Exhibit 10.2

 

Letter of Credit Agreement

   

            This Letter of Credit Agreement ("Agreement") is entered this 7th
day of October 2004 by and between Guaranty Bank ("Guaranty") and The
Exploration Company of Delaware, Inc. ("Customer") in light of the following
recitals.

 

R E C I T A L S:

   

            The Customer has requested Guaranty to issue or cause to be issued
Standby Letters of Credit ("Letters of Credit") representing Hedge Commodity
Agreements or Rate Management Transactions, (which are being issued outside the
original borrowing base as stated in the Credit Agreement dated June 30, 2004),
containing the terms and provisions set forth on Exhibit "A", (Letter of Credit
Application(s)), hereto attached and made a part hereof. The Beneficiaries named
in the Letters of Credit are called "Beneficiary" in this Agreement. The purpose
of this Agreement is to evidence the agreement between Guaranty and the Customer
regarding the Letters of Credit and the rights and obligations of the parties
arising out of transactions involving the Letters of Credit. The consideration
for Customer's agreement to the terms of this Agreement is the agreement of
Guaranty to issue Standby Letters of Credit representing Hedge Commodity
Agreements or Rate Management Transactions.

 

            THEREFORE, Guaranty and Customer agree as follows:

 

            1.            Letter of Credit Fee. The Customer agrees to pay
Guaranty an administrative fee as defined in the "Pricing Schedule" Exhibit VI
of the Credit Agreement dated June 30, 2004, per annum of the Letters of Credit
amounts with a minimum payment of $500.00, which is charged by Guaranty in
connection with the issuance or renewal of the Letters of Credit, regardless of
whether there is a payment on any drafts presented pursuant to the Letters of
Credit.

 

            2.            Agreement to Pay. Customer agrees to pay Guaranty on
demand at its main banking quarters in Dallas, Texas in currency of the United
States (a) all of Guaranty's expenses ("Guaranty Expenses") incurred in
connection with any Letters of Credit Activities (as hereinafter defined),
including, but not limited to, attorney's fees, recording fees, cost of credit
reports and expenses relating to title insurance and UCC report forms, (b) all
amounts paid by Guaranty ("Letter of Credit Payments") pursuant to drafts or
other demands made pursuant to the Letters of Credit, (c) interest on the unpaid
sums owing pursuant to subparagraphs (a) and (b) of this paragraph calculated at
the rate as defined in the "Pricing Schedule" Exhibit VI of the Credit Agreement
dated June 30, 2004, and in accordance with the further provisions of this
paragraph. Interest shall accrue from the date monies are paid by Guaranty or
expenses incurred (as appropriate) until paid by Customer. "Letters of Credit
Activities" shall include all actions taken in response to the application of
the Customer for the issuance of the Letters of Credit, the issuance and
documentation of the transaction by which the Letters of Credit are issued and
all actions taken in response to and as a result of the presentation of a draft
or other demand for payment pursuant to the Letters of Credit.

 

            3.            Authority to Pay. Guaranty is irrevocably authorized
to pay any sum requested in accordance with the Letters of Credit provided: (a)
the amount paid and the amounts previously paid pursuant thereto do not exceed
the stated amount(s) of the Letters of Credit; and (b) all documents
("Presentation Documents") required to be presented pursuant to the Letters of
Credit are presented. Guaranty may act upon Presentation Documents which it
determines in its sole discretion are authentic and in accordance with the
requirements of the Letters of Credit and pay sums in accordance with the
Letters of Credit, notwithstanding any act or failure to act of the Beneficiary
or Customer, including, but not limited to, (i) Customer's oral or written
objection to the Presentation Documents or the accuracy of any statements
therein made or (ii) Customer's oral or written challenge to the right of the
Beneficiary to request sums pursuant to the Letters of Credit on whatever basis,
including, but not limited to, Customer's claims of fraud, forgery, other
defect, default by the Beneficiary or misrepresentation. Guaranty shall not be
required to determine: (i) that any signatures on the Presentation Documents are
the signatures of the parties which they purport to be or (ii) that any
statements therein made are accurate. Guaranty shall be conclusively deemed to
be acting in good faith in the payment of any sum pursuant to the Letters of
Credit or the taking of any other action in connection therewith if it complies
with the provisions of this paragraph 3.

 

            4.            Reliance. Guaranty may act in reliance upon any oral,
telephonic, telegraphic, electronic or written request, which it believes, in
good faith, to have been authorized by the Customer, whether or not given or
signed by an authorized person.

 

            5.            Release. Guaranty shall not be responsible for and the
Customer releases Guaranty from any claim arising out of (a) any loss, cost or
expenses incurred by Customer as a result of any of the Letters of Credit
Activities unless it is determined by a court of competent jurisdiction that
Guaranty has failed to perform its obligations pursuant to this Agreement, (b)
any default, negligence, misfeasance, suspension, insolvency or bankruptcy of
any correspondent or agent of Guaranty, (c) any loss or delay, in transmission
or otherwise, of any drafts, documents or instruments or the proceeds therefrom
or (d) any delay, interruption, omission or error in transmission or delivery of
any message.

 

            6.            Indemnity. Customer indemnifies and holds Guaranty and
all of its employees, officers, directors, attorneys and agents (Guaranty and
said persons hereinafter called "Indemnified Parties") from any and all claims
and causes of action asserted against or incurred by the Indemnified Parties
arising out of a Default Event (defined below) or any of the Letters of Credit
Activities, INCLUDING THOSE BASED UPON THE NEGLIGENCE OF ANY OF THE INDEMNIFIED
PARTIES.

 

            7.            Representations. Customer represents and warrants to
Guaranty the following: (a) the execution and delivery of this Agreement and all
agreements ("Related Agreements") executed in connection herewith have been duly
authorized by all appropriate parties and this Agreement and the Related
Agreements are binding on and enforceable against the Customer; (b) all consents
and approvals required for the execution and delivery of this Agreement and the
Related Agreements by the Customer have been obtained; (c) neither the execution
of this Agreement and the Related Agreements nor the consummation of the
transactions contemplated thereby will (i)  result in a breach

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of, a default under or acceleration of any agreement to which the Customer is a
party or by which it is bound or (ii) violate any law, rule, regulation,
restriction, court order or agreement to which it is subject; (d) all of the
financial and other information ("Financial Information") delivered by the
Customer in connection with its application for the Letters of Credit and all
statements (both written and oral) made by the Customer to Guaranty were and are
true, correct and accurate in all respects at the time delivered or made and on
the date hereof; (c) Customer is not directly or indirectly engaged in
commercial trade with any foreign country targeted by the Office of Foreign
Assets Control ("OFAC"), or with any party named in OFAC's Specially Designated
Nationals and Block Persons ("SDN") list; and (d) Customer has taken reasonable
measures to ensure that Beneficiary is not directly or indirectly engaged in
commercial trade with any foreign targeted by the OFAC; or with any party named
in OFAC's SDN list.

 

            8.            Default Events. (a) The occurrence of any of the
following shall constitute a "Default Event":

 

                        (i)            The failure of Customer to perform its
obligations pursuant to this Agreement or any Related Agreement;

 

                        (ii)            The failure of any other party directly
or indirectly liable for performance of Customer's obligations hereunder
(including any party's guarantee of those obligations) (all such parties
hereinafter called "Guarantor") to perform its obligations pursuant to this
Agreement or any Related Agreement;

 

                        (iii)            Customer or Guarantor shall (A) be
adjudicated as bankrupt or insolvent, (B) make a general assignment for the
benefit of creditors, (C) file a petition, answer or consent seeking or allowing
to be entered against him or it, an order for relief (or any similar remedy)
under any provision under the United States Bankruptcy Code ("Bankruptcy Code")
or consent to the institution of any proceedings thereunder, (D) convene a
meeting of creditors, or any class thereof, for the purpose of effecting a
moratorium upon or extension or reorganization of debts or (E) apply for or
consent to the appointment of a receiver, trustee, custodian, liquidator or
other similar official of all or any portion of its assets;

 

                        (iv)            A petition is filed, or any case or
proceeding is commenced, under the Bankruptcy Code against either the Customer
or any Guarantor unless such petition in the case or proceeding initiated
thereby is dismissed within 60 days following the date of filing, an answer is
filed by Customer or any Guarantor admitting the allegations of any such
petition, or a court of competent jurisdiction enters an order, judgment or
decree without the consent of the Customer or any Guarantor appointing a
custodian, trustee, agent or receiver of either, or for all or any part of
either's property, or authorizing the taking of possession by a custodian,
trustee, agent or receiver of all or any part of either's property, unless such
appointment is vacated or dismissed or such possession is terminated within 60
days from the earlier of the date of such appointment or commencement of such
possession, but not later than 5 days before the proposed sale of any assets by
such custodian, trustee, agent or receiver;

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                        (v)            Guaranty determines that any of the
Financial Information delivered to it by the Customer or any Guarantor was
inaccurate in any material way, either at the time of the delivery of the
Financial Information or on the date of this Agreement or that any of the
representations or warranties made by the Customer or any Guarantor in this
Agreement or any of the Related Agreements is materially inaccurate; and

 

                        

            (b)            Upon the occurrence of any Default Event, Guaranty
may, at its option, take any or all of the following actions:

 

                        (i)            Make demand for payment of all sums owing
pursuant to the terms of this Agreement;

 

                        (ii)            Exercise all rights pursuant to any of
the Related Agreements, including, but not limited to, the exercise of rights in
and to property encumbered by liens or security interests securing the
obligations of the Customer or any of the Guarantors;

 

                        (iii)            Deliver a demand to the Customer and
any Guarantor that there be deposited with Guaranty good funds ("Special
Deposit") in an amount designated by Guaranty but not exceeding 120% of the
amount of the Letter of Credit; and

 

                        (iv)            Offset and apply any and all deposits
(general or special, time or demand, provisional or final) at any time held and
any other indebtedness at any time owing by Guaranty to the Customer against any
and all sums owing pursuant to this Agreement, regardless of whether any demand
has been made under this Agreement for any such sums or whether any such
deposits or other indebtedness owed by Guaranty are matured or contingent.

 

            9.            Special Deposit. If Guaranty exercises its right to
request the Special Deposit, (a) the Customer shall deliver the amount requested
to Guaranty within 5 business days following said request, (b) the Special
Deposit shall secure all of the obligations of Customer pursuant to this
Agreement and the Related Agreements, (c) Guaranty shall be entitled to hold the
Special Deposit until all of Customer's obligations are fully performed and, at
its option, apply the Special Deposit to the payment of those obligations as
they arise and (d) Customer shall not withdraw, pledge or otherwise encumber the
Special Deposit.

 

            10.            Additional Financial Information. Customer shall
deliver to Guaranty such additional financial and other information, which
Guaranty may request from time to time.

 

            11.            Security. The obligations of the Customer hereunder
are secured and guaranteed by all of the liens, security interests and
agreements (now or hereafter given) securing and granting collateral for the
loan, ("Loan Facility"), between Guaranty Bank and The Exploration Company as
evidenced by the Security Agreement dated June 30, 2004 between said parties. A
guaranty(ies) added from time to time under the "Loan Facility" will also
guarantee the obligations of the customer herein.

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            12.            No Usury. All agreements between Customer and
Guaranty, whether now existing or hereafter arising and whether written or oral,
are hereby expressly limited so that in no contingency or event whatsoever,
whether by reason of acceleration or the making of a demand for the payment of
any sum hereunder, or otherwise, shall the amount paid, agreed to be paid to
Guaranty for the use, forbearance or detention of money or for the payment or
performance of any covenant or obligation contained in this Agreement or any of
the Related Agreements, exceed the maximum amount permissible under applicable
law. If from any circumstance whatsoever, fulfillment of any provision hereof or
of any Related Agreement, at the time performance of such provision shall be
due, shall involve transcending the limit of validity prescribed by applicable
law, then, ipso facto, the obligation to be fulfilled shall be reduced to the
limit of such validity, and if from any circumstance, Guaranty shall ever
receive as interest or otherwise any amount which would exceed the highest
lawful rate, such amount which would be excessive interest shall be applied to
the reduction of sums owing hereunder other than interest and not to the payment
of interest or if such excess of interest exceeds the unpaid balance of said sum
(exclusive of interest), such excess shall be refunded to the Customer. All sums
paid or agreed to be paid to Guaranty for the use, forbearance or detention of
indebtedness shall, to the extent permitted by applicable law, be amortized,
prorated, allocated and spread throughout the full term of the indebtedness
until payment in full so that the actual rate of interest on account of such
indebtedness is uniform throughout the term. This paragraph shall control and
supersede every other provision of all agreements between Guaranty and Customer.

 

            13.            Entire Agreement. This Agreement and the Related
Agreements embody the entire agreement between Guaranty and the Customer with
respect to the Letter of Credit and Letter of Credit Activities, and there are
no oral or parol agreements existing between Guaranty and the Customer with
respect to the Letter of Credit or the Letter of Credit Activities which are not
expressly set forth herein and in the Related Agreements.

 

            14.            Headings.            The headings in this Agreement
are for reference purposes only and shall not in any way affect the meaning or
interpretation hereof.

 

            15.            Interpretation. Whenever the context hereof shall so
require, the singular shall include the plural, the male gender shall include
the female gender and the neuter, and vice versa.

 

            16.            Notice. Any notice required or permitted to be
delivered hereunder shall be deemed delivered when deposited in the United
States mail, postage prepaid, certified mail, return receipt requested,
addressed to Guaranty or the Customer, as the case may be, at the address set
forth below the signature of such party.

 

            17.            Applicable Law. This Agreement shall be construed in
accordance with the laws of the State of Texas and the United States, to the
extent applicable.

 

            18.            Severability. In case any one or more of the
provisions contained in this Agreement shall for any reason be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision hereof, and this Agreement
shall be construed as if such invalid, illegal or unenforceable provision had
never been contained herein.

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Continuing Agreement/Cumulative Rights

. This Agreement is a continuing obligation of the Customer and shall remain in
full force and effect until all of the obligations of the Customer hereunder and
pursuant to the Related Agreements have been fully satisfied. All rights and
remedies of Guaranty hereunder shall be cumulative of all other remedies to
which it may be entitled under applicable law. This Agreement shall be binding
upon and inure to the benefit of Guaranty, Customer and their respective
successors and assigns only. Neither this Agreement nor any of the Related
Agreements shall create any rights in favor of any party other than the persons
and entities described in the preceding sentence. Without limiting the scope of
the preceding sentence, the parties agree that Beneficiary shall not be entitled
to any rights or remedies created in this Agreement.

USA Patriot Act Notice.

Pursuant to federal law, Lender is required to give Borrower this important
information about procedures for opening a new account. To help the government
fight the funding of terrorism and money laundering activities, Federal law
requires all financial institutions and subsidiaries to obtain, verify, and
record information that identifies each person or entity who opens an account.
This means that when Borrower opens a loan or letter of credit account with
Lender, Borrower must provide to Lender information requested, such as name,
address, tax identification number, and other corporate information, including
business organizational documents, such as Articles of Incorporation, or other
identifying documents.  

            THIS AGREEMENT AND THE RELATED AGREEMENTS 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.

 

LENDER: 

CUSTOMER:

   

GUARANTY BANK

THE EXPLORATION COMPANY OF DELAWARE, INC.

       

By:   /s/ Jonathan Gregory                               

By:   /s/ P. Mark Stark                                  

Name: Jonathan Gregory

Name: P. Mark Stark

Title: Senior Vice President

Title: Vice President, Treasurer and CFO

Address:

Address:

8333 Douglas Avenue

500 N. Loop 1604 East, Suite 250

Dallas, Texas 75225

San Antonio, Texas 78232

             

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