EXECUTION COPY

 

EXHIBIT 10.1

 

AMENDED AND RESTATED CREDIT AGREEMENT

 

DATED AS OF MAY 31, 2007

 

AMONG

 

CRIMSON EXPLORATION INC.

 

AS BORROWER

 

WELLS FARGO BANK, NATIONAL ASSOCIATION

AS AGENT

 

THE ROYAL BANK OF SCOTLAND plc

 

AND

 

WELLS FARGO BANK, NATIONAL ASSOCIATION,

AS

CO-LEAD ARRANGERS AND JOINT BOOKRUNNERS

 

AND

 

THE LENDERS SIGNATORY HERETO

 

--------------------------------------------------------------------------------

TABLE OF CONTENTS

Page

 

ARTICLE I.

Definitions and Accounting Matters

1

 

 

Section 1.01.

Terms Defined Above.

1

 

 

Section 1.02.

Certain Defined Terms.

1

 

ARTICLE II.

Commitments

18

 

 

Section 2.01.

Loans and Letters of Credit.

18

 

 

Section 2.02.

Borrowings, Continuations and Conversions, Letters of Credit.

21

 

 

Section 2.03.

Changes of Commitments.

23

 

 

Section 2.04.

Fees.

23

 

 

Section 2.05.

Several Obligations.

24

 

 

Section 2.06.

Notes.

24

 

 

Section 2.07.

Prepayments.

25

 

 

Section 2.08.

Borrowing Base.

26

 

 

Section 2.09.

Assumption of Risks.

27

 

 

Section 2.10.

Obligation to Reimburse and to Prepay.

28

 

 

Section 2.11.

Lending Offices.

29

 

ARTICLE III.

Payments of Principal and Interest

30

 

 

Section 3.01.

Repayment of Loans.

30

 

 

Section 3.02.

Interest.

30

 

ARTICLE IV.

Payments; Pro Rata Treatment; Computations; Etc.

31

 

 

Section 4.01.

Payments.

31

 

 

Section 4.02.

Pro Rata Treatment.

31

 

 

Section 4.03.

Computations.

31

 

 

Section 4.04.

Non-receipt of Funds by the Agent.

32

 

 

Section 4.05.

Set-off, Sharing of Payments, Etc.

32

 

 

Section 4.06.

Taxes.

33

 

 

Section 4.07.

Disposition of Proceeds.

35

 

ARTICLE V.

Capital Adequacy and Additional Costs

35

 

 

Section 5.01.

Capital Adequacy and Additional Costs.

35

 

 

Section 5.02.

Limitation on LIBOR Loans.

37

 

 

Section 5.03.

Illegality.

37

 

 

Section 5.04.

Base Rate Loans Pursuant to Sections 5.01, 5.02 and 5.03.

37

 

 

Section 5.05.

Compensation.

38

 

 

Section 5.06.

Replacement Lenders.

38

 

ARTICLE VI.

Conditions Precedent

39

 

 

Section 6.01.

Initial Funding.

39

 

 

Section 6.02.

Initial and Subsequent Loans and Letters of Credit.

42

 

 

Section 6.03.

Conditions Precedent for the Benefit of Lenders.

43

 

 

Section 6.04.

No Waiver.

43

 

ARTICLE VII.

Representations and Warranties

43

 

 

Section 7.01.

Corporate Existence.

43

 

 

Section 7.02.

Financial Condition.

43

 

 

Section 7.03.

Litigation and Judgments.

44

 

 

Section 7.04.

No Breach.

44

 

 

Section 7.05.

Authority.

44

 

 

Section 7.06.

Approvals.

44

 

 

Section 7.07.

Use of Loans.

44

 

 

Section 7.08.

ERISA.

44

 

i

 

--------------------------------------------------------------------------------

TABLE OF CONTENTS

(Continued)

Page

 

 

 

Section 7.09.

Taxes.

45

 

 

Section 7.10.

Titles, Etc.

45

 

 

Section 7.11.

No Material Misstatements.

46

 

 

Section 7.12.

Investment Company Act.

46

 

 

Section 7.13.

Reserved.

46

 

 

Section 7.14.

Subsidiaries.

46

 

 

Section 7.15.

Location of Business and Offices.

46

 

 

Section 7.16.

Defaults.

47

 

 

Section 7.17.

Environmental Matters.

47

 

 

Section 7.18.

Compliance with the Law.

48

 

 

Section 7.19.

Insurance.

48

 

 

Section 7.20.

Hedging Agreements.

48

 

 

Section 7.21.

Restriction on Liens.

49

 

 

Section 7.22.

Material Agreements.

49

 

 

Section 7.23.

Solvency.

49

 

 

Section 7.24.

Gas Imbalances.

49

 

 

Section 7.25.

Madisonville.

50

 

 

Section 7.26.

Intentionally Omitted.

50

 

 

Section 7.27.

Name Changes.

50

 

 

Section 7.28.

Taxpayer Identification Number.

50

 

 

Section 7.29.

State of Formation.

50

 

ARTICLE VIII.

Affirmative Covenants

50

 

 

Section 8.01.

Reporting Requirements.

50

 

 

Section 8.02.

Litigation.

52

 

 

Section 8.03.

Maintenance, Etc.

53

 

 

Section 8.04.

Environmental Matters.

54

 

 

Section 8.05.

Further Assurances.

55

 

 

Section 8.06.

Performance of Obligations.

55

 

 

Section 8.07.

Engineering Reports.

55

 

 

Section 8.08.

Title Information and Mortgage Coverage.

56

 

 

Section 8.09.

Collateral.

57

 

 

Section 8.10.

Cash Collateral Account Agreement.

57

 

 

Section 8.11.

[Reserved.]

58

 

 

Section 8.12.

ERISA Information and Compliance.

58

 

 

Section 8.13.

Joinder and Guaranty Agreements.

58

 

ARTICLE IX.

Negative Covenants

58

 

 

Section 9.01.

Debt.

58

 

 

Section 9.02.

Liens.

59

 

 

Section 9.03.

Investments, Loans and Advances.

60

 

 

Section 9.04.

Dividends, Distributions and Redemptions.

61

 

 

Section 9.05.

Sales and Leasebacks.

61

 

 

Section 9.06.

Nature of Business.

61

 

 

Section 9.07.

Limitation on Leases.

61

 

 

Section 9.08.

Mergers, Acquisitions, Etc.

61

 

 

Section 9.09.

Proceeds of Notes; Letters of Credit.

62

 

 

Section 9.10.

ERISA Compliance.

62

 

 

Section 9.11.

Sale or Discount of Receivables.

63

 

 

Section 9.12.

Capital Expenditures.

63

 

 

Section 9.13.

Current Ratio.

63

 

 

Section 9.14.

Leverage Ratio.

63

 

 

Section 9.15.

Interest Coverage Ratio.

64

 

 

Section 9.16.

Sale of Mortgaged Properties.

64

 

 

Section 9.17.

Sale of Oil and Gas Properties.

64

 

 

ii

 

--------------------------------------------------------------------------------

TABLE OF CONTENTS

(Continued)

Page

 

 

 

Section 9.18.

Environmental Matters.

64

 

 

Section 9.19.

Transactions with Affiliates.

64

 

 

Section 9.20.

Subsidiaries.

64

 

 

Section 9.21.

Negative Pledge Agreements.

65

 

 

Section 9.22.

Take-or-Pay or Other Prepayments.

65

 

 

Section 9.23.

Ownership of Subsidiaries.

65

 

 

Section 9.24.

Change in Borrower's, any of its Subsidiaries' or any Guarantor's Name

   

 

or State of Formation.

65

 

 

Section 9.25.

Intentionally Omitted.

65

 

 

Section 9.26.

Intentionally Omitted.

65

 

 

Section 9.27.

[Reserved].

65

 

 

Section 9.28.

Limitation on Hedging.

65

 

 

Section 9.29.

Maintenance of First Lien Priority; Modification of Second Lien Loan Documents.

65

 

ARTICLE X.

Events of Default; Remedies

66

 

 

Section 10.01.

Events of Default.

66

 

 

Section 10.02.

Remedies.

68

 

ARTICLE XI.

The Agent

69

 

 

Section 11.01.

Appointment, Powers and Immunities.

69

 

 

Section 11.02.

Reliance by Agent.

69

 

 

Section 11.03.

Defaults.

70

 

 

Section 11.04.

Rights as a Lender.

70

 

 

Section 11.05.

Indemnification.

70

 

 

Section 11.06.

Non-Reliance on Agent and other Lenders.

70

 

 

Section 11.07.

Action by Agent.

71

 

 

Section 11.08.

Resignation of Agent.

71

 

 

Section 11.09.

Other Agents; Lead Managers.

71

 

 

Section 11.10.

Hedging Arrangements.

72

 

ARTICLE XII.

Miscellaneous

72

 

 

Section 12.01.

Waiver.

72

 

 

Section 12.02.

Notices.

72

 

 

Section 12.03.

Payment of Expenses, Indemnities, Etc.

72

 

 

Section 12.04.

Amendments, Etc.

74

 

 

Section 12.05.

Successors and Assigns.

74

 

 

Section 12.06.

Assignments and Participations.

74

 

 

Section 12.07.

Invalidity.

76

 

 

Section 12.08.

Counterparts.

76

 

 

Section 12.09.

References; Use of Word "Including".

76

 

 

Section 12.10.

Survival.

76

 

 

Section 12.11.

Captions.

76

 

 

Section 12.12.

NO ORAL AGREEMENTS.

77

 

 

Section 12.13.

Governing Law; Submission to Jurisdiction.

77

 

 

Section 12.14.

Interest.

78

 

 

Section 12.15.

Confidentiality.

78

 

 

Section 12.16.

Effectiveness; Termination; Collateral Matters.

79

 

 

Section 12.17.

Renewal and Continuation of Existing Indebtedness.

79

 

 

Section 12.18.

EXCULPATION PROVISIONS.

79

 

 

Section 12.19.

USA PATRIOT Act Notices.

80

 

 

 

iii

 

--------------------------------------------------------------------------------

ANNEXES, EXHIBITS AND SCHEDULES

Annex I

- List of Percentage Shares and Maximum Credit Amounts

Exhibit A

- Form of Revolving Credit Note

Exhibit B

- Form of Borrowing, Continuation and Conversion Request

Exhibit C

- Form of Compliance Certificate

Exhibit D

- List of Security Instruments

Exhibit E

- Form of Assignment Agreement

Exhibit F

- Intentionally Deleted

Exhibit G

- Joinder Agreement

Exhibit H

- Guaranty Agreement

Schedule 7.02

- Liabilities

Schedule 7.03

- Litigation and Judgments

Schedule 7.09

- Taxes

Schedule 7.10

- Titles, etc.

Schedule 7.14

- Subsidiaries, Partnerships, Locations, Jurisdictions, Taxpayer I.D. Numbers

Schedule 7.17

- Environmental Matters

Schedule 7.19

- Insurance

Schedule 7.20

- Hedging Agreements

Schedule 7.22

- Material Agreements

Schedule 7.24

- Gas Imbalances

Schedule 7.27

- Name Changes

Schedule 7.28

- Guarantors Tax I.D. Numbers and State of Formation

Schedule 9.01

- Debt

Schedule 9.02

- Liens

Schedule 9.03

- Investments, Loans and Advances

 

iv

 

--------------------------------------------------------------------------------

AMENDED AND RESTATED CREDIT AGREEMENT

THIS AMENDED AND RESTATED CREDIT AGREEMENT dated as of May 31, 2007 is among
CRIMSON EXPLORATION INC., a Delaware corporation (the "Borrower"); each of the
lenders that is a signatory hereto or which becomes a signatory hereto as
provided in Section 12.06 (individually, together with its successors and
assigns, a "Lender" and, collectively, the "Lenders"); WELLS FARGO BANK,
NATIONAL ASSOCIATION and THE ROYAL BANK OF SCOTLAND plc, as co-lead arrangers
and joint bookrunners (in such capacity each an "Arranger" and collectively the
"Arrangers") and WELLS FARGO BANK, NATIONAL ASSOCIATION, a national banking
association (in its individual capacity, "Wells Fargo"), as Agent for the
Lenders (in such capacity, together with its successors in such capacity, the
"Agent").

R E C I T A L S

A.           The Borrower, the Lenders and the Agent are parties to that certain
Amended and Restated Credit Agreement dated as of May 8, 2007 (the "Existing
Credit Agreement");

B.            Contemporaneously with the closing and initial funding under the
Existing Credit Agreement, the Borrower, Crimson Exploration Operating, Inc.
("CEOI"), Southern G Holdings, LLC ("Southern G") and EXCO Resources, Inc. (the
"Seller") entered into that certain Membership Interest Purchase and Sale
Agreement dated as of May 8, 2007 (the "Acquisition Agreement"), pursuant to
which CEOI acquired from the Seller (the "Acquisition") all of the outstanding
membership interest in Southern G Holdings, LLC, a Delaware limited liability
company (the "Acquired Assets");

C.            The Existing Credit Agreement provides for a revolving credit
facility, including a letter of credit subfacility, for the purpose of financing
the transactions contemplated by the Acquisition Agreement, repaying or
refinancing certain existing indebtedness, financing other permitted
acquisitions, providing for the working capital and other general corporate
purpose needs of the Borrower, and paying related fees and expenses;

D.           The Borrower, the Lenders and the Agent desire to amend and restate
the Existing Credit Agreement in its entirety to provide a swing line facility
to the Borrower as a sub-facility under the revolving credit facility provided
pursuant to the Existing Credit Agreement; and

E.            The amendment and restatement of the Existing Credit Agreement is
not intended by the parties hereto to constitute a novation, or discharge or a
satisfaction of the Existing Indebtedness, which indebtedness shall remain
outstanding hereunder pursuant to the terms and conditions of this Agreement;

F.            NOW THEREFORE, in consideration of the foregoing recitals, of the
mutual covenants and agreements herein contained and of the loans, extensions of
credit and commitments hereinafter referred to, the parties hereto agree that
the Existing Credit Agreement is amended and restated to read in its entirety as
follows:

ARTICLE I.

Definitions and Accounting Matters

Section 1.01.      Terms Defined Above. As used in this Agreement, the terms
defined in the opening paragraph and the Recitals above shall have the meanings
indicated therein.

Section 1.02.      Certain Defined Terms. As used herein, the following terms
shall have the following meanings (all terms defined in this Article I or in
other provisions of this Agreement in the singular to have equivalent meanings
when used in the plural and vice versa):

"Acquisition Documents" shall have the meaning assigned such term in Section
6.01(q).

 

--------------------------------------------------------------------------------

"Act" shall have the meaning assigned to such term in Section 12.19.

"Active Subsidiary" shall mean a Subsidiary of the Borrower that is not an
Inactive Subsidiary.

"Additional Costs" shall have the meaning assigned such term in Section 5.01(c).

"Affected Loans" shall have the meaning assigned such term in Section 5.04.

"Affiliate" of any Person shall mean (i) any Person directly or indirectly
controlled by, controlling or under common control with such first Person,
(ii) any director or officer of such first Person or of any Person referred to
in clause (i) above and (iii) if any Person in clause (i) above is an
individual, any member of the immediate family (including parents, spouse and
children) of such individual and any trust whose principal beneficiary is such
individual or one or more members of such immediate family and any Person who is
controlled by any such member or trust. For purposes of this definition, any
Person which owns directly or indirectly 10% or more of the securities having
ordinary voting power for the election of directors or other governing body of a
corporation or 10% or more of the partnership or other ownership interests of
any other Person (other than as a limited partner of such other Person) will be
deemed to "control" (including, with its correlative meanings, "controlled by"
and "under common control with") such corporation or other Person.

"Agreement" shall mean this Amended and Restated Credit Agreement, as the same
may from time to time be amended or supplemented.

"Aggregate Maximum Revolving Credit Amounts" at any time shall equal the sum of
the Maximum Revolving Credit Amounts of the Lenders, as the same may be reduced
pursuant to Section 2.03(b). As of the Closing Date, the Aggregate Maximum
Revolving Credit Amounts equal $ 400,000,000.00.

"Aggregate Revolving Credit Commitments" at any time shall equal the amount
calculated in accordance with Section 2.03.

"Alternative Swing Line Procedures" shall have the meaning assigned such term in
Section 2.01(d)(vii).

"Applicable Lending Office" shall mean, for each Lender and for each Type of
Loan, the lending office of such Lender (or an Affiliate of such Lender)
designated for such Type of Loan on the signature pages hereof or such other
offices of such Lender (or of an Affiliate of such Lender) as such Lender may
from time to time specify to the Agent and the Borrower as the office by which
its Loans of such Type are to be made and maintained.

"Applicable Margin" shall mean the applicable per annum percentage set forth at
the appropriate intersection in the table shown below, based on the Borrowing
Base Utilization as in effect from time to time:

Borrowing Base Utilization

Applicable Margin

 

 

LIBOR Loans

Base Rate Loans

Revolving Credit
Commitment Fee

Less than 50%

1.25%

0.000%

.375%

Greater than or equal to 50%, but less than 75%

1.50%

0.125%

.375%

 

 

 

2

 

--------------------------------------------------------------------------------

 

Greater than or equal to 75%, but less than 90%

1.75%

0.250%

.375%

Greater than or equal to 90%

2.00%

0.500%

.375%

 

 

 

 

Each change in the Applicable Margin resulting from a change in the Borrowing
Base Utilization shall take effect on the day such change in the Borrowing Base
Utilization occurs.

"Assignment" shall have the meaning assigned such term in Section 12.06(b).

"Base Rate" shall mean, with respect to any Base Rate Loan, for any day, the
higher of (i) the Federal Funds Rate for any such day plus 1/2 of 1% or (ii) the
Prime Rate for such day. Each change in any interest rate provided for herein
based upon the Base Rate resulting from a change in the Base Rate shall take
effect at the time of such change in the Base Rate.

"Base Rate Loans" shall mean Loans that bear interest at rates based upon the
Base Rate.

"Beneficiaries" shall mean the Agent, the Lenders, each Issuing Bank and each
Affiliate of a Lender that is a party to a Hedge Agreement with the Borrower.

"Board of Directors" shall mean the Board of Directors of the Borrower, or any
authorized committee of the Board of Directors.

"Borrowing Base" shall mean at any time an amount equal to the amount determined
in accordance with Section 2.08.

"Borrowing Base Utilization" shall mean the sum of (i)(a) the aggregate
outstanding principal amount of the Loans plus (b) the aggregate face amount of
all undrawn and uncancelled Letters of Credit, plus (c) the aggregate of all
amounts drawn under all Letters of Credit and not yet reimbursed, divided by
(ii) the Borrowing Base.

"Business Day" shall mean any day other than a day on which commercial banks are
authorized or required to close in Houston Texas, and, where such term is used
in the definition of "Quarterly Date" or if such day relates to a borrowing or
continuation of, a payment or prepayment of principal of or interest on, or a
conversion of or into, or the Interest Period for, a LIBOR Loan or a notice by
the Borrower with respect to any such borrowing or continuation, payment,
prepayment, conversion or Interest Period, any day which is also a day on which
dealings in Dollar deposits are carried out in the London interbank market.

"Cash Collateral Account Agreement" shall mean that certain Cash Collateral
Account Agreement, if any, between the Borrower, its Subsidiaries and the Agent
and/or other depository bank, in form and substance satisfactory to the Agent
covering and granting a perfected, first priority security interest to the Agent
in the cash collateral, and subject only to Liens or any other encumbrances
satisfactory to Agent.

"Cash Management Agreement" shall mean any agreement to provide cash management
services, including treasury, depository, overdraft, credit or debit card,
electronic funds transfer and other cash management arrangements.

"Closing Date" shall mean May 31, 2007.

"Code" shall mean the Internal Revenue Code of 1986, as amended from time to
time and any successor statute.

 

 

3

 

--------------------------------------------------------------------------------

"Commitment" shall mean, for any Lender, its obligation to make Revolving Credit
Loans and to participate in the Letters of Credit and Swing Line Loans as
provided in Section 2.01 up to the lesser of (i) such Lender's Maximum Revolving
Credit Amount and (ii) the Lender's Percentage Share of the amount equal to the
then effective Borrowing Base.

"Consolidated Net Income" shall mean with respect to the Borrower and its
Consolidated Subsidiaries, for any period, the aggregate of the net income (or
loss) of the Borrower and its Consolidated Subsidiaries after allowances for
taxes for such period, determined on a consolidated basis in accordance with
GAAP; provided that there shall be excluded from such net income (to the extent
otherwise included therein) the following: (i) the net income of any Person in
which the Borrower or any Consolidated Subsidiary has an interest (which
interest does not cause the net income of such other Person to be consolidated
with the net income of the Borrower and its Consolidated Subsidiaries in
accordance with GAAP), except to the extent of the amount of dividends or
distributions actually paid in such period by such other Person to the Borrower
or to a Consolidated Subsidiary, as the case may be; (ii) the net income (but
not loss) of any Consolidated Subsidiary to the extent that the declaration or
payment of dividends or similar distributions or transfers or loans by that
Consolidated Subsidiary is not at the time permitted by operation of the terms
of its charter or any agreement, instrument or Governmental Requirement
applicable to such Consolidated Subsidiary, or is otherwise restricted or
prohibited in each case determined in accordance with GAAP; (iii) the net income
(or loss) of any Person acquired in a pooling-of-interests transaction for any
period prior to the date of such transaction; (iv) any extraordinary gains or
losses, including gains or losses attributable to Property sales not in the
ordinary course of business; and (v) the cumulative effect of a change in
accounting principles and any gains or losses attributable to writeups or write
downs of assets.

"Consolidated Subsidiaries" shall mean each Subsidiary of a Person (whether now
existing or hereafter created or acquired) the financial statements of which
shall be (or should have been) consolidated with the financial statements of
such Person in accordance with GAAP. Unless otherwise indicated, each reference
to the term "Consolidated Subsidiary" shall mean a Subsidiary consolidated with
the Borrower.

"Continuing Directors" shall mean, as of any date of determination, any member
of the board of directors of the Borrower: (a) who was a member of the Board of
Directors on the Closing Date, (b) whose nomination for election to the Board of
Directors was made with the approval of, or whose election to the Board of
Directors was ratified by, at least two-thirds of the directors who were members
of the Board of Directors on the Closing Date or who were so elected to the
Board of Directors thereafter, or (c) whose membership on the Board of Directors
was consented to by the Majority Lenders.

"Current Assets" shall have the meaning assigned such term in Section 9.13.

"Current Liabilities" shall have the meaning assigned such term in Section 9.13.

"Debt" shall mean, for any Person the sum of the following (without
duplication): (i) all obligations of such Person for borrowed money or evidenced
by bonds, debentures, notes or other similar instruments (including principal,
interest, fees and charges); (ii) all obligations of such Person in respect of
letters of credit, (iii) all obligations of such Person (whether contingent or
otherwise) in respect of bankers' acceptances, surety or other bonds and similar
instruments; (iv) all obligations of such Person to pay the deferred purchase
price of Property or services (other than for borrowed money); (v) all
obligations under leases which shall have been, or should have been, in
accordance with GAAP, recorded as capital leases in respect of which such Person
is liable (whether contingent or otherwise); (vi) all Debt (as described in the
other clauses of this definition) and other obligations of others secured by a
Lien on any asset of such Person, whether or not such Debt is assumed by such
Person; (vii) all Debt (as described in the other clauses of this definition)
and other obligations of others guaranteed by such Person or in which such
Person otherwise assures a creditor against loss of the debtor or obligations of
others; (viii) all

 

 

4

 

--------------------------------------------------------------------------------

obligations or undertakings of such Person to maintain or cause to be maintained
the financial position or covenants of others or to purchase the Debt or
Property of others; (ix) obligations to deliver goods or services including
Hydrocarbons in consideration of advance payments, except as permitted by
Section 9.22 and disclosed by Section 8.07(c); (x) obligations to pay for goods
or services whether or not such goods or services are actually received or
utilized by such Person; (xi) any capital stock of such Person in which such
Person has a mandatory obligation to redeem such stock; (xii) any Debt of a
Special Entity for which such Person is liable either by agreement or because of
a Governmental Requirement; (xiii) the undischarged balance of any production
payment created by such Person or for the creation of which such Person directly
or indirectly received payment; and (xiv) all obligations of such Person under
Hedging Agreements excluding Hedging Agreements with Agent or any other Lender.

"Default" shall mean an Event of Default or an event which with notice or lapse
of time or both would become an Event of Default.

"Deficiency" shall have the meaning assigned such term in Section 2.07(b).

"Dollars" and "$" shall mean lawful money of the United States of America.

"EBITDAX" shall mean, for any period, the sum of Consolidated Net Income for
such period plus the following expenses or charges to the extent deducted from
Consolidated Net Income in such period: interest, income taxes, depreciation,
depletion and amortization and exploration expense; and all other non-cash items
(including hedging gains and losses under FAS 133, non-cash asset writedowns or
FAS 143 charges and/or any non-cash share based payment charges under FAS 123R).

"Effective Date" shall have the meaning assigned such term in Section 12.16.

"Engineering Reports" shall have the meaning assigned such term in Section 2.08.

"Environmental Laws" shall mean any and all Governmental Requirements pertaining
to health, safety or the environment in effect in any and all jurisdictions,
including nations (and states), and international waters, in which the Borrower
or any Subsidiary is conducting or at any time has conducted business, or where
any Property of the Borrower or any Subsidiary is located, including without
limitation, the Oil Pollution Act of 1990, 33 U.S.C.A. § 2701 et seq. ("OPA"),
as amended, the Clean Air Act, 42 U.S.C.A. § 7401 et seq., as amended, the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980
{Superfund Amendments and Reauthorization Act of 1986 ("SARA")}, 42 U.S.C.A.
§ 9601 et seq. ("CERCLA"), as amended, the Coastal Zone Management Act of 1972,
16 U.S.C.A. § 1451 et seq. ("CZMA"), as amended, the Emergency Planning and
Community Right-to-Know Act of 1986, 42 U.S.C.A. § 11001 et seq. ("EPCRTKA"), as
amended, the Endangered Species Act of 1973, 16 U.S.C.A. § 1531 et seq. ("ESA"),
as amended, the Federal Water Pollution Control Act ("FWPCA"), as amended, the
Clean Water Act, 33 U.S.C.A. § 1251 et seq. ("CWA"), as amended, the Low-Level
Radioactive Waste Policy Act, 42 U.S.C.A. § 2014 et seq. ("LLRWPA"), as amended,
the Marine Mammal Protection Act of 1972, 16 U.S.C.A. §§ 1361-62, 1371-89,
1401-07, 1411-18, 1421-21h, et seq. ("MMPA"), as amended, the Marine Protection,
Research, and Sanctuaries Act of 1972 (Ocean Dumping), 33 U.S.C.A. § 1401 et
seq. ("MPRSA"), as amended, the Act to Prevent Pollution from Ships, 33 U.S.C.A.
§ 1901 et seq. ("APPS"), as amended, the National Environmental Policy Act of
1969, 42 U.S.C.A. § 4321 et seq. ("NEPA"), as amended, the Noise Control Act of
1972, 42 U.S.C.A. § 4901 et seq. ("NCA"), as amended, the Nonindigenous Aquatic
Nuisance Prevention and Control Act of 1990, 16 U.S.C.A. § 4701 et seq.
("NANPCA"), as amended, the Occupational Safety and Health Act of 1970 ("OSHA"),
as amended, the Pollution Prevention Act of 1990, 42 U.S.C.A. § 13101 et seq.
("PPA"), as amended, the Public Health Service Act ("PHSA") {Safe Drinking Water
Act ("SDWA")}, 42 U.S.C.A. § 300f et seq., as amended, the Shore Protection Act
of 1988, 33 U.S.C.A. § 2601 et seq. ("SPA"), as amended, the Soil and Water
Resources Conservation Act of 1977, 16 U.S.C.A. § 2001 et seq. ("SWRCA"), as
amended, the Solid Waste Disposal Act ("SWDA") Resource

 

 

5

 

--------------------------------------------------------------------------------

Conservation and Recovery Act of 1976 ("RCRA"), 42 U.S.C.A. § 6901 et seq., as
amended, the Toxic Substances Control Act, 15 U.S.C.A. § 2601 et seq. ("TSCA"),
as amended, the Hazardous Materials Transportation Act, Pub.L. 93-633, 88 Stat.
2156 ("HMTA"), as amended, the Federal Insecticide, Fungicide, and Rodenticide
Act, 7 U.S.C. § 136, et seq. ("FIFRA"), as amended, the United States Public
Vessel Medical Waste Anti-Dumping Act of 1988, 33 U.S.C.A. § 2501 et seq.
("USPVMWADA"), as amended, and any corresponding international, national, state
or local laws or ordinances and regulations, rules, guidelines, or standards
promulgated pursuant to such laws, statutes and regulations, including
specifically those relating to hazardous wastes, hazardous substances, toxic
substances, asbestos, lead paint, lead in water supply, mold and biological
hazards, radon or radioactive materials, insecticide, herbicide, rodenticide,
and fungicide, as such laws, treaties, statutes, regulations, rules, guidelines,
and standards are amended from time to time, and other environmental, health,
safety, conservation or protection laws. The term "oil" shall have the meaning
specified in OPA, the terms "hazardous substance" and "release" (or "threatened
release") have the meanings specified in CERCLA, and the terms "solid waste" and
"disposal" (or "disposed") have the meanings specified in RCRA; provided,
however, that (i) in the event either OPA, CERCLA or RCRA is amended so as to
broaden the meaning of any term defined thereby, such broader meaning shall
apply subsequent to the effective date of such amendment and (ii) to the extent
the laws of the state or jurisdiction in which any Property of the Borrower or
any Subsidiary is located establish a meaning for "oil," "hazardous substance,"
"release," "solid waste" or "disposal" which is broader than that specified in
either OPA, CERCLA or RCRA, such broader meaning shall apply. The term
"hazardous substance" shall also include any substance, product, waste, or other
material that any person, their employees and agents, and their equipment and
property may come into contact with or be exposed to, which is or becomes
listed, regulated, or addressed as being polluting, flammable, toxic, corrosive
or hazardous, including toxic or hazardous wastes or substances, carcinogens,
pollutants (including, but not limited to, any solid, liquid, gaseous or thermal
irritant or contaminant), smoke, vapor, soot, fumes or smells, mold, fungus,
noises, vibrations, electromagnetic and ionizing radiation, changes in
temperature, any other sensory phenomena, or other materials of any and all
kinds and character, whether at the Property, from a neighboring site, or along
and/or across a route to or from the Property, which material(s) or
substance(s), due to quantity, concentration, or physical, chemical, or
infectious characteristic, may cause or significantly contribute to an increase
in mortality or an increase in serious, irreversible, or incapacitatingly
irreversible illness or pose a substantial present or potential harm to human
health or the environment when improperly used, treated, stored, transported,
disposed of, or otherwise managed, has the ability to cause injury to biologic
tissue, or otherwise has the ability to cause a health threat or similarly
harmful substance under any Environmental Law, including without limitation:
(i) polychlorinated biphenyls; (ii) petroleum products; (iii) underground
storage tanks, whether empty, filled or partially filled with any substance;
(iv) any radioactive materials, urea formaldehyde foam insulation, radon; and
(v) any other chemical, material or substance the exposure to which is
prohibited, limited or regulated by any Governmental Authority on the basis that
such chemical, material or substance is toxic, hazardous or harmful to human
health or the environment. The presence of any one of the following criteria
establishes a substance as a hazardous substance: 1) ignitability (posing fire
hazard); 2) corrosivity (ability to corrode standard containers); 3) reactivity
(instability with a tendency to explode or react violently); or 4) EP toxicity
(presence of certain toxic chemicals at levels greater than specified in RCRA
regulations). Said definition of the terms defined herein also includes all
applicable definitions in the regulations of the U.S. Environmental Protection
Agency and those of any state or nation (including common law, whether state,
national, or international) in the broadest sense, including several hundred
processed wastes and chemicals listed in the US-EPA regulations, or which
exhibit the characteristics of toxicity, corrosivity, ignitability, and/or
reactivity, as referred to above. In case of conflict in any of the
Environmental Laws, the most stringent definition shall apply.

"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended from time to time and any successor statute.

 

 

6

 

--------------------------------------------------------------------------------

"ERISA Affiliate" shall mean each trade or business (whether or not
incorporated) which together with the Borrower or any Subsidiary would be deemed
to be a "single employer" within the meaning of Section 4001(b)(1) of ERISA or
subsections (b), (c), (m) or (o) of Section 414 of the Code.

"ERISA Event" shall mean (i) a "Reportable Event" described in Section 4043 of
ERISA and the regulations issued thereunder, (ii) the withdrawal of the
Borrower, any Subsidiary or any ERISA Affiliate from a Plan during a plan year
in which it was a "substantial employer" as defined in Section 4001(a)(2) of
ERISA, (iii) the filing of a notice of intent to terminate a Plan or the
treatment of a Plan amendment as a termination under Section 4041 of ERISA,
(iv) the institution of proceedings to terminate a Plan by the PBGC or (v) any
other event or condition which might constitute grounds under Section 4042 of
ERISA for the termination of, or the appointment of a trustee to administer, any
Plan.

"Event of Default" shall have the meaning assigned such term in Section 10.01.

"Excepted Liens" shall mean: (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 and for which adequate reserves have been
maintained; (ii) Liens in connection with workmen's compensation, unemployment
insurance or other social security, old age pension or public liability
obligations not yet due or which are being contested in good faith by
appropriate action and for which adequate reserves have been maintained in
accordance with GAAP; (iii) operators', vendors', carriers', warehousemen's,
repairmen's, mechanics', workmen's, materialmen's, construction or other like
Liens arising by operation of law in the ordinary course of business or incident
to the exploration, development, operation and maintenance of Oil and Gas
Properties or statutory landlord's liens, each of which is in respect of
obligations that have not been outstanding more than ninety (90) days or which
are being contested in good faith by appropriate proceedings and for which
adequate reserves have been maintained in accordance with GAAP; (iv) any Liens
reserved in leases or farmout agreements for rent or royalties and for
compliance with the terms of the farmout agreements or leases in the case of
leasehold estates, to the extent that any such Lien referred to in this clause
does not materially impair the use of the Property covered by such Lien for the
purposes for which such Property is held by the Borrower or any Subsidiary or
materially impair the value of such Property subject thereto; (v) encumbrances
(other than to secure the payment of borrowed money or the deferred purchase
price of Property or services), easements, restrictions, servitudes, permits,
conditions, covenants, exceptions or reservations in any rights of way or other
Property of the Borrower or any Subsidiary for the purpose of roads, pipelines,
transmission lines, transportation lines, distribution lines for the removal of
gas, oil, coal or other minerals or timber, and other like purposes, or for the
joint or common use of real estate, rights of way, facilities and equipment, and
defects, irregularities, zoning restrictions and deficiencies in title of any
rights of way or other Property which in the aggregate do not materially impair
the use of such rights of way or other Property for the purposes of which such
rights of way and other Property are held by the Borrower or any Subsidiary or
materially impair the value of such Property subject thereto; (vi) deposits of
cash or securities to secure the performance of bids, trade contracts, leases,
statutory obligations and other obligations of a like nature incurred in the
ordinary course of business (other than obligations under Hedging Agreements);
(vii) Liens permitted by the Security Instruments; (viii) preferential rights to
purchase and similar contractual provisions affecting an Oil and Gas Property;
(ix) all lessors' royalties, overriding royalties, net profits interests,
carried interests, production payments, reversionary interests and other burdens
on or deductions from the proceeds of production with respect to each Oil and
Gas Property (in each case) that do not operate to reduce the net revenue
interest for such Oil and Gas Property (if any) as reflected in any Reserve
Report or increase the working interest for such Oil and Gas Property (if any)
as reflected in any Mortgage or Reserve Report without a corresponding increase
in the corresponding net revenue interest; (x) production sales contracts;
division orders; contracts for sale, purchase, or exchange of oil or gas;
operating agreements; area of mutual interest agreements; and production
handling agreements; in each case to the extent the same: (a) are ordinary and
customary to the oil, gas and other mineral exploration, development, processing
or extraction business, (b) do not otherwise cause any other express
representation or warranty of the Borrower in any of the Loan Documents to be
untrue, and (c) do not operate to reduce the net revenue

 

 

7

 

--------------------------------------------------------------------------------

interest for such Oil and Gas Property (if any) as reflected in any Reserve
Report, or increase the working interest for such Oil and Gas Property (if any)
as reflected in any Reserve Report without a corresponding increase in the
corresponding net revenue interest; (xi) all defects and irregularities
affecting an Oil and Gas Property that do not operate to reduce the net revenue
interest for such Oil and Gas Property (if any) as reflected in any Reserve
Report, or increase the working interest for such Oil and Gas Property (if any)
as reflected in any Reserve Report without a corresponding increase in the
corresponding net revenue interest or otherwise interfere materially with the
operation, value or use of such Oil and Gas Property; and (xii) judgment Liens
arising by operation of law or as the result of the abstracting of a judgment or
similar action under the laws of any jurisdiction and not giving rise to an
Event of Default, in respect of judgments that are not final and non-appealable
judgments so long as any appropriate legal proceedings which may have been duly
initiated for the review of such judgment shall not have been finally terminated
or the period within which such proceedings may be initiated shall not have
expired.

"Existing Indebtedness" shall mean all obligations and indebtedness of the
Borrower to the Agent and the Lenders evidenced by and outstanding under the
Existing Credit Agreement and the other Existing Loan Documents.

"Existing Letters of Credit" shall mean all "Letters of Credit" as defined in
the Existing Credit Agreement which are issued and outstanding on the Closing
Date.

"Existing Loan Documents" shall mean all promissory notes, mortgages,
guaranties, security agreements, financing statements, and other documents,
instruments, and agreements executed or delivered in connection with the
Existing Credit Agreement.

"Federal Funds Rate" shall mean, for any day, the rate per annum (rounded
upwards, if necessary, to the nearest 1/100 of 1%) equal to the weighted average
of the rates on overnight federal funds transactions with a member 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 Business Day next
succeeding such day, provided that (i) if the date for which such rate is to be
determined is not a Business Day, the Federal Funds Rate for such day shall be
such rate on such transactions on the next preceding Business Day as so
published on the next succeeding Business Day, and (ii) if such rate is not so
published for any day, the Federal Funds Rate for such day shall be the average
rate charged to the Agent on such day on such transactions as determined by the
Agent.

"Financial Statements" shall mean the financial statement or statements of the
Borrower and its Consolidated Subsidiaries described or referred to in
Section 7.02.

"GAAP" shall mean generally accepted accounting principles in the United States
of America in effect from time to time; provided that if there occurs after the
date of this Agreement any change in GAAP that affects the calculation of any
covenant contained in Article IX, "GAAP" shall mean generally accepted
accounting principles in effect on the Closing Date until the Agent and the
Borrower shall negotiate in good faith amendments to the provisions of this
Agreement that relate to the calculation of such covenants with the intent of
having the respective positions of the Lenders and the Borrower after such
change in GAAP conform as nearly as possible to their respective positions as of
the date of this Agreement.

"Governmental Authority" shall include the country, the state, county, city and
political subdivisions in which any Person or such Person's Property is located
or which exercises valid jurisdiction over any such Person or such Person's
Property, and any court, agency, department, commission, board, bureau or
instrumentality of any of them including monetary authorities which exercises
valid jurisdiction over any such Person or such Person's Property. Unless
otherwise specified, all references to Governmental Authority herein shall mean
a Governmental Authority having jurisdiction

 

 

8

 

--------------------------------------------------------------------------------

over, where applicable, the Borrower, its Subsidiaries or any of their Property
or the Agent, any Lender or any Applicable Lending Office, including
jurisdiction over the Environmental Laws.

"Governmental Requirement" shall mean any law, treaty, statute, code, ordinance,
order, determination, rule, regulation, judgment, decree, injunction, franchise,
permit, certificate, license, authorization, standard, guideline, or other
directive or requirement, including those found in common law (whether
international, national, state, or local), whether now existing or hereafter in
effect (whether or not having the force of law), including, without limitation,
Environmental Laws, energy regulations and occupational, safety, health, and
industrial hygiene standards or controls, and personnel licensing and
certifications, or environmental conditions on, under, above, around, within,
for, or about any Person or such Person's Property, of any Governmental
Authority.

"Guarantor" shall mean, individually and collectively, each and every Active
Subsidiary of Borrower and all of their Active Subsidiaries (and so on and so
forth) existing as of the date hereof; and each and every Active Subsidiary and
all of their Active Subsidiaries (and so on and so forth) hereafter created,
acquired or otherwise owned by Borrower, and shall include, without limitation,
CEOI and Southern G.

"Guaranty Agreement" shall mean any agreement executed by any Guarantor in form
and substance satisfactory to the Agent guarantying, unconditionally, payment of
the Obligations, as the same may be amended, modified or supplemented from time
to time.

"Hedging Agreements" shall mean any commodity, interest rate or currency swap,
cap, floor, collar, forward agreement or other exchange or protection agreements
or any option with respect to any such transaction.

"Highest Lawful Rate" shall mean, with respect to each Lender, the maximum
nonusurious interest rate, if any, that at any time or from time to time may be
contracted for, taken, reserved, charged or received on the Notes or on any
other Obligations under laws applicable to such Lender which are presently in
effect or, to the extent allowed by law, under such applicable laws which may
hereafter be in effect and which allow a higher maximum nonusurious interest
rate than applicable laws now allow.

"Hydrocarbon Interests" shall mean all rights, titles, interests and estates now
or hereafter acquired in and to oil and gas leases, oil, gas and mineral leases,
or other liquid or gaseous hydrocarbon leases, mineral fee interests, overriding
royalty and royalty interests, net profit interests and production payment
interests, including any reserved or residual interests of whatever nature.

"Hydrocarbons" shall mean oil, gas, casinghead gas, drip gasoline, natural
gasoline, condensate, distillate, liquid hydrocarbons, gaseous hydrocarbons and
all products refined or separated therefrom.

"Inactive Subsidiary" shall mean LTW Pipeline Co., a Texas corporation, and any
other Subsidiary of the Borrower: (i) that has assets with a fair market value
of less than $1,000,000.00; (ii) that no longer actively does business; and
(iii) that has been designated in writing to the Agent by the Borrower as an
Inactive Subsidiary and approved in writing by the Agent as an Inactive
Subsidiary; provided that no Subsidiary may be so designated as an Inactive
Subsidiary if after giving effect thereto, the aggregate fair market value of
the assets of all Inactive Subsidiaries would exceed $3,000,000.00.

"Indemnified Parties" shall have the meaning assigned such term in
Section 12.03(a)(ii).

"Indemnity Matters" shall mean any and all actions, suits, proceedings
(including any investigations, litigation or inquiries), claims, demands and
causes of action made or threatened against a Person and, in connection
therewith, all losses, liabilities, damages (including, without limitation,
consequential damages) or reasonable costs and expenses of any kind or nature
whatsoever incurred by such Person whether caused by the sole or concurrent
negligence of such Person seeking indemnification.

 

 

9

 

--------------------------------------------------------------------------------

"Initial Funding" shall mean the funding of the initial Loans or issuance of the
initial Letters of Credit upon satisfaction of the conditions set forth in
Sections 6.01 and 6.02.

"Initial Reserve Reports" shall mean the report of Pressler Engineering
Consultants dated February 14, 2007 with respect to the Oil and Gas Properties
of the Borrower and its Subsidiaries other than Southern G as of January 1,
2007, and the final audit report of Netherland, Sewell & Associates, Inc. dated
April 27, 2007 with respect to the Oil and Gas Properties owned by Southern G as
of January 1, 2007, copies of which have been delivered to the Agent.

"Intercreditor Agreement" shall mean that certain Intercreditor Agreement dated
as of May 8, 2007, by and among, Agent, as agent for itself and the Lenders,
Credit Suisse, as agent for itself and the other lenders party from time to time
to the Second Lien Loan Agreement, and the Borrower, as the same may from time
to time be amended, supplemented, restated and/or otherwise modified from time
to time in accordance with such Intercreditor Agreement.

"Interest Coverage Ratio" shall have the meaning assigned to such term in
Section 9.15.

"Interest Period" shall mean, with respect to any LIBOR Loan, the period
commencing on the date such LIBOR Loan is made and ending on the numerically
corresponding day in the first, second, third or sixth calendar month
thereafter, as the Borrower may select as provided in Section 2.02 (or such
longer period as may be requested by the Borrower and agreed to by the Majority
Lenders), except that each Interest Period which commences on the last Business
Day of a calendar month (or on any day for which there is no numerically
corresponding day in the appropriate subsequent calendar month) shall end on the
last Business Day of the appropriate subsequent calendar month.

Notwithstanding the foregoing: (i) no Interest Period may end after the
Revolving Credit Termination Date; (ii) no Interest Period for any LIBOR Loan
may end after the due date of any installment, if any, provided for in
Section 2.07(b) to the extent that such LIBOR Loan would need to be prepaid
prior to the end of such Interest Period in order for such installment to be
paid when due; (iii) each Interest Period which would otherwise end on a day
which is not a Business Day shall end on the next succeeding Business Day (or,
if such next succeeding Business Day falls in the next succeeding calendar
month, on the next preceding Business Day); (iv) no Interest Period shall have a
duration of less than one month and, if the Interest Period for any LIBOR Loans
would otherwise be for a shorter period, such Loans shall not be available
hereunder; and (v) no Interest Period shall have a duration of more than one
month for any LIBOR Loan requested during the period of time commencing on the
Closing Date and ending on the earlier to occur of (x) the date which is sixty
days after the Closing Date and (y) the date Agent shall have delivered written
notice to Borrower that the primary syndication of the credit facility provided
hereunder has been successfully completed.

"Issuing Bank" shall mean Wells Fargo.

"LC Commitment" at any time shall mean $5,000,000.00.

"LC Exposure" at any time shall mean the difference between (i) the aggregate
face amount of all undrawn and uncancelled Letters of Credit plus the aggregate
of all amounts drawn under all Letters of Credit and not yet reimbursed, minus
(ii) the aggregate amount of all cash securing outstanding Letters of Credit
pursuant to Section 2.10(b).

"LC Obligations" at any time shall mean the aggregate face amount of all undrawn
and uncancelled Letters of Credit plus the aggregate of all amounts drawn under
all Letters of Credit and not yet reimbursed.

"Lender" has the meaning specified in the opening paragraph of this Agreement
and, as the context requires, includes the Swing Line Lender.

 

 

10

 

--------------------------------------------------------------------------------

"Lender Affiliate" shall mean, (a) with respect to any Lender, (i) an Affiliate
of such Lender or (ii) any Person that is engaged in making, purchasing, holding
or otherwise investing in bank loans and similar extensions of credit in the
ordinary course of its business and is administered or managed by a Lender or an
Affiliate of such Lender and (b) with respect to any Lender that is a fund which
invests in bank loans and similar extensions of credit, any other fund that
invests in bank loans and similar extensions of credit and is managed by the
same investment advisor as such Lender or by an Affiliate of such investment
advisor.

"Lender Termination Date" shall have the meaning assigned to such term in
Section 5.06(c).

"Letter of Credit Agreements" shall mean the written agreements of the Borrower
or any of its Subsidiaries with the Issuing Bank, as issuing lender for any
Letter of Credit, executed in connection with the issuance by the Issuing Bank
of the Letters of Credit, such agreements to be on the Issuing Bank's customary
form for letters of credit of comparable amount and purpose as from time to time
in effect or as otherwise agreed to by the Borrower and the Issuing Bank.

"Letters of Credit" shall mean the Existing Letters of Credit and the letters of
credit issued pursuant to Section 2.01(b) and all reimbursement obligations
pertaining to any such letters of credit, and "Letter of Credit" shall mean any
one of the Letters of Credit and the reimbursement obligations pertaining
thereto.

"Letter of Credit Application" shall mean a letter of credit application, in
form and substance satisfactory to the Issuing Bank, delivered to the Agent
requesting the issuance, reissuance, extension or renewal of any Letter of
Credit and containing the information set forth in Section 2.02.

"Leverage Ratio" shall have the meaning assigned to such term in Section 9.14.

"LIBOR" shall mean, for each Interest Period for any LIBOR borrowing, the rate
per annum (rounded upwards, if necessary, to the nearest 1/16th of 1%) equal to
the average of the offered quotations appearing on Telerate Page 3750 (or if
such Telerate Page shall not be available, any successor or similar service as
may be selected by Agent and Borrower) as of 11:00 a.m., Houston, Texas time
(or, as soon thereafter as practicable) two (2) LIBOR Business Days prior to the
first day of such Interest Period for deposits in Dollars having a term
comparable to such Interest Period and in an amount comparable to the principal
amount of the LIBOR borrowing to which such Interest Period relates. If none of
such Telerate Page 3750 nor any successor or similar service is available, then
"LIBOR" shall mean, with respect to any Interest Period for any applicable LIBOR
borrowing, the rate of interest per annum, rounded upwards, if necessary, to the
nearest 1/16th of 1%, quoted by Agent at or before 11:00 a.m., Houston, Texas
time (or, as soon thereafter as practicable), two (2) LIBOR Business Days before
the first day of such Interest Period, to be the arithmetic average of the
prevailing rates per annum at the time of determination and in accordance with
the then existing practice in the applicable market, for the offering to Agent
by one or more prime banks selected by Agent in its sole discretion, in the
London interbank market, of deposits in Dollars for delivery on the first day of
such Interest Period and having a maturity equal (or as nearly equal as may be)
to the length of such Interest Period and in an amount equal (or as nearly equal
as may be) to the LIBOR borrowing to which such Interest Period relates. Each
determination by Agent of LIBOR shall be conclusive and binding, absent manifest
error, and may be computed using any reasonable averaging and attribution
method.

"LIBOR Loans" shall mean Loans the interest rates on which are determined on the
basis of rates referred to in the definition of "LIBOR Rate".

"LIBOR Rate" shall mean, with respect to any LIBOR Loan, a rate per annum
(rounded upwards, if necessary, to the nearest 1/16 of 1%) determined by the
Agent to be equal to the quotient of (i) LIBOR for such Loan for the Interest
Period for such Loan divided by (ii) 1 minus the Reserve Requirement for such
Loan for such Interest Period.

 

 

11

 

--------------------------------------------------------------------------------

"Lien" shall mean any interest in Property securing an obligation owed to, or a
claim by, a Person other than the owner of the Property, whether such interest
is based on the common law, statute or contract, and whether such obligation or
claim is fixed or contingent, and including but not limited to (i) the lien or
security interest arising from a mortgage, encumbrance, pledge, security
agreement, conditional sale or trust receipt or a lease, consignment or bailment
for security purposes or (ii) production payments and the like payable out of
Oil and Gas Properties. The term "Lien" shall include reservations, exceptions,
encroachments, easements, rights of way, covenants, conditions, restrictions,
leases and other title exceptions and encumbrances affecting Property. For the
purposes of this Agreement, the Borrower or any Subsidiary shall be deemed to be
the owner of any Property which it has acquired or holds subject to a
conditional sale agreement, or leases under a financing lease or other
arrangement pursuant to which title to the Property has been retained by or
vested in some other Person in a transaction intended to create a financing.

"Loan Documents" shall mean this Agreement, the Notes, the Guaranty Agreements,
all Letters of Credit, all Letter of Credit Agreements, all Letter of Credit
Applications, the Security Instruments, the Intercreditor Agreement and the
Existing Loan Documents.

"Loans" shall mean the loans as provided for by Section 2.01, including
Revolving Credit Loans and Swing Line Loans.

"Lockbox "shall mean the lockbox, if any, established pursuant to the Cash
Collateral Account Agreement and subject to the Lockbox Agreement.

"Lockbox Agreement" shall mean that certain Lockbox Agreement, if any, between
the Borrower, its Subsidiaries, and the Agent in form and substance satisfactory
to Agent which shall grant a security interest in the contents therein and shall
include a financing statement in form and substance satisfactory to Agent
covering the contents therein.

"Madisonville" shall mean The Madisonville Project, Ltd., a Texas limited
partnership and its successors and assigns.

"Majority Lenders" shall mean, at any time while no Loans are outstanding,
Lenders having more than fifty percent (50%) of the Aggregate Revolving Credit
Commitments and, at any time while Loans are outstanding, Lenders holding more
than fifty percent (50%) of the outstanding aggregate principal amount of the
Loans (without regard to any sale by a Lender of a participation in any Loan
under Section 12.06(c), but with the aggregate amount of each Lender's risk
participation and funded participation in LC Obligations and Swing Line Loans
being deemed "held" by such Lender for purposes of this definition); provided,
however, that the foregoing percentages shall be increased to sixty-six and
two-thirds percent (66 2/3%) when determining the Majority Lenders for purposes
of (i) redeterminations of the Borrower Base pursuant to Section 2.08, and (ii)
effecting any waiver, modification or amendment of Section 9.16 or Section 9.17;
provided further, however for all purposes hereunder, including, without
limitation, the approval of any redetermined Borrowing Base pursuant to Section
2.08, Agent alone, shall constitute the Majority Lenders at any time that Agent
is the sole Lender hereunder and if there are two or more Lenders, it shall take
at least two Lenders holding the foregoing required percentages, including the
Agent at any time that the Agent is a Lender hereunder with at least twenty-five
percent (25%) of the Aggregate Revolving Credit Commitments and, at any time
while Loans are outstanding, holding at least twenty-five (25%) of the
outstanding principal amount of the Loans (without regard to any sale by the
Agent of a participation in any Loan under Section 12.06, but with the aggregate
amount of each Lender's risk participation and funded participation in LC
Obligations and Swing Line Loans being deemed "held" by such Lender for purposes
of this definition), to constitute the "Majority Lenders."

"Material Adverse Effect" shall mean any set of circumstances or events that
(i) has or could reasonably be expected to have any material and adverse effect
whatsoever upon, or result in or

 

 

12

 

--------------------------------------------------------------------------------

reasonably be expected to result in a material adverse change in, (a) the
assets, liabilities, financial condition, business, operations or affairs of the
Borrower and its Subsidiaries taken as a whole different from those reflected in
the Financial Statements or from the facts represented or warranted in any Loan
Document, or (b) the ability of the Borrower and its Subsidiaries taken as a
whole to carry out their business as at the Closing Date or as proposed as of
the Closing Date to be conducted or meet their obligations under the Loan
Documents on a timely basis, (ii) impairs materially or could be reasonably
expected to impair materially the ability of the Borrower and its Subsidiaries
to duly and punctually pay and perform their obligations under the Loan
Documents or (iii) impairs materially or could reasonably be expected to impair
materially the ability of the Agent or any of the Lenders, to the extent
permitted, to enforce its legal remedies pursuant to the Loan Documents.

"Material Agreements" shall mean all agreements listed on Schedule 7.22.

"Maximum Revolving Credit Amount" shall mean, as to each Lender, the amount set
forth opposite such Lender's name on Annex I under the caption "Maximum
Revolving Credit Amounts" (as the same may be reduced pursuant to
Section 2.03(b) pro rata to each Lender based on its Percentage Share), as
modified from time to time to reflect any assignments permitted by
Section 12.06(b).

"Mortgage" shall mean, whether one or more, each Mortgage, Deed of Trust,
Assignment of Production, Security Agreement, Fixture Filing and Financing
Statement executed by the Borrower or any Guarantor pursuant hereto, and
granting a Lien in favor of the Agent to secure the Obligations in the Oil and
Gas Properties, now owned or hereafter existing, of the Borrower and the
Guarantors, as the same from time to time may be amended, supplemented, restated
or otherwise modified.

"Mortgaged Property" shall mean the Property owned by the Borrower and/or the
Guarantors and which is subject to the Liens existing and to exist under the
terms of the Security Instruments and/or Mortgages.

"Multiemployer Plan" shall mean a Plan defined as such in Section 3(37) or
4001(a)(3) of ERISA.

"Notes" shall mean the Notes (including, without limitation, the Swing Line
Note) provided for by Section 2.06, together with any and all renewals,
extensions for any period, increases, rearrangements, modifications,
consolidations, substitutions, amendments, and/or modifications thereof.

"Notice of Termination" shall have the meaning assigned such term in
Section 5.06(a).

"Obligations" shall mean all indebtedness, obligations and liabilities of the
Borrower or any Subsidiary to any of the Lenders, any of the Lenders'
Affiliates, the Agent, the Swing Line Lender or the Issuing Bank, individually
or collectively, existing on the date of this Agreement or arising thereafter,
direct or indirect, joint or several, absolute or contingent, matured or
unmatured, liquidated or unliquidated, secured or unsecured, arising or incurred
under any Hedging Agreement or Cash Management Agreement entered into by the
Borrower or any Guarantor with any Lender (or a Lender under the Existing Credit
Agreement) or any Affiliate of such Lender, or this Agreement or any of the
other Loan Documents or in respect of any of the Loans made or reimbursement
obligations incurred or any of the Notes, Letters of Credit or other instruments
at any time evidencing any thereof, including interest accruing subsequent to
the filing of a petition or other action concerning bankruptcy or other similar
proceedings, overdrafts to the Agent or ACH obligations to the Agent, or any
other obligations incurred under this Agreement or any of the Security
Instruments and all renewals, extensions, refinancings and replacements for the
foregoing.

"Oil and Gas Properties" shall mean Hydrocarbon Interests; the Properties now or
hereafter pooled or unitized with Hydrocarbon Interests; all presently existing
or future unitization, pooling agreements and declarations of pooled units and
the units created thereby (including without limitation all

 

 

13

 

--------------------------------------------------------------------------------

units created under orders, regulations and rules of any Governmental Authority)
which may affect all or any portion of the Hydrocarbon Interests; all operating
agreements, contracts and other agreements which relate to any of the
Hydrocarbon Interests or the production, sale, purchase, exchange or processing
of Hydrocarbons from or attributable to such Hydrocarbon Interests; all
Hydrocarbons in and under and which may be produced and saved or attributable to
the Hydrocarbon Interests, including all oil in tanks, the lands covered thereby
and all rents, issues, profits, proceeds, products, revenues and other incomes
from or attributable to the Hydrocarbon Interests; all tenements, hereditaments,
appurtenances and Properties in any manner appertaining, belonging, affixed or
incidental to the Hydrocarbon Interests; and all Properties, rights, titles,
interests and estates described or referred to above, including any and all
Property, real or personal, now owned or hereinafter acquired and situated upon,
used, held for use or useful in connection with the operating, working or
development of any of such Hydrocarbon Interests or Property (excluding drilling
rigs, automotive equipment or other personal property which may be on such
premises for the purpose of drilling a well or for other similar temporary uses)
and including any and all oil wells, gas wells, injection wells or other wells
(including those used for either environmental sampling or remedial purposes),
buildings, structures, fuel separators, liquid extraction plants, plant
compressors, pumps, pumping units, field gathering systems, tanks and tank
batteries, fixtures, valves, fittings, machinery and parts, engines, boilers,
meters, apparatus, equipment, appliances, tools, implements, cables, wires,
towers, casing, tubing and rods, surface leases, rights-of-way, easements and
servitudes together with all additions, substitutions, replacements, accessions
and attachments to any and all of the foregoing.

"OPA" shall mean the Oil Pollution Act which can be found at 33 U.S.C. § 27.01
et seq.

"Other Taxes" shall have the meaning assigned such term in Section 4.06(b).

"PBGC" shall mean the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions.

"Percentage Share" shall mean (with respect to any Lender) the percentage of the
Aggregate Revolving Credit Commitments to be provided by such Lender under this
Agreement as indicated on Annex I hereto, as modified from time to time to
reflect any assignments permitted by Section 12.06(b).

"Person" shall mean any individual, corporation, company, voluntary association,
partnership, joint venture, trust, unincorporated organization or government or
any agency, instrumentality or political subdivision thereof, or any other form
of entity.

"Plan" shall mean any employee pension benefit plan, as defined in Section 3(2)
of ERISA, which (i) is currently or hereafter sponsored, maintained or
contributed to by the Borrower, any Subsidiary or an ERISA Affiliate or (ii) was
at any time during the preceding six calendar years sponsored, maintained or
contributed to, by the Borrower, any Subsidiary or an ERISA Affiliate.

"Post-Default Rate" shall mean, in respect of any principal of any Loan or any
other amount payable by the Borrower under this Agreement or any other Loan
Document, a rate per annum during the period commencing on the date of
occurrence of an Event of Default until such amount is paid in full or all
Events of Default are cured or waived equal to two percent (2%) per annum above
the Base Rate as in effect from time to time plus the Applicable Margin (if
any), but in no event to exceed the Highest Lawful Rate; provided, however, for
a LIBOR Loan, the "Post-Default Rate" for such principal shall be, for the
period commencing on the date of occurrence of an Event of Default and ending on
the earlier to occur of the last day of the Interest Period therefor or the date
all Events of Default are cured or waived, two percent (2%) per annum above the
interest rate for such Loan as provided in Section 3.02(a)(ii), but in no event
to exceed the Highest Lawful Rate.

"Prime Rate" shall mean the variable per annum rate of interest then most
recently announced within Wells Fargo at its principal office in San Francisco,
California, as its "prime rate", with the

 

 

14

 

--------------------------------------------------------------------------------

understanding that Wells Fargo's "prime rate" is one of its base rates and
serves as the basis upon which effective rates of interest are calculated for
those loans making reference thereto, and is evidenced by the recording thereof
after its announcement in such internal publication or publications as Wells
Fargo may designate. Each change in any interest rate provided for herein based
upon the Prime Rate resulting from a change in the Prime Rate shall take effect
on the day the change is announced within Wells Fargo for all Prime Rate-based
loans without notice to the Borrower at the time of such change in the Prime
Rate.

"Principal Office" shall mean the principal office of the Agent, presently
located at 1000 Louisiana, Ninth Floor, Houston, Texas, 77002.

"Property" or "Properties" shall mean any interest in any kind of property or
asset, whether real, personal or mixed, or tangible or intangible.

"Quarterly Dates" shall mean the last day of each June, September, December, and
March, in each year, the first of which shall be June 30, 2007; provided,
however, that if any such day is not a Business Day, such Quarterly Date shall
be the next succeeding Business Day.

"Redetermination Date" shall mean the date that the redetermined Borrowing Base
becomes effective subject to the notice requirements specified in
Section 2.08(e) both for scheduled redeterminations and unscheduled
redeterminations.

"Regulation D" shall mean Regulation D of the Board of Governors of the Federal
Reserve System (or any successor), as the same may be amended or supplemented
from time to time.

"Regulatory Change" shall mean, with respect to any Lender, any change after the
Closing Date in any Governmental Requirement (including Regulation D) or the
adoption or making after such date of any interpretations, directives or
requests applying to a class of lenders (including such Lender or its Applicable
Lending Office) of or under any Governmental Requirement (whether or not having
the force of law) by any Governmental Authority charged with the interpretation
or administration thereof.

"Reliance Letters" shall mean letters satisfactory to the Agent and addressed to
the Agent from the title attorneys, land brokers, environmental consultants or
similar professionals who are not providing supplemental title opinions or
environmental assessments, as applicable for certain Oil and Gas Properties of
Borrower and its Subsidiaries which allow the Agent to rely on their prior
opinions or assessments, as applicable for such Oil and Gas Properties in
extending credit to the Borrower and/or its Subsidiaries.

"Replacement Lenders" shall have the meaning assigned to such term in
Section 5.06(b).

"Required Payment" shall have the meaning assigned such term in Section 4.04.

"Reserve Report" shall mean a report, in form and substance satisfactory to the
Agent, setting forth, as of each January 1 and September 1 (or such other date
in the event of an unscheduled redetermination); (i) the oil and gas reserves
attributable to the Borrower's and its Active Subsidiaries' Oil and Gas
Properties together with a projection of the rate of production and future net
income, taxes, operating expenses and capital expenditures with respect thereto
as of such date, based upon the pricing assumptions determined by Agent at the
time and (ii) such other information as the Agent may reasonably request. The
term "Reserve Report" shall also include the Initial Reserve Reports and the
information to be provided by the Borrower pursuant to Section 8.07(a).

"Reserve Requirement" shall mean, for any Interest Period for any LIBOR Loan,
the average maximum rate at which reserves (including any marginal, supplemental
or emergency reserves) are required to be maintained during such Interest Period
under Regulation D by member banks of the Federal Reserve System in New York
City with deposits exceeding one billion Dollars against "Eurocurrency
liabilities" (as such term is used in Regulation D). Without limiting the effect
of the

 

 

15

 

--------------------------------------------------------------------------------

foregoing, the Reserve Requirement shall reflect any other reserves required to
be maintained by such member banks by reason of any Regulatory Change against
(i) any category of liabilities which includes deposits by reference to which
LIBOR is to be determined as provided in the definition of "LIBOR" or (ii) any
category of extensions of credit or other assets which include a LIBOR Loan.

"Responsible Officer" shall mean, as to any Person, the Chief Executive Officer,
the President or any Vice President of such Person and, with respect to
financial matters, the term "Responsible Officer" shall include the Chief
Financial Officer of such Person. Unless otherwise specified, all references to
a Responsible Officer herein shall mean a Responsible Officer of the Borrower.

"Revolving Credit Commitment" shall mean, for any Lender, its obligation to make
Revolving Credit Loans and purchase participations in Letters of Credit and
Swing Line Loans as provided in Section 2.01 up to the lesser of (i) such
Lender's Maximum Revolving Credit Amount and (ii) such Lender's Percentage Share
of the then effective Borrowing Base.

"Revolving Credit Loans" shall mean Loans made pursuant to Section 2.01(a).

"Revolving Credit Notes" shall mean the promissory note or notes (whether one or
more) of the Borrower described in Section 2.06 and being in the form of
Exhibit A.

"Revolving Credit Period" shall mean the period from the Closing Date to and
ending on the Revolving Credit Termination Date.

"Revolving Credit Termination Date" shall mean the earlier to occur of (i) May
8, 2011 or (ii) the date that the Commitments are sooner terminated pursuant to
Sections 2.03(b) or 10.02.

"Scheduled Redetermination Date" shall have the meaning assigned such term in
Section 2.08(d).

"SEC" shall mean the Securities and Exchange Commission or any successor
Governmental Authority.

"Second Lien Loan" shall mean any Debt incurred pursuant to Section 9.01(k) and
all Debt and other obligations under the Second Lien Loan Documents.

"Second Lien Loan Agreement" shall mean that certain Second Lien Credit
Agreement dated as of May 8, 2007, by and between Credit Suisse as agent, the
lenders from time to time party to such Second Lien Credit Agreement, and the
Borrower, as the same may be amended, supplemented, restated, and/or otherwise
modified or replaced or refinanced from time to time.

"Second Lien Loan Documents" means the Second Lien Loan Agreement and the other
Loan Documents (as defined in the Second Lien Loan Agreement) as the same shall
be amended, supplemented, restated, and/or otherwise modified or replaced or
refinanced from time to time.

"Security Instruments" shall mean the Letters of Credit, the Letter of Credit
Agreements, the agreements or instruments described or referred to in Exhibit D,
the "Security Instruments" as defined in the Existing Credit Agreement, and any
and all other agreements or instruments now or hereafter executed and delivered
by the Borrower or any other Person (other than participation or similar
agreements between any Lender and any other lender or creditor with respect to
any Obligations pursuant to this Agreement) in connection with, or as security
for the payment or performance of, any of the Obligations, as such agreements
may be amended, supplemented or restated from time to time.

"Southern G" shall mean Southern G Holdings, LLC, a Delaware limited liability
company.

 

 

16

 

--------------------------------------------------------------------------------

"Special Entity" shall mean any joint venture, limited liability company or
partnership, general or limited partnership or any other type of partnership or
company other than a corporation in which a Person or one or more of its other
Subsidiaries is a member, owner, partner or joint venturer and owns, directly or
indirectly, at least a majority of the equity of such entity or controls such
entity, but excluding any tax partnerships that are not classified as
partnerships under state law. For purposes of this definition, any Person which
owns directly or indirectly an equity investment in another Person which allows
the first Person to manage or elect managers who manage the normal activities of
such second Person will be deemed to "control" such second Person (e.g., a sole
general partner controls a limited partnership).

"Subsidiary" shall mean (i) any corporation or other legally formed entity of
which at least a majority of the outstanding shares of stock or other ownership
interest having by the terms thereof ordinary voting power to elect a majority
of the board of directors or other governing body of such entity (irrespective
of whether or not at the time stock or any other ownership interest of any other
class or classes of such entity shall have or might have voting power by reason
of the happening of any contingency) is at the time directly or indirectly owned
or controlled by another Person or one or more of such Person's Subsidiaries or
by such Person and one or more of its Subsidiaries and (ii) any Special Entity.
Unless otherwise indicated herein, each reference to the term "Subsidiary" shall
mean a Subsidiary of the Borrower.

"Swing Line" means the revolving credit facility made available by the Swing
Line Lender pursuant to Section 2.01(d).

"Swing Line Borrowing" means a borrowing of a Swing Line Loan pursuant to
Section 2.01(d).

"Swing Line Lender" means Wells Fargo Bank, National Association in its capacity
as provider of Swing Line Loans, or any successor swing line lender hereunder.

"Swing Line Loan" has the meaning specified in Section 2.01(d)(i).

"Swing Line Note" has the meaning specified in Section 2.06.

"Swing Line Loan Notice" means a notice of a Swing Line borrowing pursuant to
Section 2.01(d)(ii), which, if in writing, shall be in form of and substance
satisfactory to the Swing Line Lender.

"Swing Line Settlement Date" shall mean the 15th day and the last day of each
calendar month; provided, however, that if any such day is not a Business Day,
the applicable Swing Line Settlement Date shall be the Business Day immediately
preceding such day.

"Swing Line Sublimit" means an amount equal to the lesser of (a) $5,000,000.00
and (b) the Aggregate Revolving Credit Commitments. The Swing Line Sublimit is
part of, and not in addition to, the Aggregate Revolving Credit Commitments.

"Taxes" shall have the meaning assigned such term in Section 4.06(a).

"Terminated Lender" shall have the meaning assigned such term in
Section 5.06(a).

"Type" shall mean, with respect to any Loan, the characterization of such Loan
as a Revolving Credit Loan, a Swing Line Loan, a Base Rate Loan or a LIBOR Loan.

"Wells Fargo" shall mean Wells Fargo Bank, National Association, a national
banking association.

Section 1.03        Accounting Terms and Determinations. Unless otherwise
specified herein, all accounting terms used herein shall be interpreted, all
determinations with respect to accounting matters

 

 

17

 

--------------------------------------------------------------------------------

hereunder shall be made, and all financial statements and certificates and
reports as to financial matters required to be furnished to the Agent or the
Lenders hereunder shall be prepared, in accordance with GAAP, applied on a basis
consistent with the audited financial statements of the Borrower referred to in
Section 7.02 (except for changes concurred with by the Borrower's independent
public accountants).

ARTICLE II.

Commitments

 

Section 2.01.

Loans and Letters of Credit.

(a)           Revolving Credit Loans. Each Lender severally agrees, on the terms
and conditions of this Agreement, to make loans to the Borrower during the
period from and including (i) the Closing Date or (ii) such later date that such
Lender becomes a party to this Agreement as provided in Section 12.06(b), to and
up to, but excluding, the Revolving Credit Termination Date in an aggregate
principal amount at any one time outstanding up to, but not exceeding, the
amount of such Lender's Revolving Credit Commitment as then in effect; provided,
however, that the sum of the aggregate principal amount of all such Revolving
Credit Loans by all Lenders hereunder plus the aggregate principal amount of all
Swing Line Loans plus the LC Obligations at any one time outstanding shall not
exceed the Aggregate Revolving Credit Commitments. Subject to the terms of this
Agreement, during the period from the Closing Date to and up to, but excluding,
the Revolving Credit Termination Date, the Borrower may borrow, repay and
reborrow the amount described in this Section 2.01(a). All "Loans" as defined in
the Existing Credit Agreement outstanding on the Closing Date shall be and be
deemed to be Revolving Credit Loans hereunder of the same Type and with the same
Interest Period.

(b)           Letters of Credit. During the period from and including the
Closing Date to, but excluding, the date which is 10 days prior to the Revolving
Credit Termination Date, the Issuing Bank, as issuing bank for the Lenders,
agrees to extend credit for the account of the Borrower or any Active Subsidiary
at any time and from time to time by issuing, renewing, extending or reissuing
Letters of Credit; provided, however, the LC Obligations at any one time
outstanding shall not exceed the lesser of (i) the LC Commitment or (ii) the
Aggregate Revolving Credit Commitments, as then in effect, minus the aggregate
principal amount of all Revolving Credit Loans and Swing Line Loans then
outstanding. The Lenders shall participate in such Letters of Credit according
to their respective Percentage Shares. Each of the Letters of Credit shall
(i) be issued by the Issuing Bank, (ii) contain such terms and provisions as are
reasonably required by the Issuing Bank, (iii) be for the account of the
Borrower or an Active Subsidiary and (iv) expire not later than ten (10) days
before the Revolving Credit Termination Date.

(c)           Limitation on Types of Loans. Subject to the other terms and
provisions of this Agreement, at the option of the Borrower, the Revolving
Credit Loans may be Base Rate Loans or LIBOR Loans; provided that, without the
prior written consent of the Majority Lenders, no more than six (6) LIBOR Loans
may be outstanding at any time.

 

(d)

Swing Line Loans.

(i)            The Swing Line. Subject to the terms and conditions set forth
herein, the Swing Line Lender agrees, in reliance upon the agreements of the
other Lenders set forth in this Section 2.01(d), to make loans (each such loan,
a "Swing Line Loan"), to the Borrower from time to time on any Business Day
during the Revolving Credit Period in an aggregate amount not to exceed at any
time outstanding the amount of the Swing Line Sublimit, notwithstanding the fact
that such Swing Line Loans, when aggregated with the Percentage Share of the
outstanding amount of Revolving Credit Loans and LC Obligations of the Lender
acting as Swing Line Lender, may exceed the amount of such

 

 

18

 

--------------------------------------------------------------------------------

Lender's Revolving Credit Commitment; provided, however, that after giving
effect to any Swing Line Loan, (A) the sum of the aggregate outstanding amount
of the Revolving Credit Loans plus the Swing Line Loans plus LC Obligations
shall not exceed the Aggregate Revolving Credit Commitments at such time, and
(B) the sum of the aggregate outstanding amount of the Revolving Credit Loans of
any Lender (other than the Swing Line Lender) at such time, plus such Lender's
Percentage Share of the outstanding amount of all LC Obligations at such time,
plus such Lender's Percentage Share of the outstanding amount of all Swing Line
Loans at such time shall not exceed such Lender's Revolving Credit Commitment.
Within the foregoing limits, and subject to the other terms and conditions
hereof, the Borrower may borrow under this Section 2.01(d), prepay under Section
2.07, and reborrow under this Section 2.01(d). Each Swing Line Loan shall bear
interest only at a rate based on the Base Rate. Immediately upon the making of a
Swing Line Loan, each Lender (other than the Swing Line Lender) shall be deemed
to, and hereby irrevocably and unconditionally agrees to, purchase from the
Swing Line Lender a risk participation in such Swing Line Loan in an amount
equal to the product of such Lender's Percentage Share times the amount of such
Swing Line Loan.

(ii)          Borrowing Procedures. Each Swing Line Borrowing shall be made upon
the Borrower's irrevocable notice to the Swing Line Lender and the Agent, which
may be given by telephone. Each such notice must be received by the Swing Line
Lender and the Agent not later than 3:00 p.m., Houston, Texas time on the
requested borrowing date, and shall specify (A) the amount to be borrowed, which
shall be a minimum of $200,000 or any whole multiple of $50,000 in excess
thereof, and (B) the requested borrowing date, which shall be a Business Day.
Each such telephonic notice must be confirmed promptly by delivery to the Swing
Line Lender and the Agent of a written Swing Line Loan Notice, appropriately
completed and signed by a Responsible Officer of the Borrower. Promptly after
receipt by the Swing Line Lender of any telephonic Swing Line Loan Notice, the
Swing Line Lender will confirm with the Agent (by telephone or in writing) that
the Agent has also received such Swing Line Loan Notice and, if not, the Swing
Line Lender will notify the Agent (by telephone or in writing) of the contents
thereof. Unless the Swing Line Lender has received notice (by telephone or in
writing) from the Agent (including at the request of any Lender other than the
Swing Line Lender) prior to 4:00 p.m., Houston, Texas time on the date of the
proposed Swing Line Borrowing (I) directing the Swing Line Lender not to make
such Swing Line Loan as a result of the limitations set forth in the proviso to
the first sentence of Section 2.01(d)(i), or (II) that one or more of the
applicable conditions specified in Section 6.02 is not then satisfied, then
subject to the terms and conditions hereof, the Swing Line Lender will, not
later than 5:00 p.m., Houston, Texas time on the borrowing date specified in
such Swing Line Loan Notice, make the amount of its Swing Line Loan available to
the Borrower at its office by crediting the account of the Borrower on the books
of the Swing Line Lender in immediately available funds.

(iii)         Refinancing of Swing Line Loans. (A) On each Swing Line Settlement
Date and at any other time the Swing Line Lender, in its sole and absolute
discretion, may request, the Swing Line Lender, on behalf of the Borrower (which
hereby irrevocably authorizes the Swing Line Lender to so request on its
behalf), may require that each Lender make a Revolving Credit Loan (which shall
be a Base Rate Loan) in an amount equal to such Lender's Percentage Share of the
amount of Swing Line Loans then outstanding. Such request shall be made in
writing (which written request shall be deemed to be a borrowing notice
delivered pursuant to Section 2.02(c) for purposes hereof) and in accordance
with the requirements of Section 2.02, without regard to the minimum and
multiples specified therein for the principal amount of Base Rate Loans, but
subject to the unutilized portion of the Aggregate Revolving Credit Commitments
and

 

 

19

 

--------------------------------------------------------------------------------

the conditions set forth in Section 6.02. The Swing Line Lender shall furnish
the Borrower with a copy of the applicable borrowing notice promptly after
delivering such notice to the Agent. Each Lender shall make an amount equal to
its Percentage Share of the amount specified in such notice available to the
Agent in immediately available funds for the account of the Swing Line Lender at
the Agent's Principal Office not later than 2:00 p.m. Houston, Texas time on the
day specified in such borrowing notice, whereupon, subject to Section
2.01(d)(iii)(B), each Lender that so makes funds available shall be deemed to
have made a Base Rate Loan to the Borrower in such amount. The Agent shall remit
the funds so received to the Swing Line Lender.

 

(B)

If for any reason any Swing Line Loan cannot be refinanced by such a Revolving
Credit Loan in accordance with Section 2.01(d)(iii)(A), the request for
Revolving Credit Loans submitted by the Swing Line Lender as set forth herein
shall be deemed to be a request by the Swing Line Lender that each of the
Lenders fund its risk participation in the relevant Swing Line Loan and each
Lender's payment to the Agent for the account of the Swing Line Lender pursuant
to Section 2.01(d)(iii)(A) shall be deemed payment in respect of such
participation.

 

(C)

If any Lender fails to make available to the Agent for the account of the Swing
Line Lender any amount required to be paid by such Lender pursuant to the
foregoing provisions of this Section 2.01(d)(iii) by the time specified in
Section 2.01(d)(iii)(A), the Swing Line Lender shall be entitled to recover from
such Lender (acting through the Agent), on demand, such amount with interest
thereon for the period from the date such payment is required to the date on
which such payment is immediately available to the Swing Line Lender at a rate
per annum equal to the greater of the Federal Funds Rate and a rate determined
by the Swing Line Lender in accordance with banking industry rules on interbank
compensation, plus any administrative, processing or similar fees customarily
charged by the Swing Line Lender in connection with the foregoing. If such
Lender pays such amount (with interest and fees as aforesaid), the amount so
paid shall constitute such Lender's Revolving Credit Loan included in the
relevant borrowing or funded participation in the relevant Swing Line Loan, as
the case may be. A certificate of the Swing Line Lender submitted to any Lender
(through the Agent) with respect to any amounts owing under this clause (C)
shall be conclusive absent manifest error.

 

(D)

Each Lender's obligation to make Revolving Credit Loans or to purchase and fund
risk participations in Swing Line Loans pursuant to this Section 2.01(d)(iii)
shall be absolute and unconditional and shall not be affected by any
circumstance, including (A) any setoff, counterclaim, recoupment, defense or
other right which such Lender may have against the Swing Line Lender, the
Borrower or any other Person for any reason whatsoever, (B) the occurrence or
continuance of a Default, or (C) any other occurrence, event or condition,
whether or not similar to any of the foregoing; provided, however, that each
Lender's obligation to make Revolving Credit Loans pursuant to this Section
2.01(d)(iii) is subject to the conditions set forth in Section 6.02. No such
funding of risk participations shall relieve or otherwise impair the obligation
of the Borrower to repay Swing Line Loans, together with interest as provided
herein.

 

 

20

 

--------------------------------------------------------------------------------

(iv)         Repayment of Participations. (A) At any time after any Lender has
purchased and funded a risk participation in a Swing Line Loan, if the Swing
Line Lender receives any payment on account of such Swing Line Loan, the Swing
Line Lender will distribute to such Lender its Percentage Share thereof in the
same funds as those received by the Swing Line Lender.

 

(B)

If any payment received by the Swing Line Lender in respect of principal or
interest on any Swing Line Loan is required to be refunded by the Swing Line
Lender under any of the circumstances described in Section 12.10 (including
pursuant to any settlement entered into by the Swing Line Lender in its
discretion), each Lender shall pay to the Swing Line Lender its Percentage Share
thereof on demand of the Agent, plus interest thereon from the date of such
demand to the date such amount is returned, at a rate per annum equal to the
Federal Funds Rate. The Agent will make such demand upon the request of the
Swing Line Lender. The obligations of the Lenders under this clause shall
survive the payment in full of the Obligations and the termination of this
Agreement.

(v)           Interest for Account of Swing Line Lender. The Swing Line Lender
shall be responsible for invoicing the Borrower for interest on the Swing Line
Loans. Until each Lender funds it Revolving Credit Loan or risk participation
pursuant to this Section 2.01(d) to refinance such Lender's Percentage Share of
any Swing Line Loan, interest in respect of such Percentage Share shall be
solely for the account of the Swing Line Lender.

(vi)         Payments Directly to Swing Line Lender. The Borrower shall make all
payments of principal and interest in respect of the Swing Line Loans directly
to the Swing Line Lender.

(vii)        Alternative Swing Line Procedures. Notwithstanding the foregoing,
the Borrower and the Swing Line Lender may alter or vary any of the timing for
notices of or the form of notice required for Swing Line Borrowings or repayment
of Swing Line Loans, the minimum amounts for Swing Line Borrowings or repayment
of Swing Line Loans, and/or any of the other borrowing procedures for the Swing
Line (collectively referred to as "Alternative Swing Line Procedures") from
those set forth in this Section 2.01(d) pursuant to any Cash Management
Agreement or other agreement entered into between Borrower and the Swing Line
Lender and in effect from time to time.

 

Section 2.02.

Borrowings, Continuations and Conversions, Letters of Credit.

(a)           Borrowings. The Borrower shall give the Agent (which shall
promptly notify the Lenders) advance notice as hereinafter provided of each
borrowing hereunder, which shall specify (i) the aggregate amount of such
borrowing, (ii) the Type and (iii) the date (which shall be a Business Day) of
the Loans to be borrowed, and (iv) (in the case of LIBOR Loans) the duration of
the Interest Period therefor.

(b)           Minimum Amounts. All borrowings of Revolving Credit Loans that are
Base Rate Loans shall be in amounts of at least $200,000.00 or the remaining
balance of the Aggregate Revolving Credit Commitments, if less, or any whole
multiple of $100,000.00 in excess thereof, and all borrowings of Revolving
Credit Loans that are LIBOR Loans shall be in amounts of at least $2,000,000.00
or any whole multiple of $1,000,000.00 in excess thereof.

(c)           Notices. All borrowings, continuations and conversions of
Revolving Credit Loans shall require advance written notice to the Agent (which
shall promptly notify the Lenders)

 

 

21

 

--------------------------------------------------------------------------------

in the form of Exhibit B (or telephonic notice promptly confirmed by such a
written notice), which in each case shall be irrevocable, from the Borrower to
be received by the Agent not later than 11:00 a.m., Houston, Texas time at least
one Business Day prior to the date of each borrowing of Revolving Credit Loans
that are Base Rate Loans and three Business Days prior to the date of each
borrowing of Revolving Credit Loans that are LIBOR Loans, continuation or
conversion. Without in any way limiting the Borrower's obligation to confirm in
writing any telephonic notice, the Agent may act without liability upon the
basis of telephonic notice believed by the Agent in good faith to be from the
Borrower prior to receipt of written confirmation. In each such case, the
Borrower hereby waives the right to dispute the Agent's record of the terms of
such telephonic notice except in the case of gross negligence or willful
misconduct by the Agent.

(d)           Continuation Options. Subject to the provisions made in this
Section 2.02(d), the Borrower may elect to continue all or any part of any LIBOR
Loan beyond the expiration of the then current Interest Period relating thereto
by giving advance notice as provided in Section 2.02(c) to the Agent (which
shall promptly notify the Lenders) of such election, specifying the amount of
such Loan to be continued and the Interest Period therefor. In the absence of
such a timely and proper election, the Borrower shall be deemed to have elected
to convert such LIBOR Loan to a Base Rate Loan pursuant to Section 2.02(e). All
or any part of any LIBOR Loan may be continued as provided herein, provided that
(i) any continuation of any such Loan shall be (as to each Loan as continued for
an applicable Interest Period) in amounts of at least $2,000,000.00 or any whole
multiple of $1,000,000.00 in excess thereof and (ii) no Default shall have
occurred and be continuing. If an Event of Default shall have occurred and be
continuing, each LIBOR Loan shall be converted to a Base Rate Loan on the last
day of the Interest Period applicable thereto.

(e)           Conversion Options. The Borrower may elect to convert all or any
part of any LIBOR Loan on the last day of the then current Interest Period
relating thereto to a Base Rate Loan by giving advance notice to the Agent
(which shall promptly notify the Lenders) of such election. Subject to the
provisions made in this Section 2.02(e), the Borrower may elect to convert all
or any part of any Base Rate Loan at any time and from time to time to a LIBOR
Loan by giving advance notice as provided in Section 2.02(c) to the Agent (which
shall promptly notify the Lenders) of such election. All or any part of any
outstanding Loan may be converted as provided herein, provided that (i) any
conversion of any Base Rate Loan into a LIBOR Loan shall be (as to each such
Loan into which there is a conversion for an applicable Interest Period) in
amounts of at least $2,000,000.00 or any whole multiple of $1,000,000.00 in
excess thereof and (ii) no Default shall have occurred and be continuing. If an
Event of Default shall have occurred and be continuing, no Base Rate Loan may be
converted into a LIBOR Loan. Notwithstanding anything to the contrary herein, a
Swing Line Loan may not be converted to a LIBOR Loan.

(f)           Advances. Not later than 11:00 a.m., Houston, Texas time on the
date specified for each borrowing of Revolving Credit Loans hereunder, each
Lender shall make available the amount of the Loan to be made by it on such date
to the Agent, to an account which the Agent shall specify, in immediately
available funds, for the account of the Borrower. The amounts so received by the
Agent shall, subject to the terms and conditions of this Agreement, be made
available to the Borrower by depositing the same, in immediately available
funds, in an account of the Borrower, designated by the Borrower and maintained
at the Principal Office.

(g)           Letters of Credit. The Borrower shall give the Issuing Bank (which
shall promptly notify the Lenders of such request and their Percentage Share of
such Letter of Credit), a Letter of Credit Application to be received by the
Issuing Bank not later than 11:00 a.m., Houston, Texas time not less than three
(3) Business Days prior thereto of each request for the issuance, and at least
thirty (30) Business Days prior to the date of the renewal or extension, of a
Letter of Credit hereunder which request shall specify (i) the amount of such
Letter of Credit,

 

 

22

 

--------------------------------------------------------------------------------

(ii) the date (which shall be a Business Day) such Letter of Credit is to be
issued, renewed or extended, (iii) the duration thereof, (iv) the name and
address of the beneficiary thereof, (v) the form and type of the Letter of
Credit and (vi) such other information as the Issuing Bank may reasonably
request, all of which shall be reasonably satisfactory to the Issuing Bank.
Subject to the terms and conditions of this Agreement, on the date specified for
the issuance, renewal or extension of a Letter of Credit, the Issuing Bank shall
issue, renew or extend such Letter of Credit to the beneficiary thereof.

In conjunction with the issuance of each Letter of Credit, the Borrower and the
Active Subsidiary, if the account party, shall execute a Letter of Credit
Agreement. In the event of any conflict between any provision of a Letter of
Credit Agreement and this Agreement, the Borrower, the Issuing Bank, the Agent
and the Lenders hereby agree that the provisions of this Agreement shall govern.

The Issuing Bank will send to the Borrower and each Lender, immediately upon
issuance of any Letter of Credit, or an amendment thereto, a true and complete
copy of such Letter of Credit, or such amendment thereto.

 

Section 2.03.

Changes of Commitments.

(a)           The Aggregate Revolving Credit Commitments shall at all times be
equal to the lesser of (i) the Aggregate Maximum Revolving Credit Amounts after
adjustments resulting from reductions pursuant to Section 2.03(b) or (ii) the
Borrowing Base as determined from time to time.

(b)           The Borrower shall have the right to terminate or to reduce the
amount of the Aggregate Maximum Revolving Credit Amounts or the Swing Line
Sublimit at any time, or from time to time, upon not less than three (3)
Business Days' prior notice to the Agent (which shall promptly notify the
Lenders) of each such termination or reduction, which notice shall specify the
effective date thereof and the amount of any such reduction (which shall not be
less than (i) $5,000,000.00 or any whole multiple of $1,000,000.00 in excess
thereof for any reduction of the Aggregate Maximum Revolving Credit Amounts, and
(ii) $1,000,000 or any whole multiple of $500,000 in excess thereof for the
Swing Line Sublimit) and shall be irrevocable and effective only upon receipt by
the Agent.

(c)           The Aggregate Maximum Revolving Credit Amounts and the Swing Line
Sublimit once terminated or reduced may not be reinstated.

 

Section 2.04.

Fees.

(a)           Revolving Credit Commitment Fee. The Borrower shall pay to the
Agent for the account of each Lender in accordance with its Percentage Share a
Revolving Credit Commitment fee on the daily average unused amount of the
Borrowing Base for the period from and including the Closing Date up to, but
excluding, the Revolving Credit Termination Date in an amount equal to (i) the
actual daily amount by which the Aggregate Revolving Credit Commitments exceed
the sum of the outstanding principal amount of Revolving Credit Loans plus the
outstanding amount of LC Obligations, multiplied by (ii) a rate per annum equal
to the amount reflected on the appropriate intersection in the table set forth
in the definition of "Applicable Margin." Accrued Revolving Credit Commitment
fees shall be payable quarterly in arrears on each Quarterly Date and on the
Revolving Credit Termination Date. For the avoidance of doubt, the outstanding
principal amount of any Swing Line Loans shall not be included as usage in
calculating any Revolving Credit Commitment fees due under this Section 2.04(a).

 

(b)

Intentionally Deleted.

 

 

23

 

--------------------------------------------------------------------------------

 

(c)

Letter of Credit Fees.

(i)            The Borrower agrees to pay the Agent, for the account of each
Lender, commissions for issuing the Letters of Credit on the daily average
outstanding of the maximum liability of the Issuing Bank existing from time to
time under such Letter of Credit (calculated separately for each Letter of
Credit) at the Applicable Margin for LIBOR Loans determined on the date of
issuance of the applicable Letter of Credit. Each Letter of Credit shall be
deemed to be outstanding up to the full face amount of the Letter of Credit
until the Issuing Bank has received the canceled Letter of Credit or a written
cancellation of the Letter of Credit from the beneficiary of such Letter of
Credit in form and substance acceptable to the Issuing Bank, or for any
reductions in the amount of the Letter of Credit (other than from a drawing),
written notification from the beneficiary of such Letter of Credit. Such
commissions are payable in advance at issuance of the Letter of Credit for the
first year thereof and thereafter, quarterly in arrears on each Quarterly Date
and upon cancellation or expiration of each such Letter of Credit.

(ii)  The Borrower shall pay to the Issuing Bank, for its own account, a
fronting fee equal to the greater of: (x) .125% per annum of the Letter of
Credit, and (y) $500.00.

(iii)         Upon each amendment, transfer, or negotiation of any Letter of
Credit, the Borrower shall pay the Issuing Bank, for its own account, such fees
that are in accordance with such Issuing Bank's then-current fee policy.

(d)           Other Fees. The Borrower shall pay to the Agent for its account
such other fees as are set forth in the fee letter from the Lender to the
Borrower on the dates specified therein to the extent not paid prior to the
Closing Date.

Section 2.05.       Several Obligations. The failure of any Lender to make any
Loan to be made by it or to provide funds for disbursements or reimbursements
under Letters of Credit or for its participations in Swing Line Loans on the
date specified therefor shall not relieve any other Lender of its obligation to
make its Loan or provide funds on such date, but no Lender shall be responsible
for the failure of any other Lender to make a Loan to be made by such other
Lender or to provide funds to be provided by such other Lender.

Section 2.06.       Notes. The Revolving Credit Loans made by each Lender shall
be evidenced by a single promissory note of the Borrower in substantially the
form of Exhibit A, dated (i) the date of the Existing Credit Agreement or
(ii) the effective date of an Assignment pursuant to Section 12.06(b), payable
to the order of such Lender in a principal amount equal to its Maximum Revolving
Credit Amount as originally in effect and otherwise duly completed and such
substitute Notes as required by Section 12.06(b). The date, amount, Type,
interest rate and Interest Period of each Revolving Credit Loan made by each
Lender, and all payments made on account of the principal thereof, shall be
recorded by such Lender on its books for its Note, and, prior to any transfer
may be endorsed by such Lender on the schedule attached to such Note or any
continuation thereof or on any separate record maintained by such Lender.
Failure to make any such notation or to attach a schedule shall not affect any
Lender's or the Borrower's rights or obligations in respect of such Revolving
Credit Loans or affect the validity of such transfer by any Lender of its Note.
The Swing Line Loans shall be evidenced by a single promissory note (the "Swing
Line Note") of the Borrower dated (i) the Closing Date or (ii) the effective
date of an appointment of a successor Swing Line Lender pursuant to Section
11.08, payable to the order of the Swing Line Lender in a principal amount equal
to the Swing Line Sublimit as originally in effect and containing such other
terms and provisions as shall be satisfactory to the Swing Line Lender. The
date, amount and interest rate of each Swing Line Loan made by the Swing Line
Lender, and all payments made on account of the principal thereof, shall be
recorded by the Swing Line Lender on its books for its

 

 

24

 

--------------------------------------------------------------------------------

Swing Line Note, and, prior to any transfer may be endorsed by the Swing Line
Lender on the schedule attached to such Swing Line Note or any continuation
thereof or on any separate record maintained by the Swing Line Lender. Failure
to make any such notation or to attach a schedule shall not affect the Swing
Line Lender’s or the Borrower's rights or obligations in respect of such Swing
Line Loans or affect the validity of the transfer by the Swing Line Lender of
its Swing Line Note.

 

Section 2.07.

Prepayments.

 

(a)

Voluntary Prepayments.

(i)            The Borrower may prepay the Revolving Credit Loans that are Base
Rate Loans upon not less than one (1) Business Day's prior notice to the Agent
(which shall promptly notify the Lenders), which notice shall specify the
prepayment date (which shall be a Business Day) and the amount of the prepayment
(which shall be at least $500,000.00 and a multiple of $100,000.00 or the
remaining aggregate principal balance outstanding on the Notes) and shall be
irrevocable and effective only upon receipt by the Agent, provided that interest
on the principal prepaid, accrued to the prepayment date, shall be paid on the
prepayment date. The Borrower may prepay Revolving Credit Loans that are LIBOR
Loans on the same conditions as for Revolving Credit Loans that are Base Rate
Loans (except that prior notice to the Agent shall be not less than three (3)
Business Days for LIBOR Loans) and in addition such prepayments of LIBOR Loans
shall be subject to the terms of Section 5.05 and shall be in an amount equal to
all of the LIBOR Loans for the Interest Period prepaid.

(ii)          The Borrower may, upon notice to the Swing Line Lender (with a
copy to the Agent), at any time or from time to time, voluntarily prepay Swing
Line Loans in whole or in part without premium or penalty; provided, however,
that (A) such notice must be received by the Swing Line Lender and the Agent not
later than 3:00 p.m., Houston, Texas time on the date of the prepayment, and (B)
any such prepayment shall be in a minimum principal amount of $200,000. Each
such notice shall specify the date and amount of such prepayment. If such notice
is given by the Borrower, the Borrower shall make such prepayment and the
payment amount specified in such notice shall be due and payable on the date
specified therein. Notwithstanding the foregoing, the Borrower and the Swing
Line Lender may separately agree to vary such voluntary prepayment procedures
pursuant to any Alternative Swing Line Procedures that may be in effect from
time to time.

 

(b)

Mandatory Prepayments.

(i)            If, after giving effect to any termination or reduction of the
Aggregate Maximum Revolving Credit Amounts pursuant to Section 2.03(b), the sum
of the outstanding aggregate principal amount of the Revolving Credit Loans,
plus the outstanding aggregate principal amount of the Swing Line Loans plus the
LC Obligations exceeds the Aggregate Maximum Revolving Credit Amounts, the
Borrower shall (i) prepay the Revolving Credit Loans and the Swing Line Loans on
the date of such termination or reduction in an aggregate principal amount equal
to the excess, together with interest on the principal amount paid accrued to
the date of such prepayment and (ii) if any excess remains after prepaying all
of the Revolving Credit Loans and the Swing Line Loans because of LC
Obligations, pay to the Agent on behalf of the Lenders an amount equal to the
excess to be held as cash collateral as provided in Section 2.10(b) hereof. If,
after giving effect to any termination or reduction of the Swing Line Sublimit
pursuant to Section 2.03(b), the outstanding principal amount of the Swing Line
Loans exceeds the Swing Line Sublimit, the Borrower shall prepay the Swing

 

 

25

 

--------------------------------------------------------------------------------

Line Loans on the date of such termination or reduction in an aggregate
principal amount equal to the excess, together with interest on the principal
amount paid accrued to the date of such prepayment.

(ii)          Upon any redetermination of the amount of the Borrowing Base in
accordance with Section 2.08, if the redetermined Borrowing Base is less than
the sum of the aggregate outstanding principal amount of the Revolving Credit
Loans, plus the outstanding aggregate principal amount of the Swing Line Loans
plus the LC Obligations (a "Deficiency"), then the Borrower shall within thirty
(30) days of such Borrowing Base redetermination do one or any combination of
the following: (i) prepay the Loans in an aggregate principal amount equal to
such excess, together with interest on the principal amount paid accrued to the
date of such prepayment, (ii) notify the Agent that Borrower will prepay, in
five (5) equal monthly installments commencing thirty (30) days after such
Borrowing Base redetermination and continuing on the same day the next four
months (unless there is no corresponding day, in which event, it will be paid on
the last day of such month), the Loans in an aggregate principal amount equal to
such excess, together with interest on the principal amount paid accrued to the
date of such prepayment; or (iii) provide additional collateral acceptable to
the Agent to increase the Borrowing Base to an amount at least equal to the
aggregate outstanding principal amounts of the Loans, and if a Deficiency
remains after prepaying all of the Revolving Credit Loans and Swing Line Loans
because of LC Obligations, the Borrower shall pay to the Agent on behalf of the
Lenders an amount equal to such Deficiency to be held as cash collateral as
provided in Section 2.10(b).

(c)           Generally. Prepayments permitted or required under this
Section 2.07 shall be without premium or penalty, except as required under
Section 5.05 for prepayment of LIBOR Loans. Any prepayments on the Revolving
Credit Loans and Swing Line Loans may be reborrowed subject to the then
effective Aggregate Revolving Credit Commitments and the other terms and
conditions of this Agreement.

 

Section 2.08.

Borrowing Base.

(a)           The Borrowing Base shall be determined in accordance with Section
2.08(b) by the Agent with the concurrence of the Majority Lenders and is subject
to redetermination in accordance with Section 2.08(d). Upon any redetermination
of the Borrowing Base, such redetermination shall remain in effect until the
next successive Redetermination Date. So long as any of the Commitments are in
effect or any LC Exposure or Loans are outstanding hereunder, this facility
shall be governed by the then effective Borrowing Base. During the period from
and after the Closing Date, until the first redetermination pursuant to Section
2.08(d) or adjustment pursuant to Section 8.08(c), the amount of the Borrowing
Base shall be $200,000,000.00.

(b)           Upon receipt of the reports required by Section 8.07 and such
other reports, data and supplemental information as may from time to time be
reasonably requested by the Agent (the "Engineering Reports"), the Agent will
redetermine the Borrowing Base. Such redetermination will be made by the Agent
and the applicable number of required Lenders, as provided below, in accordance
with their normal and customary procedures for evaluating oil and gas reserves
and other related assets as such exist at that particular time. The Agent, in
its sole discretion, may make adjustments to the rates, volumes and prices and
other assumptions set forth therein in accordance with its normal and customary
procedures for evaluating oil and gas reserves and other related assets as such
exist at that particular time. The Agent shall propose to the Lenders a new
Borrowing Base within twenty (20) days following receipt by the Agent and the
Lenders of the Engineering Reports. Lenders holding 100% of the Aggregate
Revolving Credit Commitments must approve increases to the Borrowing Base, while
the approval of the

 

 

26

 

--------------------------------------------------------------------------------

Majority Lenders is required to approve a decrease in, or maintain, the
Borrowing Base. After having received notice of such proposal by the Agent, all
of the Lenders shall have ten (10) days to agree or disagree with such proposal.
If at the end of the ten (10) days, any Lender shall have not communicated its
approval or disapproval, such silence shall be deemed to be an approval of the
Agent's proposal, and the Agent's proposal shall be the new Borrowing Base. If
however, within the time prescribed by the preceding sentence, (i) all the
Lenders have not approved (or have not been deemed to have approved) the Agent's
proposal with respect to an increase in the Borrowing Base, or (ii) the Majority
Lenders have not approved (or have not been deemed to have approved) the Agent's
proposal with respect to a decrease in, or maintenance of, the Borrowing Base,
the Agent and, as applicable, either all the Lenders (with respect to an
increase in the Borrowing Base) or the Majority Lenders (with respect to a
decrease in, or maintenance of, the Borrowing Base) shall, within an additional
ten (10) days, agree upon a new Borrowing Base.

If the Agent and, as applicable, either all the Lenders or the Majority Lenders
cannot otherwise agree on a redetermination of the Borrowing Base within such
additional ten (10) day period then no later than five days after the end of
such ten (10) day period, the Lenders shall submit to the Agent in writing,
and/or the Agent shall poll the Lenders, for their individual recommendations
for such redetermined Borrowing Base in accordance with their respective
customary practices and standards for oil and gas loans, whereupon the Agent
shall designate the Borrowing Base at the largest amount approved by all of the
Lenders (for any increase) or by the Majority Lenders (for maintenance of the
Borrowing Base at its current level or for any decrease). However, the amount of
the Borrowing Base shall never be increased at any time without the unanimous
consent of the Lenders, notwithstanding anything else herein to the contrary.

(c)           The Agent may exclude any Oil and Gas Property or portion of
production therefrom or any income from any other Property from the Borrowing
Base, at any time, because title information is not satisfactory to the Agent in
its sole discretion exercised in good faith.

(d)           So long as any of the Commitments are in effect and until payment
in full of all Loans and satisfaction of the LC Obligations hereunder, on or
around the first Business Day of each November and May, commencing November 1,
2007 (each being a "Scheduled Redetermination Date"), the Lenders shall
redetermine the amount of the Borrowing Base in accordance with Section 2.08(b).
In addition, (i) the Borrower may initiate a redetermination of the Borrowing
Base at any other time as it so elects by specifying in writing to the Agent
(who will promptly notify the Lenders) the date by which the Borrower will
furnish to the Agent and the Lenders a Reserve Report in accordance with
Section 8.07(b) and the date by which such redetermination is requested to
occur; provided, however, that the Borrower may initiate only one such
unscheduled redetermination between Scheduled Redetermination Dates and (ii) the
Agent may initiate a redetermination of the Borrowing Base at any other time as
it so elects by specifying in writing to the Borrower the date by which the
Borrower is to furnish a Reserve Report in accordance with Section 8.07(b) and
the date on which such redetermination is to occur; provided, however, that the
Agent may initiate only one such unscheduled redetermination between Scheduled
Redetermination Dates.

(e)           The Agent shall promptly notify in writing the Borrower and the
Lenders of the new Borrowing Base. Any redetermination of the Borrowing Base
shall not be in effect until written notice is given to the Borrower.

Section 2.09.       Assumption of Risks. The Borrower assumes all risks of the
acts or omissions of any beneficiary of any Letter of Credit or any transferee
thereof with respect to its use of such Letter of Credit. Neither the Issuing
Bank (except in the case of gross negligence or willful misconduct on the part
of the Issuing Bank or any of its employees), its correspondents nor any Lender
shall be responsible for the validity, sufficiency or genuineness of
certificates or other documents or any endorsements thereon,

 

 

27

 

--------------------------------------------------------------------------------

even if such certificates or other documents should in fact prove to be invalid,
insufficient, fraudulent or forged; for errors, omissions, interruptions or
delays in transmissions or delivery of any messages by mail, telex, or
otherwise, whether or not they be in code; for errors in translation or for
errors in interpretation of technical terms; the validity or sufficiency of any
instrument transferring or assigning or purporting to transfer or assign any
Letter of Credit or the rights or benefits thereunder or proceeds thereof, in
whole or in part, which may prove to be invalid or ineffective for any reason;
the failure of any beneficiary or any transferee of any Letter of Credit to
comply fully with conditions required in order to draw upon any Letter of
Credit; or for any other consequences arising from causes beyond the Issuing
Bank's control or the control of the Issuing Bank's correspondents. In addition,
neither the Issuing Bank, the Agent nor any Lender shall be responsible for any
error, neglect, or default of any of the Issuing Bank's correspondents; and none
of the above shall affect, impair or prevent the vesting of any of the Issuing
Bank's, the Agent's or any Lender's rights or powers hereunder or under the
Letter of Credit Agreements, all of which rights shall be cumulative. The
Issuing Bank and its correspondents may accept certificates or other documents
that appear on their face to be in order, without responsibility for further
investigation of any matter contained therein regardless of any notice or
information to the contrary. In furtherance and not in limitation of the
foregoing provisions, the Borrower agrees that any action, inaction or omission
taken or not taken by the Issuing Bank or by any correspondent for the Issuing
Bank in good faith in connection with any Letter of Credit, or any related
drafts, certificates, documents or instruments, shall be binding on the Borrower
and shall not put the Issuing Bank or its correspondents under any resulting
liability to the Borrower.

 

Section 2.10.

Obligation to Reimburse and to Prepay.

(a)           If a disbursement by the Issuing Bank is made under any Letter of
Credit, the Borrower shall pay to the Agent within two (2) Business Days after
notice of any such disbursement is received by the Borrower, the amount of each
such disbursement made by the Issuing Bank under the Letter of Credit (if such
payment is not sooner effected as may be required under this Section 2.10 or
under other provisions of the Letter of Credit), together with interest on the
amount disbursed from and including the date of disbursement until payment in
full of such disbursed amount at a varying rate per annum equal to (i) the then
applicable interest rate for Base Rate Loans through the second Business Day
after notice of such disbursement is received by the Borrower and
(ii) thereafter, the Post-Default Rate for Base Rate Loans (but in no event to
exceed the Highest Lawful Rate) for the period from and including the third
Business Day following the date of such disbursement to and including the date
of repayment in full of such disbursed amount. The obligations of the Borrower
under this Agreement with respect to each Letter of Credit shall be absolute,
unconditional and irrevocable and shall be paid or performed strictly in
accordance with the terms of this Agreement under all circumstances whatsoever,
including, without limitation, but only to the fullest extent permitted by
applicable law, the following circumstances: (i) any lack of validity or
enforceability of this Agreement, any Letter of Credit or any of the Security
Instruments; (ii) any amendment or waiver of (including any default), or any
consent to departure from this Agreement (except to the extent permitted by any
amendment or waiver), any Letter of Credit or any of the Security Instruments;
(iii) the existence of any claim, set-off, defense or other rights which the
Borrower may have at any time against the beneficiary of any Letter of Credit or
any transferee of any Letter of Credit (or any Persons for whom any such
beneficiary or any such transferee may be acting), the Issuing Bank, the Agent,
any Lender or any other Person, whether in connection with this Agreement, any
Letter of Credit, the Security Instruments, the transactions contemplated hereby
or any unrelated transaction; (iv) any statement, certificate, draft, notice or
any other document presented under any Letter of Credit proves to have been
forged, fraudulent, insufficient or invalid in any respect or any statement
therein proves to have been untrue or inaccurate in any respect whatsoever;
(v) payment by the Issuing Bank under any Letter of Credit against presentation
of a draft or certificate which appears on its face to comply, but does not
comply, with the terms of such

 

 

28

 

--------------------------------------------------------------------------------

Letter of Credit; and (vi) any other circumstance or happening whatsoever,
whether or not similar to any of the foregoing.

Notwithstanding anything in this Agreement to the contrary, the Borrower will
not be liable for payment or performance that results from the gross negligence
or willful misconduct of the Issuing Bank, except where the Borrower or any
Subsidiary actually recovers the proceeds for itself or the Issuing Bank of any
payment made by the Issuing Bank in connection with such gross negligence or
willful misconduct.

(b)           In the event of the occurrence of any Event of Default, a payment
or prepayment pursuant to Section 2.07(b) or the maturity of the Notes, whether
by acceleration or otherwise, an amount equal to the LC Exposure (or the excess
in the case of Section 2.07(b)) shall be deemed to be forthwith due and owing by
the Borrower to the Issuing Bank, the Agent and the Lenders as of the date of
any such occurrence; and the Borrower's obligation to pay such amount shall be
absolute and unconditional, without regard to whether any beneficiary of any
such Letter of Credit has attempted to draw down all or a portion of such amount
under the terms of a Letter of Credit, and, to the fullest extent permitted by
applicable law, shall not be subject to any defense or be affected by a right of
set-off, counterclaim or recoupment which the Borrower may now or hereafter have
against any such beneficiary, the Issuing Bank, the Agent, the Lenders or any
other Person for any reason whatsoever. Such payments shall be held by the Agent
on behalf of the Issuing Bank and the Lenders as cash collateral securing the LC
Obligations in an account or accounts at the Principal Office; and the Borrower
hereby grants to and by its deposit with the Agent grants to the Agent a
security interest in such cash collateral. Upon request by the Agent, the
Borrower shall immediately execute and deliver to the Agent the Cash Collateral
Account Agreement. In the event of any such payment by the Borrower of amounts
contingently owing under outstanding Letters of Credit and in the event that
thereafter drafts or other demands for payment complying with the terms of such
Letters of Credit are not made prior to the respective expiration dates thereof,
the Agent agrees, if no Event of Default has occurred and is continuing or if no
other amounts are outstanding under this Agreement, the Notes or the Security
Instruments, to remit to the Borrower amounts for which the contingent
obligations evidenced by the Letters of Credit have ceased.

(c)           Each Lender severally and unconditionally agrees that it shall
promptly reimburse the Issuing Bank an amount equal to such Lender's Percentage
Share of any disbursement made by the Issuing Bank under any Letter of Credit
that is not reimbursed according to this Section 2.10.

(d)           Notwithstanding anything to the contrary contained herein, if no
Default exists and subject to availability under the Aggregate Revolving Credit
Commitments (after reduction for LC Obligations), to the extent the Borrower has
not reimbursed the Issuing Bank for any drawn upon Letter of Credit within one
(1) Business Day after notice of such disbursement has been delivered to the
Borrower, the amount of such Letter of Credit reimbursement obligation shall
automatically be funded by the Lenders as a Revolving Credit Loan hereunder and
used by the Lenders to pay such Letter of Credit reimbursement obligation. If an
Event of Default has occurred and is continuing, or if the funding of such
Letter of Credit reimbursement obligation as a Revolving Credit Loan would cause
the aggregate amount of all Revolving Credit Loans outstanding to exceed the
Aggregate Revolving Credit Commitments (after reduction for LC Obligations),
such Letter of Credit reimbursement obligation shall not be funded as a
Revolving Credit Loan, but instead shall accrue interest as provided in
Section 2.10(a).

Section 2.11.       Lending Offices. The Loans of each Type made by each Lender
shall be made and maintained at such Lender's Applicable Lending Office for
Loans of such Type.

 

 

29

 

--------------------------------------------------------------------------------

ARTICLE III.

Payments of Principal and Interest

 

Section 3.01.

Repayment of Loans.

(a)           Revolving Credit Loans. On the Revolving Credit Termination Date
the Borrower shall repay the outstanding principal amount of the Revolving
Credit Notes.

(b)           Swing Line Loans. The Borrower shall repay each Swing Line Loan on
the earlier to occur of (i) the first Swing Line Settlement Date to occur after
such Loan is made and (ii) the Revolving Credit Termination Date.

(c)           Generally. The Borrower will pay to the Agent, for the account of
each Lender, the principal payments required by this Section 3.01.

 

Section 3.02.

Interest.

(a)           Interest Rates. The Borrower will pay to the Agent, for the
account of each Lender, interest on the unpaid principal amount of each Loan
made by such Lender for the period commencing on the date such Loan is made to,
but excluding, the date such Loan shall be paid in full, at the following rates
per annum:

(i)           if such a Loan is a Revolving Credit Loan that is a Base Rate
Loan, or a Swing Line Loan, the Base Rate (as in effect from time to time) plus
the Applicable Margin, but in no event to exceed the Highest Lawful Rate; and

(ii)          if such a Loan is a Revolving Credit Loan that is a LIBOR Loan,
for each Interest Period relating thereto, the LIBOR Rate for such Loan plus the
Applicable Margin (as in effect at the date such Loan is requested by the
Borrower) except that if such Loan is converted to a Base Rate Loan or continued
beyond the initial Interest Period, then the Applicable Margin shall be that
Applicable Margin as in effect from time to time during the relevant Interest
Period, but in no event to exceed the Highest Lawful Rate.

(b)           Post-Default Rate. Notwithstanding the foregoing, the Borrower
will pay to the Agent, for the account of each Lender interest at the applicable
Post-Default Rate on any principal of any Loan made by such Lender, and (to the
fullest extent permitted by law) on any other amount payable by the Borrower
hereunder, under any Loan Document or under any Note held by such Lender to or
for account of such Lender, for the period commencing on the date of an Event of
Default until the same is paid in full or all Events of Default are cured or
waived.

(c)           Due Dates. Accrued interest on Revolving Credit Loans that are
Base Rate Loans, and Swing Line Loans, shall be payable monthly on the last day
of each month commencing on the last day of May, 2007, and accrued interest on
each Revolving Credit Loan that is a LIBOR Loan shall be payable on the last day
of the Interest Period therefor and, if such Interest Period is longer than
three months at three-month intervals following the first day of such Interest
Period, except that interest payable at the Post-Default Rate shall be payable
from time to time on demand and interest on any LIBOR Loan that is converted
into a Base Rate Loan (pursuant to Section 5.04) shall be payable on the date of
conversion (but only to the extent so converted). Any accrued and unpaid
interest on the Revolving Credit Loans and Swing Line Loans on the Revolving
Credit Termination Date shall be paid on such date.

(d)           Determination of Rates. Promptly after the determination of any
interest rate provided for herein or any change therein, the Agent shall notify
the Lenders to which such

 

 

30

 

--------------------------------------------------------------------------------

interest is payable and the Borrower thereof. Each determination by the Agent of
an interest rate or fee hereunder shall, except in cases of manifest error, be
final, conclusive and binding on the parties.

ARTICLE IV.

Payments; Pro Rata Treatment; Computations; Etc.

Section 4.01.      Payments. Except to the extent otherwise provided herein, all
payments of principal, interest and other amounts to be made by the Borrower
under this Agreement, the Notes, and the Letter of Credit Agreements shall be
made in Dollars, in immediately available funds, to the Agent at such account as
the Agent shall specify by notice to the Borrower from time to time, not later
than 11:00 a.m., Houston, Texas time on the date on which such payments shall
become due (each such payment made after such time on such due date to be deemed
to have been made on the next succeeding Business Day). Such payments shall be
made without (to the fullest extent permitted by applicable law) defense,
set-off or counterclaim and in connection therewith, the Borrower and each
Guarantor hereby waives (to the fullest extent permitted by applicable law) all
defenses, rights of set-off and counterclaims it may have with respect to such
payments. Each payment received by the Agent under this Agreement or any Note
for account of a Lender shall be paid promptly to such Lender in immediately
available funds. Except as otherwise provided in the definition of "Interest
Period", if the due date of any payment under this Agreement or any Note would
otherwise fall on a day which is not a Business Day such date shall be extended
to the next succeeding Business Day and interest shall be payable for any
principal so extended for the period of such extension. At the time of each
payment to the Agent of any principal of or interest on any borrowing, the
Borrower shall notify the Agent of the Loans to which such payment shall apply.
In the absence of such notice the Agent may specify the Loans to which such
payment shall apply, but to the extent possible such payment or prepayment will
be applied first to the Loans comprised of Base Rate Loans.

Section 4.02.      Pro Rata Treatment. Except to the extent otherwise provided
herein each Lender agrees that: (i) each borrowing from the Lenders under
Section 2.01 and each continuation and conversion under Section 2.02 shall be
made from the Lenders pro rata in accordance with their Percentage Share, each
payment of commitment fee or other fees under Section 2.04 shall be made for
account of the Agent or the Lenders pro rata in accordance with their Percentage
Share, and each termination or reduction of the amount of the Aggregate Maximum
Revolving Credit Amounts under Section 2.03(b) shall be applied to the
Commitment of each Lender, pro rata according to the amounts of its respective
Revolving Credit Commitment; (ii) each payment of principal of Revolving Credit
Loans by the Borrower shall be made for account of the Lenders pro rata in
accordance with the respective unpaid principal amount of the Revolving Credit
Loans held by the Lenders; (iii) each payment of interest on Revolving Credit
Loans by the Borrower shall be made for account of the Lenders pro rata in
accordance with the amounts of interest due and payable to the respective
Lenders; (iv) each reimbursement by the Borrower of disbursements under Letters
of Credit shall be made for account of the Issuing Bank or, if funded by the
Lenders, pro rata for the account of the Lenders, in accordance with the amounts
of reimbursement obligations due and payable to each respective Lender; and (v)
each payment of principal or interest on Swing Line Loans shall be made for the
account of the Swing Line Lender or, if funded by the Lenders, pro rata for the
account of the Lenders, in accordance with the amounts of such Swing Line Loans
due and payable to each respective Lender.

Section 4.03.      Computations. Interest on LIBOR Loans and fees shall be
computed on the basis of a year of 360 days and actual days elapsed (including
the first day but excluding the last day) occurring in the period for which such
interest is payable, unless such calculation would exceed the Highest Lawful
Rate, in which case interest shall be calculated on the per annum basis of a
year of 365 or 366 days, as the case may be. Interest on Base Rate Loans, and
the commitment fee, Letter of Credit fees and other fees under Section 2.04
shall be computed on the basis of a year of 365 or 366 days, as the case

 

 

31

 

--------------------------------------------------------------------------------

may be, and actual days elapsed (including the first day but excluding the last
day) occurring in the period for which such interest is payable.

Section 4.04.       Non-receipt of Funds by the Agent. Unless the Agent shall
have been notified by a Lender or the Borrower prior to the date on which such
notifying party is scheduled to make payment to the Agent (in the case of a
Lender) of the proceeds of a Revolving Credit Loan or a payment under a Letter
of Credit to be made by it hereunder or (in the case of the Borrower) a payment
to the Agent for account of one or more of the Lenders hereunder (such payment
being herein called the "Required Payment"), which notice shall be effective
upon receipt, that it does not intend to make the Required Payment to the Agent,
the Agent may assume that the Required Payment has been made and may, in
reliance upon such assumption (but shall not be required to), make the amount
thereof available to the intended recipient(s) on such date and, if such Lender
or the Borrower (as the case may be) has not in fact made the Required Payment
to the Agent, the recipient(s) of such payment shall, on demand, repay to the
Agent the amount so made available together with interest thereon in respect of
each day during the period commencing on the date such amount was so made
available by the Agent until, but excluding, the date the Agent recovers such
amount at a rate per annum which, for any Lender as recipient, will be equal to
the Federal Funds Rate, and for the Borrower as recipient, will be equal to the
Base Rate plus the Applicable Margin.

 

Section 4.05.

Set-off, Sharing of Payments, Etc.

(a)           The Borrower agrees that, in addition to (and without limitation
of) any right of set-off, bankers' lien or counterclaim a Lender may otherwise
have, each Lender shall have the right and be entitled (after consultation with
the Agent), at its option, to offset balances held by it or by any of its
Affiliates for account of the Borrower or any Subsidiary at any of its offices,
in Dollars or in any other currency, against any principal of or interest on any
of such Lender's Loans, or any other amount payable to such Lender hereunder,
which is not paid when due (regardless of whether such balances are then due to
the Borrower), in which case it shall promptly notify the Borrower and the Agent
thereof, provided that such Lender's failure to give such notice shall not
affect the validity thereof.

(b)           If any Lender shall obtain payment of any principal of or interest
on any Loan made by it to the Borrower under this Agreement (or reimbursement as
to any Letter of Credit) through the exercise of any right of set-off, banker's
lien or counterclaim or similar right or otherwise, and, as a result of such
payment, such Lender shall have received a greater percentage of the principal
or interest (or reimbursement) then due hereunder by the Borrower to such Lender
than the percentage received by any other Lenders, it shall promptly (i) notify
the Agent and each other Lender thereof and (ii) purchase from such other
Lenders participation in (or, if and to the extent specified by such Lender,
direct interests in) the Loans (or participations in Letters of Credit and Swing
Line Loans) made by such other Lenders (or in interest due thereon, as the case
may be) in such amounts, and make such other adjustments from time to time as
shall be equitable, to the end that all the Lenders shall share the benefit of
such excess payment (net of any expenses which may be incurred by such Lender in
obtaining or preserving such excess payment) pro rata in accordance with the
unpaid principal and/or interest on the Loans held by each of the Lenders (or
reimbursements of Letters of Credit or funding participations of Swing Line
Loans). To such end all the Lenders shall make appropriate adjustments among
themselves (by the resale of participations sold or otherwise) if such payment
is rescinded or must otherwise be restored. The Borrower agrees that any Lender
so purchasing a participation (or direct interest) in the Loans made by other
Lenders (or in interest due thereon, as the case may be) may exercise all rights
of set-off, banker's lien, counterclaim or similar rights with respect to such
participation as fully as if such Lender were a direct holder of Loans (or
Letters of Credit and Swing Line Loans) in the amount of such participation.
Nothing contained herein shall require any Lender to exercise any such right or
shall affect the right of any Lender to exercise, and retain

 

 

32

 

--------------------------------------------------------------------------------

the benefits of exercising, any such right with respect to any other
indebtedness or obligation of the Borrower. If under any applicable bankruptcy,
insolvency or other similar law, any Lender receives a secured claim in lieu of
a set-off to which this Section 4.05 applies, such Lender shall, to the extent
practicable, exercise its rights in respect of such secured claim in a manner
consistent with the rights of the Lenders entitled under this Section 4.05 to
share the benefits of any recovery on such secured claim.

 

Section 4.06.

Taxes.

(a)           Payments Free and Clear. Any and all payments by the Borrower
hereunder shall be made, in accordance with Section 4.01, free and clear of and
without deduction for any and all present or future taxes, levies, imposts,
deductions, charges or withholdings, and all liabilities with respect thereto,
excluding, in the case of each Lender, the Issuing Bank, the Swing Line Lender
and the Agent, taxes imposed on its income, and franchise or similar taxes
imposed on it, by (i) any jurisdiction (or political subdivision thereof) of
which the Agent, the Issuing Bank, the Swing Line Lender or such Lender, as the
case may be, is a citizen or resident or in which such Lender has an Applicable
Lending Office, (ii) the jurisdiction (or any political subdivision thereof) in
which the Agent, the Issuing Bank, the Swing Line Lender or such Lender is
organized, or (iii) any jurisdiction (or political subdivision thereof) in which
such Lender, the Issuing Bank, the Swing Line Lender or the Agent is presently
doing business which taxes are imposed solely as a result of doing business in
such jurisdiction (all such non-excluded taxes, levies, imposts, deductions,
charges, withholdings and liabilities being hereinafter referred to as "Taxes").
If the Borrower shall be required by law to deduct any Taxes from or in respect
of any sum payable hereunder to the Lenders, the Issuing Bank, the Swing Line
Lender or the Agent (i) the sum payable shall be increased by the amount
necessary so that after making all required deductions (including deductions
applicable to additional sums payable under this Section 4.06) such Lender, the
Issuing Bank, the Swing Line Lender or the Agent (as the case may be) shall
receive an amount equal to the sum it would have received had no such deductions
been made, (ii) the Borrower shall make such deductions and (iii) the Borrower
shall pay the full amount deducted to the relevant taxing authority or other
Governmental Authority in accordance with applicable law.

(b)           Other Taxes. In addition, to the fullest extent permitted by
applicable law, the Borrower agrees to pay any present or future stamp or
documentary taxes or any other excise or property taxes, charges or similar
levies that arise from any payment made hereunder or from the execution,
delivery or registration of, or otherwise with respect to, this Agreement, any
Assignment or any Security Instrument (hereinafter referred to as "Other
Taxes").

(c)           Indemnification. To the fullest extent permitted by applicable
law, the Borrower will indemnify each Lender, the Issuing Bank, the Swing Line
Lender and the Agent for the full amount of Taxes and Other Taxes (including,
but not limited to, any Taxes or Other Taxes imposed by any Governmental
Authority on amounts payable under this Section 4.06) paid by such Lender, the
Issuing Bank, the Swing Line Lender or the Agent (on their behalf or on behalf
of any Lender), as the case may be, and any liability (including penalties,
interest and expenses) arising therefrom or with respect thereto, whether or not
such Taxes or Other Taxes were correctly or legally asserted unless the payment
of such Taxes was not correctly or legally asserted and such Lender's payment of
such Taxes or Other Taxes was the result of its gross negligence or willful
misconduct. Any payment pursuant to such indemnification shall be made within
thirty (30) days after the date any Lender, the Issuing Bank, the Swing Line
Lender or the Agent, as the case may be, makes written demand therefor. If any
Lender, the Issuing Bank, the Swing Line Lender or the Agent receives a refund
or credit in respect of any Taxes or Other Taxes for which such Lender, Issuing
Bank, the Swing Line Lender or the Agent has received payment from the Borrower
it shall promptly notify the Borrower of such refund or credit and

 

 

33

 

--------------------------------------------------------------------------------

shall, if no Default has occurred and is continuing, within thirty (30) days
after receipt of a request by the Borrower (or promptly upon receipt, if the
Borrower has requested application for such refund or credit pursuant hereto),
pay an amount equal to such refund or credit to the Borrower without interest
(but with any interest so refunded or credited), provided that the Borrower,
upon the request of such Lender, the Issuing Bank, the Swing Line Lender or the
Agent, agrees to return such refund or credit (plus penalties, interest or other
charges) to such Lender or the Agent in the event such Lender or the Agent is
required to repay such refund or credit.

 

(d)

Lender Representations.

(i)            Each Lender represents that it is either (1) a banking
association or corporation organized under the laws of the United States of
America or any state thereof or (2) it is entitled to complete exemption from
United States withholding tax imposed on or with respect to any payments,
including fees, to be made to it pursuant to this Agreement (a) under an
applicable provision of a tax convention to which the United States of America
is a party or (b) because it is acting through a branch, agency or office in the
United States of America and any payment to be received by it hereunder is
effectively connected with a trade or business in the United States of America.
Each Lender that is not a banking association or corporation organized under the
laws of the United States of America or any state thereof agrees to provide to
the Borrower and the Agent on the Closing Date, or on the date of its delivery
of the Assignment pursuant to which it becomes a Lender, and at such other times
as required by United States law or as the Borrower or the Agent shall
reasonably request, two accurate and complete original signed copies of either
(a) Internal Revenue Service Form W-8ECI (or successor form) certifying that all
payments to be made to it hereunder will be effectively connected to a United
States trade or business (the "Form W-8ECI Certification") or (b) Internal
Revenue Service Form W-8BEN (or successor form) certifying that it is entitled
to the benefit of a provision of a tax convention to which the United States of
America is a party which completely exempts from United States withholding tax
all payments to be made to it hereunder (the "Form W-8BEN Certification"). In
addition, each Lender agrees that if it previously filed a Form W-8ECI
Certification, it will deliver to the Borrower and the Agent a new Form W-8ECI
Certification prior to the first payment date occurring in each of its
subsequent taxable years; and if it previously filed a Form W-8BEN
Certification, it will deliver to the Borrower and the Agent a new certification
prior to the first payment date falling in the third year following the previous
filing of such certification. Each Lender also agrees to deliver to the Borrower
and the Agent such other or supplemental forms as may at any time be required as
a result of changes in applicable law or regulation in order to confirm or
maintain in effect its entitlement to exemption from United States withholding
tax on any payments hereunder, provided that the circumstances of such Lender at
the relevant time and applicable laws permit it to do so. If a Lender
determines, as a result of any change in either (i) a Governmental Requirement
or (ii) its circumstances, that it is unable to submit any form or certificate
that it is obligated to submit pursuant to this Section 4.06, or that it is
required to withdraw or cancel any such form or certificate previously
submitted, it shall promptly notify the Borrower and the Agent of such fact. If
a Lender is organized under the laws of a jurisdiction outside the United States
of America, unless the Borrower and the Agent have received a Form W-8BEN
Certification or Form W-8ECI Certification satisfactory to them indicating that
all payments to be made to such Lender hereunder are not subject to United
States withholding tax, the Borrower shall withhold taxes from such payments at
the applicable statutory rate. Each Lender agrees to indemnify and hold harmless
the Borrower or Agent, as applicable, from any United States taxes, penalties,
interest and other expenses, costs and losses incurred or payable by (i) the
Agent as a result of such

 

 

34

 

--------------------------------------------------------------------------------

Lender's failure to submit any form or certificate that it is required to
provide pursuant to this Section 4.06 or (ii) the Borrower or the Agent as a
result of their reliance on any such form or certificate which such Lender has
provided to them pursuant to this Section 4.06.

(ii)          For any period with respect to which a Lender has failed to
provide the Borrower with the form required pursuant to this Section 4.06, if
any, (other than if such failure is due to a change in a Governmental
Requirement occurring subsequent to the date on which a form originally was
required to be provided), such Lender shall not be entitled to indemnification
under Section 4.06 with respect to taxes imposed by the United States which
taxes would not have been imposed but for such failure to provide such forms;
provided, however, that if a Lender, which is otherwise exempt from or subject
to a reduced rate of withholding tax, becomes subject to taxes because of its
failure to deliver a form required hereunder, the Borrower shall take such steps
as such Lender shall reasonably request to assist such Lender to recover such
taxes.

(iii)         Any Lender claiming any additional amounts payable pursuant to
this Section 4.06 shall use reasonable efforts (consistent with legal and
regulatory restrictions) to file any certificate or document requested by the
Borrower or the Agent or to change the jurisdiction of its Applicable Lending
Office or to contest any tax imposed if the making of such a filing or change or
contesting such tax would avoid the need for or reduce the amount of any such
additional amounts that may thereafter accrue and would not, in the sole
determination of such Lender, be otherwise disadvantageous to such Lender.

Section 4.07.       Disposition of Proceeds. The Mortgage contains an assignment
by the Borrower unto and in favor of the Agent for the benefit of the Lenders of
all production and all proceeds attributable thereto which may be produced from
or allocated to the Mortgaged Property, and the Mortgage further provides in
general for the application of such proceeds to the satisfaction of the
Obligations and other indebtedness, liabilities and obligations described
therein and secured thereby. Notwithstanding the assignment contained in the
Mortgage, until the occurrence of an Event of Default, the Lenders agree that
they will neither notify the purchaser or purchasers of such production nor take
any other action to cause such proceeds to be remitted to the Lenders, but the
Lenders will instead permit such proceeds to be paid to the Borrower.

ARTICLE V.

Capital Adequacy and Additional Costs

 

Section 5.01.

Capital Adequacy and Additional Costs.

(a)           The Borrower shall pay directly to each Lender from time to time
on request such amounts as such Lender may determine to be necessary to
compensate such Lender or its parent or holding company for any costs which it
determines are attributable to the maintenance by such Lender or its parent or
holding company, pursuant to any change in, or the introduction, adoption,
reinterpretation or phase-in of, any Governmental Requirement after the Closing
Date, of capital in respect of its Commitment or making, funding or maintaining
any Loans or Letters of Credit (such compensation to include, without
limitation, an amount equal to any reduction of the rate of return on assets or
equity of such Lender or its parent or holding company to a level below that
which such Lender or its parent or holding company could have achieved but for
such Governmental Requirement). Each Lender will notify the Borrower that it is
entitled to compensation pursuant to this Section 5.01(a) as promptly as
practicable after it determines to request such compensation.

 

 

35

 

--------------------------------------------------------------------------------

(b)           Determinations and allocations by any Lender for purposes of this
Article V shall be conclusive, absent manifest error and provided that such
determinations and allocations are made on a reasonable basis.

(c)           LIBOR Regulations, etc. The Borrower shall pay directly to each
Lender from time to time such amounts as such Lender may determine to be
necessary to compensate such Lender for any costs which it determines are
attributable to its making or maintaining of any LIBOR Loans or issuing or
participating in Letters of Credit or making, maintaining or participating in
Swing Line Loans hereunder or its obligation to make any LIBOR Loans or Swing
Line Loans or issue or participate in any Letters of Credit or Swing Line Loans
hereunder, or any reduction in any amount receivable by such Lender hereunder in
respect of any of such LIBOR Loans, Letters of Credit or Swing Line Loans or
such obligation (such increases in costs and reductions in amounts receivable
being herein called "Additional Costs"), resulting from any Regulatory Change
which: (i) changes the basis of taxation of any amounts payable to such Lender
under this Agreement or any Note in respect of any of such LIBOR Loans or
Letters of Credit (other than taxes imposed on the overall net income of such
Lender or of its Applicable Lending Office for any of such LIBOR Loans or Swing
Line Loans by the jurisdiction in which such Lender has its principal office or
Applicable Lending Office); or (ii) imposes or modifies any reserve, special
deposit, insurance, minimum capital, capital ratio or similar requirements
relating to any extensions of credit or other assets of, or any deposits with or
other liabilities of such Lender, or the Commitment or Loans of such Lender or
the LIBOR interbank market; or (iii) imposes any other condition affecting this
Agreement or any Note (or any of such extensions of credit or liabilities) or
such Lender's Commitment or Loans. Each Lender will notify the Agent and the
Borrower of any event occurring after the Closing Date which will entitle such
Lender to compensation pursuant to this Section 5.01(c) as promptly as
practicable after it obtains knowledge thereof and determines to request such
compensation, and will designate a different Applicable Lending Office for the
Loans of such Lender affected by such event if such designation will avoid the
need for, or reduce the amount of, such compensation and will not, in the sole
opinion of such Lender, be disadvantageous to such Lender, provided that such
Lender shall have no obligation to so designate an Applicable Lending Office
located in the United States. If any Lender requests compensation from the
Borrower under this Section 5.01(c), the Borrower may, by notice to such Lender,
suspend the obligation of such Lender to make additional Loans of the Type with
respect to which such compensation is requested until the Regulatory Change
giving rise to such request ceases to be in effect (in which case the provisions
of Section 5.04 shall be applicable).

(d)           Regulatory Change. Without limiting the effect of the provisions
of Section 5.01(c), in the event that at any time (by reason of any Regulatory
Change or any other circumstances arising after the Closing Date affecting
(a) any Lender, (b) the LIBOR interbank market or (c) such Lender's position in
such market), the LIBOR Rate, as determined in good faith by such Lender, will
not adequately and fairly reflect the cost to such Lender of funding its LIBOR
Loans, then, if such Lender so elects, by notice to the Borrower and the Agent,
the obligation of such Lender to make additional LIBOR Loans shall be suspended
until such Regulatory Change or other circumstances ceases to be in effect (in
which case the provisions of Section 5.04 shall be applicable).

(e)           Capital Adequacy. Without limiting the effect of the foregoing
provisions of this Section 5.01 (but without duplication), the Borrower shall
pay directly to any Lender from time to time on request such amounts as such
Lender may reasonably determine to be necessary to compensate such Lender or its
parent or holding company for any costs which it determines are attributable to
the maintenance by such Lender or its parent or holding company (or any
Applicable Lending Office), pursuant to any Governmental Requirement following
any Regulatory Change, of capital in respect of its Commitment, its Note, or its
Loans or any interest

 

 

36

 

--------------------------------------------------------------------------------

held by it in any Letter of Credit or Swing Line Loan, such compensation to
include, without limitation, an amount equal to any reduction of the rate of
return on assets or equity of such Lender or its parent or holding company (or
any Applicable Lending Office) to a level below that which such Lender or its
parent or holding company (or any Applicable Lending Office) could have achieved
but for such Governmental Requirement. Such Lender will notify the Borrower that
it is entitled to compensation pursuant to this Section 5.01(e) as promptly as
practicable after it determines to request such compensation.

(f)           Compensation Procedure. Any Lender notifying the Borrower of the
incurrence of Additional Costs under this Section 5.01 shall in such notice to
the Borrower and the Agent set forth in reasonable detail the basis and amount
of its request for compensation. Determinations and allocations by each Lender
for purposes of this Section 5.01 of the effect of any Regulatory Change
pursuant to Section 5.01(c) or (d), or of the effect of capital maintained
pursuant to Section 5.01(e), on its costs or rate of return of maintaining Loans
or its obligation to make Loans or issue Letters of Credit, or on amounts
receivable by it in respect of Loans or Letters of Credit, and of the amounts
required to compensate such Lender under this Section 5.01, shall be conclusive
and binding for all purposes absent manifest error, provided that such
determinations and allocations are made on a reasonable basis. Any request for
additional compensation under this Section 5.01 shall be paid by the Borrower
within thirty (30) days of the receipt by the Borrower of the notice described
in this Section 5.01(f).

Section 5.02.       Limitation on LIBOR Loans. Anything herein to the contrary
notwithstanding, if, on or prior to the determination of any LIBOR Rate for any
Interest Period:

(i)            the Agent determines (which determination shall be conclusive,
absent manifest error) that quotations of interest rates for the relevant
deposits referred to in the definition of "LIBOR Rate" in Section 1.02 are not
being provided in the relevant amounts or for the relevant maturities for
purposes of determining rates of interest for LIBOR Loans as provided herein; or

(ii)          the Agent determines (which determination shall be conclusive,
absent manifest error) that the relevant rates of interest referred to in the
definition of "LIBOR Rate" in Section 1.02 upon the basis of which the rate of
interest for LIBOR Loans for such Interest Period is to be determined are not
sufficient to adequately cover the cost to the Lenders of making or maintaining
LIBOR Loans;

then the Agent shall give the Borrower prompt notice thereof, and so long as
such condition remains in effect, the Lenders shall be under no obligation to
make additional LIBOR Loans.

Section 5.03.       Illegality. Notwithstanding any other provision of this
Agreement, in the event that it becomes unlawful for any Lender or its
Applicable Lending Office to honor its obligation to make or maintain LIBOR
Loans hereunder, then such Lender shall promptly notify the Borrower thereof and
such Lender's obligation to make LIBOR Loans shall be suspended until such time
as such Lender may again make and maintain LIBOR Loans (in which case the
provisions of Section 5.04 shall be applicable).

Section 5.04.       Base Rate Loans Pursuant to Sections 5.01, 5.02 and 5.03. If
the obligation of any Lender to make LIBOR Loans shall be suspended pursuant to
Sections 5.01, 5.02 or 5.03 ("Affected Loans"), all Affected Loans which would
otherwise be made by such Lender shall be made instead as Base Rate Loans (and,
if an event referred to in Section 5.01 or Section 5.03 has occurred and such
Lender so requests by notice to the Borrower, all Affected Loans of such Lender
then outstanding shall be automatically converted into Base Rate Loans on the
date specified by such Lender in such notice) and, to the extent that Affected
Loans are so made as (or converted into) Base Rate Loans, all payments of

 

 

37

 

--------------------------------------------------------------------------------

principal which would otherwise be applied to such Lender's Affected Loans shall
be applied instead to its Base Rate Loans.

Section 5.05.       Compensation. The Borrower shall pay to each Lender within
thirty (30) days of receipt of written request of such Lender (which request
shall set forth, in reasonable detail, the basis for requesting such amounts and
which shall be conclusive and binding for all purposes absent manifest error and
provided that such determinations are made on a reasonable basis), such amount
or amounts as shall compensate it for any actual loss, cost, expense or
liability which such Lender determines are attributable to:

(i)            any payment, prepayment or conversion of a LIBOR Loan properly
made by such Lender or the Borrower for any reason (including, without
limitation, the acceleration of the Loans pursuant to Section 10.01) on a date
other than the last day of the Interest Period for such Loan; or

(ii)          any failure by the Borrower for any reason (including but not
limited to, the failure of any of the conditions precedent specified in Article
VI to be satisfied) to borrow, continue or convert a LIBOR Loan from such Lender
on the date for such borrowing, continuation or conversion specified in the
relevant notice given pursuant to Section 2.02(c).

 

Section 5.06.

Replacement Lenders.

(a)           If (i) any Lender has notified the Borrower and the Agent of its
incurring Additional Costs under Section 5.01, (ii) any Lender has required the
Borrower to make payments for Taxes under Section 4.06, or (iii) any Lender
refuses to consent to any amendment, waiver or other modification of any Loan
Document requested by the Borrower that requires the consent of a greater
percentage of the Lenders than the Majority Lenders and such amendment, waiver
or other modification is consented to by the Majority Lenders, then the Borrower
may, in whole but not in part, terminate the Commitment of any such Lender
(other than the Agent) (the "Terminated Lender") at any time upon five (5)
Business Days' prior written notice to the Terminated Lender and the Agent (such
notice referred to herein as a "Notice of Termination"); provided however, that,
if prior to any such transfer and assignment the circumstances or event that
resulted in such Lender's claim for Additional Costs under Section 5.01 or Taxes
under Section 4.06, as the case may be, cease to cause such Lender to incur
Additional Costs, or cease to result in amounts being payable under Section
4.06, as the case may be, or if such Lender shall waive its right to claim
Additional Costs under Section 5.01 in respect of such circumstances or event,
or shall waive its right to require further payments under Section 4.06 in
respect of such circumstances or event, or shall consent to the proposed
amendment, waiver, consent or other modification, as the case may be, then such
Lender shall not thereafter be required to make any such transfer and assignment
hereunder.

(b)           In order to effect the termination of the Commitment of the
Terminated Lender, the Borrower shall: (i) obtain an agreement with one or more
Lenders to increase their Commitment or Commitments and/or (ii) request any one
or more other banking institutions to become parties to this Agreement in place
and instead of such Terminated Lender and agree to accept a Commitment or
Commitments; provided, however, that such one or more other banking institutions
are reasonably acceptable to the Agent, the Issuing Bank and the Swing Line
Lender and become parties by executing an Assignment (the Lenders or other
banking institutions that agree to accept in whole or in part the Commitment of
the Terminated Lender being referred to herein as the "Replacement Lenders"),
such that the aggregate increased and/or accepted Commitments of the Replacement
Lenders under clauses (i) and (ii) above equal the Commitment of the Terminated
Lender.

 

 

38

 

--------------------------------------------------------------------------------

(c)           The Notice of Termination shall include the name of the Terminated
Lender, the date the termination will occur (the "Lender Termination Date"), and
the Replacement Lender or Replacement Lenders to which the Terminated Lender
will assign its Commitment and, if there will be more than one Replacement
Lender, the portion of the Terminated Lender's Commitment to be assigned to each
Replacement Lender.

(d)           On the Lender Termination Date, (i) the Terminated Lender shall by
execution and delivery of an Assignment assign its Commitment to the Replacement
Lender or Replacement Lenders (pro rata, if there is more than one Replacement
Lender, in proportion to the portion of the Terminated Lender's Commitment to be
assigned to each Replacement Lender) indicated in the Notice of Termination and
shall assign to the Replacement Lender or Replacement Lenders each of its Loans
(if any) then outstanding and participation interests in Letters of Credit (if
any) then outstanding pro rata as aforesaid), (ii) the Terminated Lender shall
endorse its Note, payable without recourse, representation or warranty to the
order of the Replacement Lender or Replacement Lenders (pro rata as aforesaid),
(iii) the Replacement Lender or Replacement Lenders shall purchase the Note held
by the Terminated Lender (pro rata as aforesaid) at a price equal to the unpaid
principal amount thereof plus interest and facility and other fees accrued and
unpaid to the Lender Termination Date, and (iv) the Replacement Lender or
Replacement Lenders will thereupon (pro rata as aforesaid) succeed to and be
substituted in all respects for the Terminated Lender with like effect as if
becoming a Lender pursuant to the terms of Section 12.06(b), and the Terminated
Lender will have the rights and benefits of an assignor under Section 12.06(b).
To the extent not in conflict, the terms of Section 12.06(b) shall supplement
the provisions of this Section 5.06(d). For each assignment made under this
Section 5.06, the Replacement Lender shall pay to the Agent the processing fee
provided for in Section 12.06(b). The Borrower will be responsible for the
payment of any actual breakage costs associated with termination and Replacement
Lenders, as set forth in Section 5.05.

ARTICLE VI.

Conditions Precedent

Section 6.01.      Initial Funding. The obligation of the Lenders to make the
Initial Funding is subject to the receipt by the Agent and the Lenders of all
fees payable pursuant to Section 2.04 on or before the Closing Date and the
receipt by the Agent of the following documents (in sufficient original
counterparts, other than the Notes, for each Lender) and satisfaction of the
other conditions provided in this Section 6.01, each of which shall be
satisfactory to the Agent in form and substance:

(a)           A certificate of the Secretary or an Assistant Secretary of the
Borrower to the effect that his certificate delivered on the closing date of the
Existing Credit Agreement setting forth (i) resolutions of its board of
directors with respect to the authorization of the Borrower to execute and
deliver the Loan Documents to which it is a party and to enter into the
transactions contemplated in those documents, (ii) the officers of the Borrower
(y) who are authorized to sign the Loan Documents to which Borrower is a party
and (z) who will, until replaced by another officer or officers duly authorized
for that purpose, act as its representative for the purposes of signing
documents and giving notices and other communications in connection with this
Agreement and the transactions contemplated hereby, (iii) specimen signatures of
the authorized officers, and (iv) that the articles or certificate of
incorporation and bylaws of the Borrower, remain true, correct and complete, and
have not been modified or revoked and are in full force and effect. The Agent
and the Lenders may conclusively rely on such certificate until the Agent
receives notice in writing from the Borrower to the contrary. Such certificate
shall be accompanied by an incumbency certificate signed by another officer as
to the incumbency and specimen signature of the Secretary or Assistant Secretary
executing such certificate.

 

 

39

 

--------------------------------------------------------------------------------

(b)           A certificate of the Secretary or an Assistant Secretary of each
Guarantor to the effect that his certificate delivered on the closing date of
the Existing Credit Agreement setting forth (i) resolutions of its board of
directors with respect to the authorization of such Guarantor to execute and
deliver the Loan Documents to which it is a party and to enter into the
transactions contemplated in those documents, (ii) the officers of such
Guarantor (y) who are authorized to sign the Loan Documents to which Guarantor
is a party and (z) who will, until replaced by another officer or officers duly
authorized for that purpose, act as its representative for the purposes of
signing documents and giving notices and other communications in connection with
this Agreement and the transactions contemplated hereby, (iii) specimen
signatures of the authorized officers, and (iv) that the articles or certificate
of incorporation and bylaws of such Guarantor, certified remain true, correct
and complete, and have not been modified or revoked and are in full force and
effect. The Agent and the Lenders may conclusively rely on such certificate
until they receive notice in writing from such Guarantor to the contrary. Such
certificate shall be accompanied by an incumbency certificate signed by another
officer as to the incumbency and specimen signature of the Secretary or
Assistant Secretary executing such certificate.

 

(c)

[Reserved.]

(d)           Certificates of the appropriate state agencies with respect to the
existence, qualification and good standing of the Borrower and
Guarantor(s)/Subsidiaries.

(e)           A compliance certificate which shall be substantially in the form
of Exhibit C, duly and properly executed by a Responsible Officer and dated as
of the Closing Date.

 

(f)

The Notes, duly completed and executed.

(g)           The Security Instruments, including those described on Exhibit D,
duly completed and executed in sufficient number of counterparts for recording,
if necessary.

 

(h)

[Reserved.]

(i)            A certificate of insurance coverage of the Borrower evidencing
that the Borrower its Subsidiaries, and the Guarantors are carrying insurance in
accordance with Section 7.19.

(j)            Title information as the Agent may require satisfactory to the
Agent setting forth the status of title to at least 80% of the value of the Oil
and Gas Properties included in the Initial Reserve Reports, including, without
limitation, the Oil and Gas Properties owned by Southern G.

 

(k)

[Reserved.]

 

(l)

[Reserved.]

 

(m)

[Reserved.]

(n)           The Agent shall have received, at least five Business Days prior
to the Closing Date, all documentation and other information required by
regulatory authorities under applicable "know your customer" and anti-money
laundering rules and regulations, including without limitation the Act.

(o)           All consents in form and substance satisfactory to all Lenders of
all Persons required by the Lenders, where the failure to obtain any such
consents would reasonably be expected to have a Material Adverse Effect.

 

 

40

 

--------------------------------------------------------------------------------

(p)           Agent shall have received, reviewed, and be satisfied, in Agent's
sole discretion, with:

(i)            the annual and most recent interim financial statements described
in Section 7.02;

 

(ii)

the Initial Reserve Reports;

(iii)         such lien searches as the Agent shall require covering Mortgaged
Property; and

(iv)         other material documents and agreements (including, without
limitation, all: (1) Material Agreements listed on Schedule 7.22, and (2) all
other material documents and agreements, as the Agent shall have requested).

(q)           The transactions contemplated by the Acquisition Agreement shall
have been consummated (without the waiver or amendment of any material condition
unless consented to in writing by the Agent), and each of the parties thereto
shall have complied in all material respects with all covenants set forth in the
Acquisition Agreement to be complied with by it on or prior to the Closing Date
(without the waiver or amendment of any of the material terms thereof unless
consented to in writing by the Agent) and Borrower shall have delivered to Agent
and the Lenders certified copies of the Acquisition Agreement and all other
documents, assignments, instruments, and other agreements, executed and
delivered in connection therewith (collectively, the "Acquisition Documents").

(r)           After giving effect to the acquisition of the Acquired Assets and
the related incurrence of Debt hereunder and under the Second Lien Loan
Agreement and the other transactions contemplated hereby, the Borrower and its
Subsidiaries shall have no indebtedness other than (i) Debt outstanding
hereunder and under the Second Lien Loan Agreement and (ii) Debt set forth in
Schedule 9.01.

(s)           The Second Lien Loan Agreement shall have been executed and
delivered and the transactions contemplated thereby shall have been consummated
and Borrower shall have furnished to Agent and the Lenders (i) evidence that
Borrower has received, in immediately available funds, gross cash proceeds from
the Second Lien Loan of $150,000,000, and (ii) certified copies of the Second
Lien Loan Agreement and the Second Lien Loan Documents, including, without
limitation, the Intercreditor Agreement, fully executed by all parties thereto,
each of which shall be in form and substance reasonably satisfactory to the
Agent.

(t)            Agent and the Lenders shall have received (i) satisfactory
evidence of Borrower's receipt from the Seller of unencumbered title to 100% of
the equity interests of Southern G and that Southern G has good and defensible
title to the Oil and Gas Properties acquired in connection with the Acquisition,
subject only to Excepted Liens and other Liens permitted by Section 9.02, (ii)
such financial statements and other information in respect of the Acquired
Assets, including lease operating expense statements in respect of the Oil and
Gas Properties owned by Southern G for the 2005 and 2006 years and other
operating and financial information, as is reasonably available to the Borrower,
which information shall not be materially inconsistent with the information
previously provided to the Agent or any Lender, and (iii) satisfactory evidence
that Southern G has no Debt (other than Debt arising under the Loan Documents
and the Second Lien Loan Documents) and has conducted no business activities or
operations other than those relating to ownership of Oil and Gas Properties
acquired by it pursuant to that certain Purchase and Sale Agreement by and among
Anadarko Petroleum Corporation, Anadarko E & P Company LP, Howell Petroleum
Corporation and Kerr-McGee Oil & Gas Onshore LP, as Seller, and Exco Resources
Inc. and Southern G, as Purchaser dated as of February 1, 2007.

 

 

41

 

--------------------------------------------------------------------------------

(u)           The Lenders shall have received a pro forma consolidated balance
sheet and related pro forma consolidated statements of income and cash flows of
the Borrower as of and for the twelve-month period ending on December 31, 2006,
prepared after giving effect to the acquisition of the Acquired Assets and the
related incurrence of Debt hereunder and under the Second Lien Loan Agreement as
if such transactions had occurred as of such date (in the case of such balance
sheet) or at the beginning of such period (in the case of such other financial
statements), which pro forma financial statements shall be in form and substance
satisfactory to the Majority Lenders.

(v)           The Agent shall have received a certificate, in form and substance
satisfactory to the Agent, from the chief financial officer of the Borrower
certifying that the Borrower and its Subsidiaries, on a consolidated basis after
giving effect to the acquisition of the Acquired Assets and the related
incurrence of Debt hereunder and under the Second Lien Loan Agreement and the
other transactions contemplated hereby, are solvent.

(w)          All requisite Governmental Authorities and third parties shall have
approved or consented to the acquisition of the Acquired Assets (except for any
such consents routinely obtained on a post-closing basis in transactions similar
to the Acquisition) and the related incurrence of Debt hereunder and under the
Second Lien Loan Agreement and the other transactions contemplated hereby to the
extent required, all applicable appeal periods shall have expired and there
shall be no litigation, governmental, administrative or judicial action, actual
or threatened, that could reasonably be expected to restrain, prevent or impose
burdensome conditions on any of such transactions.

(x)           The Borrower shall have entered into Hedging Agreements
establishing a commodity price hedging program consistent with the pricing
assumptions contained in the financial models of the Borrower previously
provided to the Lenders, such Hedging Agreements to be in form and substance
reasonably satisfactory to, and with Lenders or affiliates of Lenders or any
other counterparty or counterparties acceptable to, the Agent, covering not less
than 75% of the anticipated production as of the Closing Date from proved,
developed, producing Oil and Gas Properties of the Borrower and the Guarantors
including the Oil and Gas Properties acquired in the Acquisition through
December 31, 2011.

(y)           Such other documents, in form and substance satisfactory to Agent,
as the Agent or any Lender or special counsel to the Agent may reasonably
request, including, without limitation, (i) documentation of all environmental
and title matters relating to each of the Borrower's, each of the Guarantor's
and each of the Borrower's Subsidiaries' Oil and Gas Properties including,
without limitation, the Oil and Gas Properties of Southern G and any other
Mortgaged Properties and (ii) all Material Agreements.

Section 6.02.      Initial and Subsequent Loans and Letters of Credit. The
obligation of the Lenders to make Loans to the Borrower upon the occasion of
each borrowing hereunder and to issue, renew, extend or reissue Letters of
Credit for the account of the Borrower and for the account of any Active
Subsidiary of the Borrower (including the Initial Funding) is subject to the
further conditions precedent that, as of the date of such Loans and after giving
effect thereto:

 

(a)

no Default shall exist;

(b)           the representations and warranties made by the Borrower in Article
VII and in the Security Instruments shall be true on and as of the date of the
making of such Loans or issuance, renewal, extension or reissuance of a Letter
of Credit with the same force and effect as if made on and as of such date and
following such new borrowing, except to the extent such

 

 

42

 

--------------------------------------------------------------------------------

representations and warranties are expressly limited to an earlier date or the
Majority Lenders may expressly consent in writing to the contrary; and

(c)           after giving effect to the requested borrowing or borrowings, no
Default will exist and no Default as defined in the Second Lien Loan Agreement
will exist.

Each request for a borrowing or issuance, renewal, extension or reissuance of a
Letter of Credit by the Borrower hereunder shall constitute a certification by
the Borrower to the effect set forth in Section 6.02(b) and Section 6.02(c)
(both as of the date of such notice and, unless the Borrower otherwise notifies
the Agent prior to the date of and immediately following such borrowing or
issuance, renewal, extension or reissuance of a Letter of Credit as of the date
thereof).

Section 6.03.       Conditions Precedent for the Benefit of Lenders. All
conditions precedent to the obligations of the Lenders to make any Loan are
imposed hereby solely for the benefit of the Lenders, and no other Person may
require satisfaction of any such condition precedent or be entitled to assume
that the Lenders will refuse to make any Loan in the absence of strict
compliance with such conditions precedent.

Section 6.04.       No Waiver. No waiver of any condition precedent shall
preclude the Agent or the Lenders from requiring such condition to be met prior
to making any subsequent Loan. Without limiting the generality of the foregoing,
the making of a Loan shall not be construed as a waiver of any Default,
regardless of whether the Agent or any Lender may have had notice or knowledge
of such Default at the time.

ARTICLE VII.

Representations and Warranties

The Borrower represents and warrants to the Agent and the Lenders that (each
representation and warranty herein is given as of the Closing Date and shall be
deemed repeated and reaffirmed on the dates of each borrowing and issuance,
renewal, extension or reissuance of a Letter of Credit as provided in
Section 6.02):

Section 7.01.      Corporate Existence. Each of the Borrower and each
Subsidiary: (i) is a corporation or limited liability company duly organized,
legally existing and in good standing under the laws of the jurisdiction of its
organization; (ii) has all requisite corporate or limited liability company
power, and has all material governmental licenses, authorizations, consents and
approvals necessary to own its assets and carry on its business as now being or
as proposed to be conducted; and (iii) is qualified to do business in all
jurisdictions in which the nature of the business conducted by it makes such
qualification necessary and where failure so to qualify would have a Material
Adverse Effect.

Section 7.02.       Financial Condition. The audited consolidated balance sheet
of the Borrower and its Consolidated Subsidiaries as at December 31, 2006, and
the related consolidated statement of income, stockholders' equity and cash flow
of the Borrower and its Consolidated Subsidiaries for the fiscal year ended on
said date, with the opinion thereon of Grant Thornton LLP heretofore furnished
to each of the Lenders, are complete and correct and fairly present the
consolidated financial condition of the Borrower and its Consolidated
Subsidiaries as at said date and the results of its operations for such fiscal
year, all in accordance with GAAP, as applied on a consistent basis (subject, in
the case of the interim financial statements, to normal year-end adjustments and
the absence of footnotes). Neither the Borrower nor any Subsidiary has on the
Closing Date any material Debt, contingent liabilities, liabilities for taxes,
unusual forward or long-term commitments or unrealized or anticipated losses
from any unfavorable commitments, except as referred to or reflected or provided
for in the Financial Statements or in Schedule 7.02. Since the later of December
31, 2006 or the end of the most recent fiscal year for which financial
statements have been delivered to the Lenders pursuant to Section 8.01(a), there
has been no change or event having a Material Adverse Effect. Since the later of
December 31, 2006 or the end of the

 

 

43

 

--------------------------------------------------------------------------------

most recent fiscal year for which financial statements have been delivered to
the Lenders pursuant to Section 8.01(a), neither the business nor the Properties
of the Borrower or any Subsidiary have been materially and adversely 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
Governmental Authority, riot, activities of armed forces or acts of God or of
any public enemy.

Section 7.03.       Litigation and Judgments. Except as disclosed to the Lenders
in Schedule 7.03 hereto: (i) there is no litigation, legal, administrative or
arbitral proceeding, investigation or other action of any nature pending or, to
the knowledge of the Borrower threatened against or affecting the Borrower, any
of its Subsidiaries, or any Guarantor which involves the possibility of any
judgment or liability against the Borrower, any of its Subsidiaries, or any
Guarantor not fully covered by insurance (except for normal deductibles) or
which could result in a Material Adverse Effect; and (ii) there are no
outstanding judgments against the Borrower, any of its Subsidiaries, or any
Guarantor.

Section 7.04.      No Breach. Neither the execution and delivery of the Loan
Documents, nor compliance with the terms and provisions hereof will conflict
with or result in a breach of, or require any consent which has not been
obtained as of the Closing Date under, the respective charter, by-laws, or
limited liability company agreement of the Borrower or any Subsidiary, or any
Governmental Requirement or any Material Agreement, or constitute a default
under any such agreement, or result in the creation or imposition of any Lien
upon any of the revenues or assets of the Borrower or any Subsidiary pursuant to
the terms of any such agreement or instrument other than the Liens created by
the Loan Documents.

Section 7.05.      Authority. The Borrower and each Subsidiary have all
necessary corporate power and authority to execute, deliver and perform its
obligations under the Loan Documents to which it is a party; and the execution,
delivery and performance by the Borrower and each Subsidiary of the Loan
Documents to which it is a party, have been duly authorized by all necessary
corporate action on its part; and the Loan Documents constitute the legal, valid
and binding obligations of the Borrower and each Subsidiary, enforceable in
accordance with their terms.

Section 7.06.      Approvals. No authorizations, approvals or consents of, and
no filings or registrations with, any Governmental Authority or any Person are
necessary for the execution, delivery or performance by the Borrower or any
Subsidiary of the Loan Documents or for the validity or enforceability thereof,
except for the recording and filing of the Security Instruments as required by
this Agreement.

 

Section 7.07.

Use of Loans. The proceeds of the Loans shall be used by the Borrower to:

(a)           fund the purchase of the Acquired Assets pursuant to the
Acquisition Agreement and to fund other acquisitions; and

(b)           provide for the working capital and general corporate purpose
needs of the Borrower and its Active Subsidiaries.

Neither the Borrower, any Guarantor, nor any of the Borrower's Subsidiaries is
engaged principally, or as one of its important activities, in the business of
extending credit for the purpose, whether immediate, incidental or ultimate, of
buying or carrying margin stock (within the meaning of Regulation T, U or X of
the Board of Governors of the Federal Reserve System) and no part of the
proceeds of any Loan hereunder will be used to buy or carry any margin stock.

 

Section 7.08.

ERISA.

 

 

44

 

--------------------------------------------------------------------------------

(a)           The Borrower, each Subsidiary and each ERISA Affiliate have
complied in all material respects with ERISA and, where applicable, the Code
regarding each Plan.

(b)           Each Plan is, and has been, maintained in substantial compliance
with ERISA and, where applicable, the Code.

(c)           No act, omission or transaction has occurred which could result in
imposition on the Borrower, any Subsidiary or any ERISA Affiliate (whether
directly or indirectly) of (i) either a civil penalty assessed pursuant to
Section 502(c), (i) or (l) of ERISA or a tax imposed pursuant to Chapter 43 of
Subtitle D of the Code or (ii) breach of fiduciary duty liability damages under
Section 409 of ERISA.

(d)           No Plan (other than a defined contribution plan) or any trust
created under any such Plan has been terminated since September 2, 1974. No
liability to the PBGC (other than for the payment of current premiums which are
not past due) by the Borrower, any Subsidiary or any ERISA Affiliate has been or
is expected by the Borrower, any Subsidiary or any ERISA Affiliate to be
incurred with respect to any Plan. No ERISA Event with respect to any Plan has
occurred.

(e)           Full payment when due has been made of all amounts which the
Borrower, any Subsidiary or any ERISA Affiliate is required under the terms of
each Plan or applicable law to have paid as contributions to such Plan, and no
accumulated funding deficiency (as defined in Section 302 of ERISA and
Section 412 of the Code), whether or not waived, exists with respect to any
Plan.

(f)           The actuarial present value of the benefit liabilities under each
Plan which is subject to Title IV of ERISA does not, as of the end of the
Borrower's most recently ended fiscal year, exceed the current value of the
assets (computed on a plan termination basis in accordance with Title IV of
ERISA) of such Plan allocable to such benefit liabilities. The term "actuarial
present value of the benefit liabilities" shall have the meaning specified in
Section 4041 of ERISA.

(g)           None of the Borrower, any Subsidiary or any ERISA Affiliate
sponsors, maintains, or contributes to an employee welfare benefit plan, as
defined in Section 3(1) of ERISA, including, without limitation, any such plan
maintained to provide benefits to former employees of such entities, that may
not be terminated by the Borrower, a Subsidiary or any ERISA Affiliate in its
sole discretion at any time without any material liability.

(h)           None of the Borrower, any Subsidiary or any ERISA Affiliate
sponsors, maintains or contributes to, or has at any time in the preceding six
calendar years, sponsored, maintained or contributed to, any Multiemployer Plan.

(i)            None of the Borrower, any Subsidiary or any ERISA Affiliate is
required to provide security under Section 401(a)(29) of the Code due to a Plan
amendment that results in an increase in current liability for the Plan.

Section 7.09.      Taxes. Except as set out in Schedule 7.09, each of the
Borrower and its Subsidiaries has filed all United States Federal income tax
returns and all other tax returns which are required to be filed by them and
have paid all material 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
and other governmental charges are, in the opinion of the Borrower, adequate. No
tax lien has been filed and, to the knowledge of the Borrower, no claim is being
asserted with respect to any such tax, fee or other charge.

 

Section 7.10.

Titles, Etc.

 

 

45

 

--------------------------------------------------------------------------------

(a)           Except as set out in Schedule 7.10, each of the Borrower and its
Subsidiaries has good and defensible title to its material (individually or in
the aggregate) Properties, including, without limitation, the Acquired Assets,
free and clear of all Liens, except Liens permitted by Section 9.02. Except as
set forth in Schedule 7.10, after giving full effect to the Excepted Liens, the
Borrower owns the net interests in production attributable to the Hydrocarbon
Interests reflected in the most recently delivered Reserve Report and the
ownership of such Properties shall not in any material respect obligate the
Borrower to bear the costs and expenses relating to the maintenance, development
and operations of each such Property in an amount in excess of the working
interest of each Property set forth in the most recently delivered Reserve
Report without a proportional increase in the associated net revenue interest.

(b)           All leases and agreements necessary for the conduct of the
business of the Borrower and its Subsidiaries are valid and subsisting, in full
force and effect (including as to depths) and there exists no default or event
or circumstance which with the giving of notice or the passage of time or both
would give rise to a default by the Borrower and/or its Subsidiaries, and to the
best of the Borrower's knowledge, there exists no default or event or
circumstance which with the giving of notice or the passage of time or both
would give rise to a default by a third party, under any such lease or leases,
which would affect in any material respect the conduct of the business of the
Borrower and its Subsidiaries.

(c)           The rights, Properties and other assets presently owned, leased or
licensed by the Borrower and its Subsidiaries including, without limitation, all
easements and rights of way, include all rights, Properties and other assets
necessary to permit the Borrower and its Subsidiaries to conduct their business
in all material respects in the same manner as its business has been conducted
prior to the Closing Date.

(d)           All of the assets and Properties of the Borrower and its
Subsidiaries which are reasonably necessary for the operation of its business
are in operable working condition and are maintained in accordance with prudent
business standards.

Section 7.11.     No Material Misstatements. No written information, statement,
exhibit, certificate, document or report furnished to the Agent and the Lenders
(or any of them) by the Borrower or any Subsidiary in connection with the
negotiation of this Agreement contained any material misstatement of fact or
omitted to state a material fact or any fact necessary to make the statement
contained therein not materially misleading in the light of the circumstances in
which made and with respect to the Borrower and its Subsidiaries taken as a
whole. To the best of the Borrower's knowledge, there is no fact peculiar to the
Borrower or any Subsidiary which has a Material Adverse Effect or in the future
could have (so far as the Borrower can now foresee) a Material Adverse Effect
and which has not been set forth in this Agreement or the other documents,
certificates and statements furnished to the Agent by or on behalf of the
Borrower or any Subsidiary prior to, or on, the Closing Date in connection with
the transactions contemplated hereby.

Section 7.12.      Investment Company Act. Neither the Borrower nor any
Subsidiary is an "investment company" or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended.

 

Section 7.13.

Reserved.

Section 7.14.      Subsidiaries. Except as set forth on Schedule 7.14, the
Borrower has no Subsidiaries.

Section 7.15.       Location of Business and Offices. The Borrower's principal
place of business and chief executive offices are located at the address stated
on the signature page of this Agreement. The

 

 

46

 

--------------------------------------------------------------------------------

principal place of business and chief executive office of each Subsidiary are
located at the addresses stated on Schedule 7.14.

Section 7.16.      Defaults. Neither the Borrower nor any Subsidiary is in
default nor has any event or circumstance occurred which, but for the expiration
of any applicable grace period or the giving of notice, or both, would
constitute a default by the Borrower and/or its Subsidiaries, and to the best of
the Borrower's knowledge, no event or circumstance has occurred which, but for
the expiration of any applicable grace period or the giving of notice, or both,
would constitute a default by a third party under any Material Agreement or
instrument to which the Borrower or any Subsidiary is a party or by which the
Borrower or any Subsidiary is bound which default could have a Material Adverse
Effect. No Default hereunder has occurred and is continuing.

Section 7.17.      Environmental Matters. Except (i) as provided in
Schedule 7.17 or (ii) as would not have a Material Adverse Effect (or with
respect to (c), (d) and (e) below, where the failure to take such actions would
not have a Material Adverse Effect):

(a)           Neither any Property of the Borrower or any Subsidiary nor the
operations conducted thereon, or any failure to act, violate any order or
requirement of any court or Governmental Authority or any Environmental Laws;

(b)           Without limitation of clause (a) above, no Property of the
Borrower or any Subsidiary nor the operations currently conducted thereon, or
any failure to act, or, to the best knowledge of the Borrower, by any prior
owner or operator of such Property or operation, are in violation of or subject
to any existing, pending or threatened action, suit, investigation, inquiry or
proceeding by or before any court or Governmental Authority or to any remedial
obligations under Environmental Laws;

(c)           All notices, permits, licenses or similar authorizations, if any,
required to be obtained or filed in connection with the operation or use of any
and all Property of the Borrower and each Subsidiary, including without
limitation past or present treatment, storage, disposal or release of a
hazardous substance or solid waste into the environment, have been duly obtained
or filed, and the Borrower and each Subsidiary are in compliance with the terms
and conditions of all such notices, permits, licenses and similar
authorizations;

(d)           All hazardous substances, solid waste, and oil and gas exploration
and production wastes, if any, generated at any and all Property of the Borrower
or any Subsidiary have in the past been transported, treated and disposed of in
accordance with Environmental Laws and so as not to pose an imminent and
substantial endangerment to public health or welfare or the environment, and, to
the best knowledge of the Borrower, all such transport carriers and treatment
and disposal facilities have been and are operating in compliance with
Environmental Laws and so as not to pose an imminent and substantial
endangerment to public health or welfare or the environment, and are not the
subject of any existing, pending or threatened action, investigation or inquiry
by any Governmental Authority in connection with any Environmental Laws;

(e)           The Borrower has taken all steps reasonably necessary to determine
and has determined that no hazardous substances, solid waste, or oil and gas
exploration and production wastes, have been disposed of or otherwise released
and there has been no threatened release of any hazardous substances on or to
any Property of the Borrower or any Subsidiary except in material compliance
with Environmental Laws and so as not to pose an imminent and substantial
endangerment to public health or welfare or the environment;

(f)           To the extent applicable, all Property of the Borrower and each
Subsidiary currently satisfies all design, operation, and equipment requirements
imposed by the OPA or scheduled as of the Closing Date to be imposed by OPA
during the term of this Agreement, and

 

 

47

 

--------------------------------------------------------------------------------

the Borrower does not have any reason to believe that such Property, to the
extent subject to OPA, will not be able to maintain compliance with the OPA
requirements during the term of this Agreement; and

(g)           Neither the Borrower nor any Subsidiary has any known contingent
liability in connection with any generation, storage, release or threatened
release, transportation, or disposal of any oil, hazardous substance or solid
waste into the environment.

Section 7.18.      Compliance with the Law. Neither the Borrower nor any
Subsidiary has violated any Governmental Requirement or failed to obtain any
license, permit, franchise or other governmental authorization necessary for the
ownership of any of its Properties or the conduct of its business, which
violation or failure would have (in the event such violation or failure were
asserted by any Person through appropriate action) a Material Adverse Effect.
Except for such acts or failures to act as would not have a Material Adverse
Effect, the Oil and Gas Properties of the Borrower and its Subsidiaries (and
properties unitized therewith) have been maintained, operated and developed in a
good and workmanlike manner and in conformity with all applicable laws and all
rules, regulations and orders of all duly constituted authorities having
jurisdiction and in conformity with the provisions of all leases, subleases or
other contracts comprising a part of the Hydrocarbon Interests and other
contracts and agreements forming a part of such Oil and Gas Properties;
specifically in this connection, (i) after the Closing Date, no such Oil and Gas
Property is subject to having allowable production reduced below the full and
regular allowable (including the maximum permissible tolerance) because of any
overproduction (whether or not the same was permissible at the time) prior to
the Closing Date and (ii) none of the wells comprising a part of such Oil and
Gas Properties (or properties unitized therewith) are deviated from the vertical
more than the maximum permitted by applicable laws, regulations, rules and
orders, and such wells are, in fact, bottomed under and are producing from, and
the well bores are wholly within, such Oil and Gas Properties (or in the case of
wells located on properties unitized therewith, such unitized properties).

Section 7.19.      Insurance. Schedule 7.19 attached hereto contains an accurate
and complete description of all material policies of fire, liability, workmen's
compensation and other forms of insurance owned or held by the Borrower and each
Subsidiary. All such policies are in full force and effect, all premiums with
respect thereto covering all periods up to and including the Closing Date have
been paid, and no notice of cancellation or termination has been received with
respect to any such policy. Such policies are sufficient for compliance with all
requirements of law and of all agreements to which the Borrower or any
Subsidiary is a party; are valid, outstanding and enforceable policies; provide
adequate insurance coverage in at least such amounts and against at least such
risks (but including in any event public liability) as are usually insured
against in the same general area by companies engaged in the same or a similar
business for the assets and operations of the Borrower and each Subsidiary; will
remain in full force and effect through the respective dates set forth in
Schedule 7.19 without the payment of additional premiums; and will not in any
way be affected by, or terminate or lapse by reason of, the transactions
contemplated by this Agreement. Schedule 7.19 identifies all material risks, if
any, which the Borrower and its Subsidiaries and their respective Board of
Directors or officers have designated as being self insured, including any
potential environmental liabilities of any kind whatsoever, whether for property
damage, personal injury, remediation, or enforcement matters. Neither the
Borrower nor any Subsidiary has been refused any insurance with respect to its
assets or operations, nor has its coverage been limited below usual and
customary policy limits, by an insurance carrier to which it has applied for any
such insurance or with which it has carried insurance during the last three
years. All such policies name Agent as additional insured, loss payee, and
contain endorsements for no cancellation thereof without thirty (30) days' prior
written notice to the Agent and the Lenders on all such policies.

Section 7.20.      Hedging Agreements. Schedule 7.20 sets forth, as of the
closing date of the Existing Credit Agreement and before giving effect to any
Hedging Agreements entered into on such date in order to satisfy the condition
precedent set forth in Section 6.01(x), a true and complete list of all

 

 

48

 

--------------------------------------------------------------------------------

Hedging Agreements (including commodity price swap agreements, forward
agreements or contracts of sale which provide for prepayment for deferred
shipment or delivery of oil, gas or other commodities) of the Borrower and each
Subsidiary, the material terms thereof (including the type, term, effective
date, termination date and notional amounts or volumes), the net mark to market
value thereof, all credit support agreements relating thereto (including any
margin required or supplied), and the counter party to each such agreement.

Section 7.21.       Restriction on Liens. Neither the Borrower nor any of its
Subsidiaries is a party to any agreement or arrangement (other than the Second
Lien Loan Agreement, the Loan Documents (as defined in such agreement), this
Agreement and the Security Instruments), or subject to any order, judgment, writ
or decree, which either restricts or purports to restrict its ability to grant
Liens to other Persons on or in respect of their respective assets or
Properties, except such restrictions in favor of the holders of Debt secured by
Liens described in Sections 9.01(d), 9.01(e), or 9.01(k) but only insofar as
such restrictions pertain to the Property encumbered thereby.

Section 7.22.      Material Agreements. Set forth on Schedule 7.22 hereto is a
complete and correct list of all material agreements, leases (other than
Hydrocarbon Interests), indentures, purchase agreements, obligations in respect
of letters of credit, guarantees, joint venture agreements, and other
instruments in effect or to be in effect as of the Closing Date (other than
Hedging Agreements) providing for, evidencing, securing or otherwise relating to
any Debt of the Borrower, the Guarantors or any of the Borrower's Subsidiaries,
and all obligations of the Borrower, the Guarantors or any of the Borrower's
Subsidiaries to issuers of surety or appeal bonds issued for account of the
Borrower or any such Subsidiary, and such list correctly sets forth the names of
the debtor or lessee and creditor or lessor with respect to the Debt or lease
obligations outstanding or to be outstanding and the Property subject to any
Lien securing such Debt or lease obligation. Also set forth on Schedule 7.22
hereto is a complete and correct list of all material agreements and other
instruments of the Borrower, the Guarantors and Borrower's Subsidiaries relating
to the purchase, transportation by pipeline, gas processing, marketing, sale and
supply of natural gas and other Hydrocarbons, but in any event, any such
agreement or other instrument that will account for more than 10% of the
consolidated sales of the Borrower, the Guarantors and any of the Borrower's
Subsidiaries during the Borrower's current fiscal year and which is not
cancelable on thirty (30) or fewer days notice.

Section 7.23.      Solvency. Borrower, its Subsidiaries, and each of the
Guarantors and with respect to its Subsidiaries and the Guarantors, after taking
into account each Subsidiary's and Guarantor's rights of contribution, on an
individual and a consolidated basis, are not insolvent; Borrower's, its
Subsidiaries' and each of the Guarantors' assets and with respect to its
Subsidiaries and the Guarantors, after taking into account each Subsidiary's and
Guarantor's rights of contribution on an individual and a consolidated basis,
exceed their liabilities, and neither Borrower, the Guarantors, nor any of the
Borrower's Subsidiaries or Guarantors and with respect to its Subsidiaries and
the Guarantors, after taking into account each Subsidiary's and Guarantor's
rights of contribution will be rendered insolvent by the execution and
performance of this Agreement and the Loan Documents.

Section 7.24.      Gas Imbalances. Except as set forth on Schedule 7.24 or on
the most recent certificate delivered pursuant to Section 8.07(c), on a net
basis there are no gas imbalances, take or pay or other prepayments with respect
to the Oil and Gas Properties of the Borrower and its Subsidiaries which (taken
together with the imbalances, take or pay, or other prepayments on Schedule 7.24
or such certificate) would require the Borrower or its Subsidiaries to deliver,
in the aggregate, after netting all over-production and under-production, three
percent (3%) or more of the total volumes of proved, producing reserves of
Hydrocarbons (calculated on an mcf equivalent basis with each barrel of oil
being equivalent to six mcf of natural gas) reflected in the Initial Reserve
Reports or the most recent Reserve Report delivered pursuant to Section 8.07, as
the case may be, from the Oil and Gas Properties of Borrower and its
Subsidiaries at some future time without then or thereafter receiving full
payment therefor.

 

 

49

 

--------------------------------------------------------------------------------

Section 7.25.       Madisonville. The Initial Reserve Reports do not (nor will
any future Reserve Report) include Oil and Gas Properties owned by the Borrower
or any of its Subsidiaries through its or their interests in Madisonville.

 

Section 7.26.

Intentionally Omitted.

Section 7.27.       Name Changes. Borrower's official name as recorded on its
currently effective organizational documents which are filed with the Secretary
of State of its State of organization is the same as found on the signature page
of this Agreement. Borrower has not, during the preceding five years, entered
into any contract, agreement, security instrument or other document using a name
other than, or been known by or otherwise used any name other than, the name
used by Borrower herein and as set forth on Schedule 7.27 attached hereto.

Section 7.28.      Taxpayer Identification Number. Borrower's Taxpayer
Identification No. is 20-3037840 and each Subsidiary's Taxpayer Identification
No. is set forth on Schedule 7.14. Each Guarantor's Taxpayer Identification No.
is as set forth on Schedule 7.28.

Section 7.29.       State of Formation. Borrower is a corporation organized
under the laws of the State of Delaware. The Subsidiaries are corporations,
limited liability corporations, or partnerships organized under the laws of the
states set forth on Schedule 7.14. Each Guarantor's state of organization is as
set forth on Schedule 7.28.

ARTICLE VIII.

Affirmative Covenants

The Borrower covenants and agrees that, so long as any of the Commitments are in
effect and until payment in full of all Loans hereunder, all interest thereon
and all other amounts payable by the Borrower hereunder:

Section 8.01.      Reporting Requirements. The Borrower shall deliver, or shall
cause to be delivered, to the Agent with sufficient copies of each for the
Lenders:

(a)           Annual Financial Statements. As soon as available and in any event
within 90 days after the end of each fiscal year of the Borrower, the audited
consolidated statements of income, stockholders' equity, changes in financial
position and cash flows of the Borrower and its Consolidated Subsidiaries for
such fiscal year, and the related consolidated balance sheet of the Borrower and
its Consolidated Subsidiaries as at the end of such fiscal year, and setting
forth in each case in comparative form the corresponding figures for the
preceding fiscal year, and accompanied by the related unqualified opinion of
independent public accountants of recognized national standing acceptable to the
Agent, which opinion shall state that said financial statements fairly present
the consolidated financial condition and results of operations of the Borrower
and its Consolidated Subsidiaries as at the end of, and for, such fiscal year
and that such financial statements have been prepared in accordance with GAAP,
except for such changes in such principles with which the independent public
accountants shall have concurred and such opinion shall not contain a "going
concern" or like qualification or exception, accompanied by the certificate of a
Responsible Officer, which certificate shall state that said financial
statements fairly present the consolidated financial condition and results of
operations of the Borrower and its Consolidated Subsidiaries in accordance with
GAAP, as at the end of, and for, such period (subject to normal year-end audit
adjustments), together with calculations confirming the Borrower's compliance
with all financial covenants, certified by a senior financial officer of
Borrower.

(b)           Quarterly Financial Statements. As soon as available and in any
event within 45 days after the end of each of the first three fiscal quarterly
periods of each fiscal year of the

 

 

50

 

--------------------------------------------------------------------------------

Borrower, consolidated statements of income, stockholders' equity, changes in
financial position and cash flows of the Borrower and its Consolidated
Subsidiaries for such period and for the period from the beginning of the
respective fiscal year to the end of such period, and the related consolidated
balance sheets as at the end of such period, and setting forth in each case in
comparative form the corresponding figures for the corresponding period in the
preceding fiscal year, accompanied by the certificate of a Responsible Officer,
which certificate shall state that said financial statements fairly present the
consolidated financial condition and results of operations of the Borrower and
its Consolidated Subsidiaries in accordance with GAAP, as at the end of, and
for, such period (subject to normal year-end audit adjustments), together with
calculations confirming the Borrower's compliance with all financial covenants,
certified by a senior financial officer of Borrower.

(c)           Capital Plan and Operating Budget. As soon as available and in any
event within seventy-five (75) days after the end of each fiscal year of the
Borrower commencing with the fiscal year ending December 31, 2007, the
Borrower's capital plan and operating budget for the succeeding fiscal year.

(d)           Notice of Default, Etc. Promptly after the Borrower knows that any
Default or any Material Adverse Effect has occurred, a notice of such Default or
Material Adverse Effect, describing the same in reasonable detail and the action
the Borrower proposes to take with respect thereto.

(e)           Other Accounting Reports. Promptly upon receipt thereof, a copy of
each other report or letter submitted to the Borrower or any Subsidiary by
independent accountants in connection with any annual, interim or special audit
made by them of the books of the Borrower and its Subsidiaries, including any
reference to environmental matters, and a copy of any response by the Borrower
or any Subsidiary of the Borrower, or the Board of Directors of the Borrower or
any Subsidiary of the Borrower, to such letter or report.

(f)           SEC Filings, Etc. Promptly upon its becoming available, each
financial statement, report, notice or proxy statement sent by the Borrower to
stockholders generally and each regular or periodic report and any registration
statement, prospectus or written communication (other than transmittal letters)
in respect thereof filed by the Borrower with or received by the Borrower in
connection therewith from any securities exchange or the SEC or any successor
agency.

(g)           Notices Under Other Loan Agreements. Promptly after the furnishing
thereof, copies of any statement, report or notice furnished to any Person
pursuant to the terms of any indenture, loan or credit or other similar
agreement, other than this Agreement and not otherwise required to be furnished
to the Lenders pursuant to any other provision of this Section 8.01.

(h)           Production Reports. As soon as available and in any event within
forty-five (45) days after the end of each calendar quarter, a quarterly
production report including volumes, revenue, and lease operating expenses
attributable to the Oil and Gas Properties included in the Borrowing Base.

(i)            Hedging Agreements. As soon as available and in any event within
ten (10) Business Days after the last day of each calendar quarter, a report, in
form and substance satisfactory to the Agent, setting forth as of the last
Business Day of such calendar quarter a true and complete list of all Hedging
Agreements (including commodity price swap agreements, forward agreements or
contracts of sale which provide for prepayment for deferred shipment or delivery
of oil, gas or other commodities) of the Borrower and each Subsidiary, the
material

 

 

51

 

--------------------------------------------------------------------------------

terms thereof (including the type, term, effective date, termination date and
notional amounts or volumes), the net mark to market value therefor.

(j)            Other Matters. From time to time such other information regarding
the business, affairs or financial condition of the Borrower or any Subsidiary
(including, without limitation, any Plan or Multiemployer Plan and any reports
or other information required to be filed under ERISA) as any Lender or the
Agent may reasonably request.

(k)           Electronic Delivery. Documents required to be delivered pursuant
to paragraphs (a), (b) and (f) of this Section 8.01 may be delivered
electronically and if so delivered, shall be deemed to have been delivered on
the date (i) on which the Borrower posts such documents, or provides a link
thereto on the Borrower's website on the Internet or (ii) on which such
documents are posted on the Borrower's behalf on an Internet or intranet
website, if any, to which each Lender and the Agent have access (whether a
commercial, third-party website or whether sponsored by the Agent); provided,
however, that (x) the Borrower shall deliver paper copies of such documents to
the Agent or any Lender that requests the Borrower to deliver such paper copies
until a written request to cease delivering paper copies is given by the Agent
or such Lender and (y) the Borrower shall notify the Agent and each Lender (by
telecopier or electronic mail) of the posting of any such documents and provide
to the Agent by electronic mail electronic versions (i.e., soft copies) of such
documents. Notwithstanding anything contained herein, in every instance the
Borrower shall be required to provide paper copies of the compliance
certificates required by paragraph (1) of this Section 8.01 to the Agent.

(l)            The Borrower will furnish to the Agent, at the time it furnishes
each set of financial statements pursuant to paragraph (a) or (b) above, a
certificate substantially in the form of Exhibit C executed by a Responsible
Officer (i) certifying as to the matters set forth therein and stating that no
Default has occurred and is continuing (or, if any Default has occurred and is
continuing, describing the same in reasonable detail), and (ii) setting forth in
reasonable detail the computations necessary to determine whether the Borrower
is in compliance with Sections 9.12, 9.13, 9.14, and 9.15, as of the end of the
respective fiscal quarter or fiscal year.

The Borrower hereby acknowledges that (i) the Agent may make available to the
Lenders materials and/or information provided by or on behalf of the Borrower
hereunder (collectively, "Company Materials") by posting the Company Materials
on IntraLinks or another similar electronic system (the "Platform") and (ii)
certain of the Lenders may be "public-side" Lenders (i.e., Lenders that do not
wish to receive material non-public information with respect to the Borrower or
its securities) (each, a "Public Lender"). The Borrower hereby agrees that (w)
all Company Materials that are to be made available to Public Lenders shall be
clearly and conspicuously marked "PUBLIC" which, at a minimum, shall mean that
the word "PUBLIC" shall appear prominently on the first page thereof; (x) by
marking Company Materials "PUBLIC," the Borrower shall be deemed to have
authorized the Agent and the Lenders to treat such Company Materials as either
publicly available information or not material information (although it may be
sensitive and proprietary) with respect to the Borrower or its securities for
purposes of United States Federal and state securities laws; (y) all Company
Materials marked "PUBLIC" are permitted to be made available through a portion
of the Platform designated "Public Investor"; and (z) the Administrative Agent
shall be entitled to treat Company Materials that are not marked "PUBLIC" as
being suitable only for posting on a portion of the Platform not designated
"Public Investor."

Section 8.02.       Litigation. The Borrower shall promptly give to the Agent
notice of: (i) all legal or arbitral proceedings, and of all proceedings before
any Governmental Authority to which the Borrower or any Subsidiary is a party
and to the best of Borrower's knowledge, all legal or arbitral proceedings and
all proceedings before any Governmental Authority affecting the Borrower or any
Subsidiary, except proceedings which, if adversely determined, would not have a
Material Adverse Effect, and (ii) of any litigation or proceeding against or
adversely affecting the Borrower or any Subsidiary in which the

 

 

52

 

--------------------------------------------------------------------------------

amount involved is not covered in full by insurance (subject to normal and
customary deductibles and for which the insurer has not assumed the defense), or
in which injunctive or similar relief is sought. The Borrower will, and will
cause each of its Subsidiaries to, promptly notify the Agent and each of the
Lenders of all claims, judgments, Liens or other encumbrances affecting any
Property of the Borrower or any Subsidiary if the value of the claims,
judgments, Liens, or other encumbrances affecting such Property shall exceed
$2,500,000.00 in the aggregate.

 

Section 8.03.

Maintenance, Etc.

(a)           Generally. The Borrower shall and shall cause each Subsidiary to:
preserve and maintain its corporate existence and all of its material rights,
privileges and franchises; keep books of record and account in which full, true
and correct entries will be made of all dealings or transactions in relation to
its business and activities; comply with all Governmental Requirements if
failure to comply with such requirements will have a Material Adverse Effect;
pay and discharge all taxes, assessments and governmental charges or levies
imposed on it or on its income or profits or on any of its Property prior to the
date on which penalties attach thereto, except for any such tax, assessment,
charge or levy the payment of which is being contested in good faith and by
proper proceedings and against which adequate reserves are being maintained;
upon reasonable notice, permit representatives of the Agent or any Lender,
during normal business hours, to examine, copy and make extracts from its books
and records, to inspect its Properties, and to discuss its business and affairs
with its officers, all to the extent reasonably requested by such Lender or the
Agent (as the case may be); and keep, or cause to be kept, insured by
financially sound and reputable insurers all Property of a character usually
insured by Persons engaged in the same or similar business similarly situated
against loss or damage of the kinds and in the amounts customarily insured
against by such Persons and carry such other insurance as is usually carried by
such Persons including, without limitation, environmental risk insurance to the
extent reasonably available, or provide adequate reserves for self-insurance for
any contingent environmental liability. The Borrower shall promptly obtain
endorsements to such insurance policies naming "Wells Fargo Bank, National
Association, as Agent for the Lenders" as joint loss payee, additional insured,
and containing provisions that such policies will not be canceled without 30
days' prior written notice having been given by the insurance company to the
Agent (and not that the insurance company will merely endeavor to give the Agent
30 days' prior written notice prior to cancellation). Notwithstanding the
foregoing, but subject to the terms of this Agreement, the Borrower shall be
allowed to dissolve and liquidate any Inactive Subsidiary; provided that any
assets available for distribution following such dissolution and liquidation are
distributed to the Borrower or an Active Subsidiary. No assets can be
transferred to any Inactive Subsidiary once it reaches inactive status without
the prior written consent of the Agent, nor can any Inactive Subsidiary, once it
reaches inactive status, make any investments, loans, or advances.

(b)           Proof of Insurance. Contemporaneously with the delivery of the
financial statements required by Section 8.01(a) to be delivered for each year,
the Borrower will furnish or cause to be furnished to the Agent and the Lenders
a certificate of insurance coverage from the insurer in form and substance
satisfactory to the Agent and, if requested, will furnish the Agent and the
Lenders copies of the applicable policies.

(c)           Operation of Properties. The Borrower will and will cause each
Subsidiary to operate its Properties or cause such Properties to be operated in
a safe, careful and efficient manner in accordance with the practices of the
industry, in compliance with all applicable contracts and agreements and in
compliance in all material respects with all Governmental Requirements,
including the Environmental Laws.

 

 

53

 

--------------------------------------------------------------------------------

(d)           Oil and Gas Properties. The Borrower will and will cause each
Subsidiary to, at its own expense, do or cause to be done all things reasonably
necessary to preserve and keep in good repair, working order and efficiency all
of its Oil and Gas Properties and other material Properties including, without
limitation, all equipment, machinery and facilities, and from time to time will
make all the reasonably necessary repairs, renewals and replacements so that at
all times the state and condition of its Oil and Gas Properties and other
material Properties will be fully preserved and maintained, except to the extent
a portion of such Properties is no longer capable of producing Hydrocarbons in
economically reasonable amounts. The Borrower will and will cause each
Subsidiary to promptly: (i) pay and discharge, or make reasonable and customary
efforts to cause to be paid and discharged, all delay rentals, royalties,
expenses and indebtedness accruing under the leases or other agreements
affecting or pertaining to its Oil and Gas Properties, (ii) perform or make
reasonable and customary efforts to cause to be performed, in accordance with
industry standards, the obligations required by each and all of the assignments,
deeds, leases, sub-leases, contracts and agreements affecting its interests in
its Oil and Gas Properties and other material Properties, (iii) cause each
Subsidiary to do all other things necessary to keep unimpaired, except for Liens
described in Section 9.02, its rights with respect to its Oil and Gas Properties
and other material Properties and prevent any forfeiture thereof or a default
thereunder, except to the extent a portion of such Properties is no longer
capable of producing Hydrocarbons in economically reasonable amounts and except
for dispositions permitted by Sections 9.16 and 9.17. The Borrower will and will
cause each Subsidiary to operate its Oil and Gas Properties and other material
Properties or cause or make reasonable and customary efforts to cause such Oil
and Gas Properties and other material Properties to be operated in a safe,
careful, and efficient manner in accordance with the practices of the industry
and in compliance with all applicable contracts and agreements and in compliance
in all material respects with all Governmental Requirements, including the
Environmental Laws.

 

Section 8.04.

Environmental Matters.

(a)           Establishment of Procedures. The Borrower will and will cause each
Subsidiary to assure that any failure of the following does not have a Material
Adverse Effect: (i) all Property of the Borrower and its Subsidiaries and the
operations conducted thereon and other activities of the Borrower and its
Subsidiaries are in compliance with and do not violate the requirements of any
Environmental Laws, (ii) no oil, hazardous substances or solid wastes are
disposed of or otherwise released on or to any Property owned by any such party
except in compliance with Environmental Laws, (iii) no hazardous substance will
be released on or to any such Property in a quantity equal to or exceeding that
quantity which requires reporting pursuant to Section 103 of CERCLA, and (iv) no
oil, oil and gas exploration and production wastes or hazardous substance is
released on or to any such Property so as to pose an imminent and substantial
endangerment to public health or welfare or the environment. Upon request from
the Agent, the Borrower will notify the Agent and the Lenders in writing of such
environmental procedures as are in effect for each Property of Borrower and its
Subsidiaries on a quarterly basis.

(b)           Notice of Action. The Borrower will promptly notify the Agent and
the Lenders in writing within 30 days of such notice of any threatened action,
investigation or inquiry against or of the Borrower and/or any Subsidiary by any
Governmental Authority of which the Borrower has knowledge in connection with
any Environmental Laws and which, if resolved adversely to the Borrower and/or
any Subsidiary, could have a Material Adverse Effect, excluding routine testing,
but including corrective action.

(c)           Cure of Environmental Noncompliance. The Borrower shall cure any
material environmental noncompliance or exceptions to any of the Mortgaged
Properties or, if requested by Agent, substitute acceptable Mortgaged Properties
with no environmental noncompliance of an equivalent value by the execution of
documents in form and substance satisfactory to Agent

 

 

54

 

--------------------------------------------------------------------------------

(together with evidence satisfactory to Agent of a first priority deed of trust
lien and security interest in such Mortgaged Properties, which may include
opinions of counsel at the request of Agent), within 30 days after a request by
the Agent or the Lenders to cure such defects or exceptions.

(d)           Future Acquisitions. The Borrower will and will cause each
Subsidiary to obtain such Phase I environmental audits as would a reasonable and
prudent purchaser of oil and gas properties in the vicinity of the Oil and Gas
Properties being acquired in connection with any future acquisitions of material
Oil and Gas Properties or other material Properties. Such environmental audits
shall be performed by scientifically trained USA-graduate professional engineers
and professional geologists who are licensed in one or more states of the USA,
and shall be performed in accordance with applicable best professional
standards, including the American Society for Testing Material standards, and,
in addition to CERCLA, shall also address all hazardous substances under all
other Environmental Laws.

Section 8.05.       Further Assurances. The Borrower will and will cause each
Subsidiary to cure promptly any defects in the creation and issuance of the
Notes and the execution and delivery of the Security Instruments and this
Agreement. The Borrower at its expense will and will cause each Subsidiary to
promptly execute and deliver to the Agent upon request all such other documents,
agreements and instruments to comply with or accomplish the covenants and
agreements of the Borrower or any Subsidiary, as the case may be, in the
Security Instruments and this Agreement, or to further evidence and more fully
describe the collateral intended as security for the Notes, or to correct any
omissions in the Security Instruments, or to state more fully the security
obligations set out herein or in any of the Security Instruments, or to perfect,
protect or preserve any Liens created pursuant to any of the Security
Instruments, or to make any recordings, to file any notices or obtain any
consents, all as may be necessary or appropriate in connection therewith.

Section 8.06.       Performance of Obligations. The Borrower will pay the Notes
according to the reading, tenor and effect thereof; and the Borrower will and
will cause each Subsidiary to do and perform every act and discharge all of the
obligations to be performed and discharged by them under the Security
Instruments and this Agreement, at the time or times and in the manner
specified.

 

Section 8.07.

Engineering Reports.

(a)           Not less than forty-five (45) days prior to each Scheduled
Redetermination Date, commencing with the Scheduled Redetermination Date to
occur on November 1, 2007, the Borrower shall furnish to the Agent and the
Lenders a Reserve Report. The Reserve Report for the May 1 redetermination shall
be prepared by certified independent petroleum engineers or other independent
petroleum consultant(s) acceptable to the Agent and the Reserve Report for the
November 1 redetermination shall be prepared by or under the supervision of the
chief engineer of the Borrower who shall certify such Reserve Report to be true
and accurate and to have been prepared in accordance with the procedures used in
the immediately proceeding May 1 Reserve Report. On or before June 22, 2007, the
Borrower shall furnish to the Agent and the Lenders a Reserve Report prepared by
Netherland Sewell & Associates, Inc. or other independent petroleum
consultant(s) acceptable to the Agent with respect to the Oil and Gas Properties
owned by Southern G as of January 1, 2007, which Reserve Report shall update and
supplement the audit report on such Oil and Gas Properties described in the
definition of Initial Reserve Reports and provide information with respect to
such Oil and Gas Properties consistent with that to be provided in the Reserve
Report for each May 1 redetermination. In addition, Borrower shall furnish to
the Agent and the Lenders all Engineering Reports (as defined in the Second Lien
Loan Agreement) required to be delivered under the Second Lien Loan Agreement,
concurrently with the delivery of such Engineering Reports to the Administrative
Agent under the Second Lien Loan Agreement.

 

 

55

 

--------------------------------------------------------------------------------

(b)           In the event of an unscheduled redetermination, the Borrower shall
furnish to the Agent and the Lenders a Reserve Report prepared by or under the
supervision of the chief engineer of the Borrower who shall certify such Reserve
Report to be true and accurate and to have been prepared in accordance with the
procedures used in the immediately preceding Reserve Report. For any unscheduled
redetermination requested by the Majority Lenders or the Borrower pursuant to
Section 2.08(d), the Borrower shall provide such Reserve Report with an "as of"
date as required by the Agent as soon as possible, but in any event no later
than thirty (30) days following the receipt of the request by the Agent.

(c)           With the delivery of each Reserve Report, the Borrower shall
provide to the Agent and the Lenders, a certificate from a Responsible Officer
certifying that, to the best of his knowledge and in all material respects:
(i) the historical information delivered in connection therewith to the
preparers of such report is true and correct, (ii) the Borrower and the Active
Subsidiaries own good and defensible title to the Oil and Gas Properties
evaluated in such Reserve Report and such Properties are free of all Liens
except for Liens permitted by Section 9.02, and such Properties comply with all
Environmental Laws except for Environmental Matters permitted by Section 7.17,
(iii) except as set forth on an Exhibit to the certificate, on a net basis there
are no gas imbalances, take or pay or other prepayments with respect to its Oil
and Gas Properties evaluated in such Reserve Report which would require the
Borrower or its Subsidiaries to deliver Hydrocarbons produced from such Oil and
Gas Properties at some future time without then or thereafter receiving full
payment therefor, (iv) none of its Oil and Gas Properties have been sold since
the date of the last Borrowing Base determination except as set forth on an
Exhibit to the certificate, which certificate shall list all of its Oil and Gas
Properties sold and in such detail as reasonably required by the Agent,
(v) attached to the certificate is a list of its Oil and Gas Properties added to
and deleted from the immediately prior Reserve Report and a list showing any
change in working interest or net revenue interest in its Oil and Gas Properties
occurring and the reason for such change, (vi) attached to the certificate is a
list of all Persons disbursing proceeds to the Borrower from its Oil and Gas
Properties and (vii) except as set forth on a schedule attached to the
certificate all of the Oil and Gas Properties evaluated by such Reserve Report
are Mortgaged Property.

 

Section 8.08.

Title Information and Mortgage Coverage.

(a)           Delivery. On or before the delivery to the Agent and the Lenders
of each Reserve Report required by Section 8.07(a), the Borrower will deliver
title information in form and substance acceptable to the Agent covering enough
of the Oil and Gas Properties evaluated by such Reserve Report that were not
included in the immediately preceding Reserve Report, so that the Agent shall
have received together with title information previously delivered to the Agent,
satisfactory title information on at least eighty percent (80%) of the value of
the Oil and Gas Properties evaluated by such Reserve Report.

(b)           Cure of Title Defects. The Borrower shall cure any title defects
or exceptions which are not Excepted Liens or Liens otherwise permitted by
Section 9.02 raised by such information, or substitute acceptable Mortgaged
Properties with no title defects or exceptions except for Excepted Liens or
Liens otherwise permitted by Section 9.02 covering Mortgaged Properties of an
equivalent value, within 90 days after a request by the Agent or the Lenders to
cure such defects or exceptions.

(c)           Failure to Cure Title Defects. If the Borrower is unable to cure
any title defect requested by the Agent or the Lenders to be cured within the
90-day period or the Borrower does not comply with the requirements to provide
acceptable title information covering eighty percent (80%) of the value of the
Oil and Gas Properties evaluated in the most recent Reserve Report, such default
shall not be a Default or an Event of Default, but instead the Agent and the
Lenders

 

 

56

 

--------------------------------------------------------------------------------

shall have the right to exercise the following remedy in their sole discretion
from time to time, and any failure to so exercise this remedy at any time shall
not be a waiver as to future exercise of the remedy by the Agent or the Lenders.
To the extent that the Agent or the Lenders are not satisfied with title to any
Mortgaged Property after the time period in Section 8.08(b) has elapsed, such
unacceptable Mortgaged Property shall not count towards the eighty percent (80%)
requirement, and the Agent may send a notice to the Borrower and the Lenders
that the then outstanding Borrowing Base shall be reduced by an amount as
determined by all of the Lenders to cause the Borrower to be in compliance with
the requirement to provide acceptable title information on eighty percent (80%)
of the value of such proved Oil and Gas Properties. This new Borrowing Base
shall become effective immediately after receipt of such notice.

 

Section 8.09.

Collateral.

(a)           Collateral. The Obligations shall be secured by a perfected first
priority Lien (subject only to Excepted Liens or Liens otherwise permitted by
Section 9.02) granted to the Agent for the benefit of the Beneficiaries in
substantially all of the proved Oil and Gas Properties currently owned and
hereafter acquired by the Borrower and/or any of its Active Subsidiaries plus
all other assets, exclusive of certificated vehicles, of the Borrower and/or any
of its Active Subsidiaries now owned or hereafter acquired.

(b)           Lien in Acquired Oil and Gas Properties. Should the Borrower or
any of its Active Subsidiaries acquire any additional Oil and Gas Properties or
additional interests in its existing Oil and Gas Properties, to the extent
required by Section 8.09(a), the Borrower or such Subsidiary will grant to the
Agent as security for the Obligations a first-priority Lien interest (subject
only to Excepted Liens or Liens otherwise permitted by Section 9.02) on the
Borrower's or such Subsidiary's interest in the proved Oil and Gas Properties
acquired, which Lien will be created and perfected by and in accordance with the
provisions of mortgages, deeds of trust, security agreements and financing
statements, or other Security Instruments, all in form and substance
satisfactory to the Agent in its sole discretion exercised in good faith and in
sufficient executed (and acknowledged where necessary or appropriate)
counterparts for recording purposes.

(c)           Title Information. Concurrently with the granting of the Lien or
other action referred to in Section 8.09(b) above, if requested by the Agent,
the Borrower will provide to the Agent title information in form and substance
satisfactory to the Agent in its sole discretion exercised in good faith with
respect to the Borrower's interests in such Oil and Gas Properties.

(d)           Legal Opinions. Also, promptly after the filing of any new
Security Instrument in any state, upon the request of the Agent, the Borrower
will provide to the Agent an opinion addressed to the Agent for the benefit of
the Lenders in form and substance satisfactory to the Agent and Agent's counsel
in their sole discretion, from counsel acceptable to Agent and Agent's counsel,
stating that the Security Instrument creates a valid Lien and is valid, binding,
and enforceable in accordance with its terms in legally sufficient form for such
jurisdiction, and the means by which to perfect the Lien created by such
Security Instruments.

Section 8.10.      Cash Collateral Account Agreement. Upon the occurrence of a
Default, the Borrower and all of its Subsidiaries shall cause all proceeds
arising from its Oil and Gas Properties, including without limitation from the
sale of Hydrocarbons, to be directed to a Lockbox (and in connection therewith,
Borrower and all of its Subsidiaries shall execute a Lockbox Agreement and
financing statements in form and substance satisfactory to the Agent) pursuant
to letters acceptable to the Agent stating that such directions may not be
changed without the written consent of the Agent. The Cash Collateral Account
Agreement and the Liens and security interests established in such Cash

 

 

57

 

--------------------------------------------------------------------------------

Collateral Account Agreement will continue until all the Obligations under this
Agreement are paid in full and this Agreement is terminated.

 

Section 8.11.

[Reserved.]

Section 8.12.       ERISA Information and Compliance. The Borrower will promptly
furnish and will cause the Subsidiaries and any ERISA Affiliate to promptly
furnish to the Agent with sufficient copies to the Lenders (i) promptly after
the filing thereof with the United States Secretary of Labor, the Internal
Revenue Service or the PBGC, copies of each annual and other report with respect
to each Plan or any trust created thereunder, (ii) immediately upon becoming
aware of the occurrence of any ERISA Event or of any "prohibited transaction,"
as described in Section 406 of ERISA or in Section 4975 of the Code, in
connection with any Plan or any trust created thereunder, a written notice
signed by a Responsible Officer specifying the nature thereof, what action the
Borrower, the Subsidiary or the ERISA Affiliate is taking or proposes to take
with respect thereto, and, when known, any action taken or proposed by the
Internal Revenue Service, the Department of Labor or the PBGC with respect
thereto, and (iii) immediately upon receipt thereof, copies of any notice of the
PBGC's intention to terminate or to have a trustee appointed to administer any
Plan. With respect to each Plan (other than a Multiemployer Plan), the Borrower
will, and will cause each Subsidiary and ERISA Affiliate to, (i) satisfy in full
and in a timely manner, without incurring any late payment or underpayment
charge or penalty and without giving rise to any lien, all of the contribution
and funding requirements of Section 412 of the Code (determined without regard
to subsections (d), (e), (f) and (k) thereof) and of Section 302 of ERISA
(determined without regard to sections 303, 304 and 306 of ERISA), and (ii) pay,
or cause to be paid, to the PBGC in a timely manner, without incurring any late
payment or underpayment charge or penalty, all premiums required pursuant to
sections 4006 and 4007 of ERISA.

Section 8.13.      Joinder and Guaranty Agreements. The Borrower and each of its
Active Subsidiaries will cause each of their Active Subsidiaries, whether newly
formed, hereafter acquired, or otherwise existing, upon the creation or
acquisition thereof, to become a Guarantor hereunder by way of a Joinder
Agreement attached hereto as Exhibit G, a Guaranty Agreement attached hereto as
Exhibit H, a Contribution Agreement by and among the Borrower and all
Guarantors, and the execution of mortgages, deeds of trust, security agreements,
pledges, and any other instruments in form and substance satisfactory to Agent
and in Agent's sole discretion covering all of such Subsidiaries' assets as
security for the Obligations, together with evidence satisfactory to the Agent,
in Agent's sole discretion, that all such collateral will be subject to a
perfected first Lien on such collateral, exclusive of certificated vehicles, in
favor of the Agent, with only such Liens or other encumbrances of any kind on
such collateral permitted by Section 9.02 or otherwise permitted by the Agent.

ARTICLE IX.

Negative Covenants

The Borrower covenants and agrees that, so long as any of the Commitments are in
effect and until payment in full of Loans hereunder, all interest thereon and
all other amounts payable by the Borrower hereunder, without the prior written
consent of the Majority Lenders:

Section 9.01.      Debt. Neither the Borrower nor any Subsidiary will incur,
create, assume or permit to exist any Debt, except (with respect to the Borrower
and any Active Subsidiary):

(a)           the Notes or other Obligations or any guaranty of or suretyship
arrangement for the Notes or other Obligations (provided, however, that nothing
contained herein shall prohibit any Inactive Subsidiary from executing a
guaranty of, or entering a suretyship arrangement for, the Notes or other
Obligations);

 

 

58

 

--------------------------------------------------------------------------------

(b)           Debt of the Borrower or a Subsidiary (other than Southern G)
existing on the Closing Date which is reflected in the Financial Statements or
is disclosed in Schedule 9.01, and any renewals or extensions (but not
increases) thereof;

(c)           accounts payable (for the deferred purchase price of Property or
services), amounts owed to operators of the Hydrocarbon Interests under
applicable joint operating agreements or other extensions of credit from
suppliers or contractors from time to time incurred in the ordinary course of
business which, if greater than 90 days past the invoice or billing date, are
being contested in good faith by appropriate proceedings if reserves adequate
under GAAP shall have been established therefor;

(d)           purchase money Debt of the Borrower or any Active Subsidiary and
Debt under capital leases (as required to be reported on the financial
statements of the Borrower or any Active Subsidiary pursuant to GAAP) not to
exceed $5,000,000.00 in the aggregate;

(e)           Debt associated with bonds or surety obligations required by
Governmental Requirements in connection with the operation of the Oil and Gas
Properties, not to exceed $10,000,000 in the aggregate;

(f)           Debt of the Borrower and its Active Subsidiaries under Hedging
Agreements, but only if (i) such Hedging Agreement is not a speculative hedge
and is otherwise permitted under Section 9.28; (ii) the provider of the Hedging
Agreements is a Lender or an Affiliate of a Lender or an unsecured counterparty
acceptable to the Agent;

(g)           Debt among the Borrower and its Active Subsidiaries, or among the
Active Subsidiaries, in each case to the extent permitted under Section 9.03(g),
in the form of intercompany advances not evidenced by notes or other
instruments, in each case as long as such Active Subsidiary is a Guarantor under
this Agreement;

 

(h)

Accrued FAS 143 asset retirement obligations;

(i)            Revenue suspense accounts with respect to the Borrower's or any
Active Subsidiary's Hydrocarbon Interests;

(j)            Debt not otherwise permitted under this Section 9.01, which does
not exceed at any time an aggregate principal amount of $10,000,000.00; and

(k)           Debt incurred by the Borrower pursuant to the Second Lien Loan
Agreement and any guarantees thereof by any of the Guarantors; provided that,
unless otherwise consented to by all of the Lenders, (i) the aggregate principal
amount of such Debt shall not exceed an amount equal to $150,000,000.00 less any
prepayments of principal made with respect thereto (provided, however, that
nothing contained herein shall be construed to permit any payment or prepayment
of such Debt which is prohibited under Section 9.29 of this Agreement), (ii) the
maturity date of any debt due thereunder shall be at least twelve months
following the Revolving Credit Termination Date, (iii) such Debt and the holders
thereof shall at all times be subject to the Intercreditor Agreement, and (iv)
such Debt shall not have any principal amortization prior to the Revolving
Credit Termination Date.

Section 9.02.      Liens. Neither the Borrower nor any Subsidiary will create,
incur, assume or permit to exist any Lien on any of its Properties (now owned or
hereafter acquired), except (with respect to the Borrower or any Active
Subsidiary):

 

 

59

 

--------------------------------------------------------------------------------

(a)           Liens securing the payment of any Obligations (provided, however,
that nothing contained herein shall prohibit any Inactive Subsidiary from
granting Liens to secure the Obligations);

(b)           Excepted Liens (provided, however, that nothing contained herein
shall prohibit any Inactive Subsidiary from creating, incurring, assuming, or
permitting to exist any Excepted Liens on any of its Properties (now owned or
hereafter acquired));

(c)           Liens securing purchase money Debt permitted by Section 9.01(d)
only to the extent such Liens encumber the Property for which such purchase
money Debt was incurred, and Liens filed as precautionary financing statements
in connection with leases allowed under Section 9.01(d) but only on the Property
under the Lease, or filed as precautionary financing statements in connection
with operating leases, but only on the Property under lease;

 

(d)

Liens disclosed on Schedule 9.02;

(e)           Liens on cash or securities of the Borrower securing the Debt
described in Section 9.01(e); and

(f)           Liens securing the obligations of the Borrower and the Guarantors
under the Second Lien Loan Agreement and the other Second Lien Loan Documents;
provided that, such Liens shall not encumber any Property that is not subject to
a first priority Lien in favor of, or for the benefit of, the Lenders to secure
the Obligations, and such Liens shall be subordinate in right, priority,
operation, effect and all other respects to Liens in favor of the Lenders to
secure the Obligations pursuant to the terms of the Intercreditor Agreement.

Section 9.03.       Investments, Loans and Advances. Neither the Borrower nor
any Subsidiary will make or permit to remain outstanding any loans or advances
to or investments in any Person, except that the foregoing restriction shall not
apply to (with respect to the Borrower or any Active Subsidiary):

(a)           investments, loans or advances reflected in the Financial
Statements or which are disclosed to the Lenders in Schedule 9.03;

 

(b)

accounts receivable arising in the ordinary course of business;

(c)           direct obligations of the United States or any agency thereof, or
obligations guaranteed by the United States or any agency thereof, in each case
maturing within one year from the date of creation thereof;

(d)  commercial paper maturing within one year from the date of creation thereof
rated in the highest grade by Standard & Poor's Corporation or Moody's Investors
Service, Inc.;

(e)           deposits maturing within one year from the date of creation
thereof with, including certificates of deposit issued by, any Lender or any
office located in the United States of any other bank or trust company which is
organized under the laws of the United States or any state thereof, has capital,
surplus and undivided profits aggregating at least $500,000,000 (as of the date
of such Lender's or bank or trust company's most recent financial reports) and
has a short term deposit rating of no lower than A2 or P2, as such rating is set
forth from time to time, by Standard & Poor's Corporation or Moody's Investors
Service, Inc., respectively;

(f)           deposits in money market funds investing exclusively in
investments described in Section 9.03(c), 9.03(d) or 9.03(e);

 

 

60

 

--------------------------------------------------------------------------------

(g)          investments, loans or advances made by the Borrower in or to its
Active Subsidiaries and investments, loans or advances made by any Active
Subsidiary in or to the Borrower or another Active Subsidiary, in each case as
long as such Active Subsidiary is a Guarantor under this Agreement.

(h)           advances to employees of the Borrower or any Active Subsidiary for
the payment of expenses in the ordinary course of business, not to exceed
$100,000.00 in the aggregate at any one time outstanding;

(i)           other investments, loans or advances not to exceed $5,000,000.00
in the aggregate at any time; and

 

(j)

Hedging Agreements permitted to be incurred pursuant to Section 9.01(f).

(k)           Notwithstanding the foregoing, on or after the date hereof neither
the Borrower nor any Subsidiary will make any additional loans or advances to or
investments in Madisonville or any Inactive Subsidiary.

Section 9.04.       Dividends, Distributions and Redemptions. The Borrower will
not declare or pay any dividend, purchase, redeem or otherwise acquire for value
any of its stock now or hereafter outstanding (excluding dividends payable
solely in shares of capital stock and cashless exercise of warrants or stock
options), return any capital to its stockholders or make any distribution of its
assets to its stockholders.

Section 9.05.       Sales and Leasebacks. Neither the Borrower nor any
Subsidiary will enter into any arrangement, directly or indirectly, with any
Person whereby the Borrower or any Subsidiary shall sell or transfer any of its
Property, whether now owned or hereafter acquired, and whereby the Borrower or
any Subsidiary shall then or thereafter rent or lease as lessee such Property or
any part thereof or other Property which the Borrower or any Subsidiary intends
to use for substantially the same purpose or purposes as the Property sold or
transferred.

Section 9.06.      Nature of Business. Neither the Borrower nor any Subsidiary
will allow any material change to be made in the character of its business as an
oil and gas exploration and production company.

Section 9.07.      Limitation on Leases. Neither the Borrower nor any Subsidiary
will create, incur, assume or permit to exist any obligation for the payment of
rent or hire of Property of any kind whatsoever (real or personal, but excluding
capital leases, leases of Hydrocarbon Interests, and other leases of oil and gas
field production equipment entered into in the ordinary course of business),
under leases or lease agreements which would cause the aggregate amount of all
payments made by the Borrower and its Subsidiaries pursuant to all such lease or
lease agreements to exceed $2,500,000 in any period of twelve (12) consecutive
calendar months during the life of such leases.

Section 9.08.      Mergers, Acquisitions, Etc. Neither the Borrower nor any
Subsidiary will acquire assets or all or any part of any other Person, or merge
into or with or consolidate with any other Person unless (x) the Borrower or
such Subsidiary shall be the surviving entity in such transaction;
(y) substantially all of the assets of such Person shall consist of domestic
undeveloped Hydrocarbon Interests or domestic developed Oil and Gas Properties;
and (z) no Event of Default under Section 10.01(l) shall result therefrom, or
sell, lease or otherwise dispose of (whether in one transaction or in a series
of transactions) all or substantially all of its Property or assets to any other
Person other than the Borrower or an Active Subsidiary; provided, however,
nothing shall prohibit Borrower or any Active Subsidiary from: (i) acquiring
(a) any domestic undeveloped Hydrocarbon Interests, (b) domestic developed Oil
and Gas Properties or (c) all of the outstanding capital stock of a Person,
substantially all of the Property of which consists of domestic undeveloped
Hydrocarbon Interests or domestic developed Oil

 

 

61

 

--------------------------------------------------------------------------------

and Gas Properties, so long as Borrower or such Active Subsidiary pledges and/or
mortgages to the Lenders substantially all such developed Oil and Gas Properties
or all capital stock acquired pursuant thereto by execution of documents in form
and substance satisfactory to Agent in its sole discretion, granting perfected,
first priority Liens and security interests in such Oil and Gas Properties
subject only to Excepted Liens, Liens otherwise permitted by Section 9.02 and
other Liens acceptable to the Majority Lenders; or (ii) merging (after having
given Agent thirty (30) days prior written notice) (a) any Active or Inactive
Subsidiary into another Active Subsidiary or (b) any Guarantor into Borrower.
Notwithstanding the preceding, any transaction pursuant to this Section 9.08
shall not be permitted unless at the time of such transaction (A) both before
and after giving effect thereto, no Default or Event of Default shall have
occurred and be continuing; (B) the Borrower would be in compliance with the
covenants set forth in Section 9.13, Section 9.14 and Section 9.15 as of the
most recently completed period of four consecutive fiscal quarters ending prior
to such transaction for which the financial statements required by Section
8.01(a) or (b), as the case may be have been delivered or for which comparable
financial statements have been filed with the SEC, after giving pro forma effect
to such transaction and to any other event occurring after the commencement of
such period as to which pro forma recalculation is appropriate as if such
transaction had occurred as of the first day of such period.

Section 9.09.       Proceeds of Notes; Letters of Credit. The Borrower will not
permit the proceeds of the Notes or Letters of Credit to be used for any purpose
other than those permitted by Section 7.07. Neither the Borrower nor any Person
acting on behalf of the Borrower has taken or will take any action which might
cause any of the Loan Documents to violate Regulation T, U or X or any other
regulation of the Board of Governors of the Federal Reserve System or to violate
Section 7 of the Securities Exchange Act of 1934 or any rule or regulation
thereunder, in each case as now in effect or as the same may hereinafter be in
effect.

 

Section 9.10.

ERISA Compliance. The Borrower will not at any time:

(a)           Engage in, or permit any Subsidiary or ERISA Affiliate to engage
in, any transaction in connection with which the Borrower, any Subsidiary or any
ERISA Affiliate could be subjected to either a civil penalty assessed pursuant
to Section 502(c), (i) or (l) of ERISA or a tax imposed by Chapter 43 of
Subtitle D of the Code;

(b)           Terminate, or permit any Subsidiary or ERISA Affiliate to
terminate, any Plan in a manner, or take any other action with respect to any
Plan, which could result in any liability to the Borrower, any Subsidiary or any
ERISA Affiliate to the PBGC;

(c)           Fail to make, or permit any Subsidiary or ERISA Affiliate to fail
to make, full payment when due of all amounts which, under the provisions of any
Plan, agreement relating thereto or applicable law, the Borrower, a Subsidiary
or any ERISA Affiliate is required to pay as contributions thereto;

(d)           Permit to exist, or allow any Subsidiary or ERISA Affiliate to
permit to exist, any accumulated funding deficiency within the meaning of
Section 302 of ERISA or Section 412 of the Code, whether or not waived, with
respect to any Plan;

(e)           Permit, or allow any Subsidiary or ERISA Affiliate to permit, the
actuarial present value of the benefit liabilities under any Plan maintained by
the Borrower, any Subsidiary or any ERISA Affiliate which is regulated under
Title IV of ERISA to exceed the current value of the assets (computed on a plan
termination basis in accordance with Title IV of ERISA) of such Plan allocable
to such benefit liabilities. The term "actuarial present value of the benefit
liabilities" shall have the meaning specified in Section 4041 of ERISA;

 

 

62

 

--------------------------------------------------------------------------------

(f)           Contribute to or assume an obligation to contribute to, or permit
any Subsidiary or ERISA Affiliate to contribute to or assume an obligation to
contribute to, any Multiemployer Plan;

(g)           Acquire, or permit any Subsidiary or ERISA Affiliate to acquire,
an interest in any Person that causes such Person to become an ERISA Affiliate
with respect to the Borrower, any Subsidiary or any ERISA Affiliate if such
Person sponsors, maintains or contributes to, or at any time in the six-year
period preceding such acquisition has sponsored, maintained, or contributed to,
(1) any Multiemployer Plan, or (2) any other Plan that is subject to Title IV of
ERISA under which the actuarial present value of the benefit liabilities under
such Plan exceeds the current value of the assets (computed on a plan
termination basis in accordance with Title IV of ERISA) of such Plan allocable
to such benefit liabilities;

(h)           Incur, or permit any Subsidiary or ERISA Affiliate to incur, a
liability to or on account of a Plan under sections 515, 4062, 4063, 4064, 4201
or 4204 of ERISA;

(i)            Contribute to or assume an obligation to contribute to, or permit
any Subsidiary or ERISA Affiliate to contribute to or assume an obligation to
contribute to, any employee welfare benefit plan, as defined in Section 3(1) of
ERISA, including, without limitation, any such plan maintained to provide
benefits to former employees of such entities, that may not be terminated by
such entities in their sole discretion at any time without any material
liability; or

(j)            Amend or permit any Subsidiary or ERISA Affiliate to amend, a
Plan resulting in an increase in current liability such that the Borrower, any
Subsidiary or any ERISA Affiliate is required to provide security to such Plan
under Section 401(a)(29) of the Code.

Section 9.11.       Sale or Discount of Receivables. Neither the Borrower nor
any Subsidiary will discount or sell (with or without recourse) any of its notes
receivable or accounts receivable (other than a settlement on an account
receivable in the ordinary course of business).

Section 9.12.       Capital Expenditures. The Borrower will not make (or permit
any Subsidiaries to make) any expenditures for fixed or capital assets unless:
(a) in the ordinary course of business and (b) it does not violate the
provisions of Section 9.08.

Section 9.13.       Current Ratio. The Borrower will not permit its ratio of
(i) consolidated Current Assets (including, without limitation, Borrowing Base
availability for general corporate purposes) to (ii) consolidated Current
Liabilities (excluding current maturities of the Notes) to be less than 1.00 to
1.00 at any time. The current ratio shall be calculated and tested quarterly as
of the last day of each fiscal quarter of Borrower, beginning with the quarter
ending June 30, 2007. As used in this Section 9.13, "Current Assets" shall have
the meaning of such term as defined by GAAP, except any availability under the
Borrowing Base shall be included in the definition of Current Assets and
"Current Liabilities" shall have the meaning of such term as defined by GAAP,
except that current maturities of the Notes shall be excluded from Current
Liabilities. Current asset or liability accounts associated with Hedging
Agreements will be excluded from calculations of the current ratio.

Section 9.14.       Leverage Ratio. The Borrower will not permit its Leverage
Ratio as of the end of any fiscal quarter of the Borrower (calculated quarterly
at the end of each fiscal quarter commencing with fiscal quarter ended June 30,
2007) to be greater than (i) for the fiscal quarters ending on or before
December 31, 2007, 3.50 to 1.00, (ii) for the fiscal quarters ending after
December 31, 2007 and ending on or before after June 30, 2008, 3.25 to 1.00, and
(iii) for the fiscal quarters ending after June 30, 2008, 2.75 to 1.00. For the
purposes of this Section 9.14, "Leverage Ratio" shall mean the ratio of
(i) total Debt as of such date of the Borrower and its Consolidated
Subsidiaries, to (ii) EBITDAX of the Borrower and its Consolidated Subsidiaries
for the four fiscal quarters ending on such date. Notwithstanding the foregoing
provisions of this Section 9.14, EBITDAX as of June 30, 2007 shall be calculated
as

 

 

63

 

--------------------------------------------------------------------------------

EBITDAX for the two-quarter period ending on such date multiplied by two (2);
and EBITDAX as of September 30, 2007, shall be calculated as EBITDAX for the
three-quarter period ending on such date multiplied by four (4) and divided by
three (3).

Section 9.15.      Interest Coverage Ratio. The Borrower will not permit its
Interest Coverage Ratio as of the end of any fiscal quarter of the Borrower
(calculated quarterly at the end of each fiscal quarter commencing with fiscal
quarter ended June 30, 2007) to be less than 3.00 to 1.00. For the purposes of
this Section 9.15, "Interest Coverage Ratio" shall mean the ratio of (i) EBITDAX
for the four fiscal quarters ending on such date to (ii) interest expense for
such four fiscal quarters of the Borrower and its Consolidated Subsidiaries.
Notwithstanding the foregoing provisions of this Section 9.15, EBITDAX and
interest expense as of June 30, 2007, shall be calculated as EBITDAX and
interest expense for the quarter ending on such date multiplied by four (4);
EBITDAX and interest expense as of September 30, 2007, shall be calculated as
EBITDAX and interest expense for the two-quarter period ending on such date
multiplied by two (2); and EBITDAX and interest expense as of December 31, 2007,
shall be calculated as EBITDAX and interest expense for the three-quarter period
ending on such date multiplied by four (4) and divided by three (3).

Section 9.16.       Sale of Mortgaged Properties. The Borrower will not, and
will not permit any Subsidiary to, sell, assign, convey or otherwise transfer
any Mortgaged Property or any interest in any Mortgaged Property, except for
Mortgaged Property for which the Borrower has given the Agent at least thirty
(30) days prior written notice of the proposed transfer and which shall not
exceed $5,000,000.00 in the aggregate in between any two consecutive
Redetermination Dates.

Section 9.17.       Sale of Oil and Gas Properties. The Borrower will not, and
will not permit any Subsidiary to, sell, assign, farm-out, convey or otherwise
transfer any Oil and Gas Property or any interest in any Oil and Gas Property
except for (i) the sale of Hydrocarbons in the ordinary course of business;
(ii) farmouts of undeveloped acreage and assignments in connection with such
farmouts; (iii) the sale or transfer of equipment that is no longer necessary
for the business of the Borrower or such Subsidiary or is contemporaneously
replaced by equipment of at least comparable value and use and (iv) sales in the
ordinary course of business of Oil and Gas Properties that are not Mortgaged
Properties, which shall not exceed $1,000,000.00 in the aggregate in between any
two consecutive Redetermination Dates.

Section 9.18.       Environmental Matters. Neither the Borrower nor any
Subsidiary will cause or permit any of its Property to be in violation of, or do
anything or permit anything to be done which will cause from any Property any
actual, alleged or threatened discharge, dispersal, release, escape, emission,
transportation, disposal, seepage, exposure, consumption, or contact
(collectively, "Releases") of, with, to, or from any hazardous substance under
any Environmental Laws, subject any Property to any enforcement action under any
Environmental Laws by any Governmental Authority or lawsuit at any Property
relating to hazardous substances, or subject any such Property to any remedial
obligations by any Governmental Authority under any Environmental Laws, assuming
disclosure to the applicable Governmental Authority of all relevant facts,
conditions and circumstances, if any, pertaining to such Property where such
Releases, violations or remedial obligations would have a Material Adverse
Effect.

Section 9.19.      Transactions with Affiliates. Neither the Borrower nor any
Subsidiary will enter into any transaction, including, without limitation, any
purchase, sale, lease or exchange of Property or the rendering of any service,
with any Affiliate unless such transactions are otherwise permitted under this
Agreement, are in the ordinary course of its business and are upon fair and
reasonable terms no less favorable to it than it would obtain in a comparable
arm's length transaction with a Person not an Affiliate.

Section 9.20.      Subsidiaries. The Borrower shall not, and shall not permit
any Subsidiary to, create any additional Subsidiaries except in compliance with
Sections 8.13 and 9.24. The Borrower shall

 

 

64

 

--------------------------------------------------------------------------------

not and shall not permit any Subsidiary to sell or to issue any stock or
ownership interest of a Subsidiary, except to the Borrower or any Guarantor and
except in compliance with Section 9.03.

Section 9.21.      Negative Pledge Agreements. Neither the Borrower nor any
Subsidiary will create, incur, assume or permit to exist any contract, agreement
or understanding (other than this Agreement, the Security Instruments, the
Second Lien Loan Agreement and the Second Lien Loan Documents) which in any way
prohibits or restricts the granting, conveying, creation or imposition of any
Lien on any of its Property or restricts any Subsidiary from paying dividends to
the Borrower, or which requires the consent of or notice to other Persons in
connection therewith, except such restrictions in favor of the holders of Debt
secured by Liens described in Sections 9.01(d), 9.01(e) and 9.01(k), but only
insofar as such restrictions pertain to the Property encumbered thereby.

Section 9.22.      Take-or-Pay or Other Prepayments. The Borrower will not enter
into any take-or-pay agreements with respect to the Oil and Gas Properties of
the Borrower, any of its Subsidiaries, or any Guarantor which would require the
Borrower, any of its Subsidiaries or any Guarantor to deliver Hydrocarbons
produced from its Oil and Gas Properties at some future time without then or
thereafter receiving full payment therefor in an amount which would result in
the failure of the representation and warranty set forth in Section 7.24 to be
true and correct at all times.

Section 9.23.      Ownership of Subsidiaries. The Borrower shall not fail to
pledge, assign, deliver, and transfer to the Agent for the benefit of the
Lenders, and grant to the Agent for the benefit of the Lenders, a continuing
security interest in one hundred percent (100%) of the stock or other ownership
interests in the Subsidiaries existing as of the date hereof and any
Subsidiaries the Borrower or its Subsidiaries shall create, acquire or otherwise
own hereafter.

Section 9.24.       Change in Borrower's, any of its Subsidiaries' or any
Guarantor's Name or State of Formation. Without the prior written approval of
Agent, (a) Borrower will not (nor permit any Subsidiary or Guarantor to) change
its name, identity or place of organization and (b) Borrower will not (nor
permit any Subsidiary or Guarantor to) engage in any other business or
transaction under any name other than Borrower's, any Guarantor, or each
Subsidiary's name, respectively, hereunder. Should Agent approve, prior to doing
any of the aforesaid, Borrower shall provide (or cause each Subsidiary or
Guarantor to provide) to Agent all assignments, certificates, financing
statements, financing statement amendments or other documents determined
necessary in Agent's sole judgment to protect and continue Agent's interest in
the collateral pledged by Borrower, any of its Subsidiaries, any Guarantor, or
any other party to secure the Obligations.

 

Section 9.25.

Intentionally Omitted.

 

Section 9.26.

Intentionally Omitted.

 

Section 9.27.

[Reserved].

Section 9.28.       Limitation on Hedging. The total notional volume
attributable to any Hedging Agreement with respect to Hydrocarbon Interests of
the Borrower and its Subsidiaries shall not exceed more than eighty percent
(80%) of estimated proved producing net production quantities from such
Hydrocarbon Interests as of the most recent Reserve Report in any period. If the
Hedging Agreement is an interest rate hedge, the notional principal amount shall
not exceed more than seventy-five percent (75%) of the sum of Loans and Second
Lien Loans outstanding to the Borrower.

Section 9.29.       Maintenance of First Lien Priority; Modification of Second
Lien Loan Documents.

(a)           The Borrower agrees that it will not, and will not permit any
Subsidiary to, grant a Lien on any Property to secure the indebtedness under the
Second Lien Loan Documents or

 

 

65

 

--------------------------------------------------------------------------------

guarantee the repayment of any indebtedness under the Second Lien Loan
Documents, in each case without first (i) giving fifteen (15) days' prior
written notice to the Agent of such action and (ii) granting to the Agent to
secure the Obligations a first-priority, perfected Lien on this same Property or
entering into a similar guarantee of the Obligations in favor of the Agent and
the Lenders, as applicable, pursuant to Security Instruments in form and
substance reasonably satisfactory to the Agent. Any security instruments or
other documents and agreements drafted in connection with the Second Lien Loan
shall be expressly subject to the terms and provisions of the Intercreditor
Agreement. In connection therewith, the Borrower shall, or shall cause its
Subsidiaries to, execute and deliver such other additional closing documents,
certificates and legal opinions as shall reasonably be requested by the Agent.

(b)           The Borrower shall not, nor will it permit any of its Subsidiaries
to prepay, redeem, repurchase or defease all or any portion of the Second Lien
Loan or any other indebtedness arising under the Second Lien Loan Documents,
except that so long as no Default, Event of Default or Deficiency then exists or
would result therefrom, the Borrower may make any mandatory prepayments from
"Net Cash Proceeds" (as defined in the Second Lien Loan Agreement as in effect
on the Closing Date) required pursuant to Section 2.13(a) or Section 2.13(b) of
the Second Lien Loan Agreement as in effect on the Closing Date so long as no
Default, Event of Default or Deficiency then exists or would result therefrom
(provided, however, that nothing contained herein shall be construed to permit
any sale or disposition of assets, incurrence of Debt, or other transaction by
the Borrower or any Subsidiary resulting in any such "Net Cash Proceeds" which
is otherwise prohibited under the terms of this Agreement).

(c)           The Borrower will not, and will not permit any of its Subsidiaries
to, amend, supplement, permit a waiver of or otherwise modify any of the Second
Lien Loan Documents in any manner other than as expressly permitted under
Section 7.01(b) of the Intercreditor Agreement.

ARTICLE X.

Events of Default; Remedies

Section 10.01.    Events of Default. One or more of the following events shall
constitute an "Event of Default":

(a)           the Borrower, any of its Subsidiaries, or any Guarantor shall
default in the payment or prepayment when due of (i) any principal of any Loan,
(ii) any reimbursement obligation for a disbursement made under any Letter of
Credit within the period allowed by Section 2.10(a), or (iii) interest on any
Loan, or any fees or other amount payable by it hereunder or under any Security
Instrument and, solely with respect to any such default described in this clause
(iii), such default shall continue unremedied for a period of three Business
Days; or

(b)           the Borrower, any of its Subsidiaries, or any Guarantor shall
default in the payment when due of any principal of or interest on any of its
other Debt aggregating $5,000,000.00 or more, or any event specified in any
note, agreement, indenture or other document evidencing or relating to any such
Debt shall occur if the effect of such event is to cause, or (with the giving of
any notice or the lapse of time or both) to permit the holder or holders of such
Debt (or a trustee or Agent on behalf of such holder or holders) to cause, such
Debt to become due prior to its stated maturity; or

(c)           any representation, warranty or certification made or deemed made
herein or in any Security Instrument by the Borrower, any of its Subsidiaries,
or any Guarantor, or any certificate furnished to any Lender or the Agent
pursuant to the provisions hereof or any Security

 

 

66

 

--------------------------------------------------------------------------------

Instrument, shall prove to have been false or misleading as of the time made or
furnished in any material respect; or

(d)           the Borrower shall default in the performance of any of its
obligations under Article IX (other than as specifically excepted in this
subsection); or the Borrower shall default in the performance of any of its
obligations under Article VIII or any other Article of this Agreement (other
than as specifically excepted in this subsection) or the Borrower, any of its
Subsidiaries, or any Guarantor shall default in the performance of their
obligations under Section 9.18 as to those Oil and Gas Properties not operated
by the Borrower nor any Subsidiary and which have an aggregate value of
$5,000,000.00 or more as determined by the latest Engineering Reports provided
to the Lender pursuant to Section 2.08 of this Agreement, or the Borrower, any
of its Subsidiaries, or any Guarantor shall default in the performance of their
obligations under any Security Instrument (other than the payment of amounts due
which shall be governed by Section 10.01(a)) and any such default shall continue
unremedied for a period of thirty (30) days after the earlier to occur of
(i) notice thereof to the Borrower by the Agent or any Lender (through the
Agent), or (ii) the Borrower otherwise becoming aware of such default; or

(e)           the Borrower shall admit in writing its inability to, or be
generally unable to, pay its debts as such debts become due; or

(f)           the Borrower shall (i) apply for or consent to the appointment of,
or the taking of possession by, a receiver, custodian, trustee or liquidator of
itself or of all or a substantial part of its property, (ii) make a general
assignment for the benefit of its creditors, (iii) commence a voluntary case
under the Federal Bankruptcy Code (as now or hereafter in effect), (iv) file a
petition seeking to take advantage of any other law relating to bankruptcy,
insolvency, reorganization, winding-up, liquidation or composition or
readjustment of debts, (v) fail to controvert in a timely and appropriate
manner, or acquiesce in writing to, any petition filed against it in an
involuntary case under the Federal Bankruptcy Code, or (vi) take any corporate
action for the purpose of effecting any of the foregoing; or

(g)           a proceeding or case shall be commenced, without the application
or consent of the Borrower, in any court of competent jurisdiction, seeking
(i) its liquidation, reorganization, dissolution or winding-up, or the
composition or readjustment of its debts, (ii) the appointment of a trustee,
receiver, custodian, liquidator or the like of the Borrower of all or any
substantial part of its assets, or (iii) similar relief in respect of the
Borrower under any law relating to bankruptcy, insolvency, reorganization,
winding-up, or composition or adjustment of debts, and such proceeding or case
shall continue undismissed, or an order, judgment or decree approving or
ordering any of the foregoing shall be entered and continue unstayed and in
effect, for a period of 60 days; or (iv) an order for relief against the
Borrower shall be entered in an involuntary case under the Federal Bankruptcy
Code; or

(h)           a judgment or judgments for the payment of money in excess of
$1,000,000.00 in the aggregate shall be rendered by a court against the Borrower
or any Subsidiary and the same shall not be discharged (or provision shall not
be made for such discharge), or a stay of execution thereof shall not be
procured, within thirty (30) days from the date of entry thereof and the
Borrower or such Subsidiary shall not, within said period of 30 days, or such
longer period during which execution of the same shall have been stayed, appeal
therefrom and cause the execution thereof to be stayed during such appeal; or

(i)            the Loan Documents after delivery thereof shall for any reason,
except to the extent permitted by the terms thereof, cease to be in full force
and effect and valid, binding and enforceable in accordance with their terms, or
cease to create a valid and perfected Lien of the priority required thereby on
any of the collateral in excess of $1,000,000.00 in the aggregate at

 

 

67

 

--------------------------------------------------------------------------------

any one time purported to be covered thereby, except to the extent permitted by
the terms of this Agreement, or the Borrower shall so state in writing, or the
Intercreditor Agreement shall, in whole or in part, cease to be effective or
cease to be legally valid, binding and enforceable against the holders of any
Debt under the Second Lien Loan Agreement; or

(j)            any Letter of Credit becomes the subject matter of any order,
judgment, injunction or any other such determination, or if the Borrower, any of
its Subsidiaries, any Guarantor, or any other Person shall petition or apply for
or obtain any order restricting payment by the Agent under any Letter of Credit
or extending the Lenders' liability under any Letter of Credit beyond the
expiration date stated therein or otherwise agreed to by the Agent; or

 

(k)

[Reserved.]

(l)            the Borrower, or any of its Active Subsidiaries, discontinues its
usual business, or any Person other than Oaktree Capital Management LLC or its
Affiliates shall acquire 50.1% or more than a majority of the Borrower's
outstanding securities having ordinary voting power for the election of
directors, or any Change in Control (as defined in the Second Lien Loan
Agreement) shall occur; or

(m)         fewer than a majority of the members of the Board of Directors are
Continuing Directors; provided however, that this section shall not constitute
an Event of Default if, within the 60 days following such event, Persons are
appointed as members of the Board of Directors such that more than a majority of
the members of the Board of Directors are Continuing Directors; or

(n)           any Guarantor takes, suffers or permits to exist any of the events
or conditions referred to in paragraphs (e), (f) or (g) or if any provision of
any guaranty agreement shall for any reason cease to be valid and binding on any
such Guarantor or if any such Guarantor shall so state in writing; or

(o)          if the Borrower, any Guarantor, or any Subsidiary terminates or
liquidates or an event occurs which results in an early termination of any hedge
or transaction under a Hedging Agreement required pursuant to Section 6.01(x)
without the prior written consent of the Agent; or

(p)           any Event of Default (as defined in the Second Lien Loan
Agreement) shall have occurred pursuant to the Second Lien Loan Agreement or any
other Second Lien Loan Document.

 

Section 10.02.

Remedies.

(a)           In the case of an Event of Default other than one referred to in
clauses (e), (f) or (g) of Section 10.01 or in clauses (m) or (n) to the extent
it relates to clauses (e), (f) or (g), the Agent, upon request of the Majority
Lenders, shall, by notice to the Borrower, cancel the Commitments (in whole or
part) and the Swing Line (in whole or in part) and/or declare the principal
amount then outstanding of, and the accrued interest on, the Loans and all other
amounts payable by the Borrower hereunder and under the Notes (including without
limitation the payment of cash collateral to secure the LC Exposure as provided
in Section 2.10(b)) to be forthwith due and payable, whereupon such amounts
shall be immediately due and payable without presentment, demand, protest,
notice of intent to accelerate, notice of acceleration or other formalities of
any kind, all of which are hereby expressly waived by the Borrower.

(b)           In the case of the occurrence of an Event of Default referred to
in clauses (e), (f) or (g) of Section 10.01 or in clauses (m) or (n) to the
extent it relates to clauses (e), (f) or (g), the Commitments and the Swing Line
shall be automatically canceled and the principal amount then

 

 

68

 

--------------------------------------------------------------------------------

outstanding of, and the accrued interest on, the Loans and all other amounts
payable by the Borrower hereunder and under the Notes (including without
limitation the payment of cash collateral to secure the LC Exposure as provided
in Section 2.10(b)) shall become automatically immediately due and payable
without presentment, demand, protest, notice of intent to accelerate, notice of
acceleration or other formalities of any kind, all of which are hereby expressly
waived by the Borrower.

(c)           All proceeds received after maturity of the Notes, whether by
acceleration or otherwise shall be applied first to reimbursement of expenses
and indemnities provided for in this Agreement and the Security Instruments;
second to accrued interest on the Notes; third to fees; fourth pro rata to
principal outstanding on the Notes and any other Obligations and to serve as
cash collateral to be held by the Agent to secure the LC Obligations; and any
excess shall be paid to the Borrower or as otherwise required by any
Governmental Requirement.

ARTICLE XI.

The Agent

Section 11.01.   Appointment, Powers and Immunities. Each Lender hereby
irrevocably appoints and authorizes the Agent to act as its Agent hereunder and
under the Security Instruments with such powers as are specifically delegated to
the Agent by the terms of this Agreement and the Security Instruments, together
with such other powers as are reasonably incidental thereto. The Agent (which
term as used in this sentence and in Section 11.05 and the first sentence of
Section 11.06 shall include reference to its Affiliates and its and its
Affiliates' officers, directors, employees, attorneys, accountants, experts and
Agents): (i) shall have no duties or responsibilities except those expressly set
forth in the Loan Documents, and shall not by reason of the Loan Documents be a
trustee or fiduciary for any Lender; (ii) makes no representation or warranty to
any Lender and shall not be responsible to the Lenders for any recitals,
statements, representations or warranties contained in this Agreement, or in any
certificate or other document referred to or provided for in, or received by any
of them under, this Agreement, or for the value, validity, effectiveness,
genuineness, execution, effectiveness, legality, enforceability or sufficiency
of this Agreement, any Note or any other document referred to or provided for
herein or for any failure by the Borrower or any other Person (other than the
Agent) to perform any of its obligations hereunder or thereunder or for the
existence, value, perfection or priority of any collateral security or the
financial or other condition of the Borrower, its Subsidiaries or any other
obligor or guarantor; (iii) except pursuant to Section 11.07 shall not be
required to initiate or conduct any litigation or collection proceedings
hereunder; and (iv) shall not be responsible for any action taken or omitted to
be taken by it hereunder or under any other document or instrument referred to
or provided for herein or in connection herewith including its own ordinary
negligence, except for its own gross negligence or willful misconduct. The Agent
may employ agents, accountants, attorneys and experts and shall not be
responsible for the negligence or misconduct of any such agents, accountants,
attorneys or experts selected by it in good faith or any action taken or omitted
to be taken in good faith by it in accordance with the advice of such agents,
accountants, attorneys or experts. The Agent may deem and treat the payee of any
Note as the holder thereof for all purposes hereof unless and until a written
notice of the assignment or transfer thereof permitted hereunder shall have been
filed with the Agent. The Agent is authorized to release any collateral, or
subordinate any Lien on any collateral, that is permitted to be sold or
otherwise disposed of or released pursuant to the terms of the Loan Documents.

Section 11.02.    Reliance by Agent. The Agent shall be entitled to rely upon
any certification, notice or other communication (including any thereof by
telephone, telex, telecopier, telegram or cable) believed by it to be genuine
and correct and to have been signed or sent by or on behalf of the proper Person
or Persons, and upon advice and statements of legal counsel, independent
accountants and other experts selected by the Agent.

 

 

69

 

--------------------------------------------------------------------------------

Section 11.03.     Defaults. The Agent shall not be deemed to have knowledge of
the occurrence of a Default (other than the non-payment of principal of or
interest on Loans or of fees or failure to reimburse for Letter of Credit
drawings) unless the Agent has received notice from a Lender or the Borrower
specifying such Default and stating that such notice is a "Notice of Default."
In the event that the Agent receives such a notice of the occurrence of a
Default, the Agent shall give prompt notice thereof to the Lenders. In the event
of a payment Default, the Agent shall give each Lender prompt notice of each
such payment Default.

Section 11.04.     Rights as a Lender. With respect to its Commitments and the
Loans made by it and its participation in the issuance of Letters of Credit,
Wells Fargo (and any successor acting as Agent) in its capacity as a Lender or
the Swing Line Lender, as applicable, hereunder shall have the same rights and
powers hereunder as any other Lender and may exercise the same as though it were
not acting as the Agent, and the term "Lender" or "Lenders" shall, unless the
context otherwise indicates, include the Agent in its individual capacity. Wells
Fargo (and any successor acting as Agent) and its Affiliates may (without having
to account therefor to any Lender) accept deposits from, lend money to and
generally engage in any kind of banking, trust or other business with the
Borrower (and any of its Affiliates) as if it were not acting as the Agent, and
Wells Fargo and its Affiliates may accept fees and other consideration from the
Borrower for services in connection with this Agreement or otherwise without
having to account for the same to the Lenders.

Section 11.05.     Indemnification. The Lenders agree to indemnify the Agent,
the Swing Line Lender and the Issuing Bank ratably in accordance with their
Percentage Shares for the Indemnity Matters as described in Section 12.03 to the
extent not indemnified or reimbursed by the Borrower under Section 12.03, but
without limiting the obligations of the Borrower under said Section 12.03 and
for any and all other liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements of any kind and
nature whatsoever which may be imposed on, incurred by or asserted against the
Agent, the Swing Line Lender or the Issuing Bank in any way relating to or
arising out of: (i) this Agreement, the Security Instruments or any other
documents contemplated by or referred to herein or the transactions contemplated
hereby, but excluding, unless a Default has occurred and is continuing, normal
administrative costs and expenses incident to the performance of its agency
duties hereunder or (ii) the enforcement of any of the terms of this Agreement,
any Security Instrument or of any such other documents; whether or not any of
the foregoing specified in this Section 11.05 arises from the sole or concurrent
negligence of the Agent or the Swing Line Lender or the Issuing Bank, provided
that no Lender shall be liable for any of the foregoing to the extent they arise
from the gross negligence or willful misconduct of the Agent.

Section 11.06.    Non-Reliance on Agent and other Lenders. Each Lender
acknowledges and agrees that it has, independently and without reliance on the
Agent, the Swing Line Lender or any other Lender, and based on such documents
and information as it has deemed appropriate, made its own credit analysis of
the Borrower and its decision to enter into this Agreement, and that it will,
independently and without reliance upon the Agent, the Swing Line Lender or any
other Lender, and based on such documents and information as it shall deem
appropriate at the time, continue to make its own analysis and decisions in
taking or not taking action under this Agreement. The Agent shall not be
required to keep itself informed as to the performance or observance by the
Borrower of this Agreement, the Notes, the Security Instruments or any other
document referred to or provided for herein or to inspect the properties or
books of the Borrower. Except for notices, reports and other documents and
information expressly required to be furnished to the Lenders by the Agent
hereunder, the Agent shall not have any duty or responsibility to provide any
Lender with any credit or other information concerning the affairs, financial
condition or business of the Borrower (or any of its Affiliates) which may come
into the possession of the Agent or any of its Affiliates. In this regard, each
Lender acknowledges that Haynes and Boone, LLP is acting in this transaction as
special counsel to the Agent only, except to the extent otherwise expressly
stated in any legal opinion or any Loan Document. Each Lender will consult with
its own legal counsel to the extent that it deems necessary in connection with
the Loan Documents and the matters contemplated

 

 

70

 

--------------------------------------------------------------------------------

therein. Each Lender, the Swing Line Lender and the Issuing Bank further
acknowledges that it has received a copy of the Intercreditor Agreement,
authorizing the Agent to enter into the same, and agrees to be bound by its
terms.

Section 11.07.    Action by Agent. Except for action or other matters expressly
required of the Agent hereunder, the Agent shall in all cases be fully justified
in failing or refusing to act hereunder unless it shall (i) receive written
instructions from the Majority Lenders (or all of the Lenders as expressly
required by Section 12.04) specifying the action to be taken, and (ii) be
indemnified to its satisfaction by the Lenders against any and all liability and
expenses which may be incurred by it by reason of taking or continuing to take
any such action. The instructions of the Majority Lenders (or all of the Lenders
as expressly required by Section 12.04) and any action taken or failure to act
pursuant thereto by the Agent shall be binding on all of the Lenders. If a
Default has occurred and is continuing, the Agent shall take such action with
respect to such Default as shall be directed by the Majority Lenders (or all of
the Lenders as required by Section 12.04) in the written instructions (with
indemnities) described in this Section 11.07, provided that, unless and until
the Agent shall have received such directions, the Agent may (but shall not be
obligated to) take such action, or refrain from taking such action, with respect
to such Default as it shall deem advisable in the best interests of the Lenders.
In no event, however, shall the Agent be required to take any action which
exposes the Agent to personal liability or which is contrary to this Agreement
and the Security Instruments or applicable law.

Section 11.08.     Resignation of Agent. Subject to the appointment and
acceptance of a successor Agent as provided below, the Agent may resign at any
time by giving notice thereof to the Lenders and the Borrower. Upon any such
resignation, the Majority Lenders shall have the right to appoint a successor
Agent. If no successor Agent shall have been so appointed by the Majority
Lenders and shall have accepted such appointment within thirty (30) days after
the retiring Agent's giving of notice of resignation, then the retiring Agent
may, on behalf of the Lenders, appoint a successor Agent. Upon the acceptance of
such appointment hereunder by a successor Agent, such successor Agent shall
thereupon succeed to and become vested with all the rights, powers, privileges
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 XI and
Section 12.03 shall continue in effect for its benefit in respect of any actions
taken or omitted to be taken by it while it was acting as the Agent. Any
resignation by Wells Fargo Bank, National Association as Agent pursuant to this
Section shall also constitute its resignation as Issuing Bank and Swing Line
Lender. Upon the acceptance of a successor's appointment as Agent hereunder, (i)
such successor shall succeed to and become vested with all of the rights,
powers, privileges and duties of the retiring Issuing Bank and Swing Line
Lender, (ii) the retiring Issuing Bank and Swing Line Lender shall be discharged
from all of their respective duties and obligations hereunder or under the other
Loan Documents, (iii) the successor Issuing Bank shall issue letters of credit
in substitution for the Letters of Credit, if any, outstanding at the time of
such succession or make other arrangements satisfactory to the retiring Issuing
Bank to effectively assume the obligations of the retiring Issuing Bank with
respect to such Letters of Credit, and (iv) the successor Swing Line Lender
shall make swing line loans in substitution for the Swing Line Loans, if any,
outstanding at the time of such succession or make other arrangements
satisfactory to the retiring Swing Line Lender to effectively assume the
obligations of the retiring Swing Line Lender with respect to such Swing Line
Loans.

Section 11.09.    Other Agents; Lead Managers. None of the Lenders or other
Persons identified on the facing page or signature pages of this Agreement as a
"syndication agent," "documentation agent," "co-agent," "joint bookrunner" or
"co-lead manager" shall have any right, power, obligation, liability,
responsibility or duty under this Agreement as such. Without limiting the
foregoing, none of the Lenders or other Persons so identified shall have or be
deemed to have any fiduciary relationship with Agent or any Lender. Each Lender
acknowledges that it has not relied, and will not rely, on any of the Lenders or
other Persons so identified in deciding to enter into this Agreement or in
taking or not taking action hereunder.

 

 

71

 

--------------------------------------------------------------------------------

Section 11.10.     Hedging Arrangements. To the extent any Affiliate of a Lender
is a party to a Hedging Agreement with Borrower or any Guarantor, such Affiliate
shall be deemed to appoint the Administrative Agent its nominee and agent, and
to act for and on behalf of such Affiliate in connection with the Security
Instruments and to be bound by this Article XI.

ARTICLE XII.

Miscellaneous

Section 12.01.    Waiver. No failure on the part of the Agent or any Lender to
exercise and no delay in exercising, and no course of dealing with respect to,
any right, power or privilege under any of the Loan Documents shall operate as a
waiver thereof, nor shall any single or partial exercise of any right, power or
privilege under any of the Loan Documents preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The remedies
provided herein are cumulative and not exclusive of any remedies provided by
law.

Section 12.02.    Notices. All notices and other communications provided for
herein and in the other Loan Documents (including, without limitation, any
modifications of, or waivers or consents under, this Agreement or the other Loan
Documents) shall be given or made by telex, telecopy, courier or U.S. Mail or in
writing and telexed, telecopied, mailed or delivered to the intended recipient
at the "Address for Notices" specified below its name on the signature pages
hereof or in the Loan Documents or, as to any party, at such other address as
shall be designated by such party in a notice to each other party. Except as
otherwise provided in this Agreement or in the other Loan Documents, all such
communications shall be deemed to have been duly given when transmitted, if
transmitted before 1:00 p.m. local time on a Business Day (otherwise on the next
succeeding Business Day) by telex or telecopier and evidence or confirmation of
receipt is obtained, or personally delivered or, in the case of a mailed notice,
three (3) Business Days after the date deposited in the mails, postage prepaid,
in each case given or addressed as aforesaid.

 

Section 12.03.

Payment of Expenses, Indemnities, Etc.

 

(a)

The Borrower agrees:

(i)            whether or not the transactions hereby contemplated are
consummated, to pay all expenses of the Agent in the administration (both before
and after the execution hereof and including advice of counsel as to the rights
and duties of the Agent and the Lenders with respect thereto) of, and in
connection with the negotiation, syndication, investigation, preparation,
execution and delivery of, recording or filing of, preservation of rights under,
enforcement of, and refinancing, renegotiation or restructuring of, the Loan
Documents and any amendment, waiver or consent relating thereto (including,
without limitation, travel, photocopy, mailing, courier, telephone and other
similar expenses of the Agent, the cost of environmental audits, surveys and
appraisals at reasonable intervals, the fees and disbursements of counsel and
other outside consultants for the Agent and, in the case of enforcement, the
fees and disbursements of counsel for the Agent and any of the Lenders); and
promptly reimburse the Agent for all amounts expended, advanced or incurred by
the Agent or the Lenders to satisfy any obligation of the Borrower under this
Agreement or any Security Instrument, including without limitation, all costs
and expenses of foreclosure;

(ii)          to indemnify the Agent and each Lender and each of their
Affiliates and each of their officers, directors, employees, representatives,
Agents, attorneys, accountants and experts ("Indemnified Parties") from, hold
each of them harmless against and promptly upon demand pay or reimburse each of
them for, the Indemnity Matters which may be incurred by or asserted against or
involve any of

 

 

72

 

--------------------------------------------------------------------------------

them (whether or not any of them is designated a party thereto) as a result of,
arising out of or in any way related to (i) any actual or proposed use by the
Borrower of the proceeds of any of the Loans or Letters of Credit, (ii) the
execution, delivery and performance of the Loan Documents, (iii) the operations
of the business of the Borrower and its Subsidiaries, (iv) the failure of the
Borrower or any Subsidiary to comply with the terms of any Security Instrument
or this Agreement, or with any Governmental Requirement, (v) any inaccuracy of
any representation or any breach of any warranty of the Borrower or any
Guarantor set forth in any of the Loan Documents (vi) the issuance, execution
and delivery or transfer of or payment or failure to pay under any Letter of
Credit, or (vii) the payment of a drawing under any Letter of Credit
notwithstanding the non-compliance, non-delivery or other improper presentation
of the manually executed draft(s) and certification(s), (viii) any assertion
that the Lenders were not entitled to receive the proceeds received pursuant to
the Security Instruments or (ix) any other aspect of the Loan Documents,
including, without limitation, the fees and disbursements of counsel and all
other expenses incurred in connection with investigating, defending or preparing
to defend any such action, suit, proceeding (including any investigations,
litigation or inquiries) or claim and including all Indemnity Matters arising by
reason of the ordinary negligence of any Indemnified Party, but excluding all
Indemnity Matters arising solely by reason of claims between the Lenders or any
Lender and the Agent or a Lender's shareholders against the Agent or Lender or
by reason of the gross negligence or willful misconduct on the part of the
Indemnified Party or any of its Affiliates or any of their respective officers,
directors, employees, representatives, agents, attorneys, accountants or
experts; and

(iii)         to indemnify and hold harmless from time to time the Indemnified
Parties from and against any and all losses, claims, cost recovery actions,
administrative orders or proceedings, damages and liabilities to which any such
Person may or is alleged to become subject: (i) under any Environmental Law
applicable to the Borrower or any Subsidiary or any of their Properties,
including without limitation, the treatment or disposal of hazardous substances
on any of their Properties, (ii) as a result of the breach or non-compliance, or
alleged breach or non-compliance, by the Borrower or any Subsidiary with any
Environmental Law applicable to the Borrower or any Subsidiary, (iii) due to
past ownership by the Borrower or any Subsidiary of any of their Properties or
past activity on any of their Properties which, though lawful and fully
permissible at the time, could result in present liability, (iv) the presence,
use, release, storage, treatment, transportation, or disposal of hazardous
substances on or at any of the Properties owned or operated by the Borrower or
any Subsidiary, or (v) any other environmental, health or safety condition in
connection with the Loan Documents; provided, however, no indemnity shall be
afforded under this Section 12.03(a)(iii) in respect of any Property for any
occurrence arising from the acts or omissions of the Agent or any Lender or any
purchaser at foreclosure or pursuant to a deed-in-lieu thereof during the period
after which such Person, its successors or assigns shall have obtained
possession of such Property (whether by foreclosure or deed in lieu of
foreclosure, as mortgagee-in-possession or otherwise).

(b)           No Indemnified Party may settle any claim to be indemnified
without the consent of the indemnitor, such consent not to be unreasonably
withheld; provided, that the indemnitor may not reasonably withhold consent to
any settlement that an Indemnified Party proposes, if the indemnitor does not
have the financial ability to pay all its obligations outstanding and asserted
against the indemnitor at that time, including the maximum potential claims
against the Indemnified Party to be indemnified pursuant to this Section 12.03.

 

 

73

 

--------------------------------------------------------------------------------

(c)           In the case of any indemnification hereunder, the Agent or Lender,
as appropriate shall give notice to the Borrower of any such claim or demand
being made against the Indemnified Party and the Borrower shall have the
non-exclusive right to join in the defense against any such claim or demand
provided that if the Borrower provides a defense, the Indemnified Party shall
bear its own cost of defense unless there is a conflict between the Borrower and
such Indemnified Party.

(d)           The foregoing indemnities shall extend to the Indemnified Parties
notwithstanding the sole or concurrent negligence of every kind or character
whatsoever, whether active or passive, whether an affirmative act or an
omission, including without limitation, all types of negligent conduct
identified in the restatement (second) of torts of one or more of the
Indemnified Parties or by reason of strict liability imposed without fault on
any one or more of the Indemnified Parties; provided, however, that to the
extent that an Indemnified Party is found to have committed an act of gross
negligence or willful misconduct, this contractual obligation of indemnification
shall continue but shall only extend to the portion of the claim that is deemed
to have occurred by reason of events other than the gross negligence or willful
misconduct of the Indemnified Party.

(e)           The Borrower's obligations under this Section 12.03 shall survive
any termination of this Agreement and the payment of the Notes and shall
continue thereafter in full force and effect.

(f)           The Borrower shall pay any amounts due under this Section 12.03
within thirty (30) days of the receipt by the Borrower of notice of the amount
due.

Section 12.04.     Amendments, Etc. Any provision of this Agreement or any
Security Instrument may be amended, modified or waived with the Borrower's and
the Majority Lenders' prior written consent; provided that (i) no amendment,
modification or waiver which extends the final maturity of the Loans, increases
the Aggregate Maximum Revolving Credit Amounts, increases the Borrowing Base,
forgives the principal amount of any Obligations outstanding under this
Agreement, releases any guarantor of any Obligations or releases all or
substantially all of the collateral, reduces the interest rate applicable to the
Loans or the fees payable to the Lenders generally, affects Section 2.03(a),
this Section 12.04 or Section 12.06(a) or modifies the definition of "Majority
Lenders" shall be effective without consent of all Lenders; (ii) no amendment,
modification or waiver which increases the Maximum Revolving Credit Amount of
any Lender shall be effective without the consent of such Lender; and (iii) no
amendment, modification or waiver which modifies the rights, duties or
obligations of the Agent, the Issuing Bank or the Swing Line Lender shall be
effective without the consent of the Agent, the Issuing Bank or the Swing Line
Lender, as applicable.

Section 12.05.     Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and permitted assigns.

 

Section 12.06.

Assignments and Participations.

(a)           The Borrower may not assign its rights or obligations hereunder or
under the Notes or any Letters of Credit without the prior consent of all of the
Lenders and the Agent.

(b)           Any Lender may assign to one or more assignees all or a portion of
its rights and obligations under this Agreement pursuant to an Assignment
Agreement substantially in the form of Exhibit E (an "Assignment"); provided,
however, that (i) except in the case of an assignment to a Lender or a Lender
Affiliate, such assignment shall require the written consent of the Agent, the
Issuing Bank and the Swing Line Lender and, if no Event of Default has occurred
and is continuing, the Borrower (which consent will not be unreasonably
withheld), (ii) except in the case of an assignment to a Lender or a Lender
Affiliate, any such assignment shall be in the

 

 

74

 

--------------------------------------------------------------------------------

amount of at least $5,000,000.00 or such lesser amount to which the Borrower and
the Agent have consented and if the assigning Lender has assigned less than all
of its Percentage Share of the Loans, such assigning Lender shall retain a
Percentage Share of the Loans equating to at least $5,000,000.00 or such lesser
amount to which the Borrower and the Agent have consented and (iii) the assignee
or assignor shall pay to the Agent a processing and recordation fee of $3,000.00
for each assignment. Any such assignment will become effective upon the
execution and delivery to the Agent of the Assignment, payment of the
recordation fee and, if required, the consent of the Agent, the Issuing Bank and
the Swing Line Lender and the Borrower. Promptly after receipt of an executed
Assignment, the Agent shall send to the Borrower a copy of such executed
Assignment. Upon receipt of such executed Assignment, the Borrower, will, at its
own expense, execute and deliver new Notes to the assignor and/or assignee, as
appropriate, in accordance with their respective interests as they appear. Upon
the effectiveness of any assignment pursuant to this Section 12.06(b), the
assignee will become a "Lender," if not already a "Lender," for all purposes of
this Agreement and the other Loan Documents. The assignor shall be relieved of
its obligations hereunder to the extent of such assignment (and if the assigning
Lender no longer holds any rights or obligations under this Agreement, such
assigning Lender shall cease to be a "Lender" hereunder except that its rights
under Sections 4.06, 5.01, 5.05 and 12.03 shall not be affected). The Agent will
prepare on the last Business Day of each month during which an assignment has
become effective pursuant to this Section 12.06(b), a new Annex I giving effect
to all such assignments effected during such month, and will promptly provide
the same to the Borrower and each of the Lenders. Any assignment or transfer by
a Lender of rights or obligations under this Agreement that does not comply with
this Section 12.06(b) shall be treated for purposes of this Agreement as a sale
by such Lender of a participation in such rights and obligations in accordance
with Section 12.06(c).

(c)           Each Lender may, without the consent of the Borrower, the Agent,
the Swing Line Lender or the Issuing Bank, transfer, grant or assign
participations in all or any part of such Lender's interests hereunder pursuant
to this Section 12.06(c) to any Person, provided that: (i) such Lender shall
remain a "Lender" for all purposes of this Agreement and the transferee of such
participation shall not constitute a "Lender" hereunder, (ii) such Lender's
obligations under this Agreement shall remain unchanged, (ii) such Lender shall
remain solely responsible to the other parties hereto for the performance of
such obligations and (iv) the Borrower, the Agent, the Issuing Bank, the Swing
Line Lender and the other Lenders shall continue to deal solely and directly
with such Lender in connection with such Lender's rights and obligations under
this Agreement. Any agreement or instrument pursuant to which a Lender sells
such a participation shall provide that such Lender shall retain the sole right
to enforce the Loan Documents and to approve any amendment, modification or
waiver of any provision of the Loan Documents; provided that such agreement or
instrument may provide that such Lender will not, without the consent of the
participant, agree to any amendment, modification or waiver that would
(x) forgive any principal owing on any Obligations or extend the final maturity
of the Loans, (y) reduce the interest rate (other than as a result of waiving
the applicability of any post-default increases in interest rates) or fees
applicable to any of the Commitments or Loans or Letters of Credit in which such
participant is participating, or postpone the payment of any thereof, or (z)
release any guarantor of the Obligations or release all or substantially all of
the collateral (except as provided in the Loan Documents) supporting any of the
Commitments or Loans or Letters of Credit in which such participant is
participating. In the case of any such participation, the participant shall not
have any rights under this Agreement or any of the Security Instruments (the
participant's rights against the granting Lender in respect of such
participation to be those set forth in the agreement with such Lender creating
such participation), and all amounts payable by the Borrower hereunder shall be
determined as if such Lender had not sold such participation, provided that such
participant shall be entitled to receive additional amounts under Article V on
the same basis as if it were a Lender and be indemnified under Section 12.03 as
if it were a

 

 

75

 

--------------------------------------------------------------------------------

Lender. In addition, each agreement creating any participation must include an
agreement by the participant to be bound by the provisions of Section 12.15.

(d)           The Lenders may furnish any information concerning the Borrower in
the possession of the Lenders from time to time to assignees and participants
(including prospective assignees and participants); provided that, such Persons
agree to be bound by the provisions of Section 12.15.

(e)           Notwithstanding anything in this Section 12.06 to the contrary,
any Lender may assign and pledge its Note to any Federal Reserve Bank. No such
assignment and/or pledge shall release the assigning and/or pledging Lender from
its obligations hereunder.

(f)           Notwithstanding any other provisions of this Section 12.06, no
transfer or assignment of the interests or obligations of any Lender or any
grant of participations therein shall be permitted if such transfer, assignment
or grant would require the Borrower to file a registration statement with the
SEC or to qualify the Loans under the "Blue Sky" laws of any state.

Section 12.07.     Invalidity. In the event that any one or more of the
provisions contained in any of the Loan Documents or the Letters of Credit, the
Letter of Credit Agreements shall, for any reason, be held invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision of the Notes, this Agreement or any other
Loan Document.

Section 12.08.     Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties hereto may execute this Agreement by signing
any such counterpart.

 

Section 12.09.

References; Use of Word "Including".

The words "herein," "hereof," "hereunder" and other words of similar import when
used in this Agreement refer to this Agreement as a whole, and not to any
particular article, Section or subsection. Any reference herein to a Section or
Article shall be deemed to refer to the applicable Section or Article of this
Agreement unless otherwise stated herein. Any reference herein to an exhibit,
schedule, or other attachment shall be deemed to refer to the applicable
exhibit, schedule, or other attachment attached hereto unless otherwise stated
herein. The word "including", "includes" and words of similar import means
"including, without limitation".

Section 12.10.    Survival. The obligations of the parties under Section 4.06,
Article V, and Sections 11.05, 12.03, and 12.15 shall survive the repayment of
the Loans and the termination of the Commitments. To the extent that any
payments on the Obligations or proceeds of any collateral are subsequently
invalidated, declared to be fraudulent or preferential, set aside or required to
be repaid to a trustee, debtor in possession, receiver or other Person under any
bankruptcy law, common law or equitable cause, then to such extent, the
Obligations so satisfied shall be revived and continue as if such payment or
proceeds had not been received and the Agent's and the Lenders' Liens, security
interests, rights, powers and remedies under this Agreement and each Security
Instrument shall continue in full force and effect. In such event, each Security
Instrument shall be automatically reinstated and the Borrower shall take such
action as may be reasonably requested by the Agent and the Lenders to effect
such reinstatement.

Section 12.11.    Captions. Captions and Section headings appearing herein are
included solely for convenience of reference and are not intended to affect the
interpretation of any provision of this Agreement.

 

 

76

 

--------------------------------------------------------------------------------

Section 12.12.    No Oral Agreements. The Loan Documents embody the entire
agreement and understanding between the parties and supersede all other
agreements and understandings between such parties relating to the subject
matter hereof and thereof. The Loan Documents represent the final agreement
between the parties and may not be contradicted by evidence of prior,
contemporaneous or subsequent oral agreements of the parties. There are no
unwritten oral agreements between the parties.

 

Section 12.13.

Governing Law; Submission to Jurisdiction.

(a)           This Agreement, the Notes and the other Loan Documents (except the
Intercreditor Agreement) shall be governed by, and construed in accordance with,
the laws of the State of Texas, except to the extent (i) otherwise expressly
provided in any Mortgage and (ii) that United States federal law permits any
Lender to charge interest at the rate allowed by the laws of the state where
such Lender is located. Ch. 346 of the Texas Finance Code (which regulates
certain revolving credit loan accounts and revolving tri-party accounts) shall
not apply to this Agreement, the Notes or any other Loan Document. All
environmentally related activities or omissions shall be governed by and
construed in accordance with the laws of the United States of America, and where
applicable, any U.S. treaty, or the laws (including common law) of the state or
jurisdiction where any Property is located, including those located in any
foreign country, or in international waters. In case of conflict with respect
to, and only with respect to, environmentally related activities or omissions,
the more stringent requirement shall govern.

(b)           Any legal action or proceeding with respect to the Loan Documents
shall be brought in the courts of the State of Texas or of the United States of
America for the Southern District of Texas, and, by execution and delivery of
this Agreement, the Borrower hereby accepts for itself and (to the extent
permitted by law) in respect of its Property, generally and unconditionally, the
jurisdiction of the aforesaid courts. The Borrower hereby irrevocably waives any
objection, including, without limitation, any objection to the laying of venue
or based on the grounds of forum non conveniens, which it may now or hereafter
have to the bringing of any such action or proceeding in such respective
jurisdictions. This submission to jurisdiction is non-exclusive and does not
preclude the Agent or any Lender from obtaining jurisdiction over the Borrower,
any of its Subsidiaries, or any Guarantor in any court otherwise having
jurisdiction.

(c)           The Borrower hereby irrevocably consents to the service of process
of any of the aforementioned courts in any such action or proceeding by the
mailing of copies thereof by registered or certified mail, postage prepaid, to
the Borrower at its said address, such service to become effective thirty (30)
days after such mailing. Nothing herein shall affect the right of the Agent, any
Lender or any holder of a Note to serve process in any other manner permitted by
law or to commence legal proceedings or otherwise proceed against the Borrower
or its Properties in any other jurisdiction.

(d)           The Borrower, the Agent and each Lender hereby (i) irrevocably and
unconditionally waive, to the fullest extent permitted by law, trial by jury in
any legal action or proceeding relating to this Agreement or any Loan Document
and for any counterclaim therein; (ii) irrevocably waive, to the maximum extent
not prohibited by law, any right it may have to claim or recover in any such
litigation any special, exemplary, punitive or consequential damages, or damages
other than, or in addition to, actual damages; (iii) certify that no party
hereto nor any representative, agent or counsel for any party hereto has
represented, expressly or otherwise, or implied that such party would not, in
the event of litigation, seek to enforce the foregoing waivers, and
(iv) acknowledge that it has been induced to enter into this Agreement and the
other Loan Documents and the transactions contemplated hereby and thereby by,
among other things, the mutual waivers and certifications contained in this
Section 12.13.

 

 

77

 

--------------------------------------------------------------------------------

Section 12.14.     Interest. It is the intention of the parties hereto that each
Lender shall conform strictly to usury laws applicable to it. Accordingly, if
the transactions contemplated hereby would be usurious as to any Lender under
laws applicable to it (including the laws of the United States of America and
the State of Texas or any other jurisdiction whose laws may be mandatorily
applicable to such Lender notwithstanding the other provisions of this
Agreement), then, in that event, notwithstanding anything to the contrary in any
of the Loan Documents or any agreement entered into in connection with or as
security for the Notes, it is agreed as follows: (i) the aggregate of all
consideration which constitutes interest under law applicable to any Lender that
is contracted for, taken, reserved, charged or received by such Lender under any
of the Loan Documents or agreements or otherwise in connection with the Notes
shall under no circumstances exceed the maximum amount allowed by such
applicable law, and any excess shall be canceled automatically and if
theretofore paid shall be credited by such Lender on the principal amount of the
Obligations (or, to the extent that the principal amount of the Obligations
shall have been or would thereby be paid in full, refunded by such Lender to the
Borrower); and (ii) in the event that the maturity of the Notes is accelerated
by reason of an election of the holder thereof resulting from any Event of
Default under this Agreement or otherwise, or in the event of any required or
permitted prepayment, then such consideration that constitutes interest under
law applicable to any Lender may never include more than the maximum amount
allowed by such applicable law, and excess interest, if any, provided for in
this Agreement or otherwise shall be canceled automatically by such Lender as of
the date of such acceleration or prepayment and, if theretofore paid, shall be
credited by such Lender on the principal amount of the Obligations (or, to the
extent that the principal amount of the Obligations shall have been or would
thereby be paid in full, refunded by such Lender to the Borrower). All sums paid
or agreed to be paid to any Lender for the use, forbearance or detention of sums
due hereunder shall, to the extent permitted by law applicable to such Lender,
be amortized, prorated, allocated and spread throughout the full term of the
Loans evidenced by the Notes until payment in full so that the rate or amount of
interest on account of any Loans hereunder does not exceed the maximum amount
allowed by such applicable law. If at any time and from time to time (i) the
amount of interest payable to any Lender on any date shall be computed at the
Highest Lawful Rate applicable to such Lender pursuant to this Section 12.14 and
(ii) in respect of any subsequent interest computation period the amount of
interest otherwise payable to such Lender would be less than the amount of
interest payable to such Lender computed at the Highest Lawful Rate applicable
to such Lender, then the amount of interest payable to such Lender in respect of
such subsequent interest computation period shall continue to be computed at the
Highest Lawful Rate applicable to such Lender until the total amount of interest
payable to such Lender shall equal the total amount of interest which would have
been payable to such Lender if the total amount of interest had been computed
without giving effect to this Section 12.14. To the extent that Chapter 303 of
the Texas Finance Code is relevant for the purpose of determining the Highest
Lawful Rate, such Lender elects to determine the applicable rate ceiling under
such Chapter by the indicated weekly rate ceiling from time to time in effect.

Section 12.15.    Confidentiality. In the event that the Borrower provides to
the Agent or the Lenders written non-public information belonging to the
Borrower, the Agent and the Lenders shall thereafter maintain such information
in confidence in accordance with the standards of care and diligence that each
utilizes in maintaining its own confidential information. This obligation of
confidence shall not apply to such portions of the information which (i) are in
the public domain, (ii) hereafter become part of the public domain without the
Agent or the Lenders breaching their obligation of confidence to the Borrower,
(iii) are previously known by the Agent or the Lenders from some source other
than the Borrower, (iv) are hereafter developed by the Agent or the Lenders
without using the Borrower's information, (v) are hereafter obtained by or
available to the Agent or the Lenders from a third party who owes no obligation
of confidence to the Borrower with respect to such information or through any
other means other than through disclosure by the Borrower, (vi) are disclosed
with the Borrower's consent, (vii) must be disclosed either pursuant to any
Governmental Requirement, including compliance under any Environmental Laws, or
to Persons regulating the activities of the Agent or the Lenders, or (viii) as
may be required by law or regulation or order of any Governmental Authority in
any judicial, arbitration or governmental proceeding. Further, the Agent or a
Lender may disclose any such information to any

 

 

78

 

--------------------------------------------------------------------------------

other Lender, any independent petroleum engineers or consultants, any
independent certified public accountants, any legal counsel employed by such
Person in connection with this Agreement or any Security Instrument, including
without limitation, the enforcement or exercise of all rights and remedies
thereunder, or any assignee or participant (including prospective assignees and
participants) in the Loans; provided, however, that the Agent or the Lenders
shall receive a confidentiality agreement from the Person to whom such
information is disclosed such that said Person shall have the same obligation to
maintain the confidentiality of such information as is imposed upon the Agent or
the Lenders hereunder. Notwithstanding anything to the contrary provided herein,
this obligation of confidence shall cease three (3) years from the date the
information was furnished, unless the Borrower requests in writing at least
thirty (30) days prior to the expiration of such three year period, to maintain
the confidentiality of such information for an additional three year period. The
Borrower waives any and all other rights it may have to confidentiality as
against the Agent and the Lenders arising by contract, agreement, statute or law
except as expressly stated in this Section 12.15.

Section 12.16.    Effectiveness; Termination; Collateral Matters. This Agreement
shall not be effective until the date (the "Effective Date") that it is
delivered to the Agent in the State of Texas, accepted by the Lenders in such
State, and executed by the Agent in such State. If the Obligations are finally
and indefeasibly paid and satisfied in full, including, without limitation, all
such Obligations arising under Hedging Agreements and/or Cash Management
Agreements, all Commitments of the Lenders and the Swing Line have been
terminated and are no longer in effect and this Agreement is terminated, the
Administrative Agent and the Lenders shall execute and deliver or cause to be
executed and delivered such instruments of satisfaction and reassignment as may
be appropriate in order to release all liens and security interests created by
the Security Instruments; provided, however, that in lieu of terminating and
repaying any such Obligations arising under any Hedging Agreement with any
Lender or Affiliate of any Lender, the Borrower may provide substitute credit
support under a standard form ISDA Credit Support Annex or other credit support
documents acceptable to such Lender (or its Affiliate), in its sole discretion,
to cover its then current exposure under such Hedging Agreement and such Lender
(and its Affiliate, if applicable) shall have provided written notice to Agent
to the effect that such substitute credit support has been provided to it and
that such Lender (and its Affiliate, if applicable) no longer claim any right,
title or interest in any collateral security arising under the Loan Documents to
secure any obligations and indebtedness of Borrower or any of its Subsidiaries
arising under or related to such Hedging Agreement, whether then existing or
thereafter arising. The benefits of the Mortgage and Security Instruments, and
of the provisions of this Agreement relating to any collateral securing the
Obligations, shall also extend to and be available to those Lenders or their
Affiliates which are counterparties to any Hedging Agreement or Cash Management
Agreement with Borrower or any of its Subsidiaries on a pro rata basis in
respect of any obligations of Borrower or such Subsidiary which arise under any
such Hedging Agreement or Cash Management Agreement, such benefits extending
while such Person or its Affiliate is a Lender, but only while such Person or
its Affiliate is a Lender, including any Hedging Agreements or Cash Management
Agreement between such Persons in existence prior to the date hereof. No Lender
or any Affiliate of a Lender shall have any voting rights under any Loan
Documents as a result of the existence of obligations owed to it under any such
Hedging Agreements or Cash Management Agreements.

Section 12.17.    Renewal and Continuation of Existing Indebtedness. Upon the
effectiveness of this Agreement, all of the Existing Indebtedness outstanding on
such date shall hereby be renewed and continued as provided in this Agreement
and all Letters of Credit outstanding under the Existing Credit Agreement shall
become Letters of Credit outstanding hereunder.

Section 12.18.     Exculpation Provisions. Each of the parties hereto
specifically agrees that it has a duty to read this Agreement and the Security
Instruments and agrees that it is charged with notice and knowledge of the terms
of this Agreement and the Security Instruments; that it has in fact read this
Agreement and is fully informed and has full notice and knowledge of the terms,
conditions and effects of this Agreement; that it has been represented by
independent legal counsel

 

 

79

 

--------------------------------------------------------------------------------

of its choice throughout the negotiations preceding its execution of this
Agreement and the Security Instruments; and has received the advice of its
attorney in entering into this Agreement and the Security Instruments; and that
it recognizes that certain of the terms of this Agreement and the Security
Instruments result in one party assuming the liability inherent in some aspects
of the transaction and relieving the other party of its responsibility for such
liability. Each party hereto agrees and covenants that it will not contest the
validity or enforceability of any exculpatory provision of this Agreement and
the Security Instruments on the basis that the party had no notice or knowledge
of such provision or that the provision is not "conspicuous."

Section 12.19.    USA PATRIOT Act Notices. Each Lender that is subject to the
Act (as hereinafter defined) and the Agent (for itself and not on behalf of any
Lender) hereby notifies the Borrower that pursuant to the requirements of the
USA PATRIOT Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001))
(the "Act"), it is required to obtain, verify and record information that
identifies Borrower and each Guarantor, which information includes the name and
address of Borrower and each Guarantor and other information that will allow
such Lender or the Agent, as applicable, to identify Borrower and each Guarantor
in accordance with the Act.

[SIGNATURES BEGIN ON NEXT PAGE]

 

 

80

 

--------------------------------------------------------------------------------

The parties hereto have caused this Agreement to be duly executed as of the day
and year first above written.

BORROWER:

CRIMSON EXPLORATION INC.,
a Delaware corporation

 

 

 

By: /s/ E. Joseph Grady

E. Joseph Grady

Senior Vice President and

Chief Financial Officer

 

 

 

Address for Notices:

 

 

 

Crimson Exploration Inc.

717 Texas Ave., Suite 2900

Houston, Texas 77002

Telecopier No.: (713) 236-7474

Telephone No.: (713) 236-7400

Attention: E. Joseph Grady

 

 

 

S-1

 

--------------------------------------------------------------------------------

 

LENDER, SWING LINE

LENDER AND AGENT:

 

WELLS FARGO BANK, NATIONAL
ASSOCIATION

 

 

 

By: /s/ Richard A. Gould

Richard A. Gould

Senior Vice President

 

 

 

Lending Office for Base Rate and LIBOR Loans:

 

 

 

Wells Fargo Bank, National Association

1000 Louisiana, Ninth Floor

Houston, Texas 77002

 

 

 

Telecopier No.: (713) 739-1087

Telephone No.: (713) 319-1343

Attention: Richard Gould

 

 

 

Address for Notices:

 

 

 

Wells Fargo Bank, National Association

1000 Louisiana, Ninth Floor

Houston, Texas 77002

 

 

 

Telecopier No.: (713) 739-1087

Telephone No.: (713) 319-1343

Attention: Richard Gould

 

 

 

With copy to:

 

 

 

Haynes and Boone, LLP

One Houston Center

1221 McKinney Street, Suite 2100

Houston, Texas 77010

Telecopier No.: (713) 236-5577

Telephone No.: (713) 547-2077

Attention: Bernard F. Clark, Jr.

 

 

 

S-2

 

--------------------------------------------------------------------------------

 

LENDERS:

THE ROYAL BANK OF SCOTLAND plc

 

 

 

By: /s/ Robert E. Poirrier, Jr.

Name: Robert E. Poirrier, Jr.

Title: Vice President

 

 

 

Lending Office for Base Rate Loans, LIBOR Loans and Address for Notices as set
forth on the Administrative Details Form on file with the Agent in accordance
with its customary practices as in effect from time to time

 

 

 

 

 

 

 

S-3