Pipeline Construction And Operating Agreement

PIPELINE CONSTRUCTION AND
OPERATING AGREEMENT
between
MICHIGAN PRODUCTION COMPANY, L.L.C.
Owner


and
WEST SHORE PROCESSING COMPANY, L.L.C.
Operator


October 1, 1996


TABLE OF CONTENTS
Page ARTICLE 1 DEFINITIONS................................... 1


ARTICLE 2 CONSTRUCTION OF THE PIPELINE SYSTEM........... 3
2.1 General Contractor........................ 3
2.2 Property and Permits...................... 3
2.3 Construction.............................. 3
2.4 Management............................... 3


ARTICLE 3 OPERATION OF THE PIPELINE SYSTEM.............. 3
3.1 Operator.................................. 3
3.2 Custody................................... 4
3.3 Agreement of Operator to Operate
the Pipeline.................................. 4


ARTICLE 4 DUTIES OF OPERATOR............................ 4
4.1 Supervision of Operations..................... 4
4.2 Acquisitions.................................. 4
4.3 Payment of Expenses; Liens; Claims............ 4
4.4 No Conditional Sale Contracts, Etc............ 5
4.5 Employment of Personnel....................... 5
4.6 Information................................... 5
4.7 Carrier Status................................ 5
4.8 Compliance with Regulations................... 5
4.9 Continued Authority........................... 5
4.10 Access; Books and Records..................... 5
4.11 Prohibition on Transfers...................... 6
4.12 Operator's Performance........................ 6
4.13 Notification of Adverse Changes............... 6
4.14 General Supervision........................... 7


ARTICLE 5 MATTERS REQUIRING CONSENT OF OWNER........ 7
5.1 Releases and Partial Releases................. 7
5.2 Claims Not Covered by Insurance............... 7


ARTICLE 6 MATTERS NOT REQUIRING CONSENT OF OWNER.... 7
6.1 Normal Operations............................. 7
6.2 Emergency..................................... 7


ARTICLE 7 OPERATING PROCEDURE....................... 7
7.1 Product Acceptance............................ 7
7.2 Line Fill..................................... 7
7.3 Measurement and Sampling...................... 8


ARTICLE 8 LIABILITY................................. 8
8.1 Liability of Operator......................... 8
8.2 No Liability of Owner......................... 8


ARTICLE 9 INSURANCE................................. 8
9.1 Insurance Policies............................ 8
9.2 Insurance Proceeds............................ 9


(i)


9.3 Insurance by Owner............................ 9
9.4 Contractor Insurance.......................... 9
9.5 Third Party Damage Liability.................. 9
9.6 Pipeline System Damages....................... 9
9.7 Settlement of Claims.......................... 10


ARTICLE 10 ACCOUNTING.................................. 10
10.1 Maintenance of Accounts; Monthly Statements... 11
10.2 Payments...................................... 11
10.3 Adjustments................................... 11
10.4 Audits........................................ 11
10.5 Certain Costs and Expenses.................... 11
10.6 Taxes......................................... 11


ARTICLE 11 REPRESENTATIONS AND WARRANIES............... 11
11.1 Authority and Power........................... 11
11.2 Valid and Binding Obligation.................. 11
11.3 Litigation and Condemnation................... 11
11.4 Title to the Property......................... 11
11.5 Accuracy of Information....................... 11
11.6 Tax and Other Payments........................ 11
11.7 Environmental Matters......................... 11
11.8 Permits and Restrictions...................... 12


ARTICLE 12 MISCELLANEOUS............................... 12
12.1 Modifications................................. 12
12.2 Rights of Third Parties....................... 12
12.3 No Agency, Partnership or Joint Venture....... 12
12.4 Further Assurances............................ 12
12.5 Notices....................................... 12
12.6 Severability.................................. 13
12.7 Number and Gender............................. 13
12.8 Time of Essence............................... 14
12.9 Captions...................................... 14
12.10 Applicable Law................................ 14
12.11 Counterparts.................................. 14
12.12 Successors and Assigns........................ 14
12.13 No Oral Agreement............................. 14
12.14 Term of Agreement............................. 14
(ii)


PIPELINE CONSTRUCTION AND OPERATING AGREEMENT

THIS PIPELINE CONSTRUCTION AND OPERATING AGREEMENT (this "Agreement"), dated as of October 1, 1996, is between WEST SHORE PROCESSING COMPANY, LLC, a Michigan limited liability company ("Operator"), and MICHIGAN PRODUCTION COMPANY, L.L.C., a Michigan limited liability company ("Owner").


WHEREAS, Owner has previously determined to design, construct, and operate the Pipeline (as hereinafter defined), the general location and physical description of which are more particularly set forth in Article 1;


WHEREAS, Owner desires to appoint Operator to construct, operate, and maintain the Pipeline on Owner's behalf and Operator desires to accept such appointment;


NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein contained, and for other consideration, the receipt and adequacy of which are hereby acknowledged, and without limitation of the parties' rights and obligations under the Gathering Agreement and the Participation Agreement (as such terms are hereinafter defined), Owner and Operator hereby agree as follows:


ARTICLE 1
DEFINITIONS
-----------


For purposes of this Agreement, the following terms are defined as follows:


Affiliate of any Person means any other Person directly or indirectly controlling, controlled by or under common control with such person. A Person shall be deemed to control another Person if the controlling Person owns 50% or more of any class of voting securities (or other ownership interests) of the controlled Person or possesses, directly or indirectly, the power to direct or cause the direction of the management or policies of the controlled Person, whether through ownership of stock, by contact or otherwise.


Basin means Operator's Affiliate, Basin Pipeline, L.L.C., a Michigan limited liability company.


Capital Expenditures shall mean all costs incurred in constructing the Pipeline and any additions or changes thereto, subject to such adjustment as may be required for removal or abandonment of all or part of the Pipeline.


Gathering Agreement means the Gas Gathering, Treatment and Processing Agreement dated May 2, 1996, as amended from time to time, between Owner, as producer, and Operator, as processor.


Governmental Authority means the United States of America or any nation, commonwealth, state, county, city, territory,
1


possession, parish, town, municipality, and any other political subdivision, agency, court, department, commission, board, bureau, or other instrumentality.


Governmental Requirements means all Laws of any Governmental Authority applicable to Operator or the Pipeline.


Law or Laws means all applicable statutes, laws, ordinances, regulations, orders, writs, injunctions, decisions, opinions, or decrees of any Governmental Authority.


Loan Agreement means the Non-Recourse Loan Agreement dated as of October 1, 1996, between Operator, as lender, and Owner, as borrower, as amended from time to time.


MARKWEST means Operator's Affiliate, MarkWest Michigan, LLC, a Michigan limited liability company, or any successor in interest to MarkWest Michigan, LLC, in connection with any reorganization of such company.


OPERATING ACCOUNT shall mean the account that represents the financial responsibility of Operator to Owner. Specifically, it shall represent the accountability of all revenue, expense, allocations, and distributions of the Operator on behalf of Owner.


OPTION AGREEMENT means the Option and Agreement to Purchase and Sell Pipeline dated as of October 1, 1996, between Owner and Operator, as amended from time to time.


PARTICIPATION AGREEMENT means the Participation, Ownership and Operating Agreement for West Shore Processing Company, LLC, dated May 2, 1996, between MarkWest and Michigan Energy Company, L.L.C., as amended by the First Amendment thereto dated as of October 1, 1996, and as further amended from time to time.


PIPELINE means the nominal 10-inch diameter, natural gas producer pipeline extending along the right of way of Consumers Power from the delivery point at the gathering lateral of Owner's Slocum 1-21 Well, which delivery point is expected to be in the Northwest quarter of Section 30, Township 15 North, Range 16 West, Elbridge Township, in Oceana County, Michigan, to the terminus of Basin's existing pipeline located in Section 32, Township 19 North, Range 17 West, Victory Township, in Mason Countv, Michigan, including, without limitation, (a) the Property, and (b) all pipes, pipelines, pumping equipment, assemblies, heaters, valves, controls, monitoring equipment, communications equipment, towers, sensors, cathodic protection systems, test stations, corrosion detection and monitoring devices, inspection pigs, drums, flare facilities, sampling equipment, and all associated facilities and equipment, including spare parts, related thereto, as wel1 as any and all additions, replacements, extension, modifications or enlargements of any of the foregoing.


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PLAN OF DEVELOPMENT means the Plan of Development for the Pipeline (including the final working drawings and specifications), together with any amendments or modifications thereto, and authorizations for expenditures prepared by MarkWest under the Participation Agreement and approved in accordance with the Participation Agreement.


PRODUCTS shal1 mean all natural gas, natural gas liquids and other petroleum or petroleum related commodities that the Pipeline will transport for the benefit of Owner.


PROPERTY means all rights of way, easements, leaseholds, fee parcels and other real property interests associated with the Pipeline, as contemplated by the Plan of Development.


ARTICLE 2
CONSTRUCTION OF THE PIPELINE SYSTEM
-----------------------------------

2.1 General Contractor. Owner hereby designates Operator as the
-------------------- general contractor for the construction of the Pipeline and, subject to the provisions of this Agreement, Operator shall have the exclusive right to act as such general contractor.


2.2 Property and Permits. Operator shall acquire, on behalf of Owner,
---------------------- the Property and all permits from Government Authorities required for the construction, operation and maintenance of the Pipeline.


2.3 Construction. Operator (directly, or acting through Basin or
-------------- MarkWest) shall construct the Pipeline in accordance with the Plan of Development and all Governmental Requirements.


2.4 Management. Operator shall be in direct charge and shall
------------ supervise, on behalf of Owner, all matters arising under the construction and shall proceed with such matters in a good and workmanlike manner and, subject to the provisions of this Agreement, in accordance with its best judgment of what a prudent general contractor would do under the same or similar circumstances. Operator shall consult freely with Owner and shall keep Owner reasonably informed of all significant matters arising during the construction of the Pipeline.


ARTICLE 3
OPERATION OF THE PIPELINE SYSTEM

3.1 Operator. Owner hereby designates Operator as the operator of the
--------- Pipeline and, subject to the provisions of this Agreement, Operator shall have the exclusive right (directly, or acting through Basin or MarkWest) to operate the Pipeline.


3


3.2 Custody. Operator shall have custody of the Pipeline and
------- the Pipeline will be held by Operator for Owner's benefit.


3.3 Agreement of Operator to Operate the Pipeline. Operator shall
--------------------------------------------- conduct all operations hereunder in a good and workmanlike manner, and, subject to the provisions of this Agreement, in accordance with is best judgment of what a prudent operator would do under the same or similar circumstances. Operator shall consult freely with Owner and shall keep Owner reasonably informed of all significant matters arising during the operation, maintenance, or alteration of the Pipeline.


ARTICLE 4
DUTIES OF OPERATOR
------------------

Supervision of Operations. Operator shall supervise all operations of
------------------------- the Pipeline for measurement, analysis, dispatching, pumping, and transporting of Products from all points of delivery into or out of the Pipeline.


4.2 Acquisitions. Operator shall supervise the purchase and use of all
------------ materials, contract services, utilities, and supplies in connection with the construction, operation and maintenance of the Pipeline. Operator shall cause all materials supplied for, or intended to be used in, the construction of the Pipeline, but not affixed to or incorporated into the Pipeline, to be stored on the Property or at such other location as may be approved by Owner in writing prior to storage in such other location, with adequate safeguards, as required by Owner, to prevent loss, theft, damage, or commingling with other materials or Pipelines.


4.3 Payment of Expenses; Liens; Claims. Operator shall promptly pay
---------------------------------- and discharge all costs and expenses incurred in connection with the construction, maintenance and operation of the Pipeline pursuant to this Agreement and take advantage of trade discounts where available. Operator shall keep the Pipeline free and clear of any Liens arising out of the Pipeline's construction, operation or maintenance, other than Liens in favor of Bank of America Illinois and liens approved in writing by Owner (and Liens hereafter created by Owner, which Owner agrees to promptly discharge and remove). Operator (a) may contest the validity or amount of any claim of any contractor, consultant, or other person providing labor, materials, or services with respect to the Pipeline, (b) may contest any Tax levied by any Governmental Authority, and (c) may contest the enforcement of or compliance with any Governmental Requirements; provided however, that during the pendency of any such contest, Operator shall set aside adequate reserves being established in accordance with GAAP and shall pay any amount adjudged by a court of competent jurisdiction to be due, with all costs, interest, and penalties thereon, before such judgment becomes a lien on the Property. Owner may (but shall not ...