Contribution Amounts at the time each such contribution is made by the Company. ARTICLE VI DISTRIBUTIONS VI.1 Distribution of Deferred Compensation and Discretionary Company Contributions. (a) Distribution Without Future Date Withdrawal. (1) In the case of a Participant who terminates employment with the Company due to Disability or Retirement and has an Account balance of more than $25,000, the Distributable Amount shall be paid to the Participant (and, after his or her death, to his or her Beneficiary) in substantially equal quarterly installments over 15 years commencing on the Participant's Payment Date. An optional form of benefit may be elected by the Participant, on the form provided by Company, during his or her Initial Election Period from among the following: (i) A lump sum distribution beginning on the Participant's Payment Date, (ii) Substantially equal quarterly installments over five years beginning on the Participant's Payment Date, (iii)Substantially equal quarterly installments over ten years beginning on the Participant's Payment Date, (iv) Substantially equal quarterly installments over 20 years beginning on the Participant's Payment Date. A Participant may modify the form of benefit that he or she has previously elected, pursuant to this Section 6.1(a)(1), provided such modification occurs at least one year before the Participant terminates employment with Company. (2) In the case of a Participant who terminates employment with the Company other than due to Disability or Retirement, the Distributable Amount shall be paid to the Participant in a lump sum on the Participant's Payment Date. (3) In the case of a Participant who terminates employment with the Company for any reason and has an Account balance of $25,000 or less, the Distributable Amount shall be paid to the Participant (and, in the event of his or her death, to his or her Beneficiary) in a lump sum distribution on the Participant's Payment Date. The Participant's Account shall continue to be credited with earnings pursuant to Section 4.1 of the Plan until all amounts credited to Account under the Plan have been distributed. (b) Distribution With Future Date Withdrawal. In the case of a Participant who has elected a Future Date Withdrawal for a distribution while still in the employ of the Company, such Participant shall receive his or her Distributable Amount, but only with respect to those deferrals of Compensation, vested Matching Contributions and vested Company Discretionary Contributions and earnings on such deferrals of Compensation, Matching Contributions and Company Discretionary Contribution Amounts as shall have been elected by the Participant to be subject to the Future Date Withdrawal in accordance with Section 81 1.2(u) of the Plan. A Participant's Future Date Withdrawal with respect to amounts of Compensation, Matching Contributions and Company Discretionary Contribution Amounts deferred in a given Plan Year can be no earlier than two years from the last day of the Plan Year for which the deferrals of Compensation, Matching Contributions and Company Discretionary Contribution Amounts are made. A Participant may extend the Future Date Withdrawal for any Plan Year, provided such extension occurs at least one year before the Future Date Withdrawal and is for a period of not less than two years from the Future Date Withdrawal. The Participant shall have the right to twice modify any Future Date Withdrawal. In the event a Participant terminates employment with the Company prior to a Future Date Withdrawal, other than by reason of death, the portion of the Participant's Account associated with Future Date Withdrawals which have not occurred prior to such termination shall be distributed in a lump sum. (c) Death Benefit. In the case of a Participant who dies while employed by the Company, the Participant's Beneficiary shall receive his or her vested Account Balance in a lump sum. (d) Death After Benefit Commencement. In the event a Participant dies after the Participant has terminated from the employ of the Company and still has a balance in his or her Account, the balance shall continue to be paid to such Participant's Beneficiary as provided in Section 6.1(a) above. VI.2 Early Distributions. A Participant shall be permitted to elect an Early Distribution from his or her Account prior to the Payment Date, subject to the following restrictions: (a) The election to take an Early Distribution shall be made by filing a form provided by and filed with the Committee prior to the end of any calendar month. (b) The amount of the Early Distribution shall be an amount not to exceed 90% of his or her vested Account balance. (c) The amount described in subsection (b) above shall be paid in a single cash lump sum as soon as practicable after the end of the calendar month in which the Early Distribution election is made. (d) If a Participant receives an Early Distribution of 90% of his vested Account, the remaining balance of his or her Account shall be permanently forfeited and the Company shall have no obligation to the Participant or his or her Beneficiary with respect to such forfeited amount. (e) If a Participant receives an Early Distribution of less than 90% of his or her vested Account balance, the Participant will forfeit an amount equal to 10% of the Early Distribution and will be ineligible to participate in the Plan for the remainder of the Plan Year and the following Plan Year. VI.3 Hardship Distribution The committee may, pursuant to rules or policies from time to time adopted by it and applied in a consistent mannerr, accelerate the date of distribution to all or any portion of a Participant's Account balance because of a Financial Hardship. A distribution pursuant to this Section 6.3 of less than the Participant's entire interest in the Plan shall be made pro rata from his or her Investment Fund Subaccounts according to the balances in such subaccounts. Subject to the foregoing payment of any amount with respect to which a Participant has filed a request under this Section 6.3 shall be made as soon as practible after approval of such request by the Committee. Distributions made pursuant to this Section 6.3 shall be without penalty. VI.4 Inability to Locate Participant. In the event that the Committee is unable to locate a Participant or Beneficiary within two years following the required Payment Date, the amount allocated to the Participant's Deferral Account shall be forfeited. If, after such forfeiture, the Participant or Beneficiary later claims such benefit, such benefit shall be reinstated without interest or earnings. 82 ARTICLE VII ADMINISTRATION VII.1 Committee. A committee shall be appointed by, and serve at the pleasure of, the Board of Directors. The number of members comprising the Committee shall be determined by the Board which may from time to time vary the number of members. A member of the Committee may resign by delivering a written notice of resignation to the Board. The Board may remove any member by delivering a certified copy of its resolution of removal to such member. Vacancies in the membership of the Committee shall be filled promptly by the Board. VII.2 Committee Action. The Committee shall act at meetings by affirmative vote of a majority of the members of the Committee. Any action permitted to be taken at a meeting may be taken without a meeting if, prior to such action, a written consent to the action is signed by all members of the Committee and such written consent is filed with the minutes of the proceedings of the Committee. A member of the Committee shall not vote or act upon any matter which relates solely to himself or herself as a Participant. The Chairman or any other member or members of the Committee designated by the Chairman may execute any certificate or other written direction on behalf of the Committee. VII.3 Powers and Duties of the Committee. (a) The Committee, on behalf of the Participants and their Beneficiaries, shall enforce the Plan in accordance with its terms, shall be charged with the general administration of the Plan, and shall have all powers necessary to accomplish its purposes, including, but not by way of limitation, the following: (1) To select the Funds in accordance with Section 3.2(b) hereof; (2) To construe and interpret the terms and provisions of this Plan; (3) To compute and certify to the amount and kind of benefits payable to Participants and their Beneficiaries; (4) To maintain all records that may be necessary for the administration of the Plan; (5) To provide for the disclosure of all information and the filing or provision of all reports and statements to Participants, Beneficiaries or governmental agencies as shall be required by law; (6) To make and publish such rules for the regulation of the Plan and procedures for the administration of the Plan as are not inconsistent with the terms hereof; (7) To appoint a plan administrator or any other agent, and to delegate to them such powers and duties in connection with the administration of the Plan as the Committee may from time to time prescribe; and (8) To take all actions necessary for the administration of the Plan, including determining whether to hold or discontinue the Policies. VII.4 Construction and Interpretation. The Committee shall have full discretion to construe and interpret the terms and provisions of this Plan, which interpretations or construction shall be final and binding on all parties, including, but not limited to, the Company and any Participant or Beneficiary. The Committee shall administer such terms and provisions in a uniform and nondiscriminatory manner and in full accordance with any and all laws applicable to the Plan. VII.5 Information. To enable the Committee to perform its functions, the Company shall supply full and timely information to the Committee on all matters relating to the Compensation of all Participants, their death or other events which cause termination of their participation in this Plan, and such other pertinent facts as the Committee may require. VII.6 Compensation, Expenses and Indemnity. (a) The members of the Committee shall serve without compensation for their services hereunder. (b) The Committee is authorized, at the expense of the Company, to employ such legal counsel as it may deem advisable to assist in the performance of its duties hereunder. Expenses and fees in connection with the administration shall be paid by the Company. 83 (c) To the extent permitted by applicable state law, the Company shall indemnify and hold harmless the Committee and each member thereof, the Board of Directors and any delegate of the Committee who is an employee of the Company against any and all expenses, liabilities and claims, including legal fees to defend against such liabilities and claims arising out of their discharge in good faith of responsibilities under or incident to the Plan, other than expenses and liabilities arising out of willful misconduct. This indemnity shall not preclude such further indemnities as may be available under insurance purchased by the Company or provided by the Company under any bylaw, agreement or otherwise, as such indemnities are permitted under state law. VII.7 Quarterly Statements. Under procedures established by the Committee, a Participant shall receive a statement with respect to such Participant's Accounts on a quarterly basis as of each March 31, June 30, September 30 and December 31. VII.8 Disputes. (a) Claim. A person who believes that he or she is being denied a benefit to which he or she is entitled under this Plan (hereinafter referred to as "Claimant") must file a written request for such benefit with the Company, setting forth his or her claim. The request must be addressed to the President of the Company at its then principal place of business. (b) Claim Decision. Upon receipt of a claim, the Company shall advise the Claimant that a reply will be forthcoming within 90 days and shall, in fact, deliver such reply within such period. The Company may, however, extend the reply period for an additional 90 days for special circumstances. If the claim is denied in whole or in part, the Company shall inform the Claimant in writing, using language calculated to be understood by the Claimant, setting forth: (1) the specified reason or reasons for such denial; (2) the specific reference to pertinent provisions of this Plan on which such denial is based; (3) a description of any additional material or information necessary for the Claimant to perfect his or her claim and an explanation of why such material or such information is necessary; (4) appropriate information as to the steps to be taken if the Claimant wishes to submit the claim for review; and (5) the time limits for requesting a review under subsection (c). (c) Request For Review. Within 60 days after the receipt by the Claimant of the written opinion described above, the Claimant may request in writing that the Committee review the determination of the Company. Such request must be addressed to the Secretary of the Company, at its then principal place of business. The Claimant or his or her duly authorized representative may, but need not, review the pertinent documents and submit issues and comments in writing for consideration by the Committee. If the Claimant does not request a review within such 60 day period, he or she shall be barred and estopped from challenging the Company's determination. (d) Review of Decision. Within 60 days after the Committee's receipt of a request for review, after considering all materials presented by the Claimant, the Committee will inform the Claimant in writing, in a manner calculated to be understood by the Claimant, the decision setting forth the specific reasons for the decision containing specific references to the pertinent provisions of this Plan on which the decision is based. If special circumstances require that the 60 day time period be extended, the Committee will so notify the Claimant and will render the decision as soon as possible, but no later than 120 days after receipt of the request for review. 84 ARTICLE VIII MISCELLANEOUS VIII.1 Unsecured General Creditor. Participants and their Beneficiaries, heirs, successors, and assigns shall have no legal or equitable rights, claims, or interest in any specific property or assets of the Company. No assets of the Company shall be held in any way as collateral security for the fulfilling of the obligations of the Company under this Plan. Any and all of the Company's assets shall be, and remain, the general unpledged, unrestricted assets of the Company. The Company's obligation under the Plan shall be merely an unfunded and unsecured promise of the Company to pay money in the future, and the rights of the Participants and Beneficiaries shall be no greater than those of unsecured general creditors. It is the intention of the Company that this Plan be unfunded for purposes of the Code and for purposes of Title 1 of ERISA. VIII.2 Restriction Against Assignment. The Company shall pay all amounts payable hereunder only to the person or persons designated by the Plan and not to any other person or corporation. No part of a Participant's Accounts shall be liable for the debts, contracts, or engagements of any Participant, his or her Beneficiary, or successors in interest, nor shall a Participant's Accounts be subject to execution by levy, attachment, or garnishment or by any other legal or equitable proceeding, nor shall any such person have any right to alienate, anticipate, sell, transfer, commute, pledge, encumber, or assign any benefits or payments hereunder in any manner whatsoever. If any Participant, Beneficiary or successor in interest is adjudicated bankrupt or purports to anticipate, alienate, sell, transfer, commute, assign, pledge, encumber or charge any distribution or payment from the Plan, voluntarily or involuntarily, the Committee, in its discretion, may cancel such distribution or payment (or any part thereof) to or for the benefit of such Participant, Beneficiary or successor in interest in such manner as the Committee shall direct. VIII.3 Withholding. There shall be deducted from each payment made under the Plan or any other Compensation payable to the Participant (or Beneficiary) all taxes which are required to be withheld by the Company in respect to such payment or this Plan. The Company shall have the right to reduce any payment (or compensation) by the amount of cash sufficient to provide the amount of said taxes. VIII.4 Amendment, Modification, Suspension or Termination. The Committee may amend, modify, suspend or terminate the Plan in whole or in part, except that no amendment, modification, suspension or termination shall have any retroactive effect to reduce any amounts allocated to a Participant's Accounts. In the event that this Plan is terminated, the amounts allocated to a Participant's Accounts shall be distributed to the Participant or, in the event of his or her death, his or her Beneficiary in a lump sum within 30 days following the date of termination. VIII.5 Governing Law. This Plan shall be construed, governed and administered in accordance with the laws of the State of Delaware. VIII.6 Receipt or Release. Any payment to a Participant or the Participant's Beneficiary in accordance with the provisions of the Plan shall, to the extent thereof, be in full satisfaction of all claims under the Plan against the Committee and the Company. The Committee may require such Participant or Beneficiary, as a condition precedent to such payment, to execute a receipt and release to such effect. VIII.7 Payments on Behalf of Persons Under Incapacity. In the event that any amount becomes payable under the Plan to a person who, in the sole judgment of the Committee, is considered by reason of physical or mental condition to be unable to give a valid receipt therefore, the Committee may direct that such payment be made to any person found by the Committee, in its sole judgment, to have assumed the care of such person. Any payment made pursuant to such determination shall constitute a full release and discharge of the Committee and the Company. 85 VIII.8 Limitation of Rights and Employment Relationship. Neither the establishment of the Plan and Trust nor any modification thereof, nor the creating of any fund or account, nor the payment of any benefits shall be construed as giving to any Participant or other person any legal or equitable right against the Company or the trustee of the Trust except as provided in the Plan and Trust; and in no event shall the terms of employment of any Employee or Participant be modified or in any way be affected by the provisions of the Plan and Trust. VIII.9 Headings. Headings and subheadings in this Plan are inserted for convenience of reference only and are not to be considered in the construction of the provisions hereof. IN WITNESS WHEREOF, the Company has caused this document to be executed by its duly authorized officer on this _____ day of __________, 1999. By _______________________________________ 86 CABOT OIL & GAS CORPORATION DEFERRED COMPENSATION PLAN TABLE OF CONTENTS Page ARTICLE I TITLE AND DEFINITIONS......................................... 1 1.1 Title......................................................... 1 1.2 Definitions................................................... 1 ARTICLE II PARTICIPATION................................................. 5 ARTICLE III DEFERRAL ELECTIONS............................................ 5 3.1 Elections to Defer Compensation............................... 5 3.2 Investment Elections.......................................... 6 ARTICLE IV DEFERRAL ACCOUNTS AND TRUST FUNDING........................... 7 4.1 Deferral Accounts............................................. 7 4.2 Company Discretionary Contribution Account.................... 8 4.3 Trust Funding................................................. 8 ARTICLE V VESTING....................................................... 9 ARTICLE VI DISTRIBUTIONS................................................. 9 6.1 Distribution of Deferred Compensation and Discretionary Company Contributions........................ 9 6.2 Early Distributions........................................... 11 6.3 Inability to Locate Participant............................... 11 ARTICLE VII ADMINISTRATION................................................ 12 7.1 Committee..................................................... 12 7.2 Committee Action.............................................. 12 7.3 Powers and Duties of the Committee............................ 12 7.4 Construction and Interpretation............................... 13 7.5 Information................................................... 13 7.6 Compensation, Expenses and Indemnity.......................... 13 7.7 Quarterly Statements.......................................... 14 7.8 Disputes...................................................... 14 ARTICLE VIII MISCELLANEOUS................................................. 15 8.1 Unsecured General Creditor.................................... 15 8.2 Restriction Against Assignment................................ 15 8.3 Withholding................................................... 16 8.4 Amendment, Modification, Suspension or Termination............ 16 8.5 Governing Law................................................. 16 8.6 Receipt or Release............................................ 16 8.7 Payments on Behalf of Persons Under Incapacity................ 16 8.8 Limitation of Rights and Employment Relationship.............. 16 8.9 Headings...................................................... 17 87 EX-10.20 5 TRUST AGREEMENT Exhibit 10.20 TRUST AGREEMENT (this "Trust Agreement") made this ______ day of August, 1998, by and between Cabot Oil & Gas Corporation, a Delaware corporation (the "Company" or "Grantor"), and BANKERS TRUST COMPANY, a New York banking corporation (the "Trustee"). W I T N E S S E T H: WHEREAS, the Company has adopted the nonqualified deferred compensation plan(s) listed in Appendix A (the "Plan(s)"); WHEREAS, the Company has incurred or expects to incur liability under the terms of the Plan(s) with respect to the Participants; WHEREAS, the Company desires to establish a trust (hereinafter called the "Trust") and, in its discretion, to contribute to the Trust assets that shall be held therein, subject to the claims of the Company's creditors in the event the Company is Insolvent, to provide an alternative source of funds to assist the Company in meeting its liabilities under the Plan(s); WHEREAS, the Company desires to direct the investment of the Trust assets; and WHEREAS, Bankers Trust Company is willing to act as Trustee of the Trust upon all of the terms and conditions hereinafter set forth. NOW, THEREFORE, the Company and the Trustee declare and agree that the Trustee will receive, hold and administer all sums of money and such other property acceptable to the Trustee as shall from time to time be contributed, paid or delivered to it hereunder, IN TRUST, upon all of the following terms and conditions: 1. Establishment of Trust. (a) The Company hereby deposits with the Trustee the property listed on Schedule A attached hereto, and such additional deposits of cash or other property acceptable to the Trustee, which shall become the principal of the Trust, to be held, administered and disposed of by the Trustee as provided in this Trust Agreement. All such cash and other property, all investments and reinvestments made therewith and the income and proceeds thereof, less the payments or other distributions which, at the time of reference, shall have been made by the Trustee, are referred to herein as the "Trust" or "Fund". (b) The Trust hereby established shall be irrevocable. (c) The Trust is intended to be a grantor trust within the meaning of subpart E, part I, subchapter J, chapter 1, subtitle A of the Code of which the Company is the grantor. The Company acknowledges that determination of the status of the Trust as a grantor trust has been made by the Company and Bankers Trust Company assumes no responsibility in this regard. The Company represents and covenants to the Trustee that at all times during the continuation of the Trust: the Trust shall constitute an unfunded arrangement and the establishment of this Trust shall not affect the status of any Plan as an unfunded plan maintained for the purpose of providing deferred compensation for a select group of management or highly compensated employees and/or as an excess benefit plan for purposes of Title I of ERISA; if any interests in the Plan(s) are deemed to be "securities," within the meaning of the Securities Act, each offering by the Company of any such interests either has been or will be registered under the Securities Act or falls or will fall within an available exemption from the registration requirements of such Act, and complies or will comply with any applicable state securities laws; and the Trust is not required to register as an investment company under the Investment Company Act of 1940, as amended. 88 (d) Unless and until withdrawn from trust as provided herein, the principal of the Trust, and any earnings thereon, shall be held separate and apart from other funds of the Company (or any other grantor trust established by the Company) and shall be used exclusively for the uses and purposes of Participants and general creditors of the Company as herein set forth. Participants shall have no preferred claim on, or any beneficial ownership interest in, any assets of the Trust. Any rights created under a Plan and this Trust Agreement shall be unsecured contractual rights of Participants against the Company, and, subject to the other terms and conditions of this Trust Agreement, to the extent that the Company fails to pay a Participant benefits to which such Participant is entitled under a Plan, such Participant shall be entitled to receive such deficiency from the available assets of the Trust, but not in excess of the amount required by the Payment Schedule to be paid to such Participant. Any claim of a Participant to receive benefits under a Plan in addition to the payments set forth in the Payment Schedule for such Participant shall be solely against the Company and not against the Trust or the Trustee. Any assets held by the Trust will be subject to the claims of the general creditors of the Company under Federal and state law in the event the Company becomes Insolvent. (e) The Trustee shall be responsible only for contributions actually received by it. The amount and timing of each or any contribution shall be determined in the sole discretion of the Company. The Company may undertake under the terms of a Plan or a related agreement to which the Trustee is not a party to make contributions at specific intervals or on the occurrence of a specific event. If the Company fails to make any such contribution, in whole or in part, the Company shall be responsible for notifying affected Participants. The Trustee shall have no obligation to police the Company's compliance therewith or to notify Participants thereof. The Trustee shall have no duty or responsibility to any Person to bring any proceeding or take any other action to compel any contributions by the Company, except to add such contributions to the Trust for the account of the designated Plans if and when received by the Trustee. (f) The Trustee shall maintain a separate account, and such sub-accounts as the Company shall deem advisable, to reflect the Equitable Share of each Plan, or part thereof, in the Trust. The Company shall provide the Trustee with sufficient information at the time of each contribution to or distribution from the Trust in order that the Trustee may determine such Equitable Shares. 2. Payments to Participants. (a) The Company shall be solely responsible for keeping, and providing to the Recordkeeper, accurate books and records with respect to the employees of the Company, their compensation and their and their beneficiaries' rights and interests in the Trust pursuant to the Plan(s). As soon as practicable after the establishment of this Trust and the addition of any nonqualified deferred compensation plan to Appendix A, or the amendment of any Plan, the Company shall provide the Recordkeeper with certified copies of such Plans and/or amendments, and all related documents. The Trustee shall not be required to maintain any separate records or accounts with respect to any Participant, and any records or accounts required to be maintained pursuant to the terms of any Plan shall be the responsibility of the Company or Recordkeeper. (b) As soon as practicable after the establishment of this Trust, the Company shall deliver a Payment Schedule to the Trustee. The Company shall regularly revise or update the Payment Schedule, as required. Except as otherwise provided in Section 3, upon receipt from the Company of such Payment Schedule, which shall include the amount of Federal, state and local tax required to be withheld, the Trustee shall make payments at the times and in the manner and form specified in such Payment Schedule to Participants and to the Company with respect to any taxes withheld from such payments in accordance with the Company's instructions, all to the extent funds are available in the Trust with respect to the applicable Plan(s). The Trustee shall not make any payments to Participants from the Trust other than as required by the Payment Schedule. 89 (c) The Company may make payment of benefits directly to Participants as they become due under the terms of the Plan(s). In such event, the Company shall also provide for the reporting and withholding of any Federal, state or local taxes that may be required to be withheld with respect to such benefit payments. The Company shall notify the Trustee of its decision to pay such benefits directly prior to the time amounts are payable to Participants, and any such notice received by the Trustee shall constitute an amendment of the affected Payment Schedule. (d) If the principal of the Trust, and any earnings thereon, allocated to a Plan are not sufficient to make payments of all benefits then payable as of a payment date in accordance with the Payment Schedule, the Trustee shall allocate the available assets pro rata among the payees and shall notify the Company of such insufficiency. The Company shall make the balance of each such payment to affected Participants in accordance with the Payment Schedule. (e) The Company shall have sole responsibility for the payment of all withholding taxes to, and the filing of all required tax returns with, the appropriate taxing authority and shall furnish each Participant with the appropriate tax information form evidencing such payment and the amount thereof. The Company shall provide the Trustee with a schedule of all benefits that have been paid by the Company directly to Participants and a schedule of all tax withholding payments made by it to the taxing authorities within fifteen (15) days after the end of the month in which such payments have been made. (f) The entitlement of a Participant to benefits under the Plan(s) shall be determined by the Company and any claim for such benefits shall be considered and reviewed by the Company or its designee under the procedures set forth in the applicable Plan. The Trustee shall have no responsibility with regard to administration of the Plan(s). Without limiting the generality of the foregoing, the Trustee shall have no responsibility should the Trust, or any Plan's interest in the Trust, have insufficient assets from which to make any distribution called for under any Payment Schedule or Plan, the Trustee shall have no responsibility to interpret the provisions of the Plan(s), and the Trustee shall have no responsibility for determining whether any Participant has become entitled to any distribution under any Plan, or the amount thereof, and the Trustee shall be entitled to rely solely upon the accuracy, timeliness and completeness of the latest Payment Schedule delivered to it by the Company. (g) The Trustee shall notify the Company periodically of any returned or undeliverable payments to Participants. Any payments remaining unclaimed for [six (6)] months after such notice has been given to the Company shall be returned to Trust and allocated to the account of the Plan(s) originally debited. (h) Anything in this Trust Agreement to the contrary notwithstanding, payments by the Trustee to Participants under a Plan shall be allocated to that Plan's Equitable Share. Unless and until all of the liabilities of a Plan to its Participants have been satisfied, the Equitable Share of one Plan shall not be used to satisfy the liabilities under any other Plan. 3. Trustee Responsibility Regarding Payments to Trust Beneficiary When Company is Insolvent. (a) At all times during the continuance of this Trust, as provided in Section 1(d) hereof, the principal and income of the Trust shall be subject to claims of general creditors of the Company under Federal and state law. (b) The Trustee shall cease payment of benefits to Participants if the Company is Insolvent, as set forth below. (1) The Board of Directors and the Chief Executive Officer of the Company shall have the duty to inform the Trustee in writing if the Company is Insolvent. If a person claiming to be a creditor of the Company alleges in writing to the Trustee, or the Trustee has actual knowledge, or the Trustee otherwise receives, in 90 accordance with paragraph (f) of Section 15, written notification, that the Company has become or may be Insolvent, the Trustee shall determine whether the Company is Insolvent for purposes of this Trust Agreement by requesting confirmation that the Company is not Insolvent (a "Section 3(b)(1) Confirmation") from the Board of Directors, acting through its Chairman, and the Chief Executive Officer of the Company. The Trustee shall, without further inquiry of any Person, conclusively rely on such confirmation for all purposes of this Trust Agreement, and, pending such determination, the Trustee shall discontinue payment of benefits to Participants. (2) Unless the Trustee, acting through the Trustee's officer to whom notices hereunder are to be directed as provided in Section 15(f), has actual knowledge that the Company is or may be Insolvent, or has received written notification, in accordance with paragraph (f) of Section 15, from the Company or a Person claiming to be a creditor of the Company alleging that the Company is Insolvent, the Trustee shall have no duty to the Company or the Company's creditors to inquire whether the Company is Insolvent. (3) If the Trustee does not receive a Section 3(b)(1) Confirmation, the Trustee shall discontinue payments to Participants and shall hold the assets of the Trust for the benefit of the Company's general creditors until the Trustee either receives a court order directing the disposition of the Trust, or the Chairman of the Board of Directors and the Chief Executive Officer of the Company deliver a written notice to the Trustee confirming that the Company is no longer Insolvent (a "Section 3(b)(3) Confirmation"); provided, however, in no event shall the provisions of Sections 10 and 11 providing for the payment of the Trust's expenses and taxes be suspended. (4) Nothing in this Trust Agreement is intended to and shall not in any way diminish any rights of Participants to pursue their rights as general creditors of the Company with respect to benefits due under the Plan(s) or otherwise. (5) The Trustee shall resume the payment of benefits to Participants in accordance with Section 2 only after the Trustee has received a Section 3(b)(1) or a Section 3(b)(3) Confirmation. (c) Provided that there are sufficient assets, if the Trustee discontinues the payment of benefits from the Trust and subsequently resumes such payments pursuant to Section 3(b), the first payment following such discontinuance shall include the aggregate amount of all payments due to Participants under the terms of the Plan(s) for the period of such discontinuance, less the aggregate amount of any payments certified by the Company to the Trustee to have been made to such Participants by the Company in lieu of the payments provided for hereunder during any such period of discontinuance. 4. Payments to Company. Except as provided in Sections 3, 10 and 11, the Company shall have no right or power to direct the Trustee to return to the Company or to divert to others, any of the Trust assets before all payment of benefits have been made to Participants pursuant to the terms of the Plan(s), as certified to the Trustee by the Company in writing, and all obligations owed to the Trustee under Section 10, and all taxes under Section 11, have been fully satisfied or otherwise provided for. If a Plan terminates prior to the termination of this Trust, any excess assets after the satisfaction of all liabilities thereunder and hereunder, shall be allocated among the remaining Plans on Schedule A in such manner, pro rata or otherwise, as the Company shall direct. 91 5. Investment Authority. (a) Discretionary authority for the management and control of the assets of the Trust may be retained, allocated or delegated, as the case may be, for one or more purposes, to and among the Asset Managers by the Company in its absolute discretion. The terms and conditions of appointment, authority and retention of any Asset Manager shall be the sole responsibility of the Company. Any investment policy, and any related guidelines, established by the Company from time to time, shall be communicated to the affected Asset Manager and monitored by the Company. The assets of the Trust shall be invested and reinvested, without distinction between principal and income, at such time or times in such investments pursuant to such investment strategies or courses of action and in such shares and proportions, as each Asset Manager, in its sole discretion, shall deem advisable, subject to such policies and guidelines, if any. The initial Asset Manager shall be the Company and all of the assets of the Trust shall be under its exclusive control and management until further written direction to the Trustee. (b) The Company shall promptly notify the Trustee in writing of the appointment or removal of an Asset Manager and shall specify the portion of the Trust to be managed by such Asset Manager. Each Asset Manager shall have sole and complete investment responsibility for the assets of the Trust that are subject to its discretionary authority or control and the Trustee shall receive, hold and transfer assets purchased or sold by the Asset Manager in accordance with the directions of such Asset Manager. The Trustee shall be under no duty or obligation to review or to question any direction of any Asset Manager, or to review the securities or any other property held in any Directed Fund with respect to prudence, proper diversification or compliance with any limitation on an Asset Manager's authority under this Trust Agreement or the terms of a Plan, any investment policies and guidelines, or any agreement entered into between the Company and the Asset Manager or imposed by applicable law, or to make any suggestions or recommendations to any Asset Manager or the Company with respect to the retention or investment of any Directed Fund. The Trustee shall have no authority to take any action or to refrain from taking any action with respect to any asset of a Directed Fund unless and until it is directed to do so by the Asset Manager of such Directed Fund or the Company. (c) The Trustee will have no responsibility for any asset allocated to a Directed Fund upon the resignation or removal of an Asset Manager unless and until the Trustee has been notified in writing by the Company that the Asset Manager's authority will be terminated or relinquished, and the Trustee has agreed in writing to become an Asset Manager or that such assets are to be integrated with a Discretionary Fund, as the case may be. In no event shall the Trustee be liable for any losses to the Trust resulting from the disposition of any investment made for a Directed Fund or for the retention of any illiquid or unmarketable investment or for the holding of any other asset acquired therefor if the Trustee is unable to dispose of such investment because of any securities laws restrictions or if an orderly liquidation of such investment is difficult under prevailing conditions, or for failure to comply with any investment or diversification limitations imposed by the Company, or for any other violation of the terms of this Trust Agreement, any Plan or applicable law or laws, as a result of the addition of such assets to the Discretionary Fund. (d) No person dealing with the Trustee or an Asset Manager hereunder shall be under any obligation to see to the proper application of any money paid or property delivered to the Trustee or the Asset Manager, or to inquire into the authority of the Trustee or the Asset Manager as to any transaction, or the validity, expediency or propriety thereof. 6. Powers of the Asset Managers. (a) Without in any way limiting the powers and discretions conferred upon the Asset Managers by the other provisions of this Trust Agreement or by law, each Asset Manager shall be vested with the following powers and discretions, and, upon the directions of the Asset Manager, the 92 Trustee shall make, execute, acknowledge and deliver any and all documents of transfer and conveyance and any and all other instruments that may be necessary or appropriate to enable such Asset Manager to carry out such powers and discretions: (1) to invest and reinvest in any property, real, personal or mixed, wherever situated and whether or not productive of income or consisting of wasting assets, including, without limitation, common and preferred stocks, bonds, notes, debentures (including convertible stocks and securities but not including any stock or other security (or right to acquire such stock or other security) of the Company (other than a de minimis amount held in commingled investment vehicles in which an Asset Manager invests)), leaseholds, mortgages, certificates of deposit or demand or time deposits (including any such deposits with the Trustee), securities of investment companies, registered or unregistered (notwithstanding that the Asset Manager, or an affiliate of the Asset Manager, acts as investment adviser, custodian, transfer agent, registrar, sponsor, distributor or manager or provides, for compensation, other services to the investment company), interests in partnerships and trusts, insurance contracts, and oil, mineral or gas properties, royalties, interests or rights, without being limited to the classes of property in which trustees are authorized to invest by any applicable law or any rule or court of any state and without regard to the proportion any such property may bear to the entire amount of the Trust assets; (2) to retain any property at any time received by the Trust; (3) to purchase, sell, exchange, convey, transfer or otherwise dispose of any property by private contract or at public auction; (4) to grant and exercise options for the purchase or exchange of property held by it; (5) to enter into contracts or to make commitments, either alone or in company with others, to sell or acquire property; (6) to purchase, sell, write or issue puts, calls or other options, covered or uncovered, to enter into financial futures contracts, forward placement contracts, standby contracts and similar arrangements commonly referred to as "derivatives", and in connection therewith, to deposit, hold (or direct the Trustee to deposit or hold) or pledge assets of the Trust; (7) to exercise all voting or other rights (but subject to the suspension of any voting rights as a result of any broker loan or similar agreement); to give general or special proxies or powers of attorney with or without power of substitution; to exercise any conversion privileges, subscription rights or other options and to make any payments incidental thereto; to participate in any plan of reorganization, consolidation, merger, combination, liquidation or other similar plan relating to property that is subject to its management and control and to consent to or oppose any such plan or any action thereunder or any contract, lease, mortgage, purchase, sale or other action by any person, and to delegate discretionary powers and to pay any assessments or charges in connection therewith; (8) to manage, administer, operate, insure, repair, improve, develop, preserve, mortgage, lease or otherwise deal with, for any period, any real property or any oil, mineral or gas properties, royalties, interest, or rights directly or through any corporation, either alone or by joining with others, using Trust assets for any such purposes, to modify, extend, renew, waive or otherwise adjust any provision of any such mortgage or lease and to make provision for amortization of the investment in or depreciation of the value of such property; and (9) to acquire the remaining undivided interest of any Affiliate Trust created by an Affiliate pursuant to Section 18 without notice to or consent of any other Person. (b) In addition, the Trustee is hereby authorized: (1) to register any securities held in the Trust or to take title to any property in its own name or in the name of a nominee or nominees, with or without the addition of words indicating that such securities or other property are held as trustee, and to hold any securities in bearer form, and to combine certificates representing such securities with certificates of the same issue held by the Trustee in other representative capacities or as agent for customers, or to deposit or to arrange for the deposit of such securities in any qualified central depository, domestic or foreign, even though, when so deposited, such securities may be merged and held in bulk in the name of the nominee of such depository with other securities deposited therein by other depositors, or to deposit or arrange for the deposit of any securities issued by the United States Government, or any agency or instrumentality thereof, with a 93 Federal Reserve Bank, but the books and records of the Trustee shall at all times show that all such investments are part of the Trust; (2) to employ on behalf of the Trust suitable agents, accountants, actuaries, investment advisers, financial or employee benefits consultants, sub-custodians and depositories, domestic or foreign, counsel, who may be counsel to the Company or the Trustee, and others, to assist it in determining or performing its duties or obligations hereunder, and to pay their reasonable expenses and compensation from the Trust to the extent not paid by the Company, and to confer upon any depository or sub-custodian the powers conferred upon the Trustee by subparagraph (1) of this Section 6(b) as well as the power to appoint subagents and sub-depositories, wherever situated, in connection with the retention of securities or other property; (3) to extend the time of payment of any obligation held by it; (4) subject to Section 9(b) and with the consent of the Company: to compromise, compound, submit to arbitration or settle any claims, debts, damages or obligations due or owing to or from, or otherwise adjust all claims in favor of or against, the Trust, except that the consent of the Company shall not be required in connection with any claim with respect to which the Trustee is not entitled to be reimbursed or indemnified for liabilities, damages and expenses under this Agreement; to commence or defend suits or legal proceedings to protect any interest of the Trust; and to represent the Trust in all suits or legal proceedings in any court or before any other body or tribunal; (5) to organize under the laws of any state a corporation or trust for the purpose of acquiring and holding title to any property which it is authorized or directed to acquire hereunder and to exercise, or permit the Asset Manager with respect thereto, to exercise any or all of the powers set forth herein; (6) to hold uninvested any monies received by it, without incurring any liability for the payment of interest thereon, until such monies shall be invested or disbursed; (7) to hold and invest (or permit the investment by Asset Managers) of the property of two or more Plans, or parts thereof, or two or more Trusts, or parts thereof, created by the Company and/or one or more of its Affiliates pursuant to Section 18 in solido, without distinction or separation between such Plans or Trusts or parts thereof; provided, however, (i) each separate Plan or Trust, as the case may be, and part thereof shall have a separate and undivided interest in the whole, subject to all the terms and conditions of the separate Trust and the Plans funded thereunder, and (ii) the books and records of the Trustee shall at all times reflect the Equitable Share of each Plan or Trust; and (8) to be reimbursed for the expenses incurred in exercising any of the foregoing powers or to pay the reasonable expenses incurred by any agent, manager or trustee appointed pursuant hereto. (c) All rights associated with the assets of the Trust shall be exercised by the Company, the Trustee, or an Asset Manager, as hereinabove provided, and shall in no event be exercisable by, or rest with, Participants. (d) The Company reserves the right to transfer to the Trust paid-up life insurance contracts (each a "PLIC") on or for the life of any Participant or to direct, in writing, the Trustee to purchase a PLIC on or for the life of any such Participant out of amounts held in the Trust with respect to one or more Plans. A PLIC shall be an asset of the Trust subject to the claims of the Company's creditors in the event the Company is Insolvent. The proceeds of any PLIC shall, upon the death of the insured Participant or otherwise, upon receipt by the Trustee, be credited to the Equitable Share of the applicable Plan. The Trustee shall have no power to name a beneficiary of the PLIC other than the Trust, to consent to the assignment of the PLIC (as distinct from conversion of the PLIC to a different form upon the written direction of the Company) other than to a successor trustee hereunder, or to loan to any Person (other than the Company) the proceeds of any borrowing against such PLIC. Except as provided in this paragraph (d), the Trustee's sole responsibility with respect to any insurance contract, including a PLIC, to be held under the Trust or purchased with Trust assets shall be as directed owner and custodian thereof and the Company shall be solely responsible for determining the issuer and the terms of any such insurance contract and monitoring the terms of the insurance contract and the issuer thereof to determine and protect the Trust's rights and to instruct the Trustee in the exercise of those rights. 94 (e) When the Trustee delivers property against payment, delivery of the property and receipt of payment may not be simultaneous. In such case, the risk of non-receipt of payment shall be the Trust's, and the Trustee shall have no liability therefor. All credits to the Trust of the anticipated proceeds of sales and redemption of property and of anticipated income from property shall be conditional upon receipt by the Trustee of final payment and may be reversed to the extent final payment is not received. At the discretion of the Trustee, the Trust may make use of such conditional credits. To the extent such credits do not become unconditional by receipt of final payment, the Trust shall reimburse the Trustee upon demand for the amount of such conditional credits. When the Trustee is to receive property, it is authorized to accept documents in lieu of such property as long as such documents contain the agreement of the issuer thereof to hold such property subject to the Trustee's sole order. The Trustee may, in its discretion, advance funds to the Trust to facilitate the settlement of any trade. In the event of such an advance, the Trust shall immediately reimburse the Trustee for the amount thereof. 7. Disposition of Income. During the term of this Trust, all income received by the Trust, net of expenses charged to income and taxes, shall be added to principal and reinvested. 8. Accounting by Trustee. (a) The Trustee shall maintain records of all investments, receipts, and disbursements under this Trust Agreement, and all accounts, books and records relating thereto shall be open to inspection and audit at all reasonable times during normal business hours by any Person designated by the Company. (b) Within a reasonable time after the close of each calendar year (or such shorter period as to which the Company and Trustee may agree), or of any termination of the duties of the Trustee hereunder, the Trustee shall deliver to the Company a written statement of transactions reflecting its acts and transactions as trustee hereunder during such calendar year (or such shorter period), or during such period from the close of the last calendar year or last statement period to the termination of the Trustee's duties, respectively, including a statement of the then current value of the Trust. Any such statement shall be deemed an account stated and accepted and approved by the Company, and the Trustee shall be relieved and discharged to all Persons with respect to all matters and things contained in such statement as though such account had been settled and allowed by a judgment or decree of a court of competent jurisdiction in an action or proceeding to which the Company and all Persons having any beneficial interest in the Trust were parties, unless the Company shall have filed with the Trustee specific written exceptions or objections to any such statement within ninety (90) days of receipt thereof by the Company. (c) The Trustee will determine the value of the Trust as of each reporting date under Section 8. Except in the case of an investment in which amortized cost is the valuation method designated, assets will be valued at their market values at the close of business on such date, or, in the absence of readily ascertainable market values, at such values as the Trustee determines in accordance with methods consistently followed and uniformly applied or obtained as provided below. The Company acknowledges and agrees that in the normal course of valuing assets, the Trustee may rely on pricing information provided by recognized pricing services which the Trustee deems to be reliable or provided by the Asset Manager or dealers or sponsors of pooled investment vehicles ("dealers"), and that the Trustee does not verify, warrant or represent the accuracy or completeness of such information, and shall not be liable for any diminution or inflation in the value of any assets as a result of any inaccurate or incomplete information furnished or transmitted by such pricing services or the Asset Managers or dealers. The Trustee may rely for all purposes of this Trust Agreement on the latest valuation information submitted to it even if such information predates the purported valuation date. The Company will provide or cause the Asset Managers to provide the Trustee with all information needed by the Trustee to value such assets and to report and account under this Trust Agreement. 95 (d) The Trustee shall have the right, at the expense of the Trust, to apply at any time to a court of competent jurisdiction for judicial settlement of any account of the Trustee not previously settled as herein provided or for the determination of any question of construction or for instructions. In any such action or proceeding it shall be necessary to join as parties only the Trustee and the Company (although the Trustee may also join such other Persons as it may deem appropriate), and judgment or decree entered therein shall be conclusive. 9. Indemnification; Liabilities of the Trustee. (a) (1) The Trustee shall be held harmless by the Company from and against any claim, liability, loss, damage or expenses (including, but not limited to, reasonable attorneys' fees and expenses incurred in preparing, investigating or defending any claim) that may be asserted against the Trustee arising out of any action taken or omitted by the Trustee pursuant to this Trust Agreement, except due to the Trustee's own negligence or willful misconduct. Any loss, damage or expense that is not paid by the Company under this Section or Section 10 shall be paid from the assets of the Trust and, until so paid, shall constitute a charge on the Trust and a lien against the assets of the Trust in favor of the Trustee. (2) The Company shall be held harmless by the Trustee from and against any claim, liability, loss, damage or expenses (including, but not limited to, reasonable attorneys' fees and expenses incurred in preparing, investigating or defending any claim) that may be asserted against the Company arising out of any negligent action or omission by the Trustee hereunder or arising out of its willful misconduct hereunder. (b) If the Trustee undertakes or defends any litigation, action, proceeding or appeal arising in connection with this Trust, the Company agrees to indemnify the Trustee against the Trustee's costs, expenses and liabilities (including, without limitation, reasonable attorneys' fees and expenses) relating thereto and to be primarily liable for such payments, and to make periodic payments in respect of such fees and expenses during the course of any such proceedings. The Trustee shall not be required to take any action pursuant to Section 6(b)(4), or pursuant to a direction by the Company pursuant to Section 11(b), or otherwise, unless it shall have been indemnified by the Company or the Trust to the Trustee's reasonable satisfaction against any liabilities and expenses it might incur therefrom. The Trustee shall also be entitled to reasonable payment from the Trust for allocation of the Trustee's personnel to the investigation and defense or prosecution thereof, at the Trustee's normal hourly billing rates. If the Company does not pay such costs, fees, expenses and liabilities in a reasonably timely manner, the Trustee shall discontinue participation in any such litigation, action, proceeding or appeal, and shall charge the assets of the Trust to the extent sufficient for any unpaid costs, fees, expenses and liabilities. (c) Any charges allocable to the Trust under this Section or Section 10 shall be allocated pro rata, to and among the Equitable Shares of the Plans having an interest in the claim, action or proceeding. (d) Under no circumstances shall the Trustee incur liability in contract, tort or otherwise to any Person for any consequential, special or punitive damages, whether or not foreseeable, with respect to the Trust or its role as Trustee of the Trust. 10. Expenses and Compensation of Trustee. The Company shall pay to or reimburse the Trustee its reasonable expenses incurred or arising out of the management and administration of the Trust, including, without limitation, advances for or prompt reimbursement of reasonable fees and expenses of counsel and any other Person which provides services contemplated herein or under any Plan, and, in addition, the Company shall pay the Trustee reasonable compensation for the Trustee's services hereunder, the amount of which shall be agreed upon from time to time by the Company and the Trustee in writing; provided, however, that, to the extent that the Company does not timely pay or reimburse any amounts payable or reimbursable by the Company pursuant to this Section 10, such 96 amounts shall be paid or reimbursed from the assets of the Trust and, until so paid or reimbursed, shall be a charge on the Trust and shall constitute a lien on the assets of the Trust in favor of the Trustee. If the Trustee amends its fee schedules and forwards an amended fee schedule to the Company requesting its agreement thereto and the Company fails to object thereto in writing within ninety (90) days thereafter, the amended fee schedule shall be deemed to be agreed upon by the Company and the Trustee, as of its stated effective date. 11. Taxes. (a) All income, deductions and credits attributable to the Trust belong to the Company and will be included on the Company's income tax returns. Any and all Federal, state, local or other tax returns required to be filed with respect to the Trust shall be prepared and filed by the Company. The Company shall pay any Federal, state, local or other taxes imposed or levied with respect to the assets and/or income of the Trust or any part thereof under existing or future laws. Upon furnishing the Trustee with evidence reasonably required by the Trustee of any such tax payments made directly by the Company, the Company shall be entitled to receive reimbursement from the assets of the Trust for the full amount of such taxes paid by it. The Trustee shall promptly notify the Company of any notice it receives relating to any taxes imposed or levied with respect to the assets and/or income of the Trust. If the Trustee receives notice that any such taxes are not timely paid by the Company, the Trustee shall pay such taxes from the assets of the Trust to the extent sufficient therefor, prior to any payments to Participants, after notifying the Company as herein provided. As provided in Section 2(b), the Trustee shall deduct any taxes required to be withheld with respect to any payments made to Participants pursuant to the Trust, with any such taxes being paid out of the Trust. (b) The Company, in its discretion, may undertake, at the sole expense of the Company, to defend any tax claims which are asserted by the Internal Revenue Service against any Participant and which the Company determines would affect Participants generally. In addition, the Company may contest or, subject to Section 9(b), direct the Trustee to contest the validity or amount of any tax, claim, assessment or demand otherwise respecting the Trust or any part thereof, but the Company shall have the sole authority and responsibility to determine whether or not to appeal any determination made by the Internal Revenue Service or by any court. The Company may, but shall not be required to, agree to reimburse directly, or direct the Trustee to reimburse, any Participant for any taxes, interest or penalties in respect of tax claims hereunder which the Company determines would affect Participants generally, upon receipt of documentation of same (but in no event shall the Trust be responsible therefor in the absence of such direction). Any distributions from the Trust to a Participant under this Section for reimbursements of taxes (but not for reimbursement of interest or penalties) shall reduce the benefits payable to such Participant under the Plan(s). 12. Resignation and Removal of Trustee; Appointment of Successor. (a) The Trustee may resign or be removed upon sixty (60) days' prior written notice to or from the Company, as the case may be, at any time. (b) Such resignation or removal shall be effective upon the earlier of the expiry of the notice period provided herein (unless a shorter period is agreed upon by the parties) and the appointment of a successor trustee. (c) Upon resignation or removal of the Trustee, the Company shall appoint any natural person or persons or a bank or trust company, or combination thereof, as a successor to replace the Trustee hereunder. Any such successor trustee shall have all the rights, powers and duties granted the Trustee hereunder, including ownership rights in the Trust assets. Such appointment of a successor trustee shall be effected by delivery to the Trustee of (i) a written appointment of such successor trustee, duly executed by the Company and (ii) a written acceptance by such successor trustee, duly executed thereby. The Trustee shall execute any instruments necessary or reasonably requested by the successor trustee to evidence the transfer. 97 (d) If a successor trustee shall not have been appointed prior to the effective time of the Trustee's resignation, the Trustee may apply to any court of competent jurisdiction for the appointment of a successor trustee or for instructions. All expenses of the Trustee in connection with such proceeding shall be allowed and charged to the Trust as administrative expenses of the Trust. (e) The Trustee is authorized to reserve such amount as it may deem advisable for payments of its fees and expenses in connection with the settlement of its account or otherwise, and any balance of such reserve remaining after the payment of such fees and expenses shall be paid over to the successor trustee. The Trustee is authorized to invest such reserves in any investment authorized under the terms of this Trust Agreement appropriate for the temporary investment of cash reserves of trusts. After the acceptance and approval of its account and the payment of its expenses, the Trustee shall transfer and deliver the balance of the Trust to such successor, and the Trustee shall have no further responsibilities to any Person under this Trust Agreement. 13. Amendment or Termination. (a) This Trust Agreement (including any Appendices or Schedules) may be amended, in whole or in part, at any time and from time to time, by the Company. Notwithstanding the foregoing, (i) the Company shall ensure that no such amendment conflicts with the terms of the Plan(s) or shall make the Trust revocable, and (ii) no amendment (including the deletion or addition of a Plan on Appendix A) which affects the rights, duties or responsibilities of the Trustee may be made without the Trustee's prior written consent. (b) Any limitations contained in Section 13(a) shall not apply with respect to any amendment which is reasonably necessary, in the opinion of counsel to the Company and reasonably acceptable to the Trustee, to preserve the status of the Trust as a grantor trust and the status of the Plan(s) as unfunded for Federal income tax purposes and for purposes of ERISA. (c) The Trust shall not terminate until the date on which Participants are no longer entitled to benefits pursuant to the terms of the Plan(s); provided, however, the Trust shall terminate prior to such date if and when all of the assets of the Trust are consumed in satisfaction of the claims of the general creditors of the Company pursuant to Section 3. Upon satisfaction of all liabilities under the Plans with respect to all Participants, the Company, pursuant to a resolution of its Board of Directors, may terminate the Trust by delivery to the Trustee of (i) a certified copy of such resolution, (ii) a certification of the Plans' enrolled actuary confirming that all liabilities under the Plans have been satisfied, and (iii) a written instrument of termination duly executed and acknowledged in the same form as this Trust Agreement. (d) Upon termination of the Trust in accordance with this Section 13, the Trustee shall, after acceptance and approval of its account, at the direction of the Company, return any assets remaining in the Trust to the Company. Upon completing such distribution, the Trustee shall be relieved and discharged of any responsibilities under this Trust Agreement. The powers of the Trustee under this Section and Section 12 shall continue as long as any assets of the Trust remain in its possession. 14. Authorities. (a) After the execution of this Trust Agreement, the Company or any successor thereto shall promptly file with the Trustee a certified list of the names and specimen signatures of the officers of the Company and any Persons authorized to act for the Company or any successor thereto. The Company shall cause each Investment Manager to file with the Trustee a certified list of the names and specimen signatures of those individuals authorized to direct the Trustee on its behalf. The Trustee shall be fully protected in acting upon any certifications, instructions, notices, directions, requests or approvals and other communications("Instructions"), howsoever 98 transmitted, received by the Trustee and purporting to be from any such Persons which the Trustee reasonably believed to be from such a Person, each such Instruction constituting a certification by the Person so giving that such Instruction is in conformity with the terms of the Plan(s), the Trust and/or other related documents, and the Trustee shall be fully protected in omitting to act in the absence of Instructions. (b) Any agreement or understanding between the Company and any Person (including an Investment Manager) or any other provision of this Trust Agreement to the contrary notwithstanding, all Instructions to the Trustee shall be in writing or in such other form, including transmission by electronic means through the facilities of third parties or otherwise, agreed to by the Trustee. The Trustee shall be fully protected in acting in accordance therewith, but shall not thereby assume responsibility for any errors or inaccuracies contained in the Instructions to the Trustee or for any delays or failures in such transmission facilities caused by the failure, breakdown or unavailability of any such means of communication or equipment not due to the Trustee's own negligence or willful misconduct. (c) The Trustee shall have the right to assume, in the absence of notice in writing to the contrary, that no event constituting a change in, or terminating, the authority of any Person, including any Asset Manager, has occurred. (d) The Trustee shall incur no liability under this Trust Agreement for any failure to act pursuant to any Instruction from any Asset Manager, the Company or any other Person or the designee of any of them unless and until it shall have been received in the form acceptable to the Trustee. 15. Miscellaneous. (a) Any provision of this Trust Agreement prohibited by law shall be ineffective to the extent of any such prohibition, without invalidating the remaining provisions hereof. (b) Except as required by law, benefits payable to Participants under this Trust Agreement may not be anticipated, assigned (either at law or in equity), alienated, pledged, encumbered or subjected to attachment, garnishment, levy, execution or other legal or equitable process by creditors of Participants. (c) This Trust Agreement shall be construed and interpreted under, and the Trust hereby created shall be governed by, the laws of the State of New York, insofar as such laws do not contravene any applicable Federal laws, rule or regulations. Section 9 of this Trust Agreement shall be construed as a contract between the Company and the Trustee according to the laws of the State of New York in effect from time to time. Nothing in this Trust Agreement shall be construed to subject the Trust created hereunder to ERISA or to cause it to be treated as other than a grantor trust. (d) This Trust Agreement shall be binding upon and inure to the benefit of any successor(s) or assign(s) of the Company or the Trustee, or any of its businesses, in whole or in part, as the result of merger, consolidation, reorganization, transfer of assets or otherwise, and any subsequent successor thereto. In the event of any such merger, consolidation, reorganization, transfer of assets or other similar transaction, the successor to the Company or the Trustee or its business or relevant part thereof or any subsequent successor thereto shall promptly notify the other party hereto in writing of its successorship and furnish it with the information specified in Section 14. (e) The undertakings and obligations of the Company, and the entitlements of the Trustee, under Sections 9 and 10 of this Trust Agreement shall survive the termination, amendment or restatement of this Trust Agreement, or the resignation or removal of the Trustee. 99 (f) Until notice be given in writing to the contrary, all instructions, notices and other communications shall be delivered or sent: If to the Trustee to: Bankers Trust Company 280 Park Avenue New York, New York 10017 Attention: Charles Greiner Tel.: (212) 454-2381 Fax.: (212) 454-2692 If to the Company to: Cabot Oil & Gas Corporation 15375 Memorial Drive Houston, Texas 77079 Attention: Human Resources Tel.: (281) 589-4600 Fax.: (281) 589-4910 (g) Notwithstanding any powers granted to the Trustee or any other Person pursuant to this Trust Agreement or by applicable law, no Person shall have any power that could give this Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of Section 301.7701-2 of the Procedure and Administrative Regulations promulgated pursuant to the Code. (h) The Company shall, at any time and from time to time, upon the reasonable request of the Trustee, execute and deliver such further instruments and do such further acts as may be necessary or proper to effectuate the purpose of this Trust Agreement. (i) Neither the gender nor the number (singular or plural) of any word shall be construed to exclude another gender or number when a different gender or number would be appropriate. (j) The words "paragraph" and "Section" shall be to provisions of this Trust Agreement and the titles to Sections of this Trust Agreement are for convenience of reference only, and this Trust Agreement is not to be construed by reference thereto. (k) This Trust Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which shall together constitute only one agreement. (l) The Trustee's obligations are limited to those set out in this Trust Agreement. No additional duties or obligations shall be imposed on the Trustee or implied from the terms of this Trust Agreement. In case of any conflict or inconsistency between the terms of this Trust Agreement and any Plan, in determining the obligations and responsibilities of the Trustee, the terms of this Trust Agreement shall control. (m) The Company hereby irrevocably and unconditionally agrees for itself and for any Participants (or their beneficiaries) that all claims, actions, suits or proceedings against, or involving, the Trust, this Agreement or the Trustee shall exclusively be brought in the Supreme Court of the State of New York sitting in New York County or in the Federal District Court for the Southern District of New York, and it further agrees that all such claims, actions, suits or proceedings shall be heard and determined by such courts. Nothing in this Agreement shall affect any right that the Trustee may have to bring any claim, action, suit or proceeding relating to this Agreement or the Trust against the Company or any other person in the courts of any other jurisdiction. 100 16. Definitions. When used herein, the following terms shall have the following meanings: (1) "Asset Manager" shall mean, individually or collectively as the context shall require, the Trustee, with respect to those assets of the Trust allocated to the Discretionary Fund, or an Investment Manager or the Company with respect to those assets of the Trust allocated to a Directed Fund to the extent each is authorized to exercise, discretionary investment authority or control over such assets under Section 5(a). (2) "Chief Executive Officer" shall mean the highest ranking officer of the Company at the relevant time. (3) "Code" shall mean the Internal Revenue Code of 1986, as amended, and the regulations promulgated and rulings issued thereunder. (4) "Directed Fund" shall mean each portion of the Trust subject to the discretionary management and control of an Asset Manager other than the Trustee. If more than one Directed Fund is established under this Trust Agreement, "Directed Fund" shall also mean the Directed Fund subject to the management and control of a particular Asset Manager, as the context may require. (5) "Discretionary Fund" shall mean any portion of the Trust subject to the discretionary management and control of the Trustee pursuant to a separate written asset management agreement between the Company and the Trustee. (6) "Equitable Share" shall mean the interest of any Plan in the Trust or, if the context shall require, an Investment Fund. (7) "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended, and the regulations promulgated and rulings issued thereunder. (8) "Insolvent" shall mean (i) the Company is generally not paying its debts as such debts become due unless such debts are the subject of a bona fide dispute, or (ii) the Company is subject to a pending proceeding as a debtor under the United States Bankruptcy Code, Title 11 of the United States Code, or other proceedings intended to liquidate or rehabilitate the Company's estate, or (iii) the Company is subject to regulation by Federal or state regulators and such regulators have determined that the Company is insolvent or should be placed in insolvency or similar proceedings. (9) "Investment Fund" shall mean an account allocated to an Asset Manager for investment in which one or more Plans may have an interest. (10) "Investment Manager" shall mean (i) an investment adviser registered under the Investment Advisers Act of 1940, (ii) an investment adviser which is not registered as an investment adviser under such Act by reason of paragraph (1) of section 203A(a) of such Act but is registered as an investment adviser under the laws of the state in which it maintains its principal office and place of business, and, at the time such adviser last filed the registration form most recently filed by it with such State in order to maintain the its registration under the laws of such State, also filed a copy of such form with the United States Secretary of Labor; (iii) a bank as defined in that Act, or (iv) an insurance company qualified to manage, acquire or dispose of any assets of the trusts under the laws of one or more State. (11) "Participant" shall mean an active or former employee or director of the Company who is a participant under a Plan, and any beneficiary of such an employee or director. (12) "Payment Schedule" means the document delivered to the Trustee by the Company or Recordkeeper showing the amounts payable in accordance with the terms of the Plan(s) in respect of each Participant, the manner in which such amounts are to be paid (as provided for or available under the Plan(s)), the time of commencement for payment of such amounts, the addresses or depositary to which such payments are to be sent, and the Plan(s), and if relevant, the Investment Fund(s), to be charged. 101 (13) "Person" shall mean a natural person, trust, estate, corporation of any kind or purpose, mutual company, joint-stock company, unincorporated organization, association, partnership, joint venture, employee organization, committee, board, Participant, trustee, partner, or venturer acting in an individual, fiduciary or representative capacity, as the context may require. (14) "Recordkeeper" shall mean the Company, or, if different, the Person (other than the Trustee) appointed by the Company to discharge the Company's obligations under Section 2. (15) "Securities Act" shall mean the Securities Act of 1933, as amended. (16) "writing" or "written" shall mean a manually signed instrument or electronic transmission through a facility approved by the Trustee. 17. Effective Date. The effective date of this Trust Agreement shall be the date of its execution set forth on page 1 of this Trust Agreement, or, if later, the date of its adoption by a Plan added to Appendix A after such date. 18. Establishment of Trust by Affiliates. (a) Any affiliate or subsidiary of the Company (an "Affiliate" and "Parent", respectively) that is obligated to provide benefits to Participants under one or more non-qualified deferred compensation or supplemental retirement Plans may, with the consent of the Parent and the Trustee, by execution of an adoption agreement substantially in the form of Appendix B, elect to establish a trust (the "Affiliate Trust"), which shall be a separate trust subject to all of the terms and conditions of this Trust Agreement (including the provisions of this Section 18) to the same extent and effect as if it had been separately negotiated between the Trustee and such Affiliate (the "Affiliate Trust Agreement"), pursuant to which (and except as herein provided) such Affiliate shall be "the Company" and Grantor thereof for all purposes of such Affiliate Trust Agreement (including, without limitation, the provisions of paragraphs (c) and (d) of Section 1 and Section 3, which provisions shall be construed to apply separately to the Parent and each Affiliate. (b) The Affiliate-Grantor appoints Parent, including its designees under Section 14, as its agent for all purposes of the Affiliate Trust Agreement to receive notices, reports or other communications hereunder, to give Confirmations under Section 3, or, where action is required to or may be taken by or on behalf of the "Company" to take or refrain from taking such acts, and Affiliate shall be bound by the decisions, Instructions and actions of the Parent under or affecting the Affiliate Trust Agreement, and the Trustee shall be fully protected by the Parent and the Affiliate-Grantor under Section 9 and Section 15(e) in relying upon the decisions, instructions, actions, and directions of the Parent; provided, however, in no event shall Parent use the power and authority granted it hereunder to direct the Trustee to pay over any assets of the Trust to the Parent under Section 4 or Section 13, or creditors of Parent under Section 3. (c) The Trustee shall not be required to give notice to or to obtain the consent of the Affiliate-Grantor with respect to any action to be taken by the Trustee on or pursuant to the actions of the Parent pursuant to the Affiliate Trust Agreement, and the Parent shall have the sole authority to enforce the Affiliate Trust Agreement on behalf of any Affiliate. 102 IN WITNESS WHEREOF, the parties hereto have caused this Trust Agreement to be duly executed as of the day and year first above written. Attest: CABOT OIL & GAS CORPORATION By: /s/ Lisa Machesney ------------------------------ Name: Lisa A. Machesney Title: Corporate Secretary By: /s/ Ray Seegmiller ------------------------------ Name: Ray R. Seegmiller Title: President & CEO Attest: BANKERS TRUST COMPANY By: /s/ Andrew F. Gallivan ------------------------------ Name: Andrew F. Gallivan Title: Principal By: /s/ Charles R. Greiner, Jr. ------------------------------ Name: Charles R. Greiner, Jr. Title: Assistant Vice President STATE OF NEW YORK ) ) ss.: COUNTY OF NEW YORK ) On the 31st day of August, 1998, before me personally came Charles R. Greiner, Jr.to me known, who being by me duly sworn, did depose and say: that he/she resides in 219 West Dover Road, Pawling, New York; that he/she is the Assistant Vice President of BANKERS TRUST COMPANY, the corporation described in and which executed the above instrument; that he/she knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by order of the Board of Directors of said corporation, and that he/she signed his/her name thereto by like order. /s/ Joseph F. Hanvey - ------------------------------ Notary Public STATE OF Texas ) ) ss.: COUNTY OF Harris ) On the 5th day of August, 1998, before me personally came Ray R. Seegmiller to me known, who being by me duly sworn, did depose and say: that he/she resides in Houston, Texas; that he/she is the President and CEO of Cabot Oil & Gas Corporation, the corporation described in and which executed the above instrument; that he/she knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by order of the Board of Directors of said corporation, and that he/she signed his/her name thereto by like order. /s/ Lisa A. Machesney - ------------------------------ Notary Public 103 APPENDIX A The Plans The following Company plans and agreements (collectively referred to as the "Plans") are subject to this Trust: The Cabot Oil & Gas Corporation Deferred Compensation Plan, effective as of June 1, 1998 104 APPENDIX B Form of Adoption Agreement The undersigned _________________ (the "Affiliate"), a _________ of _________ (the "Parent"), has adopted, and/or incurred, or expects to incur, liability under, one or more nonqualified deferred compensation plans listed in Appendix A to that certain Trust Agreement (the "Trust Agreement"), made as of ______ __, 19__, by and between the Parent and Bankers Trust Company (the "Trustee"). The Affiliate hereby adopts the Trust Agreement for the uses and purposes set forth in the Trust Agreement, which, for purposes hereof, shall be construed as applying separately to the Affiliate as if the Affiliate were the "Company", therein, except as otherwise provided herein or in Section 18 of the Trust Agreement. As so adopted by the Affiliate, the Trust Agreement shall be known as the "Affiliate Trust Agreement," and the Affiliate shall be the Grantor of the separate trust established by the Affiliate Trust Agreement. The Affiliate agrees and confirms that it shall be subject to all of the terms and conditions of the Trust Agreement, as heretofore or hereafter amended. The Affiliate further agrees and confirms that: (a) it will be bound by the decisions, instructions, actions and directions of the Parent under or affecting the Affiliate Trust Agreement and the Affiliate as provided in Section 18 of the Trust Agreement, and the Trustee shall be fully protected by the Affiliate in relying upon the decisions, instructions, actions, and directions of the Parent; (b) the Trustee shall not be required to give notice to or to obtain the consent of the Affiliate with respect to any action taken or to be taken by the Trustee on or to the instructions of the Parent or otherwise pursuant or with respect to the Affiliate Trust Agreement; and (c) the Parent shall have the sole authority to enforce the Affiliate Trust Agreement on behalf of the Affiliate. IN WITNESS WHEREOF, the Affiliate has caused this Adoption Agreement to be duly executed as of this ____ day of _________, 19__. AFFILIATE Attest: By: By: Name: Name: Title: Title: Accepted and agreed: PARENT By: Date: Name: Title: BANKERS TRUST COMPANY By: Date: Name: Title: 105 STATE OF NEW YORK ) ) ss.: COUNTY OF NEW YORK ) On the _____ day of ____________, 1998, before me personally came _________________ to me known, who being by me duly sworn, did depose and say: that he/she resides in ___________________________; that he/she is the _____________ of BANKERS TRUST COMPANY, the corporation described in and which executed the above instrument; that he/she knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by order of the Board of Directors of said corporation, and that he/she signed his/her name thereto by like order. - --------------------------------- Notary Public STATE OF ) )ss.: COUNTY OF ) On the _____ day of ____________, 1998, before me personally came _________________ to me known, who being by me duly sworn, did depose and say: that he/she resides in ___________________________; that he/she is the _____________ of the ___________________, the corporation described in and which executed the above instrument; that he/she knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by order of the Board of Directors of said corporation, and that he/she signed his/her name thereto by like order. - --------------------------------- Notary Public STATE OF ) )ss.: COUNTY OF ) On the _____ day of ____________, 1998, before me personally came _________________ to me known, who being by me duly sworn, did depose and say: that he/she resides in ___________________________; that he/she is the _____________ of the ___________________, the corporation described in and which executed the above instrument; that he/she knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by order of the Board of Directors of said corporation, and that he/she signed his/her name thereto by like order. - --------------------------------- Notary Public 106 SCHEDULE A List of Property Deposited With Trustee $700,804.19 cash to be wired to the Trustee by the Company. 17 175759v3 175759v3 APPENDIX A Page 1 175759v3 175759v3 SCHEDULE A Page 2 175759v3 107 EX-10.21 6 LEASE AGREEMENT Exhibit 10.21 AMENDED AND RESTATED LEASE AGREEMENT BY AND BETWEEN DNA COG, LTD., AS LANDLORD AND CABOT OIL & GAS CORPORATION, AS TENANT April 24, 1998 TABLE OF CONTENTS Page ARTICLE I Premises........................................................ 1 1.1 Premises................................................. 1 1.2 Definitions for Measuring the Premises and the Building.. 2 1.3 Measurement of Premises.................................. 3 1.4 No Modification of Net Rentable Area..................... 3 ARTICLE II Term............................................................ 4 2.1 Term..................................................... 4 ARTICLE III Rental Payments................................................. 4 3.1 Payments of Rent......................................... 4 3.2 Base Rental.............................................. 5 3.3 Additional Rental........................................ 5 3.4 Operating Expenses....................................... 6 3.5 Reduced Services......................................... 12 3.6 Tax Protests............................................. 12 ARTICLE IV Landlord Services............................................... 13 4.1 Services to be Provided by Landlord...................... 13 4.2 Interruption of Services................................. 15 4.3 Payment for Non-Standard Services........................ 16 4.4 Keys and Locks........................................... 17 4.5 Graphics and Building Directory.......................... 18 ARTICLE V Use and Care of the Premises.................................... 19 5.1 Use...................................................... 19 5.2 Care of the Premises..................................... 20 5.3 Entry for Repairs and Inspection......................... 20 5.4 Tenant's Compliance with Laws and Regulations; Rules of Building..................................... 21 5.5 Landlord's Compliance with Laws.......................... 21 5.6 Hazardous Substances..................................... 21 5.7 Parking.................................................. 22 ARTICLE VI Construction of Project and Leasehold Improvements.............. 23 6.1 Construction of Project.................................. 23 6.2 Construction of Leasehold Improvements................... 23 6.3 Alterations, Additions, Improvements..................... 23 6.4 Property of Landlord..................................... 24 6.5 Taxes and Tax Abatement.................................. 24 6.6 Repairs by Landlord...................................... 25 6.7 Repairs by Tenant........................................ 25 6.8 Waiver of Landlord Liens................................. 25 ARTICLE VII Condemnation and Casualty....................................... 26 7.1 Condemnation............................................. 26 7.2 Damages from Certain Causes.............................. 27 7.3 Fire or Other Casualty................................... 27 7.4 Casualty Insurance....................................... 28 7.5 Liability Insurance...................................... 29 7.6 Hold Harmless............................................ 29 7.7 Waiver of Subrogation Rights............................. 30 108 ARTICLE VIII Tenant Default.................................................. 30 8.1 Default by Tenant........................................ 30 8.2 Non-Waiver............................................... 35 8.3 Holding Over............................................. 35 8.4 Attorneys' Fees.......................................... 35 8.5 Limitation of Landlord's Liability....................... 35 8.6 Limitation of Tenant's Liability......................... 36 8.7 Arbitration.............................................. 36 8.8 Default by Landlord...................................... 37 ARTICLE IX Transfers....................................................... 38 9.1 Assignment or Sublease by Tenant......................... 38 9.2 Transfer by Landlord..................................... 40 9.3 Peaceful Enjoyment....................................... 40 ARTICLE X Additional Provisions........................................... 41 10.1 Notices.................................................. 41 10.2 Subordination............................................ 41 10.3 Estoppel Certificate or Three-Party Agreement............ 41 10.4 Brokerage................................................ 42 10.5 Disclaimers.............................................. 42 10.6 Memorandum of Lease...................................... 42 10.7 Publicity................................................ 42 10.8 Effect of Delivery of This Lease......................... 42 10.9 Communications Equipment................................. 42 10.10 Uninterrupted Power Supply............................... 44 10.11 Option to Purchase....................................... 44 10.12 Purchase of Property..................................... 45 10.13 Miscellaneous............................................ 45 10.14 Restatement.............................................. 46 EXHIBITS: Exhibit A - Land Description Exhibit B - Floor Plans Exhibit C - Certificate of Commencement Date Exhibit D - Project Rules and Regulations Exhibit E - Construction of the Project Exhibit E-1 - Construction Schedule Exhibit F - Leasehold Improvements Exhibit G - Initial Plans and Specifications Exhibit G-1 - Tenant Add Ons Exhibit H - Renewal Option Exhibit I - Expansion Option Exhibit J - First Refusal Right Exhibit K - Cleaning Specifications Exhibit L - Memorandum of Lease Exhibit M - Security Services Exhibit N - Restrictions 109 GLOSSARY FOR DEFINED TERMS Landlord.................................................................... 1 Tenant...................................................................... 1 Building.................................................................... 1 Land........................................................................ 1 Garage...................................................................... 1 Project..................................................................... 1 Initial Premises............................................................ 1 Premises.................................................................... 1 Net Rentable Area........................................................... 2 Usable Area................................................................. 2 Service Areas............................................................... 2 Building Common Areas....................................................... 2 On-Floor Common Areas....................................................... 3 Leasable Space.............................................................. 3 Term........................................................................ 4 Commencement Date........................................................... 4 Rent Commencement Date...................................................... 4 Rent........................................................................ 4 Base Rental................................................................. 5 Base Rental Rate............................................................ 5 Tenant's Additional Rental.................................................. 5 Tenant's Estimated Additional Rental........................................ 5 Tenant's Proportionate Share................................................ 6 Operating Expenses.......................................................... 6 Comparable Buildings........................................................ 13 HVAC Service................................................................ 13 Outline Plans and Specifications............................................ 13 Normal Business Hours....................................................... 13 Holidays.................................................................... 13 Essential Services.......................................................... 16 Significant Portion......................................................... 16 Untenantable................................................................ 16 Legal Requirements.......................................................... 21 Rules and Regulations....................................................... 21 ADA......................................................................... 21 hazardous substances........................................................ 22 Landlord Indemnified Parties................................................ 22 Tenant Indemnified Parties.................................................. 22 Restoration Estimate........................................................ 27 Objectively Reasonable Efforts.............................................. 33 Event of Default............................................................ 37 Affiliate................................................................... 40 Control..................................................................... 40 Tenant's Equipment Area..................................................... 42 Communications Equipment.................................................... 42 UPS......................................................................... 44 Restrictions................................................................ 45 Lease....................................................................... C-1 Project Architect........................................................... E-1 Base Building Contractor.................................................... E-1 Preliminary Plans and Specifications........................................ E-1 Project Plans and Specifications............................................ E-1 Construction Schedule....................................................... E-3 Delivery.................................................................... E-3 Core and Shell Improvements................................................. F-1 Initial Tenant Improvements................................................. F-1 Tenant Plans and Specifications............................................. F-1 Tenant's Architect.......................................................... F-1 High Risk Items............................................................. F-2 Tenant Contractor........................................................... F-2 Landlord's Representative................................................... F-5 Tenant's Representative..................................................... F-6 Tenant Delay................................................................ F-6 Landlord Delay.............................................................. F-6 Force Majeure............................................................... F-7 Completion Date............................................................. F-7 substantial completion...................................................... F-7 substantially completed..................................................... F-7 110 Tenant Allowance............................................................ F-9 Initial Allowance........................................................... F-9 Additional Allowance........................................................ F-9 Permitted Tenant Allowance Costs............................................ F-9 Renewal Option.............................................................. H-1 Renewal Term................................................................ H-1 MRR......................................................................... H-2 Expansion Option............................................................ I-1 Expansion Space............................................................. I-1 Expansion Premises.......................................................... I-1 Preference Right............................................................ J-1 Preference Space............................................................ J-1 Preference Notice........................................................... J-1 ADA......................................................................... 21 Additional Allowance........................................................ F-9 Affiliate................................................................... 40 Base Building Contractor.................................................... E-1 Base Rental................................................................. 5 Base Rental Rate............................................................ 5 Building Common Areas....................................................... 2 Building.................................................................... 1 Commencement Date........................................................... 4 Communications Equipment.................................................... 42 Comparable Buildings........................................................ 13 Completion Date............................................................. F-7 Construction Schedule....................................................... E-3 Control..................................................................... 40 Core and Shell Improvements................................................. F-1 Delivery.................................................................... E-3 Essential Services.......................................................... 16 Event of Default............................................................ 37 Expansion Option............................................................ I-1 Expansion Space............................................................. I-1 Expansion Premises.......................................................... I-1 Force Majeure............................................................... F-7 Garage...................................................................... 1 Hazardous Substances........................................................ 22 High Risk Items............................................................. F-2 Holidays.................................................................... 13 HVAC Service................................................................ 13 Initial Premises............................................................ 1 Initial Allowance........................................................... F-9 Initial Tenant Improvements................................................. F-1 Land........................................................................ 1 Landlord.................................................................... 1 Landlord Indemnified Parties................................................ 22 Landlord Delay.............................................................. F-6 Landlord's Representative................................................... F-5 Leasable Space.............................................................. 3 Lease....................................................................... C-1 Legal Requirements.......................................................... 21 MRR......................................................................... H-2 Net Rentable Area........................................................... 2 Normal Business Hours....................................................... 13 objectively reasonable efforts.............................................. 33 On-Floor Common Areas....................................................... 3 Operating Expenses.......................................................... 6 Outline Plans and Specifications............................................ 13 Permitted Tenant Allowance Costs............................................ F-9 Preference Right............................................................ J-1 Preference Space............................................................ J-1 Preference Notice........................................................... J-1 Preliminary Plans and Specifications........................................ E-1 Premises.................................................................... 1 Project Plans and Specifications............................................ E-1 Project Architect........................................................... E-1 Project..................................................................... 1 Renewal Option.............................................................. H-1 Renewal Term................................................................ H-1 Rent........................................................................ 4 Rent Commencement Date...................................................... 4 Restoration Estimate........................................................ 27 Restrictions................................................................ 45 111 Rules and Regulations....................................................... 21 Service Areas............................................................... 2 Significant Portion......................................................... 16 substantial completion...................................................... F-7 substantially completed..................................................... F-7 Tenant Contractor........................................................... F-2 Tenant Delay................................................................ F-6 Tenant...................................................................... 1 Tenant Allowance............................................................ F-9 Tenant Indemnified Parties.................................................. 22 Tenant Plans and Specifications............................................. F-1 Tenant's Architect.......................................................... F-1 Tenant's Additional Rental.................................................. 5 Tenant's Estimated Additional Rental........................................ 5 Tenant's Representative..................................................... F-6 Tenant's Proportionate Share................................................ 6 Tenant's Equipment Area..................................................... 42 Term........................................................................ 4 Untenantable................................................................ 16 UPS......................................................................... 44 Usable Area................................................................. 2 112 AMENDED AND RESTATED LEASE AGREEMENT THIS AMENDED AND RESTATED LEASE AGREEMENT (this "Lease") is effective as of the 24th day of April, 1998, by and between DNA COG, LTD., a Texas limited partnership ("Landlord"), whose address for purposes hereof is c/o Dienna Nelson Augustine Company, 1400 Post Oak Boulevard, Suite 1100, Houston, Texas 77056, and CABOT OIL & GAS CORPORATION, a Delaware corporation ("Tenant"), whose address for purposes hereof is 15375 Memorial Drive, Houston, Texas 77079, prior to the Commencement Date (as defined below), and thereafter shall be that of the Building (as defined below). W I T N E S S E T H: ARTICLE I Premises 1.1 Premises. (a) Subject to and upon the terms, provisions and conditions hereinafter set forth, and each in consideration of the duties, covenants and obligations of the other under this Lease, Landlord does hereby lease to Tenant, and Tenant does hereby lease from Landlord, approximately 111,695 square feet of Net Rentable Area (as defined below), comprising a portion of the 1st Floor and all of Floors 3, 4, 5, and 6, of the building to be constructed by Landlord at 1200 Enclave Parkway, Houston, Harris, County, Texas (the "Building"), and situated on that parcel of real property to be purchased by Landlord and described on Exhibit "A" attached hereto (the "Land"). The Building, together with the Land and any additional land used in connection with the Building, the parking facilities serving the Building and any additional parking areas serving or used in connection with the Building (collectively, the "Garage"), and all other improvements situated on the Land or directly benefiting the Building, shall collectively be referred to herein as the "Project". The area initially leased in the Building under this Lease is hereinafter called the "Initial Premises" and is shown on the floor plan(s) attached hereto as Exhibit "B". The Initial Premises, as expanded pursuant to the terms hereof, shall hereinafter be referred to as the "Premises". (b) In addition to Tenant's rights with respect to the Premises, Tenant and Tenant's agents, employees, invitees and guests shall also have the non-exclusive right, in common with Landlord and the other tenants, if any, in the Project (and such tenants' agents, employees, invitees and guests), to use the common areas within the Project, including without limitation, all lobbies and restrooms (other than lobbies and restrooms on floors occupied entirely by one tenant or within such tenant's premises), public corridors, stairways (exclusive of any internal stairways which are wholly located within a tenant's leased premises, as to which such tenant shall have the exclusive right to use), elevators, entranceways, sidewalks, driveways, and other common areas, easements, facilities and appurtenances which, from time to time, benefit and serve, or are designed and intended to benefit and serve, tenants of the Project, subject to the Project Rules and Regulations (as hereinafter defined) to the extent hereinafter set forth; provided, that Landlord shall have the right, from time to time, to change such common areas within the Project as reasonably necessary or appropriate. (c) Tenant shall also have the non-exclusive right to enter into and use the interior stairs of the Building shown on the Project Plans and Specifications (as hereinafter defined), and to install card-key readers (or other means of access, subject to obtaining Landlord's prior approval thereto) for access from such stairwells onto the floors of the Building included in the Premises; provided, that Tenant pays for all costs and expenses of installing, operating and maintaining such access control systems, and for complying with all applicable Legal Requirements with respect thereto. Tenant agrees to indemnify Landlord for any and all liability and claims resulting from unauthorized access to the Premises and/or the Building as a result of such card-key or other means of access installed by Tenant. 113 1.2 Definitions for Measuring the Premises and the Building. (a) The term "Net Rentable Area" shall mean, with respect to the area or areas within the Building being measured, the total of (i) the Usable Area (as defined below) of the area being measured; plus (ii) the portion of the Building Common Areas (as defined below) allocable to the area being measured; plus (iii) the portion of the On-Floor Common Areas (as defined below) allocable to the area being measured. (b) The term "Usable Area" shall mean, with respect to any Leasable Space (as defined below) in the Building, the total square footage of such space measured from the inside surface of the outer glass, finished column or exterior wall of the Building enclosing such space to (a) the inside surface of the opposite outer glass, finished column or exterior wall of the Building, or (b) the mid-point of any demising walls separating such space from other space within the Building, as the case may be. The Usable Area of any tenant space shall include any areas for the specific use of such tenant or installed at the request of such tenant, such as special stairs or elevators. No deductions from Usable Area shall be made for columns or projections. (c) The term "Service Areas" shall mean the square footage of the areas within (and measured from the mid-point of the walls enclosing) any Building stairs, fire towers, elevator shafts, flues, vents, stacks, vertical pipe shafts, vertical ducts and other vertical penetrations. Areas reserved for the exclusive use of a tenant such as special stairs or elevators are not included within the definition of Service Areas. (d) The term "Building Common Areas" shall mean the square footage of the areas within (and measured from the mid-point of the walls enclosing) the Building elevator machine rooms, main mechanical and electrical rooms, public lobbies, enclosed garage access walkways and other areas not included in Service Areas or On-Floor Common Areas, but which are necessary or desirable for the proper utilization of the Building or to provide customary services to the Building. The allocation to the Premises of the Building Common Areas shall be equal to the total Building Common Areas within the Building multiplied by a fraction, the numerator of which is the Usable Area of the Premises and the denominator of which is the total Usable Area of the Building. (e) The term "On-Floor Common Areas" shall mean, with respect to any floor on which all of the Leasable Space on such floor is not leased to one tenant, the square footage of the areas within (and measured from the mid-point of the walls enclosing) public corridors, elevator foyers, restrooms, mechanical rooms, janitor closets, telephone and equipment rooms, and other similar facilities for the use of tenants on the floor on which the Premises are located and which are not included in Service Areas or reserved for the exclusive use of a particular tenant. The allocation to the Premises of any On-Floor Common Areas shall be equal to the total On-Floor Common Areas on a floor multiplied by a fraction, the numerator of which is the Usable Area of the Premises located on said floor and the denominator of which is the total Usable Area of said floor. (f) The term "Leasable Space" shall mean the space in the Building that is actually leased to tenants (including without limitation, Tenant), or that is available or intended for lease to tenants, including the Premises and the management and/or leasing office(s) for the Project. 1.3 Measurement of Premises. Based on the foregoing definitions, the Net Rentable Area of the Premises is estimated to be approximately 111,695 square feet and the Net Rentable Area of the Building is estimated to be approximately 149,654 square feet. After the Commencement Date but not later than thirty (30) days following the Commencement Date (as hereinafter defined), Landlord shall cause such estimates to be confirmed by the Project Architect in accordance with the definitions contained in this Lease. Upon such confirmation by the Project Architect, Tenant shall have the right to request that the Project Architect review such calculations with Tenant's Architect (as hereinafter defined) and in the event of a dispute regarding same that cannot be resolved by the parties within sixty (60) days following notice thereof to the other party, either party shall be entitled to submit such dispute to arbitration in accordance with Section 8.7 below. In the event of a change in the Net Rentable Area of the 114 Premises or the Building based on physical changes to the Building, Landlord and Tenant shall each execute a confirmation agreement setting forth such corrected areas as well as Tenant's Share and Tenant's Base Rental (if changed). Landlord and Tenant shall each execute similar confirmation agreements each time additional space is added to or deleted from the Premises or Base Rental or Tenant's Share changes pursuant to the terms hereof. 1.4 No Modification of Net Rentable Area. No modification of Net Rentable Area of the Premises (except incident to additions thereto or deletions therefrom pursuant to the terms hereof) or the Building shall be made for purposes of this Lease except upon the mutual agreement of Landlord and Tenant. ARTICLE II Term 2.1 Term. Subject to and upon the terms and conditions set forth in this Lease, the term of this Lease (the "Term") shall commence on the date (the "Commencement Date") which is the earlier to occur of (a) the Completion Date (as defined in Exhibit "F") or (b) the date Tenant first occupies and commences to use the Premises for the conduct of its business therein, and shall expire on the last day of the one hundred twentieth (120th) full calendar month after the Commencement Date, unless earlier terminated as provided in this Lease. If the Commencement Date should be changed for any reason, including a change pursuant to the terms of Exhibit "F" attached hereto, Landlord shall not be responsible for any claims, damages or liabilities in connection therewith or by reason thereof except as specifically provided in Exhibits "E" and "F". After the occurrence of the Commencement Date, Tenant and Landlord shall execute a certificate confirming the Commencement Date in the form attached hereto as Exhibit "C". ARTICLE III Rental Payments 3.1 Payments of Rent. (a) Commencing on the date (the "Rent Commencement Date") which is the later to occur of (a) the Commencement Date or (b) August 1, 1999, and continuing thereafter throughout the Term, Tenant shall pay the Base Rental as described in Section 3.2, plus Tenant's Estimated Additional Rental and Tenant's Additional Rental, as described in Section 3.3 (the Base Rental, Tenant's Estimated Additional Rental, Tenant's Additional Rental, and all other amounts payable to Landlord under this Lease are sometimes hereinafter collectively referred to as "Rent"), in the manner and at such times as are provided in this Lease. Base Rental, together with Tenant's Estimated Additional Rental, shall be due and payable in twelve (12) equal installments on the first day of each calendar month during the Term, in legal tender of the United States of America, and Tenant shall pay such Rent to Landlord at Landlord's address specified in the preamble paragraph of this Lease (or to such other person or at such other address as may be designated by Landlord from time to time), so that Landlord has received such installments monthly on or before the first day of each such calendar month. (b) If the Commencement Date is other than the first day of a calendar month or if this Lease terminates on other than the last day of a calendar month, then the installments of Base Rental, Tenant's Estimated Additional Rental and Tenant's Additional Rental for such month or months shall be prorated and the installment or installments so prorated shall be paid in advance. The payment for such prorated month shall be calculated by multiplying the sum of Base Rental and Tenant's Estimated Additional Rental or Tenant's Additional Rental, as the case may be, by a fraction, the numerator of which shall be the number of days of the Term occurring during said commencement or termination month, as the case may be, and the denominator of which shall be three hundred sixty-five (365). (c) Tenant shall pay all Rent that becomes payable by Tenant to Landlord under this Lease at the times and in the manner provided in this Lease, without demand, abatement, deduction, set-off or counterclaim except as expressly permitted in this Lease. All Rent owed by Tenant 115 to Landlord under this Lease shall bear interest from the date due until properly paid at a rate (the "Applicable Rate") equal to the lesser of (i) four percent (4%) above the per annum "base rate" (or if the "base rate" is discontinued, the rate announced as that being charged to the most creditworthy commercial borrowers for ninety (90) day unsecured loans) announced by Citibank, N.A. (or its successor), from time to time, or (ii) the maximum lawful contract rate per annum; provided that, the first two (2) late payments of Rent made by Tenant during any twelve (12) month period shall not begin to accrue interest at the Applicable Rate until three (3) days after the date when such payment of Rent is due if such payment is not made within said three (3) day period. 3.2 Base Rental. Throughout the Term, Tenant shall pay a base annual rental ("Base Rental") equal to the product of the following base rental rates (individually, a "Base Rental Rate" and collectively, "Base Rental Rates") for the indicated rental periods multiplied by the number of square feet of Net Rentable Area within the Premises during such period: Annual Rental Period Base Rental Rate Base Rental* ========================================= ================ =========== Rent Commencement Date through the 5th $16.54 $1,847,435 anniversary of the Commencement Date 5th anniversary of the Commencement Date $18.61 $2,078,644 through the 10th anniversary of the Commencement Date *assuming 111,695 square feet of Net Rentable Area in the Premises. 3.3 Additional Rental. (a) Tenant shall also pay as additional rental Tenant's Proportionate Share of Operating Expenses for each calendar year during the Term plus an annual management fee equal to three percent (3%) of the Base Rental and Additional Rental (exclusive of such management fee) payable by Tenant for such calendar year (collectively, "Tenant's Additional Rental"). At least thirty (30) days prior to the Rent Commencement Date and prior to the commencement of each calendar year during the Term, Landlord shall provide Tenant a statement of Landlord's reasonable estimate of Tenant's Additional Rental ("Tenant's Estimated Additional Rental") for such calendar year, or portion thereof as the case may be, and Tenant shall thereafter pay Tenant's Estimated Additional Rental for such calendar year in accordance with Section 3.1 above. In addition, if at any time during a calendar year it appears to Landlord that Tenant's Additional Rental for such calendar year will exceed Tenant's Estimated Additional Rental then being paid by Tenant, Landlord shall have the right, but not the obligation, to appropriately revise, on at least 30 days' notice to Tenant, Tenant's Estimated Additional Rental for the remainder of such calendar year and Tenant shall thereafter pay the revised Tenant's Estimated Additional Rental for the remainder of such calendar year. (b) Within one hundred fifty (150) days after the end of the calendar year during the Term, and as soon as reasonably possible after the termination of this Lease (Landlord and Tenant agreeing that the provisions of this Section 3.3 shall survive the termination of this Lease), Landlord shall provide Tenant a statement showing the Operating Expenses for said calendar year as prepared by a certified public accounting firm, and a statement prepared by Landlord comparing Tenant's Estimated Additional Rental with Tenant's Additional Rental. If Tenant's Estimated Additional Rental exceeds Tenant's Additional Rental for said calendar year, Landlord shall refund to Tenant the excess paid by Tenant within thirty (30) days after providing Tenant the statement. Additionally, if Tenant's Estimated Additional Rental has been overestimated by five percent (5%) or more, Landlord shall refund to Tenant interest on the entire overpayment at the Applicable Rate from July 1 of the calendar year during which such overpayment was made until refunded. If Tenant's Additional Rental exceeds Tenant's Estimated Additional Rental for said calendar year, Tenant shall pay to Landlord within thirty (30) days of receipt of the 116 statement an amount equal to such difference. Notwithstanding anything in this Lease to the contrary, Landlord acknowledges and agrees that, except as provided in Section 3.4(d) below, in no event shall any Operating Expenses be billed or chargeable to Tenant after the date which is two (2) years following the calendar year end in which such Operating Expenses were incurred by Landlord. In the event Landlord (or any successor to Landlord in the event the Building is conveyed to a new owner during the Term of this Lease, as the Term may be renewed as provided herein) fails to bill any such Operating Expenses to Tenant within the aforementioned two (2) year period, Tenant shall have no obligation to pay any such Operating Expenses. For purposes of this Section 3.3, third-party expenses shall be deemed to have been incurred by Landlord on the date that Landlord receives an invoice for such third-party expense. (c) "Tenant's Proportionate Share" shall mean the percentage found by dividing the Net Rentable Area of the Premises by the Leasable Area in the Building. 3.4 Operating Expenses. (a) The term "Operating Expenses" shall mean all reasonable expenses, costs and disbursements relating to or incurred or paid in connection with the ownership, operation and maintenance of the Project, computed on an accrual basis and determined in accordance with generally accepted accounting principles consistently applied, including but not limited to the following: (i) wages and salaries of all persons (other than corporate, executive or home office administrative personnel) engaged in the operation, maintenance or access control of the Project, and personnel who provide traffic control relating to ingress and egress to and from the Building and Garage to the adjacent public streets, including all taxes, insurance, and benefits relating thereto; provided, that if any such personnel are working on other projects, including those being periodically developed, managed and/or operated by Landlord or one or more of its affiliates in addition to the Project, then such employees' wages, salaries and other compensation and benefits shall be equitably allocated among all such projects such that only that portion of such expenses (in proportion to their time spent in performing services for the Project) shall be included herein; (ii) the cost of all supplies, tools, equipment, and materials used in the management, operation, maintenance and security of the Project; (iii)the cost of all utilities for the Project, including but not limited to the cost of water and power for heating, lighting, air conditioning, and ventilating the Building during Normal Business Hours, but excluding those costs separately billed to specific tenants; (iv) the cost of all maintenance and service agreements for the Project and the equipment therein, including but not limited to access control, window cleaning, elevator maintenance, janitorial service, security and landscaping; (v) the cost of repairs and general maintenance (excluding repairs and general maintenance paid by proceeds of insurance, by Tenant or by other third parties, alterations attributable solely to tenants of the Project, and repairs and general maintenance required to be paid by other tenants or which would have been paid by insurance required to be maintained by Landlord under this Lease); (vi) an amortization charge (including an interest factor equal to the Applicable Rate) on account of any Capital Cost (as defined in paragraph (v) of Section 3.4(b) below) incurred by Landlord to either (a) effect a reduction in the Operating Expenses of the Project (in which case the Capital Cost shall be amortized over the payback period, but such amortization charge shall not exceed the actual annual reduction in Operating Expenses) or (b) comply with applicable governmental requirements due to changes in laws (or current reasonable interpretations thereof) in effect as of the Commencement Date (in which case the Capital Cost shall be amortized over the useful life of the Capital Cost not to exceed ten (10) years); (vii)the cost of all insurance relating to the Project, including but not limited to the cost of casualty, rental loss and liability insurance applicable to the Project and Landlord's personal property used in connection therewith and the cost of deductibles (to the extent not in excess of any limitations on deductible amounts set forth herein) paid on claims made by Landlord; provided, however, with respect to rental loss insurance, Operating Expenses shall not include any additional premiums associated with covering rental loss for a 117 period in excess of twelve (12) months; (viii) all taxes, assessments, and governmental charges, whether directly paid by Landlord, whether federal, state, county, or municipal and whether imposed by taxing districts of authorities presently taxing the Project or by others subsequently created or otherwise, and any other taxes and assessments attributable to the Project or its operation, including without limitation reasonable costs and expenses incurred by Landlord in contesting such taxes, but excluding federal and state taxes on income, death taxes, franchise taxes, and any taxes imposed or measured on or by the income of Landlord from the operation of the Project (other than ad valorem taxes on the Project determined by reference to Landlord's income from the Project) or imposed in connection with any change of ownership of the Project; provided, however, that if at any time during the Term, the present method of taxation or assessment shall be so changed that the whole or any part of the taxes, assessments, levies, impositions, or charges now levied, assessed or imposed on real estate and the improvements thereof, shall be changed and as a substitute therefor, or in lieu of an addition thereto, taxes, assessments, levies, impositions, or changes shall be levied, assessed, or imposed wholly or partially, directly or indirectly, as a capital levy or otherwise on the rents received from the Project or the Rent reserved herein or any part thereof, then such substitute or additional taxes, assessments, levies, impositions or charges, to the extent so levied, assessed, or imposed, shall be deemed to be included within the Operating Expenses to the extent that such substitute or additional tax would be payable if the Project were the only property of Landlord subject to such tax; (ix) market rental and other office expenses for Landlord's On-Site management office; provided, in no event shall such expenses apply to in excess of 1,500 square feet of Net Rentable Area; (x) all landscape maintenance costs for the Project; (xi) any lease payments made by Landlord for any equipment used in the operation or maintenance of the Project, excluding, however, any part of such lease payments that constitutes a Capital Cost and could not be included as an Operating Expense under clause (vi) of this Section 3.4(a); (xii)an allocation for Landlord's corporate, executive and home office personnel of up to $10,000 per year; and (xiii) Landlord's (or Landlord's managing agent's) accounting and audit costs and attorneys' fees applicable to the Project, including without limitation, the cost of providing audited statements of Operating Expenses to all tenants as required by Section 3.3(b) above (provided that costs charged hereunder shall not include any such costs incurred in connection with preparation of tax returns or internal ownership accounting); and (xiv)any and all other expenses necessary or appropriate for operation, maintenance, repair, security or management of the Project consistent with the standards for Comparable Buildings (as hereafter defined). (b) Notwithstanding the foregoing, the following items shall be expressly excluded from Operating Expenses: (i) repairs or other work occasioned by fire, windstorm or other casualty, to the extent that the costs of which are reimbursed to Landlord by insurers or by governmental authorities in eminent domain; (ii) costs, expenses and fees relating to negotiating with or entering into leases for space in the Building, or in connection with disputes with and/or enforcement of agreements with prospective tenants, tenants or other occupants of the Project, including leasing commissions and attorneys' fees; (iii)costs incurred in renovating or otherwise improving, decorating or redecorating space for tenants or other occupants in the Building or vacant Leasable Space in the Building, or for more than $18,000 of costs incurred by Landlord in the initial build-out of the Building management office, which costs shall be amortized over the initial term hereof at an interest cost of ten percent (10%) per annum; (iv) Landlord's cost of electricity and other services sold to tenants and which are not standard for the Building, for which Landlord is reimbursed or entitled to be paid by tenants as an additional charge or rental; (v) Costs of a capital nature, including, but not limited to, capital additions, capital improvements, capital alterations, capital replacements, capital equipment and capital tools, and/or capital redesign, all in accordance with generally accepted accounting principles, consistently applied, giving due regard for the materiality of any such expenditures ("Capital Costs"), except as provided for in Section 3.4(a) above; (vi) expenses in connection with services or other benefits of a type which are not standard for the 118 Building and which are not available to Tenant without specific charge therefor, but which are provided to another tenant or occupant and for which such tenant or occupant is specifically charged by Landlord; (vii)principal, finance charges and interest on debt or amortization payments on any mortgage, or mortgages, and rental under any ground or underlying lease, or leases, except to the extent the same may be made to pay or reimburse, or may be measured by, ad valorem taxes, insurance or other amounts that would otherwise be included in Operating Expenses; (viii) advertising and promotional expenses; (ix) depreciation and amortization, except as set forth in clause (vi) of Section 3.4(a) above; (x) Fines, penalties and legal fees incurred due to the violation by Landlord, its employees, agents and/or contractors, any tenant or other occupant of the Building, of any terms and conditions of this Lease or of the leases of other tenants in the Building, and/or of any valid, applicable laws, rules, regulations and codes of any federal, state, county, municipal or other governmental authority having jurisdiction over the Building that would not have been incurred but for such violation by Landlord, its employees, agents and/or contractors, tenants or other occupants of the Building; (xi) Penalties for late payment, including, without limitation, penalties for late payment of taxes, equipment leases, etc.; (xii)Payments to any subsidiary or Affiliate of Landlord for services (other than the management fee) on or to the Building and/or the Land, or for goods, supplies or other materials, to the extent that the costs of such services, goods, supplies and/or materials exceed the costs that would have been paid had comparable services, goods, supplies or materials been provided by parties unaffiliated with Landlord; (xiii) To the extent that a separate allocation has been made therefor by the applicable taxing authority, real estate taxes allocable to the leasehold improvements of tenants in the Building (in excess of Building standard); (xiv)Except as set forth in Sections 3.4(a)(xii) and (xiii), wages, salaries, benefits and expenses attributable to Landlord's or its property management company's executive personnel above the level of building manager or central office administrative personnel; (xv) Costs or expenses incurred with respect to the purchase, ownership, leasing, showing, promotion and/or repairs of sculptures, paintings or other works of art; maintenance (as opposed to repairs) of any such sculptures, paintings or other works of art shall be included in Operating Expenses; (xvi)Costs for which Landlord is compensated through or reimbursed by insurance or other means of recovery; (xvii) Costs of correcting or repairing defects, including latent defects, in the construction of the Building (and/or any associated parking facilities, and/or equipment or the replacement of defective equipment, to the extent such costs are covered by warranties in effect of manufacturers, suppliers or contractors, or are otherwise borne by parties other than Landlord); (xviii) Contributions to operating expense reserves; (xix)Contributions to charitable organizations (other than for up to $500.00 of such contributions made with Tenant's prior written approval); (xx) Costs incurred in removing the property of former tenants and/or other occupants of the Building; (xxi)Consulting costs and expenses incurred by Landlord except to the extent same relate to the management, repair, maintenance, security or operation of the Project; (xxii) The costs of any "tap fees" or one-time lump sum sewer or water connection fees for the Building; (xxiii) Costs or fees relating to the defense of Landlord's title to or interest in the Building and/or the Land, or any part thereof; (xxiv) Unless Tenant's prior written approval has first been obtained, costs incurred in installing, operating, maintaining and/or owning any specialty facilities or specialty services not customarily installed, operated and/or maintained in Comparable Buildings, such as an observatory, beacon(s), broadcasting facilities (other than the Building's music system, life support and security systems), luncheon club, athletic or recreational club, helicopter pad, child care center, kiosks, concierge or similar facilities or services. Notwithstanding the foregoing, the costs of providing standard Building services to any of the foregoing shall not be excluded from Operating Expenses provided that the tenant or occupant thereof pays its proportionate share of the costs of such services for the Project as a whole; and (xxv)Any expenditure of a type that is not specifically included hereunder and that is not of the type necessary or appropriate for the operation, maintenance, repair, security or management of the Project consistent with the standards for Comparable Buildings. 119 (c) Notwithstanding any other provision herein to the contrary, if less than ninety-seven and one-half percent (97.5%) of the Net Rentable Area in the Building is occupied and fully provided with Building standard services during any partial year or any full calendar year, an adjustment shall be made in computing each component of Operating Expenses (other than the items described in Section 3.4(a)(viii)) for such year so that Operating Expenses shall be computed for such year as though ninety-seven and one-half percent (97.5%) of the Net Rentable Area leased or held for lease in the Building had been occupied and provided with Building standard services during such partial or full year. Any such adjustment shall be made in a manner consistent with the predominant practice of landlords of Comparable Buildings. (d) Landlord shall maintain or cause to be maintained complete and accurate records of all Operating Expenses. As long as an Event of Default by Tenant is not then continuing under the Lease, Tenant, at its sole cost and expense, shall have the right not more than once per calendar year during the Term to audit Landlord's books and records relating to the Operating Expenses for any preceding calendar year for the sole purpose of determining whether this Lease and generally accepted accounting principles have been followed and consistently applied. This audit must take place during reasonable normal business hours at Landlord's office at the address specified in the preamble paragraph of this Lease (or such other address as may be designated by Landlord from time to time). If Tenant elects to exercise this right, Tenant must do so within two (2) years after the date Landlord delivers to Tenant the statements described in Section 3.3, or Tenant shall be deemed to have accepted the Operating Expenses as presented by Landlord; provided, that if Tenant exercises its audit right within such two (2) year period and discovers an error in Landlord's calculation of such Operating Expenses, Tenant shall be permitted to go back one (1) additional year for the sole purpose of determining whether the same error(s) were made in such prior year as well, in which event Landlord shall also have the opportunity to review such additional one (1) year period and to charge Tenant for any Operating Expenses for which Tenant was incorrectly not charged. Tenant acknowledges that Landlord shall not be required to consider any claim that Landlord has charged Tenant more than Tenant's Proportionate Share of Operating Expenses based on an audit by (i) any party (other than a "Big 6" accounting firm) performing such audit on or under a contingency fee arrangement or otherwise basing its fees on the savings produced for Tenant from such audit, or (ii) any party other than a "Big 6" accounting firm or other regional certified public accounting firm reasonably approved by Landlord in advance. In the event that Tenant asserts an error by Landlord on the basis of Tenant's audit, Landlord shall have the right to review Tenant's audit report and to perform its own investigation of Tenant's findings. If an audit performed by Tenant and confirmed by Landlord reveals an overcharge in the Operating Expenses paid by Tenant of 3% or more of the amount actually due from Tenant, Landlord shall reimburse Tenant for all out of pocket costs incurred by Tenant in connection with such audit. Any shortfalls or excess revealed by Tenant's inspection or audit and verified by Landlord shall be paid to the applicable party within thirty (30) days after such party is notified of such shortfall or excess. 3.5 Reduced Services. To the extent Operating Expenses are reduced due to the fact that one or more full floors within the Premises are not being occupied (without implying that Tenant must remove its furniture, fixtures and equipment from such space), any savings in Operating Expenses actually realized (as reasonably estimated by Landlord) by Landlord shall be passed on to Tenant. 3.6 Tax Protests. Except as provided herein, Tenant hereby waives any and all rights under applicable law to an administrative or judicial review of any determination of the appraised value of the Project, including without limitation, any rights applicable under the Texas Tax Code (as amended); provided, that if Landlord does not otherwise intend to review or contest the appraised value of the Project during any calendar year, Landlord agrees, upon such request by Tenant, to undertake such review and/or protest, with the cost thereof being an Operating Expense of the Project. 120 ARTICLE IV Landlord Services 4.1 Services to be Provided by Landlord. Landlord shall operate and maintain the Project in accordance with the standards customarily followed in the operation and maintenance of Comparable Buildings, and shall furnish to Tenant as long as Tenant and its permitted sublessees and assigns are occupying the Premises, the following services, which services shall be in keeping with the services customarily provided in first-class office buildings in the area of Houston, Texas, bounded by State Highway 6, Interstate Highway 10 (including the properties immediately adjacent to both sides of such freeway), Kirkwood and Briar Forest ("Comparable Buildings"): (a) hot and cold domestic water at those points of supply provided for general use of tenants in the Building; (b) heating, ventilation and air conditioning ("HVAC Service") in season, subject to curtailment required by governmental laws, rules, or regulations, in such amounts as are reasonably required in Landlord's judgment for the comfortable use and occupancy of the Premises and consistent with the provisions of the Outline Plans and Specifications attached hereto as Exhibit "G" (the "Outline Plans and Specifications"). Landlord shall furnish HVAC Service to Tenant between the hours of 7:00 a.m. and 7:00 p.m. Monday through Friday, and 8:00 a.m. and 2:00 p.m. Saturdays (herein referred to as "Normal Business Hours"), excluding the following holidays: New Year's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, Friday following Thanksgiving Day, Christmas Eve, Christmas Day and one additional day per year if designated by Tenant on or before November 1 of the immediately preceding calendar year ("Holidays"); (c) routine maintenance and standard electric lighting service for all public areas and service areas of the Project; (d) janitorial service on a five (5) day week basis, exclusive of Holidays and generally in accordance with the janitorial specifications set forth in Exhibit "K" attached hereto; provided, that if Tenant's floor coverings or other improvements are other than Building standard, or if Tenant requires such janitorial service to be performed at times different than the times such service is typically provided to the other tenants in the Project, Tenant shall pay the net additional cleaning cost, if any, attributable thereto. If Tenant reasonably determines that Landlord's cleaning contractor is not providing janitorial service to the level required hereby, and Landlord is not able to correct such performance within thirty (30) days following Tenant's notice thereof (specifying in reasonable detail any such deficiencies) and consistently maintain such level thereafter, then Tenant shall have the right to cause Landlord to engage a new cleaning contractor reasonably satisfactory to Tenant to provide such services for the Project; provided, that Tenant may not exercise such right more often than once every two (2) calendar years during the Term. (e) equipment or personnel designed to limit access to the Project in accordance with the standards of Comparable Buildings, which services shall include at least one (1) on-site security person on a full-time (24-hour) basis performing generally the services outined in Exhibit "M" attached hereto, limited (e.g., by card-key) access to the Building after Normal Business Hours, and limited (e.g., by card-key) access for automobiles entering into the non-visitor portion of the Garage. Any reasonable services in excess of such level requested by Tenant shall be provided, but at Tenant's sole cost and expense. LANDLORD SHALL HAVE NO RESPONSIBILITY TO PREVENT, AND SHALL NOT BE LIABLE TO TENANT FOR AND SHALL BE INDEMNIFIED BY TENANT AGAINST, LIABILITY OR LOSS OF TENANT, ITS AGENTS, CONTRACTORS, CUSTOMERS, EMPLOYEES, INVITEES, LICENSEES, SERVANTS, AND VISITORS ARISING OUT OF LOSSES DUE TO THEFT, BURGLARY, OR DAMAGE OR INJURY TO PERSONS OR PROPERTY CAUSED BY PERSONS GAINING ACCESS TO THE PROJECT, THE GARAGE OR THE PREMISES, AND TENANT HEREBY RELEASES LANDLORD FROM ALL LIABILITY RELATING THERETO, REGARDLESS OF WHETHER SUCH LOSSES ARE CAUSED IN WHOLE OR IN PART BY THE NEGLIGENCE OF LANDLORD; LIKEWISE, NEITHER TENANT NOR ITS SUBTENANTS SHALL HAVE RESPONSIBILITY TO 121 PREVENT, AND SHALL NOT BE LIABLE TO LANDLORD FOR, LIABILITY OR LOSS TO LANDLORD, ITS AGENTS, CONTRACTORS, CUSTOMERS, EMPLOYEES, INVITEES, LICENSEES, SERVANTS, AND VISITORS ARISING OUT OF LOSSES DUE TO THEFT OR BURGLARY OR DAMAGE OR INJURY TO PERSONS OR PROPERTY CAUSED BY PERSONS GAINING ACCESS TO THE PROJECT, THE GARAGE OR THE PREMISES, AND LANDLORD HEREBY RELEASES TENANT FROM ALL LIABILITY RELATING THERETO, REGARDLESS OF WHETHER SUCH LOSSES ARE CAUSED IN WHOLE OR IN PART BY THE NEGLIGENCE OF TENANT; (f) electrical capacity sufficient to service a total connected load of not less than seven (7) watts per square foot of Net Rentable Area within the Premises (exclusive of Building standard lighting and base-Building air handlers), plus sufficient additional electrical capacity to operate Building-standard lighting and base-Building air handlers, calculated separately for each floor on which portions of the Premises are located. Landlord will provide all electrical distribution equipment (including but not limited to feeders, meters, K-rated transformers, low voltage panel boards with 20 AMP single pole circuit breakers) required to provide a minimum low voltage (208Y/120V) connected load of five (5) watts per square foot and a minimum high voltage (480Y/277V) connected load of two (2) watts per square foot. There shall be no less than one (1) transformer per floor. Electricity will be made available to Tenant twenty-four (24) hours per day, seven (7) days per week; however, Tenant shall pay to Landlord, monthly as billed, such charges as may be separately metered for Tenant's electrical consumption exceeding .85 kilowatt hours per square foot of Net Rentable Area per month. Any such meters will be installed, operated and maintained by Landlord, and Tenant shall reimburse Landlord for the actual and reasonable out-of-pocket costs for such installation, operation and maintenance. Metered consumption at Tenant's expense shall be charged at a per kilowatt-hour cost equal to the Building average cost per Kilowatt-hour calculated by dividing the total effective Building electricity charges for the month the metered electricity was supplied, by the total number of Kilowatt-hours used by the Building. Landlord will coordinate the installation of such meters with Tenant so as not to unreasonably interfere with the operation of Tenant's business or the construction of the Initial Tenant Improvements, as applicable. Should the total electrical capacity of Tenant's machines and equipment located in the Premises exceed low voltage (208Y/120V) connected load of five (5) watts per square foot or high voltage (480Y/277V) connected load of two (2) watts per square foot of Net Rentable Area of the Premises and such excess capacity necessitates installation by Landlord of additional electrical equipment in excess of Building standard, the same shall be installed, operated and maintained by Landlord, and Tenant shall reimburse Landlord for the actual and reasonable out-of-pocket costs for such installation, operation and maintenance. If the heat generated by the operation of Tenant's electrical equipment requires air conditioning in excess of Building standard air conditioning, the same shall be installed (subject to Landlord's prior approval of location and compatibility with Building systems, which approval shall not be unreasonably withheld or delayed) and maintained by Tenant, at Tenant's expense, and Tenant shall pay all expenses attributable thereto. (g) all Building standard fluorescent bulb and ballast replacement in all areas and all incandescent bulb replacement in public areas, toilet and restroom areas and stairwells; (h) nonexclusive passenger elevator service to the Premises twenty-four (24) hours per day and nonexclusive freight elevator service during normal Business Hours (and after Normal Business Hours, if properly scheduled with Landlord); and (i) periodic extermination services as shall be reasonably appropriate. Except as otherwise provided above, water, electricity and lighting in public areas of the Project shall be provided twenty-four (24) hours a day, seven (7) days a week. Landlord shall retain or cause to be retained at least one (1) full-time property manager with no less than five (5) years experience in the management of suburban office buildings to be in charge of managing the Building, and shall 122 maintain or cause to be maintained one (1) full time engineer at the Building. The property manager may (but shall not be obligated to) split his time between the Building and no more than one other building (which other building shall be in the Galleria or other west-Houston area) that he is managing at the same time. 4.2 Interruption of Services. (a) To the extent the services described in Section 4.1 require electricity, gas or water supplied by public utilities, Landlord's covenants thereunder shall only impose on Landlord the obligation to use its reasonable efforts to cause the applicable public utilities to furnish the same. Failure by Landlord to any extent to furnish the facilities, utilities or services described in Section 4.1, or any cessation in the furnishing of same, shall not render Landlord liable in any respect for damages to either person or property, nor be construed as an eviction of Tenant, nor constitute a breach of any covenant or implied warranty hereunder, nor work an abatement of Rent, nor relieve Tenant from fulfillment of any covenant or agreement under this Lease. Landlord shall use all commercially reasonable efforts under the circumstances to restore such services as quickly as possible. In addition to the foregoing, should any of the equipment or machinery break down, cease to function properly for any cause, or be intentionally turned off for testing or maintenance purposes, Tenant shall have no claim for abatement or reduction of Rent or damages on account of an interruption in service occasioned thereby or resulting therefrom; provided, however, Landlord agrees to use all commercially reasonable efforts under the circumstances to promptly repair said equipment or machinery and to restore said services as quickly as reasonably possible. (b) Notwithstanding the foregoing, except with respect to a casualty or condemnation (which casualty or condemnation shall be governed by Article VII below and not by this Section 4.2(b)) or interruption caused by the actions of Tenant or its employees, agents, representatives, or contractors, if (i) there occurs an interruption in the HVAC, electricity, water or elevator services (the "Essential Services") to the Building or Premises; (ii) such interruption renders a Significant Portion (hereinafter defined) of the Premises Untenantable (hereinafter defined); and (iii) such interruption continues to render a Significant Portion of the Premises Untenantable for five (5) consecutive business days (or for more than five (5) business days in a ten (10) consecutive business day period), then Rent shall abate as to that portion of the Premises that is rendered Untenantable. The abatement shall commence on the sixth (6th) day of such interruption and continue for so long as the interruption continues; provided, however, if the interruption of Essential Services continues to render more than fifty percent (50%) of the Premises Untenantable for forty-five (45) consecutive days, Tenant shall have the right, but only if exercised during the period such interruption shall continue to exist, to terminate this Lease effective as of the date of such notice, in which event Tenant will be relieved of all obligations arising after such date hereunder. In lieu of such termination, if Landlord is not using all commercially reasonable efforts to cure such failure, Tenant shall have the right to cure such Essential Services failure and Landlord shall reimburse Tenant (which reimbursement Tenant may effect through the withholding of Rent) for all reasonable sums expended in so curing such failure. As used in this Lease, the term "Significant Portion" shall mean at least one thousand (1,000) square feet of Net Rentable Area, and the term "Untenantable" shall mean the condition whereby Tenant is unable, on a reasonable basis, to use the Premises or a portion thereof for the conduct of its business therein and, in fact, does not use the Premises (or such portion thereof) for such purposes as a result thereof. In consideration of the terms of this Section 4.2(b), Tenant waives any and all other rights and remedies Tenant may have at law or in equity, including without limitation any rights Tenant may have arising from implied warranties of suitability, as a result of the circumstances described in this Section 4.2. 123 4.3 Payment for Non-Standard Services. (a) Landlord shall provide HVAC Service for such additional times as Tenant shall request; provided, that Tenant shall (i) give Landlord notice of any evening HVAC Service required not later than 5:00 p.m. on the date such service is required and not later than 5:00 p.m. on Friday or the prior business day for any weekend or Holiday service, and (ii) pay to Landlord for providing such HVAC Services an amount equal to Landlord's actual cost for providing same, excluding any management fee or administrative charge; provided, that in no event shall the charge to Tenant for such overtime HVAC operation (prior to the proration set forth below) exceed the respective prevailing hourly rates for cooling and heating charged from time to time to other tenants in the Building. Further, in the event there are other tenants sharing a Floor with Tenant and such other tenant(s) or occupant(s) of such Floor request utilization of the same air handling system at the same time as Tenant, the charges to Tenant shall be reduced pro-rata (on a rentable square foot basis) based on the relative area of the tenants using such same system. To eliminate the necessity of the notices to Landlord as described above, Landlord shall during the design stage for the Building review the possibility of installing as part of the base Building, a card-reader allowing Tenant to program its own after-hours air conditioning. If such equipment will not result in an increase in base Building costs by more than $5,000, Landlord shall install same at Landlord's sale cost and expense; if such equipment will result in a greater increase, Landlord will notify Tenant and give Tenant the option to reimburse Landlord for such incremental costs. If Tenant elects not to cover such incremental costs, Landlord shall not be required to install such additional equipment. (b) Tenant shall also pay Landlord, upon demand, such additional amounts as are necessary to recover additional costs incurred by Landlord in performing or providing additional janitorial, maintenance, security or other services or requirements of Tenant in excess of those set forth as standard in Section 4.1 or in performing any services (and in paying additional taxes) as to any non-Building standard installations in the Premises (in excess of the cost of such work for the corresponding Building standard installations, if any). Tenant shall pay Landlord upon demand, actual or estimated costs for all electricity in excess of the amounts required to be provided by Landlord to Tenant pursuant to Section 4.1(f) above and all electrical capacity required to supply such excess amounts or as otherwise requested by Tenant, plus six percent (6%) for overhead. 4.4 Keys and Locks. Landlord shall initially furnish Tenant with one card key per employee of Tenant as of the Commencement Date (plus fifteen (15) visitor card keys) for all Building standard card key locks to exterior entrance doors to the Premises, at Landlord's expense. Additional card keys will be furnished by Landlord upon an order signed by Tenant and at Tenant's expense equal to Landlord's cost. In the event that Landlord changes the keys or security devices with regard to access to the Project, Landlord will furnish without direct cost to Tenant (but as part of Operating Expenses) one access device or card key for each of Tenant's then-employees. All keys furnished to Tenant by Landlord shall remain the property of Landlord. No additional locks shall be allowed on any door of the Premises without Landlord's consent, and Tenant shall not make or permit to be made any duplicate keys, except those furnished by Landlord. Notwithstanding the foregoing, Tenant, at Tenant's sole cost and expense, shall have the right to change or replace any locks within the Premises or place additional locks within the Premises provided such locks conform to the Building key system and Landlord is provided keys therefor. Upon termination of this Lease, Tenant shall surrender to Landlord all keys to any locks on doors entering or within the Premises, and shall give to Landlord the explanation of the combination of all locks for safes, safe cabinets, and vault doors, if any, left in the Premises. 4.5 Graphics and Building Directory. (a) Landlord shall initially provide and install all signage, letters or numerals at the entrance to the Premises and a strip containing a listing of Tenant's name on the Building directory board to be placed in the main lobby of the Building. Tenant shall be provided listings on the directory board for Tenant's offices and major departments, and Tenant's name shall be prominently displayed thereon. All such signage, letters and numerals shall be in the Building standard graphics. Landlord shall not be liable for any inconvenience or damage occurring as a result of any error or omission in any directory or graphics. 124 (b) As long as no Event of Default by Tenant exists hereunder and Tenant (excluding any assignees or sublessees that are not Affiliates of Tenant) continues to lease and occupy at least two (2) full floors in the Building, the Building shall be officially named the "Cabot Oil & Gas Corporation Building." In the event Tenant changes its name or assigns this Lease to an entity that is approved by Landlord or as to which no such approval is required by Landlord pursuant to Section 9.1(c)(iii), Tenant shall have the right to change the name of the Building to Tenant's new name or to Tenant's assignee or successor entity subject to Landlord's prior written approval with respect thereto, which approval shall not be unreasonably withheld; provided, that all costs incurred by Landlord in connection with any such change (including without limitation, any such expenses Landlord is required to reimburse other tenants of the Building) shall be reimbursed by Tenant to Landlord within thirty (30) days following Landlord's request therefor. (c) Tenant shall be permitted to install, at Tenant's sole cost and expense, appropriate signage, including its corporate logo, on the walls of all floors in the Building where Tenant occupies the entire floor, and on any partial floor occupied by Tenant, subject in the case of any such partial floor to obtaining Landlord's prior approval with respect thereto, which approval shall not be unreasonably withheld. (d) As long as no Event of Default by Tenant exists hereunder and Tenant (excluding any assignees or sublessees that are not Affiliates of Tenant) continues to lease and occupy at least two (2) full floors in the Building, Tenant shall have the right to install a sign, at Tenant's sole cost and expense, in the lobby of the Building and an illuminated monument sign on the exterior grounds of the Project compatible with the design of the Building. The size, location, lighting and design of such signs shall be subject to Landlord's reasonable approval with respect thereto, which approval shall not be unreasonably withheld. As long as Tenant continues to have such signage rights, no other tenant in the Building shall be permitted to install any signage in the lobby of the Building or on the exterior grounds of the Project. Landlord shall also provide, at Tenant's sole cost and expense, three (3) flagpoles at the front entry area of the Building in a location mutually satisfactory to Landlord and Tenant. (e) Except as expressly provided in this Section 4.5, no signs, numerals, letters or other graphics shall be used or permitted on the exterior of, or which may be visible from outside, the Premises, unless approved in writing by Landlord. All graphics installed in, on and around the Premises, Building and/or Project shall comply in all respects with all covenants, restrictions, ordinances, laws, codes and regulations applicable to the Project. All of the graphics and other improvements made to the Project pursuant to Paragraphs (b) - (d) of this Section 4.5 shall be maintained by Tenant at Tenant's sole cost and expense, and shall be removed by Tenant at the expiration or earlier termination of this Lease, in which event Tenant shall repair any damage caused thereby and restore the Project to the condition it was in prior to the installation of such signs and improvements, reasonable wear and tear accepted. Tenant will, at Tenant's expense, indemnify and defend Landlord against all losses, costs, damages, liabilities, attorneys' fees and other expenses which Landlord may sustain or incur arising out of or in any way connected with any claim that any name or mark set out on the signage of the Project at the request of Tenant constitutes an infringement of any third party rights. (f) Notwithstanding the foregoing, in addition to the Tenant Allowance (as defined in Exhibit "F" attached hereto), Landlord agrees to pay for or reimburse Tenant for up to $89,000 of the costs and expenses incurred by Tenant in connection with the design, fabrication and installation of the signage described in this Section 4.5. Any costs in excess of such amount shall be paid by Tenant. All such graphics work shall be part of the Initial Tenant Improvements. If Tenant elects to have the Base Building Contractor construct the Initial Tenant Improvements, Tenant shall reimburse Landlord for any such excess costs within thirty (30) days following demand from Landlord therefor. If Tenant elects to use the Tenant Contractor to install the Initial Tenant 125 Improvements, Tenant shall, upon completion of such installation but not later than sixty (60) days following the Commencement Date, deliver to Landlord copies of invoices and other reasonable evidence of such costs and expenses and Landlord shall reimburse Tenant for such costs (subject to the maximum amount set forth above) within thirty (30) days thereafter. ARTICLE V Use and Care of the Premises 5.1 Use. The Premises shall be used and occupied by Tenant (and its permitted assignees and subtenants) solely for general office purposes and for other ancillary legally permitted uses consistent with the character of first-class office buildings in the Houston Energy Corridor and for no other purpose. Without limiting the foregoing, the Premises shall not be used for any purpose which would (i) tend to lower the quality or character of the Building, (ii) exceed the utility (including water, wastewater, electricity or gas) capacity limits of the Building, create unreasonable structural or elevator loads, or otherwise interfere with standard Building operations, (iii) violate any applicable Legal Requirements (as hereinafter defined), (iv) create any public or private nuisance, or interfere with or pose any threat to the use, health or safety of, any other tenant of the Building (including without limitation, any such interference that may be caused by smells, noise, vibration or visual conditions), (v) create within the Premises (or any portion thereof) a working environment with a density of greater than four (4) persons per 1,000 square feet of Net Rentable Area (averaged over the entire Premises), or (vi) increase the existing rate of insurance on the Project or any portion thereof or cause any cancellation of any insurance policy covering the Project or any portion thereof. During the Term and only on weekends, Holidays (as hereafter defined) and between the hours of 6:00 p.m. and 7:00 a.m. on weekdays (other than Holidays), Tenant shall have the right to use the Building lobby and/or exterior grounds, without charge, for any Tenant sponsored social event (without prohibition of alcohol), provided that: (a) Tenant gives Landlord reasonable prior written notice of the date, time and nature of the event, (b) the date and time of the event do not conflict with another previously scheduled event, and (c) Tenant restores such area to the same condition it was in prior to such event, and (d) Tenant reimburses Landlord for any direct out-of-pocket expenses Landlord incurs in connection with the event (including, without limitation, personnel charges, utility charges and security charges), plus a reimbursement to Landlord of an additional six percent (6%) of such costs to reimburse Landlord for its overhead relating thereto. 5.2 Care of the Premises. Tenant shall not commit and shall use reasonable efforts to prevent any party under Tenant's reasonable control from committing any waste or damage to any portion of the Premises or the Project, and at the termination of this Lease, by lapse of time or otherwise, Tenant shall surrender and deliver up the Premises to Landlord in as good condition as existed on the date of possession by Tenant, ordinary wear and tear, alterations and additions permitted to be made and removed under the terms of this Lease, damage arising by fire or other casualty, and condemnation, excepted. Upon such termination of this Lease, Landlord shall have the right to reenter and resume possession of the Premises. 5.3 Entry for Repairs and Inspection. Landlord and its contractors, agents, or representatives shall have the right to enter into and upon any part of the Premises at all reasonable hours, to inspect or clean the same, make repairs, alterations or additions, and unless Tenant has elected (deemed or otherwise) to renew or extend the Term of this Lease, to show the Premises to prospective tenants during the final twelve (12) months of the Term of this Lease, show the same to prospective tenants, purchasers, lenders or for any other purpose, as Landlord may deem reasonably necessary or appropriate, and Tenant shall not be entitled to any abatement or reduction of Rent or other claim against Landlord by reason thereof. In exercising this right, Landlord agrees to give Tenant reasonable prior notice of any such unscheduled or non-routine entries, except in the case of an emergency, and to use reasonable efforts not to interfere with the conduct of Tenant's business in the Premises. Except in the event of an emergency, all repairs, alterations or additions that would interfere in any material respect with Tenant's use and enjoyment of the Premises shall be made after normal business hours. Unless otherwise requested by Tenant in writing, Landlord shall not enter into any areas previously designated in writing by 126 Tenant as high security areas unless (a) Landlord shows cause therefor and provides Tenant with not less than forty-eight (48) hours' advance written notice thereof, or (b) in the event of an emergency, in which event Landlord shall use reasonable efforts to notify Tenant's emergency response team (which Tenant shall supply to Landlord in the event that Tenant designates any high security areas) and in either such case, in no event shall Landlord enter into any such high security areas without notifying and being accompanied by one of Tenant's on-site security personnel. 5.4 Tenant's Compliance with Laws and Regulations; Rules of Building. Tenant shall comply with, and Tenant shall cause its agents, contractors, customers, employees, invitees, licensees, servants, and visitors to comply with, all laws, ordinances, orders, rules, regulations (of state, federal, municipal, and other agencies or bodies having any jurisdiction thereof) and restrictive covenants relating to the use, condition, or occupancy of the Premises, or the conduct of Tenant's business therein, including environmental laws, and all amendments thereto (collectively, the "Legal Requirements"), with the Rules and Regulations set forth on Exhibit "D" attached hereto ("Rules and Regulations") and with such other rules and regulations as are reasonably adopted by Landlord from time to time for the safety, care or cleanliness of the Premises, the Building or the Project, or for preservation of good order therein, all of which will be sent by Landlord to Tenant in writing and shall be thereafter consistently applied by Landlord and carried out and observed by Tenant, its agents, contractors, customers, employees, invitees, licensees, servants and visitors. Such Rules and Regulations shall prohibit tenants and their visitors and invitees from bringing firearms into the Building and smoking inside the Building or the Garage or in the immediate vicinity of the entrances to either, but shall provide for smoking a covered area on the Building grounds or in the Garage in a location mutually agreeable to Landlord and Tenant. In the event of a conflict between the Building Rules and Regulations and the provisions of this Lease, the provisions of this Lease shall control. In particular, Tenant shall bear the cost of and be responsible for the Tenant Improvements and subsequent leasehold improvements made by Tenant in the Premises being designed so as to be in compliance with the provisions of the 1990 Clean Air Act, the Americans With Disabilities Act (Public Law 101-336, July 26, 1990) (the "ADA"), the Texas Architectural Barriers Act (Article 9102, Tex. Rev. Civ. Stat.), all as amended from time to time, and any applicable building codes. 5.5 Landlord's Compliance with Laws. Landlord shall be responsible for all consultation, architectural and engineering charges, and to otherwise make (or cause to be made) alterations, additions, improvements and/or renovations to the common areas of the Building and path(s) of travel to and from the Building (other than as required solely by Tenant's design of the Tenant Improvements in the Premises), including any associated parking facilities, core restrooms, drinking fountains, fire alarm systems, exit signs and elevator lobbies during the Term, such that same, to the extent required, shall be in compliance with the provisions of 1990 Clean Air Act, the ADA, the Texas Architectural Barriers Act, all as amended from time to time, and any other applicable law, ordinance or regulation, including applicable building codes, whether or not Tenant is the sole occupant of the floor in question. Except as otherwise provided in Section 3.4(b)(v) above, all such expenses shall be Operating Expenses of the Project. 5.6 Hazardous Substances. (a) Without limiting any of the foregoing provisions of this Article V, Tenant shall not generate or cause to be released (whether by way of uncapping, pouring, spilling, spraying, spreading, attaching, leaking or otherwise) into or onto the Premises, the Building, the Project or the surrounding areas (including the ground and ground water thereunder and the sewer and drainage systems therein) any hazardous substances (as defined or established from time to time by applicable local, state or federal law) other than in compliance with law and normal practices in Comparable Buildings. The term "hazardous substances" includes, among other things, hazardous waste. Tenant shall immediately notify Landlord if any such release occurs, and, as to any such release that has been caused by Tenant: (i) Tenant shall immediately and entirely remove such released hazardous substance at Tenant's expense, and such removal shall be in a manner fully in compliance with all laws pertaining to the removal and storage or disposal thereof; and (ii) Tenant hereby agrees to indemnify hold harmless Landlord, Landlord's mortgagee, Landlord's management company, and their partners, officers, directors, employees and agents (collectively, the "Landlord Indemnified Parties") of and from any 127 liability, public or private, resulting to Landlord as a result of such release and agrees to, and does hereby, indemnify such Landlord Indemnified Parties from and against any expense or cost incurred by Landlord, of any nature whatsoever, which results, in whole or in part, directly or indirectly, from a release of a hazardous substance which is caused or permitted by Tenant. The provisions of this Section 5.6 shall survive the expiration or termination of this Lease for any reason. (b) Without limiting any of the foregoing provisions of this Article V, Landlord shall not generate or cause to be released (whether by way of uncapping, pouring, spilling, spraying, spreading, attaching, leaking or otherwise) into or onto the Premises, the Building, the Project or the surrounding areas (including the ground and ground water thereunder and the sewer and drainage systems therein) any hazardous substances (as defined or established from time to time by applicable local, state or federal law) other than in compliance with applicable law and normal practices in Comparable Buildings. As to any such release that has been caused by Landlord: (i) Landlord shall immediately and entirely remove such released hazardous substance at Landlord's expense, and such removal shall be in a manner fully in compliance with all laws pertaining to the removal and storage or disposal thereof; and (ii) Landlord hereby agrees to indemnify hold harmless Tenant and Tenant's partners, officers, directors, employees and agents (collectively, the "Tenant Indemnified Parties") of and from any liability, public or private, resulting to Tenant as a result of such release and agrees to, and does hereby, indemnify such Tenant Indemnified Parties from and against any expense or cost incurred by Tenant, of any nature whatsoever, which results, in whole or in part, directly or indirectly, from a release of a hazardous substance which is caused or permitted by Landlord. The provisions of this Section 5.6 shall survive the expiration or termination of this Lease for any reason. 5.7 Parking. (a) Landlord hereby agrees to make available to Tenant, and Tenant hereby agrees to take, during the full Term of this Lease, four (4) permits per 1,000 square feet of Net Rentable Area in the Premises (including in such number Tenant's Proportionate Share of the visitor and disabled parking spaces for the Building), with one (1) permit per 1,000 square feet of Net Rentable Area in the Premises (not including visitor and disabled parking) out of such total parking to be marked "Cabot Reserved" and reserved for use by Tenant's employees. Each permit shall permit one (1) automobile to be self-parked in the Garage. Tenant shall not be required to pay any rent for such parking. Notwithstanding the foregoing, Tenant may, upon exercising any option for a Renewal Term, reduce the number of spaces leased hereby during such Renewal Term. (b) The locations of the "Cabot Reserved" parking spaces shall be mutually agreed to by Landlord and Tenant prior to the Commencement Date. All parking spaces shall be not less than nine feet in width; provided, that Tenant shall have the right to increase the width of reserved parking spaces to more than nine feet by reducing the number thereof so that in the aggregate Tenant's reserved parking area in the Garage is the same or less than it would have been with the more numerous but narrower spaces. (c) Landlord shall provide at least fifty (50) visitor parking spaces (which number shall exclude disabled parking spaces required by law to be provided in the Garage) on the first level of the Garage for the use of visitors to the Project, ten (10) of which will be designated "Cabot Visitors" and dedicated to the exclusive use of Tenant's visitors. Landlord and Tenant will cooperate in the future if this number of exclusive visitor spaces proves to be inadequate or more than necessary, and increase or decrease such exclusive visitor parking as reasonably appropriate. Visitors entry shall be restricted to the first level of the Garage and shall be provided free of charge. All disabled parking spaces shall be sized vertically as shown on the Preliminary Plans and Specifications. 128 (d) Landlord may make, modify and enforce reasonable rules and regulations relating to the parking of automobiles in the Garage, and Tenant will abide by and cause its agents, employees and invitees to comply with such rules and regulations provided they are uniformly enforced and Tenant and Garage users are given reasonable notice thereof. ARTICLE VI Construction of Project and Leasehold Improvements 6.1 Construction of Project. Landlord, at Landlord's sole cost and expense, shall construct the Project in accordance with Exhibit "E" attached hereto. 6.2 Construction of Leasehold Improvements. Landlord shall construct Tenant's Initial Tenant Improvements to the Premises in accordance with Exhibit "F" attached hereto. 6.3 Alterations, Additions, Improvements. Tenant shall have the right, at its sole cost and expense and without Landlord's consent, to install within the Premises any fixtures, equipment, facilities and other improvements, and to make such alterations, additions or improvements to the Premises, required by Tenant from time to time for the conduct of Tenant's business on the Premises; provided, that (i) Tenant shall not make or allow to be made any alterations, additions or improvements which materially affect or are incompatible with the structural components and/or operating systems (electrical, plumbing and mechanical) of the Project without Landlord's prior consent thereto, which consent shall not be unreasonably withheld; (ii) it shall not be unreasonable for Landlord to withhold its consent to any such alterations, additions or improvements if Landlord reasonably believes that Tenant's use thereof will violate the provisions of Section 5.1 above; (iii)as to the mechanical, electrical and plumbing portions of any such alterations, additions or improvements to the Premises requiring Landlord's consent thereto, Landlord shall also have the right to approve Tenant's contractor for such mechanical, electrical and plumbing portions only; and (iv) each contractor used by Tenant for the construction of any material alterations, additions or improvements to the Premises shall maintain insurance in amounts reasonably determined by Landlord given the nature and extent of the work to be performed by such contractor, and comply with all reasonable rules and regulations relating thereto adopted by Landlord from time to time. To the extent Tenant causes plans and specifications for any such alterations, additions or improvements to be prepared, Tenant will deliver copies of the same to Landlord including without limitation, "as built" plans and specifications with respect thereto. Tenant shall reimburse Landlord for any costs and expenses incurred by Landlord in connection with the review and approval of such proposed alterations, additions or improvements, together with an additional charge of 6% of such costs to cover Landlord's overhead. 6.4 Property of Landlord. All alterations, physical additions, and improvements in or to the Premises (including fixtures) shall, when made, become the property of Landlord and shall be surrendered to Landlord without compensation to Tenant upon termination of this Lease, whether by lapse of time or otherwise; provided, that Landlord may require Tenant to remove all of Tenant's personal property upon the expiration or earlier termination of this Lease or the termination of Tenant's right to possession of the Premises. Notwithstanding the foregoing to the contrary, Tenant may remove all trade fixtures, movable equipment or furniture owned or leased by Tenant and Tenant's special light fixtures (such as chandeliers), audio visual equipment, shelves and filing systems, as well as such other fixtures installed by Tenant that Tenant and Landlord agree at the time of such installation that Tenant shall be permitted to remove same, but Tenant cannot remove any built-in fixtures, built-in equipment, built-in furniture, flooring, or wall paneling. Any such removal permitted to be made by Tenant hereunder shall be made within thirty (30) days after the expiration or earlier termination of this Lease, or the termination of Tenant's right to possession of the Premises, or Tenant shall forfeit such removal rights. Tenant shall bear the costs of all removal of Tenant's property and removal of any non-Building standard items from the Premises and all repairs to the Premises, Building or Project caused by such removal. 129 6.5 Taxes and Tax Abatement. (a) Tenant shall be responsible for ad valorem taxes on its personal property and on the value of the leasehold improvements in the Premises to the extent that the same exceed Building standard allowances and the taxing authorities separately assess Tenant's leasehold improvements. (b) Landlord agrees to use reasonable efforts to assist Tenant in obtaining an abatement of ad valorem taxes to be imposed on the Project by the City of Houston and Harris County taxing authorities; provided, that Landlord shall not be required to expend any material amounts and shall be reimbursed for all out-of-pocket costs incurred by Landlord in connection therewith. In the event Tenant obtains an abatement of ad valorem taxes imposed on the interest of Landlord in the Project by any taxing authority and, as a result thereof, all or a portion of such taxes are not in fact payable by Landlord to such authorities (the "Abated Taxes"), Landlord and Tenant agree as follows: (i) Tenant shall pay on a monthly basis, and Tenant's Estimated Additional Rental shall include, Tenant's Proportionate Share of all ad valorem taxes that would have been imposed upon the Project if no such tax abatement had been granted or existed with respect to the Project, and (ii) Landlord shall thereafter pay to Tenant on or before January 31st of each such succeeding year an amount equal to the Abated Taxes for the proceeding calendar year. 6.6 Repairs by Landlord. Landlord shall keep and maintain in good working order and repair, and shall make such improvements, repairs or replacements as are necessary or appropriate to, the exterior walls, all structural components and elements of the Project, lobbies, stairs, elevators (including without limitation, cabs and doors), corridors and corridor walls and wall treatments, carpeting, public restrooms, roofs, plateglass, parking areas, paved areas, walkways and drives, landscaping, base Building improvements, and all facilities, systems and equipments relating to the furnishing of services (including mechanical, electrical, water, heating, ventilating and air conditioning, life safety and elevators) required to be provided by Landlord pursuant to this Lease, all at such times, in such manner and to such extent as is standard in Comparable Buildings. All repairs, alterations or additions that affect the Project's structural components or major mechanical, electrical, or plumbing systems shall be made by Landlord or its contractors only, and, in the case of any damage to such components or systems caused by Tenant or Tenant's agents, contractors, customers, employees, invitees, licensees, servants, or visitors, shall be paid for by Tenant in an amount equal to Landlord's cost plus six percent (6%) for overhead. Unless otherwise provided in this Lease, Landlord shall not be required to make any improvements to or repairs of any kind or character to the Premises during the Term or any extensions or renewals thereof, except such repairs to Building standard improvements as may be necessary or appropriate for normal maintenance; provided, however, non-Building standard leasehold improvements shall, at Tenant's written request, be maintained, repaired, or replaced by Landlord at Tenant's expense, at a cost or charge equal to Landlord's costs (net of savings effected by not having to maintain, repair or replace Building Standard improvements), which costs shall be payable within thirty (30) days after demand. Notwithstanding the foregoing, Landlord shall be responsible for the repair, at its expense, of any structural and/or latent defects in the Building and, if Landlord constructed them, the Initial Tenant Improvements. 6.7 Repairs by Tenant. Subject to Sections 6.6 and 7.7, Tenant shall, at its own cost and expense, repair, or replace any damage or injury done to its leasehold improvements or any part thereof caused by Tenant or Tenant's agents, contractors, customers, employees, invitees, licensees, servants, or visitors. If Tenant fails to make such repairs or replacements to its leasehold improvements promptly, Landlord may, at its option, make such repairs or replacements, and Tenant shall repay Landlord's cost plus a charge of six percent (6%) for overhead to Landlord on demand. 6.8 Waiver of Landlord Liens. Landlord does hereby waive, relinquish and discharge all liens and rights (constitutional, statutory, consensual or otherwise) that Landlord may have on any personal property or fixtures of Tenant of any kind, and all additions, accessions and substitutions thereto (except for judgment liens which may hereafter arise in favor of Landlord). This clause shall be self-operative and no further instrument of waiver need be required by 130 any lienholder on such property of fixtures. In confirmation of such waiver, however, Landlord shall, at Tenant's request, execute promptly any appropriate certificate or instrument that Tenant may reasonably request. ARTICLE VII Condemnation and Casualty 7.1 Condemnation. (a) If the Premises shall be taken or condemned for any public purpose to such an extent as to render fifty percent (50%) or more of the Premises Untenantable, this Lease shall, at the option of either party, exercised within sixty (60) days following the effective date of such taking, cease and terminate as of the date of such taking or condemnation. If any portion of the Building or Project shall be taken or condemned for any public purpose to such an extent, in Landlord's reasonable judgment, as to render the continued operation of the Building impractical or infeasible, this Lease shall, at the option of Landlord, cease and terminate as of the effective date of such taking or condemnation; provided, that Landlord agrees that it will not exercise such termination right solely for the purpose of re-leasing the Premises to another tenant and if Landlord does exercise such termination right, it will cease to operate the Building for at least one (1) full year. Each party shall notify the other of its election to terminate pursuant to this Section 7.1 within thirty (30) days after receipt of notice of such taking or condemnation. If only a portion of the Premises shall be so taken so as not to render the remainder Untenantable, this Lease shall continue in full force and effect but all Rent shall abate with respect to the portion so taken. All amounts awarded upon taking of any part or all of the Project or the Premises shall belong to Landlord and Tenant shall be entitled to, and expressly assigns all claims, rights and interests to, any such compensation to Landlord. (b) Notwithstanding the foregoing, in the event of a taking of the Premises, (i) Tenant shall be entitled to the unamortized value of any improvements, alterations or additions to the Premises and paid for by Tenant (excluding, however, any improvements, alterations or additions paid for with the proceeds of any improvements/refurbishment allowance) and not removable by Tenant at the expiration of the Term; provided, that if the portion of Landlord's award reasonably allocable to improvements to the Premises is not sufficient to cover all expenses of Landlord and Tenant relating to same, Landlord and Tenant shall share in such portion of the award on a pro rata basis based upon the relative amount paid by each such party for such improvements; and (ii) Tenant shall be entitled to prosecute a separate claim for the value of Tenant's leasehold estate, subject to the limitations set forth in the last sentence of this Section 7.1, and for Tenant's relocation and moving expenses. Amortization of any improvements, alterations or additions made to the Premises during the primary Term shall be calculated on a straight-line method over the remainder of the primary Term. Amortization of any improvements, alterations or additions made to the Premises during a Renewal Term shall be calculated on a straight-line method over the remainder of such Renewal Term. In no event shall Tenant be entitled to any condemnation award for the value of Tenant's leasehold estate under this Lease, unless the same does not reduce the value of Landlord's award. 7.2 Damages from Certain Causes. Neither Landlord nor any mortgagee shall be liable or responsible to Tenant, its agents, contractors, customers, employees, officers, directors, invitees, licensees, servants or visitors for any loss or damage to any property or person occasioned by theft, fire, act of God, public enemy, injunction, riot, strike, insurrection, war, court order, requisition, or order of governmental body or authority, or any cause beyond Landlord's control, or for any damage or inconvenience which may arise through repair or alteration of any part of the Project resulting from the aforementioned causes. 7.3 Fire or Other Casualty. (a) In the event of a fire or other casualty to the Premises, Tenant shall immediately give notice thereof to Landlord. 131 Within forty-five (45) days following any damage or destruction to the Project or the Premises, Landlord shall obtain from a responsible contractor selected by Landlord, an estimate (the "Restoration Estimate") of the time required to complete the applicable restoration or rebuilding. (b) Except as otherwise provided in this Section, if the Premises are partially destroyed by fire or other casualty so as to render the Premises Untenantable in whole or in part, the Rent provided for herein shall abate thereafter as to the portion of the Premises rendered Untenantable until such time as the Premises are no longer Untenantable. (c) Landlord and Tenant shall each have the right to terminate this Lease if the Premises or any portion thereof is damaged or destroyed and the Restoration Estimate provides that the repair or restoration of the Premises with Building standard improvements cannot reasonably be completed within one hundred eighty (180) days following the commencement thereof; provided however, the rights of termination granted under this sentence shall be available to Landlord only if the damage or destruction occurs during the last three (3) years of this Lease and there is no Renewal Option then remaining, or if there is a remaining Renewal Option, Tenant does not exercise the same by written notice to Landlord delivered within thirty (30) days following receipt of Landlord's termination notice, which renewal notice shall include the same information as contained in a renewal notice delivered pursuant to Exhibit "H" hereto. In the event either Landlord or Tenant elects to terminate this Lease based upon the provisions of this Section 7.3, such party must make such election and notify the other party of such election within thirty (30) days following the date Tenant receives the Restoration Estimate from Landlord; otherwise, such party shall be deemed to have elected not to terminate this Lease as a result of such damage or destruction. In the event that a fire or other casualty not affecting the Premises gives rise to a termination right by Landlord under this Section 7.3, Landlord agrees that it shall not exercise its termination right solely for the purpose of re-leasing the Premises to another tenant. In the event this Lease is terminated by either party pursuant to this Section 7.3, Tenant shall vacate the Premises as soon as reasonably practicable, but in no event later than one hundred twenty (120) days following the election by either party to terminate this Lease. Tenant shall pay all Rent owed up to the time of such damage or destruction, and Tenant shall pay a pro rata share of Rent on those portions of the Premises occupied (or deemed occupied) by Tenant following such damage or destruction from the date of such damage or destruction until Tenant vacates such portion or portions, as the case may be, of the Premises. Tenant's occupancy of any portion of a floor shall be deemed for purposes of this section to be Tenant's occupancy of the entirety of such Floor. (d) Unless this Lease is terminated as provided in this Section 7.3 hereof, this Lease shall continue in effect following a fire or other casualty on the same terms and conditions set forth herein, except that the Rent provided for herein shall abate as to the portion of the Premises rendered Untenantable until such time as the Premises (or portion thereof) are no longer Untenantable. (e) Subject to the rights of Landlord and Tenant to terminate this Lease as set forth in this Section 7.3, Landlord shall commence and prosecute any repair work promptly and with reasonable diligence, but Landlord shall be obligated only to restore or rebuild the Premises to a Building standard condition; provided, however, if Landlord's insurance does not provide such coverage, or if Tenant desires Landlord to rebuild more than Building standard condition, Tenant may cause Landlord to rebuild or restore the Premises with such greater improvements (including without limitation, any improvements located in the Premises prior to such damage or destruction) if Tenant bears the cost (including rentals which are lost due to any excess construction time) of such restoration or rebuilding to the extent the same exceeds the costs Landlord would have incurred had only Building standard improvements been used. (f) Notwithstanding anything to the contrary set forth in this Lease, if the Premises or any other portion of the Building is damaged by fire other casualty resulting from the intentional misconduct of Tenant or its agents, contractors, or employees, Tenant shall not be permitted to exercise any right to terminate this Lease due to such casualty or damage. 132 7.4 Casualty Insurance. (a) Landlord shall maintain standard fire and extended coverage insurance on the Project (excluding leasehold improvements) and on all Building standard leasehold improvements, in the amount not less than their full replacement cost, with a deductible not in excess of $50,000. Said insurance shall be issued by and binding upon an insurance company authorized to do business in Texas with a Best's rating of not less than A-, XI, at the expense of Landlord (but with the same to be included in the Operating Expenses, subject to any limitations set forth in Section 3.4) and payments for losses thereunder shall be made solely to Landlord. Such insurance shall provide that not less than fifteen (15) days advance written notice of cancellation or non-renewal shall be given to Tenant. (b) Tenant shall maintain at its expense standard fire and extended coverage (including water damage and sprinkler leakage) insurance on all of its personal property, including removable trade fixtures, located in the Premises and on its non-Building standard leasehold improvements and all other additions and improvements (including fixtures) made by Tenant and not required to be insured by Landlord above, in the amount not less than their full replacement cost. Said insurance shall be issued by and binding upon an insurance company authorized to do business in Texas with a Best's rating of not less than A-, XI, and provide that not less than fifteen (15) days advance written notice of cancellation or nonrenewal shall be given to Landlord. Tenant shall provide Landlord a certificate of such insurance prior to the Commencement Date. (c) If the annual premiums to be paid by Landlord shall exceed the standard rates because of Tenant's operations or contents within the Premises or because the improvements to the Premises are above Building standard, Tenant shall promptly pay the excess amount of the premiums upon request by Landlord (and, if necessary, Landlord may allocate the insurance costs of the Project to give effect to this sentence). Landlord acknowledges and agrees that Tenant's current operations, contents and improvements within the premises located at 15375 Memorial Drive, do not require the payment by Landlord of an additional insurance premium. 7.5 Liability Insurance. Landlord (with respect to the Project) and Tenant (with respect to the Premises) shall each, at their respective expense, maintain a policy or policies of comprehensive general liability insurance with the premiums thereon fully paid on or before the due dates, issued by and binding upon an insurance company authorized to do business in Texas with a Best's rating of not less than A-, XI, and providing that not less than fifteen (15) days advance written notice of cancellation or nonrenewal shall be given to the other party. Landlord's liability insurance shall afford minimum protection (which may be effected by primary and excess coverage) of not less than five million dollars ($5,000,000) combined single limit bodily injury or property damage in any one occurrence, and Tenant's liability insurance shall afford minimum protection (which may be effected by primary and excess coverage) of not less than five million dollars ($5,000,000) combined single limit bodily injury or property damage in any one occurrence. Both Landlord's and Tenant's insurance required by this Section 7.5 shall include contractual liability insurance sufficient to cover their indemnity obligations hereunder. 7.6 Hold Harmless. Tenant shall not be liable to Landlord, or to Landlord's agents, contractors, customers, employees, invitees, licensees, servants or visitors for any damage to person or property caused by any act, omission, or neglect of Landlord, its agents, contractors, customers, employees, invitees, licensees, servants or visitors and Landlord agrees, subject to Section 7.7, to indemnify and hold Tenant harmless from all claims for such damage. Neither Landlord nor any mortgagee shall be liable to Tenant, its agents, contractors, customers, employees, invitees, licensees, servants or visitors for any damage to person or property caused by any act, omission or neglect of Tenant, its agents, contractors, customers, employees, invitees, licensees, servants or visitors, and Tenant agrees, subject to Section 7.7, to indemnify and hold Landlord and any mortgagee harmless from all liability and claims for any such damage. The provisions of this section shall survive the termination of this Lease. 133 7.7 Waiver of Subrogation Rights. Anything in this Lease to the contrary notwithstanding, Landlord and Tenant hereby waive any and all rights of recovery, claim, action, or cause of action, against the other, its agents, employees, officers, directors, partners, servants, or shareholders, for any loss or damage that may occur to the Premises, the Building, the Project or any improvements thereto, or any personal property of such party therein, by reason of fire, the elements, or any other cause which is insured against under the terms of the fire and extended coverage insurance policies obtained or required to be obtained pursuant to this Lease, REGARDLESS OF CAUSE OR ORIGIN, INCLUDING WITHOUT LIMITATION, ANY SUCH CLAIMS RESULTING FROM THE NEGLIGENCE OF THE OTHER PARTY HERETO, ITS AGENTS, EMPLOYEES, OFFICERS, DIRECTORS, PARTNERS, SERVANTS, OR SHAREHOLDERS, and each party covenants that no insurer shall hold any right of subrogation against such other party. ARTICLE VIII Tenant Default 8.1 Default by Tenant. (a) The occurrence of any one or more of the following events shall constitute an event of default ("Event of Default") by Tenant under this Lease: (i) Tenant fails to pay when due any Rent or other amounts payable hereunder and such failure to pay continues and remains unremedied for a period of ten (10) days after written notice thereof given by Landlord to Tenant; provided, that in no event shall Landlord be required to give more than two (2) such notices during any calendar year and after the second of such notices is given, an Event of Default shall occur upon any subsequent failure by Tenant to pay when due any Rent or other amount required to be paid by Tenant hereunder; (ii) the failure by Tenant to comply with or perform any of the terms, provisions, covenants, or conditions which Tenant is required to observe and to perform hereunder other than those covered by the remaining subsections of this Section 8.1(a), and such failure or action continues for a period of thirty (30) days after notice thereof; provided, however, if the nature of the default is such that it cannot be cured with the exercise of Tenant's best efforts within the thirty (30) day period set forth above, and if Tenant undertakes such curative action promptly following the occurrence thereof and diligently and continuously proceeds with such curative action using Tenant's best efforts, Tenant shall have such additional time as is reasonably necessary to cure such default; (iii)the failure by Tenant to return the estoppel certificate required by Section 10.3 below within the time period provided in such Section 10.3 and for an additional period of fifteen (15) days after written notice thereof is given by Landlord to Tenant; (iv) if Tenant is a corporation, if Tenant ceases to exist as a corporation in good standing in the state of its incorporation; or, if Tenant, is a partnership or other entity, if Tenant is dissolved or otherwise liquidated; (v) the filing of any voluntary petition in bankruptcy by Tenant, or the filing of an involuntary petition by Tenant's creditors, which involuntary petition remains undischarged or unstayed for a period of sixty (60) days. In the event that under applicable law the trustee in bankruptcy or Tenant has the right to affirm this Lease and continue to perform the obligations of Tenant hereunder, such trustee or Tenant shall, in such time period as may be permitted by the bankruptcy court having jurisdiction, cure all defaults of Tenant hereunder outstanding as of the date of the affirmance of this Lease and prove to Landlord such adequate assurances as may be necessary to ensure Landlord of the continued performance of Tenant's obligations under this Lease; (vi) a general assignment by Tenant for the benefit of one or more of its creditors, or the admission by Tenant in writing of its inability to pay its debts as they become due, the filing by Tenant of a petition seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, the filing by Tenant of any answer admitting or failing timely to contest a material allegation of a petition filed against Tenant in any such proceeding or, if within sixty (60) days after the commencement of any proceeding against Tenant seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, such proceeding shall 134 not have been dismissed; (vii)the attachment, execution, or other judicial seizure of all or substantially all of Tenant's assets or the Premises, and such attachment or other seizure remains undismissed or undischarged for a period of sixty (60) business days after the levy thereof; and (viii) the employment of a receiver to take possession of substantially all of Tenant's assets or the Premises, if such receivership remains undissolved for a period of sixty (60) business days after creation thereof. (b) Upon the occurrence of an Event of Default by Tenant, Landlord shall have the option to pursue any one or more of the following remedies without any notice (except for such notice expressly required by Section 8.1(a)) or demand for possession whatsoever (and without limiting the generality of the foregoing, Tenant hereby specifically waives notice and demand for payment of Rent or other obligations due and waives any and all other notices or demand requirements imposed by applicable law): (i) terminate this Lease, in which event Tenant shall immediately surrender the Premises to Landlord; (ii) terminate Tenant's right to occupy the Premises and re-enter and take possession of the Premises (without terminating this Lease); (iii)enter upon the Premises and do whatever Tenant is obligated to do under the terms of this Lease including without limitation, the right to remove and store any or all of Tenant's property located therein; and Tenant agrees to reimburse Landlord on demand for any expenses which Landlord may incur in effecting compliance with Tenant's obligations under this Lease, and Tenant further agrees that Landlord shall not be liable for any damages resulting to Tenant or its property from such action; and (iv) exercise all other remedies available to Landlord at law or in equity, including, without limitation, injunctive relief of all varieties. (c) In the event Landlord elects to re-enter and take possession of the Premises after an Event of Default, Tenant hereby waives notice of such re-entry and repossession and of Landlord's intent to re-enter and retake possession. Landlord may, without prejudice to any other remedy which it may have for possession or arrearages in or future Rent, expel or remove Tenant and any other person who may be occupying said Premises or any part thereof. In addition, the provisions of Section 8.3 hereof shall apply with respect to the period from and after the giving of notice of such repossession by Landlord. All Landlord's remedies shall be cumulative and not exclusive. Forbearance by Landlord to enforce one or more of the remedies herein provided upon an Event of Default shall not be deemed or construed to constitute a waiver of such default. Landlord's right to enter the Premises may be accomplished by Landlord without service or notice or resort to legal process and without being guilty of any trespass or becoming liable for any loss or damage and without any liability therefore. (d) If Landlord elects to terminate this Lease or terminate Tenant's right of possession to the Premises without terminating this Lease, there shall immediately become due and payable (but only at Landlord's option, in the case of Landlord's termination of Tenant's right of possession) the amount by which: (i) the present value determined using a discount rate of ten percent (10%) per annum of the total Rent and other benefits which would have accrued to Landlord under this Lease for the remainder of the Term if the terms and provisions of this Lease had been fully complied with by Tenant, exceeds (ii) the total fair market rental value determined using a discount rate of ten percent (10%) per annum of the Premises for the balance of the Term (it being the agreement of both parties hereto that Landlord shall receive the benefit of its bargain). In the event that Landlord elects to terminate Tenant's right of possession to the Premises without terminating this Lease, and thereafter Landlord recovers from Tenant all sums payable under this Section 8.1(d), this Lease shall be deemed terminated as of the date of such recovery. For purposes of this Section 8.1(d), the fair market rental value of the Premises shall be the prevailing Market Rate for Comparable Buildings for a lease term equal to the remaining Term (without regard to any renewal options). In addition to the amounts otherwise recoverable by Landlord hereunder, there shall be 135 recoverable from Tenant: (i) the reasonable cost of restoring the Premises to Building standard condition, normal wear and tear and damage due to casualty or condemnation excepted; (ii) all accrued, unpaid sums, plus interest at the Applicable Rate for past due sums up to the date of termination; (iii)Landlord's reasonable cost of recovering possession of the Premises; (iv) Rent accruing subsequent to the date of termination pursuant to the holdover provisions of Section 8.3, if any; and (v) any other sum of money or damages owed by Tenant to Landlord pursuant to this Lease. (e) Right to Relet. If Landlord elects to terminate Tenant's right to possession of the Premises without terminating this Lease, but elects not to pursue at that time the remedies set forth in Section 8.1(d), Tenant shall continue to be liable for all Rent and Landlord agrees to use objectively reasonable efforts to relet the Premises, or any part thereof, to a substitute tenant or tenants, which reletting may be for a period of time equal to or lesser or greater than the remainder of the Term on whatever terms and conditions Landlord, in Landlord's commercially reasonable judgement, deems advisable. The term "objectively reasonable efforts" shall mean that Landlord shall, not more than thirty (30) days after terminating Tenant's possession of the Premises, place the Premises on Landlord's inventory of available space, make Landlord's inventory available to brokers on request, advertise the space (along with Landlord's other inventory) for lease in a suitable trade journal or newspaper, and show the space to prospective tenants requesting to see it; provided, that notwithstanding anything herein to the contrary, objectively reasonable efforts to relet the Premises shall not (i) require Landlord to give priority to the Premises over other premises owned or managed by Landlord or its Affiliates; (ii) require Landlord to relet for less than market rent; or (iii) require Landlord to relet to a tenant (or for a use) which is not in keeping with the standards of Comparable Buildings. Tenant shall be given a credit against the Rent due from Tenant to Landlord during the remainder of the Term in the net amount of rent received from the new tenant; however, the net amount of such rent received from the new tenant shall first be applied to: (i) all costs incurred by Landlord in reletting the Premises (including, without limitation, remodeling costs, brokerage fees, legal fees, advertising costs and the like); (ii) the accrued sums, plus interest and late charges if in arrears, under the terms of this Lease; (iii)Landlord's reasonable cost of recovering possession of the Premises; and (iv) the cost of storing (for a period not to exceed thirty (30) days unless a longer period is mandated by law or judicial decree, after which period Tenant acknowledges that Landlord shall have the right to sell or give such property away and apply any proceeds therefrom to amounts owed by Tenant to Landlord hereunder)) any of Tenant's property left on the Premises after reentry. Notwithstanding any such reletting without termination of this Lease, Landlord may at any time thereafter elect to exercise its rights under Section 8.1(e) for such previous breach. Notwithstanding any provision in this Section 8.1(e) to the contrary, upon the default of any substitute tenant or upon the expiration of the lease term of such substitute tenant before the expiration of the Term, Landlord may, at Landlord's election, either relet to still another substitute tenant or exercise its rights under Section 8.1(d). (f) Any and all property which may be removed from the Premises by Landlord pursuant to the authority of this Lease or of law, to which Tenant is or may be entitled, may be handled, removed and stored, as the case may be, by or at the direction of Landlord at the risk, reasonable cost and expense of Tenant (subject to the same limitations specified in Section 8.1(e)(iv), and Landlord shall in no event be responsible for the value, preservation or safekeeping thereof. Tenant shall pay to Landlord, upon demand, any and all reasonable expenses incurred in such removal and all reasonable storage charges (for a storage period not to exceed thirty (30) days unless a longer period is mandated by law or judicial decree) against such property so long as the same shall be in Landlord's possession or under Landlord's control. Any such property of Tenant not retaken by Tenant from storage within thirty (30) days after removal from the Premises shall, at Landlord's option, be deemed conveyed by Tenant to Landlord under this Lease as by a bill of sale without further payment or credit by Landlord to Tenant. 136 (g) This Section 8.1 shall be enforceable to the maximum extent allowed by applicable law, and the unenforceability of any portion thereof shall not thereby render unenforceable any other portion. No act or failure to act by Landlord or its agents during the Lease Term shall be deemed an acceptance of an attempted surrender of the Premises, and no agreement to accept a surrender of the Premises shall be valid unless made in writing and signed by Landlord. No re-entry or taking of possession of the Premises by Landlord shall be construed as an election on Landlord's part to terminate this Lease unless a written notice of such termination is given to Tenant. 8.2 Non-Waiver. Neither acceptance of Rent by Landlord nor failure by either Party to declare any default immediately upon occurrence thereof, or delay in taking any action in connection therewith, shall waive such default but such non-defaulting party may declare any such default at any time and take such action as might be lawful or authorized hereunder, either at law or in equity. Waiver by either party of any right for any default by Tenant shall not constitute a waiver of any right for either a subsequent default of the same obligation or any other default. Receipt by Landlord of Tenant's keys to the Premises shall not constitute an acceptance of surrender of the Premises. 8.3 Holding Over. If Tenant holds over after expiration or termination of this Lease without the written consent of Landlord, Tenant shall pay as liquidated damages one and one-half times (150%) the Base Rental and Tenant's Estimated Additional Rental or Tenant's Additional Rental, as the case may be, then payable as described in Sections 3.2 and 3.3 for the entire holdover period calculated and prorated on a daily basis. No holding over by Tenant after the Term shall be construed to extend this Lease; provided, that at the expiration of the full Term hereof (other than an early termination by Landlord due to an Event of Default by Tenant hereunder), Landlord agrees not to commence proceedings to forcibly remove Tenant from the Premises for thirty (30) days following the expiration of the Term. In the event of any unauthorized holding over for more than sixty (60) days, Tenant shall indemnify Landlord (i) against all claims for damages by any other tenant to whom Landlord may have leased all or any part of the Premises effective upon the termination of this Lease, and (ii) for all other losses, costs and expenses, including reasonable attorneys' fees, incurred by reason of such holding over. Any holding over with the consent of Landlord in writing shall thereafter constitute this Lease a lease from month to month. 8.4 Attorneys' Fees. If either party defaults in the performance of any of the terms, agreements, or conditions contained in this Lease and the other party places the enforcement of this Lease, or any part hereof, or the collection of any Rent due or to become due hereunder, or recovery of the possession of the Premises, in the hands of an attorney who files suit upon the same, and should such non-defaulting party prevail in such suit, the defaulting party agrees to pay the other party's reasonable attorneys' fees. 8.5 Limitation of Landlord's Liability. Except as provided in the next sentence, the liability of Landlord to Tenant for any judgment against Landlord hereunder or for any tort liability relating hereto shall be limited to Tenant's actual direct, but not special, consequential or punitive, damages therefor, which damages shall be recoverable solely from the interest of Landlord in the Project at the time such liability accrued, it being agreed that neither Landlord (and its partners, agents, officers, directors, and shareholders) nor any mortgagees shall ever be personally liable for any such judgment. In the event of a transfer by Landlord of its interest in the Project after any such liability has accrued, Tenant may only proceed against Landlord to the extent of the net sales proceeds received by Landlord from such transfer for the recovery of any claim that accrued prior to such transfer and only if Tenant gives Landlord written notice of the claim and commences an action to recover on such claim within twelve (12) months after consummation of such transfer by Landlord. In the event that the sale proceeds from any such transfer have been distributed to the owners (e.g., partners, shareholders, members) of the transferring Landlord prior to the commencement of Tenant's claim, the liability of each owner for such claim shall be limited to that portion of the sale proceeds actually received by such owner. In addition, Tenant also agrees that Tenant shall not be entitled to recover from Landlord nor any of its agents, employees, officers, partners, servants or shareholders any indirect, special or consequential damages Tenant may incur as a result of a default under this Lease or other action by Landlord, its agents, employees, officers, partners, servants or shareholders. The foregoing sentence is not intended to, and shall not, limit any right that Tenant might otherwise have to obtain injunctive relief against 137 Landlord or Landlord's successors in interest, or to maintain any suit or action in connection with the enforcement of rights hereunder or arising herefrom or the collection of amounts which may become owing or payable under or on account of insurance maintained by Landlord, or any other action which does not require Landlord to be personally liable for damages from other than the Project. 8.6 Limitation of Tenant's Liability. Except as otherwise specifically provided herein in Sections 8.1 and 8.3 above, the liability of Tenant to Landlord for any judgment against Tenant hereunder or for any tort liability relating hereto shall be limited to Landlord's actual direct, but not special, consequential or punitive, damages therefor, it being agreed that none of the partners, agents, officers, directors or shareholders of Tenant shall ever be personally liable for any such judgment. 8.7 Arbitration. In the event of any dispute under the Lease, Landlord or Tenant may resolve such dispute by binding arbitration, excepting the determination of the MRR (as hereinafter defined), the method of resolution of which shall be as described herein. Any arbitrator shall, if possible, have recognized expertise in the subject matter of the arbitration. All arbitrations shall occur at a location in Houston, Texas, chosen by the arbitrators and shall be conducted pursuant to the rules of the American Arbitration Association except where different rules are required by the Texas General Arbitration Act. The party desiring such arbitration shall give written notice to that effect to the other party, specifying in said notice the name and address of the person designated to act as arbitrator on its behalf. Within ten (10) days after the service of such notice the other party shall give written notice to the first party specifying the name and address of the person designated to act as arbitrator on its behalf. If the second party fails to notify the first party of the appointment of its arbitrator, as aforesaid, within or by the time above specified, then the appointment of the second arbitrator shall be made in the same manner as hereinafter provided for the appointment of a third arbitrator in a case where two arbitrators are appointed hereunder and the parties are unable to agree upon such third appointment. The arbitrators so chosen shall meet within thirty (30) days after the second arbitrator is appointed and they shall appoint a third arbitrator; and in the event of their being unable to agree upon such appointment within thirty (30) days after the time aforesaid, the third arbitrator shall be selected by the parties themselves if they can agree thereon within a further period of five (5) days. If the parties do not so agree, then either party, on behalf of both, may request such appointment by any United States District Judge for the Southern District of Texas, Houston Division. In the event of the failure, refusal or inability of any arbitrator to act, a new arbitrator shall be appointed in his stead, which appointment shall be made in the same manner as hereinbefore provided for the appointment of such arbitrator so failing, refusing or unable to act. The decision of the arbitrators so chosen shall be given within a period of sixty (60) days after the appointment of such third arbitrator, and shall be accompanied by conclusions of law and findings of fact. The decision in which any two arbitrators so appointed and acting hereunder concur shall in all cases be binding and conclusive upon the parties and shall be the basis for a judgment entered in any court of competent jurisdiction. Each party shall pay the fees and expenses of the one of the two original arbitrators appointed by such party, or in whose stead, as above provided, such arbitrator was appointed, and the fees and expense of the third arbitrator, if any, shall be borne equally by both parties. 8.8 Default by Landlord. Except where the provisions of this Lease grant Tenant an express, exclusive remedy, or expressly deny Tenant a remedy, if: (i) Landlord fails to pay any amount payable by Landlord hereunder on or before the date such payment is due and such failure to pay continues and remains unremedied for a period of ten (10) days after written notice thereof given by Tenant to Landlord; or (ii) Landlord fails to perform or observe any covenant, term, provision or condition of this Lease, and such failure continues for a period of thirty (30) days after written notice thereof given by Tenant to Landlord; provided, however, if the nature of the default is such that it cannot be cured with the exercise of Landlord's reasonable and good faith efforts within such thirty (30) day period, Landlord shall have such additional time as is reasonably necessary to cure such default, provided Landlord commences such curative action within such thirty (30) day period and diligently and continuously proceeds with such curative action using Landlord's reasonable and good faith efforts; then, Tenant may deliver a second notice to Landlord, and if such default shall continue uncured by Landlord and/or its mortgagee for an additional thirty (30) days after the delivery of such second notice (such event thereby becoming an "Event of Default" by Landlord), Tenant shall have the right 138 to exercise one or more of the following options (but not (A) and (B) simultaneously): (A) Tenant may cure the default in which event Landlord shall reimburse Tenant (which reimbursement may be effected through the withholding of or offsetting of such amounts against up to fifty percent (50%) of the Base Rent due hereunder) for all reasonable sums expended in so curing said default, (B) if the Event of Default by Landlord causes more than fifty percent (50%) of the Premises to be Untenantable for a continuous period in excess of one (1) year from the date of Tenant's initial notice of default, Tenant may terminate this Lease at any time prior to the date such Event of Default has been cured by Landlord, and (C) Tenant may pursue all other remedies at law or in equity to which Tenant may be entitled. No notice to Landlord under this Section 8.8 shall be effective until a copy thereof is delivered to each Landlord mortgagee for which Tenant has received a notice address in writing from Landlord or its mortgagee. The rights of Tenant pursuant to this Section 8.8 shall be subject to the express provisions of this Lease providing for remedies different from, or in exclusion of, the remedies above-described. Without limiting the immediately preceding sentence, the provisions of this Section 8.8 shall not apply to a default of Landlord under, or the failure of Landlord to provide the services described in, Section 4.1 of this Lease. Tenant may not terminate this Lease because of Landlord's default unless specifically permitted pursuant to this Section 8.8 or unless otherwise specifically provided in this Lease. Tenant specifically agrees that the cure of any default by any Landlord mortgagee shall be deemed a cure by Landlord under this Lease. ARTICLE IX Transfers 9.1 Assignment or Sublease by Tenant. (a) If Tenant should desire to assign this Lease or sublet the Premises or any part thereof following initial occupancy of the Premises by Tenant, Tenant shall give Landlord written notice of such desire at least thirty (30) days in advance of the date on which Tenant desires to make such assignment or sublease. The notice shall include the identity of the proposed assignee or sublessee, current financial data of the proposed sublessee or assignee, its nature of business, and intended use of the Premises, and shall specify the financial terms, including rental, commissions, tenant build-out allowances and other inducements, and the term of the proposed sublease or assignment. Landlord shall then have a period of thirty (30) days following receipt of such notice within which to notify Tenant in writing that Landlord elects to either (i) permit Tenant to assign or sublet this Lease to the party specified in the notice, or (ii) reject the proposed assignee or sublessee (which it may only do if such party is not creditworthy, financially responsible or of a kind or type customarily found in the Building, or whose operations in the Building or proposed use of the Premises would not be in keeping with and would detract from, the operations of the Project or the other tenants in the Building), and continue this Lease in full force and effect as to the space so affected. If Landlord should fail to notify Tenant in writing of such election within said period, or, if it elects option (ii) above, shall fail to state in such notice reasonably specific reasons for such rejection, Landlord shall be deemed to have elected option (i) above. Tenant shall be responsible for reimbursing Landlord for all reasonable costs incurred by Landlord and related to such proposed assignment or subletting, including without limitation, administrative costs, any build-out or tenant improvements or restoration costs incurred by Landlord in connection therewith, and attorneys' fees, and Tenant shall pay the same to Landlord within thirty (30) days following Landlord's demand therefor. If the aggregate rental, bonus or other consideration paid by any such assignee or sublessee for any such space exceeds the sum of (a) Tenant's Base Rental and Tenant's Additional Rental or Tenant's Estimated Additional Rental, as the case may be, to be paid to Landlord for such space during such period, plus (b) Tenant's costs and expenses actually incurred in connection with such assignment or sublease, consisting of reasonable brokerage fees, reasonable costs of finishing out or renovating the space affected, reasonable market cash rental concessions, which costs and expenses are to be amortized by Tenant over the term of the assignment or sublease, then fifty percent (50%) of such excess shall be paid to Landlord within fifteen (15) days after such amount is paid to Tenant. Landlord shall have the same 139 rights granted to Tenant under Section 3.4(d) to audit Tenant's books and records relating to the assignment or sublease. In addition, if such sublet space reverts to Tenant prior to the expiration of the initial Term and Tenant is unable to resublet such space for the remainder of the initial Term after using reasonable efforts with respect thereto and does not intend to use such space for the remainder of the initial Term, then Tenant shall notify Landlord of such fact and thereafter be entitled to recalculate the fifty percent (50%) excess (if any) paid to Landlord in connection with such subletting so as to include as one of Tenant's costs deducted from such excess the Base Rent required to be paid by Tenant to Landlord during the remainder of the initial Term on such sublet space, in which event Landlord shall refund to Tenant any portion of such excess that would not have been paid to Landlord had such additional Base Rent been taken into account in the original calculation thereof; provided, that (A) in no event shall Landlord ever be required to pay to Tenant more than the refund of Landlord's share of such excess profits received by Landlord from the subletting of such space by Tenant as described above, and (B) Landlord shall have the option, in lieu of refunding such excess, to recapture such space from Tenant for the remainder of the Term. (b) Each sublessee or assignee shall fully observe all covenants of this Lease, including without limitation, the provisions of Article V, and no consent by Landlord to an assignment or sublease shall be deemed in any manner to be a consent to a use not theretofore permitted under Article V. No assignment or subletting by Tenant shall relieve Tenant of any obligation under this Lease, and Tenant shall remain fully liable hereunder. Any attempted assignment or sublease by Tenant in violation of the terms and covenants of this Section 9.1 shall be void and shall constitute a default by Tenant hereunder. Any consent by Landlord to a particular assignment or sublease shall not constitute Landlord's consent to any other or subsequent assignment or sublease, and any proposed sublease or assignments by a sublessee of Tenant shall be subject to the provisions of this Section 9.1 as if it were a proposed sublease or assignment by Tenant. The restriction against an assignment or sublease described in this Section 9.1 shall be deemed to include a restriction against tenant's mortgaging its leasehold estate, as well as against an assignment or sublease which may occur by operation of law. If, at the time a default occurs under this Lease, the Premises or any part thereof have been assigned or sublet, Landlord, in addition to any other remedies herein provided or available at law or in equity, may, at its option, collect directly from such assignee or subtenant all rents due and becoming due to Tenant under such assignment or sublease and apply such rent against the Rent due to Landlord from Tenant hereunder, and no such collection shall be construed to constitute a novation or a release of Tenant from the further performance of its obligations hereunder or a recognition of any direct rights of such assignor or subtenant in and to such space other than by, through and under Tenant. (c) Notwithstanding anything to the contrary contained within this Article IX or this Lease, (i) Tenant shall not assign or sublet any portion of the Premises to any party or affiliate of any party (other than an Affiliate of Tenant) which is then a tenant in the Building without Landlord's prior written consent if Landlord then has comparable space in the Building which could be leased to such party or affiliate, and any such attempt to the assignment or subletting shall be void and of no further force and effect, and (ii) Tenant shall be permitted without obtaining Landlord's prior consent or approval to assign the Lease or sublease all or a portion of the Premises to an Affiliate (as hereinafter defined) of Tenant, or to any successor entity by merger, consolidation, liquidation, reorganization or otherwise, or to any entity purchasing all or substantially all of the assets of Tenant, provided, that no such assignment or subletting shall relieve Tenant of any obligation under the Lease and Tenant shall remain fully liable hereunder. The term "Affiliate" shall mean and refer to any person or entity controlling, controlled by or under common control with another such person or entity. The term "Control" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such controlled person or entity; the ownership, directly or indirectly, of at least fifty-one percent (51%) of the beneficial ownership of, or possession of the right to 140 vote, in the ordinary direction of its affairs, or at least fifty-one percent (51%) of the beneficial ownership in, any person or entity shall be presumed to constitute such control. Nothing in this Lease shall prohibit Tenant from contracting with a concessionaire for purposes of the operation of dining or food services within the Premises operated primarily for the benefit of Tenant, its employees and invitees. 9.2 Transfer by Landlord. Landlord shall have the right to transfer and assign, in whole or in part, all its rights and obligations hereunder and in the Project, and all other property referred to herein, and in such event and upon such transfer (any such transferee to have the benefit of, and be subject to, the provisions of Sections 9.3 and 8.6), no further liability or obligations shall thereafter accrue against Landlord, provided such successor in interest has agreed to assume (subject to the limitations of Section 8.5 and the other terms hereof) all of Landlord's obligations accruing under this Lease after the date of such assignment. Notwithstanding the foregoing, except with respect to any financing obtained by Landlord with respect to the Project, in no event will Landlord convey its interest in the Project prior to the Completion Date to other than an Affiliate of Dienna-Nelson-Augustine Company, and in no event will Landlord cease to be an Affiliate of Dienna-Nelson-Augustine Company or will Peter W. Dienna cease to be a Managing Partner thereof (other than as a result of death or disability) prior to the Completion Date, without Tenant's prior written consent, it being a material inducement to Tenant to enter this Lease that Peter W. Dienna control the entity causing construction of the Project. 9.3 Peaceful Enjoyment. Landlord covenants that as of the Commencement Date, Tenant shall and may peacefully have, hold, and enjoy the Premises subject to the other terms of this Lease, provided that no Event of Default exists. It is understood and agreed that this covenant and any and all other covenants of Landlord contained in this Lease shall be binding upon Landlord and its successors only with respect to breaches occurring during its and their respective ownership of the Landlord's interest hereunder. ARTICLE X Additional Provisions 10.1 Notices. Any notice or other communications to Landlord or Tenant required or permitted to be given under this Lease must be in writing and shall be effectively given if delivered to the addresses for Landlord and Tenant stated in the preamble paragraph of this Lease or if sent by United States mail, certified or registered, return receipt requested, to said addresses. Any notice mailed shall be deemed to have been given on the regular business day next following the date of deposit of such item in a depository of the United States Postal Service. Notice effected other than by mail shall be deemed to have been given at the time of actual delivery. Either party shall have the right to change its address to which notices shall thereafter be sent by giving the other party five (5) days prior written notice thereof. 10.2 Subordination. This Lease is subject and subordinate to all mortgages, deed of trust, and related security instruments which may now or hereafter encumber the Project and to all renewals, modifications, consolidations, replacements, and extensions thereof and to each advance made or hereafter to be made thereunder; provided that Tenant has received from the holder thereof an agreement in form reasonably satisfactory to Tenant that Tenant will not be disturbed in its possession of the Premises, or have its rights under the Lease modified or terminated, except pursuant to the terms of this Lease. In the event of the enforcement by the trustee or the beneficiary under any such mortgage or deed of trust of the remedies provided for by law or by such mortgage or deed of trust, Tenant will, automatically upon the request of any person or party succeeding to the interest of said trustee or beneficiary, as a result of such enforcement, become the Tenant of, and attorn to, such successor in interest without change in the terms or provisions of this Lease; provided, however, that such successor in interest shall not be bound (i) by any payment of Rent for more than one month in advance except prepayments in the nature of security for the performance by Tenant of its obligations under this Lease, or (ii) by any amendment or modification of this Lease made without the written consent of such trustee or such beneficiary or such successor in interest. Upon request by such successor in interest, Tenant shall execute and deliver an instrument or instruments confirming the subordination and attornment herein provided for. In addition, Tenant agrees to give to any holder of a mortgage or deed of trust covering Landlord's interest in the Project of which Tenant has been given notice and an address for purposes of notices, a copy of any notice of default given by Tenant to Landlord, addressed to such mortgagee at the address furnished to Tenant for such purposes. 141 10.3 Estoppel Certificate or Three-Party Agreement. At Landlord's request, Tenant will within fifteen (15) days following Landlord's request therefor execute either an estoppel certificate or a three-party agreement among Landlord, Tenant and any third party dealing with Landlord certifying to such facts (if and to the extent relating to Landlord, known by Tenant to be true) as such third party may reasonably require in connection with the business dealings of Landlord and such third party. 10.4 Brokerage. Tenant represents and warrants that Tenant has dealt with, and only with, Trione & Gordon, Inc. as broker(s) in connection with this Lease, and that, insofar as Tenant knows, no other broker(s) negotiated this Lease or is entitled to any commission in connection with this Lease. Tenant and Landlord shall each indemnify the other from and against all costs, expenses, attorneys' fees, and other liability for commissions or other compensation claimed by any broker or agent claiming the same by, through, or under the indemnifying party. 10.5 Disclaimers. LANDLORD AND TENANT EXPRESSLY DISCLAIM ANY IMPLIED WARRANTY THAT THE PREMISES ARE SUITABLE FOR TENANT'S INTENDED COMMERCIAL PURPOSE. TENANT'S OBLIGATION TO PAY RENT UNDER THIS LEASE IS NOT DEPENDENT UPON THE CONDITION OF THE PREMISES, THE PROJECT, OR THE PERFORMANCE BY LANDLORD OF ITS OBLIGATIONS UNDER THIS LEASE, AND, UNLESS AND EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS LEASE TO THE CONTRARY, TENANT SHALL CONTINUE TO PAY THE RENT, WITHOUT DEMAND, ABATEMENT, DEDUCTION, SET-OFF OR COUNTERCLAIM, NOTWITHSTANDING ANY BREACH BY LANDLORD OF ITS DUTIES AND OBLIGATIONS UNDER THIS LEASE, WHETHER EXPRESS OR IMPLIED. 10.6 Memorandum of Lease. Landlord and Tenant shall at the closing of Landlord's acquisition of the Land, execute and acknowledge a Memorandum of Lease in the form attached hereto as Exhibit "L" which may be recorded in the Real Property Records of Harris County, Texas. Nothing in such Memorandum of Lease shall modify or amend any provision of this Lease. Upon the termination of this Lease and at the request of either party, Landlord and Tenant shall enter into and record a memorandum evidencing such termination in a form reasonably satisfactory to each of such parties. 10.7 Publicity. Except as required by Legal Requirements, there shall be no press releases or other publicity originated by Landlord or Tenant, or any agents or representatives thereof, concerning the execution of, or terms of, this Lease without the prior approval of the text thereof by Landlord and Tenant. 10.8 Effect of Delivery of This Lease. Landlord has delivered a copy of this Lease to Tenant for Tenant's review only, and the delivery hereof does not constitute an offer to Tenant or option. This Lease shall not be effective until executed by both Landlord and Tenant. 10.9 Communications Equipment. (a) Without liability for rental or any other charges therefor, except as expressly stated in this Section, Tenant shall have the right, at Tenant's sole cost and expense, to install, maintain and operate on the roof of the Building in a location mutually agreeable to Landlord and Tenant ("Tenant's Equipment Area") one or more satellite dishes and whip antennae (collectively, the "Communications Equipment"); provided, that (A) the Communications Equipment shall comply with all applicable Legal Requirements and (B) the exact size and location of such equipment shall be mutually agreeable to Landlord and Tenant and in no event shall Tenant be permitted to use space on the roof of the Building outside of the Tenant Equipment Area. Tenant shall also have access to the roof of the Building at all times for the purpose of inspecting, adjusting, repairing and maintaining the Communications Equipment. Landlord may lease or otherwise allow other tenants of the Building to use the remaining portions of the roof of the Building for the installation of similar type communications equipment; provided, that such equipment will not materially interfere with the installation, maintenance or operation of the Communications Equipment by Tenant. Subject to availability and Landlord's prior approval thereof, not to be unreasonably withheld, and at no cost to Landlord except as otherwise stated below, Tenant shall have the right to run cabling from the Communications Equipment to the Premises through interior Building chases, ducts and flues, and (ii) Landlord will supply as a Base Building cost secure conduit from two (2) 142 telecommunications vendor's point of presence vault to Tenant's telecommunications facilities and there shall be no cost to Tenant for the use of such riser space. The exact location and size of such equipment shall be mutually agreeable and subject to restrictions applicable to the Land, if any. Roof penetrations must be made by Landlord's roofer at Tenant's expense. (b) Tenant shall have the right at no cost to Landlord to obtain telecommunications services from such suppliers as it shall elect (which are not suppliers then chosen by Landlord to supply such services generally to tenants of the Building). Without imposing any fee or charge for such suppliers, but subject to the availability of space therefor, Landlord shall permit such suppliers to enter the Project and install in the Project, in a manner approved by Landlord, which approval shall not be unreasonably withheld, and in compliance with any rules and regulations reasonably adopted by Landlord with respect thereto, and as part of the Communications Equipment, such conduits, cables and appurtenances as shall be necessary for the providing of such service to Tenant. If any such supplier shall need to install equipment in the Project, Landlord shall use reasonable efforts to identify and provide suitable space therefor (and provide electricity and other services thereto); provided, that Landlord shall not be required to pay or incur any costs to provide, enclose, accommodate, maintain, bring, improve or otherwise allow such telecommunications or other services to be brought to the Premises, and all such equipment and appurtenances shall, at Tenant's option at the termination of this Lease, either remain at the Project (but only if Landlord shall consent thereto) or be removed by Tenant and the Project restored to its preexisting condition, reasonable wear and tear excepted. (c) The Communications Equipment (including its location and installation) shall be described in plans and specifications to be submitted to Landlord by Tenant in connection with (or in the same manner as) the Initial Tenant Improvements, except that Tenant shall be responsible for the installation of the Communication Equipment using contractors approved by Landlord in advance, which approval shall not be unreasonably withheld; provided, that all roof penetrations shall be made by Landlord or its designated contractors at Tenant's expense. Tenant shall be responsible for all repairs and maintenance of the Communications Equipment, and shall indemnify Landlord for any claims, damages or expenses (including, without limitation, reasonable attorneys' fees) incurred by Landlord in connection with the installation, operation, maintenance or repair of the Communications Equipment by Tenant (including without limitation, those involving property damage or personal injury or death of a person), other than any portion of any such claims, damages or expenses that are attributable to the affirmative acts of negligence or intentional wrongdoing by Landlord. Tenant shall, within thirty (30) days following the expiration or other termination of this Lease, remove all Communication Equipment from the Building and/or Garage. 10.10 Uninterrupted Power Supply. (a) The Outline Plans and Specifications contain provisions for an emergency battery system to provide power for, egress lighting, exit signs, the Building's fire alarm system and Tenant's security system in the event of an emergency. Tenant shall have the right, at Tenant's sole cost and expense, to install an uninterrupted power system generator ("UPS") to operate Tenant's computer room and other initial operations. Tenant shall also have the right, by delivering written notice to Landlord prior to the commencement of construction of the Project, to cause Landlord to combine such UPS with the emergency power system for the Building pursuant to plans and specifications approved in advance by Landlord and Tenant, in which event (i) Landlord shall take over and be responsible for the maintenance, operation and repair of the UPS and emergency power system for the Project, (ii) Landlord and Tenant shall prorate the cost of such UPS, with Landlord paying for the portion that replaces the emergency power system that Landlord would have been required to install in the Project less any redesign or other costs required to replace the proposed battery system with Tenant's generator system and Tenant paying for the remainder of the cost thereof, and (iii) such UPS generator system shall, at Landlord's option, remain with the Premises upon expiration or earlier termination of this Lease. 143 (b) In the event Tenant elects to install such UPS and operate it solely for Tenant's benefit, and gives notice thereof to Landlord prior to the commencement of construction, Landlord shall provide to Tenant at no additional rental charge a place to put such generator in close proximity to the Building in a location to be mutually agreeable to Landlord and Tenant. Tenant shall be responsible for all costs and expenses incurred in connection with the installation, ownership, maintenance and repair of such generator, including without limitation, the cost of all screening reasonably required by Landlord in connection therewith. Upon the expiration of the Lease, Tenant shall also, at Landlord's option, either leave the UPS at the Project or remove the UPS and all related equipment from the Project and restore the Project to its pre-existing condition, reasonable wear and tear excepted. Tenant shall comply with all Legal Requirements relating to such generator, and indemnify and hold Landlord harmless from any and all liabilities, losses, costs, damages and expenses (including, without limitation, reasonable attorneys' fees) incurred by Landlord and arising out of any claims or causes of actions resulting from the installation, operation and/or use thereof. Tenant shall also comply with any Rules and Regulations adopted by Landlord from time to time and relating to the operation of such generator. 10.11 Option to Purchase. In the event Landlord desires to sell the Project at any time prior to or during the Term, Landlord shall first offer to sell the Project to Tenant. Any such offer to Tenant shall be in writing, shall state the terms and conditions of the sale that Landlord desires to make of the Project or portion thereof, and shall give Tenant a period of not less than fifteen (15) business days to elect to purchase the Project upon the terms and conditions set forth in such offer; provided, that if any such offer is again made to Tenant prior to the expiration of the six (6) months period during which Landlord may sell the Project to third parties on terms previously offered to Tenant, Tenant shall only have a period of seven (7) days to elect to purchase the Project on the terms and conditions set forth in such subsequent offer. If Tenant elects not to purchase the Project upon the terms and conditions set forth in such offer from Landlord, Landlord may sell the Project or applicable portion thereof to a third party as long as the terms and conditions of such sale are not materially more favorable (i.e., having a variance of not more than five percent (5%)) to the purchaser than those specified in such offer to Tenant. If Landlord does not consummate the originally proposed transfer within six (6) months after the expiration of the period during which Tenant shall have the option to elect to exercise such offer to purchase the Project, then Landlord must re-offer the Project to Tenant as provided pursuant to this Section as though no written notice and offer had previously been given. If Tenant elects to accept Landlord's offer to purchase the Project, Tenant and Landlord shall consummate the sale and purchase of the Project in accordance with the terms and conditions of such offer (but in no event shall the closing of each purchase and sale occur prior to the expiration of a reasonable period of time following Tenant's election to purchase the Project without Tenant's prior written consent), at which time this Lease shall, at the option of Tenant, terminate. If such offer does not contain reasonable periods for due diligence and closing (up to but not in excess of thirty (30) days for due diligence and thirty (30) days to closing), Tenant shall have the option to include such provisions in the purchase contract. 10.12 Purchase of Property. Tenant acknowledges that Landlord is not the current owner of the Land but has the Land under contract and is intending to close the purchase of same in the near future. In connection with such purchase, Landlord and the seller of such property have agreed to encumber the property across the street from the Land that is currently being used as a lake with restrictions in substantially the form attached hereto as Exhibit "N" (the "Restrictions"). Landlord agrees that, if the Restrictions are violated by third parties, it shall at Tenant's request and as an Operating Expense of the Project, take all reasonable actions (including litigation) as are necessary to try to enforce such Restrictions. 10.13 Miscellaneous. (a) This Lease shall be binding upon and inure to the benefit of Landlord, its successors and assigns, and shall be binding upon and inure to the benefit of Tenant, its successors and assigns (provided that the benefits of this Lease shall inure only to the benefit of assignees of Tenant and Landlord permitted under Article IX). 144 (b) The pronouns of any gender shall include the other genders, and either the singular or the plural shall include the other. (c) All rights and remedies of each party under this Lease shall be cumulative and none shall exclude any other rights or remedies allowed by law; and this Lease is declared to be a Texas contract, and all of the terms hereof shall be construed according to the laws of the State of Texas. (d) This Lease may not be altered, changed, or amended, except by an instrument in writing executed by all parties hereto. Further, the terms and provisions of this Lease shall not be construed against or in favor of a party hereto merely because such party is the "Landlord" or the "Tenant" hereunder or such party or its counsel is the draftsman of this Lease. (e) The terms and provisions of Exhibits "A" through "L", inclusive, attached hereto are hereby made a part hereof for all purposes. (f) Each party (and each individual signing for such party) represents and warrants that all consents or approvals required of third parties (including, but not limited to, its Board of Directors or partners) for the execution, delivery, and performance of this Lease have been obtained and that each party has the right and authority to enter into and perform its covenants contained in this Lease. (g) If any term or provision of this Lease, or the application thereof to any person or circumstance, shall to any extent be invalid or unenforceable, the remainder of this Lease, or the application of such provision to persons or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby, and each provision of this Lease shall be valid and shall be enforceable to the extent permitted by law. (h) All references to days in this Lease and any exhibits or riders thereto mean calendar days, not working or business days unless otherwise stated. (i) Captions and headings herein are for Landlord's and Tenant's convenience only, and neither limit nor amplify the provisions of this Lease. 10.14 Restatement. This Lease hereby amends and restates in its entirety that certain Lease dated as of April 24, 1998 by and between Landlord and Tenant, which earlier Lease shall be of no further force and effect. 145 IN TESTIMONY WHEREOF, the parties hereto have executed this Lease effective as of the date first set forth above. LANDLORD: DNA COG, LTD., a Texas Limited Partnership By: DNA Sandbridge, L.L.C., a Texas Limited Liability Company, General Partner By: Peter W. Dienna Co., Inc., Managing Member By: Peter W. Dienna, President TENANT: CABOT OIL & GAS CORPORATION, a Delaware corporation By: /s/ Abraham Garza ------------------------------ Name: Abraham Garza Title: Vice President, Human Resources 146 EXHIBIT A LAND DESCRIPTION EXHIBIT B FLOOR PLANS -- 1ST FLOOR [DNA] EXHIBIT C CERTIFICATE OF COMMENCEMENT DATE DNA COG, LTD. _______________, 19___ - --------------------------- - ------------, ------------- Ladies and Gentlemen: Please refer to that certain Lease Agreement (the "Lease") dated April ___, 1998 by and between DNA COG, LTD. ("Landlord") and the undersigned ("Tenant"), covering office space (the "Premises") in the building commonly known as the Cabot Oil & Gas Building, located at ______ Enclave Parkway, Houston, Texas, Harris County, Texas. Capitalized terms not defined herein shall have the meaning given to such terms in the Lease. The undersigned hereby certifies, acknowledges and represents the following to you, all as of the date hereto: 1. The initial Term of the Lease commenced on _________________ and will expire on _________________. 2. [Except as set forth below] To Tenant's actual knowledge, Landlord is not in default in the performance of its obligations under the Lease, and Landlord has performed all obligations to be performed by it under the Lease through the date hereof, including its obligations under Exhibit "E" of the Lease. Tenant currently claims no off-sets against any rentals owed under the Lease [except as set forth below]. 3. Tenant is in occupancy of the Premises and acknowledges that it has accepted the same, subject to the matters noted in Paragraph 2 above, if any. 4. The Lease has not been amended except as may be set forth at the end of this letter. 5. The attached Schedule 1 accurately and completely represents the current status of all free rent, rent abatements, build-out allowances and other concessions which were or are owing to Tenant from Landlord in connection with the Premises. The undersigned hereby agrees that this certificate may be relied upon by Landlord and its lenders and partners, as well as their respective successors and assigns. Very truly yours, CABOT OIL & GAS CORPORATION By: Name: Title: 147 Amendments to Lease: Joinder Landlord hereby joins in the execution of this Certificate solely for purposes of acknowledging and agreeing to the Commencement Date set forth in Paragraph 1 above. LANDLORD: DNA COG, LTD., a Texas Limited Partnership By: DNA Sandbridge, L.L.C., a Texas Limited Liability Company, General Partner By: Peter W. Dienna Co., Inc., Managing Member By: Peter W. Dienna, President 148 EXHIBIT D PROJECT RULES AND REGULATIONS 1. Sidewalks, doorways, vestibules, halls, stairways, freight elevator lobbies, and other similar areas shall not be used for the disposal of trash, be obstructed by tenants, or be used by tenants for any purpose other than entering or leaving the leased premises and for going from one part of the Building to another. If special trash haulings are required, please contact the Management Office. 2. No sweepings, rubbish, rags or other unsuitable materials shall be disposed into plumbing fixtures or appliances. Damage resulting to any fixtures from misuse by a tenant shall be the liability of said tenant. 3. Movement of furniture or office equipment in or out of the Building, or the dispatch or receipt of any bulky material, merchandise, or materials which requires the use of the elevators or the stairways or movement through the Building entrances or lobby will be restricted to such hours as Landlord shall reasonably designate. All such movement will be under the supervision of Landlord and in the manner agreed to between the tenant and Landlord by prearrangement. Such prearrangement, initiated by the tenant, is subject to Landlord's control as to the time, method, routing of the movement and as to limitations for safety or other concerns which may prohibit any article, equipment or other item(s) from being brought into the Building. The Tenant is to assume all risks for damage to articles moved or injury to persons engaged or not engaged in such movement and for any damage to Landlord's equipment or property or injury to Landlord's personnel as a result of any act in connection with fulfilling this service for the tenant. Landlord shall not be liable for any acts of any person(s) engaged in, or any damage or loss to any of said property of person(s) resulting from, any act in connection with such service performed for the tenant unless the damage or injury is caused by the gross negligence or willful misconduct of Landlord. 4. All routine deliveries to a tenant's leased premises during 8:00 a.m. to 5:00 p.m. weekdays shall be made through the freight elevators Passenger elevators are to be used only for the movement of people, unless an exception is approved by the Management Office. 5. To insure orderly operation of the Building, no ice, mineral or other water, towels, newspapers, packages, etc. will be delivered to tenants' leased premises except by persons appointed or approved by Landlord in writing (such approval not to be unreasonably withheld). 6. On multiple tenant floors, corridor doors, when not in use, shall be kept closed. 7. Tenant space that is visible from public areas must be kept neat and clean and is subject to Landlord's approval. 8. Tenants shall not tamper with or attempt to adjust temperature control thermostats in the leased premises. Landlord shall adjust thermostats as required to maintain the Building standard temperature. All window blinds shall remain down and tilted at a 45 degree angle toward the street to help maintain comfortable room temperatures and conserve energy. 9. All requests for overtime air conditioning or heating must be submitted in writing to the Management Office by 5:00 p.m. on the day desired for weekday requests, by 5:00 p.m. Friday for weekend requests, and by 5:00 p.m. on the preceding business day for holiday requests. 10. The Building hours are from 7:00 a.m. until 7:00 p.m. Monday through Friday, and from 8:00 a.m. to 2:00 p.m. on Saturday, excluding holidays. 11. Tenants will comply with all security procedures during business hours and after hours and on weekends. 12. Landlord will provide all locks for doors in the leased premises and no additional lock(s) will be placed on any door within the leased premises without Landlord's written consent. All requests for duplicate keys will be made to the Management Office. 149 13. Tenants will cooperate with Landlord's employees in keeping leased areas neat and clean, unless the tenant is responsible for cleaning and maintenance personnel. Landlord will in no way be held responsible by any tenant, its agents, employees or invitees for any loss of property from the leased premises or public areas or for any damage to any property within the leased premises even if such loss or damage occurred when the leased premises were locked against entry. 14. Signs, advertisements, or notices visible in or from public corridors or from outside the Building shall be subject to Landlord's prior written approval. 15. Landlord will provide and maintain a directory board for all the tenants in the main lobby of the Building, and no other directory will be permitted. 16. Proposed plans for alterations within the Building must be approved in writing by Landlord. This provision will apply to all work performed in the Building including, but not limited to, installation of telephones, telegraph equipment, electrical devices and attachments, and all installations affecting or affixed to floors, walls, woodwork, trim, windows, ceilings, equipment or any other portion of the Building. 17. Landlord reserves the right to prescribe the weight and positioning of safes, files, filing systems, and other heavy equipment and written approval must be obtained from the Management Office before work begins. All damage done to the Building by the movement of property of the tenant, or done by the tenant's property while in the Building, will be repaired at the tenant's expense. 18. Should a tenant require telegraphic, telephonic, annunciator or other communication service, Landlord will direct the electricians where and how wires are to be introduced and placed and none shall be introduced or placed except as Landlord shall direct. Electric current shall not be used for power or heating without Landlord's prior written permission. 19. Tenants are requested to lock all office doors leading to corridors and to turn out all lights at the close of their working day. 20. Tenants, their agents, employees and invitees shall observe no smoking, as per applicable law and municipal ordinance, in all public areas including elevators, restrooms, etc. 21. No flammable, hazardous or explosive fluids or materials shall be kept or used within the Building except in areas approved by Landlord, and tenants shall comply with all applicable laws and building and fire codes relating thereto. 22. Tenants will not make or permit any improper noises within the Building or otherwise interfere with other tenants or persons having business within the Building. 23. No animals shall be brought into or kept in, on or about the Building. Landlord reserves the right to rescind any of these rules and regulations and to make such other and further rules and regulations as, in its reasonable judgment, shall, from time to time, be required for the safety, protection, care and cleanliness of the Building, the operation thereof, the preservation of good order therein and the protection and comfort of the tenants and their agents, employees and invitees. Such rules and regulations, when made and written notice thereof is given to a tenant, shall be binding upon it in like manner as if originally herein prescribed. 150 EXHIBIT E CONSTRUCTION OF THE PROJECT 1. Project Architect and Contractor. The architect for the Project shall be Kirksey Partners Architects (the "Project Architect"). The general contractor for the Project shall be E.E. Reed Construction Company or such other contractor as may be selected by Landlord in its sole discretion (the "Base Building Contractor"). 2. Project Plans and Specifications. (a) Attached hereto as Exhibit "G" is a description of the preliminary plans and specifications for the Project (the "Preliminary Plans and Specifications"). The Preliminary Plans and Specifications have been reviewed and are hereby approved by Landlord and Tenant. Landlord has supplied Tenant with a CAD diskette containing dimensional floor plans for the Building. (b) On or before June 29, 1998, Landlord shall supply Tenant with the complete construction plans and specifications for the base Building, including without limitation, architectural, structural, mechanical, electrical and plumbing drawings and specifications relating thereto. In addition, Landlord shall have the right, from time to time, to submit to Tenant in advance, one or more portions of such plans and specifications for Tenant's advance approval (e.g., foundation plans and specifications) so that Landlord may commence and continue construction of the Project on a "fast-track" basis. (c) Tenant shall, as soon as reasonably possible, but in no event later than five (5) business days following Landlord's submission thereof to Tenant, review and approve the proposed plans and specifications for the base Building (or portions thereof submitted in advance by Landlord as provided above). Tenant's failure to approve or disapprove any of such proposed items within such period shall be deemed to be Tenant's approval thereof. If Tenant disapproves any such items proposed by Landlord, Tenant shall notify Landlord of such disapproval in writing together with a reasonably specific description of Tenant's reasons for disapproving such items and, as to any aesthetic items (such as colors, finishes, etc.), a reasonably specific description of what modifications or alternatives would satisfy Tenant's objections. Landlord shall promptly revise any of such proposed items in accordance with Tenant's objections (or in accordance with any other alternatives which Landlord reasonably believes will be acceptable to Tenant based upon such objections by Tenant) and resubmit the same to Tenant for its approval in the same manner as the original items. Upon receipt of Tenant's approval therefor (deemed or otherwise), Landlord shall incorporate such items into the final plans and specifications for the Project (such final plans and specifications for the Project in the form approved by Tenant being hereinafter referred to as the "Project Plans and Specifications"). Notwithstanding anything to the contrary set forth in this Section, in no event shall Landlord be required to make any modifications to the Project or any of the plans and specifications for the Project at Tenant's request which would violate applicable Legal Requirements, change the scope of the Project, or otherwise be inconsistent with any previously approved plans and specifications, or result in an increase in the cost of the Project by more than $50,000 unless Tenant shall agree to pay the excess in cash. In the event of a modification which would result in an increase in the cost of constructing the Project which Tenant does not pay in cash, Tenant's annual Base Rental shall increase by an amount equal to 10.3% multiplied by such increased costs. (d) Landlord shall have the right, from time to time, to make changes and modifications to the Project Plans and Specifications; provided, that any material changes by Landlord not being made to comply with applicable Legal Requirements not in effect when the Project Plans and Specifications were previously approved shall be subject to the prior written approval of Tenant, which approval shall be promptly considered and not be unreasonably withheld (and in no event longer than five (5) business days) if such requested changes are consistent with the first-class nature of the Project. The cost of preparing the Project Plans and Specifications shall be borne solely by Landlord, except as otherwise provided below. 151 (e) Once approved by Tenant, Tenant shall not have the right to request any further changes to the Project Plans and Specifications (or previously approved portions thereof) without Landlord's prior approval, which approval may be granted or withheld in Landlord's sole discretion; provided, that (i) Tenant shall have the right to reduce the scope of the Project by eliminating the add on items previously requested by Tenant and set forth in Exhibit "G-1" attached to the Lease, in which event Tenant's annual Base Rental shall be reduced by the net reduction in Landlord's costs (after taking into consideration any redesign costs and other expenses previously incurred by Landlord in connection therewith) multiplied by 10.3%; and (ii) Tenant shall have the right to request changes in the scope of the Project or that otherwise require changes in the Project Plans and Specifications as long as (A) such changes do not affect the structure of the Building or the external pre-cast curtain wall, (B) such changes are approved by Landlord's lender(s), which approval Landlord shall use good faith efforts to obtain, (C) Tenant agrees to be responsible for all delays and expenses incurred by Landlord in connection therewith, and (D) Landlord and Tenant are able to agree upon an amendment hereto to take into account all such items. If Tenant shall request a change, Landlord shall within ten (10) days thereafter identify to Tenant in writing the delays and expenses anticipated by Landlord in connection therewith. Tenant shall thereupon either (i) require the change and be responsible for the delays and expenses thus identified, or (B) rescind its request for the change, which shall be presumed unless confirmation of its requirement of the change is delivered to Landlord within five (5) days after Landlord's notice to Tenant identifying delays and expenses. Tenant shall not be responsible for delays and expenses in connection with such change if they either (i) were reasonably anticipatable by Landlord but not identified to Tenant by Landlord after Tenant's proposal for the change involved, or (ii) due to the negligence or intentional misconduct of Landlord. In addition, Tenant shall reimburse Landlord for all reasonable out-of-pocket costs incurred by Landlord in evaluating the feasibility of such change, including without limitation, architectural, engineering and legal fees relating thereto. 3. Construction Schedule. Landlord will use reasonable efforts to commence construction of the Project and to cause such construction to be carried forward with due diligence in accordance with the construction schedules attached hereto as Exhibit "E-1" (the "Construction Schedule") to final completion in accordance with the Project Plans and Specifications and applicable Legal Requirements, subject to Force Majeure and Tenant Delays (as defined in Exhibit "F"). 4. Delays in Construction. (a) If for any reason other than Force Majeure or Tenant Delay, Landlord shall fail to commence construction of the Project (as evidenced by commencement of pouring the foundation footings) on or before July 5, 1998, Tenant shall have the right to terminate this Lease, by giving written notice thereof on or before July 20, 1998 (provided, that Landlord has not cured such default by commencing such construction prior to the giving of such notice by Tenant). If the Lease is terminated as described in the previous sentence, Tenant shall be entitled to receive, as Tenant's sole and exclusive remedy for such failure by Landlord, liquidated damages of $500,000.00 payable to Tenant within thirty (30) days of Landlord's receipt of such cancellation notice, the parties agreeing that Tenant's actual damages would be difficult or impossible to ascertain and that such liquidated damages are reasonable under the circumstances. (b) Subject to Tenant Delays but regardless of Force Majeure, if Landlord has not delivered the Premises for Tenant construction of interior improvements by an outside date of July 1, 1999, Tenant shall have the right, as Tenant's sole and exclusive remedies with respect thereto, to either (i) receive an abatement of Base Rental for two (2) months following the Commencement Date, or (ii) to terminate this Lease. "Delivery" of such space as used in the previous sentence shall mean that such space is dried-in, exterior glass has been installed, and the space is lockable and is being supplied with conditioned air. Any such election by Tenant shall be made on or before delivery of such space for such purposes, and in no event later than July 15, 1999. In 152 the event Landlord has not delivered such space prior to July 15, 1999, and Tenant has not elected either of the options set forth in this paragraph, Tenant shall be deemed to have elected option (i) above. If Tenant elects option (i) above, Landlord shall continue to proceed with reasonable due diligence to deliver the Premises for Tenant's construction of interior improvements as soon as reasonably possible thereafter. If Landlord thereafter fails to so proceed with due diligence, Tenant shall be entitled to exercise any and all remedies at law or in equity Tenant may have for such subsequent failure by Landlord other than the termination of this Lease, which termination right Tenant hereby waives in its entirety with respect to any such breach (other than as provided in Section 8(c) of Exhibit "F" to the Lease). 153 EXHIBIT F LEASEHOLD IMPROVEMENTS 1. Landlord's Obligations. Landlord, at Landlord's sole cost and expense, shall complete the construction of the core and shell improvements of the Premises more particularly described and included in the Project Plans and Specifications ("Core and Shell Improvements") in accordance with the Project Plans and Specifications, the Construction Schedule and all applicable Legal Requirements. All initial leasehold improvements included in the Premises in excess of that included as a part of the Core and Shell Improvements are hereinafter referred to as the "Initial Tenant Improvements". 2. Tenant Plans and Specifications. (a) The term "Tenant Plans and Specifications" means the complete architectural drawings and mechanical, electrical, plumbing and structural drawings and related specifications for any and all Initial Tenant Improvements desired by Tenant in the Premises (which shall include such written instructions or specifications as may be necessary or required to secure a building permit from the City of Houston for said improvements and to allow construction of said improvements to commence in due course, and which shall show the full detailed scope of all improvements to be performed to the Premises, other than the Core and Shell Improvements). All Initial Tenant Improvements shall (i) be consistent with the Project Plans and Specifications, (ii) not structurally impair the Project with respect to the Premises, impair or be incompatible with the mechanical, electrical or plumbing systems of the Project, or exceed the utility capacity (fresh water, wastewater, electricity or gas) limits of the Project with respect to the Premises set forth in the Project Plans and Specifications, (iii) not alter the exterior of the Project, and (iv) be compatible with the permitted uses of the Premises and other terms and conditions set forth in the Lease. The Tenant Plans and Specifications shall be prepared by Ken R. Harry Associates, Inc. Architects ("Tenant's Architect"), and Tenant shall be responsible for the preparation thereof. (b) On or before ninety (90) days after Landlord's delivery to Tenant of the Project Plans and Specifications, Tenant shall deliver to Landlord two (2) copies of the proposed Tenant Plans and Specifications for Landlord's review and approval. Landlord's approval shall not be unreasonably withheld, but may be withheld if the proposed Tenant Plans and Specifications do not conform to the criteria set forth in Section 2(a) above. If the proposed Tenant Plans and Specifications are not acceptable, Landlord shall notify Tenant within fourteen (14) days after Landlord's receipt thereof (including specifics as to why such proposed plans are not acceptable.) Promptly following Tenant's receipt of any such objections, Tenant shall cause such changes to be made as shall be necessary to meet such criteria and deliver final Tenant Plans and Specifications no later than one hundred twenty (120) days after Landlord's delivery to Tenant of the Project Plans and Specifications. The dates by which Tenant shall submit final or substantially completed Tenant Plans and Specifications shall be extended for any delays caused by Landlord in delivering the Project Plans and Specifications (or any portion thereof), and any delays caused by changes made by Landlord in the Project Plans and Specifications (or any portion thereof) that cause delays in completion of the Tenant Plans and Specifications by Tenant. The approval by Landlord of the Tenant Plans and Specifications shall not constitute a warranty or representation by Landlord of the quality or suitability of such plans and specifications for Tenant's intended use thereof, or as to the compliance of such plans and specifications with Legal Requirements, all of which shall be solely the Tenant's responsibility. (c) Subject to Section 9 below, Tenant shall pay and be responsible for the architectural and engineering fees incurred by Tenant in preparing the Tenant Plans and Specifications. (d) Landlord and Tenant shall assist and cooperate fully with one another in preparation and development of the Tenant Plans and Specifications, 154 which assistance and cooperation shall include (i) coordination of Tenant Plans and Specifications with the Project Plans and Specifications, (ii) assistance in cost estimates, (iii) regular meetings of Landlord, Tenant and their respective architects and engineers to coordinate development of the Tenant Plans and Specifications, and (iv) identification by Landlord of any High Risk Items (as hereinafter defined) in a timely manner. "High Risk Items" means any Initial Tenant Improvements which Landlord, acting in good faith, believes have a reasonable probability of not being completed on or before the estimated Completion Date due to limited supplies or suppliers, length of time to be manufactured, delivered or installed, or otherwise. Landlord will, not later than fourteen (14) days following Landlord's receipt of the proposed Tenant Plans and Specifications, consult with Tenant as requested on High Risk Items, identify the delay that is likely to be caused as a result of same, and deliver a definitive list thereof to Tenant with its notice of required changes to and/or approval of the Tenant Plans and Specifications. Only Initial Tenant Improvements included on any such list shall be considered High Risk Items. 3. Submission of Tenant Plans for Pricing. Promptly following Landlord's approval of the Tenant Plans and Specifications, Landlord shall submit the Tenant Plans and Specifications for pricing to the Base Building Contractor and to not more than two (2) other contractors selected by Tenant but subject to Landlord's approval, not to be unreasonably withheld (the "Tenant Contractor"). The following would be acceptable Tenant Contractors: David Spaw Company; LTB Ward Constructors, Inc.; Constructors & Associates, Inc.; Gilbane Building Company; and S.L. Crawford Construction. All such pricing shall assume that all aspects of such construction shall be performed by such contractor, including without limitation, obtaining a certificate of occupancy for the Premises. In addition, in the case of the Base Building Contractor, Landlord shall require as a part of such pricing letter, assuming that the Premises contains no more than 109,958 square feet of Net Rentable Area, a $142,945 limit on the Base Building Contractor's fee (plus a 4.5% fee on all work associated with millwork and granite/wood veneer floor and wall finishes) and a maximum of $164,937 of general conditions cost; provided, that if the Premises as designed contains more than 109,958 square feet of Net Rentable Area, the $142,945 limit shall be increased by $1.30, and the general conditions cost shall increase by $1.50, per square foot of additional Net Rentable Area in the Premises. The Base Building Contractor and any Tenant Contractors shall have a period of fourteen (14) days in which to price the Tenant Plans and Specifications. Promptly following the receipt by Landlord of pricing of the Tenant Plans and Specifications by the Base Building Contractor and any Tenant Contractors, Landlord shall submit same to Tenant for Tenant's selection of either the Base Building Contractor or any Tenant Contractor to construct the Initial Tenant Improvements. 4. Selection of Contractor. (a) Tenant shall have ten (10) days following receipt of the pricing letters from the Base Building Contractor and any Tenant Contractors to select the contractor for the construction of the Initial Tenant Improvements in accordance with the Tenant Plans and Specifications. (b) If Tenant selects the Base Building Contractor for the construction of the Initial Tenant Improvements, Landlord shall promptly contract with the Base Building Contractor for the construction of the Initial Tenant Improvements based upon the terms set forth in such contractor's pricing letter. Thereafter, Landlord shall supervise, manage and administer the construction of the Initial Tenant Improvements by the Base Building Contractor and cause all Initial Tenant Improvements to be constructed in compliance with the Tenant Plans and Specifications; provided, that Landlord shall not be required to install any portion of the Initial Tenant Improvements which do not conform to any applicable regulations, laws, ordinances, codes and rules, or with the terms of this Lease, which conformity shall be the obligation of Tenant. (c) If Tenant selects a Tenant Contractor to construct the Initial Tenant Improvements, then Tenant shall enter into a separate contract with the Tenant Contractor for the build out of the Initial Tenant Improvements, which contract shall be subject to Landlord's prior 155 approval (not to be unreasonably withheld) and shall provide that the Tenant Contractor shall comply with the following: (i) conduct its work in such a manner so as not to unreasonably interfere with other tenants, project operations, or any other construction occurring on or in the Project or the Premises; (ii) execute a set of and comply with all rules and regulations relating to the construction activities in or on the Project as may be reasonably promulgated and uniformly enforced from time to time by Landlord or its agents; (iii)maintain such insurance and bonds in force and effect as required of the Base Building Contractor or as required by applicable law (but in any event said bonds shall be in amounts equal to the full value or cost of the work being done by the Tenant Contractor); and (iv) be responsible for reaching a reasonable agreement with Landlord and its agents as to the terms and conditions for all contractor items relating to the conducting of its work, including but not limited to, those matters relating to hoisting, systems interfacing, use of temporary utilities, storage of materials, access to the Premises and the Project, and the purchase and return of Building standard materials (and Landlord agrees to cooperate reasonably with Tenant's Contractor in the coordination of these items). Landlord shall have the right to approve the subcontractors to be used by the Tenant Contractor for mechanical, electrical and plumbing work, which approval shall not be unreasonably withheld. As a condition precedent to Landlord permitting the Tenant Contractor to commence the Initial Tenant Improvements, Tenant and the Tenant Contractor shall deliver to Landlord such assurances or instruments as may be reasonably requested by Landlord, to evidence the Tenant Contractor's and its subcontractor's compliance or agreement to comply with the provision of this Paragraph 4. (d) If Tenant selects the Tenant Contractor to construct the Initial Tenant Improvements, Tenant shall construct, at Tenant's sole cost and expense (but subject to reimbursement to the extent of the Tenant Allowance), the Initial Tenant Improvements in accordance with the Tenant Plans and Specifications, this Exhibit "F" and all other applicable provisions of the Lease. Without in any way limiting the foregoing provisions of this Section, the following provisions shall be applicable to Tenant's construction of the Initial Tenant Improvements or performance of any other work in the Premises by Tenant or Tenant's Contractors or their respective employees, agents, or representatives: (i) Tenant shall cause the Initial Tenant Improvements to be constructed and performed in accordance with all applicable laws, rules, regulations, and ordinances and otherwise in a good and workmanlike manner. Without limiting the foregoing, Tenant shall be responsible for obtaining all permits necessary to commence construction of the Initial Tenant Improvements. (ii) Tenant and each of Tenant's contractors (including the General Contractor and each subcontractor and supplier of General contractor), workmen, mechanics, engineers, space planners, and other agents and consultants shall comply with all construction rules and regulations reasonably adopted and uniformly enforced by Landlord. (iii)The Tenant Contractor and each of its subcontractors and suppliers shall waive all contractual, statutory and constitutional liens against the Premises and the Building as a condition to receipt of final payment and recognize that Tenant is the owner of a leasehold estate only in the Premises, pursuant to the terms of the Lease and that nothing in this Exhibit or other portions of the Lease shall be deemed to confer on Tenant the power or authority to create a lien on Landlord's interest in the Building or the Project that is not permitted pursuant to the Texas Property Code with respect to work installed. (iv) Within thirty (30) days of completion of the Initial Tenant Improvements and in any event prior to the final disbursement of the Tenant Allowance, Tenant shall deliver to Landlord one set of the final record construction plans and a CADD diskette reflecting the actual conditions and construction of the Initial Tenant Improvements and copies of all warranties. The diskette will be in a format of AutoCAD or otherwise reasonably acceptable to Landlord. (v) Prior to occupancy of any portion of the Premises, Tenant shall obtain, at Tenant's sole cost and expense, a certificate of occupancy for such portion of the Premises from the appropriate governmental agency which will permit Tenant to occupy the Premises. (vi) Subject to Section 7.7 of the Lease, Tenant shall 156 indemnify and hold harmless Landlord from and against any and all costs, expenses, claims, liabilities and causes of action arising out of or in connection with work performed by Tenant or Tenant's Contractors, any subcontractor of Tenant's Contractors or any of their respective employees, agents or representatives, unless caused by the negligence of Landlord, its contractors or their respective employees and agents. (vii)Landlord shall have the right (but not the obligation) to inspect the Initial Tenant Improvements as they are being installed and to require Tenant to correct any aspect of such improvements that have not been installed in substantial compliance with the Tenant Plans and Specifications or in compliance with applicable law. 5. Cooperation and Meetings. Landlord and Tenant shall assist and cooperate fully with each other in completion of the Initial Tenant Improvements and coordination of the Initial Tenant Improvements with the construction and completion of the Project, which assistance and cooperation shall include regular and frequent meetings of Landlord, Tenant and their respective contractors, architects, engineers and representatives. The parties recognize the advisability of identifying one or more persons as the point of responsibility for dealing with the other. Landlord hereby designates Al Augustine as the "Landlord's Representative" for such purpose. Tenant hereby designates Abraham Garza as the "Tenant's Representative" for such purpose. Either party, by notice to the other, shall have the right to change such designations from time to time. 6. Change Orders. Tenant shall have the right, from time to time, to make changes to the Tenant Plans and Specifications and in the Initial Tenant Improvements, and Landlord shall cause the same to be made, provided that any such changes must meet the criteria set forth in Section 2(a) above. In the event Tenant desires to make any such changes or modifications to the Tenant Plans and Specifications or Initial Tenant Improvements, Tenant shall submit a brief description thereof to Landlord in writing. Within five (5) business days following Landlord's receipt of such proposed modification, Landlord shall deliver to Tenant Landlord's good faith estimate of the additional cost and schedule changes required to implement such proposed change by Tenant, including any potential Tenant Delay. Tenant shall then have a period of five (5) business days in which to determine whether to go forward with any such proposed changes. Tenant's failure to notify the Landlord in writing during such period of its election to go forward with any such proposed changes shall constitute Tenant's election not to go forward with such changes. Subject to Sections 2 above and 9 below, Tenant shall pay any net increase, or receive the benefit of any net decrease, in the cost under such contract as a result of any such change orders. 7. Tenant Delay. (a) "Tenant Delay" means (i) delays of Tenant in timely meeting its obligations pursuant to Exhibits "E" and "F" of this Lease; (ii) delays caused by changes by Tenant in the Tenant Plans and Specifications or in the Initial Tenant Improvements made by Tenant pursuant to Section 6 above; (iii) any delays caused by Tenant's or Tenant's Contractor's material interference with the construction of the Project or the Initial Tenant Improvements; and (iv) such additional time as is required for construction and installation of High Risk Items identified by Landlord pursuant to Section 2(d) (not exceeding the estimated delay identified by Landlord pursuant to Section 2(d)); provided, that (A) Tenant Delay shall not include any delays of (or caused by) Landlord or the Base Building Contractor; and (B) Tenant Delay shall not include delays caused by Force Majeure. (b) "Landlord Delay" means (i) delays of Landlord in timely meeting its obligations pursuant to Exhibits "E" and "F" of this Lease; (ii) delays caused by changes in the Project Plans and Specifications not requested by Tenant; and (iii) delays caused by Landlord's or the Base Building Contractor's breach of the agreements regarding the coordination of construction of the Project and the Initial Tenant Improvements described in Section 4(c)(iv) of this Exhibit "F"; provided, (A) Landlord Delay shall not include any delays of (or caused by) Tenant or Tenant's Contractor; and (B) Landlord Delay shall not include delays caused by Force Majeure. For all purposes of this Lease, Landlord Delay and Tenant Delay shall be netted against each other in determining whether and how much Landlord Delay or Tenant Delay exists. 157 (c) The term "Force Majeure" means when either party to this Lease shall be delayed, hindered, or prevented from the performance of any act required hereunder (other than the payment of money) by reason of acts of God, strikes, lockouts, labor disputes, inability to produce materials, inclement weather, failure of power, restrictive governmental laws or regulations implemented after the date hereof, riots, insurrections, war, delays by permitting authorities in obtaining permits for the construction of the Project (in excess of thirty (30) days following submission thereof), delay or refusal to perform by the current owner of the Land, or other cause not within the reasonable control of such party (expressly excepting the financial inability of such party to perform its obligations hereunder), then the performance of such acts shall be excused for the period of such delay and the period for performance of any such act shall be extended for a period equivalent to the period of such delay; provided, that any party subjected to any Force Majeure that may reasonably be expected to delay the performance by such party of an obligation under this Lease shall, not later than ten (10) days following the date of which it becomes reasonably apparent that such event will cause such a delay, give written notice thereof to the other party hereto. (d) Notwithstanding anything in this Lease to the contrary, in no event shall Tenant be entitled to take possession of any portion of the Premises for the purposes of conducting its business therein prior to the occurrence of the Completion Date. 8. Completion Date. (a) The term "Completion Date," shall mean the date upon which each of the Project and the Initial Tenant Improvements have been substantially completed in accordance with the Project Plans and Specifications and the Tenant Plans and Specifications, a temporary certificate of occupancy has been issued with respect thereto, and Landlord has received all other governmental consents, licenses and permits necessary for (i) the occupancy by Tenant of the Premises and the use of the Garage for the purposes intended hereby, and (ii) the Project being operational to the extent necessary so that the services required to be provided hereby to Tenant are capable of being provided; provided, that in the event Tenant elects to have the Initial Tenant Improvements constructed by a Tenant Contractor, the Completion Date for the Initial Tenant Improvements shall be deemed to occur one hundred and twenty (120) calendar days following delivery of the Premises to Tenant as described in Section 4(b) of Exhibit "E". The terms "substantial completion" and "substantially completed", as used in this Lease, shall mean completion of construction in accordance with the plans and specifications therefor and in good order and operating condition except for minor details of construction, decoration or mechanical adjustments which will not, interfere in any material respect with Tenant's access to or use or enjoyment of, the Premises. If Tenant selected the Base Building Contractor to construct the Initial Tenant Improvements, Landlord shall cause the Base Building Contractor to complete any such unfinished minor details of construction, decoration and mechanical adjustment within thirty (30) days following the Completion Date of the Premises. Landlord shall also cause any such unfinished minor details of construction, decoration and mechanical adjustment with respect to the ground floor lobby and entranceways to be completed within sixty (60) days following the Completion Date with respect to the remainder of the Project (subject to Force Majeure). If Tenant selected the Base Building Contractor to construct the Initial Tenant Improvements, and if Landlord and Tenant (and the Project Architect and Tenant's Architect) are unable to agree upon the Completion Date with respect to the Initial Tenant Improvements, or upon the existence or completion within the time periods set forth above of any such punch-list items, for a period of ten (10) business days, either party may, at its option, submit such items for arbitration in accordance with the terms of Section 8.7 of the Lease, and the decision reached as a result thereof shall be binding on Landlord and Tenant. If Landlord and Tenant are unable to agree upon any such items which affect the timing of the commencement of Rent payable by Tenant to Landlord hereunder, Tenant shall, upon resolution of such issues in accordance with the terms of this Lease, promptly pay any such amounts determined to be due to Landlord hereunder together with interest thereon at the prime rate from the date such amounts are determined to have been due until paid in full. 158 (b) The Commencement Date of the Lease, as defined in Section 2.1 of the Lease, is conditioned in part on the substantial completion of the Project and the Initial Tenant Improvements (if the Base Building Contractor is selected by Tenant). The Commencement Date shall not be postponed by virtue of Tenant Delay. Accordingly, the Commencement Date shall be accelerated for all purposes by the number of days that the Completion Date was delayed due to Tenant Delay. (c) Notwithstanding the foregoing, in the event Tenant selects the Base Building Contractor to construct the Initial Tenant Improvements and if for any reason other than Tenant Delay, the Commencement Date has not occurred with respect to the Premises prior to December 31, 1999, Tenant may, as its sole and exclusive remedies with respect thereto, either (i) cancel this Lease by delivering written notice thereof to Landlord at any time prior to such Commencement Date, or (ii) accept the Premises upon substantial completion thereof and receive an abatement of Base Rental for the first two (2) months after the Commencement Date. Tenant must make such election on or before January 10, 2000. If no such election is made by Tenant prior to such date, Tenant shall be deemed to have elected option (ii) in the preceding sentence. 9. Landlord's Expenses. In the event Tenant elects to use a Tenant Contractor for the construction of the Initial Tenant Improvements, Landlord shall be entitled to receive a fee for the supervision, construction, management and administration of the construction of the Initial Tenant Improvements equal to the lesser of (a) six percent (6%) of the costs thereof, or (b) $150,000. No other fees or expenses shall be payable by Tenant in connection with Landlord's construction management of the Initial Tenant Improvements. The amounts to be paid by Tenant to Landlord pursuant to this paragraph shall be paid monthly within fifteen (15) days after Landlord's presentation of an invoice therefor containing the amount of any such reimbursement. 10. Tenant Allowance. (a) Landlord hereby agrees to provide to Tenant an allowance (the "Tenant Allowance") equal to the sum of (i) $30.00 per square foot of Net Rentable Area in the Initial Premises (the "Initial Allowance") and (ii) if requested by Tenant in writing not less than ninety (90) days prior to the commencement of construction of the Initial Tenant Improvements, up to an additional $5.00 per square foot of Net Rentable Area in the Initial Premises (the "Additional Allowance"), in which event Tenant's annual Base Rental shall be increased by the amount necessary to amortize the Additional Allowance over the Term at an interest rate of nine percent (9%). The Tenant Allowance shall be applied by Tenant in Tenant's sole discretion to (i) contractor and vendor costs associated with the construction of the Initial Tenant Improvements, (ii) architectural and engineering fees, and (iii) the physical move of Tenant's offices, including voice/data cabling and telephone switch ((i) and (ii) or (iii) being hereinafter collectively referred to as the "Permitted Tenant Allowance Costs"). Such allowance shall be provided by Landlord in addition to the construction and installation by Landlord at its sole cost and expense of the Core and Shell Improvements within the Premises. If the Base Building Contractor is selected for the construction of the Initial Tenant Improvements, until the Tenant Allowance is exhausted, Landlord shall apply such sums as and when due under the contract for the construction of the Initial Tenant Improvements. If a Tenant Contractor is selected for the construction of the Initial Tenant Improvements, Landlord shall disburse the Tenant Allowance from time to time within thirty (30) days after presentation by Tenant or Tenant's Architect of invoices or bills for any Permitted Tenant Allowance Costs, with reasonable evidence supporting the same. Tenant shall pay the excess, if any, of the cost of the Initial Tenant Improvements over the Tenant Allowance, as and when due. Any portion of the Initial Allowance not required to cover any such expenses incurred prior to the Commencement Date shall be credited against Rent next coming due. 159 (b) In addition to the amounts payable by Landlord under Section 10(a) above, Landlord shall also pay for any architectural and engineering costs incurred by Tenant for changes in the Tenant Plans and Specifications resulting from changes by Landlord to the Initial Plans and Specifications or the Project Plans and Specifications after approval thereof by Tenant. Landlord shall pay the same within thirty (30) days after presentation of bills therefor to Landlord, together with reasonable evidence supporting the same. 11. Entry into Tenant Area. (a) Tenant (and its employees, agents, contractors, subcontractors, architects, space planners, consultants, suppliers and other representatives) shall be entitled to enter the Project and the Premises from time to time during the course of construction as may be reasonably necessary for Tenant's space planning or inspection purposes, or for the period of time up to one hundred twenty (120) days prior to the Completion Date, for the installation by Tenant of its furniture, fixtures or equipment (including telephone, communications and computer equipment); provided (i) Tenant does not hinder or interfere in a material manner with construction of the Project or with the construction of the Initial Tenant Improvements, and (ii) Tenant takes such reasonable protective precautions or measures for Landlord and/or Tenant as Landlord may reasonably request, given the state of construction of the Project and/or the Premises at the time of such entry. (b) There shall be no obligation on the part of Tenant to pay any Base Rental, Basic Costs and/or parking charges by reason of any prior access pursuant to this Section. (c) Except as provided below or as part of the bid by the Base Building Contractor for the construction of the Initial Tenant Improvements, Landlord shall not charge Tenant, its contractors or their subcontractors for electricity, heating, ventilation, air conditioning, exterior hoisting (which hoisting shall not be available during any move-in period), security and insurance (which security and insurance are not required to be provided by Landlord to Tenant's Contractor) and/or taxes during the construction and move-in period, for the use of the loading dock or elevators (including the freight elevator), or for the personnel required for the operation thereof, during the construction of the Initial Tenant Improvements; provided, that (i) if Tenant requests Landlord to provide loading dock, security or freight elevator personnel or to provide conditioned air after Normal Business Hours, Tenant shall reimburse Landlord for Landlord's reasonable out-of-pocket expenses incurred in connection therewith, and (ii) if Tenant elects to use Tenant's Contractor for the construction of the Initial Tenant's Improvements, Tenant or Tenant's Contractor shall agree to pay ninety percent (90%) of the charges by the utility company providing electricity to the Project during the construction period for the Initial Tenant Improvements up to a maximum amount of $15,000. 160 EXHIBIT G OUTLINE PLANS AND SPECIFICATIONS EXHIBIT H RENEWAL OPTION 1. Renewal Option. Provided that no Event of Default is then existing under this Lease, Tenant shall have the option (the "Renewal Option") to renew the Lease with respect to all or any portion of the Premises, by delivering written notice of such election to Landlord not less than twelve (12) months nor more than fifteen (15) months prior to the expiration of the initial Term or any previously exercised Renewal Term. If Tenant exercises any option for less than all of the Premises, such space shall (a) comprise no less than two (2) full contiguous floors, (b) any additional space covered by the Renewal Option shall be contiguous space and contiguous to such two (2) full floors, and (c) any partial floor included by Tenant shall be reasonably configured so as to leave Landlord with space in a reasonably leasable configuration based on customary space planning standards and applicable Legal Requirements. Tenant shall have the right to exercise any Renewal Option in any combination of five (5) year periods of up to a total of twenty (20) years plus a one time option to extend for a one (1) year period (such elected period being the "Renewal Term"). Tenant's notice to Landlord exercising a Renewal Option shall specify the space to be covered thereby (if less than all of the Premises) and the length of Tenant's proposed Renewal Term. Failure of Tenant to exercise its Renewal Option in the time periods set forth herein shall render all remaining Renewal Options void and of no further force and effect. Within fifteen (15) days of Landlord's receipt of the notice of the exercise of the Renewal Option, Landlord shall provide Tenant with written notice of its estimation of the prevailing MRR for such Renewal Space. Tenant shall then have fifteen (15) days to notify Landlord in writing that it accepts or rejects Landlord's determination of MRR and to provide Landlord with Tenant's estimation of MRR. If the parties cannot agree on a determination of MRR within fifteen (15) days thereafter, Tenant may (i) withdraw its election to exercise the Renewal Option or (ii) elect that the MRR be determined in accordance with the appraisal provisions contained herein. Once such MRR is determined, within fifteen (15) days thereafter, Tenant may withdraw its election to exercise the Renewal Option. Any such renewal of this Lease shall be upon the same terms and conditions of this Lease, except (i) the Base Rental during the Renewal Term shall be based on ninety-five percent (95%) of the MRR at the time of determination of the MRR; (ii) Tenant shall pay the standard rate then being charged for the Parking Permits to the Garage with respect to all Parking Permits then issued to Tenant; (iii) Tenant shall have no option to renew this Lease beyond the expiration of the twenty (20) year renewal period; (iv) the leasehold improvements will be provided to Tenant in their then-existing condition (on an "as is" basis) at the time the Renewal Term commences, and (v) items such as the Landlord's and Tenant's insurance and other non-rental terms shall be adjusted to amounts and terms then standard for comparable leases with comparable tenants in Houston, Texas. 2. Market Rental Rate. The term Market Rental Rate ("MRR") shall mean the annual amount of rental that a tenant would pay and a willing landlord would accept in arm's length, bona fide negotiations for a lease to be executed at the time the Renewal Option is exercised, based upon other lease transactions then being made in the Building and other Comparable Buildings, taking into consideration all relevant terms and conditions of such comparable leasing transactions, including, without limitation: (i) location, quality and age of the building; (ii) use and size of the space in question; (iii) location and or floor level within the building; (iv) extent of leasehold improvements and allowances therefor provided; (v) the amount of any abatement of rental or other charges; (vi) parking charges or inclusion of same in rental; (vii) lease takeovers/assumptions; (viii) relocation allowances; (ix) refurbishment and repainting allowances; (x) distinction between "gross" and "net" leases; (xi) extent of services provided or to be provided and contributions thereto; (xii) base year or dollar amount for escalation purposes (both operating costs and ad valorem taxes); (xiii) credit standing and financial stature of the tenant; and (xiv) commencement and length of term. 161 3. Appraisal. Should Tenant and Landlord be unable to agree upon the fair MRR applicable in the case of renewal or expansion, Tenant and Landlord shall each within five (5) days of an election by either party to proceed with such appraisal, appoint an appraiser who is knowledgeable in commercial property values in the area in which the Premises are located, and the two appraisers shall, within ten (10) days after their selection, try to agree upon the MRR for the Premises. If the two appraisers are unable to agree upon the MRR, they shall within ten (10) days of their appointment appoint a third appraiser with the same qualifications and the three appraisers shall, within ten (10) days thereafter, prepare appraisals of the Premises. The average of the three appraisals shall be used as the MRR of the Premises; provided, that if any appraiser's estimate is either (a) less than ninety percent (90%) of the average figure, or (b) more than one hundred ten percent (110%) of such average, the MRR for the Premises will be the average of the remaining figures which are between 90 - 110% of the average figure even if only one estimate remains. If all figures fall outside of the range of 90-110%, the middle figure of the three appraisals shall be the MRR. Tenant and Landlord shall each bear the cost of its appraiser and shall share equally the cost of the third, if any. 162 EXHIBIT I EXPANSION OPTION 1. Hold Option. Provided that no Event of Default is then existing under the Lease, Tenant shall have the right, continuing through December 31, 1998, at Tenant's option (the "Hold Option"), to include under this Lease any space located on the 1st Floor of the Building other than the up to 1,500 square feet of space to be used by Landlord for the management of the Building. In the event Tenant desires to exercise all or any part of its Hold Option, Tenant shall deliver notice to Landlord describing the amount and preferred location of such available space desired to be leased by Tenant on or before December 31, 1998; however, the exact location of such space must be agreeable to both Landlord and Tenant, and shall depend, in part, upon the amount of space desired to be leased by Tenant. Landlord and Tenant shall then enter into an amendment to this Lease to cover such space on the same terms and conditions as applicable to the Initial Premises (and such space shall thereafter be considered part of the Initial Premises), and Landlord shall, at its sole cost and expense, provide all necessary multi-tenant corridors to bring the 1st Floor of the Building into compliance with all Legal Requirements. 2. Expansion Option. Provided that no Event of Defaults is then existing, Tenant shall have the option (the "Expansion Option"), effective as of the fifth (5th) anniversary of the Commencement Date, to lease all (but not less than all) of the second level of the Building containing approximately 25,000 square feet of Net Rentable Area (the "Expansion Space") to be exercised with no more than twelve (12) months nor less than nine (9) months prior written notice to Landlord. The portion of the Expansion Space to be added to the Premises (the "Expansion Premises") shall be subject to the same terms, covenants and conditions under the Lease, except that (a) the Base Rental Rate for the Expansion Premises shall be the prevailing MRR (as defined in Exhibit "H" above) as of the date such Expansion Space shall be added to the Premises, (b) the Tenant Allowance for the Expansion Premises shall be equal to $15.00 per square foot of Net Rentable Area in the Expansion Premises (and the MRR shall be increased to allow for such improvement allowance), (c) there shall be no refurbishment allowance applicable to such Expansion Premises and (d) the term of such lease shall expire as of the expiration of the Term. Landlord may, on a date established by at least sixty (60) days' notice to Tenant, deliver the Expansion Premises to Tenant up to three (3) months prior to the end of the fifth (5th) anniversary of the Commencement Date, or up to six (6) months after the end of the fifth (5th) anniversary of the Commencement Date. Within thirty (30) days of receipt of Tenant's notice of the exercise of the Expansion Option, Landlord shall provide Tenant with written notice of its estimation of the MRR for such Expansion Premises. Tenant shall then have fifteen (15) days to notify Landlord in writing that it accepts or rejects Landlord's determination of MRR and to provide Landlord with Tenant's estimation of MRR. If the parties cannot agree on a determination of MRR within fifteen (15) days thereafter Tenant may either (i) withdraw its Expansion Option or (ii) elect that such MRR shall be determined in accordance with the appraisal provisions set forth in Paragraph 3 of Exhibit "H", which MRR shall then be binding on the parties. Tenant shall not be required to pay (and the MRR shall so reflect) any amount for parking for such Expansion Premises, which shall be provided in the same ratios as provided with respect to the Initial Premises. Tenant's obligation to commence paying Rent on such space shall commence (A) in the case of space in the Building not previously built out with tenant improvements, on the 90th day, and (B) in the case of previously built out space, on the 30th day, after the availability of such space for the construction of the tenant improvements therein. Tenant's rights under this Exhibit shall terminate if (i) this Lease or Tenant's right of possession of the Premises is terminated, (ii) Tenant assigns any of its interest in this Lease other than to an Affiliate or sublets more than 50,000 square feet of Net Rentable Area, (iii) to the extent Tenant has previously leased any Expansion Space pursuant to its other options contained herein or otherwise, and (iv) Tenant fails to timely exercise its option under this Exhibit, time being of the essence with respect to Tenant's exercise thereof. 163 EXHIBIT J FIRST REFUSAL RIGHT Provided that no Event of Default then exists under this Lease, Tenant shall have the right (the "Preference Right"), to lease all or any portion of the space in the Building ("Preference Space") that becomes available to lease during the term of the Lease or any renewals thereof. When Landlord learns that any Preference Space will become available for lease, but no more than nine (9) months prior to the date Landlord expects such Preference Space to become available (other than in connection with the initial leasing of such space, with respect to which Landlord shall not be limited by such nine (9) month advance notice period), Landlord shall deliver Tenant written notice (the "Preference Notice"), together with the economic terms (Base Rental Rate, term, allowances, etc.) pursuant to which Landlord desires to lease such space, and the estimated date of availability. Within fifteen (15) days thereafter, Tenant shall give Landlord written notice of its election to exercise its Preferential Right to lease the Preference Space. If Tenant does not exercise its First Refusal Right within such fifteen (15) day period, then Landlord may offer such space to third parties and Tenant's Preference Right with respect to such space shall expire. Such Preference Space shall be leased at the same terms and conditions of the Lease except that the Base Rental Rate and allowance for such Preference Space shall be the MRR and shall terminate concurrently with the Premises or at the end of such shorter term as Tenant shall designate in its election to lease such space (subject to the minimum requirements set forth below). Landlord shall provide Tenant no less than sixty (60) days' prior written notice of the date on which Landlord shall render possession to Tenant. The minimum term of the Preferential Right space shall be for a period of five (5) years, unless such space is leased during the last five (5) years of the Lease Term, in which case, the term shall be for the balance of the remaining term; provided, that if the term of such lease is less than the period offered by Landlord, the MRR shall be adjusted to account for such shorter period. Notwithstanding the foregoing, no Preferential Right space shall be leased during the last thirty (30) months of the Term unless this Lease is simultaneous renewed pursuant to Exhibit "H" above. If the term of Preference Space terminates concurrently with the Premises, all renewal options applicable to the Premises shall be applicable to the Preference Space as well. If Tenant elects (or is deemed to have elected) not to lease the Preference Space, Landlord may not lease such space to another tenant on terms more favorable to the tenant than those offered to Tenant without first offering such terms to Tenant on the basis above, and if such space has not been leased within six (6) months after it has become available, Landlord shall again notify Tenant of its availability and repeat the process above as if it were new Preference Space. Tenant's rights under this Exhibit shall terminate if (i) this Lease or Tenant's right of possession of the Premises is terminated, (ii) Tenant assigns any of its interest in this Lease other than to an Affiliate or sublets more than 50,000 square feet of Net Rentable Area, and (iii) Tenant fails to timely exercise its option under this Exhibit, time being of the essence with respect to Tenant's exercise thereof. EXHIBIT K CLEANING SPECIFICATIONS EXHIBIT L MEMORANDUM OF LEASE EXHIBIT M SECURITY SERVICES 164 EX-10.22 7 $250,000,000 CREDIT AGREEMENT Exhibit 10.22 CONFORMED COPY $250,000,000 CREDIT AGREEMENT dated as of December 17, 1998 among Cabot Oil & Gas Corporation, The Banks Parties Hereto and Morgan Guaranty Trust Company of New York, as Administrative Agent J.P. Morgan Securities, Inc., Arranger Bank of Montreal, Syndication Agent NationsBank, N.A. Documentation Agent 165 TABLE OF CONTENTS Page ARTICLE 1 Definitions Section 1.01. Definitions1 Section 1.02. Accounting Terms and Determinations..................... 13 Section 1.03. Types of Borrowings..................................... 14 ARTICLE 2 The Credits Section 2.01. Commitments to Lend14 Section 2.02. Notice of Borrowings.................................... 14 Section 2.03. Notes................................................... 16 Section 2.04. Maturity of Loans....................................... 16 Section 2.05. Interest Rates.......................................... 16 Section 2.06. Commitment Fees......................................... 19 Section 2.07. Termination or Reduction of Commitments................. 19 Section 2.08. Method of Electing Interest Rates....................... 20 Section 2.09. Optional Prepayments.................................... 21 Section 2.10. General Provisions as to Payments....................... 22 Section 2.11. Funding Losses.......................................... 23 Section 2.12. Computation of Interest and Fees........................ 23 Section 2.13. Withholding Tax Exemption............................... 23 Section 2.14. Regulation D Compensation............................... 24 Section 2.15. Maximum Interest Rate................................... 24 ARTICLE 3 Conditions Section 3.01. Effectiveness........................................... 25 Section 3.02. Borrowings.............................................. 26 ARTICLE 4 Representations and Warranties Section 4.01. Corporate Existence and Power........................... 27 Section 4.02. Corporate Governmental Authorization; No Contravention.. 28 Section 4.03. Binding Effect.......................................... 28 Section 4.04. Financial and Other Information......................... 28 Section 4.05. Full Disclosure......................................... 29 Section 4.06. Litigation.............................................. 29 Section 4.07. Compliance with ERISA................................... 29 Section 4.08. Environmental Matters................................... 30 Section 4.09. Taxes................................................... 30 Section 4.10. Titles, etc............................................. 30 Section 4.11. Casualties; Taking of Properties........................ 31 Section 4.12. Use of Proceeds......................................... 31 Section 4.13. Year 2000 Compliance.................................... 31 ARTICLE 5 Covenants Section 5.01. Information............................................. 32 Section 5.02. Payment of Obligations.................................. 34 Section 5.03. Maintenance of Property................................. 34 Section 5.04. Conduct of Business and Maintenance of Existence........ 34 Section 5.05. Compliance with Laws.................................... 34 Section 5.06. Inspections of Property, Books and Records.............. 35 Section 5.07. Insurance............................................... 35 Section 5.08. Covenant to Secure Indebtedness Equally................. 35 Section 5.09. Engineering Reports..................................... 35 Section 5.10. Debt.................................................... 37 Section 5.11. Liens................................................... 39 Section 5.12. Sales of Petroleum Properties........................... 40 Section 5.13. Annual Coverage Ratio................................... 40 Section 5.14. Consolidations, Mergers and Sales of Assets............. 40 Section 5.15. Subsidiary Debt......................................... 41 Section 5.16. Subsidiaries............................................ 41 ARTICLE 6 Defaults Section 6.01. Events of Default....................................... 41 Section 6.02. Notice of Default....................................... 44 166 ARTICLE 7 The Agent Section 7.01. Appointment and Authorization........................... 44 Section 7.02. Agent and Affiliates.................................... 44 Section 7.03. Action by Agent......................................... 45 Section 7.04. Consultation with Experts............................... 45 Section 7.05. Liability of Agent...................................... 45 Section 7.06. Indemnification......................................... 45 Section 7.07. Credit Decision......................................... 46 Section 7.08. Successor Agent......................................... 46 Section 7.09. Agent's Fees............................................ 46 ARTICLE 8 Change in Circumstances Section 8.01. Basis for Determining Interest Rate Inadequate or Unfair............................... 46 Section 8.02. Illegality.............................................. 47 Section 8.03. Increased Cost and Reduced Return....................... 48 Section 8.04. Base Rate Loans Substituted for Affected Fixed Rate Loans............................... 50 Section 8.05. Substitution of Bank.................................... 50 ARTICLE 9 Miscellaneous Section 9.01. Notices................................................. 50 Section 9.02. No Waivers.............................................. 51 Section 9.03. Expenses; Documentary Taxes; Indemnification............ 51 Section 9.04. Sharing of Set-Offs..................................... 51 Section 9.05. Amendments and Waivers.................................. 52 Section 9.06. Successors and Assigns.................................. 52 Section 9.07. Collateral.............................................. 54 Section 9.08. New York Law; Submission to Jurisdiction................ 54 Section 9.09. Counterparts............................................ 54 Section 9.10. Confidentiality......................................... 54 Section 9.11. No Unwritten Agreements................................. 55 Exhibit A - Note Exhibit B - Opinion of Special Counsel for the Borrower Exhibit C - Opinion of Managing Counsel of the Borrower Exhibit D - Opinion of Special Counsel for the Agent 167 CREDIT AGREEMENT CREDIT AGREEMENT dated as of December 17, 1998 among CABOT OIL & GAS CORPORATION, the BANKS from time to time parties hereto and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent. The parties hereto agree as follows: ARTICLE 1 Definitions Section 1.01. Definitions. The following terms, as used herein, have the following meanings: "Adjusted CD Rate" has the meaning set forth in Section 2.05(b). "Administrative Questionnaire" means, with respect to each Bank, the administrative questionnaire in the form submitted to such Bank by the Agent and submitted to the Agent (with a copy to the Borrower) duly completed by such Bank. "Agent" means Morgan Guaranty Trust Company of New York in its capacity as agent for the Banks hereunder, and its successors in such capacity. "Applicable Lending Office" means, with respect to any Bank, (i) in the case of its Domestic Loans, its Domestic Lending Office and (ii) in the case of its Euro-Dollar Loans, its Euro-Dollar Lending Office. "Assessment Rate" has the meaning set forth in Section 2.05(b). "Assignee" has the meaning set forth in Section 9.06(c). "Bank" means each bank or other financial institution listed on the signature pages hereof, each Assignee which becomes a Bank pursuant to Section 9.06(c), and their respective successors. "Base Rate" means, for any day, a rate per annum equal to the higher of (i) the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the Federal Funds Rate for such day. "Base Rate Loan" means, at any time, a Loan which bears interest at such time at a rate determined pursuant to Section 2.05(a) in accordance with the applicable Notice of Borrowing or Notice of Interest Rate Election or pursuant to Article 8. "Borrower" means Cabot Oil & Gas Corporation, a Delaware corporation, and its successors. "Borrower's Consolidated Debt" means, at any date, the aggregate outstanding principal amount of Debt of the Borrower and its Subsidiaries, determined on a consolidated basis as of such date (not including any Non-Recourse Debt in an aggregate principal amount not to exceed $150,000,000 at any such date incurred by the Borrower and its Subsidiaries to finance the acquisition of Properties (other than Petroleum Properties)); provided that the Borrower may request from time to time the exclusion from Borrower's Consolidated Debt of any Subordinated Debt proposed to be incurred at such time by written notice to the Agent setting forth the terms of such Subordinated Debt (such terms to include, without limitation, the aggregate principal amount of such Subordinated Debt, the rate, if any, at which interest is to accrue thereon, the dates of any scheduled repayments thereof and the final maturity thereof), and the Agent shall promptly thereafter notify each Bank of such request. The Borrower shall also furnish each Bank with such other information with respect to such Subordinated Debt as any Bank may reasonably request. Within 30 days of receipt of notice of such request from the Agent, the Banks shall consult with one another to determine the percentage, if any, acceptable to the Required Banks of the aggregate principal amount of such Subordinated Debt which is to be excluded from Borrower's Consolidated Debt. Such percentage as so determined by the Required Banks shall be promptly notified in writing by the Agent to the Borrower, and upon such notification, and for all purposes thereafter, an amount equal to such percentage of the aggregate outstanding principal amount of such Subordinated Debt shall be excluded from Borrower's Consolidated Debt until such Subordinated Debt is repaid in full or, if applicable, converted into capital stock of the Borrower. 168 "Borrower's 1997 Form 10-K" means the Borrower's annual report on Form 10-K for the fiscal year ended December 31, 1997, as filed with the Securities and Exchange Commission. "Borrowing" has the meaning set forth in Section 1.03. "CD Base Rate" has the meaning set forth in Section 2.05(b). "CD Loan" means, at any time, a Loan which bears interest at such time at a rate determined pursuant to Section 2.05(b) in accordance with the applicable Notice of Borrowing or Notice of Interest Rate Election. "CD Margin" has the meaning set forth in Section 2.05(b). "CD Reference Banks" means Morgan Guaranty Trust Company of New York and any other Bank selected by the Agent to serve in such capacity and not disapproved by the Borrower or the Required Banks. "CFADS" or "Cash Flow Available for Debt Service" means, for any period, gross cash operating revenues properly allocable to (i) Proved Reserves and other assets consisting primarily of gas gathering and transmission pipelines that are directly owned by the Borrower or its Subsidiaries or (ii) any Section 29 Transaction PPI in Proved Reserves or other assets, which Proved Reserves or other assets are in each case not subject to any Non-Recourse Debt or any Lien except Excepted Liens and Liens permitted under Section 5.11(e) and located in the United States of America or in Canada for such period, less (in the case of clause (i)) the following cash items: royalties, operating costs, severance, wellhead taxes, general and administrative expenses and current income and other taxes properly allocable to such period and cash capital expenditures made during such period and properly allocable to Petroleum Properties and such other assets. CFADS shall be determined based on the most recent Reserve Report and financial statements (and supplemental information) furnished to the Banks, subject to approval of such Reserve Report and financial statements (and supplemental information) by the Required Banks and, with respect to pipeline assets, shall take into account the Borrower's end product sales value of natural gas as most recently furnished by the Borrower in writing to the Banks (together with a description of the applicable period of sales data from which such end product sales value was derived) and derived from information set forth in financial statements furnished to the Banks and shall be determined based on an assumption that, for so long as substantially all of the natural gas moving through such pipeline assets are produced from reserves (i) owned by the Borrower or any Subsidiary or (ii) in which the Borrower has a Section 29 Transaction PPI, the volumes of natural gas transported by such pipelines positively correlate with the rate at which natural gas is produced from proved developed producing reserves as determined according to such Reserve Report and financial statements (and supplemental information). CFADS shall exclude amounts attributable to any Subsidiary to the extent of any minority interest in such Subsidiary. "Commitment" means, with respect to each Bank, the amount set forth opposite the name of such Bank on the signature pages hereof as its Commitment, as such amount may be reduced from time to time pursuant to Section 2.07 or increased or reduced by reason of an assignment pursuant to Section 9.06, or the obligation of such Bank to make Loans pursuant to Section 2.01 not to exceed such amount, as the context may require, and "Commitments" means the aggregate Commitments of all of the Banks. "Consolidated Subsidiary" means at any date any Subsidiary or other entity the accounts of which would be consolidated with those of the Borrower in its consolidated financial statements as if such statements were prepared as of such date. "Debt" of any Person means at any date, without duplication, (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii)all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable arising in the ordinary course of business, (iv) all obligations of such Person as lessee under capital leases, (v) all Debt of others secured by a Lien on any asset of such Person, whether or not such Debt is assumed by such Person, and (vi) all Debt of others directly or indirectly guaranteed by such Person or in respect of which such Person is otherwise liable, contingently or otherwise. 169 "Debt Limit" means that dollar amount determined and periodically adjusted in accordance with Section 5.10(b). A "Debt Limit Excession" exists at any date if and to the extent that Borrower's Consolidated Debt at such date exceeds the Debt Limit at such date. "Debt Percentage" means, at any date, the percentage equivalent of a fraction the numerator of which is Borrower's Consolidated Debt at such date and the denominator of which is the Debt Limit at such date and shall be determined based on the certificate of the chief financial officer, chief accounting officer or treasurer of the Borrower furnished to the Banks as provided in Section 5.01(h). "Default" means the occurrence of any of the events specified in Section 6.01, whether or not any requirement for notice or lapse of time or other condition precedent has been satisfied. "Domestic Borrowing" means any Borrowing comprised of Domestic Loans. "Domestic Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in New York City are authorized by law to close. "Domestic Lending Office" means, as to each Bank, its office located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Domestic Lending Office) or such other office as such Bank may hereafter designate as its Domestic Lending Office by notice to the Borrower and the Agent; provided that any Bank may so designate separate Domestic Lending Offices for its Base Rate Loans, on the one hand, and its CD Loans, on the other hand, in which case all references herein to the Domestic Lending Office of such Bank shall be deemed to refer to either or both of such offices, as the context may require. "Domestic Loans" means CD Loans or Base Rate Loans or both. "Domestic Reserve Percentage" has the meaning set forth in Section 2.05(b). "Effective Date" means the date this Agreement becomes effective in accordance with Section 3.01. "Environmental Laws" means any and all federal, state, local and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or other governmental restrictions relating to the environment or to emissions, discharges or releases of pollutants, contaminants, petroleum or petroleum products, chemicals or industrial, toxic or hazardous substances or wastes into the environment including, without limitation, ambient air, surface water, ground water, or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, petroleum or petroleum products, chemicals or industrial, toxic or hazardous substances or wastes or the clean-up or other remediation thereof. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, or any successor statute. "ERISA Group" means the Borrower, any Subsidiary and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower or any Subsidiary, are treated as a single employer under Section 414 of the Internal Revenue Code. "Euro-Dollar Business Day" means any Domestic Business Day on which commercial banks are open for international business (including dealings in dollar deposits) in London. "Euro-Dollar Lending Office" means, as to each Bank, its office, branch or affiliate located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Euro-Dollar Lending Office) or such other office, branch or affiliate of such Bank as it may hereafter designate as its Euro-Dollar Lending Office by notice to the Borrower and the Agent. 170 "Euro-Dollar Loan" means, at any time, a Loan which bears interest at such time at a rate determined pursuant to Section 2.05(c) or 2.05(d) in accordance with the applicable Notice of Borrowing or Notice of Interest Rate Election. "Euro-Dollar Margin" has the meaning set forth in Section 2.05(c). "Euro-Dollar Reference Banks" means the principal London offices of Morgan Guaranty Trust Company of New York and any other Bank selected by the Agent to serve in such capacity and not disapproved by the Borrower or the Required Banks. "Euro-Dollar Reserve Percentage" means, with respect to any Bank, for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement for such Bank in respect of "Eurocurrency liabilities" (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any Bank to United States residents). "Event of Default" means any of the events specified in Section 6.01. "Excepted Liens" means: (i) Liens for taxes, assessments or other governmental charges or levies not yet due or which are being contested in good faith by appropriate action; (ii) Liens in connection with workmen's compensation, unemployment insurance or other social security, old age pension or public liability obligations; (iii)legal or equitable encumbrances deemed to exist by reason of the existence of any litigation or other legal proceeding or arising out of a judgment or award with respect to which an appeal is being prosecuted, but only so long as execution of such judgment and enforcement of such Lien is effectively stayed and the amount thereof (in excess of applicable insurance coverage) does not exceed, individually or in the aggregate, $5,000,000; (iv) vendors', carriers', warehousemen's, repairmen's, mechanics', workmen's, materialmen's, construction or other like Liens (including, without limitation, Liens arising in favor of sellers of hydrocarbons) arising by operation of law in the ordinary course of business incident to obligations which are not yet due or which are being contested in good faith by appropriate proceedings by or on behalf of the Borrower or a Subsidiary; (v) Liens arising in the ordinary course of business under farm-out agreements, gas sales contracts, operating agreements, unitization and pooling agreements, and such other documents as are customarily found in connection with comparable drilling and producing operations; (vi) letters of credit, pledges or deposits, including bonds, required in the ordinary course of business to secure public or statutory obligations or to secure performance in connection with bids or contracts related to the exploration or development of Petroleum Properties, to the extent that payment of the underlying obligations is not yet due or is being contested in good faith by appropriate proceedings by or on behalf of the Borrower or a Subsidiary and with respect to which appropriate reserves have been established; and (vii) minor irregularities in title which do not materially interfere with the occupation, use and enjoyment by the Borrower and its Subsidiaries of their respective Properties in the normal course of business as presently conducted or materially impair the value thereof for such business. "Exchange Act" means the Securities Exchange Act of 1934, as amended, or any successor statute. For purposes of Section 6.01(k), unless otherwise defined in such Section, the terms enclosed in quotation marks as used therein have the meanings ascribed to such terms under the Exchange Act and the rules and regulations promulgated by the Securities and Exchange Commission thereunder. "Executive Officer" means, with respect to any Person, the president, any vice president, the treasurer, the chief financial officer, the chief accounting officer, the controller or the general counsel or any other person performing similar functions. "Existing Agreement" means the Amended and Restated Credit Agreement dated as of May 30, 1995 among the Borrower, the banks parties thereto and Morgan Guaranty Trust Company of New York, as agent for such banks, as amended to the Effective Date. 171 "Federal Funds Rate" means, for any day, the rate per annum (rounded upwards, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Domestic Business Day next succeeding such day, provided that (i) if such day is not a Domestic Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Domestic Business Day as so published on the next succeeding Domestic Business Day, and (ii) if no such rate is so published on such next succeeding Domestic Business Day, the Federal Funds Rate for such day shall be the average rate quoted to Morgan Guaranty Trust Company of New York on such day on such transactions as determined by the Agent. "Financing Documents" means this Agreement and the Notes. "Fixed Rate Borrowing" means any Borrowing comprised of Fixed Rate Loans. "Fixed Rate Loans" means CD Loans or Euro-Dollar Loans or both. "Group of Loans" means at any time, a group of Loans consisting of (i) all Loans which are Base Rate Loans at such time (other than Base Rate Loans arising under Section 8.02 or 8.04, which shall be included in the related Group of Fixed Rate Loans) or (ii) all Loans which are the same Type of Fixed Rate Loans having the same Interest Period at such time. "Indebtedness" means any and all Loans and all other liabilities of the Borrower to the Banks from time to time existing under the Financing Documents and all renewals, extensions, rearrangements, amendments or supplements to such documents. "Interest Period" means: (1) with respect to each Euro-Dollar Loan, a period beginning on the date of borrowing specified in the applicable Notice of Borrowing or on the date specified in the applicable Notice of Interest Rate Election and ending one, three or six months thereafter, as the Borrower may elect in the applicable Notice; provided that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (c) below, end on the last Euro-Dollar Business Day of a calendar month; and (c) any Interest Period which begins before the Termination Date and would otherwise end after the Termination Date shall end on the Termination Date. (2) with respect to each CD Loan, a period beginning on the date of borrowing specified in the applicable Notice of Borrowing or on the date specified in the applicable Notice of Interest Rate Election and ending 30, 90 or 180 days thereafter, as the Borrower may elect in the applicable Notice; provided that: (a) any Interest Period (other than an Interest Period determined pursuant to clause (b) below) which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day; and (b) any Interest Period which begins before the Termination Date and would otherwise end after the Termination Date shall end on the Termination Date. Notwithstanding the foregoing (x) all Interest Periods at any one time outstanding shall end on not more than six different dates and (y) the duration of any Interest Period which would otherwise violate the limitation in clause (x) shall be adjusted to coincide with the remaining term of such other then current Interest Period with respect to a Fixed Rate Loan of the same Type as the Borrower shall specify in the related Notice of Borrowing or Notice of Interest Rate Election. "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended, or any successor statute. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset (including without limitation any Production Payment, advance payment, gas imbalances, take or pay or similar arrangement with respect to minerals in place) or any other arrangement the economic effect of which is to give a creditor preferential access to such asset to satisfy its claim, whether or not filed, recorded or otherwise perfected under applicable law. For the purposes of 172 this Agreement, the Borrower or any Subsidiary shall be deemed to own subject to a Lien (i) any asset that it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset or any capitalized lease obligation or (ii) any account receivable transferred by it with recourse (including any such transfer subject to a holdback or similar arrangement which effectively imposes the risk of collectibility upon the transferor). "Loan" means any loan made or to be made by a Bank hereunder, which will be either a Domestic Loan (i.e., a Base Rate Loan or a CD Loan) or a Euro-Dollar Loan. "Loans" means all or any combination of the foregoing, as the context may require. "London Interbank Offered Rate" has the meaning set forth in Section 2.05(c). "Material Adverse Effect" means (i) any material adverse effect on the business, Properties, financial position, results of operations or prospects of the Borrower and its Subsidiaries, taken as a whole; (ii) any material adverse effect on the ability of the Borrower to perform any of its obligations under the Financing Documents or (iii) any material adverse effect on any of the rights and remedies of the Banks and the Agent under the Financing Documents. "Material Debt" means Debt (other than Non-Recourse Debt) of the Borrower and/or one or more of its Subsidiaries, arising in one or more related or unrelated transactions, in an aggregate principal amount exceeding $7,000,000. "Material Plan" means at any time a Plan or Plans having aggregate Unfunded Liabilities in excess of $3,000,000. "Multiemployer Plan" means at any time an employee pension benefit plan within the meaning of Section 4001(a)(3) of ERISA to which any member of the ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions, including for these purposes any Person which ceased to be a member of the ERISA Group during such five year period. "Non-Recourse Debt" of any Person means Debt of such Person in respect of which (i) the recourse of the holder of such Debt, whether direct or indirect and whether contingent or otherwise, is effectively limited to the assets directly securing such Debt; (ii) such holder may not collect by levy of execution against assets of such Person generally (other than the assets directly securing such Debt) if such Person fails to pay such Debt when due and the holder obtains a judgment with respect thereto; and (iii) such holder has waived, to the extent such holder may effectively do so, such holder's right to elect recourse treatment under 11 U.S.C. 1111(b). "Notes" means promissory notes of the Borrower, substantially in the form of Exhibit A hereto, evidencing the obligation of the Borrower to repay the Loans, and "Note" means any one of such promissory notes issued hereunder. "Notice of Borrowing" has the meaning set forth in Section 2.02. "Notice of Interest Rate Election" has the meaning set forth in Section 2.08. "Parent" means, with respect to any Bank, any Person controlling such Bank. "Participant" has the meaning set forth in Section 9.06(b). "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Person" means an individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Petroleum Property" means (i) any interest of the Borrower or any Subsidiary in oil and gas reserves and assets consisting primarily of gas gathering and transmission pipelines which is, or is to be, taken into account in the determination of the Debt Limit pursuant to Section 5.10 or the annual coverage ratio pursuant to Section 5.13 and (ii) any Section 29 Transaction PPI provided that (a) such Section 29 Transaction PPI constitutes a production 173 payment within the meaning of the Bankruptcy Reform Act of 1994 and (b) such Section 29 Transaction PPI is filed, recorded or otherwise perfected under applicable law so as to be fully protected from all creditors and transferees of the grantor thereof. "Plan" means at any time an employee pension benefit plan (other than a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code and either (i) is maintained, or contributed to, by any member of the ERISA Group for employees of any member of the ERISA Group or (ii) has at any time within the preceding five years been maintained, or contributed to, by any Person which was at such time a member of the ERISA Group for employees of any Person which was at such time a member of the ERISA Group. "Pricing Schedule" means the schedule annexed hereto denominated as such. "Prime Rate" means the rate of interest publicly announced by Morgan Guaranty Trust Company of New York in New York City from time to time as its Prime Rate. "Production Payment" means an interest in a Petroleum Property that (i) is not subject to the costs of production and (ii) terminates at such time as the interest-holder has realized a specified sum from the sale of oil or gas attributable to such interest. "Property" means any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "Proved Reserves" means "proved oil and gas reserves" as specified under Rule 4-10(a)(2) of Regulation S-X of the Securities and Exchange Commission. "Quarterly Date" means the first day of each March, June, September and December or if any such date is not a Euro-Dollar Business Day, the next succeeding Euro-Dollar Business Day. "Reference Banks" means the CD Reference Banks or the Euro-Dollar Reference Banks, as the context may require, and "Reference Bank" means any one of such Reference Banks. "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Required Banks" means at any time Banks having at least 66 2/3% of the aggregate amount of the Commitments then in effect, or, if the Commitments shall have been terminated, holding Notes evidencing at least 66 2/3% of the aggregate principal amount of the Loans then outstanding. "Reserve Report" means a report delivered by the Borrower pursuant to Section 5.09(a), Section 5.09(b) or Section 5.09(c). "Revolving Credit Period" means the period from and including the Effective Date to but not including the Termination Date. "Section 29 Transaction" means a transaction completed prior to the date hereof with terms similar to those outlined in the letter dated March 20, 1995 from State Street Bank and Trust Company to the Borrower, copies of which have heretofore been delivered to the Banks. "Section 29 Transaction PPI" means a volumetric production payment interest arising from the Section 29 Transaction. "Subordinated Debt" means indebtedness of the Borrower for borrowed money which (i) is not guaranteed by any other Person, (ii) requires no payment of principal to be made prior to the first anniversary of the Termination Date (as in effect at the time such Subordinated Debt is incurred or as requested to be extended by the Borrower and approved by the Banks at such time) and (iii)is subordinated in right of payment to the Indebtedness by subordination provisions in form and substance satisfactory to the Required Banks. "Subsidiary" means any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by the Borrower. 174 "Termination Date" means December 17, 2003, or if such date is not a Euro-Dollar Business Day, the next preceding Euro-Dollar Business Day. "Type" refers to the determination whether a Loan is a Base Rate Loan, a CD Loan or a Euro-Dollar Loan (or a Borrowing comprised of such Loans). "Unfunded Liabilities" means, with respect to any Plan at any time, the amount (if any) by which (i) the present value of all benefits under such Plan exceeds (ii) the fair market value of all Plan assets allocable to such benefits (excluding any accrued but unpaid contributions), all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of the Borrower or any Subsidiary (whether direct or joint and several with one or more affiliates) to the PBGC or any other Person under Title IV of ERISA. "Wholly-Owned Subsidiary" means any Subsidiary all of the shares of capital stock or other ownership interests of which (except directors' qualifying shares) are at the time directly or indirectly owned by the Borrower. Section 1.02. Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used in this Agreement shall be interpreted, all accounting determinations hereunder shall be made and all financial statements required to be delivered hereunder shall be prepared in accordance with generally accepted accounting principles as in effect from time to time, applied on a basis consistent (except for changes concurred in by the Borrower's independent public accountants) with the most recent audited consolidated financial statements of the Borrower and its Consolidated Subsidiaries delivered to the Banks; provided that, if the Borrower notifies the Agent that the Borrower wishes to amend any covenant in Article 5 to eliminate the effect of any change in generally accepted accounting principles on the operation of such covenant (or if the Agent notifies the Borrower that the Required Banks wish to amend Article 5 for such purpose), then the Borrower's compliance with such covenant shall be determined on the basis of generally accepted accounting principles in effect immediately before the relevant change in generally accepted accounting principles became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Borrower and the Required Banks. Section 1.03. Types of Borrowings. The term "Borrowing" means a borrowing of the same Type by the Borrower from one or more Banks pursuant to Article 2 on a given date and, in the case of Fixed Rate Loans, for the same Interest Period. Borrowings are classified for purposes of this Agreement by Type (e.g., a "Euro-Dollar Borrowing" is a Borrowing comprised of Euro-Dollar Loans). ARTICLE 2 The Credits Section 2.01. Commitments to Lend. During the Revolving Credit Period each Bank severally agrees, on the terms and conditions set forth in this Agreement, to make Loans to the Borrower pursuant to this Section from time to time in amounts such that the aggregate principal amount of Loans by such Bank at any one time outstanding shall not exceed the amount of its Commitment at such time. Within the foregoing limits, the Borrower may borrow under this Section, prepay Loans and reborrow at any time during the Revolving Credit Period under this Section. Each Borrowing under this Section shall be made from the several Banks ratably in proportion to their respective Commitments. Section 2.02. Notice of Borrowings. (a) The Borrower shall give the Agent notice (a "Notice of Borrowing") not later than 10:30 A.M. (New York City time) on (x) the Domestic Business Day of each Base Rate Borrowing, (y) the second Domestic Business Day next preceding each CD Borrowing and (z) the third Euro-Dollar Business Day next preceding each Euro-Dollar Borrowing, specifying: (i) the date of such Borrowing, which shall be a Domestic Business Day in the case of a Domestic Borrowing or a Euro-Dollar Business Day in the case of a Euro-Dollar Borrowing, (ii) the aggregate amount of such Borrowing, which shall be $3,000,000 or any larger multiple of $1,000,000 (except that any Borrowing may be in the aggregate amount available hereunder in accordance with Section 3.02(b)) (iii)whether the Loans comprising such Borrowing are initially to be CD Loans, Base Rate Loans or Euro-Dollar Loans, and (iv) in the case of a Fixed Rate Borrowing, the duration of the initial Interest Period applicable thereto, subject to the provisions of the definition of Interest Period. 175 (b) Upon receipt of a Notice of Borrowing, the Agent shall promptly notify each Bank of the contents thereof and of such Bank's share (if any) of such Borrowing and such Notice of Borrowing shall not thereafter be revocable by the Borrower. (c) Not later than 12:00 Noon (New York City time) on the date of each Borrowing, each Bank shall make available its share of such Borrowing, in Federal or other funds immediately available in New York City, to the Agent at its address specified in or pursuant to Section 9.01. Unless the Agent determines that any applicable condition specified in Article 3 has not been satisfied, the Agent will make the funds so received from the Banks available to the Borrower at the Agent's aforesaid address. (d) Unless the Agent shall have received notice from a Bank prior to the date of any Borrowing that such Bank will not make available to the Agent such Bank's share of such Borrowing, the Agent may assume that such Bank has made such share available to the Agent on the date of such Borrowing in accordance with subsection (c) of this Section 2.02 and the Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Bank shall not have so made such share available to the Agent, such Bank and the Borrower severally agree to repay to the Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Agent, at (i) in the case of the Borrower, a rate per annum equal to the higher of the Federal Funds Rate and the interest rate applicable thereto pursuant to Section 2.05 and (ii) in the case of such Bank, the Federal Funds Rate. If such Bank shall repay to the Agent such corresponding amount, such amount so repaid shall constitute such Bank's Loan included in such Borrowing for purposes of this Agreement. The failure of any Bank to make the Loan to be made by it as part of any Borrowing shall not relieve any other Bank of its obligation, if any, hereunder to make its Loan, and no Bank shall be responsible for the failure of any other Bank to make any Loan to be made by such other Bank hereunder. Section 2.03. Notes. (a) The Loans of each Bank shall be evidenced by a single Note payable to the order of such Bank for the account of its Applicable Lending Office in an amount equal to the aggregate unpaid principal amount of such Bank's Loans. (b) Upon receipt of each Bank's Note pursuant to Section 3.01, the Agent shall forward such Note to such Bank. Each Bank shall record the date, amount and Type of each Loan made by it and the date and amount of each payment of principal made by the Borrower with respect thereto, and may, if such Bank so elects in connection with any transfer or enforcement of its Note, endorse on the schedule forming a part thereof appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding; provided that the failure of any Bank to make, or any error in making, any such recordation or endorsement shall not affect the obligations of the Borrower hereunder or under the Notes. Each Bank is hereby irrevocably authorized by the Borrower so to endorse its Note and to attach to and make a part of its Note a continuation of any such schedule as and when required. Section 2.04. Maturity of Loans. The Loans of each Bank shall mature, and the principal amount thereof shall be due and payable, together with accrued interest thereon, on the Termination Date. Section 2.05. Interest Rates. (a) Subject to Section 2.15, each Base Rate Loan shall bear interest on the outstanding principal amount thereof, for each day from the date such Loan is made until it becomes due, at a rate per annum equal to the Base Rate for such day. Such interest shall be payable quarterly in arrears on each Quarterly Date and, in the case of any Base Rate Loan converted to a Fixed Rate Loan, on the date of such conversion. Subject to Section 2.15, any overdue principal of and overdue interest on any Base Rate Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the rate otherwise applicable to Base Rate Loans for such day. 176 (b) Subject to Section 2.15, each CD Loan shall bear interest on the outstanding principal amount thereof, for each Interest Period applicable thereto, at a rate per annum equal to the sum of the CD Margin plus the applicable Adjusted CD Rate; provided that if any CD Loan shall, as a result of clause (2)(b) of the definition of Interest Period, have an Interest Period of less than 30 days, such CD Loan shall bear interest during such Interest Period at the rate applicable to Base Rate Loans during such period. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than 90 days, 90 days after the first day thereof. Subject to Section 2.15, any overdue principal of and overdue interest on any CD Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the higher of (i) the sum of the CD Margin plus the Adjusted CD Rate applicable to such Loan at the date such payment was due and (ii) the rate applicable to Base Rate Loans for such day. "CD Margin" means a rate per annum determined in accordance with the Pricing Schedule. The "Adjusted CD Rate" applicable to any Interest Period means a rate per annum determined pursuant to the following formula: ACDR = [ CDBR ]* [ ------------- ] + AR [ 1.00 - DRP ] ACDR = Adjusted CD Rate CDBR = CD Base Rate DRP = Domestic Reserve Percentage AR = Assessment Rate ------------------------ * The amount in brackets being rounded upwards, if necessary, to the next higher 1/100 of 1% The "CD Base Rate" applicable to any Interest Period is the rate of interest determined by the Agent to be the average (rounded upward, if necessary, to the next higher 1/100 of 1%) of the prevailing rates per annum bid at 10:00 A.M. (New York City time) (or as soon thereafter as practicable) on the first day of such Interest Period by two or more New York certificate of deposit dealers of recognized standing for the purchase at face value from each CD Reference Bank of its certificates of deposit in an amount comparable to the unpaid principal amount of the CD Loan of such CD Reference Bank to which such Interest Period applies and having a maturity comparable to such Interest Period. "Domestic Reserve Percentage" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including without limitation any basic, supplemental or emergency reserves) for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect of new non-personal time deposits in dollars in New York City having a maturity comparable to the related Interest Period and in an amount of $100,000 or more. 177 The Adjusted CD Rate shall be adjusted automatically on and as of the effective date of any change in the Domestic Reserve Percentage. "Assessment Rate" means for any day the annual assessment rate in effect on such day which is payable by a member of the Bank Insurance Fund classified as adequately capitalized and within supervisory subgroup "A" (or a comparable successor assessment risk classification) within the meaning of 12 C.F.R. Section 327.4(a) (or any successor provision) to the Federal Deposit Insurance Corporation (or any successor) for such Corporation's (or such successor's) insuring time deposits at offices of such institution in the United States. The Adjusted CD Rate shall be adjusted automatically on and as of the effective date of any change in the Assessment Rate. (c) Subject to Section 2.15, each Euro-Dollar Loan shall bear interest on the outstanding principal amount thereof, for each Interest Period applicable thereto, at a rate per annum equal to the sum of the Euro-Dollar Margin plus the applicable London Interbank Offered Rate. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, three months after the first day thereof. "Euro-Dollar Margin" means a rate per annum determined in accordance with the Pricing Schedule. The "London Interbank Offered Rate" applicable to any Interest Period means the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which deposits in dollars are offered to each of the Euro-Dollar Reference Banks in the London interbank market at approximately 11:00 A.M. (London time) two Euro-Dollar Business Days before the first day of such Interest Period in an amount approximately equal to the principal amount of the Euro-Dollar Loan of such Euro-Dollar Reference Bank to which such Interest Period is to apply and for a period of time comparable to such Interest Period. (d) Subject to Section 2.15, any overdue principal of and overdue interest on any Euro-Dollar Loan shall bear interest, payable on demand, for each day from and including the date payment thereof was due to but excluding the date of actual payment, at a rate per annum equal to the sum of 2% plus the higher of (i) the sum of the Euro-Dollar Margin plus the London Interbank Offered Rate applicable to such Loan and (ii) the Euro-Dollar Margin plus the quotient obtained (rounded upwards, if necessary, to the next higher 1/100 of 1%) by dividing (x) the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which one day (or, if such amount due remains unpaid more than three Euro-Dollar Business Days, then for such other period of time not longer than six months as the Agent may select) deposits in dollars in an amount approximately equal to such overdue payment due to each of the Euro-Dollar Reference Banks are offered to such Euro-Dollar Reference Bank in the London interbank market for the applicable period determined as provided above by (y) 1.00 minus the Euro-Dollar Reserve Percentage (or, if the circumstances described in clause (a) or (b) of Section 8.01 shall exist, at a rate per annum equal to the sum of 2% plus the rate applicable to Base Rate Loans for such day). (e) The Agent shall determine each interest rate applicable to the Loans hereunder. The Agent shall give prompt notice to the Borrower and the participating Banks of each rate of interest so determined, and its determination thereof shall be conclusive in the absence of manifest error. (f) Each Reference Bank agrees to use its best efforts to furnish quotations to the Agent as contemplated by this Section. If any Reference Bank does not furnish a timely quotation, the Agent shall determine the relevant interest rate on the basis of the quotation or quotations furnished by the remaining Reference Bank or Banks or, if none of such quotations is available on a timely basis, the provisions of Section 8.01 shall apply. 178 Section 2.06. Commitment Fees. The Borrower shall pay to the Agent for the account of each Bank a commitment fee at a rate per annum equal to the Commitment Fee Rate (determined daily in accordance with the Pricing Schedule) on the daily average unused amount of its Commitment. Such commitment fees shall accrue from and including the Effective Date to but excluding the date of termination of the Commitments in their entirety. Accrued fees under this Section shall be payable quarterly in arrears on each Quarterly Date and upon the date of termination of the Commitments in their entirety. Section 2.07. Termination or Reduction of Commitments. (a) Mandatory. The Commitments shall terminate on the Termination Date. (b) Optional. The Borrower may, upon at least three Domestic Business Days' notice to the Agent, (i) terminate the Commitments at any time, if no Loans are outstanding at such time or (ii) ratably reduce from time to time by an aggregate amount of $5,000,000 or any larger multiple thereof, the aggregate amount of the Commitments in excess of the aggregate outstanding principal amount of the Loans. Section 2.08. Method of Electing Interest Rates. (a) The Loans comprising each Borrowing shall bear interest initially at the Type of rate specified by the Borrower in the applicable Notice of Borrowing. Thereafter, the Borrower may from time to time elect to change or continue the type of interest rate borne by each Group of Loans (subject in each case to the provisions of Article 8), as follows: (i) if such Loans are Base Rate Loans, the Borrower may elect to convert such Loans to CD Loans as of any Domestic Business Day or to Euro-Dollar Loans as of any Euro-Dollar Business Day; (ii) if such Loans are CD Loans, the Borrower may elect to convert such Loans to Base Rate Loans or Euro-Dollar Loans, or may elect to continue such Loans as CD Loans for an additional Interest Period, in each case beginning on the last day of the then current Interest Period applicable to such Loans; (iii)if such Loans are Euro-Dollar Loans, the Borrower may elect to convert such Loans to Base Rate Loans or CD Loans, or may elect to continue such Loans as Euro-Dollar Loans for an additional Interest Period, in each case beginning on the last day of the then current Interest Period applicable to such Loans; (iv) if such Loans are Base Rate Loans, the Borrower may elect to designate such Loans as any combination of Base Rate Loans, CD Loans or Euro-Dollar Loans as of any Domestic Business Day in the case of CD Loans and as of any Euro-Dollar Business Day in the case of Euro-Dollar Loans (subject to the definition of Interest Period); and (v) if such Loans are Fixed Rate Loans, the Borrower may elect to designate such Loans as any combination of Base Rate Loans, CD Loans or Euro-Dollar Loans as of the last day of the then current Interest Period applicable to such Loans (subject to the definition of Interest Period). Each such election shall be made by delivering a notice (a "Notice of Interest Rate Election") to the Agent not later than 10:30 A.M. (New York City time) on the third Euro-Dollar Business Day before the conversion or continuation selected in such notice is to be effective (unless the relevant Loans are to be converted from Domestic Loans of one Type to Domestic Loans of the other Type or are CD Loans to be continued as CD Loans for an additional Interest Period, in which case such notice shall be delivered to the Agent not later than 10:30 A.M. (New York City time) on the second Domestic Business Day before such conversion or continuation is to be effective). A Notice of Interest Rate Election may, if it so specifies, apply to only a portion of the aggregate principal amount of the relevant Group of Loans; provided that (i) such portion is allocated ratably among the Loans comprising such Group and (ii) the portion to which such notice applies, and the remaining portion to which it does not apply, are each at least $3,000,000. 179 (b) Each Notice of Interest Rate Election shall specify with respect to the outstanding Borrowing to which such notice applies: (i) the Group of Loans (or portion thereof) to which such notice applies); (ii) the date on which conversion or continuation selected in such notice is to be effective, which shall comply with the applicable clause of subsection (a) above; (iii)if such Group of Loans (or portion thereof) are to be converted, the new type of Loans and, if such new Loans are CD Loans or Euro-Dollar Loans, the duration of the initial Interest Period applicable thereto after such conversion; and (iv) if such Group of Loans (or portion thereof) are to be continued as CD Loans or Euro-Dollar Loans for an additional Interest Period, the duration of such additional Interest Period. Each Interest Period specified in a Notice of Interest Rate Election shall comply with the provisions of the definition of Interest Period. (c) Upon receipt of a Notice of Interest Rate Election from the Borrower pursuant to subsection (a) above, the Agent shall promptly notify each Bank of the contents thereof and such notice shall not thereafter be revocable by the Borrower. If the Borrower fails to deliver a timely Notice of Interest Rate Election to the Agent for any Borrowing comprised of Fixed Rate Loans, such Loans shall be converted into Base Rate Loans on the last day of the then current Interest Period applicable thereto. Section 2.09. Optional Prepayments. (a) Subject in the case of Fixed Rate Loans to the provisions of Section 2.11, the Borrower may (i) upon notice to the Agent not later than 10:30 A.M. (New York City time) on any Domestic Business Day, prepay on such Domestic Business Day any Group of Base Rate Loans, (ii) upon at least three Domestic Business Days' notice to the Agent, prepay any Group of CD Loans and (iii) upon at least three Euro-Dollar Business Days' notice to the Agent, prepay any Group of Euro-Dollar Loans, in each case in whole at any time, or from time to time in part in amounts aggregating $1,000,000 or any larger multiple of $1,000,000, by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. Each such optional prepayment shall be applied to prepay ratably the Loans of the several Banks included in such Group. (b) Upon receipt of a notice of prepayment pursuant to subsection (a) this Section 2.09, the Agent shall promptly notify each Bank of the contents thereof and of such Bank's ratable share of such prepayment and such notice shall not thereafter be revocable by the Borrower. Section 2.10. General Provisions as to Payments. (a) The Borrower shall make each payment of principal of, and interest on, the Loans and of fees hereunder, not later than 12:00 Noon (New York City time) on the date when due, in Federal or other funds immediately available in New York City, to the Agent at its address referred to in Section 9.01. The Agent will promptly distribute to each Bank its ratable share of each such payment received by the Agent for the account of the Banks. Whenever any payment of principal of, or interest on, the Domestic Loans or of fees shall be due on a day which is not a Domestic Business Day, the date for payment thereof shall be extended to the next succeeding Domestic Business Day. Whenever any payment of principal of, or interest on, the Euro-Dollar Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case the date for payment thereof shall be the next preceding Euro-Dollar Business Day. If the date for any payment of principal is extended by operation of law or otherwise, interest thereon shall be payable for such extended time. (b) Unless the Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Banks hereunder that the Borrower will not make such payment in full, the Agent may assume that the Borrower has made such payment in full to the Agent on such date and the Agent may, in reliance upon such assumption, cause to be 180 distributed to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent that the Borrower shall not have so made such payment, each Bank shall repay to the Agent forthwith on demand such amount distributed to such Bank together with interest thereon, for each day from the date such amount is distributed to such Bank until the date such Bank repays such amount to the Agent, at the Federal Funds Rate. Section 2.11. Funding Losses. If the Borrower makes any payment of principal with respect to any Fixed Rate Loan or any Fixed Rate Loan is converted to a Base Rate Loan (whether pursuant to this Article 2 or Article 6 or 8 or otherwise) on any day other than the last day of the Interest Period applicable thereto, or the end of an applicable period fixed pursuant to Section 2.05(d), or if the Borrower fails to borrow or prepay any Fixed Rate Loans after notice has been given to any Bank in accordance with Section 2.02(b) or 2.09(a), the Borrower shall reimburse each Bank within 15 days after demand for any resulting loss or expense incurred with respect to such Loans, including (without limitation) any loss incurred in obtaining, liquidating or employing deposits from third parties, but excluding loss of margin for the period after any such payment or conversion or failure to borrow or prepay, provided that such Bank shall have delivered to the Borrower a certificate as to the amount of such loss or expense, which certificate shall be conclusive in the absence of manifest error. Section 2.12. Computation of Interest and Fees. Interest based on the Prime Rate and commitment fees hereunder shall be computed on the basis of a year of 365 days (or 366 days in a leap year) and paid for the actual number of days elapsed (including the first day but excluding the last day). All other interest shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day). Section 2.13. Withholding Tax Exemption. At least five Domestic Business Days prior to the first date on which interest or fees are payable hereunder for the account of any Bank, each Bank that is not incorporated under the laws of the United States of America or a state thereof agrees that it will deliver to each of the Borrower and the Agent two duly completed copies of United States Internal Revenue Service Form 1001 or 4224, certifying in either case that such Bank is entitled to receive payments under this Agreement and the Notes without deduction or withholding of any United States federal income taxes. Each Bank which so delivers a Form 1001 or 4224 further undertakes to deliver to each of the Borrower and the Agent two additional copies of such form (or a successor form) on or before the date that such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form so delivered by it, and such amendments thereto or extensions or renewals thereof as may be reasonably requested by the Borrower or the Agent, in each case certifying that such Bank is entitled to receive payments under this Agreement and the Notes without deduction or withholding of any United States federal income taxes, unless an event (including without limitation any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Bank from duly completing and delivering any such form with respect to it and such Bank advises the Borrower and the Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax. Section 2.14. Regulation D Compensation. For so long as any Bank maintains reserves against "Eurocurrency liabilities" (or any other category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of such Bank to United States residents), then such Bank may require the Borrower to pay, contemporaneously with each payment of interest on the Euro-Dollar Loans, additional interest on the related Euro-Dollar Loan of such Bank at a rate per annum up to but not exceeding the excess of (i) (A) the applicable London Interbank Offered Rate divided by (B) one minus the Euro-Dollar Reserve Percentage over (ii) the applicable London Interbank Offered Rate. Any Bank wishing to require payment of such additional interest (x) shall so notify the Borrower and the Agent, in which case such additional interest on the Euro-Dollar Loans of such Bank shall be payable to such Bank at the place indicated in such notice with respect to each Interest Period commencing at least five Euro-Dollar Business Days after the giving of such notice and (y) shall notify the Borrower at least five Euro-Dollar Business Days prior to each date on which interest is payable on the Euro-Dollar Loans of the amount to which such Bank is then entitled under this Section. 181 Section 2.15. Maximum Interest Rate. (a) Nothing contained in this Agreement or the Notes shall require the Borrower to pay interest at a rate exceeding the maximum rate permitted by law. (b) If the amount of interest, including amounts that would be deemed to constitute interest under applicable law, payable for the account of any Bank, would at any time exceed the maximum amount permitted by applicable law to be charged by such Bank, the amount of interest payable for its account shall ipso facto be automatically reduced to such maximum permissible amount, and any amount constituting interest received by such Bank in excess of the maximum permissible amount of interest which, under applicable law, could then be collected by such Bank shall be credited by such Bank against and to the extent of the unpaid principal amount of the Loans of such Bank outstanding at such time, first against any Base Rate Loans and next against any Fixed Rate Loans as selected by such Bank, with the remaining excess, if any, being promptly refunded to the Borrower. (c) If the amount of interest, including amounts that would be deemed to constitute interest under applicable law, payable for the account of any Bank in respect of any applicable computation period is reduced pursuant to clause (b) of this Section and the amount of interest payable for its account in respect of any subsequent computation period would be less than the maximum amount permitted by applicable law to be charged by such Bank, then the amount of interest payable for its account in respect of such subsequent computation period shall be automatically increased to such maximum permissible amount; provided that at no time shall the aggregate amount by which interest paid for the account of any Bank has been increased pursuant to this clause (c) exceed the aggregate amount by which interest paid for its account has theretofore been reduced pursuant to clause (b) of this Section. ARTICLE 3 Conditions Section 3.01. Effectiveness. This Agreement shall become effective on the date that each of the following conditions shall have been satisfied (or waived in accordance with Section 9.05) (except Sections 2.11 and 9.03, which shall become effective on the date that clause (a) below is satisfied): (a) receipt by the Agent of counterparts hereof, signed by each of the parties hereto (or, in the case of any party as to which any executed counterpart shall not have been received, receipt by the Agent in form satisfactory to it of facsimile or other written confirmation from such party of execution of a counterpart hereof by such party); (b) receipt by the Agent for the account of each Bank of a Note duly executed on behalf of the Borrower and dated on or before the Effective Date, complying with the provisions of Section 2.03; (c) receipt by the Agent of an opinion of Baker & Botts, special counsel for the Borrower, substantially in the form of Exhibit B hereto; (d) receipt by the Agent of an opinion of Lisa A. Machesney, Vice President, Managing Counsel and Corporate Secretary of the Borrower, substantially in the form of Exhibit C hereto; (e) receipt by the Agent of an opinion of Davis Polk & Wardwell, special counsel for the Agent, substantially in the form of Exhibit D hereto; (f) receipt by the Agent of a certificate signed by the chief financial officer, chief accounting officer or treasurer of the Borrower, to the effect set forth in clauses (b), (c) and (d) of Section 3.02; (g) receipt by the Agent of all documents it may reasonably request relating to the existence of the Borrower, the corporate authority for and the validity of the Financing Documents, and any other matters relevant hereto, all in form and substance satisfactory to the Agent; and 182 (h) receipt by the Agent of evidence satisfactory to it of the payment of all principal of and interest on any loans outstanding under, and all accrued fees under, the Existing Agreement; The certificate and opinions referred to in clauses (c), (d), (e) and (f) above shall be dated the Effective Date; provided that this Agreement shall not become effective or be binding on any party hereto unless all of the foregoing conditions are satisfied not later than December 17, 1998. Promptly after the Effective Date occurs, the Agent shall notify the Borrower and the Banks thereof, and such notice shall be conclusive and binding on all parties hereto. The Borrower and the Banks party to the Existing Agreement, comprising the "Required Banks" as defined therein, hereby agree that (i) the commitments of the banks under the Existing Agreement shall terminate in their entirety immediately and automatically upon the effectiveness of this Agreement, without further action by any party to the Existing Agreement, (ii) all accrued fees under the Existing Agreement shall be due and payable at such time and (iii) subject to the funding loss indemnities in the Existing Agreement, the Borrower may prepay any and all loans outstanding thereunder on the Effective Date. Promptly after the Effective Date, each Bank which is a party to the Existing Agreement will return to the Borrower the note issued to it pursuant to the Existing Agreement (or if it is unable to locate such note, will provide the Borrower with an officer's certificate to that effect). Section 3.02. Borrowings. The obligation of each Bank to make a Loan to the Borrower on the occasion of any Borrowing is subject to the satisfaction of the following conditions: (a) receipt by the Agent of notice of such Borrowing as required by Section 2.02; (b) the fact that, immediately after such Borrowing, Borrower's Consolidated Debt will not exceed the Debt Limit; (c) the fact that, immediately before and after such Borrowing, no Default shall have occurred and be continuing; and (d) the fact that the representations and warranties of the Borrower contained in this Agreement (except, in the case of any Borrowing occurring subsequent to the first Borrowing, the representations and warranties covering historical information in Sections 4.04(a) and (b) and the first sentence of Section 4.05, and except to the extent the representations and warranties would cover price and other economic assumptions furnished by the Required Banks under Section 5.09(d)) shall be true and correct on and as of the date of such Borrowing. Each Borrowing hereunder shall be deemed to be a representation and warranty by the Borrower on the date of such Borrowing as to the facts specified in clauses (b), (c) and (d) of this Section. ARTICLE 4 Representations and Warranties The Borrower represents and warrants that: Section 4.01. Corporate Existence and Power. The Borrower and each Subsidiary is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation, and has all corporate powers and all governmental licenses, authorizations, consents and approvals required to own its assets and to carry on its business as now conducted and is duly qualified as a foreign corporation in good standing in each jurisdiction where the nature of its business or the ownership or leasing of its Properties requires such qualification, except where the failure to qualify would not materially and adversely affect the conduct of its business or the enforceability of contractual obligations of the Borrower. Neither the Borrower nor any Subsidiary is subject to regulation under the Public Utility Holding Company Act of 1935, the Investment Company Act of 1940, the Interstate Commerce Act or any other law or regulation the application of which limits the incurrence by the Borrower of Debt hereunder, including, but not limited to, laws relating to common or contract carriers or the sale of electricity, gas, steam, water or other public utility services. 183 Section 4.02. Corporate Governmental Authorization; No Contravention. The execution, delivery and performance by the Borrower of the Financing Documents are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental body, agency or official and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the certificate of incorporation or by-laws of the Borrower or of any agreement or instrument evidencing or governing Debt of the Borrower or any Subsidiary or any other agreement, instrument, judgment, injunction, order or decree binding upon the Borrower or any Subsidiary or result in the creation or imposition of any Lien on any asset of the Borrower pursuant to any such agreement, instrument, judgment, injunction, order or decree. Section 4.03. Binding Effect. This Agreement constitutes a valid and binding agreement of the Borrower and each of the other Financing Documents, when executed and delivered in accordance with this Agreement, will constitute valid and binding obligations of the Borrower, in each case enforceable in accordance with its terms, except as the same may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and by general principles of equity. Section 4.04. Financial and Other Information. (a) (i) The combined balance sheet of the Borrower and its Subsidiaries as of December 31, 1997 and the related combined statements of income and cash flows for the fiscal year then ended, reported on by Coopers & Lybrand and incorporated by reference in the Borrower's 1997 Form 10-K, a copy of which has been delivered to each of the Banks, fairly present, in conformity with generally accepted accounting principles, the combined financial position of the Borrower and its Subsidiaries as of such date and their combined results of operations and cash flows for such fiscal year. (ii) The unaudited consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of September 30, 1998 and the related unaudited consolidated statements of income and cash flows for the nine months then ended, set forth in the Borrower's quarterly report for the fiscal quarter ended September 30, 1998 as filed with the Securities and Exchange Commission on Form 10-Q, a copy of which has been delivered to each of the Banks fairly present, in conformity with generally accepted accounting principles, the consolidated financial position of the Borrower and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such nine-month period (subject to normal year-end adjustments). (b) There are no statements or conclusions in the Cabot Oil & Gas Corporation Reserve Summary as of July 1, 1998, a copy of which has been delivered to each of the Banks (the "Reserve Report"), which are based upon or include misleading information or fail to take into account material information regarding the matters reported therein, it being understood that such statements and conclusions are necessarily based upon professional opinions, estimates and forecasts, and the Borrower does not warrant that such opinions, estimates and forecasts will ultimately prove to have been accurate. (c) Since September 30, 1998, there has been no material adverse change in the business, Properties, financial position, results of operations or prospects of the Borrower or of the Borrower and its Subsidiaries, considered as a whole. Section 4.05. Full Disclosure. None of the financial statements and other financial or factual information included in the financial statements described in Section 4.04(a) or in the Reserve Report (excluding estimates, financial projections and pro forma financial statements) contains any untrue statement of material fact or omits to state a material fact necessary in order to make the statements contained therein not misleading. All other financial and reserve information, financial statements and other documents, estimates, projections and pro forma financial information furnished by the Borrower to the Banks in connection with the Financing Documents do not and will not contain any untrue statement of material fact or omit to state a material fact necessary in order to make the statements contained therein not misleading. The Borrower has disclosed to the Banks in writing any and all facts which materially and adversely affect the business, properties, operations or condition, financial or otherwise, of the Borrower or of the Borrower and its Subsidiaries, considered as a whole, or the Borrower's ability to perform its obligations under the Financing Documents. 184 Section 4.06. Litigation. Except as set forth in the Borrower's Form 1997 10-K, there is no action, suit or proceeding pending against, or to the knowledge of the Borrower threatened against or affecting, the Borrower or any of its Subsidiaries before any court or arbitrator or any governmental body, agency or official in which there is a reasonable possibility of an adverse decision which could materially adversely affect the business, Properties, financial position, results of operations or prospects of the Borrower or of the Borrower and its Subsidiaries, considered as a whole, or which in any manner draws into question the validity of any Financing Document. Section 4.07. Compliance with ERISA. Each member of the ERISA Group has fulfilled its obligations under the minimum funding standards of ERISA and the Internal Revenue Code with respect to each Plan and is in compliance in all material respects with the presently applicable provisions of ERISA and the Internal Revenue Code with respect to each Plan. No member of the ERISA Group has (i) sought a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code in respect of any Plan, (ii) failed to make any contribution or payment to any Plan or Multiemployer Plan, or made any amendment to any Plan, which, in either case, has resulted or could result in the imposition of a Lien on Property of the Borrower or any Subsidiary or the posting of a bond or other security by the Borrower or any Subsidiary under ERISA or the Internal Revenue Code or (iii) incurred any liability under Title IV of ERISA (other than a liability to the PBGC for premiums under Section 4007 of ERISA) which could cause the Borrower or any Subsidiary (whether directly or jointly and severally with one or more affiliates) to incur any liability. Section 4.08. Environmental Matters. In the ordinary course of its business, the Borrower considers the effect of all existing and applicable Environmental Laws on the business, operations and properties of the Borrower and its Subsidiaries, in the course of which it identifies and evaluates associated liabilities and costs (including, without limitation, any capital or operating expenditures required for clean-up or closure of properties presently or previously owned, any capital or operating expenditures required to achieve or maintain compliance with environmental protection standards imposed by law or as a condition of any license, permit or contract, any related constraints on operating activities, including any periodic or permanent shutdown of any facility or reduction in the level of or change in the nature of operations conducted thereat and any actual or potential liabilities to third parties, including employees, and any related costs and expenses). The Borrower has reasonably concluded that existing and applicable Environmental Laws are unlikely to have a material adverse effect on the business, Properties, financial condition, results of operations or prospects of the Borrower or of the Borrower and its Subsidiaries, considered as a whole. Section 4.09. Taxes. The Borrower and its Subsidiaries have filed all United States Federal income tax and all other material tax returns which are required to be filed by them and have paid all taxes due pursuant to such returns or pursuant to any assessment received by the Borrower or any Subsidiary. The charges, accruals and reserves on the books of the Borrower and its Subsidiaries in respect of taxes or other governmental charges are adequate. Section 4.10. Titles, etc. The Borrower and each Subsidiary has good, valid and defensible title to its material (individually or in the aggregate) Properties (including valid and defensible title to all of the oil and gas Properties which such Borrower has identified to the Banks for use in determining the Debt Limit and good title to other material Properties which are not oil and gas Properties) free and clear of all Liens except (i) Excepted Liens or (ii) Liens otherwise expressly permitted by Section 5.11. Section 4.11. Casualties; Taking of Properties. Since the date of the most recent Reserve Report, neither the business nor the Petroleum Properties of the Borrower have been affected as a result of any fire, explosion, earthquake, flood, drought, windstorm, accident, strike or other labor disturbance, embargo, requisition or taking of Property or cancellation of contracts, permits or concessions by any domestic or foreign government or any agency thereof, riot, activities of armed forces or acts of God or of any public enemy, the occurrence of which would have a material adverse effect on the business, Properties, financial condition, results of operations or prospects of the Borrower or of the Borrower and its Subsidiaries, considered as a whole. Section 4.12. Use of Proceeds. The proceeds of the Loans will be used for the Borrower's general corporate purposes, including without limitation the payment of dividends as permitted hereunder and the financing of the acquisition, exploration and development of Petroleum Properties. None of such proceeds will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, which violates or which would be inconsistent with Regulation U. 185 Section 4.13. Year 2000 Compliance. The Borrower has (i) initiated a review and assessment of all areas within the business and operations of the Borrower and each of its Subsidiaries that could be adversely affected by the "Year 2000 Problem" (that is, the risk that computer applications used by it or any of its Subsidiaries may be unable to recognize and perform properly date-sensitive functions involving any date after December 31, 1999), (ii) developed a course of action and timeline for addressing the Year 2000 Problem on a timely basis and (iii)is in the process of implementing the same. The Borrower reasonably believes that all computer applications used by the Borrower that are material to the business or operations of the Borrower or any of its Subsidiaries will on a timely basis be able to perform properly date-sensitive functions for all dates on and after January 1, 2000, except to the extent that a failure to do so could not reasonably be expected to have a Material Adverse Effect. ARTICLE 5 Covenants The Borrower agrees that, so long as any Bank has any Commitment hereunder or any amount payable under any Note remains unpaid, it will perform and comply with each of the following covenants, unless such performance and compliance shall have been specifically waived in writing by the Required Banks. Section 5.01. Information. The Borrower will deliver to each of the Banks: (a) as soon as available and in any event within 95 days after the end of each fiscal year of the Borrower, a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such fiscal year and the related consolidated statements of income and cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on in a manner acceptable to the Securities and Exchange Commission by PricewaterhouseCoopers or other independent public accountants of nationally recognized standing; (b) as soon as available and in any event within 60 days after the end of each of the first three quarters of each fiscal year of the Borrower, a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such quarter and the related consolidated statements of income and cash flows for such quarter and for the portion of the Borrower's fiscal year ended at the end of such quarter, setting forth in each case in comparative form the figures for the corresponding quarter and the corresponding portion of the Borrower's previous fiscal year, all certified (subject to normal year-end adjustments) as to fairness of presentation, generally accepted accounting principles and consistency by the chief financial officer, chief accounting officer or treasurer of the Borrower; (c) simultaneously with the delivery of each set of financial statements referred to in clauses (a) and (b) above, a certificate of the chief financial officer, chief accounting officer or treasurer of the Borrower (i) setting forth in reasonable detail the calculations required to establish whether the Borrower was in compliance with the requirements of Section 5.10 and Section 5.13 on the date of such financial statements, and (ii) stating whether any Default exists on the date of such certificate and, if any Default then exists, setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (d) within five days after any Executive Officer of the Borrower obtains knowledge of any Default, if such Default is then continuing, a certificate of the chief financial officer, chief accounting officer or treasurer of the Borrower setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (e) promptly upon the mailing thereof to the shareholders of the Borrower generally, copies of all financial statements, reports and proxy statements so mailed; (f) promptly upon the filing thereof, copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their equivalents) which the Borrower shall have filed with the Securities and Exchange Commission; 186 (g) if and when any member of the ERISA Group (i) gives or is required to give notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or any Executive Officer of the Borrower or any Subsidiary knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA or notice that any Multiemployer Plan is in reorganization, is insolvent or has been terminated, a copy of such notice; (iii)receives notice from the PBGC under Title IV of ERISA of an intent to terminate, impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or appoint a trustee to administer any Plan, a copy of such notice; (iv) applies for a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code, a copy of such application; (v) gives notice of intent to terminate any Plan under Section 4041(c) of ERISA, a copy of such notice and other information filed with the PBGC; (vi) gives notice of withdrawal from any Plan pursuant to Section 4063 of ERISA, a copy of such notice; or (vii)fails to make any required payment or contribution to any Plan or Multiemployer Plan or makes any amendment to any Plan which has resulted or could result in the imposition of a Lien on Property of the Borrower or any Subsidiary or the posting of a bond or other security by the Borrower or any Subsidiary, a certificate of the chief financial officer, chief accounting officer or treasurer of the Borrower setting forth details as to such occurrence and action, if any, which the Borrower or applicable member of the ERISA Group is required or proposes to take; (h) as soon as practicable upon any change in the applicable Commitment Fee Rate, Euro-Dollar Margin or CD Margin on account of a change in the Debt Percentage, a certificate of the chief financial officer, chief accounting officer or treasurer of the Borrower setting forth the date thereof and a calculation of the Debt Percentage at such date; and (i) from time to time such additional information regarding the financial position or business of the Borrower and its Subsidiaries as any Bank may reasonably request; provided that, to the extent practicable (as determined by the Agent in its sole discretion), requests from the Banks for written reports shall be delivered to the Borrower by the Agent. Section 5.02. Payment of Obligations. The Borrower will pay and discharge, and will cause each Subsidiary to pay and discharge, at or before maturity, all their respective material obligations and liabilities, including, without limitation, tax liabilities, except where the same may be contested in good faith by appropriate proceedings, and will maintain, and will cause each Subsidiary to maintain, in accordance with generally accepted accounting principles, appropriate reserves for the accrual of any of the same. Section 5.03. Maintenance of Property. The Borrower will keep, and will cause each Subsidiary to keep, all property useful and necessary in its business in good working order and condition, ordinary wear and tear excepted. The Borrower will operate, or will use its best efforts to cause a third party operator to operate, all Petroleum Properties in a prudent manner, and will market or will cause to be marketed the production therefrom at the best price reasonably obtainable at the time the applicable sales contract is executed. The Borrower will not abandon any Petroleum Property capable of production in paying quantities. Section 5.04. Conduct of Business and Maintenance of Existence. The Borrower will continue, and will cause each Subsidiary to continue, to engage in business of the same general type as now conducted by the Borrower and its Subsidiaries, and will preserve, renew and keep in full force and effect, and will cause each Subsidiary to preserve, renew and keep in full force and effect their respective corporate existence and their respective rights, privileges and franchises necessary or desirable in the normal conduct of business; provided that nothing in this Section shall prohibit (i) the merger of a Wholly-Owned Subsidiary into the Borrower or the merger or consolidation of a Wholly-Owned Subsidiary with or 187 into another Person if the corporation surviving such consolidation or merger is a Wholly-Owned Subsidiary and if, in each case, after giving effect thereto, no Default shall have occurred and be continuing or (ii) the termination of the corporate existence of any Subsidiary if the Borrower in good faith determines that such termination is in the best interest of the Borrower and is not materially disadvantageous to the Banks. Section 5.05. Compliance with Laws. The Borrower will comply, and will cause each Subsidiary to comply, in all material respects with all applicable laws, ordinances, rules, regulations, and requirements of governmental authorities (including, without limitation, Environmental Laws and ERISA and the rules and regulations thereunder) except where the necessity of compliance therewith is contested in good faith by appropriate proceedings. Section 5.06. Inspections of Property, Books and Records. The Borrower will keep, and will cause each Subsidiary to keep, proper books of record and account in which full, true and correct entries shall be made of all dealings and transactions in relation to its business and activities; and will permit, and will cause each Subsidiary to permit, representatives of any Bank at such Bank's expense to visit and inspect any of their respective Properties, to examine and make abstracts from any of their respective books and records and to discuss their respective affairs, finances and accounts with their respective officers, employees and independent public accountants, all at such reasonable times and as often as may reasonably be desired. Section 5.07. Insurance. The Borrower and each Subsidiary now maintains and will cause to be maintained with insurers which the Borrower believes to be financially sound and reputable, insurance with respect to its Properties and business against such liabilities, casualties, risks and contingencies and in such types and amounts as is customary in the case of Persons engaged in the same or similar businesses and similarly situated. Upon request of any Bank, the Borrower will furnish or cause to be furnished to such Bank from time to time a summary of the insurance coverage of the Borrower and its Subsidiaries in form and substance satisfactory to the Required Banks. In the case of any fire, accident or other casualty causing loss or damage to any Properties of the Borrower, the proceeds of such policies shall be used to repair or replace the damaged Property, or to prepay the Indebtedness. Section 5.08. Covenant to Secure Indebtedness Equally. If the Borrower or any Subsidiary shall create or assume any Lien upon any of its Property, whether now owned or hereafter acquired, other than Liens permitted by Section 5.11, the Borrower and such Subsidiary, if applicable, shall make effective provision whereby the Indebtedness will be concurrently secured by such Lien equally and ratably with any and all other Debt thereby secured as long as any other Debt shall be so secured. The remedy provided in this Section 5.08 shall not be exclusive and shall have no effect on the availability or exercise of any other remedy that may be available to any Bank under the Financing Documents. Section 5.09. Engineering Reports. (a) By March 15 and September 15 of each year, the Borrower shall furnish to each of the Banks a report in form and substance reasonably satisfactory to the Required Banks which may be prepared by or under the supervision of a petroleum engineer who may be an employee of the Borrower, which shall evaluate all Proved Reserves owned by the Borrower and its Subsidiaries as of the preceding December 31 or June 30, respectively (provided, that each such report evaluating such Proved Reserves as of the preceding June 30 of each year shall be based upon the geologic and well data set forth in the immediately preceding Reserve Report), and which shall, together with any other information reasonably requested by any Bank, set forth the information necessary to determine the Debt Limit as of such date. (b) Together with the Reserve Report furnished pursuant to subsection (a) as of December 31 of any year, the Borrower shall furnish to each of the Banks a review report thereon in form and substance reasonably satisfactory to the Required Banks by Miller & Lents, Ltd. or other independent petroleum engineers acceptable to the Required Banks (provided that such review report shall not be required to comment on any price or other economic assumptions furnished by the Required Banks to the Borrower under subsection (d) below). 188 (c) At any time and upon request by the Required Banks, the Borrower shall furnish to each of the Banks, within 30 days of such request, a report which shall evaluate all Proved Reserves owned by the Borrower and its Subsidiaries as of the date of the most recent Reserve Report or as of such other date as the Required Banks specify, in form and substance reasonably satisfactory to the Required Banks (a "Special Engineering Report"), together with any other information reasonably requested by any Bank; provided, that such evaluation shall be based upon the geologic and well data set forth in the Reserve Report furnished as of the immediately preceding Reserve Report for which a review report has been furnished under subsection (b). The Special Engineering Report shall use production and cost profiles from the most recent Reserve Report with such other information as supplied by the Required Banks. (d) The reports contemplated by this Section shall be prepared on the basis of price and other economic assumptions specified by the Required Banks to the Borrower not less than 60 days prior to the date the related report is due and in accordance with their customary oil and gas lending practices for Persons engaged in the same or similar businesses and similarly situated as the Borrower; provided that the natural gas price assumptions shall take into account the Borrower's end product sales value for natural gas as most recently furnished by the Borrower in writing to the Banks (together with a description of the applicable period of sales data from which such end product sales value was derived) and derived from the financial statements furnished to the Banks. Section 5.10. Debt. (a) The Borrower's Consolidated Debt will at no time exceed the Debt Limit; provided that if a Debt Limit Excession exists solely by reason of a reduction of the Debt Limit pursuant to a redetermination under subsection (b)(ii) below, no Default will arise hereunder until 180 days following the date of such redetermination (during which time the Borrower or any Subsidiary may reduce Debt or acquire additional Petroleum Properties so as to restore compliance hereunder; provided further that the Debt Limit Excession shall be reduced by an amount equal to 50% of such Debt Limit Excession no later than 90 days following such redetermination). (b) The Debt Limit will be determined and adjusted periodically as follows: (i) Prior to a determination pursuant to subsection (b)(ii) below on the basis of the Reserve Report delivered as of December 31, 1998, and subject to adjustment in accordance with subsections (b)(iii) and (b)(iv) below, the Debt Limit shall be $400,000,000. (ii) The Agent will determine a proposed Debt Limit in accordance with its customary oil and gas lending practices (A) within 30 days of delivery of each Reserve Report pursuant to Section 5.09, commencing January 1, 1999 or (B) at any time if the Required Banks so elect by notice to the Borrower and the Agent and, in either such case, notify such proposed Debt Limit to each of the other Banks. Unless the Banks having more than 33 1/3% of the aggregate amount of Commitments then in effect (or, if the Commitments have been terminated, holding Notes evidencing more than 33 1/3% of the aggregate principal amount of the Loans then outstanding) notify the Borrower and Agent that they disapprove such proposed Debt Limit within 30 days of notice by the Agent as aforesaid, such Debt Limit shall become effective on such 30th day. If the Debt Limit is so disapproved, then the Banks shall consult with one another to determine a Debt Limit acceptable to the Required Banks. The Debt Limit so determined by the Required Banks shall be promptly notified in writing by the Agent to the Borrower, and upon such notification shall be binding on all parties. (iii)Upon any sale by the Borrower or any Subsidiary of any Petroleum Property (other than (i) the sale of hydrocarbons after severance occurring in the ordinary course of the Borrower's business as presently conducted, (ii) the sale of any Petroleum Property pursuant to the Section 29 Transaction or (iii)the sale of the Section 29 Transaction PPIs by reason of the rescission of the Section 29 Transaction) or any direct or indirect transfer or other disposition to any third party of a direct or indirect interest in any Subsidiary whose assets were included in the most recent determination of the Debt Limit, the Debt Limit shall be reduced, effective on the date of consummation of the sale of such Petroleum Property or transfer of such interest in such 189 Subsidiary, by an amount equal to 60% of the net proceeds of or consideration for (whether received in cash or otherwise) such sale or transfer; provided that no such reduction shall be required with respect to aggregate net sales proceeds or consideration received of up to $10,000,000 in any calendar year; and provided, further, that all such sales of Petroleum Properties and transfers of interests in Subsidiaries are subject to the provisions of Sections 5.12 and 5.15. (iv) If the Debt Limit shall have been reduced pursuant to subsection (b)(ii) or (b)(iii) above, then prior to the next redetermination of the Debt Limit pursuant to subsection (b)(ii) above, and immediately upon notification by the Borrower to the Agent of the development by the Borrower or any Subsidiary of any Proved Reserves and other assets consisting primarily of gas gathering and transmission pipelines located in the United States of America or in Canada owned directly by the Borrower or any Subsidiary and not reflected in the most recent Reserve Report, the Debt Limit shall be increased up to but not in excess of the amount thereof prior to such reductions, by an amount equal to 50% of the net present value of projected CFADS, determined on the basis of the price and other economic assumptions reflected in the most recent Reserve Report, applicable to such Proved Reserves (to the extent permitted to be included in the determination of CFADS) and other assets. (v) If prior to the next preparation of the Reserve Report pursuant to Section 5.09 the Borrower notifies the Agent of the acquisition by the Borrower or any Subsidiary of any Proved Reserves (to the extent permitted to be included in the determination of CFADS) and other assets consisting primarily of gas gathering and transmission pipelines located in the United States of America or in Canada, the Agent shall promptly thereafter notify each Bank of such acquisition and the Borrower shall as promptly as practicable thereafter deliver to each of the Banks a report prepared by or under the supervision of a petroleum engineer (who may be an employee of the Borrower) evaluating such Proved Reserves and other assets. Within 60 days of delivery of such evaluation report, the Agent, after consultation with the Borrower, will determine a proposed increase in the Debt Limit and notify such proposed increase to each of the Banks. Unless the Banks having more than 33 1/3% of the aggregate amount of Commitments then in effect (or, if the Commitments have been terminated, holding Notes evidencing more than 33 1/3% of the aggregate principal amount of the Loans then outstanding) notify the Borrower and the Agent that they disapprove such proposed increase within 30 days of notice by the Agent as aforesaid, the Debt Limit as proposed to be increased shall become effective on such 30th day. If such proposed increase in the Debt Limit is so disapproved, then the Banks shall consult with one another to determine an increase in the Debt Limit acceptable to the Required Banks. The Debt Limit as increased by the amount so determined by the Required Banks shall be promptly notified in writing by the Agent to the Borrower, and upon such notification shall be binding on all parties. (vi) The Borrower shall notify each Bank at the earliest practicable time in advance of any transactions which entail a reasonable likelihood of an adjustment to the Debt Limit pursuant to subsection (b)(iii), (b)(iv) or (b)(v) above, and shall furnish each Bank with such information with respect thereto as any Bank may reasonably request. Section 5.11. Liens. The Borrower will not, and not permit any Subsidiary to, create, incur, assume or suffer to exist any Lien on any of its Properties (now owned or hereafter acquired), except: (a) Excepted Liens; (b) Liens existing on Property owned by the Borrower or any Subsidiary on the Effective Date, but not any renewals and extensions thereof; provided that the aggregate amount of Debt secured by such Liens shall not exceed $5,000,000; (c) subject to Section 5.10, a Lien existing on any asset (other than any Petroleum Property) prior to the acquisition thereof by a Borrower, but not created in contemplation of such acquisition; (d) subject to Section 5.10, a Lien on any asset securing Debt incurred or assumed for the purpose of financing all or any part of the cost of acquiring such asset (other than any Petroleum Property), provided that such Lien attaches to such asset concurrently with or within 90 days after the acquisition thereof; 190 (e) Liens representing gas imbalances, take or pay or other prepayments in the ordinary course of business with respect to any Petroleum Properties which would require the Borrower or any Subsidiary to deliver hydrocarbons produced from any Petroleum Properties at some future time without then or thereafter receiving full payment therefor, which in the aggregate would not exceed 3% of the Debt Limit and as adjusted to reflect any subsequent adjustment of the Debt Limit pursuant to Section 5.10(b)(iii), (iv) or (v), all as notified in writing by the Agent to the Borrower; and (f) Liens securing other Debt of the Borrower or any Subsidiary the aggregate principal amount of which does not exceed $3,000,000 at any time. Section 5.12. Sales of Petroleum Properties. The Borrower will not, and will not permit any Subsidiary to, sell, transfer or otherwise dispose of any Petroleum Property for less than the fair market value of such Property (other than (i) the sale of any Petroleum Property pursuant to the Section 29 Transaction or (ii) the sale of the Section 29 Transaction PPIs by reason of the rescission of the Section 29 Transaction) and if, after giving effect thereto, to any concurrent reduction in the Debt Limit pursuant to Section 5.10 and to application of the proceeds of such disposition, Borrower's Consolidated Debt would exceed the Debt Limit. Section 5.13. Annual Coverage Ratio. The Annual Coverage Ratio will at no time be less than 2.8:1. For this purpose: "Annual Coverage Ratio" means at any date the ratio of Consolidated Cash Flow to Consolidated Interest Expense for the period of four consecutive fiscal quarters most recently ended on or prior to such date. "Consolidated Cash Flow" means, for any period, the net cash from operating activities of the Borrower and its Consolidated Subsidiaries for such period, as the same is, or would in accordance with generally accepted accounting principles be set forth in a statement of cash flows for such period, plus to the extent deducted in determining such net cash from operating activities, the sum of (i) consolidated interest charges incurred by the Borrower and its Consolidated Subsidiaries during such period and (ii) income tax expense. "Consolidated Interest Expense" means, for any period, the interest expense of the Borrower and its Consolidated Subsidiaries determined on a consolidated basis for such period in accordance with generally accepted accounting principles. Section 5.14. Consolidations, Mergers and Sales of Assets. The Borrower will not, and will not permit any Subsidiary to, consolidate or merge with or into any other Person or sell, lease or otherwise transfer, directly or indirectly, all or substantially all of its assets to any other Person except as otherwise permitted by Section 5.04. Section 5.15. Subsidiary Debt. The Borrower will not permit any of its Subsidiaries to incur, create, assume, guarantee or in any other manner become liable with respect to, or extend the maturity of or become responsible for the payment of any Debt other than (i) Debt owing to the Borrower or a Wholly-Owned Subsidiary, (ii) Non-Recourse Debt in an aggregate principal amount not to exceed $150,000,000 (together with any such Non-Recourse Debt incurred by the Borrower) at any time incurred to finance the acquisition of Properties (other than Petroleum Properties) and (iii)other Debt in an aggregate principal amount not to exceed at any time an amount equal to 3% of the Debt Limit and as adjusted to reflect any subsequent adjustment of the Debt Limit pursuant to Section 5.10(b)(iii), (iv) or (v), all as notified in writing by the Agent to the Borrower. Section 5.16. Subsidiaries. The Borrower will not, and will not permit any Subsidiary to, directly or indirectly, create, incur, assume or suffer to exist any restriction (other than any restriction imposed by applicable corporate law) on (i) the ability of such Subsidiary to make intercompany payments or advances to the Borrower or (ii) the ability of the Borrower to direct the actions of such Subsidiary or to otherwise maintain or exercise control over such Subsidiary's actions, subject to any fiduciary responsibility under applicable law to any minority stockholders of such Subsidiary. 191 ARTICLE 6 Defaults Section 6.01. Events of Default. If one or more of the following events not specifically waived in writing by the Required Banks shall have occurred and be continuing: (a) the Borrower shall fail to pay when due any principal of any Loan or shall fail to pay within five Business Days of the due date thereof any interest, fees or other amount payable under the Financing Documents; (b) the Borrower shall fail to observe or perform any covenant or agreement contained in Section 5.16 for 10 days after it shall have become aware of such failure or any covenant or agreement contained in Sections 5.10 through 5.15; (c) the Borrower shall fail to observe or perform any of its covenants or agreements contained in any of the Financing Documents (other than those covered by clause (a) or (b) above) for 30 days after it shall have become aware of such failure; (d) any representation, warranty, certification or statement made by the Borrower in any of the Financing Documents or in any certificate, financial statement or other document delivered pursuant to any of the Financing Documents shall prove to have been incorrect in any material respect when made (or deemed made); (e) the Borrower or any Subsidiary shall fail to make any payment in respect of any Material Debt (other than the Notes) when due or within any applicable grace period and such default has not been effectively waived by the holders of such Debt; (f) any event or condition shall occur which, after the expiration of any applicable grace period with respect thereto, results in the acceleration of the maturity of any Material Debt (other than the Notes) or enables the holder of such Debt or any Person acting on such holder's behalf to accelerate the maturity thereof and such default has not been effectively waived by the holders of such Debt (provided, that prior to the expiration of such grace period, the occurrence of such event or condition shall constitute a Default hereunder); (g) the Borrower or any Subsidiary shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; (h) an involuntary case or other proceeding shall be commenced against the Borrower or any Subsidiary seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; or an order for relief shall be entered against the Borrower or any Subsidiary under the federal bankruptcy laws as now or hereafter in effect; (i) any member of the ERISA Group shall fail to pay when due an amount or amounts aggregating in excess of $500,000 which it shall have become liable to pay under Title IV of ERISA which failure to pay could cause the Borrower or any Subsidiary (whether directly or jointly and severally with one or more affiliates) to incur a liability in respect of such amount or amounts, except for any such failure which is being 192 contested in good faith through appropriate proceedings, so long as such proceedings are diligently prosecuted and no Lien has been imposed on any Property of the Borrower or any Subsidiary as a consequence of such failure; or notice of intent to terminate a Material Plan shall be filed under Title IV of ERISA by any member of the ERISA Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate, to impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or to cause a trustee to be appointed to administer any Material Plan; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Material Plan must be terminated; or there shall occur a complete or partial withdrawal from, or a default, within the meaning of Section 4219(c)(5) of ERISA, with respect to, one or more Multi-employer Plans which could cause the Borrower or any Subsidiary (whether directly or jointly and severally with one or more affiliates) of the ERISA Group to incur a current payment obligation in excess of $500,000; (j) a judgment or order for the payment of money in excess of $5,000,000 shall be rendered against the Borrower or any Subsidiary and such judgment or order shall continue unsatisfied and unstayed pending appeal for a period of 30 days; or (k) (i) any "person" or "group" of persons shall have acquired "beneficial ownership" of 35% or more of the outstanding shares of common stock of the Borrower or (ii) during any period of 24 consecutive calendar months, individuals who were directors of the Borrower on the first day of such period and individuals who are "Qualifying Directors", in the aggregate, shall cease to constitute a majority of the board of directors of the Borrower; for purposes of this Section (k), a "Qualifying Director" shall mean any director who (a) is elected by a majority of the members of the board of directors of the Borrower who were directors immediately prior to the event that caused the change in directorships and (b) is not a "person" or member of a "group" of persons, or an "affiliate" or "associate" of any "person" or "group" member, or an "associate" of an "affiliate" of any such "person" or "group" member, which "person" or "group" of persons, together with all of their respective "affiliates" and "associates" and all "associates" of their respective "affiliates" (other than a "person" or "group" of persons or an "affiliate" or "associate" of such "person" or "group" of persons or an "associate" of such "affiliate", in each case which is affiliated with the Borrower or any Subsidiary) comprise a majority of the board of directors of the Borrower ("person", "group", "beneficial ownership", "affiliate" and "associate" having the meanings assigned thereto in Rules 12b-2 and 13d under the Securities Exchange Act of 1934); then, and in every such event, the Agent shall (i) if requested by the Banks holding 50% or more of the aggregate amount of the Commitments then in effect, by notice to the Borrower terminate the Commitments and they shall thereupon terminate, and (ii) if requested by the Banks holding 50% or more of the aggregate principal amount of the Loans then outstanding, by notice to the Borrower declare the Notes (together with accrued interest thereon) to be, and the Notes shall thereupon become, immediately due and payable without presentment, demand, protest, notice of intent to accelerate or other notice of any kind, all of which are hereby waived by the Borrower; provided that in the case of any of the Events of Default specified in Section 6.01(g) or Section 6.01(h) with respect to the Borrower, without any notice to the Borrower or any other act by the Agent or the Banks, the Commitments shall thereupon terminate and the Notes (together with accrued interest thereon) shall become immediately due and payable without presentment, demand, protest, notice of intent to accelerate, notice of acceleration or other notice of any kind, all of which are hereby waived by the Borrower. Section 6.02. Notice of Default. The Agent shall give notice to the Borrower of a Default under Section 6.01(d) promptly upon being requested to do so by any Bank and shall thereupon notify all the Banks thereof. 193 ARTICLE 7 The Agent Section 7.01. Appointment and Authorization. Each Bank irrevocably appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement and the Notes as are delegated to the Agent by the terms hereof or thereof, together with all such powers as are reasonably incidental thereto. Section 7.02. Agent and Affiliates. Morgan Guaranty Trust Company of New York shall have the same rights and powers under this Agreement as any other Bank and may exercise or refrain from exercising the same as though it were not the Agent, and Morgan Guaranty Trust Company of New York and its affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Borrower or any Subsidiary or affiliate of the Borrower as if it were not the Agent hereunder. Section 7.03. Action by Agent. The obligations of the Agent hereunder are only those expressly set forth herein. Without limiting the generality of the foregoing, the Agent shall not be required to take any action with respect to any Default, except as expressly provided in Article 6. Section 7.04. Consultation with Experts. Consultation with Experts. The Agent may consult with legal counsel (who may be counsel for the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. Section 7.05. Liability of Agent. Neither the Agent nor any of its affiliates nor any of their respective directors, officers, agents or employees shall be liable to the Banks for any action taken or not taken by it in connection herewith (i) with the consent or at the request of the Required Banks or (ii) in the absence of its own gross negligence or willful misconduct. Neither the Agent nor any of its affiliates nor any of their respective directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into or verify (i) any statement, warranty or representation made in connection with this Agreement or any Borrowing hereunder; (ii) the performance or observance of any of the covenants or agreements of the Borrower; (iii)the satisfaction of any condition specified in Article 3, except receipt of items required to be delivered to the Agent; or (iv) the validity, effectiveness or genuineness of this Agreement, the Notes or any other instrument or writing furnished in connection herewith. The Agent shall not incur any liability by acting in reliance upon any notice, consent, certificate, statement or other writing (which may be a bank wire, telex or similar writing) believed by it to be genuine or to be signed by the proper party or parties. Without limiting the generality of the foregoing, the use of the term "agent" in this Agreement with reference to the Agent is not intended to connote any fiduciary or other implied (or expressed) obligations arising under agency doctrine of any applicable law. Instead, such term is used merely as a matter of market custom and is intended to create or reflect only an administrative relationship between independent contracting parties. Section 7.06. Indemnification. Each Bank shall, ratably in accordance with its Commitment, indemnify the Agent, its affiliates and their respective directors, officers, agents and employees (to the extent not reimbursed by the Borrower) against any cost, expense (including counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from such indemnitees, gross negligence or willful misconduct) that such indemnitees may suffer or incur in connection with this Agreement or any action taken or omitted by such indemnitees hereunder. Section 7.07. Credit Decision. Each Bank acknowledges that it has, independently and without reliance upon the Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that it will, independently and without reliance upon the Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking any action under this Agreement. 194 Section 7.08. Successor Agent. The Agent may resign at any time by giving written notice thereof to the Banks and the Borrower. Upon any such resignation, the Required Banks shall have the right, with the consent of the Borrower, to appoint a successor Agent. If no successor Agent shall have been so appointed by the Required Banks, and shall have accepted such appointment, within 30 days after the retiring Agent gives notice of resignation, then the retiring Agent may, on behalf of the Banks, appoint a successor Agent, which shall be a commercial bank organized or licensed under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $50,000,000. Upon the acceptance of its appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent. Section 7.09. Agent's Fees. The Borrower shall pay to the Agent for its own account fees in the amounts and at the times previously agreed upon between the Borrower and the Agent. ARTICLE 8 Change in Circumstances Section 8.01. Basis for Determining Interest Rate Inadequate or Unfair. If on or prior to the first day of any Interest Period for any Group of Fixed Rate Loans: (a) the Agent is advised by the Reference Banks that deposits in dollars (in the applicable amounts) are not being offered to the Reference Banks in the relevant market for such Interest Period, or (b) Banks holding Notes evidencing 50% or more of the aggregate principal amount of the Loans comprising such Group advise the Agent that the Adjusted CD Rate or the London Interbank Offered Rate, as the case may be, as determined by the Agent will not adequately and fairly reflect the cost to such Banks of funding their CD Loans or Euro-Dollar Loans, as the case may be, for such Interest Period, the Agent shall forthwith give notice thereof to the Borrower and the Banks, whereupon until the Agent notifies the Borrower that the circumstances giving rise to such suspension no longer exist, (a) the obligations of the Banks to make CD Loans or Euro-Dollar Loans, as the case may be, or to convert outstanding Loans into CD Loans or Euro-Dollar Loans, as the case may be, shall be suspended and (b) unless the Agent shall have received a timely Notice of Interest Rate Election from the Borrower in accordance with Section 2.08 requesting the conversion of CD Loans or Euro-Dollar Loans, as the case may be, into a different Type of Fixed Rate Loans, each outstanding CD Loan or Euro-Dollar Loan, as the case may be, shall be converted into a Base Rate Loan on the last day of the then current Interest Period applicable thereto. Unless the Borrower notifies the Agent at least one Domestic Business Day before the date of any Fixed Rate Borrowing for which a Notice of Borrowing has previously been given that it elects not to borrow on such date, such Borrowing shall instead be made as a Base Rate Borrowing. Section 8.02. Illegality. If, on or after the date of this Agreement, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Euro-Dollar Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall make it unlawful or impossible for any Bank (or its Euro-Dollar Lending Office) to make, maintain or fund its Euro-Dollar Loans and such Bank shall so notify the Agent, the Agent shall forthwith give notice thereof to the other Banks and the Borrower, whereupon until such Bank notifies the Borrower and the Agent that the circumstances giving rise to such suspension no longer exist, the obligation of such Bank to make Euro-Dollar Loans, or to 195 convert outstanding Loans into Euro-Dollar Loans, shall be suspended. Before giving any notice to the Agent pursuant to this Section, such Bank shall designate a different Euro-Dollar Lending Office if such designation will avoid the need for giving such notice and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. If such notice is given, all Euro-Dollar Loans of such Bank then outstanding shall be converted to Base Rate Loans either (a) on the last day of the then current Interest Period applicable to such Euro-Dollar Loans if such Bank may lawfully continue to maintain and fund such Loans to such day or (b) immediately if such Bank may not lawfully continue to maintain and fund such Loans to such day. Section 8.03. Increased Cost and Reduced Return. (a) If on or after the date hereof, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency: (i) shall subject any Bank (or its Applicable Lending Office) to any tax, duty or other charge with respect to its Fixed Rate Loans, its Note or its obligation to make Fixed Rate Loans, or shall change the basis of taxation of payments to any Bank (or its Applicable Lending Office) of the principal of or interest on its Fixed Rate Loans or any other amounts due under this Agreement in respect of its Fixed Rate Loans or its obligation to make Fixed Rate Loans (except for any increase in franchise taxes imposed or changes in the rate of tax on the overall net income of such Bank or its Applicable Lending Office imposed by the jurisdiction in which such Bank's principal executive office or Applicable Lending Office is located); or (ii) shall impose, modify or deem applicable any reserve (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System, but excluding (A) with respect to any CD Loan any such requirement included in an applicable Domestic Reserve Percentage and (B) with respect to any Euro-Dollar Loan any such requirement with respect to which such Bank is entitled to compensation during the relevant Interest Period under Section 2.14), special deposit, insurance assessment (excluding, without respect to any CD Loan, any such requirement reflected in an applicable Assessment Rate) or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Bank (or its Applicable Lending Office) or shall impose on any Bank (or its Applicable Lending Office) or on the United States market for certificates of deposit or the London interbank market any other condition affecting its Fixed Rate Loans, its Note or its obligation to make Fixed Rate Loans; and the result of any of the foregoing is to increase the cost to such Bank (or its Applicable Lending Office) of making or maintaining any Fixed Rate Loan, or to reduce the amount of any sum received or receivable by such Bank (or its Applicable Lending Office) under this Agreement or under its Note with respect thereto, by an amount deemed by such Bank to be material, then, within 15 days after demand by such Bank (with a copy to the Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank for such increased cost or reduction. (b) If any Bank shall have determined that, after the date hereof, the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change in any such law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on capital of such Bank (or its Parent) as a consequence of such Bank's obligations hereunder to a level below that which such Bank (or its Parent) could have achieved but for such law, rule, regulation, change or compliance (taking into consideration its policies with respect to capital 196 adequacy) by an amount deemed by such Bank to be material, then from time to time, within 15 days after demand by such Bank (with a copy to the Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank (or its Parent) for such reduction; provided that the Borrower will not be obligated to compensate any Bank for any such reduction attributable to a period commencing more than 120 days prior to the giving of notice by such Bank to the Borrower of its intention to seek compensation under this paragraph (b) and the making of demand by such Bank for payment thereof in accordance herewith (except for any period during which, because of the retroactive application of such statute, regulation or other basis upon which the claimed compensation is based, such Bank did not know that the amount of such reduction would arise or accrue). (c) Each Bank will promptly notify the Borrower and the Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section and will designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. A certificate of any Bank claiming compensation under this Section and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error. In determining such amount, such Bank may use any reasonable averaging and attribution methods. Section 8.04. Base Rate Loans Substituted for Affected Fixed Rate Loans. If (i) the obligation of any Bank to make or maintain Euro-Dollar Loans has been suspended pursuant to Section 8.02 or (ii) any Bank has demanded compensation under Section 8.03(a) and the Borrower shall, by at least five Euro-Dollar Business Days' prior notice to such Bank through the Agent, have elected that the provisions of this Section shall apply to such Bank, then, unless and until such Bank notifies the Borrower that the circumstances giving rise to such suspension or demand for compensation no longer apply: (a) all Loans which would otherwise be made by such Bank as (or continued as or converted into) CD Loans or Euro-Dollar Loans, as the case may be, shall instead be Base Rate Loans, and (b) after each of its outstanding CD Loans or Euro-Dollar Loans, as the case may be, has been repaid (or converted), all payments of principal which would otherwise be applied to repay such Fixed Rate Loans shall be applied to repay its Base Rate Loans instead. If such Bank notifies the Borrower that the circumstances giving rise to such notice no longer apply, the Borrower shall elect that the principal amount of each such Base Rate Loan shall be converted into a CD Loan or a Euro-Dollar Loan, as the case may be, on the first day of the next succeeding Interest Period applicable to the related CD Loans or Euro-Dollar Loans of the other Banks. Section 8.05. Substitution of Bank. If (i) the obligation of any Bank to make Euro-Dollar Loans has been suspended pursuant to Section 8.02 or (ii) any Bank has demanded compensation under Section 8.03, the Borrower shall have the right, with the assistance of the Agent, to seek a mutually satisfactory substitute bank or banks (which may be one or more of the Banks) to purchase the Note and assume the Commitment of such Bank. ARTICLE 9 Miscellaneous Section 9.01. Notices. All notices, requests and other communications to any party hereunder shall be in writing (including bank wire, telex, facsimile transmission or similar writing) and shall be given to such party: (x) in the case of the Borrower or the Agent, at its address, facsimile number or telex number set forth on the signature pages hereof, (y) in the case of any Bank, at its address or telex number set forth in its Administrative Questionnaire or (z) in the case of any party, such other address, facsimile number or telex number as such party may hereafter specify for the purpose by notice to the Agent and the Borrower. Each such notice, request or other communication shall be effective (i) if given by telex, when such telex is transmitted to the telex number specified in this Section and the appropriate answerback is received (ii) 197 or if given by any other means, when received; provided that notices given by telex to the Agent under Article 2 or Article 8 shall not be effective until received. Section 9.02. No Waivers. No failure or delay by the Agent or any Bank in exercising any right, power or privilege under any Financing Document shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies therein provided shall be cumulative and not exclusive of any rights or remedies provided by law. Section 9.03. Expenses; Documentary Taxes; Indemnification. (a) The Borrower shall pay (i) all reasonable out-of-pocket expenses of the Agent, including fees and disbursements of special counsel for the Agent, in connection with the preparation of the Financing Documents, any waiver or consent thereunder or any amendment thereof or any Default or alleged Default hereunder and (ii) if an Event of Default occurs, all out-of-pocket expenses incurred by the Agent or any Bank, including fees and disbursements of counsel, in connection with such Event of Default and collection and other enforcement proceedings resulting therefrom. The Borrower shall indemnify each Bank against any transfer taxes, documentary taxes, assessments or charges made by any governmental authority by reason of the execution and delivery of any Financing Document. (b) The Borrower agrees to indemnify the Agent and each Bank, their respective affiliates and the respective directors, officers, agents and employees of the foregoing (each an "Indemnitee") and hold each Indemnitee harmless from and against any and all liabilities, losses, damages, costs and expenses of any kind, including, without limitation, the reasonable fees and disbursements of counsel, which may be incurred by such Indemnitee in connection with any investigative, administrative or judicial proceeding (whether or not such Indemnitee shall be designated a party thereto) relating to or arising out of this Agreement or any actual or proposed use of proceeds of Loans hereunder; provided that no Indemnitee shall have the right to be indemnified hereunder for such Indemnitees own gross negligence or willful misconduct as determined by a court of competent jurisdiction. Section 9.04. Sharing of Set-Offs. Each Bank agrees that if it shall, by exercising any right of set-off or counterclaim or otherwise, receive payment of a proportion of the aggregate amount of principal and interest due with respect to any Note held by it which is greater than the proportion received by any other Bank in respect of the aggregate amount of principal and interest due with respect to any Note held by such other Bank, the Bank receiving such proportionately greater payment shall purchase such participations in the Notes held by the other Banks, and such other adjustments shall be made, as may be required so that all such payments of principal and interest with respect to the Notes held by the Banks shall be shared by the Banks pro rata; provided that nothing in this Section shall impair the right of any Bank to exercise any right of set-off or counterclaim it may have and to apply the amount subject to such exercise to the payment of indebtedness of the Borrower other than its indebtedness under the Notes. The Borrower agrees, to the fullest extent it may effectively do so under applicable law, that any holder of a participation in a Note acquired pursuant to the foregoing arrangements may exercise rights of set-off or counterclaim and other rights with respect to such participation as fully as if such holder of a participation were a direct creditor of the Borrower in the amount of such participation. Section 9.05. Amendments and Waivers. Any provision of this Agreement or the Notes may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Borrower and the Required Banks (and, if the rights or duties of the Agent are affected thereby, by the Agent); provided that no such amendment or waiver shall, unless signed by all the Banks, (i) increase or decrease the Commitment of any Bank or subject any Bank to any additional obligation, (ii) reduce the principal of or rate of interest on any Loan or any fees hereunder, (iii)postpone the date fixed for any payment of principal of or interest on any Loan or any fees hereunder or for any reduction or termination of any Commitment or (iv) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Notes, or the number of Banks, which shall be required for the Banks or any of them to take any action under this Section or any other provision of this Agreement. 198 Section 9.06. Successors and Assigns. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Borrower may not assign or otherwise transfer any of its rights under this Agreement without the prior written consent of all Banks. Any assignment or transfer hereunder shall be made in accordance with applicable law, including without limitation federal and/or state securities laws, if applicable. (b) Any Bank may at any time grant to one or more banks or other financial institutions (each a "Participant") participating interests in its Commitment or any or all of its Loans. In the event of any such grant by a Bank of a participating interest to a Participant, whether or not upon notice to the Borrower and the Agent, such Bank shall remain responsible for the performance of its obligations hereunder, and the Borrower and the Agent shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. The rights and entitlements of any Bank under Sections 2.11 and 2.14 and Article 8 shall be determined for purposes of this Agreement on the basis of what such Bank would be entitled to receive under this Agreement had it not granted any participating interest to any Participant, whether or not such Bank has in fact done so. Any agreement pursuant to which any Bank may grant such a participating interest shall provide that such Bank shall retain the sole right and responsibility to enforce the obligations of the Borrower hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement; provided that such participation agreement may provide that such Bank will not agree to any modification, amendment or waiver of this Agreement described in clause (i), (ii) or (iii) of Section 9.05 without the consent of the Participant and may contain any other provisions, or such participation may take place on such other terms, as such Bank deems appropriate. An assignment or other transfer which is not permitted by subsection (c) or (d) below shall be given effect for purposes of this Agreement only to the extent of a participating interest granted in accordance with this subsection (b). (c) Any Bank may at any time assign to one or more banks or other financial institutions (each an "Assignee") all or a portion of its rights and obligations under the Financing Documents, and such Assignee shall assume such rights and obligations, pursuant to an instrument executed by such Assignee and such transferor Bank, with (and subject to) notice to, and the consent of, the Borrower and the Agent (which consents shall not be unreasonably withheld); provided that if an Assignee is an affiliate of such transferor Bank, such notice shall be given but no such consent shall be required; provided, further, that no assignment representing less than $5,000,000 in Commitments shall be permitted without the consent of the Borrower and the Agent; and provided, further, that during the continuance of an Event of Default, no such consent of the Borrower shall be required. Upon execution and delivery of such an instrument and payment by such Assignee to such transferor Bank of an amount equal to the purchase price agreed between such transferor Bank and such Assignee, such Assignee shall be a Bank party to this Agreement and shall have all the rights and obligations of a Bank with a Commitment as set forth in such instrument of assumption, and the transferor Bank shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. Upon the consummation of any assignment pursuant to this subsection (c), the transferor Bank, the Agent and the Borrower shall make appropriate arrangements so that, if required, new Notes are issued to the Assignee. In connection with any such assignment, the transferor Bank shall pay to the Agent an administrative fee for processing such assignment in the amount of $2,500. If the Assignee is not incorporated under the laws of the United States of America or a state thereof, it shall, prior to the first date on which interest or fees are payable hereunder for its account, deliver to the Borrower and the Agent certification as to exemption from deduction or withholding of any United States federal income taxes in accordance with Section 2.13. 199 (d) Any Bank may at any time assign all or any portion of its rights under this Agreement and its Note to a Federal Reserve Bank. No such assignment shall release the transferor Bank from its obligations hereunder. (e) No Assignee or other transferee of any Bank's rights (not including Participants) shall be entitled to receive any greater payment under Section 8.03 than such Bank would have been entitled to receive with respect to the rights transferred, unless such transfer is made with the Borrower's prior written consent or by reason of the provisions of Section 8.02 or 8.03 requiring such Bank to designate a different Applicable Lending Office under certain circumstances or at a time when the circumstances giving rise to such greater payment did not exist. Section 9.07. Collateral. Each of the Banks represents to the Agent and each of the other Banks that it in good faith is not relying upon any "margin stock" (as defined in Regulation U) as collateral in the extension or maintenance of the credit provided for in this Agreement. Section 9.08. New York Law; Submission to Jurisdiction. THIS AGREEMENT AND EACH NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK. THE BORROWER HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK AND OF ANY NEW YORK STATE COURT SITTING IN NEW YORK CITY FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. THE BORROWER IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. Section 9.09. Counterparts. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. Section 9.10. Confidentiality. Each of the Agent and the Banks agrees to maintain the confidentiality of any information of a confidential nature which it has or shall acquire during the term of this Agreement relating to the business, operations and financial or other condition of the Borrower or its Subsidiaries or, with respect to ERISA matters, any other member of the ERISA Group, except and to the extent that (i) the Agent or such Bank may be required to disclose such information (a) at the request of a bank regulatory agency or in connection with an examination of the Agent or such Bank by bank examiners, (b) pursuant to subpoena or other court process, (c) at the express direction of any other authorized government agency, (d) to its independent auditors or (e) otherwise as required by law or (ii) such information is disclosed in connection with the prospective or actual assignment, grant of a participation interest or other transfer by a Bank of or in any of its interests in this Agreement, the Notes or the other Financing Documents, provided that such prospective or actual Assignee, Participant or other transferee shall have agreed to keep such information confidential on the terms and conditions set forth herein. Section 9.11. No Unwritten Agreements. THIS AGREEMENT AND THE NOTES REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES HERETO, SUPERSEDING ANY AND ALL PRIOR AGREEMENTS AND UNDERSTANDINGS RELATING TO THE SUBJECT MATTER HEREOF, AND MAY NOT BE CONTRADICTED BY EVIDENCE OF ORAL AGREEMENTS OF THE PARTIES HERETO, WHETHER MADE BEFORE, ON OR AFTER THE DATE OF THIS AGREEMENT. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES HERETO. 200 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. CABOT OIL & GAS CORPORATION By: /s/ Scott C. Schroeder Title: Vice President and Treasurer Commitments: $32,500,000 BANKBOSTON, N.A. By: /s/ Christopher C. Holmgren Title: Director $32,500,000 BANK OF MONTREAL By: /s/ Melissa Bauman Title: Director $32,500,000 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By: /s/ John Kowalczuk Title: Vice President $32,500,000 NATIONSBANK, N.A. By: /s/ James V. Ducote Title: Vice President $20,000,000 BANK ONE, TEXAS, NATIONAL ASSOCIATION By: /s/ Christine M. Macan Title: Vice President $20,000,000 CHASE BANK OF TEXAS, N.A. By: /s/ Sandra I. Aulman Title: Vice President $20,000,000 FROST NATIONAL BANK By: /s/ Scott W. Baxter Title: Market President $20,000,000 MEES PIERSON CAPITAL CORP. By: /s/ Karel Louman Title: Managing Director By: /s/ Darrell W. Holley Title: Senior Vice President 201 $20,000,000 PNC BANK, NATIONAL ASSOCIATION By: /s/ Thomas A. Majeski Title: Vice President $20,000,000 THE BANK OF NEW YORK By: /s/ Peter W. Keller Title: Vice President - ------------ Total Commitments $250,000,000 ============ MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent By: /s/ John Kowalczuk Title: Vice President 202 PRICING SCHEDULE Each of "Euro-Dollar Margin", "CD Margin" and "Commitment Fee Rate" means, for any date, the rate set forth below in the row opposite such term and in the column corresponding to the Debt Percentage that exists on such date: Debt Percentage Lower than 60% 60%-80% Higher than 80% Euro-Dollar Margin 0.750% 1.00% 1.250% CD Margin 0.875% 1.125% 1.375% Commitment Fee Rate 0.250% 0.3750% 0.3750% 203 EXHIBIT A NOTE New York, New York December 17, 1998 For value received, Cabot Oil & Gas Corporation, a Delaware corporation (the "Borrower"), promises to pay to the order of (the "Bank"), for the account of its Applicable Lending Office, the unpaid principal amount of each Loan made by the Bank to the Borrower pursuant to the Credit Agreement referred to below on the date or dates provided for in the Credit Agreement. The Borrower promises to pay interest on the unpaid principal amount of each such Loan on the dates and at the rate or rates provided for in the Credit Agreement. All such payments of principal and interest shall be made in lawful money of the United States in Federal or other immediately available funds at the office of Morgan Guaranty Trust Company of New York, 60 Wall Street, New York, New York. All Loans made by the Bank, the respective Types thereof and all repayments of the principal thereof shall be recorded by the Bank and, if the Bank so elects in connection with any transfer or enforcement hereof, appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding may be endorsed by the Bank on the schedule attached hereto, or on a continuation of such schedule attached to and made a part hereof; provided that the failure of the Bank to make any such recordation or endorsement shall not affect the obligations of the Borrower hereunder or under the Credit Agreement. This note is one of the Notes referred to in the Credit Agreement dated as of December 17, 1998 among the Borrower, the banks parties thereto and Morgan Guaranty Trust Company of New York, as Agent (as the same may be amended from time to time, the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meanings. Reference is made to the Credit Agreement for provisions for the prepayment hereof and the acceleration of the maturity hereof. CABOT OIL & GAS CORPORATION By:_____________________________ Title: Note (cont'd) LOANS AND PAYMENTS OF PRINCIPAL Date Amount of Loan Type of Loan Amount of Principal Repaid Notation Made By 204 EXHIBIT B OPINION OF SPECIAL COUNSEL FOR THE BORROWER [Effective Date] To the Banks and the Agent Referred to Below c/o Morgan Guaranty Trust Company of New York, as Agent 60 Wall Street New York, New York 10260 Dear Sirs: We have acted as special counsel for Cabot Oil & Gas Corporation (the "Borrower") in connection with the Credit Agreement (the "Credit Agreement") dated as of December , 1998 among the Borrower, the banks parties thereto and Morgan Guaranty Trust Company of New York, as Agent. This opinion is delivered to you pursuant to Section 3.01 of the Credit Agreement. Unless otherwise defined herein, capitalized terms used in this opinion are used as defined in, or by reference in, the Credit Agreement. In connection with this opinion, we have examined copies of the following documents: (a) The Credit Agreement; (b) The Notes; and (c) The certificate of incorporation and bylaws, as amended or restated to the date hereof, of the Borrower. The documents described in Paragraphs (a) and (b) above are herein called the "Loan Documents." In addition, we have reviewed the originals or copies, certified or otherwise identified to our satisfaction, of such documents and corporate records furnished to us by the Borrower, certificates of public officials and of representatives of the Borrower, statutes and other instruments and documents and (except as otherwise stated herein) have conducted such other investigations of fact and law as we have deemed necessary or advisable for purposes of this opinion. In giving such opinion, we have relied upon certificates of officers of the Borrower with respect to the accuracy of the factual matters contained in such certificates copies of which are attached hereto. In our examination of the Loan Documents, we have assumed, without independent investigation, (i) the genuineness of all signatures of, and the authority of, all Persons signing all documents examined by us in connection with this opinion on behalf of parties thereto, other than the Borrower, (ii) the capacity of each signing party, and (iii) the authenticity of all documents submitted to us as originals and the conformity to authentic original documents of all copies submitted to us as certified, conformed or photostatic copies. Based upon and subject to the foregoing and other qualifications and assumptions set forth below and upon such other matters as we deem appropriate, we are of the opinion that: 1. The Borrower is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware, and has all corporate powers required to carry on its business as now conducted. Neither the Borrower nor any Subsidiary is subject to regulation under the Public Utility Holding Company Act of 1935, the Investment Company Act of 1940 or the Interstate Commerce Act, in each case such that the application thereof would limit the incurrence by the Borrower of Debt under the Credit Agreement. 2. The Borrower has taken all necessary corporate action to authorize the execution, delivery and performance of each of the Loan Documents. The Borrower has corporate power and authority to execute and deliver the Loan Documents and to perform its obligations thereunder. 3. The execution and delivery by the Borrower of the Loan Documents, and the performance of its obligations thereunder do not and will not conflict with any of the terms, conditions or provisions of the certificate of incorporation or bylaws of the Borrower; or to our knowledge after due inquiry, (A) require any action by or in respect 205 of, or filing with, any Texas or United States federal governmental body, agency or official, or (B) violate any provision of any existing Texas, New York, Delaware corporate or United States federal law or regulation applicable to the Borrower. We call to your attention the fact that in the event the Borrower or a Subsidiary grants liens to its creditors, it may be required to grant equal and ratable liens to creditors of Cabot Corporation under provisions governing indebtedness of Cabot Corporation which require the granting of equal and ratable liens to creditors of Cabot Corporation. 4. The Credit Agreement constitutes a valid and binding agreement of the Borrower and the Notes constitute valid and binding obligations of the Borrower, in each case enforceable in accordance with their respective terms except as (i) the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and (ii) rights of acceleration and the availability of equitable remedies may be limited by equitable principles of general applicability. The foregoing opinions are subject to the following additional assumptions and qualifications: (a) We have not been called upon to, and accordingly do not, express any opinion as to the various state and Federal Laws (other than Regulations U or X promulgated by the Board of Governors of the Federal Reserve System, as in effect on the date hereof) regulating banks or the conduct of their business that may relate to the Loan Documents and the transactions contemplated thereby. (b) We express no opinion in paragraph 3 above as to whether the conduct of the Borrower's business in the ordinary course is in compliance with the laws, rules and regulations governing the same. (c) We express no opinion as to the enforceability under Texas law of (i) Section 6.01 of the Credit Agreement to the extent it purports to waive any defense to the performance of contract obligations which cannot, as a matter of law, be effectively waived, or (ii) any indemnity provisions contained in the Credit Agreement or the Notes. (d) For the purpose of rendering the opinions expressed in Paragraph 4 above we have assumed that the Agent and each Bank will at all times comply strictly with the provisions of Section 2.15 of the Credit Agreement. If any Bank fails to comply with the usury savings clause provisions under Section 2.15 of the Credit Agreement prohibiting the collections of amounts constituting interest payable under or in connection with the Credit Agreement and the Notes in excess of the highest lawful rate, we express no opinion as to whether the refunding of such amounts, or the crediting of any outstanding principal as provided in Section 2.15 of the Credit Agreement with such amount which has been contracted for, charged or collected in violation of any applicable usury laws is sufficient to avoid violation of such laws. We are qualified to practice law in the States of New York and Texas only and do not hold ourselves out as experts on, or express any opinion herein concerning, the laws of any jurisdiction other than the laws of the States of New York, Texas, the General Corporation Law of the State of Delaware and applicable federal law of the United States. This opinion is being furnished to the Banks and the Agent for the use of their counsel. No other use or distribution of this opinion may be made without our prior written consent. Very truly yours, 206 EXHIBIT C OPINION OF MANAGING COUNSEL OF THE BORROWER [Effective Date] To the Banks and The Agent Referred to Below c/o Morgan Guaranty Trust Company of New York, as Agent 60 Wall Street New York, New York 10260 Dear Sirs: I am Managing Counsel of Cabot Oil & Gas Corporation (the "Borrower") and am familiar with the Credit Agreement (the "Credit Agreement") dated as of December ____, 1998 among the Borrower, the banks parties thereto and Morgan Guaranty Trust Company of New York, as Agent. This opinion is delivered to you pursuant to Section 3.01 of the Credit Agreement. Unless otherwise defined herein, capitalized terms used in this opinion are used as defined in, or by reference in, the Credit Agreement. In Connection with this opinion, I have examined copies of the following documents: (a) The Credit Agreement; and (b) The Notes. The documents described in Paragraphs (a) and (b) above are herein called the "Loan Documents." In addition, I have reviewed the originals or copies, certified or otherwise identified to my satisfaction, of such documents and corporate records furnished to me by the Borrower, certificates of public officials and of representatives of the Borrower, statutes and other instruments and documents and (except as otherwise stated herein) have conducted such other investigations of fact and law as I have deemed necessary or advisable for purposes of this opinion. In giving such opinion, I have relied upon certificates of officers of the Borrower with respect to the accuracy of the factual matters contained in such certificates copies of which are attached hereto. In my examination of the Loan Documents, I have assumed, without independent investigation, (i) the genuineness of all signatures of, and the authority of, all Persons signing all documents examined by me in connection with this opinion on behalf of parties thereto, (ii) the capacity of each signing party, and (iii)the authenticity of all documents submitted to me as certified, conformed or photostatic copies. I have not been requested to opine, and I have not opined, as to any issues other than those expressly set forth herein. It is my understanding that as to such other matters, you are relying on the respective opinions of even date herewith of Baker & Botts, counsel for the Borrower; and Davis, Polk & Wardwell, special counsel for the Agent. Based upon and subject to the foregoing, I am of the opinion that: 1. To my knowledge after due inquiry, the Borrower has all material governmental licenses, authorizations and consents required to carry on its business as now conducted and is in good standing and is duly qualified as a foreign corporation in all jurisdictions in which the failure to so qualify would have a Material Adverse Effect. 2. To my knowledge after due inquiry, the execution and delivery by the Borrower of the Loan Documents, and the performance of its obligations hereunder do not and will not (A) create (with or without the giving of notice or the lapse of time, or both) a default under or a breach of any instrument or document evidencing indebtedness for borrowed money to which the Borrower is a party or by which it is bound or any other material agreement, or (B) result in the creation or imposition of any Lien on any asset of the Borrower pursuant to any such agreement or instrument, or (C) conflict with or result in a breach of any order, judgment, injunction or decree which is binding upon the Borrower. 3. Except as described in the 1997 Form 10-K Statement, there is not action, suit or proceeding pending against, or to my knowledge threatened against or affecting, the Borrower or any or its Subsidiaries or Affiliates before any court or arbitrator or any governmental body, agency or official in which there is a reasonable possibility of an adverse decision which could materially adversely affect the business, Properties, financial position, results of operations or prospects of the Borrower or of the Borrower and its Subsidiaries, taken as a whole, or which in any manner draws into question the validity of any of the Loan Documents. 207 I am qualified to practice law in the State of Texas only and I do not hold myself out as an expert on, or express any opinion herein concerning, the laws of any jurisdiction other than the laws of the State of Texas and applicable federal law of the United States. This opinion is being furnished to the Banks and the Agent for their use of their counsel. No other use or distribution of this opinion may be made without my prior written consent. Very truly yours, 208 EXHIBIT D OPINION OF DAVIS POLK & WARDWELL, SPECIAL COUNSEL FOR THE AGENT [Effective Date] To the Banks and the Agent Referred to Below c/o Morgan Guaranty Trust Company of New York, as Agent 60 Wall Street New York, New York 10260 Ladies and Gentlemen: We have participated in the preparation of the Credit Agreement (the "Credit Agreement") dated as of December , 1998 among Cabot Oil & Gas Corporation, a Delaware corporation (the "Borrower"), the banks parties thereto and Morgan Guaranty Trust Company of New York, as Agent (the "Agent"), and have acted as special counsel for the Agent for the purpose of rendering this opinion pursuant to Section 3.01 of the Credit Agreement. Terms defined in the Credit Agreement are used herein as therein defined. We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as we have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, we are of the opinion that: 1. The execution, delivery and performance by the Borrower of the Credit Agreement and the Notes are within the Borrower's corporate powers and have been duly authorized by all necessary corporate action. 2. The Credit Agreement constitutes a valid and binding agreement of the Borrower and each Note constitutes a valid and binding obligation of the Borrower, in each case enforceable in accordance with its terms except as the same may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and by general principles of equity. We are members of the Bar of the State of New York and the foregoing opinion is limited to the laws of the State of New York, the federal laws of the United States of America and the General Corporation Law of the State of Delaware. In giving the foregoing opinion, we express no opinion as to the effect (if any) of any law of any jurisdiction (except the State of New York) in which any Bank is located which limits the rate of interest that such Bank may charge or collect. This opinion is rendered solely to you in connection with the above matter. This opinion may not be relied upon by you for any other purpose or relied upon by any other person without our prior written consent. Very truly yours, 209 EX-21.1 8 SUBSIDIARIES OF CABOT OIL & GAS CORPORATION Exhibit 21.1 SUBSIDIARIES OF CABOTA OIL & GAS CORPORATION Big Sandy Gas Company Cabot Oil & Gas Marketing Corporation* Cabot Oil & Gas U.K. Limited Cabot Petrolem North Sea, Ltd. Cranberry Pipeline Corporation* Franklin Brine Treatment Corporation * Denotes significant subsidiary. EX-23.1 9 CONSENT OF INDEPENDENT ACCOUNTS Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Cabot Oil & Gas Corporation on Form S-8 (File No.'s 33-35478 and 33-71134 of our report dated February 26, 1999, on our audits of the consolidated financial statements of Cabot Oil & Gas Corporation as of December 31, 1998 and 1997, and for the years ended December 31, 1998, 1997 and 1996, which report is included in this Annual Report on Form 10-K. PricewaterhouseCoopers LLP Houston, Texas March 26, 1999 210 EX-23.2 10 CONSENT OF MILLER & LENTS, LTD. Exhibit 23.2 [Miller and Lents, Ltd. Letterhead] February 23, 1999 Cabot Oil & Gas Corporation 15375 Memorial Drive Houston, Texas 77079 Re: Securities and Exchange Commission Form 10-K of Cabot Oil & Gas Corporation Gentlemen: The firm of Miller and Lents, Ltd. consents to the use of its name and the use of its report dated February 9, 1999 regarding Cabot Oil & Gas Corporation Proved Reserves and Future Net Revenues as of January 1, 1999, which report is to be included by reference in Form 10-K to be filed by Cabot Oil & Gas Corporation with the Securities and Exchange Commission. Miller and Lents, Ltd. has no interests in Cabot Oil & Gas Corporation, or in any of its affiliated companies or subsidiaries and is not to receive any such interest as payment for such report and has no director, officer, or employee employed or otherwise connected with Cabot Oil & Gas Corporation. We are not employed by Cabot Oil & Gas Corporation on a contingent basis. Very truly yours, MILLER AND LENTS, LTD. By: /s/ JAMES A. COLE -------------------------------- James A. Cole Senior Vice President 211 EX-27 11 FDS --
5 1,000 YEAR DEC-31-1998 DEC-31-1998 2,200 0 56,273 (474) 9,312 71,115 1,110,556 (480,648) 704,160 99,034 343,000 193,598 0 56,700 (67,630) 704,160 152,936 159,606 132,676 132,676 0 0 18,598 8,805 3,501 1,902 0 0 0 1,902 0.08 0.08
EX-28.1 12 MILLER & LENTS, LTD. REVIEW LETTER Exhibit 28.1 [Miller & Lents, Ltd. Letterhead] February 9, 1999 Cabot Oil & Gas Corporation 15375 Memorial Drive Houston, TX 77079 Re: Review of Proved Reserves And Future Net Revenues As of January 1, 1999 Gentlemen: At your request, we reviewed the estimates of proved reserves of oil, natural gas liquids, and gas and the future net revenues associated with these reserves that Cabot Oil & Gas Corporation, hereinafter Cabot, attributes to its net interests in oil and gas properties as of January 1, 1999. Cabot's estimates, shown below, are in accordance with the definitions contained in Securities and Exchange Commission Regulation S-X, Rule 4-10(a).
Proved Reserves --------------- Developed Undeveloped Total ---------------------------------- Net Liquids, MBbls ................ 5,822 1,855 7,677 Net Gas, MMcf .................... 788,390 208,365 996,755 Future Net Revenues Undiscounted, M$ ................ 1,339,825 262,330 1,602,155 Discounted at 10 Percent, M$ .... 639,996 98,932 738,928
Based on our investigations and subject to the limitations described hereinafter, it is our judgment that (1) Cabot has an effective system for gathering data and documenting information required to estimate its proved reserves and to project its future net revenues, (2) in making its estimates and projections, Cabot used appropriate engineering, geologic, and evaluation principles and techniques that are in accordance with practices generally accepted in the petroleum industry, and (3) the results of those estimates and projections are, in the aggregate, reasonable. All reserves discussed herein are located within the continental United States. Gas volumes were estimated at the appropriate pressure base and temperature base that are established for each well or field by the applicable sales contract or regulatory body. Total gas reserves were obtained by summing the reserves for all the individual properties and are therefore stated herein at a mixed pressure base. Cabot represents that the future net revenues reported herein were computed based on prices being received for oil, natural gas liquids, and gas as of Cabot's fiscal year end, December 31, 1998, and are in accordance with Securities and Exchange Commission guidelines. The present value of future net revenues was computed by discounting the future net revenues at 10 per cent per annum. Estimates of future net revenues and the present value of future net revenues are not intended and should not be interpreted to represent fair market values for the estimated reserves. 213 In conducting our investigations, we reviewed the pertinent available engineering, geological, and accounting information for each well or designated property to satisfy ourselves that Cabot's estimates of reserves and future production forecasts and economic projections are, in the aggregate, reasonable. We independently selected a sampling of properties in each region and reviewed the direct operating expenses and product prices used in the economic projections. In its estimates of proved reserves and future net revenues associated with its proved reserves, Cabot has considered that a portion of its facilities associated with the movement of its gas in the Appalachian Region to its markets are unusual in that the construction and operation of these facilities are highly dependent on its producing operations. Cabot has deemed the portion of the cost of these facilities associated with its revenue interest gas as costs that are attributable to its oil and gas producing activities, and accordingly, has included these costs in its computation of the future net revenues associated with its proved reserves. Reserve estimates were based on decline curve extrapolations, material balance calculations, volumetric calculations, analogies, or combinations of these methods for each well, reservoir, or field. Reserve estimates from volumetric calculations and from analogies are often less certain than reserve estimates based on well performance obtained over a period during which a substantial portion of the reserves were produced. In making its projections, Cabot estimated yearly well abandonment costs except where salvage values were assumed to offset these expenses. Costs for possible future environmental claims were not included. Cabot's estimates include no adjustments for production prepayments, exchange agreements, gas balancing, or similar arrangements. We were provided with no information concerning these conditions, and we have made no investigations of these matters as such was beyond the scope of this investigation. The evaluations presented in this report, with the exceptions of those parameters specified by others, reflect our informed judgments based on accepted standards of professional investigation but are subject to those generally recognized uncertainties associated with interpretation of geological, geophysical, and engineering information. Government policies and market conditions different from those employed in this study may cause the total quantity of oil, natural gas liquids, or gas to be recovered, actual production rates, prices received, or operating and capital costs to vary from those presented in this report. In conducting these evaluations, we relied upon production histories, accounting and cost data, and other financial, operating, engineering, and geological data supplied by Cabot. To a lesser extent, nonproprietary data existing in the files of Miller and Lents, Ltd., and data obtained from commercial services were used. We also relied, without independent verification, upon Cabot's representation of its ownership interests, payout balances and reversionary interests, the current prices, and the transportation fees applicable to each property. Miller and Lents, Ltd. is an independent oil and gas consulting firm. None of the principals of this firm have any financial interests in Cabot or any of its affiliated companies. Our fee is not contingent upon the results of our work or report, and we have not performed other services for Cabot that would affect our objectivity. Very truly yours, MILLER AND LENTS, LTD. By: /s/James A. Cole ------------------------------ James A. Cole Senior Vice President 214 -----END PRIVACY-ENHANCED MESSAGE-----