Document:

exv10w1

 

Exhibit 10.1

AMENDMENT NO. 2

     This Amendment No. 2 dated as of March 28, 2006 (the “Agreement”) is among Stone
Energy Corporation, a Delaware corporation (“Borrower”), the banks party to the Credit
Agreement described below (“Banks”) and Bank of America, N.A., as Agent for the Banks
(“Agent”).

INTRODUCTION

     A. The Borrower, the Banks, and the Agent have entered into the Credit Agreement dated as of
April 30, 2004, as amended by Amendment No. 1 dated as of December 14, 2004 (as so amended, the
“Credit Agreement”).

     B. In connection with the proposed restatement of certain financial statements of the
Borrower, the Borrower, the Banks, and the Agent have entered into the Waiver dated as of December
15, 2005 (the “Waiver”).

     C. In consideration for the Banks’ granting of the Waiver, the Borrower has agreed to (a)
grant a valid, perfected, first-priority Lien in favor of the Agent for the benefit of the Agent
and the Banks, securing the Obligations, on (i) Oil and Gas Properties comprising not less than 80%
of the value of the Oil and Gas Properties included in Oil and Gas Reserve Reports delivered
pursuant to Section 5.6(c) of the Credit Agreement (the “Mortgaged Properties”),
together with the related equipment and (ii) the Borrower’s contracts related to the Mortgaged
Properties (the “Mortgaged Contracts”), (b) perform such title review, title reports, and
title clean-up as are reasonably requested by the Agent with respect to the Mortgaged Properties,
(c) obtain consents from contract counterparties with respect to each Mortgaged Contract that is
material to (i) its business or financial condition or (ii) the operation and ownership of the
Mortgaged Property to which it relates (including without limitation production, transportation,
and marketing of oil and gas produced therefrom), in each case, to the extent such material
Mortgaged Contract prohibits or restricts assignment of Borrower’s rights thereunder to the Agent,
unless otherwise agreed by Agent and the Majority Banks, (d) amend the Credit Agreement to reflect
such grant of security and the restatement of such financial statements, and (e) take such other
actions, approve such other filings, and execute and deliver such other documents as are reasonably
requested by the Agent in connection with the foregoing, all in a timely manner in cooperation with
the Agent but in any event no later than March 31, 2006.

     THEREFORE, in fulfillment of the foregoing, Borrower, Agent and the Banks hereby agree as
follows:

     Section 1. Definitions; References. Unless otherwise defined in this Agreement, each
term used in this Agreement which is defined in the Credit Agreement has the meaning assigned to
such term in the Credit Agreement.

     Section 2. Amendment. The Credit Agreement is amended as follows:

 

 

          (a) Section 1.1 of the Credit Agreement is hereby amended by inserting the following
definitions therein, in alphabetical order:

     “Acceptable Security Interest” in any Property means a Lien
which (a) exists in favor of the Agent for the benefit of the Agent and the
Banks, (b) except for Permitted Collateral Liens, is the only Lien on such
Property and which is superior to all Liens or rights of any other Person in
the Property encumbered thereby except for such Permitted Collateral Liens,
(c) secures the Obligations, and (d) is perfected and enforceable.

     “Collateral” has the meaning specified in the Security
Documents.

     “Consents” means the Consent and Agreements made by the
counterparties to the applicable Mortgaged Contracts in favor of the Agent,
including any such Consent and Agreements delivered from time to time in
accordance with Section 5.11, in each case, as the same may be
amended, supplemented, or otherwise modified from time to time.

     “Mortgaged Contracts” means the contracts of the Borrower and
the Guarantors related to the Mortgaged Properties.

     “Mortgaged Properties” means the Oil and Gas Properties of the
Borrower and the Guarantors that are subject to the Mortgages.

     “Mortgaged Property Value” means, as of any date of its
determination, the aggregate present value of the future net income with
respect to the Mortgaged Properties as set forth in the applicable
engineering report, discounted at the stated per annum rate utilized in such
report. For the avoidance of doubt, the methodology utilized to calculate
the Mortgaged Property Value shall be the same methodology utilized to
calculate the Oil and Gas Property Value for all purposes of this Agreement.

     “Mortgages” means (i) the Deed of Trust, Security Agreement,
Financing Statement, Fixture Filing and Assignment of Production dated as of
March 1, 2006, (ii) the Act of Mortgage, Assignment of Production, Security
Agreement, Fixture Filing, and Financing Statement dated as of March 1,
2006, (iii) the Mortgage, Assignment of Production, Security Agreement,
Fixture Filing, and Financing Statement dated as of March 1, 2006, and (iv)
any other mortgage or deed of trust executed by the Borrower or any
Guarantor in favor of the Agent for the benefit of the Agent and the Banks,
in each case, as the same may be amended, supplemented, or otherwise
modified from time to time.

     “Oil and Gas Property Value” means, as of any date of its
determination, the aggregate present value of the future net income with
respect to the Oil and Gas Properties of the Borrower and the Guarantors

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as set forth in the applicable engineering report, discounted at the
stated per annum rate utilized in such report.

     “Permitted Collateral Liens” means Permitted Liens of the type
described in clauses (a) and (d)-(i) (inclusive) of
Section 6.1.

     “Security Documents” means the Mortgages, the Consents, and
each of the other agreements, instruments, or documents that creates or
purports to create, or to consent to the creation of, a Lien in favor of the
Agent for the benefit of the Agent and the Banks.

     “Specified Swap Contract” means any Swap Contract (a) entered
into by the Borrower and any Bank or Affiliate of any Bank and (b) that has
been designated by the relevant Bank and the Borrower, by written notice to
the Agent, as a Specified Swap Contract. The designation of any Swap
Contract as a Specified Swap Contract shall not create in favor of such Bank
or Affiliate any rights in connection with the management or release of any
Collateral or of the obligations of the Borrower or any Guarantor under any
Security Document.

     “Swap Contract” means (a) any and all rate swap transactions,
basis swaps, credit derivative transactions, forward rate transactions,
commodity swaps, commodity options, forward commodity contracts, equity or
equity index swaps or options, bond or bond price or bond index swaps or
options or forward bond or forward bond price or forward bond index
transactions, interest rate options, forward foreign exchange transactions,
cap transactions, floor transactions, collar transactions, currency swap
transactions, cross-currency rate swap transactions, currency options, spot
contracts, or any other similar transactions or any combination of any of
the foregoing (including any options to enter into any of the foregoing),
whether or not any such transaction is governed by or subject to any master
agreement, and (b) any and all transactions of any kind, and the related
confirmations, which are subject to the terms and conditions of, or governed
by, any form of master agreement published by the International Swaps and
Derivatives Association, Inc., any International Foreign Exchange Master
Agreement, or any other master agreement (any such master agreement,
together with any related schedules, a “Master Agreement”),
including any such obligations or liabilities under any Master Agreement, in
each case, expressly including any such transactions in which a Person
hedges the price to be received by it for future production from the Oil and
Gas Properties.

          (b) Section 1.1 of the Credit Agreement is hereby amended by replacing the definitions of
“Credit Documents” and “Obligations” in their entirety with the following
respective definitions:

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     “Credit Documents” means this Agreement, the Notes, the Letter
of Credit Documents, the Guaranties, the Security Documents, and each other
agreement, instrument, or document executed at any time in connection with
this Agreement.

     “Obligations” means all (a) principal, interest, fees,
reimbursements, indemnifications, and other amounts payable by the Borrower
or any Guarantor to the Agent or the Banks under the Credit Documents and
(b) all debts, liabilities, obligations of the Borrower or any Guarantor
under any Specified Swap Contract, in each case, whether direct or indirect
(including those acquired by assumption), absolute or contingent, due or to
become due, now existing or hereafter arising and including interest and
fees that accrue after the commencement by or against the Borrower or any
Guarantor of any proceeding under any law relating to bankruptcy, insolvency
or reorganization or relief of debtors naming such Person as the debtor in
such proceeding, regardless of whether such interest and fees are allowed
claims in such proceeding; provided that any release of Collateral
or Guarantors pursuant to this Agreement shall not require the consent of
the holders of Obligations under Specified Swap Contracts.

          (c) Section 2.2 of the Credit Agreement is hereby amended by replacing clause (e) of such
Section in its entirety with the following clause (e):

     (e) (i) Upon any sale, lease, transfer, or other disposition, whether
or not in the ordinary course of business, by the Borrower or any of its
Subsidiaries of Borrowing Base Assets that (individually or on a cumulative
basis with all such dispositions consummated since the determination of the
most recently determined Borrowing Base) either (A) have a fair market value
in excess of 5% of the amount of the most recently determined Borrowing Base
or (B) were given value in the most recently determined Borrowing Base in
excess of 5% of the amount of such Borrowing Base, the Borrowing Base shall
automatically be reduced by the present value given to such assets in the
most recent engineering report delivered pursuant to Section 5.6(c),
including the applicable stated discount utilized therein, and (ii) upon the
issuance of any Debt permitted under Section 6.2(f), the Borrowing Base
shall automatically reduce by 50% of the principal amount of such Debt.

          (d) Section 2.2 of the Credit Agreement is hereby amended by replacing clause (f) of such
Section in its entirety with the following clause (f):

     (f) The Borrowing Base shall represent the determination by the
Majority Banks of the loan value of the Borrower’s and the Guarantors’ Oil
and Gas Properties which are either (i) subject to an Acceptable Security
Interest or (ii) unencumbered (except for Permitted Collateral Liens), but
the Agent and the Majority Banks shall make their

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determination and vote their approval, respectively, in accordance with
the applicable definitions and provisions herein contained, each such Bank’s
standard policies regarding energy lending, industry lending practices,
consultation with the Agent and the other Banks (but without requiring the
approval of any such Bank), and consideration for the nature of the
facilities established hereunder. The Borrower acknowledges that the
determination of the Borrowing Base contains an equity cushion (market value
in excess of loan value), which is acknowledged by Borrower to be essential
for the adequate protection of the Agent and the Banks.

          (e) Section 5.6(c) of the Credit Agreement is hereby amended by renumbering the existing
clause (iii) thereof as clause (v), and inserting the following clauses (iii) and (iv), in
numerical order:

     (iii) Each engineering report delivered pursuant to clause (i) or (ii)
above or clause (iv) below shall be accompanied by a certificate, executed
by a Responsible Officer of the Borrower in the form of Exhibit I
attached hereto, which (A) sets forth the Mortgaged Property Value, as set
forth in such engineering report and (B) either (y) demonstrates and
certifies that such Mortgaged Property Value equals or exceeds 80% of the
Oil and Gas Property Value as set forth in such engineering report or (z)
demonstrates and certifies the amount by which such Mortgaged Property Value
is less than 80% of such Oil and Gas Property Value and agrees that the
Borrower shall take all actions required under Section 5.11 hereof
within the period required by such Section.

     (iv) Within (A) at least 10 days prior to the consummation of any sale,
lease, transfer, or other disposition, whether or not in the ordinary course
of business, by the Borrower or any Guarantor of any Mortgaged Property for
which the value of the future net income attributed thereto in the most
recently delivered engineering report (individually or on a cumulative basis
with all sales of Mortgaged Properties consummated since the date of such
report) comprised in excess of 5% of the Mortgaged Property Value as set
forth in such report, (B) at least 10 days prior to the consummation of any
acquisition by the Borrower or any Guarantor of any Oil and Gas Property for
which the value of the future net income attributed thereto in the
engineering reports obtained in connection with such acquisition
(individually or on a cumulative basis with all acquisitions of Oil and Gas
Properties consummated since the date of such report) comprises in excess of
5% of the Oil and Gas Property Value as set forth in the engineering report
most recently delivered under this Agreement, or (C) 10 days following the
written request of the Agent (provided that so long as no Event of
Default exists, the Agent shall not make more than 2 such requests in any
calendar year), the Borrower shall provide (y) an updated internal
engineering report, current as of the end of the month then most recently
ended for which production data is available and in form and substance
satisfactory

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to the Agent, setting forth the information required by clause (ii)
above for internal engineering reports and (z) a certificate as required by
clause (iii) above which, in the case of any disposition of any Mortgaged
Property or acquisition of any Oil and Gas Property, shall make the required
calculation giving pro forma effect to such transaction (including, in the
case of any disposition of any Mortgaged Property, the inclusion of any
additional Oil and Gas Properties mortgaged by the Borrower or the
Guarantors pursuant to Section 6.2(b)(ii) prior to or concurrently
with such disposition).

          (f) Section 5.6 of the Credit Agreement is hereby amended by inserting the following clause
(n), in alphabetical order:

     (n) Notices regarding Oil and Gas Properties. Prompt, but in
any event at least 10 days prior to the consummation thereof, written notice
of (i) any sale, lease, transfer, or other disposition, whether or not in
the ordinary course of business, by the Borrower or any Guarantor of any
Mortgaged Property and (ii) any acquisition by the Borrower or any Guarantor
of any Oil and Gas Property for which the value of the future net income
attributed thereto in the engineering reports obtained in connection with
such acquisition (individually or on a cumulative basis with all
acquisitions of Oil and Gas Properties consummated since the date of such
report) comprises in excess of 5% of the Oil and Gas Property Value as set
forth in the engineering report most recently delivered under this
Agreement.

          (g) Article V of the Credit Agreement is hereby amended by inserting the following Section
5.11, in numerical order:

     Section 5.11 Agreement to Mortgage; Further Assurances.

     (a) If any certificate delivered pursuant to Section
5.6(c)(iii) or (iv) demonstrates that the Mortgaged Property
Value as set forth in the related engineering report is less than 80% of the
Oil and Gas Property Value as set forth in such report, the Borrower shall,
or shall cause the Guarantors to (i) promptly, but in any event within 60
days of the delivery of such certificate, grant to the Agent an Acceptable
Security Interest in (A) additional Oil and Gas Properties of the Borrower
or the Guarantors as necessary to cause the Mortgaged Property Value to
equal or exceed 80% of the Oil and Gas Property Value, together with all
related equipment and (B) the Borrower’s and the Guarantors’ contracts
related to such additional Mortgaged Properties (unless the granting of a
security interest in any such contract requires the consent of the
applicable counterparty, in which case the Borrower or applicable Guarantor
shall grant such security interest upon receipt of such consent), and (ii)
promptly, but in any event within 90 days of the delivery of such
certificate (A) perform such title review, title reports, and title clean-up
as are reasonably requested by the

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Agent with respect to such additional Mortgaged Properties, (B) use
commercially reasonable efforts to obtain consents from contract
counterparties with respect to each such additional Mortgaged Contract that
is material to (y) the Borrower’s or the applicable Guarantor’s business or
financial condition or (z) the operation and ownership of the additional
Mortgaged Property to which it relates (including without limitation
production, transportation, and marketing of oil and gas produced
therefrom), in each case, to the extent such material Mortgaged Contract
prohibits or restricts assignment of the Borrower’s or the applicable
Guarantor’s rights thereunder to the Agent, unless otherwise agreed by Agent
and the Majority Banks, and (C) take such other actions, approve such other
filings, provide such opinions of counsel, and execute and deliver such
other documents as are reasonably requested by the Agent in connection with
the foregoing.

     (b) From time to time execute and deliver, or cause to be executed and
delivered, such additional instruments, certificates or documents, and take
such actions, as the Agent may reasonably request for the purposes of
implementing or effectuating the provisions of this Agreement and the other
Credit Documents, or of more fully perfecting or renewing the rights of the
Agent and the Banks with respect to the Collateral (or with respect to any
additions thereto or replacements or proceeds thereof or with respect to any
other property or assets hereafter acquired by the Borrower or any Guarantor
which may be part of the Collateral) pursuant hereto or thereto, including
without limitation using commercially reasonable efforts to obtain consents
from contract counterparties with respect to any future Mortgaged Contract
that is material to (i) the Borrower’s or the applicable Guarantor’s
business or financial condition or (ii) the operation and ownership of the
Mortgaged Property to which it relates (including without limitation
production, transportation, and marketing of oil and gas produced
therefrom), in each case, to the extent such material Mortgaged Contract
prohibits or restricts assignment of the Borrower’s or the applicable
Guarantor’s rights thereunder to the Agent, unless otherwise agreed by Agent
and the Majority Banks. Upon the exercise by the Agent or any Bank of any
power, right, privilege or remedy pursuant to this Agreement or the other
Credit Documents which requires any consent, approval, recording,
qualification or authorization of any Governmental Authority, the Borrower
will execute and deliver, or will cause the execution and delivery of, all
applications, certifications, instruments and other documents and papers
that the Agent or such Bank may be required to obtain from the Borrower or
any of its Subsidiaries for such governmental consent, approval, recording,
qualification or authorization.

          (h) Section 6.4 of the Credit Agreement is hereby amended by replacing clause (b) of such
Section in its entirety with the following clause (b):

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     (b) sell, lease, transfer, or otherwise dispose of any of its Property,
except for (i) dispositions of assets that are not Borrowing Base Assets or
Mortgaged Properties either (y) in the ordinary course of business or (z)
outside of the ordinary course of business in an aggregate amount for any
fiscal year not to exceed $15,000,000.00, and (ii) dispositions, whether or
not in the ordinary course of business, of Borrowing Base Assets, including
Mortgaged Properties, of which the Borrower has provided the Agent and the
Banks 10 days’ advance notice, provided that (y) such proposed dispositions
will not cause the aggregate outstanding amount of the Advances plus the
Letter of Credit Exposure to exceed the Borrowing Base, after giving effect
to any reduction of the Borrowing Base that would be required under
Section 2.2(e) in connection with such sale and (z) in the case of
any disposition of a Mortgaged Property, at the time of such disposition the
Mortgaged Property Value is not less than 80% of the Oil and Gas Property
Value, as set forth in the engineering report most recently delivered
pursuant to Section 5.6(c), after giving effect to (1) any reduction
of such present value (which shall be the present value given to such assets
in such most recent engineering report, including the applicable stated
discount utilized therein, in connection with such disposition) on a
cumulative basis with all sales of Mortgaged Properties since the date of
such report and (2) the aggregate present value, as set forth in such report
or otherwise reasonably determined by the Agent and discounted at the
applicable rate stated in such report, of any additional Oil and Gas
Properties mortgaged by the Borrower or the Guarantors in accordance with
the requirements of Section 5.11 prior to or concurrently with such
disposition (on a cumulative basis with all mortgages of additional Oil and
Gas Properties since the date of such report).

          (i) Section 7.1(d) of the Credit Agreement is hereby amended by adding the following clause
(iv) in appropriate numerical order:

     or (iv) there occurs under any Swap Contract an Early Termination Date
(as defined in such Swap Contract, if applicable), or such Swap Contract is
otherwise terminated prior to the scheduled term of the applicable
transaction, in each case, resulting from (A) any event of default under
such Swap Contract as to which the Borrower or any Subsidiary is the
defaulting party or (B) any Termination Event (as defined in such Swap
Contract, if applicable) under such Swap Contract as to which the Borrower
or any Subsidiary is an Affected Party (as so defined, if applicable) and,
in either event, the net hedging obligation owed by the Borrower or such
Subsidiary as a result thereof is greater than $2,500,000;

          (j) Section 7.1 of the Credit Agreement is hereby amended by adding the following Section
7.1(l), in numerical order:

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     (l) Security Documents. Any Security Document shall for any
reason (other than as permitted pursuant to the terms thereof or hereof)
cease to create a valid and perfected lien on and security interest in any
material portion of the Collateral or the Borrower or applicable Guarantor
shall so state in writing; or

          (k) Article VII of the Credit Agreement is hereby amended by adding the following Section 7.7
in appropriate alphabetical order:

     Section 7.7. Application of Funds. After the exercise of
remedies provided for above (or after the Loans have automatically become
immediately due and payable and the Letter of Credit Obligations have
automatically been required to be cash collateralized as set forth in
Section 7.3), any amounts received on account of the Obligations
shall be applied by the Agent in the following order:

     First, to payment of that portion of the Obligations
constituting fees, indemnities, expenses and other amounts (including fees,
charges and disbursements of counsel to the Agent payable to the Agent in
its capacity as such;

     Second, to payment of that portion of the Obligations
constituting fees, indemnities and other amounts (other than principal,
interest and Letter of Credit Fees) payable to the Banks and the Issuing
Bank (including fees, charges and disbursements of counsel to the respective
Banks and the Issuing Bank and amounts payable under Sections 2.11,
2.12, and 2.13), ratably among them in proportion to the
respective amounts described in this clause Second payable to them;

     Third, to payment of that portion of the Obligations
constituting accrued and unpaid Letter of Credit Fees and interest on the
Loans and other Obligations, ratably among the Banks and the Issuing Bank in
proportion to the respective amounts described in this clause Third
payable to them;

     Fourth, to payment of that portion of the Obligations
constituting unpaid principal of the Loans and Obligations with respect to
Specified Swap Contracts, ratably among the Banks and the Issuing Bank and,
in the case of Specified Swap Contracts, Affiliates of Banks, in proportion
to the respective amounts described in this clause Fourth held by
them;

     Fifth, to the Agent for the account of the Issuing Bank, to
cash collateralize that portion of Letter of Credit Obligations comprised of
the aggregate undrawn amount of Letters of Credit; and

     Last, the balance, if any, after all of the Obligations have
been indefeasibly paid in full, to the Borrower or as otherwise required by
applicable law.

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     Subject to Section 2.3, amounts used to cash collateralize the
aggregate undrawn amount of Letters of Credit pursuant to clause
Fifth above shall be applied to satisfy drawings under such Letters
of Credit as they occur. If any amount remains on deposit as cash
collateral after all Letters of Credit have either been fully drawn or
expired, such remaining amount shall be applied to the other Obligations, if
any, in the order set forth above.

          (l) Section 8.11 of the Credit Agreement is hereby amended by replacing such Section in its
entirety with the following Section 8.11:

     Section 8.11. Collateral and Guaranty Matters. The Banks and
the Issuing Bank irrevocably authorize the Agent, at its option and in its
discretion,

     (a) to release any Lien on any property granted to or held by the Agent
under any Credit Document (i) upon termination of the Commitments and
payment in full of all Obligations and the expiration or termination of all
Letters of Credit, (ii) that is disposed of or to be disposed of as part of
or in connection with any transaction permitted hereunder or under any other
Credit Document, or (iii) subject to Section 9.1, if approved,
authorized or ratified in writing by the Banks; and

     (b) to release any Guarantor from its obligations under the Guaranty if
such Person ceases to be a Subsidiary as a result of a transaction permitted
hereunder.

     Upon request by the Agent at any time, the Majority Banks will confirm
in writing the Agent’s authority to release its interest in particular types
or items of Property, or to release any Guarantor from its obligations under
the Guaranty pursuant to this Section 8.11.

          (m) Section 9.1 of the Credit Agreement is hereby amended by replacing clause (i) of such
Section in its entirety with the following clause (i):

     (i) release any Collateral (other than as provided in Section
8.11(a) or as otherwise permitted by the Credit Documents) in any
transaction or series of related transactions.

          (n) The Credit Agreement is hereby amended by incorporating Exhibit I attached hereto
as Exhibit I thereto.

     Section 3. Waiver.

          (a) In connection with the foregoing, and notwithstanding any provisions in the Credit
Agreement and the other Credit Documents to the contrary, the Banks hereby waive any Default or
Event of Default that may exist (i) under Section 7.1(c) of the Credit Agreement due to the
Borrower’s failure to comply with Sections 5.6(a) and Section 5.6(b) of the Credit

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Agreement resulting from its delivery from time to time prior to the date hereof pursuant to
such Sections of financial statements covering the various reporting periods during the period from
2001 to 2004 and for the first six months of 2005 that did not properly reflect the Borrower’s
proved reserves (as subsequently evidenced by the Borrower’s December 2005 decision to downwardly
revise its proved reserves by 171 billion cubic feet of natural gas equivalent) and (ii) under
Section 7.1(b) of the Credit Agreement due to any breach of representation arising under
Section 3.2(a)(ii) of the Credit Agreement as a result of the Borrower’s failure to state,
at the time of such Borrowing, the existence of the non-compliance referred to in the immediately
preceding clause (i).

          (b) The waivers contained in this Section 3 are limited to the extent described herein
and shall not be construed to be a waiver of any other present or future default under or action
prohibited by the Credit Agreement.

     Section 4. Representations and Warranties.

          (a) the representations and warranties set forth in the Credit Agreement and in the other
Credit Documents are true and correct in all material respects as of the date of this Agreement;

          (b) (i) the execution, delivery, and performance of this Agreement are within the corporate
power and authority of the Borrower and have been duly authorized by appropriate proceedings and
(ii) this Agreement constitutes a legal, valid, and binding obligation of the Borrower, enforceable
in accordance with its terms, except as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or similar laws affecting the rights of creditors generally and general
principles of equity; and

          (c) as of the effectiveness of this Agreement and after giving effect thereto, no Default or
Event of Default has occurred and is continuing.

     Section 5. Effectiveness; Post-Closing Deliveries.

          (a) This Agreement shall become effective as of the date hereof, and the Credit Agreement
shall be amended as provided herein, upon the occurrence of all of the following: (i) the Majority
Banks’ and the Borrower’s duly and validly executing originals of this Agreement and delivery
thereof to the Agent, (ii) the representations and warranties in this Agreement being true and
correct in all material respects, (iii) delivery of all items listed on the Closing Documents List
of even date herewith, except for any such items permitted to be delivered post-closing pursuant to
clause (b) below, all in form and substance reasonably satisfactory to the Agent and duly executed
by all parties thereto where applicable, and (iv) the Borrower shall have paid all costs and
expenses which have been invoiced and are payable pursuant to Section 9.4. Notwithstanding
the foregoing clause (i), the amendment to Section 9.1(i) of the Credit Agreement shall not
become effective, and Section 9.1(i) of the Credit Agreement shall not be amended as
provided herein, until the Banks and the Borrower shall have duly and validly executed originals of
this Agreement and delivered the same to the Agent.

          (b) With respect to the Borrower’s obligation to perform such title reports and title clean-up
as are reasonably requested by the Agent with respect to the Mortgaged Properties

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on or prior to the effective date of this Agreement, the parties hereto agree that, solely
with respect to Mortgaged Properties that constitute, in the aggregate, no more than 5% of the
Mortgaged Property Value as of such effective date (the “Subject Properties”), the Borrower
shall have until June 30, 2006, to perform such title clean-up and provide such title reports with
respect to the Subject Properties, all reasonably satisfactory to the Agent, and to provide any
supplemental legal opinions reasonably requested by the Agent in connection therewith. Failure to
provide the foregoing with respect to all Subject Properties on or before June 30, 2006, shall
constitute a breach of this Section 5(b). For the avoidance of doubt, this Agreement is a
Credit Document, and a breach hereunder shall constitute an Event of Default under the Credit
Agreement as provided in Section 7.1(c)(ii) thereof.

     Section 6. Choice of Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Texas.

     Section 7. Counterparts. This Agreement may be signed in any number of counterparts,
each of which shall be an original.

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     THIS WRITTEN AGREEMENT AND THE CREDIT DOCUMENTS, AS DEFINED IN THE CREDIT AGREEMENT,
REPRESENT THE FINAL AGREEMENT AMONG 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.

     EXECUTED as of the date first set forth above.

	 	 	 	 	 	 	 
	 	 	BORROWER:	 	 
	 
	 	 	 	 	 	 
	 	 	STONE ENERGY CORPORATION	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Kenneth H. Beer
 

	 	 
	 	 	Name: Kenneth H. Beer	 	 
	 	 	Title: Senior Vice President & Chief Financial Officer	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ J. Kent Pierret
 

	 	 
	 	 	Name: J. Kent Pierret	 	 
	 	 	Title: Senior V.P. — C.A.O. & Treasurer	 	 

Signature
Page to Amendment No. 2

 

 

	 	 	 	 	 	 	 
	 	 	AGENT:	 	 
	 
	 	 	 	 	 	 
	 	 	BANK OF AMERICA, N.A., as administrative agent	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Ronald E. McKaig
 

	 	 
	 	 	Name: Ronald E. McKaig	 	 
	 	 	Title: Senior Vice President	 	 
	 
	 	 	 	 	 	 
	 	 	BANKS:	 	 
	 
	 	 	 	 	 	 
	 	 	BANK OF AMERICA, N.A.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Ronald E. McKaig
 

	 	 
	 	 	Name: Ronald E. McKaig	 	 
	 	 	Title: Senior Vice President	 	 

Signature
Page to Amendment No. 2

 

 

	 	 	 	 	 	 	 
	 	 	JPMORGAN CHASE BANK, N.A.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Charles Kingswell-Smith
 

	 	 
	 	 	Name: Charles Kingswell-Smith	 	 
	 	 	Title: Senior Vice President	 	 

Signature
Page to Amendment No. 2

 

 

	 	 	 	 	 	 	 
	 	 	HARRIS NESBITT FINANCING, INC.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Mary Lou Allen
 

	 	 
	 	 	Name: Mary Lou Allen	 	 
	 	 	Title: Vice President	 	 

Signature
Page to Amendment No. 2

 

 

	 	 	 	 	 	 	 
	 	 	UNION BANK OF CALIFORNIA, N.A.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Alison Fuqua
 

	 	 
	 	 	Name: Alison Fuqua	 	 
	 	 	Title: Investment Banking Officer	 	 

Signature
Page to Amendment No. 2

 

 

	 	 	 	 	 	 	 
	 	 	U.S. BANK NATIONAL ASSOCIATION	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Justin M. Alexander	 	 
	 	 	Name: Justin M. Alexander	 	 
	 	 	Title: Vice President	 	 

Signature
Page to Amendment No. 2

 

 

	 	 	 	 	 	 	 
	 	 	BNP PARIBAS	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Betsy Jocher
 

	 	 
	 	 	Name: Betsy Jocher	 	 
	 	 	Title: Vice President	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Polly Schott
 

	 	 
	 	 	Name: Polly Schott	 	 
	 	 	Title: Vice President	 	 

Signature
Page to Amendment No. 2

 

 

	 	 	 	 	 	 	 
	 	 	THE ROYAL BANK OF SCOTLAND PLC	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Douglas A. Whiddon
 

	 	 
	 	 	Name: Douglas A. Whiddon	 	 
	 	 	Title: Senior Vice President	 	 

Signature
Page to Amendment No. 2

 

 

	 	 	 	 	 	 	 
	 	 	THE BANK OF TOKYO-MITSUBISHI UFJ, LTD.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Takeshi Takahashi
 

	 	 
	 	 	Name: Takeshi Takahashi	 	 
	 	 	Title: Senior Vice President & Group Head	 	 

Signature
Page to Amendment No. 2

 

 

	 	 	 	 	 	 	 
	 	 	WHITNEY NATIONAL BANK	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Trudy W. Nelson
 

	 	 
	 	 	Name: Trudy W. Nelson	 	 
	 	 	Title: Vice President	 	 

Signature
Page to Amendment No. 2

 

 

	 	 	 	 	 	 	 
	 	 	COMERICA BANK	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Huma Vadgama
 

	 	 
	 	 	Name: Huma Vadgama	 	 
	 	 	Title: Vice President	 	 

Signature
Page to Amendment No. 2

 

 

	 	 	 	 	 	 	 
	 	 	MIZUHO CORPORATE BANK, LTD.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Raymond Ventura
 

	 	 
	 	 	Name: Raymond Ventura	 	 
	 	 	Title: Deputy General Manager	 	 

Signature
Page to Amendment No. 2

 

 

	 	 	 	 	 	 	 
	 	 	BANK OF SCOTLAND	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Karen Welch
 

	 	 
	 	 	Name: Karen Welch	 	 
	 	 	Title: Assistant Vice President	 	 

Signature
Page to Amendment No. 2

 

 

	 	 	 	 	 	 	 
	 	 	HIBERNIA NATIONAL BANK	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ David R. Reid	 	 
	 	 	Name: David R. Reid	 	 
	 	 	Title: Senior Vice President	 	 

Signature
Page to Amendment No. 2

 

 

	 	 	 	 	 	 	 
	 	 	NATEXIS BANQUES POPULAIRES	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Donovan C. Broussard
 

	 	 
	 	 	Name: Donovan C. Broussard	 	 
	 	 	Title: Vice President & Group Manager	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Louis P. Laville, III
 

	 	 
	 	 	Name: Louis P. Laville, III	 	 
	 	 	Title: Vice President & Group Manager	 	 

Signature
Page to Amendment No. 2exv10w2

 

EXHIBIT 10.2

EMPLOYMENT AGREEMENT

     EMPLOYMENT AGREEMENT, dated as of May 2, 2006 (this “Agreement”) by and among PIONEER
COMPANIES, INC., a Delaware corporation (the “Company”), and MICHAEL Y. McGOVERN (the “Executive”).

W I T N E S S E T H:

     WHEREAS, the Company desires to engage Executive as Chairman, President and Chief Executive
Officer upon the terms and conditions contained in this Agreement; and

     WHEREAS, Executive desires to be so employed by the Company from and after the Effective Date,
as hereinafter defined, upon the terms and conditions contained in this Agreement; and

     WHEREAS, the parties hereto desire to enter this Agreement upon the terms and
conditions hereinafter set forth.

     NOW, THEREFORE, in consideration of the foregoing, of the mutual covenants and agreements
herein contained and for other good and valuable consideration, the receipt, adequacy and
sufficiency of which are hereby acknowledged, the parties, intending legally to be bound, hereby
agree as follows:

     1. Employment. The Company hereby employs Executive, and Executive hereby accepts such
employment, upon the terms and conditions hereinafter set forth.

          (a) Position. Executive shall be the Chairman, President and Chief Executive Officer of the
Company. At all times during the term of this Agreement, the Company shall cause Executive to be
nominated as a member of the Company’s Board of Directors (the “Board”).

          (b) Duties. Subject to the Board’s authority and oversight, the Executive shall have full
responsibility for all the day-to-day activities of the Company and its affiliated companies and
over all officers and employees of the Company, including, but not limited to, the power to hire
and, subject to contractual commitments, fire employees, and shall have responsibilities
commensurate with those normally performed by a chief executive officer. In such capacity, the
Executive shall report solely and directly to the Board.

          (c) Place of Employment. During the term of this Agreement, the Executive shall perform the
services required by this Agreement at the principal executive office of the Company, subject to
travel necessary to appropriately discharge Executive’s responsibilities, recognizing that the
Company has operations, customers and suppliers in locations other than that of its principal
executive office.

          (d) Performance of Duties. The Executive agrees to devote his full time and best efforts to
the performance of his duties and to serve the Company well and faithfully in conformity with the
direction of the Board and written policies of the Company.

 

The foregoing shall not prevent Executive from serving on the boards of directors of other
companies; provided that service on more than one board must have been approved by the Board and in
the case of service on any board only for so long as such service does not interfere or conflict
with the Executive’s discharge of his duties under this Agreement.

     2. Term.

          (a) Effective Date. This Agreement shall become effective on May 2, 2006 (the “Effective
Date”) and have an initial term of three (3) years after the Effective Date. Beginning on the
first anniversary of the Effective Date, the term of this Agreement shall automatically be extended
from day to day so that it always has a remaining term of (2) years, unless terminated pursuant to
Section 2(b) below.

          (b) Termination Date. The term of employment under this Agreement shall terminate upon the
earliest to occur of the following events (the date specified in each such event is referred to as
the “Termination Date”):

               (i) the date upon which the Company terminates the Executive’s employment by the Company for
Cause or without Cause (it being understood that the date of termination shall be the date upon
which the Company provides the Executive written notice of such event);

               (ii) the date of the Executive’s death;

               (iii) the date upon which the Company terminates Executive’s employment by the Company as a
result of Executive’s Disability;

               (iv) the date upon which Executive effects a Voluntary Termination (it being understood that
the date of termination shall be the date upon which the Executive provides the Company written
notice of such event); or

               (v) upon or after the date of a Change in Control.

          (c) Performance of Duties Following Notice of Termination. In the event that either (i) the
Company terminates the Executive’s employment pursuant to Section 2(b)(i) hereof or (ii) Executive
effects a Voluntary Termination pursuant to Section 2(b)(iv), Executive, if requested by the
Company, shall continue to render services hereunder to the Company for a period not to exceed 30
days from the Termination Date, and shall, in such event, be paid the compensation and benefits
hereunder for such period.

     3. Compensation and Benefits.

          (a) Base Salary.

               (i) The Company shall pay the Executive a base salary at the annual rate of $550,000 per year
(“Base Salary”).

2

 

               (ii) The Base Salary shall be paid in equal installments, consistent with the manner in which
other senior executives of the Company are paid, and subject to all applicable withholding and
deductions, in accordance with the usual payroll practices of the Company, but not less frequently
than monthly.

          (b) Bonuses; Benefits; Long Term Incentives.

               (i) Annual Incentive Bonus.

                    (A) The Executive will have an annual incentive opportunity to earn a performance bonus equal
to sixty percent (60%) of Base Salary (the “Performance Bonus”) in accordance with such terms and
conditions as shall be determined by the Compensation and Governance Committee of the Board, or its
successor (the “Compensation Committee”).

                    (B) The Executive will have an annual additional incentive opportunity to earn a profit
sharing bonus of up to ten percent (10%) of Base Salary (the “Profit Sharing Bonus”) in accordance
with such terms and conditions as shall be determined by the Compensation Committee.

               (ii) In the event the Executive’s employment is terminated (other than if such termination is
by the Company for Cause or pursuant to Section 2(b)(iv) in which case there shall be no
Performance Bonus or Profit Sharing payable), the Performance Bonus and Profit Sharing Bonus, if
any, to which the Executive may be entitled for the calendar year in which the termination occurs
shall each be prorated, such prorated portion being the portion of each such Performance Bonus and
Profit Sharing Bonus corresponding to the period commencing with the beginning of such calendar
year in which such termination occurs and ending on the date of termination.

          (c) Benefits. During the term of this Agreement, the Executive shall be entitled to all such
benefits as may, from time to time, be made generally available to employees and senior executives
of the Company, including, but not limited to, pension or other retirement plans, medical plans,
disability plans, incentive plans, stock plans, investment plans, additional compensation plans and
all other group and other insurance plans and benefits to the extent that the Executive is, and
remains, eligible to participate therein and subject to eligibility provisions of such plans then
in effect.

          (d) Business Expenses. The Company shall pay, either directly or by reimbursement to the
Executive, all documented expenses incurred by the Executive, including travel and entertainment
expenses, in the performance of his duties upon submission of appropriate evidence thereof and on a
basis consistent with the Company’s then current policies.

          (e) Vacation. For each year of this Agreement, the Executive shall be entitled to paid
vacation in accordance with the Company’s standard policy for the Company’s executives.

          (f) Long Term Incentives.

3

 

               (i) The Executive will participate each year in a long term incentive award of up to 60% of
Base Salary (the “Long Term Incentive Award”), which shall consist of a combination of stock
options and/or performance or restricted stock grants, and the amount of such grants and the
performance metrics determined by the Compensation Committee and subject to such terms and
conditions as shall be determined by the Compensation Committee.

               (ii) Fundamental Change Compensation. If during the term there is a fundamental change in the
business or operations of the Company, the Compensation Committee shall evaluate in good faith the
contribution of Executive to such change with a view to conferring upon Executive additional
compensation and/or benefits that in the view of the Compensation Committee are appropriate, having
regard to not only the contributions of Executive but also other compensation and benefits to be
received by Executive.

          (g) Relocation Expenses. The Company shall pay, either directly or by reimbursement to the
Executive, all documented expenses associated with the move of Executive’s principal residence from
Dallas, Texas to Houston, Texas in accordance with the Company’s employee relocation policy.
Executive and Company agree that Executive shall complete his relocation within six months of the
Effective Date. In addition, until Executive relocates, the Company shall continue to pay lease
expenses for Executive’s current residence in Houston, Texas for a period not to exceed six months.

     4. Compensation Upon Termination of Employment.

          (a) Termination Upon Death. If Executive’s employment by the Company is terminated as a
result of the occurrence of Executive’s death pursuant to Section 2(b)(ii), the Company shall be
obligated to pay to the Executive’s estate any unpaid compensation and other benefits expressly
provided under this Agreement through the Termination Date, and any unpaid Performance Bonus or
Profit Sharing Bonus for any prior fiscal period and the term shall thereupon end.

          (b) Termination Because of Disability. If Executive’s employment by the Company is terminated
by the Company as a result of the occurrence of Executive’s Disability pursuant to Section
2(b)(iii), the Company shall pay Executive the compensation and other benefits expressly provided
under this Agreement through the Termination Date, and any unpaid Performance Bonus or Profit
Sharing Bonus for any prior fiscal period and the term shall thereupon end.

          (c) Termination by the Company for Cause. If Executive’s employment by the Company is
terminated by the Company for Cause pursuant to Section 2(b)(i), Executive shall receive the
compensation and other benefits expressly provided under this Agreement through the Termination
Date and the term shall thereupon end.

          (d) Termination by the Company without Cause or Constructive Termination. If Executive’s
employment by the Company is terminated by the Company without Cause pursuant to Section 2(b)(i),
or if Executive’s employment is Constructively Terminated, Executive shall become automatically and
fully vested in any Long Term Incentive

4

 

Awards described in Section 3(f)(i) herein and the Company shall pay Executive (i) the
compensation and other benefits expressly provided under this Agreement through the Termination
Date, (ii) any unpaid Performance Bonus or Profit Sharing Bonus for any prior fiscal period, and
(iii) a lump sum payment equal to two (2) times Base Salary and the term shall thereupon end.

          (e) Voluntary Termination by Executive. If the Executive’s employment by the Company is
terminated as a result of a Voluntary Termination by the Executive pursuant to Section 2(b)(iv),
the Company shall pay the Executive the compensation and other benefits expressly provided under
this Agreement through the Termination Date, and any unpaid Performance Bonus or Profit Sharing
Bonus for any prior fiscal year and the term shall thereupon end.

          (f) Termination Following Change in Control. If the Executive’s employment by the Company is
terminated for any reason or Constructively Terminated within 18 months following the occurrence of
a Change in Control, Executive shall become automatically and fully vested in any Long Term
Incentive Awards described in Section 3(f)(i) herein and the Company shall pay Executive (i) the
compensation and other benefits expressly provided under this Agreement through the Termination
Date, (ii) any unpaid Performance Bonus or Profit Sharing Bonus for any prior fiscal period, and
(iii) a lump sum payment equal to two (2) times the Base Salary and the term shall thereupon end.

          (g) No Mitigation. If the Executive’s employment described herein is terminated, the
Executive shall have no duty to mitigate his damages or seek other employment, and the Company
shall have no right to offset any amounts which are paid to or earned by Executive from other
employment obtained by Executive (including self-employment) against any amounts which are payable
to Executive pursuant to this Agreement.

          (h) Continuation of Health and Life Insurance Coverage. At Executive’s own expense, Executive
and Executive’s dependents shall also be entitled to any continuation of health insurance coverage
rights after the Termination Date under any applicable law; provided, however, that in the event of
the termination of Executive’s employment with the Company pursuant to Section 4(d), health and
life insurance coverage shall be provided until the Executive qualifies for Medicare, with the
Executive paying the premium charged by the Company for coverage under its health plan pursuant to
the Consolidated Omnibus Reconciliation Act of 1986, as amended, after the Termination Date.

          (i) Effects of Termination; Payments.

               (i) Effective as of the Termination Date, the Executive shall be deemed to have resigned from
all offices and directorships then held with the Company and its subsidiaries.

               (ii) The covenants and agreements of the Executive contained in Sections 5, 6 and 7 shall
survive termination of the Executive’s employment by the Company and the termination of this
Agreement.

5

 

               (iii) All payments due to Executive or his estate pursuant to Section 4 shall be paid as soon
as practicable after the Termination Date, but in no event later than ten (10) days thereafter,
except in the case of the Performance Bonus for any prior fiscal period which shall be paid as soon
as practicable after the end of such fiscal period, but not later than seventy-five (75) days
thereafter, and except for benefits provided by the Company pursuant to Section 4(h).

     5. Confidentiality and Non-Disclosure. The Executive recognizes and acknowledges that he will
have access to certain information concerning the Company that is confidential and proprietary and
constitutes valuable and unique property of the Company. The Executive agrees that he will not at
any time disclose to others, use, copy or permit to be copied, except pursuant to his duties on
behalf of the Company or its successors, assigns or nominees, any secret or confidential
information of the Company (whether or not developed by the Executive) without the prior written
consent of the Board. The term “secret or confidential information of the Company” (sometimes
referred to herein as “Confidential Information”) shall include, without limitation, the Company’s
plans, strategies, potential acquisitions, costs, prices, systems for buying, selling, and/or
trading relating to the manufacture and market chlorine, caustic soda and related products, client
lists, pricing policies, financial information, the names of and pertinent information regarding
suppliers, computer programs, policy or procedure manuals, training and recruiting procedures,
accounting procedures, the status and content of the Company’s contracts with its suppliers or
clients, or servicing methods and techniques at any time used, developed, or investigated by the
Company, before or during the Executive’s tenure of employment to the extent any of the foregoing
are (i) not generally available to the public and (ii) maintained as confidential by the Company.
The Executive further agrees to maintain in confidence any confidential information of third
parties received as a result of the Executive’s employment and duties with the Company. Upon
termination, the Executive will deliver to the Company, as determined appropriate by the Company,
all correspondence, memoranda, notes, records, client lists, computer systems, programs, or other
documents and all copies thereof made, composed or received by the Executive, solely or jointly
with others, and which are in his possession, custody or control at such date and which are related
in any manner to the past, present or anticipated business of the Company. The provisions of this
Section 5 are in addition to any other agreements which Executive now has or enters into in the
future regarding the Company’s secret or confidential information. The provisions of this Section
5 shall survive the termination of this Agreement.

     6. Non-Solicitation. During the term of this Agreement and for a period of two (2) years
following the Executive’s termination of employment, the Executive agrees that he will not solicit,
raid, entice, encourage or induce any person who at the time of his termination of employment is an
employee of the Company, or any of its parents, subsidiaries or affiliates or to become employed by
any person, firm or corporation or to discontinue their employment with the Company. The Executive
further agrees, for the two (2) year period following his termination of employment, to refrain
from approaching any such employee for such purpose or authorizing or knowingly approving such
actions by any other person, firm or corporation or assisting any such person, firm or corporation
in taking such action. The provisions of this Section 6 are in addition to any other agreements
which Executive now has or enters into in the future regarding the Executive’s relationship with
Company employees following Executive’s

6

 

termination of employment. The provisions of this Section 6 shall survive the termination of
this Agreement.

     7. Enforcement. It is understood and agreed by the parties that no amount of money would
adequately compensate the Company for damages which the parties acknowledge would be suffered as a
result of a violation by the Executive of the covenants contained in Sections 5 and 6 above, and
that, therefore, the Company shall be entitled, upon application to a court of competent
jurisdiction, to obtain injunctive relief (without the need to post bond) to enforce the provisions
of Sections 5 and 6, which injunctive relief shall be in addition to any other rights or remedies
available to the Company. The provisions of this Section 7 shall survive the termination of this
Agreement.

     8. Certain Defined Terms. For purposes of this Agreement the following terms and phrases
shall have the following meanings:

          “Cause” shall mean: (i) the Executive shall have committed an act of fraud, embezzlement or
misappropriation against the Company or committed a material breach of fiduciary duty owed to the
Company; or (ii) the Executive shall have been convicted by a court of competent jurisdiction (or
entered a plea of guilty or nolo contendere) of any felony or crime involving moral turpitude or
fraud; or (iii) the Executive shall have engaged in willful misconduct, material breach of his
obligations under this Agreement or the refusal or failure to perform his duties as required by
this Agreement (other than as a result of incapacity due to physical or mental illness) which
violations are not remedied within 15 days after receipt of written notice from the Company
specifying such violations.

          “Change in Control” means (in accordance with Internal Revenue Code Section 409A):

     (i) Any one person, or more than one person acting as a group (as defined in U.S. Treasury
Notice 2005-1) acquires ownership of stock of the Company that, together with stock held by such
person or group, constitutes more than 50 percent of the total fair market value or total voting
power of the stock of the Company. An increase in the percentage of stock owned by any one person,
or persons acting as a group, as a result of a transaction in which the Company acquires its stock
in exchange for property will be treated as an acquisition of stock for purposes of this section.

     (ii) Any one person, or more than one person acting as a group acquires, (or has acquired
during the 12-month period ending on the date of the most recent acquisition by such person or
persons) ownership of stock of the Company possessing 35 percent or more of the total voting power
of the stock of the Company; or

     (iii) A majority of members of the Board is replaced during any 12-month period by directors
whose appointment or election is not endorsed by a majority of the members of the Board prior to
the date of the appointment or election.

     (iv) Any one person has acquired, or more than one person acting as a group acquires (or
during the 12-month period ending on the date of the most recent acquisition by such person or
persons) assets from the Company that have a total gross fair market value equal

7

 

to or more than 40 percent of the total gross fair market value of all of the assets of the
Company immediately prior to such acquisition or acquisitions. For this purpose, gross fair market
value means the value of the assets of the Company, or the value of the assets being disposed of,
determined without regard to any liabilities associated with such assets. A transfer of assets by
a Company is not treated as a change in the ownership of such assets if the assets are transferred
to -

     (a) A shareholder of the Company (immediately before the asset transfer) in exchange for or
with respect to its stock;

     (b) An entity, 50 percent or more of the total value or voting power of which is owned,
directly or indirectly, by the Company;

     (c) A person, or more than one person acting as a group, that owns, directly or indirectly, 50
percent or more of the total value or voting power of all the outstanding stock of the Company; or

     (d) An entity, at least 50 percent of the total value or voting power of which is owned,
directly or indirectly, by a person described in paragraph (c).

          “Company” as used in this Agreement, the term “the Company” includes the Company, any assignee
or other successor of interest in the Company, and any parent, subsidiary, or other corporation or
partnership under common ownership or control with the Company.

          “Constructive Termination” means a material diminution of the title or management
responsibilities of the Executive or the diminution of Executive’s Base Salary, annual incentive
opportunity or long term incentive opportunity which is not remedied within 30 days after written
notice thereof is given by the Executive.

          “Disability” means (i) an inability by the Executive to engage in any substantial gainful
activity by reason of any medically determinable physical or mental impairment which can be
expected to result in death or can be expected to last for a continuous period of not less than 12
months, or (ii) the Executive’s medically determinable physical or mental impairment which can be
expected to result in death or can be expected to last for a continuous period of not less than 12
months, which impairment is the reason for Executive’s receipt of income replacement benefits for a
period of not less than 3 months under an accident and health plan covering employees of the
Company.

          “Fair Market Value” means, as of a particular date, with respect to any security, the fair
value thereof determined by the Board in good faith taking into account all relevant factors,
including recently reported trades of such security.

          “Voluntary Termination” shall mean the voluntary termination by Executive of Executive’s
employment from the Company by voluntary resignation or any other means (other than (i) death or
Disability or (ii) simultaneous with or following termination for Cause or an event which if known
to the Company at the time of such voluntary termination by Executive would constitute Cause).

8

 

     9. Miscellaneous Provisions.

          (a) Arbitration. Any controversy or claim arising out of or relating to this Agreement,
including the making, interpretation or breach thereof, or the employment or termination of
employment of Executive shall be resolved by expedited arbitration in the City of the principal
offices of the Company in accordance with the Employment Dispute Resolution Rules of the American
Arbitration Association. Judgment upon the award rendered by the arbitrator(s) may be entered in
any court having jurisdiction thereof, and any party to the arbitration may, if such party so
elects, institute proceedings in any court having jurisdiction for the specific performance of any
such award.

The powers of the arbitrator(s) shall include, but not be limited to, the awarding of injunctive
relief. Notwithstanding any other provision of this Section 9(a) to the contrary, the parties
agree that any monetary award arising out of a claim or controversy relating to this Agreement
which may be awarded by the arbitrator(s) or any court having jurisdiction thereof shall be limited
to the prevailing party’s actual damages and shall not include any monetary awards for punitive,
special, consequential, exemplary, indirect or other damages of any kind; provided, however, that
(i) the arbitrator(s) shall include in any award in which Executive is the prevailing party the
amount of his reasonable attorneys’ fees and expenses and all other reasonable costs and expenses
of the arbitration; and (ii) in the event the arbitrator(s) do not rule in favor of Executive in
respect to all of the material claims alleged by Executive, the arbitrator(s) may include in the
award in favor of Executive, if any, the amount of Executive’s reasonable costs and expenses of the
arbitration, if any, as the arbitrator(s) deem just and equitable under the circumstances. Except
as provided above, each party shall bear his or its own attorneys’ fees and expenses, and the
parties shall bear equally all other costs and expenses of the arbitration. The provisions of this
Section 9 shall survive the termination of this Agreement.

          (b) Entire Agreement. This Agreement sets forth the entire agreement and understanding
between the parties with respect to the subject matter hereof and supersedes all prior agreements,
arrangements, and understandings between the parties with respect to the subject matter hereof.

          (c) Modification. This Agreement may be amended, modified, superseded, canceled, renewed or
extended, and the terms or covenants hereof may be waived, only by a written instrument executed by
both of the parties or in the case of a waiver, by the party waiving compliance.

          (d) Waiver. The failure of either party at any time or times to require performance of any
provision hereof in no manner shall affect the right at a later time to enforce the same. No
waiver by either party of a breach of any term or covenant contained in this Agreement, whether by
conduct or otherwise, in any one or more instances, shall be deemed to be or construed as a further
or continuing waiver of any such breach or waiver of any other term or covenant contained in this
Agreement.

          (e) Notices. Any and all notices or other communications provided for herein shall be given
in writing and shall be hand-delivered or sent by United States mail, postage prepaid, registered
or certified, return receipt requested, addressed as follows:

9

 

If to the Company:

Pioneer Companies, Inc.

700 Louisiana, Suite 4300

Houston, Texas 77002

Attention: Board of Directors

With a copy to:

Baker Botts, L.L.P.

One Shell Plaza

910 Louisiana

Houston, Texas 77002-4995

Attention: James Raborn

If to Executive:

Michael Y. McGovern

4899 Montrose, Unit 1209

Houston, Texas 77096

provided, however, that any of the parties may, from time to time, give notice to the other parties
of some other address to which notices or other communications to such party shall be sent, in
which event, notices or other communications to such party shall be sent to such address. Any
notice or other communication shall be deemed to have been given and received hereunder as of the
date the same is actually hand delivered or, if mailed, three days after deposit in the United
States mail, postage prepaid, registered or certified, return receipt requested.

          (f) Governing Law. This Agreement shall be construed in accordance with and governed by the
laws of the State of Delaware applicable to contracts made and to be performed wholly within such
state.

          (g) Assignability. This Agreement, and the Executive’s rights and obligations hereunder, may
not be assigned by the Executive. The Company may assign its rights, together with its obligations
hereunder, only to a successor by merger or by the purchase of all or substantially all of the
assets and business of the Company and such rights and obligations shall inure to, and be binding
upon, any such successor.

          (h) Binding Effect. This Agreement shall be binding upon and shall inure to the benefit of
the parties and their respective legal representatives, heirs, permitted successors and permitted
assigns.

          (i) Captions. Headings and titles in this Agreement are for convenience of reference only and
shall not control the construction or interpretation of any provisions hereof. The words “herein,”
“hereof,” “hereunder,” and the words of similar import, when used anywhere in this Agreement, refer
to this Agreement as a whole and not merely to a

10

 

subdivision in which such words appear, unless the context otherwise requires. The singular
shall include the plural unless the context otherwise requires.

          (j) Indemnification. The Company agrees that the Executive shall be entitled to
indemnification and payment or reimbursement of expenses (including attorneys’ fees and expenses)
to the fullest extent provided in the Company’s Certificate of Incorporation, as in effect on the
date hereof and as it may be hereafter amended (but in no event on terms less favorable to the
Executive than those in effect on the date hereof), for all damages, losses and expenses incurred
by the Executive in connection with any claim, action, suit or proceeding which arises from the
Executive’s services and/or activities as an officer and/or employee of the Company or any
affiliate thereof. This Section shall survive any termination of the term of this Agreement.

          (k) Separability. Any term or provision of this Agreement which is invalid or unenforceable
in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such validity
or unenforceability without rendering invalid or unenforceable the

          (l) Remaining terms and provisions of this Agreement or affecting the validity or
enforceability of any of the terms or provisions of this Agreement in any other jurisdiction.

     10. Section 409A. Notwithstanding any provision of the Agreement to the contrary, the
following provisions shall apply for purposes of complying with Section 409A of the Internal
Revenue Code and applicable Treasury authorities (“Section 409A”):

          (a) If Executive is a “specified employee,” as such term is defined in Section 409A and
determined as described below in this Section 10(a), any payments or benefits payable or provided
as a result of Executive’s termination of employment that would otherwise be paid or provided
within six months and one day of such termination (other than death or Disability) shall instead be
paid or provided on the earlier of (i) the date that is six months and two days after Executive’s
termination, (ii) the date of Executive’s death, or (iii) the date that otherwise complies with the
requirements of Section 409A. This Section 10(a) shall be applied by accumulating all payments or
benefits that otherwise would have been paid or provided within six months of Executive’s
termination and paying or providing such accumulated amounts at the earliest date which complies
with the requirements of Section 409A.

          (b) If any provision of the Agreement would result in the imposition of an applicable tax
under Section 409A, Executive and the Company agree that such provision will be reformed to avoid
imposition of the applicable tax in a manner that will result in the least adverse economic impact
on the Executive.

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     IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above
written.

	 	 	 	 	 	 	 
	 	 	THE COMPANY:	 	 
	 
	 	 	 	 	 	 
	 	 	PIONEER COMPANIES, INC.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	     /s/ Richard L. Urbanowski	 	 
	 

	 	 	 	 	 	 
	 

	 	Name:
	 	Richard L. Urbanowski	 	 
	 

	 	Title:
	 	Chairman of the Compensation Committee	 	 
	 
	 	 	 	 	 	 
	 	 	EXECUTIVE:	 	 
	 
	 	 	 	 	 	 
	 	 	      /s/ Michael Y. McGovern	 	 
	 	 	 	 	 
	 	 	Michael Y. McGovern	 	 

12

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