Document:

ex_10-1.htm

    Exhibit
10.1

     

     

     

    

      

       

      AMENDED
AND RESTATED

      CREDIT
AGREEMENT

       

      

       

      DATED
AS OF

       

      MARCH
27, 2009

       

      

       

      AMONG

       

      

       

      LEGACY
RESERVES LP,

      AS
BORROWER,

       

      

       

      BNP
PARIBAS,

      AS
ADMINISTRATIVE AGENT,

       

      

       

      WACHOVIA
BANK, N.A.,

      AS
SYNDICATION AGENT,

       

      

       

      COMPASS
BANK,

      AS
DOCUMENTATION AGENT,

       

      

       

      AND

       

      

       

      THE
LENDERS PARTY HERETO

       

      

       

      SOLE
LEAD ARRANGER AND BOOK RUNNER

       

      BNP
PARIBAS SECURITIES CORP.

       

      

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      TABLE
OF CONTENTS

       

      
        
          
            	 
      	 
      	
                    Page

                  

          

        

      

      
        ARTICLE
I

        Definitions
and Accounting Matters

        
          
            
              
                
                  
                    
                      
                        
                          	
                                  Section
      1.01

                                	
                                  Terms
      Defined Above

                                	
                                  1

                                
	
                                  Section
      1.02

                                	
                                  Certain
      Defined Terms

                                	
                                  1

                                
	
                                  Section
      1.03

                                	
                                  Types
      of Loans and Borrowings

                                	
                                  21

                                
	
                                  Section
      1.04

                                	
                                  Terms
      Generally

                                	
                                  21

                                
	
                                  Section
      1.05

                                	
                                  Accounting
      Terms and Determinations; GAAP

                                	
                                  22

                                

                        

                      

                    

                  

                

              

            

          

        

        ARTICLE
II

        The
Credits

        
          
            
              
                
                  	
                          Section
      2.01

                        	
                          Commitments.

                        	
                          22

                        
	
                          Section
      2.02

                        	
                          Loans
      and Borrowings.

                        	
                          23

                        
	
                          Section
      2.03

                        	
                          Requests
      for Borrowings

                        	
                          24

                        
	
                          Section
      2.04

                        	
                          Interest
      Elections.

                        	
                          25

                        
	
                          Section
      2.05

                        	
                          Funding
      of Borrowings.

                        	
                          27

                        
	
                          Section
      2.06

                        	
                          Termination
      and Reduction of Aggregate Maximum Credit Amounts.

                        	
                          28

                        
	
                          Section
      2.07

                        	
                          Borrowing
      Base.

                        	
                          28

                        
	
                          Section
      2.08

                        	
                          Letters
      of Credit.

                        	
                          31

                        

                

              

            

          

        

        ARTICLE
III

        Payments
of Principal and Interest; Prepayments; Fees

        
          
            
              
                	
                        Section
      3.01

                      	
                        Repayment
      of Loans

                      	
                        36

                      
	
                        Section
      3.02

                      	
                        Interest.

                      	
                        36

                      
	
                        Section
      3.03

                      	
                        Alternate
      Rate of Interest

                      	
                        37

                      
	
                        Section
      3.04

                      	
                        Prepayments.

                      	
                        37

                      
	
                        Section
      3.05

                      	
                        Fees.

                      	
                        39

                      

              

            

          

        

        ARTICLE
IV

        Payments;
Pro Rata Treatment; Sharing of Set-offs.

        
          
            
              
                	
                        Section
      4.01

                      	
                        Payments
      Generally; Pro Rata Treatment; Sharing of Set-offs.

                      	
                        40

                      
	
                        Section
      4.02

                      	
                        Presumption
      of Payment by the Borrower

                      	
                        41

                      
	
                        Section
      4.03

                      	
                        Certain
      Deductions by the Administrative Agent

                      	
                        41

                      
	
                        Section
      4.04

                      	
                        Payments
      and Deductions to a Defaulting Lender.

                      	
                        41

                      

              

            

          

        

        ARTICLE
V

        Increased
Costs; Break Funding Payments; Taxes; Illegality

        
          
            
              
                	
                        Section
      5.01

                      	
                        Increased
      Costs.

                      	
                        44

                      
	
                        Section
      5.02

                      	
                        Break
      Funding Payments

                      	
                        45

                      
	
                        Section
      5.03

                      	
                        Taxes.

                      	
                        45

                      
	
                        Section
      5.04

                      	
                        Designation
      of Different Lending Office

                      	
                        46

                      
	
                        Section
      5.05

                      	
                        Illegality

                      	
                        46

                      
	
                        Section
      5.06

                      	
                        Replacement
      of Lenders Under Certain Circumstances.

                      	
                        47

                      

              

            

          

        

        ARTICLE
VI

        Conditions
Precedent

         

        
          
            
            

          

          
            i

            
              

            

          

           

        

        
          
            
              
                	
                        Section
      6.01

                      	
                        Effective
      Date

                      	
                        47

                      
	
                        Section
      6.02

                      	
                        Each
      Credit Event

                      	
                        49

                      

              

            

          

        

        ARTICLE
VII

        Representations
and Warranties

        
          
            
              
                	
                        Section
      7.01

                      	
                        Organization;
      Powers

                      	
                        50

                      
	
                        Section
      7.02

                      	
                        Authority;
      Enforceability

                      	
                        50

                      
	
                        Section
      7.03

                      	
                        Approvals;
      No Conflicts

                      	
                        51

                      
	
                        Section
      7.04

                      	
                        Financial
      Position; No Material Adverse Change.

                      	
                        51

                      
	
                        Section
      7.05

                      	
                        Litigation

                      	
                        51

                      
	
                        Section
      7.06

                      	
                        Environmental
      Matters

                      	
                        52

                      
	
                        Section
      7.07

                      	
                        Compliance
      with the Laws and Agreements; No Defaults.

                      	
                        53

                      
	
                        Section
      7.08

                      	
                        Investment
      Company Act

                      	
                        53

                      
	
                        Section
      7.09

                      	
                        Taxes

                      	
                        53

                      
	
                        Section
      7.10

                      	
                        ERISA.

                      	
                        53

                      
	
                        Section
      7.11

                      	
                        Disclosure;
      No Material Misstatements

                      	
                        54

                      
	
                        Section
      7.12

                      	
                        Insurance

                      	
                        55

                      
	
                        Section
      7.13

                      	
                        Restriction
      on Liens

                      	
                        55

                      
	
                        Section
      7.14

                      	
                        Subsidiaries

                      	
                        55

                      
	
                        Section
      7.15

                      	
                        Location
      of Business and Offices

                      	
                        55

                      
	
                        Section
      7.16

                      	
                        Properties;
      Titles, Etc.

                      	
                        56

                      
	
                        Section
      7.17

                      	
                        Maintenance
      of Properties

                      	
                        56

                      
	
                        Section
      7.18

                      	
                        Gas
      Imbalances, Prepayments

                      	
                        57

                      
	
                        Section
      7.19

                      	
                        Marketing
      of Production

                      	
                        57

                      
	
                        Section
      7.20

                      	
                        Swap
      Agreements

                      	
                        57

                      
	
                        Section
      7.21

                      	
                        Use
      of Loans and Letters of Credit

                      	
                        58

                      
	
                        Section
      7.22

                      	
                        Solvency

                      	
                        58

                      

              

            

          

        

        ARTICLE
VIII

        Affirmative
Covenants

        
          
            
              
                
                  	
                          Section
      8.01

                        	
                          Financial
      Statements; Other Information

                        	
                          58

                        
	
                          Section
      8.02

                        	
                          Notices
      of Material Events

                        	
                          61

                        
	
                          Section
      8.03

                        	
                          Existence;
      Conduct of Business

                        	
                          62

                        
	
                          Section
      8.04

                        	
                          Payment
      of Obligations

                        	
                          62

                        
	
                          Section
      8.05

                        	
                          Performance
      of Obligations under Loan Documents

                        	
                          62

                        
	
                          Section
      8.06

                        	
                          Operation
      and Maintenance of Properties

                        	
                          62

                        
	
                          Section
      8.07

                        	
                          Insurance

                        	
                          63

                        
	
                          Section
      8.08

                        	
                          Books
      and Records; Inspection Rights

                        	
                          63

                        
	
                          Section
      8.09

                        	
                          Compliance
      with Laws

                        	
                          63

                        
	
                          Section
      8.10

                        	
                          Environmental
      Matters.

                        	
                          63

                        
	
                          Section
      8.11

                        	
                          Further
      Assurances.

                        	
                          64

                        
	
                          Section
      8.12

                        	
                          Reserve
      Reports.

                        	
                          65

                        
	
                          Section
      8.13

                        	
                          Title
      Information.

                        	
                          66

                        
	
                          Section
      8.14

                        	
                          Additional
      Collateral; Additional Guarantors.

                        	
                          67

                        
	
                          Section
      8.15

                        	
                          ERISA
      Compliance

                        	
                          67

                        
	
                          Section
      8.16

                        	
                          Marketing
      Activities

                        	
                          68

                        

                

              

            

          

        

         

        
          
            
            

          

          
            ii

            
              

            

          

          
            
            

          

        

         

        ARTICLE
IX

        Negative
Covenants

        
          
            
              
                	
                        Section
      9.01

                      	
                        Financial
      Covenants.

                      	
                        68

                      
	
                        Section
      9.02

                      	
                        Debt

                      	
                        69

                      
	
                        Section
      9.03

                      	
                        Liens

                      	
                        69

                      
	
                        Section
      9.04

                      	
                        Dividends,
      Distributions and Redemptions

                      	
                        70

                      
	
                        Section
      9.05

                      	
                        Investments,
      Loans and Advances

                      	
                        70

                      
	
                        Section
      9.06

                      	
                        Nature
      of Business

                      	
                        71

                      
	
                        Section
      9.07

                      	
                        Limitation
      on Leases

                      	
                        71

                      
	
                        Section
      9.08

                      	
                        Proceeds
      of Notes

                      	
                        71

                      
	
                        Section
      9.09

                      	
                        ERISA
      Compliance

                      	
                        72

                      
	
                        Section
      9.10

                      	
                        Sale
      or Discount of Receivables

                      	
                        73

                      
	
                        Section
      9.11

                      	
                        Mergers,
      Etc

                      	
                        73

                      
	
                        Section
      9.12

                      	
                        Sale
      of Properties

                      	
                        73

                      
	
                        Section
      9.13

                      	
                        Environmental
      Matters

                      	
                        74

                      
	
                        Section
      9.14

                      	
                        Transactions
      with Affiliates

                      	
                        74

                      
	
                        Section
      9.15

                      	
                        Subsidiaries

                      	
                        74

                      
	
                        Section
      9.16

                      	
                        Negative
      Pledge Agreements; Dividend Restrictions

                      	
                        74

                      
	
                        Section
      9.17

                      	
                        Gas
      Imbalances, Take-or-Pay or Other Prepayments

                      	
                        74

                      
	
                        Section
      9.18

                      	
                        Swap
      Agreements

                      	
                        75

                      
	
                        Section
      9.19

                      	
                        Swap
      Agreement Termination

                      	
                        75

                      
	
                        Section
      9.20

                      	
                        Tax
      Status as Partnership; Partnership Agreement

                      	
                        75

                      

              

            

          

        

        ARTICLE
X

        Events of
Default; Remedies

        
          
            
              
                	
                        Section
      10.01

                      	
                        Events
      of Default

                      	
                        75

                      
	
                        Section
      10.02

                      	
                        Remedies.

                      	
                        78

                      
	
                        Section
      10.03

                      	
                        Disposition
      of Proceeds

                      	
                        78

                      

              

            

          

        

        ARTICLE
XI

        The
AgentS

        
          
            
              
                	
                        Section
      11.01

                      	
                        Appointment;
      Powers

                      	
                        79

                      
	
                        Section
      11.02

                      	
                        Duties
      and Obligations of Administrative Agent

                      	
                        79

                      
	
                        Section
      11.03

                      	
                        Action
      by Administrative Agent

                      	
                        80

                      
	
                        Section
      11.04

                      	
                        Reliance
      by Administrative Agent

                      	
                        80

                      
	
                        Section
      11.05

                      	
                        Subagents

                      	
                        81

                      
	
                        Section
      11.06

                      	
                        Resignation
      or Removal of Administrative Agent

                      	
                        81

                      
	
                        Section
      11.07

                      	
                        Administrative
      Agent and Lenders

                      	
                        81

                      
	
                        Section
      11.08

                      	
                        No
      Reliance

                      	
                        81

                      
	
                        Section
      11.09

                      	
                        Administrative
      Agent May File Proofs of Claim

                      	
                        82

                      
	
                        Section
      11.10

                      	
                        Authority
      of Administrative Agent to Release Collateral and Liens

                      	
                        83

                      
	
                        Section
      11.11

                      	
                        The
      Arranger, the Syndication Agent and the Documentation
Agent

                      	
                        83

                      

              

            

          

        

        ARTICLE
XII

        Miscellaneous

        
          
            
              
                
                  
                    
                      
                        
                          	
                                  Section
      12.01

                                	
                                  Notices.

                                	
                                  83

                                

                        

                         

                         

                        
                          
                            
                            

                          

                          
                            iii

                            
                              

                            

                          

                          
                            
                            

                          

                        

                         

                        
                          	Section
      12.02	
                                  Waivers;
      Amendments.

                                	
                                  84

                                
	
                                  Section
      12.03

                                	
                                  Expenses,
      Indemnity; Damage Waiver.

                                	
                                  85

                                
	
                                  Section
      12.04

                                	
                                  Successors
      and Assigns.

                                	
                                  88

                                
	
                                  Section
      12.05

                                	
                                  Survival;
      Revival; Reinstatement.

                                	
                                  91

                                
	
                                  Section
      12.06

                                	
                                  Counterparts;
      Integration; Effectiveness.

                                	
                                  91

                                
	
                                  Section
      12.07

                                	
                                  Severability

                                	
                                  92

                                
	
                                  Section
      12.08

                                	
                                  Right
      of Setoff

                                	
                                  92

                                
	
                                  Section
      12.09

                                	
                                  GOVERNING
      LAW; JURISDICTION; CONSENT TO SERVICE OF PROCESS.

                                	
                                  92

                                
	
                                  Section
      12.10

                                	
                                  Headings

                                	
                                  93

                                
	
                                  Section
      12.11

                                	
                                  Confidentiality

                                	
                                  93

                                
	
                                  Section
      12.12

                                	
                                  Interest
      Rate Limitation

                                	
                                  94

                                
	
                                  Section
      12.13

                                	
                                  EXCULPATION
      PROVISIONS

                                	
                                  95

                                
	
                                  Section
      12.14

                                	
                                  Collateral
      Matters; Swap Agreements

                                	
                                  95

                                
	
                                  Section
      12.15

                                	
                                  No
      Third Party Beneficiaries

                                	
                                  96

                                
	
                                  Section
      12.16

                                	
                                  USA
      Patriot Act Notice

                                	
                                  96

                                

                        

                      

                    

                  

                

              

            

          

        

      

       

      
        
          
            
              
                	
                        Annex
      I

                      	
                        List
      of Maximum Credit Amounts

                      
	 
      	 
      
	
                        Exhibit
      A

                      	
                        Form
      of Note

                      
	
                        Exhibit
      B

                      	
                        Form
      of Compliance Certificate

                      
	
                        Exhibit
      C

                      	
                        Security
      Instruments

                      
	
                        Exhibit
      D

                      	
                        Form
      of Assignment and Assumption

                      
	 
      	 
      
	
                        Schedule
      7.05

                      	
                        Litigation

                      
	
                        Schedule
      7.14

                      	
                        Subsidiaries
      and Partnerships

                      
	
                        Schedule
      7.15

                      	
                        Location
      of Businesses

                      
	
                        Schedule
      7.18

                      	
                        Gas
      Imbalances

                      
	
                        Schedule
      7.19

                      	
                        Marketing
      Contracts

                      
	
                        Schedule
      7.20

                      	
                        Swap
      Agreements

                      

              

            

          

        

      

    

     

    
      
        
        

      

      
        iv

        
          

        

      

      
        
        

      

    

     

    
      This
AMENDED AND RESTATED CREDIT AGREEMENT dated as of March 27, 2009, is among
Legacy Reserves LP, a limited partnership duly formed and existing under the
laws of the State of Delaware (the “Borrower”); each of
the Lenders from time to time party hereto; BNP PARIBAS (in its individual
capacity, “BNP
Paribas”), as administrative agent for the Lenders (in such capacity,
together with its successors in such capacity, the “Administrative
Agent”), Wachovia Bank, N.A., as syndication agent (the “Syndication Agent”),
and Compass Bank as document agent (the “Document
Agent”).

       

      R E C I T A L
S

       

      A.           The
Borrower, the Administrative Agent and other agents and lenders party thereto
have entered that certain Credit Agreement dated as of March 15, 2006, as
amended by that certain First Amendment to Credit Agreement, dated as of July 7,
2006, that certain Second Amendment to Credit Agreement, dated as of May 3,
2007, that certain Third Amendment to Credit Agreement, dated as of October 24,
2007, that certain Fourth Amendment to Credit Agreement, dated as of April 24,
2008, and that certain Fifth Amendment to Credit Agreement, dated as of October
6, 2008, pursuant to which such lenders provided certain loans and extensions of
credit to the Borrower (the “Existing Credit
Agreement”).

       

      B.           The
Borrower has requested the Lenders, and the Lenders have agreed, to amend and
restate the Existing Credit Agreement subject to the terms and conditions of
this Agreement.

       

      C.           In
consideration of the mutual covenants and agreements herein contained and of the
loans, extensions of credit and commitments hereinafter referred to, the parties
hereto agree as follows:

       

      ARTICLE
I

       

      DEFINITIONS
AND ACCOUNTING MATTERS

       

      Section
1.01                                Terms Defined
Above.  As used in this Agreement, each term defined above has
the meaning indicated above.

       

      Section
1.02                                Certain Defined
Terms.  As used in this Agreement, the following terms have the
meanings specified below:

       

      “ABR”, when used in
reference to any Loan or Borrowing, refers to whether such Loan, or the Loans
comprising such Borrowing, are bearing interest at a rate determined by
reference to the Alternate Base Rate.

       

      “Adjusted LIBO Rate”
means, with respect to any Eurodollar Borrowing for any Interest Period, an
interest rate per annum (rounded upwards, if necessary, to the next 1/100 of 1%)
equal to (a) the LIBO Rate for such Interest Period multiplied by (b) the
Statutory Reserve Rate.

       

      “Administrative
Questionnaire” means an Administrative Questionnaire in a form supplied
by the Administrative Agent.

       

      “Affected Loans” has
the meaning assigned such term in Section
5.05.

       

      
        
          
          

        

        
          1

          
            

          

        

        
          
          

        

      

       

      “Affiliate” means,
with respect to a specified Person, another Person that directly, or indirectly
through one or more intermediaries, Controls or is Controlled by or is under
common Control with the Person specified.

       

      “Agents” means,
collectively, the Administrative Agent, the Syndication Agent and the
Documentation Agent; and “Agent” shall mean either the Administrative Agent, the
Syndication Agent or the Documentation Agent, as the context
requires.

       

      “Aggregate Maximum Credit
Amounts” at any time shall equal the sum of the Maximum Credit Amounts,
as the same may be reduced or terminated pursuant to Section 2.06.

       

      “Agreement” means this
Amended and Restated Credit Agreement, as the same may from time to time be
further amended, modified, supplemented or restated.

       

      “Alternate Base Rate”
means, for any day, a rate per annum equal to the highest of (a) the Prime Rate
in effect on such day, (b) the Federal Funds Effective Rate in effect on such
day plus 1⁄2 of 1%, (c) the LIBO Rate for a one month Interest Period on such day
(or if such day is not a Business Day, the immediately preceding Business Day)
plus 1.50%, and (d) the Reference Bank Cost of Funds Rate on such day, provided
that, in the context of this definition of Alternate Base Rate and for the
avoidance of doubt, the LIBO Rate for any day shall be based on the rate as
quoted at approximately 11:00 a.m. London time on such day to the Administrative
Agent’s London office for dollar deposits of $5,000,000 having a one-month
maturity.  Any change in the Alternate Base Rate due to a change in
the Prime Rate, the Federal Funds Effective Rate, the LIBO Rate or the Reference
Bank Cost of Funds Effective Rate shall be effective from and including the
effective date of such change in the Prime Rate, the Federal Funds Effective
Rate the LIBO Rate or the Reference Bank Cost of Funds Effective Rate,
respectively.

       

      “Applicable Margin”
means, for any day, with respect to any ABR Loan or Eurodollar Loan, as the case
may be, the rate per annum set forth in the Borrowing Base Utilization Grid
below based upon the Borrowing Base Utilization Percentage then in
effect:

       

      
        
          	 
      	
                  Borrowing
      Base Utilization Percentage

                	
                  Eurodollar
      Loans

                	
                  ABR
      Loans

                
	
                  Level
      1

                	
                  less
      than 33%

                	
                  2.250%

                	
                  0.750%

                
	
                  Level
      2

                	
                  greater
      than or equal to 33%, but less than 66%

                	
                  2.500%

                	
                  1.000%

                
	
                  Level
      3

                	
                  greater
      than or equal to 66%, but less than 85%

                	
                  2.750%

                	
                  1.250%

                
	
                  Level
      4

                	
                  greater
      than or equal to 85%

                	
                  3.000%

                	
                  1.500%

                

        

      

      

      Each
change in the Applicable Margin shall apply during the period commencing on the
effective date of such change and ending on the date immediately preceding the
effective date of the next such change, provided, however, that if at any time
the Borrower fails to deliver a Reserve Report pursuant to Section 8.12(a), then
the “Applicable
Margin” means the rate per 

       

      
        
          
          

        

        
          2

          
            

          

        

        
          
          

        

         

        annum set
forth on the grid when the Borrowing Base Utilization Percentage is at its
highest level.

      

       

      “Applicable
Percentage” means, with respect to any Lender, the percentage of the
Aggregate Maximum Credit Amounts represented by such Lender’s Maximum Credit
Amount as such percentage is set forth on Annex I.

       

      “Approved
Counterparty” means (a) any Lender or any Affiliate of a Lender and (b)
any other Person whose long term senior unsecured debt rating is A/A2 by S&P
or Moody’s (or their equivalent) or higher.

       

      “Arranger” means BNP
Paribas Securities Corp., in its capacity as lead arranger and book runner
hereunder.

       

      “Assignment and
Assumption” means an assignment and assumption entered into by a Lender
and an assignee (with the consent of any party whose consent is required by Section 12.04(b)), and accepted by the Administrative
Agent, in the form of Exhibit D or any other form approved by the Administrative
Agent.

       

      “Availability Period”
means the period from and including the Effective Date to but excluding the
Termination Date.

       

      “Available Cash”
means, with respect to any fiscal quarter ending prior to the Termination
Date:

       

      (a)           the
sum of (i) all cash and cash equivalents of the Borrower and its Subsidiaries,
treated as a single consolidated entity, on hand at the end of such fiscal
quarter; and (ii) all additional cash and cash equivalents of the Borrower and
its Subsidiaries on hand on the date of determination of Available Cash with
respect to such fiscal quarter resulting from working capital borrowings
(including borrowings under this Agreement) made subsequent to the end of such
fiscal quarter, less

       

      (b)           the
amount of any cash reserves established by Legacy Reserves GP, LLC as the
general partner of the Borrower to (i) provide for the proper conduct of the
business of the Borrower and its Subsidiaries (including reserves for future
capital expenditures including drilling and acquisitions and for anticipated
future credit needs of the Borrower and its Subsidiaries), (ii) comply with
applicable law or any loan agreement, security agreement, mortgage, debt
instrument or other agreement or obligation to which the Borrower or an
Affiliate is a party or by which it is bound or its assets are subject or (iii)
provide funds for distributions with respect to any one or more of the next four
fiscal quarters; provided, that disbursements
made by the Borrower or its Subsidiaries or cash reserves established, increased
or reduced after the end of such fiscal quarter but on or before the date of
determination of Available Cash with respect to such fiscal quarter shall be
deemed to have been made, established, increased or reduced, for purposes of
determining Available Cash, within such fiscal quarter if Legacy Reserves GP,
LLC as the general partner of the Borrower so determines.

       

      “Board” means the
Board of Governors of the Federal Reserve System of the United States of America
or any successor Governmental Authority.

       

      
        
          
          

        

        
          3

          
            

          

        

        
          
          

        

      

       

      “Borrowing” means
Loans of the same Type, made, converted or continued on the same date and, in
the case of Eurodollar Loans, as to which a single Interest Period is in
effect.

       

      “Borrowing Base” means
at any time an amount equal to the amount determined in accordance with Section 2.07, as the same may be adjusted from time to
time pursuant to Section 2.07(e), Section 8.13(c)
or Section 9.12(d).

       

      “Borrowing Base
Deficiency” occurs if at any time the total Revolving Credit Exposures
exceeds the Borrowing Base then in effect.

       

      “Borrowing Base Utilization
Percentage” means, as of any day, the fraction expressed as a percentage,
the numerator of which is the sum of the Revolving Credit Exposures of the
Lenders on such day, and the denominator of which is the Borrowing Base in
effect on such day.

       

      “Borrowing Request”
means a request by the Borrower for a Borrowing in accordance with Section 2.03.

       

      “Business Day” means
any day that is not a Saturday, Sunday or other day on which commercial banks in
New York City or Houston, Texas are authorized or required by law to remain
closed; and 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 Eurodollar 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.

       

      “Capital Leases”
means, in respect of any Person, all leases which shall have been, or should
have been, in accordance with GAAP, recorded as capital leases on the balance
sheet of the Person liable (whether contingent or otherwise) for the payment of
rent thereunder.

       

      “Casualty Event” means
any loss, casualty or other insured damage to, or any nationalization, taking
under power of eminent domain or by condemnation or similar proceeding of, any
Property of the Borrower or any of its Subsidiaries having a fair market value
in excess of $100,000 in the aggregate for any calendar year.

       

      “Change in Control”
means (a) the acquisition of ownership, directly or indirectly, beneficially or
of record, by any Person or group of Persons acting in concert as a partnership
or other “group” (within the meaning of the Securities Exchange Act of 1934 and
the rules of the SEC thereunder as in effect on the date hereof) other than any
Permitted Holders (except that such person or group shall be deemed to have
“beneficial ownership” of all shares that any person or group has the right to
acquire, whether such right is exercisable immediately or only after the passage
of time), of Equity Interests representing more than 35% of the aggregate
ordinary voting power represented by the issued and outstanding Equity Interests
of the Borrower (or its successor by merger, consolidation or purchase of all or
substantially all of its assets);  (b) the first day on which a
majority of the members of the Board of Directors of Legacy Reserves GP, LLC are
not Continuing Directors; (c) the direct or indirect sale, lease, transfer,
conveyance or other disposition (other than by way of merger or consolidation),
in one or a series of related transactions, of all or substantially all of the
properties or assets (including Equity Interests of the Subsidiaries) of the
Borrower and its Subsidiaries taken as a whole to any 

       

      
        
          
          

        

        
          4

          
            

          

        

        
          
          

        

         

        “person”
(as such term is used in Section 13(d) and 14(d) of the Securities and Exchange
Act of 1934); (d) the adoption of a plan relating to the liquidation or
dissolution of the Borrower; or (e) Legacy Reserves GP, LLC ceases to be the
sole general partner of the Borrower.

      

       

      “Change in Law” means
(a) the adoption of any law, rule or regulation after the date of this
Agreement, (b) any change in any law, rule or regulation or in the
interpretation or application thereof by any Governmental Authority after the
date of this Agreement or (c) compliance by any Lender or any Issuing Bank (or,
for purposes of Section 5.01(b), by any lending
office of such Lender or by such Lender’s or such Issuing Bank’s holding
company, if any) with any request, guideline or directive (whether or not having
the force of law) of any Governmental Authority made or issued after the date of
this Agreement.

       

      “Code” means the
Internal Revenue Code of 1986, as amended from time to time, and any successor
statute.

       

      “Commitment” means,
with respect to each Lender, the commitment of such Lender to make Loans and to
acquire participations in Letters of Credit hereunder, expressed as an amount
representing the maximum aggregate amount of such Lender’s Revolving Credit
Exposure hereunder, as such commitment may be (a) modified from time to time
pursuant to Section 2.06 and (b) modified from time
to time pursuant to assignments by or to such Lender pursuant to Section 12.04(b).  The amount representing
each Lender’s Commitment shall at any time be the lesser of such Lender’s
Maximum Credit Amount and such Lender’s Applicable Percentage of the then
effective Borrowing Base.

       

      “Consolidated Net
Income” means with respect to the Borrower and the Consolidated
Subsidiaries, for any period, the aggregate of the net income (or loss) of the
Borrower and the 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:  (a) the net income of any Person in which the Borrower or
a 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 the Consolidated Subsidiaries in accordance with GAAP), except to
the extent of the amount of dividends or distributions actually paid in cash
during such period by such other Person to the Borrower or to a Consolidated
Subsidiary, as the case may be; (b) the net income (but not loss) during such
period 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; (c) 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; and (d) any extraordinary gains or
losses during such period; and provided further that if the
Borrower or any Consolidated Subsidiary shall acquire or dispose of any Property
during such period, then Consolidated Net Income shall be calculated after
giving pro forma effect to such acquisition or disposition, as if such
acquisition or disposition had occurred on the first day of such
period.

       

      
        
          
          

        

        
          5

          
            

          

        

        
          
          

        

      

       

      “Consolidated
Subsidiaries” means each Subsidiary of the Borrower (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 the Borrower in
accordance with GAAP.

       

      “Continuing Directors”
means, as of any date of determination, any member of the board of directors of
Legacy Reserves GP, LLC who (a) was a member of such board of directors on the
date of this Agreement or (b) was nominated for election or elected to such
board of directors with the approval of a majority of the Continuing Directors
who were members of such board of directors at the time of such nomination or
election.

       

      “Contributing Parties”
means Moriah Properties, Ltd., a Texas limited partnership, DAB Resources, Ltd.,
a Texas limited partnership, Brothers Production Properties, Ltd., a Texas
limited partnership, Brothers Production Company, Inc., a Texas corporation,
Brothers Operating Company, Inc., a Texas corporation, J&W McGraw
Properties, Ltd., a Texas limited partnership, H2K Holdings, Ltd., a Texas
limited partnership, MBN Properties LP, a Delaware limited partnership,
Charities Support Foundation, Inc., a Texas nonprofit corporation, Moriah
Foundation, Inc., a Texas nonprofit corporation, and Cary Brown Family
Foundation, Inc., a Texas nonprofit corporation.

       

      “Control” means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of a Person, whether through the ability
to exercise voting power, by contract or otherwise.  For the purposes
of this definition, and without limiting the generality of the foregoing, any
Person that owns directly or indirectly 10% or more of the Equity Interests
having ordinary voting power for the election of the directors or other
governing body of a Person will be deemed to “control” such other
Person.  “Controlling” and
“Controlled”
have meanings correlative thereto.

       

      “Cost of Funds” means
with respect to any Non-Defaulting Lender, the rate per annum quoted by such
Non-Defaulting Lender to the Administrative Agent as contemplated in Section
2.03(b) as its cost of funds with respect to a Borrowing Request, as determined
solely by such Non-Defaulting Lender in its reasonable discretion based upon
such factors as such non-Defaulting Lender shall deem
appropriate from time to time, including market, regulatory and liquidity
conditions; provided that such rate is not necessarily the cost to such
Non-Defaulting Lender of funding the specific Borrowing
Request.

       

      “Debt” means, for any
Person, the sum of the following (without duplication): (a) all obligations of
such Person for borrowed money or evidenced by bonds, bankers’ acceptances,
debentures, notes or other similar instruments; (b) all obligations of such
Person (whether contingent or otherwise) in respect of letters of credit, surety
or other bonds and similar instruments; (c) all accounts payable, accrued
expenses, liabilities or other obligations of such Person, in each such case to
pay the deferred purchase price of Property or services; (d) all obligations
under Capital Leases; (e) all obligations under Synthetic Leases; (f) all Debt
(as defined in the other clauses of this definition) of others secured by (or
for which the holder of such Debt has an existing right, contingent or
otherwise, to be secured by) a Lien on any Property of such Person, whether or
not such Debt is assumed by such Person; (g) all Debt (as defined in the other
clauses of this definition) of others guaranteed by such Person or in which

       

      
        
          
          

        

        
          6

          
            

          

        

        
          
          

        

         

        such
Person otherwise assures a creditor against loss of the Debt (howsoever such
assurance shall be made) to the extent of the lesser of the amount of such Debt
and the maximum stated amount of such guarantee or assurance against loss; (h)
all 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; (i) obligations to deliver commodities, goods or
services, including, without limitation, Hydrocarbons, in consideration of one
or more advance payments, other than gas balancing arrangements in the ordinary
course of business; (j) obligations to pay for goods or services whether or not
such goods or services are actually received or utilized by such Person; (k) any
Debt of a partnership for which such Person is liable either by agreement, by
operation of law or by a Governmental Requirement but only to the extent of such
liability; (l) Disqualified Capital Stock; and (m) the undischarged balance of
any production payment created by such Person or for the creation of which such
Person directly or indirectly received payment.  The Debt of any
Person shall include all obligations of such Person of the character described
above to the extent such Person remains legally liable in respect thereof
notwithstanding that any such obligation is not included as a liability of such
Person under GAAP.

      

       

      “Default” means any
event or condition which constitutes an Event of Default or which upon notice,
lapse of time or both would, unless cured or waived, become an Event of
Default.

       

      “Defaulting Lender”
means any Lender, as determined by the Administrative Agent, that has (a) failed
to fund any portion of its Loans or participations in Letters of Credit within
three Business Days of the date required to be funded by it hereunder, (b)
notified the Borrower, the Administrative Agent, the Issuing Bank or any Lender
in writing that it does not intend to comply with any of its funding obligations
under this Agreement or has made a public statement to the effect that it does
not intend to comply with its funding obligations under this Agreement or under
other agreements in which it commits to extend credit, (c) failed, within three
Business Days after request by the Administrative Agent or the Borrower, to
confirm that it will comply with the terms of this Agreement relating to its
obligations to fund prospective Loans and participations in then outstanding
Letters of Credit, (d) otherwise failed to pay over to the Administrative Agent
or any other Lender any other amount required to be paid by it hereunder within
three Business Days of the date when due, unless the subject of a good faith
dispute, or (e) (i) become or is insolvent or has a parent company that has
become or is insolvent or (ii) become the subject of a bankruptcy or insolvency
proceeding, or has had a receiver, conservator, trustee or custodian appointed
for it, or has taken any action in furtherance of, or indicating its consent to,
approval of or acquiescence in any such proceeding or appointment or has a
parent company that has become the subject of a bankruptcy or insolvency
proceeding, or has had a receiver, conservator, trustee or custodian appointed
for it, or has taken any action in furtherance of, or indicating its consent to,
approval of or acquiescence in any such proceeding or appointment.

       

      “Determination Date”
has the meaning given such term in Section 2.04(f)(i).

       

      “Disqualified Capital
Stock” means any Equity Interest that, by its terms (or by the terms of
any security into which it is convertible or for which it is exchangeable) or
upon the happening of any event, matures or is mandatorily redeemable for any
consideration other than other Equity Interests (which would not constitute
Disqualified Capital Stock), pursuant to a sinking fund obligation or otherwise,
or is convertible or exchangeable for Debt or redeemable 

       

      
        
          
          

        

        
          7

          
            

          

        

        
          
          

        

         

        for any
consideration other than other Equity Interests (which would not constitute
Disqualified Capital Stock) at the option of the holder thereof, in whole or in
part, on or prior to the date that is one year after the earlier of (a) the
Maturity Date and (b) the date on which there are no Loans, LC Exposure or other
obligations hereunder outstanding and all of the Commitments are
terminated.

      

       

      “dollars” or “$” refers to lawful
money of the United States of America.

       

      “Domestic Subsidiary”
means any Subsidiary that is organized under the laws of the United States of
America or any state thereof or the District of Columbia.

       

      “EBITDA” means, for
any period, Consolidated Net Income for such period plus, to the extent deducted
from revenues in determining Consolidated Net Income, (i) Consolidated Interest
Expense, (ii) expense for income and income based taxes paid or accrued, (iii)
depreciation, depletion, amortization, accretion and impairment, including
without limitation, impairment of goodwill, and (iv) any non-cash items
associated with (a) mark to market accounting related to derivatives or
investments, (b) stock based compensation arising from the grant of or issuance
or replacement of stock, stock options or other equity-based awards or any
amendment, modification, substitution or change of any such stock, stock options
or other equity-based awards, in each case in connection with employee plans or
other compensation arrangements, and/or (c) any gains or losses attributable to
writeups or writedowns of assets, including ceiling test writedowns; less, all
non-cash items increasing Consolidated Net Income, all calculated for the
Borrower and its Subsidiaries on a consolidated basis.

       

      “Effective Date” means
the date on which the conditions specified in Section
6.01 are satisfied (or waived in accordance with Section 12.02).

       

      “Engineering Reports”
has the meaning assigned such term in Section
2.07(c)(i).

       

      “Environmental Laws”
means any and all Governmental Requirements pertaining in any way to health,
safety the environment or the preservation or reclamation of natural resources,
in effect in any and all jurisdictions in which the Borrower or any of its
Subsidiaries is conducting or at any time has conducted business, or where any
Property of the Borrower or any of its Subsidiaries is located, including
without limitation, the Oil Pollution Act of 1990 (“OPA”), as amended,
the Clean Air Act, as amended, the Comprehensive Environmental, Response,
Compensation, and Liability Act of 1980 (“CERCLA”), as
amended, the Federal Water Pollution Control Act, as amended, the Occupational
Safety and Health Act of 1970, as amended, the Resource Conservation and
Recovery Act of 1976 (“RCRA”), as amended,
the Safe Drinking Water Act, as amended, the Toxic Substances Control Act, as
amended, the Superfund Amendments and Reauthorization Act of 1986, as amended,
the Hazardous Materials Transportation Act, as amended, and other environmental
conservation or protection Governmental Requirements.  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, the terms “solid waste” and
“disposal” (or
“disposed”)
have the meanings specified in RCRA and the term “oil and gas waste” shall have
the meaning specified in Section 91.1011 of the Texas Natural Resources Code
(“Section
91.1011”); provided, however, that (a) in the
event either OPA, CERCLA, RCRA or Section 91.1011 is amended so as to broaden
the meaning of 

       

      
        
          
          

        

        
          8

          
            

          

        

        
          
          

        

         

        any term
defined thereby, such broader meaning shall apply subsequent to the effective
date of such amendment and (b) to the extent the laws of the state or other
jurisdiction in which any Property of the Borrower or any of its Subsidiaries is
located establish a meaning for “oil,” “hazardous substance,”
“release,”
“solid waste,”
“disposal” or
“oil and gas
waste” which is broader than that specified in either OPA, CERCLA, RCRA
or Section 91.1011, such broader meaning shall apply.

      

       

      “Equity Interests”
means shares of capital stock, partnership interests, membership interests in a
limited liability company, beneficial interests in a trust or other equity
ownership interests in a Person, and any warrants, options or other rights
entitling the holder thereof to purchase or acquire any such Equity
Interest.

       

      “ERISA” means the
Employee Retirement Income Security Act of 1974, as amended, and any successor
statute.

       

      “ERISA Affiliate”
means each trade or business (whether or not incorporated) which together with
the Borrower or any of its Subsidiaries 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” means
(a) a “Reportable Event” described in section 4043 of ERISA and the regulations
issued thereunder, (b) the withdrawal of the Borrower or any of its Subsidiaries
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, (c) 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, (d) the institution of proceedings
to terminate a Plan by the PBGC, (e) receipt of a notice of withdrawal liability
pursuant to Section 4202 of ERISA or (f) 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.

       

      “Eurodollar”, when
used in reference to any Loan or Borrowing, refers to whether such Loan, or the
Loans comprising such Borrowing, are bearing interest at a rate determined by
reference to the Adjusted LIBO Rate.

       

      “Event of Default” has
the meaning assigned such term in Section
10.01.

       

      “Excepted Liens”
means:  (a) Liens for Taxes, assessments or other governmental charges
or levies which are not delinquent or which are being contested in good faith by
appropriate action and for which adequate reserves have been maintained in
accordance with GAAP; (b) Liens in connection with workers’ compensation,
unemployment insurance or other social security, old age pension or public
liability obligations which are not delinquent or which are being contested in
good faith by appropriate action and for which adequate reserves have been
maintained in accordance with GAAP; (c) statutory landlord’s liens, operators’,
vendors’, carriers’, warehousemen’s, repairmen’s, mechanics’, suppliers’,
workers’, 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 each of which
is in respect of obligations that are not delinquent or which are being
contested in 

       

      
        
          
          

        

        
          9

          
            

          

        

        
          
          

        

         

        good
faith by appropriate action and for which adequate reserves have been maintained
in accordance with GAAP; (d) contractual Liens which arise in the ordinary
course of business under operating agreements, joint venture agreements, oil and
gas partnership agreements, oil and gas leases, farm-out agreements, division
orders, contracts for the sale, transportation or exchange of oil and natural
gas, unitization and pooling declarations and agreements, area of mutual
interest agreements, overriding royalty agreements, marketing agreements,
processing agreements, net profits agreements, development agreements, gas
balancing or deferred production agreements, injection, repressuring and
recycling agreements, salt water or other disposal agreements, seismic or other
geophysical permits or agreements, and other agreements which are usual and
customary in the oil and gas business and are for claims which are not
delinquent or which are being contested in good faith by appropriate action and
for which adequate reserves have been maintained in accordance with GAAP, provided 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 of its Subsidiaries or materially impair the value of such
Property subject thereto; (e) Liens arising solely by virtue of any statutory or
common law provision relating to banker’s liens, rights of set-off or similar
rights and remedies and burdening only deposit accounts or other funds
maintained with a creditor depository institution, provided that no such deposit
account is a dedicated cash collateral account or is subject to restrictions
against access by the depositor in excess of those set forth by regulations
promulgated by the Board and no such deposit account is intended by the Borrower
or any of its Subsidiaries to provide collateral to the depository institution;
(f) easements, restrictions, servitudes, permits, conditions, covenants,
exceptions or reservations in any Property of the Borrower or any of its
Subsidiaries 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, that do not secure
any monetary obligations and which in the aggregate do not materially impair the
use of such Property for the purposes of which such Property is held by the
Borrower or any of its Subsidiaries or materially impair the value of such
Property subject thereto; (g) Liens on cash or securities pledged to secure
performance of tenders, surety and appeal bonds, government contracts,
performance and return of money bonds, bids, trade contracts, leases, statutory
obligations, regulatory obligations and other obligations of a like nature
incurred in the ordinary course of business and (h) judgment and attachment
Liens not giving rise to an Event of Default, provided that 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
proceeding may be initiated shall not have expired and no action to enforce such
Lien has been commenced; provided further that Liens
described in clauses (a) through (e) shall remain “Excepted Liens” only for so
long as no action to enforce such Lien has been commenced and no intention to
subordinate the first priority Lien granted in favor of the Administrative Agent
and the Lenders is to be hereby implied or expressed by the permitted existence
of such Excepted Liens.

      

       

      “Excluded Taxes”
means, with respect to the Administrative Agent, any Lender, any Issuing Bank or
any other recipient of any payment to be made by or on account of any obligation
of the Borrower or any Guarantor hereunder or under any other Loan Document, (a)
income or franchise taxes imposed on (or measured by) its net income by the
United States of America or such other jurisdiction under the laws of which such
recipient is organized or in which its principal office is located or, in the
case of any Lender, in which its applicable lending 

       

      
        
          
          

        

        
          10

          
            

          

        

        
          
          

        

         

        office is
located, (b) any branch profits taxes imposed by the United States of America or
any similar tax imposed by any other jurisdiction in which the Borrower or any
Guarantor is located and (c) in the case of a Foreign Lender any withholding tax
that is imposed on amounts payable to such Foreign Lender at the time such
Foreign Lender becomes a party to this Agreement (or designates a new lending
office) or is attributable to such Foreign Lender’s failure to comply with Section 5.03(e), except to the extent that such
Foreign Lender (or its assignor, if any) was entitled, at the time of
designation of a new lending office (or assignment), to receive additional
amounts with respect to such withholding tax pursuant to Section 5.03(a) or Section
5.03(c).

      

       

      “Existing Credit
Agreement” has the meaning assigned such term in Recital A.

       

      “Federal Funds Effective
Rate” means, for any day, the weighted average (rounded upwards, if
necessary, to the next 1/100 of 1%) of the rates on overnight Federal funds
transactions with members of the Federal Reserve System arranged by Federal
funds brokers, as published on the next succeeding Business Day by the Federal
Reserve Bank of New York, or, if such rate is not so published for any day that
is a Business Day, the average (rounded upwards, if necessary, to the next 1/100
of 1%) of the quotations for such day for such transactions received by the
Administrative Agent from three Federal funds brokers of recognized standing
selected by it.

       

      “Financial Officer”
means, for any Person, the chief financial officer, principal accounting
officer, treasurer or controller of such Person.  Unless otherwise
specified, all references to a Financial Officer shall mean a Financial Officer
of the Borrower.

       

      “Financial Statements”
means the financial statement or statements of the Borrower and its Consolidated
Subsidiaries referred to in Section
7.04(a).

       

      “Foreign Lender” means
any Lender that is organized under the laws of a jurisdiction other than that in
which the Borrower is located.  For purposes of this definition, the
United States of America, each State thereof and the District of Columbia shall
be deemed to constitute a single jurisdiction.

       

      “Foreign Subsidiary”
means any Subsidiary that is not a Domestic Subsidiary.

       

      “GAAP” means generally
accepted accounting principles in the United States of America as in effect from
time to time subject to the terms and conditions set forth in Section 1.05.

       

      “Governmental
Authority” means the government of the United States of America, any
other nation or any political subdivision thereof, whether state or local, and
any agency, authority, instrumentality, regulatory body, court, central bank or
other entity exercising executive, legislative, judicial, taxing, regulatory or
administrative powers or functions of or pertaining to government over the
Borrower or any of its Subsidiaries, any of their Properties, any Agent, any
Issuing Bank or any Lender.

       

      “Governmental
Requirement” means any law, statute, code, ordinance, order,
determination, rule, regulation, judgment, decree, injunction, franchise,
permit, certificate, license, authorization or other directive or requirement,
whether now or hereinafter in effect, 

       

      
        
          
          

        

        
          11

          
            

          

        

        
          
          

        

         

        including,
without limitation, Environmental Laws, energy regulations and occupational,
safety and health standards or controls, of any Governmental
Authority.

      

       

      “Guarantors” means (a)
Legacy Reserves Operating LP, (b) Legacy Reserves Operating GP LLC, (c) Legacy
Reserves Services, Inc., (d) Pan-Ellis Properties, Ltd., (e) Pantwist LLC and
(f) each Material Domestic Subsidiary formed or acquired during the term of this
Agreement or other Domestic Subsidiary that guarantees the Indebtedness pursuant
to Section 8.14(b).

       

      “Guaranty Agreement”
means the Amended and Restated Guarantee Agreement executed by the Guarantors on
the date hereof, unconditionally guarantying on a joint and several basis
payment of the Indebtedness, as the same may be amended, modified or
supplemented from time to time.

       

      “Highest Lawful Rate”
means, 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 other Indebtedness 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
allow as of the date hereof.

       

      “Hydrocarbon
Interests” means 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” means
oil, gas, casinghead gas, drip gasoline, natural gasoline, condensate,
distillate, liquid hydrocarbons, gaseous hydrocarbons and all products refined
or separated therefrom.

       

      “Indebtedness” means
any and all amounts owing or to be owing by the Borrower, any of its
Subsidiaries or any Guarantor (whether direct or indirect (including those
acquired by assumption), absolute or contingent, due or to become due, now
existing or hereafter arising): (a) to the Administrative Agent, any Issuing
Bank or any Lender under any Loan Document; (b) to any Lender or any Affiliate
of a Lender under any Swap Agreements among such Person and the Borrower or any
Subsidiary or assigned to such Person while such Person (or in the case of its
Affiliate, the Lender affiliated therewith) is a Lender hereunder; (c) all
renewals, extensions and/or rearrangements of any of (a) or (b) above; and (d)
Swap Agreements between the Lenders (as defined in the Existing Credit
Agreement) or their Affiliates and the Borrower or any of its Subsidiaries
entered into prior to the date hereof.

       

      “Indemnified Taxes”
means Taxes other than Excluded Taxes.

       

      “Initial Reserve
Report” means the report of LaRoche Petroleum Consultants Ltd., with
respect to the value of the Oil and Gas Properties of the Borrower and its
Subsidiaries as of December 31, 2008.

       

      
        
          
          

        

        
          12

          
            

          

        

        
          
          

        

      

       

      “Interest Election
Request” means a request by the Borrower to convert or continue a
Borrowing in accordance with Section
2.04.

       

      “Interest Expense”
means, for any period, the sum (determined without duplication) of the aggregate
gross interest expense of the Borrower and the Consolidated Subsidiaries for
such period, including (a) to the extent included in interest expense under
GAAP:  (i) amortization of debt discount, (ii) capitalized interest
and (iii) the portion of any payments or accruals under Capital Leases allocable
to interest expense, plus the portion of any payments or accruals under
Synthetic Leases allocable to interest expense whether or not the same
constitutes interest expense under GAAP and (b) cash dividend payments by the
Borrower in respect of any Disqualified Capital Stock.

       

      “Interest Period”
means with respect to any Eurodollar Borrowing, the period commencing on the
date of such Borrowing and ending on the numerically corresponding day in the
calendar month that is one, two, three or six months thereafter, as the Borrower
may elect; provided,
that (a) if any Interest Period would end on a day other than a Business Day,
such Interest Period shall be extended to the next succeeding Business Day
unless such next succeeding Business Day would fall in the next calendar month,
in which case such Interest Period shall end on the next preceding Business Day
and (b) any Interest Period pertaining to a Eurodollar Borrowing that commences
on the last Business Day of a calendar month (or on a day for which there is no
numerically corresponding day in the last calendar month of such Interest
Period) shall end on the last Business Day of the last calendar month of such
Interest Period.  For purposes hereof, the date of a Borrowing
initially shall be the date on which such Borrowing is made and thereafter shall
be the effective date of the most recent conversion or continuation of such
Borrowing.

       

      “Interim
Redetermination” has the meaning assigned such term in Section 2.07(b).

       

      “Investment” means,
for any Person: (a) the acquisition (whether for cash, Property, services or
securities or otherwise) of Equity Interests of any other Person or any
agreement to make any such acquisition (including, without limitation, any
“short sale” or any sale of any securities at a time when such securities are
not owned by the Person entering into such short sale); (b) the making of any
deposit with, or advance, loan or capital contribution to, assumption of Debt
of, purchase or other acquisition of any other Debt or equity participation or
interest in, or other extension of credit to, any other Person (including the
purchase of Property from another Person subject to an understanding or
agreement, contingent or otherwise, to resell such Property to such Person, but
excluding any such advance, loan or extension of credit having a term not
exceeding ninety (90) days representing the purchase price of inventory or
supplies sold by such Person in the ordinary course of business); (c) the
purchase or acquisition (in one or a series of transactions) of Property of
another Person that constitutes a business unit or (d) the entering into of any
guarantee of, or other contingent obligation (including the deposit of any
Equity Interests to be sold) with respect to, Debt or other liability of any
other Person and (without duplication) any amount committed to be advanced, lent
or extended to such Person.

       

      “Issuing Bank” means
BNP Paribas, in its capacity as an issuer of Letters of Credit hereunder, and
its successors in such capacity as provided in Section
2.08(i).  Any Issuing Bank may, in its discretion, arrange for one
or more Letters of Credit to be issued by Affiliates of such 

       

      
        
          
          

        

        
          13

          
            

          

        

        
          
          

        

         

        Issuing
Bank, in which case the term “Issuing Bank” shall
include any such Affiliate with respect to Letters of Credit issued by such
Affiliate.

      

       

      “LC Commitment” at any
time means Two Million Dollars ($2,000,000).

       

      “LC Disbursement”
means a payment made by any Issuing Bank pursuant to a Letter of Credit issued
by such Issuing Bank.

       

      “LC Exposure” means,
at any time, the sum of (a) the aggregate undrawn amount of all outstanding
Letters of Credit at such time plus (b) the aggregate amount of all LC
Disbursements that have not yet been reimbursed by or on behalf of the Borrower
at such time.  The LC Exposure of any Lender at any time shall be its
Applicable Percentage of the total LC Exposure at such time.

       

      “Legacy Reserves GP,
LLC” means Legacy Reserves GP, LLC, a Delaware limited liability company
and the general partner of the Borrower.

       

      “Legacy Reserves Operating GP
LLC” means Legacy Reserves Operating GP LLC, a Delaware limited liability
company, the general partner of Legacy Reserves Operating LP and a wholly-owned
Subsidiary of the Borrower.

       

      “Legacy Reserves Operating
LP” means Legacy Reserves Operating LP, a Delaware limited partnership
and a wholly-owned Subsidiary of the Borrower.

       

      “Legacy Reserves Services,
Inc.” means Legacy Reserves Services, Inc., a Texas corporation and a
wholly-owned Subsidiary of the Borrower.

       

      “Lenders” means the
Persons listed on Annex I, and any Person that shall have become a party hereto
pursuant to an Assignment and Assumption, other than any such Person that ceases
to be a party hereto pursuant to an Assignment and Assumption.

       

      “Letter of Credit”
means any letter of credit issued pursuant to this Agreement.

       

      “Letter of Credit
Agreements” means all letter of credit applications and other agreements
(including any amendments, modifications or supplements thereto) submitted by
the Borrower, or entered into by the Borrower, with any Issuing Bank relating to
any Letter of Credit issued by such Issuing Bank.

       

      “LIBO Rate” means,
with respect to any Eurodollar Borrowing for any Interest Period, the rate
appearing on Page 3750 of the Dow Jones Market Service (or on any successor or
substitute page of such Service, or any successor to or substitute for such
Service, providing rate quotations comparable to those currently provided on
such page of such Service, as determined by the Administrative Agent from time
to time for purposes of providing quotations of interest rates applicable to
dollar deposits in the London interbank market) at approximately 11:00 a.m.,
London time, two Business Days prior to the commencement of such Interest
Period, as the rate for dollar deposits with a maturity comparable to such
Interest Period.  In the event that such rate is not available at such
time for any reason, then the “LIBO Rate” with
respect to such Eurodollar Borrowing for such Interest Period shall be the rate
(rounded upwards, if necessary, 

       

      
        
          
          

        

        
          14

          
            

          

        

        
          
          

        

         

        to the
next 1/100th of 1%)
at which dollar deposits of an amount comparable to such Eurodollar Borrowing
and for a maturity comparable to such Interest Period are offered to the
principal London office of the Administrative Agent in immediately available
funds in the London interbank market at approximately 11:00 a.m., London time,
two Business Days prior to the commencement of such Interest
Period.

      

       

      “Lien” means 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 (a) 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 (b) production payments and the like payable out of Oil and
Gas Properties.  The term “Lien” shall include
easements, restrictions, servitudes, permits, conditions, covenants, exceptions
or reservations. For the purposes of this Agreement, the Borrower and its
Subsidiaries shall be deemed to be the owner of any Property which they have
acquired or hold 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” means
this Agreement, the Notes, the Letter of Credit Agreements, the Letters of
Credit and the Security Instruments.

       

      “Loans” means the
loans made by the Lenders to the Borrower pursuant to this
Agreement.

       

      “Majority Lenders”
means, at any time while no Loans or LC Exposure is outstanding, Lenders having
at least sixty-six and two-thirds percent (66.67%) of the Aggregate Maximum
Credit Amounts; and at any time while any Loans or LC Exposure is outstanding,
Lenders holding at least sixty-six and two-thirds percent (66.67%) of the
outstanding aggregate principal amount of the Loans or participation interests
in Letters of Credit (without regard to any sale by a Lender of a participation
in any Loan under Section 12.04(c)).

       

      “Material Adverse
Effect” means a material adverse change in, or any event, development or
circumstance that has had or could reasonably be expected to have a material
adverse effect on (a) the business, operations, Property, liabilities (actual or
contingent) or condition (financial or otherwise) of the Borrower and its
Guarantors taken as a whole, (b) the ability of the Borrower, any of its
Subsidiaries or any Guarantor to perform any of its obligations under any Loan
Document to which it is a party, (c) the validity or enforceability of any Loan
Document or (d) the rights and remedies of or benefits available to the
Administrative Agent, any other Agent, any Issuing Bank or any Lender under any
Loan Document.

       

      “Material Domestic
Subsidiary” means, as of any date, any Domestic Subsidiary that (a) is a
Wholly-Owned Subsidiary and (b) together with its Subsidiaries, owns Property
having a fair market value of $1,000,000 or more.

       

      “Material
Indebtedness” means Debt (other than the Loans and Letters of Credit), or
obligations in respect of one or more Swap Agreements, of any one or more of the
Borrower and 

       

      
        
          
          

        

        
          15

          
            

          

        

        
          
          

        

         

        its
Subsidiaries in an aggregate principal amount exceeding
$1,000,000.  For purposes of determining Material Indebtedness, the
“principal amount” of the obligations of the Borrower or any of its Subsidiaries
in respect of any Swap Agreement at any time shall be the maximum aggregate
amount (giving effect to any netting agreements) that the Borrower or such
Subsidiary would be required to pay if such Swap Agreement were terminated at
such time.

      

       

      “Maturity Date” means
April 1, 2012.

       

      “Maximum Credit
Amount” means, as to each Lender, the amount set forth opposite such
Lender’s name on Annex I under the caption “Maximum Credit Amounts”, as the same
may be (a) reduced or terminated from time to time in connection with a
reduction or termination of the Aggregate Maximum Credit Amounts pursuant to Section 2.06(b) or (b) modified from time to time
pursuant to any assignment permitted by Section
12.04(b).

       

      “Moody’s” means
Moody’s Investors Service, Inc. and any successor thereto that is a nationally
recognized rating agency.

       

      “Mortgaged Property”
means any Property owned by the Borrower or any Guarantor, which is subject to
the Liens existing and to exist under the terms of the Security
Instruments.

       

      “Multiemployer Plan”
means a Plan that is a multiemployer plan as defined in section 3(37) or 4001
(a)(3) of ERISA.

       

      “New Borrowing Base
Notice” has the meaning assigned such term in Section 2.07(d).

       

      “Non-Defaulting
Lender” means, at any time, each Lender that is not a Defaulting Lender
at such time.

       

      “Notes” means the
promissory notes of the Borrower described in Section
2.02(d) and being substantially in the form of Exhibit A, together with all
amendments, modifications, replacements, extensions and rearrangements
thereof.

       

      “Oil and Gas
Properties” means (a) Hydrocarbon Interests; (b) the Properties now or
hereafter pooled or unitized with Hydrocarbon Interests; (c) all presently
existing or future unitization, pooling agreements and declarations of pooled
units and the units created thereby (including without limitation all units
created under orders, regulations and rules of any Governmental Authority) which
may affect all or any portion of the Hydrocarbon Interests; (d) all operating
agreements, contracts and other agreements, including production sharing
contracts and 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; (e) all Hydrocarbons in and under
and which may be produced and saved or attributable to the Hydrocarbon
Interests, including all oil in tanks, and all rents, issues, profits, proceeds,
products, revenues and other incomes from or attributable to the Hydrocarbon
Interests; (f) all tenements, hereditaments, appurtenances and Properties in any
manner appertaining, belonging, affixed or incidental to the Hydrocarbon
Interests and (g) 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 

       

      
        
          
          

        

        
          16

          
            

          

        

        
          
          

        

         

        Interests
or Property (excluding drilling rigs, automotive equipment, rental 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, 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.

      

       

      “Other Taxes” means
any and all present or future stamp or documentary taxes or any other excise or
Property taxes, charges or similar levies arising from any payment made
hereunder or from the execution, delivery or enforcement of, or otherwise with
respect to, this Agreement and any other Loan Document.

       

      “Pan-Ellis Properties,
Ltd.” means Pan-Ellis Properties, Ltd., a Texas limited partnership and
wholly owned Subsidiary of the Borrower.

       

      “Pantwist LLC” means
Pantwist LLC, a Texas limited liability company and wholly owned subsidiary of
the Borrower.

       

      “Participant” has the
meaning set forth in Section
12.04(c)(i).

       

      “Partnership
Agreement” means the Partnership Agreement of the Borrower.

       

      “PBGC” means the
Pension Benefit Guaranty Corporation, or any successor thereto.

       

      “Permitted Holders”
means (i) the natural persons that were the direct or indirect beneficial owners
as of March 15, 2006 of the Contributing Parties, (ii) any family members
(including spouses) of any Persons described in clause (i), and (iii) any
Affiliates of the Persons described in clauses (i) or (ii), including the
Contributing Parties, as of the Effective Date, but only for such time as they
remain so affiliated.

       

      “Person” means any
natural person, corporation, limited liability company, trust, joint venture,
association, company, partnership, Governmental Authority or other
entity.

       

      “Plan” means any
employee pension benefit plan, as defined in section 3(2) of ERISA, which (a) is
currently or hereafter sponsored, maintained or contributed to by the Borrower,
any of its Subsidiaries or an ERISA Affiliate or (b) was at any time during the
six calendar years preceding the date hereof, sponsored, maintained or
contributed to by the Borrower, any of its Subsidiaries or an ERISA
Affiliate.

       

      “Pledge Agreement”
means the Amended and Restated Pledge Agreement of even date herewith executed
by Borrower pledging its limited partner interests in Legacy Reserves Operating
LP, its membership interests in Legacy Reserves Operating GP LLC and all of the
common stock of Legacy Reserves Services, Inc., by Legacy Reserves Operating GP
LLC pledging its general partner interest in Legacy Reserves Operating LP and
its general partner 

       

      
        
          
          

        

        
          17

          
            

          

        

        
          
          

        

         

        interest
in Pan-Ellis Properties, Ltd. and by Legacy Reserves Operating LP pledging its
limited partner interests in Pan-Ellis Properties, Ltd. and its membership
interests in Pantwist, LLC.

      

       

      “Prime Rate” means the
rate of interest per annum publicly announced from time to time by BNP Paribas
as its prime rate in effect at its principal office in New York City; each
change in the Prime Rate shall be effective from and including the date such
change is publicly announced as being effective.  Such rate is set by
BNP Paribas as a general reference rate of interest, taking into account such
factors as BNP Paribas may deem appropriate; it being understood that many of
BNP Paribas’s commercial or other loans are priced in relation to such rate,
that it is not necessarily the lowest or best rate actually charged to any
customer and that BNP Paribas may make various commercial or other loans at
rates of interest having no relationship to such rate.

       

      “Property” means any
interest in any kind of property or asset, whether real, personal or mixed, or
tangible or intangible, including, without limitation, cash, securities,
accounts and contract rights.

       

      “Proposed Borrowing
Base” has the meaning assigned to such term in Section 2.07(c)(i).

       

      “Proposed Borrowing Base
Notice” has the meaning assigned to such term in Section 2.07(c)(ii).

       

      “Proved Developed Producing
Properties” means Oil and Gas Properties which are categorized as “Proved
Reserves” that are both “Developed” and “Producing”, as such terms are defined
in the Definitions for Oil and Gas Reserves as promulgated by the Society of
Petroleum Engineers (or any generally recognized successor) as in effect at the
time in question.

       

      “Redemption” means
with respect to any Debt, the repurchase, redemption, prepayment, repayment or
defeasance or any other acquisition or retirement for value (or the segregation
of funds with respect to any of the foregoing) of any such
Debt.  “Redeem” has the
correlative meaning thereto.

       

      “Redetermination Date”
means, with respect to any Scheduled Redetermination or any Interim
Redetermination, the date that the redetermined Borrowing Base related thereto
becomes effective pursuant to Section
2.07(d).

       

      “Reference Bank Cost of Funds
Rate” means the rate determined pursuant to Section
2.03(b)(iii).

       

      “Register” has the
meaning assigned such term in Section
12.04(b)(iv).

       

      “Related Parties”
means, with respect to any specified Person, such Person’s Affiliates and the
respective directors, officers, employees, agents and advisors (including
attorneys, accountants and experts) of such Person and such Person’s
Affiliates.

       

      “Remedial Work” has
the meaning assigned such term in Section
8.10(a).

       

      
        
          
          

        

        
          18

          
            

          

        

        
          
          

        

      

       

      “Reserve Report” means
a report, in form and substance reasonably satisfactory to the Administrative
Agent, setting forth, as of each January 1st or July 1st (or such other date in
the event of an Interim Redetermination) the oil and gas reserves attributable
to the Oil and Gas Properties of the Borrower and its Subsidiaries, 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 economic assumptions consistent with the Administrative
Agent’s lending requirements at the time.

       

      “Responsible Officer”
means, as to any Person, the Chief Executive Officer, the President, any
Financial Officer or any Vice President of such Person.  Unless
otherwise specified, all references to a Responsible Officer herein shall mean a
Responsible Officer of the Borrower.

       

      “Restricted Payment”
means any dividend or other distribution (whether in cash, securities or other
Property) with respect to any Equity Interests in the Borrower, or any payment
(whether in cash, securities or other Property), including any sinking fund or
similar deposit, on account of the purchase, Redemption, retirement,
acquisition, cancellation or termination of any such Equity Interests in the
Borrower or any option, warrant or other right to acquire any such Equity
Interests in the Borrower.

       

      “Revolving Credit
Exposure” means, with respect to any Lender at any time, the sum of the
outstanding principal amount of such Lender’s Loans and its LC Exposure at such
time.

       

      “Scheduled
Redetermination” has the meaning assigned such term in Section 2.07(b).

       

      “Scheduled Redetermination
Date” means the date on which a Borrowing Base that has been redetermined
pursuant to a Scheduled Redetermination becomes effective as provided in Section 2.07(d).

       

      “Security Instruments”
means the Guaranty Agreement, the Pledge Agreement, mortgages, deeds of trust
and other agreements, instruments or certificates described or referred to in
Exhibit C, and any and all other agreements, instruments, consents or
certificates now or hereafter executed and delivered by the Borrower or any
other Person (other than Swap Agreements with the Lenders or any Affiliate of a
Lender or participation or similar agreements between any Lender and any other
lender or creditor with respect to any Indebtedness pursuant to this Agreement)
in connection with, or as security for the payment or performance of the
Indebtedness, the Notes, this Agreement, or reimbursement obligations under the
Letters of Credit, as such agreements may be amended, modified, supplemented or
restated from time to time.

       

      “S&P” means
Standard & Poor’s Ratings Group, a division of The McGraw-Hill Companies,
Inc., and any successor thereto that is a nationally recognized rating
agency.

       

      “Statutory Reserve
Rate” means a fraction (expressed as a decimal), the numerator of which
is the number one and the denominator of which is the number one minus the
aggregate of the maximum reserve percentages (including any marginal, special,
emergency or supplemental reserves) expressed as a decimal established by the
Board to which the Administrative Agent is subject with respect to the Adjusted
LIBO Rate for Eurocurrency funding (currently referred to 

       

      
        
          
          

        

        
          19

          
            

          

        

        
          
          

        

         

        as
“Eurocurrency Liabilities” in Regulation D of the Board).  Such
reserve percentages shall include those imposed pursuant to such Regulation
D.  Eurodollar Loans shall be deemed to constitute Eurocurrency
funding and to be subject to such reserve requirements without benefit of or
credit for proration, exemptions or offsets that may be available from time to
time to any Lender under such Regulation D or any comparable
regulation.  The Statutory Reserve Rate shall be adjusted
automatically on and as of the effective date of any change in any reserve
percentage.

      

       

      “Subsidiary”
means:  (a) any Person of which at least a majority of the outstanding
Equity Interests having by the terms thereof ordinary voting power to elect a
majority of the board of directors, manager or other governing body of such
Person (irrespective of whether or not at the time Equity Interests of any other
class or classes of such Person 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 the Borrower or one or more of its Subsidiaries or by the
Borrower and one or more of its Subsidiaries and (b) any partnership of which
the Borrower or any of its Subsidiaries is a general partner.  Unless
otherwise indicated herein, each reference to the term “Subsidiary” shall
mean a Subsidiary of the Borrower.

       

      “Swap Agreement” means
any agreement with respect to any swap, forward, future or derivative
transaction or option or similar agreement, whether exchange traded,
“over-the-counter” or otherwise, involving, or settled by reference to, one or
more rates, currencies, commodities, equity or debt instruments or securities,
or economic, financial or pricing indices or measures of economic, financial or
pricing risk or value or any similar transaction or any combination of these
transactions; provided
that no phantom stock or similar plan providing for payments only on account of
services provided by current or former directors, officers, employees or
consultants of the Borrower or any of its Subsidiaries shall be a Swap
Agreement.

       

      “Synthetic Leases”
means, in respect of any Person, all leases which shall have been, or should
have been, in accordance with GAAP, treated as operating leases on the financial
statements of the Person liable (whether contingently or otherwise) for the
payment of rent thereunder and which were properly treated as indebtedness for
borrowed money for purposes of U.S. federal income taxes, if the lessee in
respect thereof is obligated to either purchase for an amount in excess of, or
pay upon early termination an amount in excess of, 80% of the residual value of
the Property subject to such operating lease upon expiration or early
termination of such lease.

       

      “Taxes” means any and
all present or future taxes, levies, imposts, duties, deductions, charges or
withholdings imposed by any Governmental Authority.

       

      “Termination Date”
means the earlier of the Maturity Date and the date of termination of the
Commitments.

       

      “Total Debt” means, at
any date, all Debt of the Borrower and the Consolidated Subsidiaries on a
consolidated basis, excluding (i) non-cash obligations under FAS 133 and (ii)
accounts payable and other accrued liabilities (for the deferred purchase price
of Property or services) from time to time incurred in the ordinary course of
business which are not greater than ninety (90) days past the date of invoice or
delinquent or which are being contested in good faith 

       

      
        
          
          

        

        
          20

          
            

          

        

        
          
          

        

         

        by
appropriate action and for which adequate reserves have been maintained in
accordance with GAAP.  The term “Total Debt”
specifically excludes any obligations of the Borrower under any Swap
Agreements.

      

       

      “Transactions” means,
with respect to (a) the Borrower, the execution, delivery and performance by the
Borrower of this Agreement, and each other Loan Document to which it is a party,
borrowing of Loans, the use of the proceeds thereof and the issuance of Letters
of Credit hereunder, and the grant of Liens by the Borrower on Mortgaged
Properties and other Properties pursuant to the Security Instruments and (b) any
Guarantor, the execution, delivery and performance by such Guarantor of each
Loan Document to which it is a party, the guaranteeing of the Indebtedness and
the other obligations under the Guaranty Agreement by such Guarantor and such
Guarantor’s grant of the security interests and provision of collateral under
the Security Instruments, and the grant of Liens by such Guarantor on Mortgaged
Properties and other Properties pursuant to the Security
Instruments.

       

      “Type”, when used in
reference to any Loan or Borrowing, refers to whether the rate of interest on
such Loan, or on the Loans comprising such Borrowing, is determined by reference
to the Alternate Base Rate or the Adjusted LIBO Rate.

       

      “Wholly-Owned
Subsidiary” means any Subsidiary of which all of the outstanding Equity
Interests (other than any directors’ qualifying shares mandated by applicable
law), on a fully-diluted basis, are owned by the Borrower or one or more of the
Wholly-Owned Subsidiaries or are owned by the Borrower and one or more of the
Wholly-Owned Subsidiaries.

       

      Section
1.03                                Types of Loans and
Borrowings.  For purposes of this Agreement, Loans and
Borrowings, respectively, may be classified and referred to by Type (e.g., a “Eurodollar Loan” or a
“Eurodollar
Borrowing”).

       

      Section
1.04                                Terms
Generally.  The definitions of terms herein shall apply equally
to the singular and plural forms of the terms defined.  Whenever the
context may require, any pronoun shall include the corresponding masculine,
feminine and neuter forms.  The words “include”, “includes” and
“including” shall be deemed to be followed by the phrase “without
limitation”.  The word “will” shall be construed to have the same
meaning and effect as the word “shall”.  Unless the context requires
otherwise (a) any definition of or reference to any agreement, instrument or
other document herein shall be construed as referring to such agreement,
instrument or other document as from time to time amended, supplemented or
otherwise modified (subject to any restrictions on such amendments, supplements
or modifications set forth in the Loan Documents herein), (b) any reference
herein to any law shall be construed as referring to such law as amended,
modified, codified or reenacted, in whole or in part, and in effect from time to
time, (c) any reference herein to any Person shall be construed to include such
Person’s successors and assigns (subject to the restrictions contained in the
Loan Documents herein), (d) the words “herein”, “hereof” and “hereunder”, and
words of similar import, shall be construed to refer to this Agreement in its
entirety and not to any particular provision hereof, (e) with respect to the
determination of any time period, the word “from” means “from and including” and
the word “to” means “to and including” and (f) any reference herein to Articles,
Sections, Annexes, Exhibits and Schedules shall be construed to refer to
Articles and Sections of, and Annexes, Exhibits and Schedules to, this
Agreement.  No provision 

       

      
        
          
          

        

        
          21

          
            

          

        

        
          
          

        

         

        of this
Agreement or any other Loan Document shall be interpreted or construed against
any Person solely because such Person or its legal representative drafted such
provision.

      

       

      Section
1.05                                Accounting Terms and
Determinations; GAAP.  Unless otherwise specified herein, all
accounting terms used herein shall be interpreted, all determinations with
respect to accounting matters hereunder shall be made, and all financial
statements and certificates and reports as to financial matters required to be
furnished to the Administrative Agent or the Lenders hereunder shall be
prepared, in accordance with GAAP, applied on a basis consistent with the
Financial Statements except for changes in which the Borrower’s independent
certified public accountants concur and which are disclosed to Administrative
Agent on the next date on which financial statements are required to be
delivered to the Lenders pursuant to Section
8.01(a); provided
that, unless the Borrower and the Majority Lenders shall otherwise agree in
writing, no such change shall modify or affect the manner in which compliance
with the covenants contained herein is computed such that all such computations
shall be conducted utilizing financial information presented consistently with
prior periods.

       

      ARTICLE
II

       

      THE
CREDITS

       

      Section
2.01                                Commitments.

       

      (a)           Subject
to the terms and conditions set forth herein, each Lender agrees to make Loans
to the Borrower during the Availability Period in an aggregate principal amount
that will not result in (i) such Lender’s Revolving Credit Exposure exceeding
such Lender’s Commitment or (ii) the total Revolving Credit Exposures exceeding
the total Commitments.  Within the foregoing limits and subject to the
terms and conditions set forth herein, the Borrower may borrow, repay and
reborrow the Loans.

       

      (b)           On
the Effective Date (or as soon as practicable with respect to
(iii)):

       

      (i)           the
Borrower shall pay all accrued and unpaid commitment fees, break funding fees
under Section 5.02 and all other fees that are outstanding under the Existing
Credit Agreement for the account of each “Lender” under the Existing Credit
Agreement;

       

      (ii)           each
“ABR Loan” and “Eurodollar Loan” outstanding under the Existing Credit Agreement
shall be deemed to be repaid with the proceeds of a new ABR Loan or Eurodollar
Loan, as applicable, under this Agreement;

       

      (iii)           the
Administrative Agent shall use reasonable efforts to cause such “Lender” under
the Existing Credit Agreement to deliver to the Borrower as soon as practicable
after the Effective Date the Note issued by the Borrower to it under the
Existing Credit Agreement, marked “canceled” or otherwise similarly
defaced;

       

      (iv)           each
Letter of Credit issued and outstanding under the Existing Credit Agreement
shall be deemed issued under this Agreement without the payment of additional
fees; and

       

      
        
          
          

        

        
          22

          
            

          

        

        
          
          

        

      

       

      (v)           the
Existing Credit Agreement and the commitments thereunder shall be superceded by
this Agreement and such commitments shall terminate.

       

      It is the
intent of the parties hereto that this Agreement not constitute a novation of
the obligations and liabilities existing under the Existing Credit Agreement or
evidence repayment of any such obligations and liabilities and that this
Agreement amend and restate in its entirety the Existing Credit Agreement and
re-evidence the obligations of the Borrower outstanding thereunder.

      

      Section
2.02                                Loans and
Borrowings.

       

      (a)           Borrowings; Several
Obligations.  Each Loan shall be made as part of a Borrowing
consisting of Loans made by the Lenders ratably in accordance with their
respective Commitments.  The failure of any Lender to make any Loan
required to be made by it shall not relieve any other Lender of its obligations
hereunder; provided
that the Commitments are several and no Lender shall be responsible for any
other Lender’s failure to make Loans as required.

       

      (b)           Types of
Loans.  Subject to Section 3.03,
each Borrowing shall be comprised entirely of ABR Loans or Eurodollar Loans as
the Borrower may request in accordance herewith.  Each Lender at its
option may make any Eurodollar Loan by causing any domestic or foreign branch or
Affiliate of such Lender to make such Loan; provided that any exercise of
such option shall not affect the obligation of the Borrower to repay such Loan
in accordance with the terms of this Agreement.

       

      (c)           Minimum Amounts; Limitation
on Number of Borrowings.  At the commencement of each Interest
Period for any Eurodollar Borrowing, such Borrowing shall be in an aggregate
amount that is an integral multiple of $500,000 and not less than
$1,000,000.  At the time that each ABR Borrowing is made, such
Borrowing shall be in an aggregate amount that is an integral multiple of
$250,000 and not less than $1,000,000; provided that an ABR
Borrowing may be in an aggregate amount that is equal to the entire unused
balance of the total Commitments or that is required to finance the
reimbursement of an LC Disbursement as contemplated by Section 2.08(e).  Borrowings of more than
one Type may be outstanding at the same time; provided that there shall not
at any time be more than a total of eight (8) Eurodollar Borrowings
outstanding.  Notwithstanding any other provision of this Agreement,
the Borrower shall not be entitled to request, or to elect to convert or
continue, any Borrowing if the Interest Period requested with respect thereto
would end after the Maturity Date.

       

      (d)           Notes.  At
the request of a Lender, the Loans made by such Lender shall be evidenced by a
single promissory note of the Borrower in substantially the form of Exhibit A,
dated, in the case of (i) any Lender party hereto as of the date of this
Agreement, as of the date of this Agreement or (ii) any Lender that becomes a
party hereto pursuant to an Assignment and Assumption, as of the effective date
of the Assignment and Assumption, payable to the order of such Lender in a
principal amount equal to its Maximum Credit Amount as in effect on such date,
and otherwise duly completed.  In the event that such Lender’s Maximum
Credit Amount increases or decreases for any reason (whether pursuant to Section 2.06, Section
12.04(b) or otherwise), the Borrower shall deliver or cause to be delivered
on the effective date of such increase or decrease, a new Note payable to the
order of such Lender in a principal amount equal 

       

      
        
          
          

        

        
          23

          
            

          

        

        
          
          

        

         

        to its
Maximum Credit Amount after giving effect to such increase or decrease, and
otherwise duly completed.  The date, amount, Type, interest rate and,
if applicable, Interest Period of each Loan made by such 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 a 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 Loans or affect the validity
of such transfer by any Lender of its Note.

      

       

      Section
2.03                                Requests for
Borrowings.  To request a Borrowing, the Borrower shall notify
the Administrative Agent of such request by telephone (a) in the case of a
Eurodollar Borrowing, not later than 11:00 a.m., Houston time, three Business
Days before the date of the proposed Borrowing or (b) in the case of an ABR
Borrowing, not later than 12:00 noon, Houston time, on the Business Day prior to
the proposed Borrowing; provided that no such notice
shall be required for any deemed request of an ABR Borrowing to finance the
reimbursement of an LC Disbursement as provided in Section 2.08(e).  Each such telephonic
Borrowing Request shall be irrevocable and shall be confirmed promptly by hand
delivery or telecopy to the Administrative Agent of a written Borrowing Request
in a form approved by the Administrative Agent and signed by the
Borrower.  Each such telephonic and written Borrowing Request shall
specify the following information in compliance with Section 2.02:

       

      (c)           the
aggregate amount of the requested Borrowing;

       

      (d)           the
date of such Borrowing, which shall be a Business Day;

       

      (e)           whether
such Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing;

       

      (f)           in
the case of a Eurodollar Borrowing, the initial Interest Period to be applicable
thereto, which shall be a period contemplated by the definition of the term
“Interest
Period”;

       

      (g)           the
amount of the then effective Borrowing Base, the current total Revolving Credit
Exposures (without regard to the requested Borrowing) and the pro forma total
Revolving Credit Exposures (giving effect to the requested Borrowing);
and

       

      (h)           the
location and number of the Borrower’s account to which funds are to be
disbursed, which shall comply with the requirements of Section 2.05.

       

      If no
election as to the Type of Borrowing is specified, then the requested Borrowing
shall be a Eurodollar Loan having an Interest Period of one-month.  If
no Interest Period is specified with respect to any requested Eurodollar
Borrowing, then the Borrower shall be deemed to have selected an Interest Period
of one month’s duration.  Each Borrowing Request shall constitute a
representation that the amount of the requested Borrowing shall not cause the
total Revolving Credit Exposures to exceed the total Commitments (i.e., the lesser of the
Aggregate Maximum Credit Amounts and the then effective Borrowing
Base).

       

      
        
          
          

        

        
          24

          
            

          

        

        
          
          

        

      

       

      Promptly
following receipt of a Borrowing Request in accordance with this Section 2.03, the Administrative Agent shall advise
each Lender of the details thereof and of the amount of such Lender’s Loan to be
made as part of the requested Borrowing.

       

      Section
2.04                                Interest
Elections.

       

      (a)           Conversion and
Continuance.  Each Borrowing initially shall be of the Type
specified in the applicable Borrowing Request and, in the case of a Eurodollar
Borrowing, shall have an initial Interest Period as specified in such Borrowing
Request.  Thereafter, the Borrower may elect to convert such Borrowing
to a different Type or to continue such Borrowing and, in the case of a
Eurodollar Borrowing, may elect Interest Periods therefor, all as provided in
this Section 2.04.  The Borrower may
elect different options with respect to different portions of the affected
Borrowing, in which case each such portion shall be allocated ratably among the
Lenders holding the Loans comprising such Borrowing, and the Loans comprising
each such portion shall be considered a separate Borrowing.

       

      (b)           Interest Election
Requests.  To make an election pursuant to this Section 2.04, the Borrower shall notify the
Administrative Agent of such election by telephone by the time that a Borrowing
Request would be required under Section 2.03 if the
Borrower were requesting a Borrowing of the Type resulting from such election to
be made on the effective date of such election.  Each such telephonic
Interest Election Request shall be irrevocable and shall be confirmed promptly
by hand delivery or telecopy to the Administrative Agent of a written Interest
Election Request in a form approved by the Administrative Agent and signed by
the Borrower.

       

      (c)           Information in Interest
Election Requests.  Each telephonic and written Interest
Election Request shall specify the following information in compliance with Section 2.02:

       

      (i)           the
Borrowing to which such Interest Election Request applies and, if different
options are being elected with respect to different portions thereof, the
portions thereof to be allocated to each resulting Borrowing (in which case the
information to be specified pursuant to Section
2.04(c)(iii) and (iv) shall be specified for
each resulting Borrowing);

       

      (ii)           the
effective date of the election made pursuant to such Interest Election Request,
which shall be a Business Day;

       

      (iii)           whether
the resulting Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing;
and

       

      (iv)           if
the resulting Borrowing is a Eurodollar Borrowing, the Interest Period to be
applicable thereto after giving effect to such election, which shall be a period
contemplated by the definition of the term “Interest
Period”.

       

      If any
such Interest Election Request requests a Eurodollar Borrowing but does not
specify an Interest Period, then the Borrower shall be deemed to have selected
an Interest Period of one month’s duration.

       

      
        
          
          

        

        
          25

          
            

          

        

        
          
          

        

      

       

      (d)           Notice to Lenders by the
Administrative Agent.  Promptly following receipt of an
Interest Election Request, the Administrative Agent shall advise each Lender of
the details thereof and of such Lender’s portion of each resulting
Borrowing.

       

      (e)           Effect of Failure to Deliver
Timely Interest Election Request and Events of Default and Borrowing Base
Deficiencies on Interest Election.  If the Borrower fails to
deliver a timely Interest Election Request with respect to a Eurodollar
Borrowing prior to the end of the Interest Period applicable thereto, then,
unless such Borrowing is repaid as provided herein, at the end of such Interest
Period such Borrowing shall be continued as a Eurodollar Loan having an Interest
Period of one-month.  Notwithstanding any contrary provision hereof,
if an Event of Default or a Borrowing Base Deficiency has occurred and is
continuing:  (i) no outstanding Borrowing may be converted to or
continued as a Eurodollar Borrowing (and any Interest Election Request that
requests the conversion of any Borrowing to, or continuation of any Borrowing
as, a Eurodollar Borrowing shall be ineffective) and (ii) unless repaid, each
Eurodollar Borrowing shall be converted to an ABR Borrowing at the end of the
Interest Period applicable thereto.

       

      (f)           Reference Bank Cost of Funds
Rate.

       

      (i)           Upon
the Administrative Agent’s receipt of a Borrowing Request for an ABR Loan
(including any request for a Eurodollar Borrowing converted to an ABR Borrowing
pursuant to Section 3.03) and for each Business Day that an ABR Loan is
outstanding under this Agreement, on or prior to 1:00 pm, New York City time on
such Business Day for a Borrowing Request, and 10:00 am, New York City time, on
each such Business Day that an ABR Loan is outstanding, the Administrative Agent
shall communicate the Alternate Base Rate, without reference to the Reference
Bank Cost of Funds Rate, to each Lender and shall request each Lender to notify
the Administrative Agent by not later than 2:00 pm New York City time on such
Business Day for a Borrowing Request and 11:00 am, New York City time on each
such Business Day that an ABR Loan is outstanding (in each instance, the Determination Date)
whether such Lender’s Cost of Funds exceeds the Alternate Base Rate without
reference to the Reference Bank Cost of Funds Rate.  Any Lender that
does not provide notice to the Administrative Agent with respect to its Cost of
Funds prior to 2:00 pm or 11:00 am, New York City time, on such Business Day, as
applicable, shall be deemed to have confirmed to the Administrative Agent that
such Lender’s Cost of Funds does not exceed the Alternate Base Rate without
reference to the Reference Bank Cost of Funds Rate.

       

      (ii)           If
sixty percent (60%) or more of the Lenders with a Commitment as of an applicable
Determination Date (the “Cost of Funds Calculation
Threshold”) notify the Administrative Agent that their Cost of Funds
exceeds the Alternate Base Rate communicated by the Administrative Agent, then
the Administrative Agent shall calculate the “Reference Bank Cost of Funds Rate”
which shall be calculated as the simple average of the Cost of Funds of the
Lenders; provided that, any Lender which does not submit a Cost of Funds Rate
shall be deemed to have confirmed to the Administrative Agent that the Alternate
Base Rate communicated by the Administrative Agent is its Cost of Funds Rate for
the purpose of determining such Reference Bank Cost of Funds Rate.  If
the Cost of Funds Calculation Threshold is not met, then the Reference

       

      
        
          
          

        

        
          26

          
            

          

        

        
          
          

        

         

        Bank Cost
of Funds Rate shall not be calculated and shall be disregarded for the purposes
of calculating the Alternate Base Rate as of such Determination
Date.

      

       

      (iii)           The
Administrative Agent shall calculate the Reference Bank Cost of Funds Rate in
accordance with the procedures set forth in subsection (ii) above and shall
provide such rate to the Borrower no later than 3:00 pm, New York City time for
a Borrowing Request and 12:00 noon, New York City time on each Business Day that
an ABR Loan is outstanding, which rate shall be provided to the Borrower as a
simple average rate, without identifying the underlying rates submitted by the
Lenders.

       

      (iv)           For
each Borrowing Request for an ABR Loan, the Administrative Agent will promptly
provide each Lender with a confirmed Borrowing Request confirming the initial
Borrowing Request and the applicable rate that shall initially apply to such
Borrowing on or prior to 3:00 pm, New York City time.  On each
Business Day that an ABR Loan is outstanding, the Administrative Agent shall
communicate any change in the applicable Alternate Base Rate determined pursuant
to this Section 2.04, if any, to each Lender and the Borrower on or prior to
12:00 noon, New York City time.  For purposes of determining the
Reference Bank Cost of Funds Rate, each Lender and the Administrative Agent may
provide notice by electronic communications pursuant to procedures approved by
the Administrative Agent.

       

      Section
2.05                                Funding of
Borrowings.

       

      (a)           Funding by
Lenders.  Each Lender shall make each Loan to be made by it
hereunder on the proposed date thereof by wire transfer of immediately available
funds by 1:00 p.m., Houston time, to the account of the Administrative Agent
most recently designated by it for such purpose by notice to the
Lenders.  The Administrative Agent will make such Loans available to
the Borrower by promptly crediting the amounts so received, in like funds, to an
account of the Borrower and designated by the Borrower in the applicable
Borrowing Request; provided that ABR Loans made
to finance the reimbursement of an LC Disbursement as provided in Section 2.08(e) shall be remitted by the
Administrative Agent to the Issuing Bank that made such LC
Disbursement.  Nothing herein shall be deemed to obligate any Lender
to obtain the funds for its Loan in any particular place or manner or to
constitute a representation by any Lender that it has obtained or will obtain
the funds for its Loan in any particular place or manner.

       

      (b)           Presumption of Funding by
the Lenders.  Unless the Administrative Agent shall have
received notice from a Lender prior to the proposed date of any Borrowing that
such Lender will not make available to the Administrative Agent such Lender’s
share of such Borrowing, the Administrative Agent may assume that such Lender
has made such share available on such date in accordance with Section 2.05(a) and may, in reliance upon such
assumption, make available to the Borrower a corresponding amount.  In
such event, if a Lender has not in fact made its share of the applicable
Borrowing available to the Administrative Agent, then the applicable Lender and
the Borrower severally agree to pay to the Administrative Agent forthwith on
demand such corresponding amount with interest thereon, for each day from and
including the date such amount is made available to the Borrower to but
excluding the date of payment to the Administrative Agent, at (i) in the case of
such Lender, the greater of the Federal 

       

      
        
          
          

        

        
          27

          
            

          

        

        
          
          

        

         

        Funds
Effective Rate and a rate determined by the Administrative Agent in accordance
with banking industry rules on interbank compensation or (ii) in the case of the
Borrower, the interest rate applicable to ABR Loans.  If such Lender
pays such amount to the Administrative Agent, then such amount shall constitute
such Lender’s Loan included in such Borrowing.

      

       

      Section
2.06                                Termination and Reduction of
Aggregate Maximum Credit Amounts.

       

      (a)           Scheduled Termination of
Commitments.  Unless previously terminated, the Commitments
shall terminate on the Maturity Date.  If at any time the Aggregate
Maximum Credit Amounts or the Borrowing Base is terminated or reduced to zero,
then the Commitments shall terminate on the effective date of such termination
or reduction.

       

      (b)           Optional Termination and
Reduction of Aggregate Credit Amounts.

       

      (i)           The
Borrower may at any time terminate, or from time to time reduce, the Aggregate
Maximum Credit Amounts; provided that (A) each
reduction of the Aggregate Maximum Credit Amounts shall be in an amount that is
an integral multiple of $500,000 and not less than $1,000,000 and (B) the
Borrower shall not terminate or reduce the Aggregate Maximum Credit Amounts if,
after giving effect to any concurrent prepayment of the Loans in accordance with
Section 3.04(c), the total Revolving Credit
Exposures would exceed the total Commitments.

       

      (ii)           The
Borrower shall notify the Administrative Agent of any election to terminate or
reduce the Aggregate Maximum Credit Amounts under Section 2.06(b)(i) at least three Business Days prior
to the effective date of such termination or reduction, specifying such election
and the effective date thereof.  Promptly following receipt of any
notice, the Administrative Agent shall advise the Lenders of the contents
thereof.  Each notice delivered by the Borrower pursuant to this Section 2.06(b)(ii) shall be
irrevocable.  Any termination or reduction of the Aggregate Maximum
Credit Amounts shall be permanent and may not be reinstated.  Each
reduction of the Aggregate Maximum Credit Amounts shall be made ratably among
the Lenders in accordance with each Lender’s Applicable Percentage.

       

      Section
2.07                                Borrowing
Base.

       

      (a)           Initial Borrowing
Base.  For the period from and including the Effective Date to
but excluding October 1st, 2009, the amount of the Borrowing Base shall be equal
to $340,000,000.  Notwithstanding the foregoing, the Borrowing Base
may be subject to further adjustments from time to time pursuant to Section 8.13(c) or Section
9.12(d).

       

      (b)           Scheduled and Interim
Redeterminations.  Subject to Section
2.07(d), the Borrowing Base shall be redetermined (a “Scheduled
Redetermination”) on April 1st and October 1st of each year, commencing
October 1st, 2009.  In addition, either the Borrower or the
Administrative Agent, at the direction of the Majority Lenders, may once during
each calendar year, each elect to cause the Borrowing Base to be redetermined
between Scheduled Redeterminations (an “Interim
Redetermination”) in accordance with this Section 2.07. The Borrower shall have the right, once
during each calendar year, to initiate an Interim Redetermination in addition to
the one otherwise provided in this Section 2.07(b)
upon the 

       

      
        
          
          

        

        
          28

          
            

          

        

        
          
          

        

         

        proposed
acquisition of Proved Developed Producing Properties whose purchase price is
greater than 10% of the Borrowing Base, provided such Interim
Redetermination is in accordance with this Section
2.07.

      

       

      (c)           Scheduled and Interim
Redetermination Procedure.

       

      (i)           Each
Scheduled Redetermination and each Interim Redetermination shall be effectuated
as follows:  Upon receipt by the Administrative Agent of (A) the
Reserve Report and the certificate required to be delivered by the Borrower to
the Administrative Agent, in the case of a Scheduled Redetermination, pursuant
to Section 8.12(a) and (c), and, in the case of an Interim Redetermination,
pursuant to Section 8.12(b) and (c), and (B) such
other reports, data and supplemental information, including, without limitation,
the information provided pursuant to Section
8.12(c), as may, from time to time, be reasonably requested by the Majority
Lenders (the Reserve Report, such certificate and such other reports, data and
supplemental information being the “Engineering
Reports”), the Administrative Agent shall evaluate the information
contained in the Engineering Reports and shall, in good faith, propose a new
Borrowing Base (the “Proposed Borrowing
Base”) based upon such information and such other information (including,
without limitation, the status of title information with respect to the Oil and
Gas Properties as described in the Engineering Reports and the existence of any
other Debt) as the Administrative Agent deems appropriate in its sole discretion
and consistent with its normal oil and gas lending criteria as it exists at the
particular time.  In no event shall the Proposed Borrowing Base exceed
the Aggregate Maximum Credit Amounts.

       

      (ii)           The
Administrative Agent shall notify the Borrower and the Lenders of the Proposed
Borrowing Base (the “Proposed Borrowing Base
Notice”):

       

      (A)           in
the case of a Scheduled Redetermination (1) if the Administrative Agent shall
have received the Engineering Reports required to be delivered by the Borrower
pursuant to Section 8.12(a) and (c) in a timely and complete manner, then on or
before the March 15th and September 15th of such year following the date of
delivery of such Engineering Report or (2) if the Administrative Agent shall not
have received the Engineering Reports required to be delivered by the Borrower
pursuant to Section 8.12(a) and (c) in a timely and complete manner, then
promptly after the Administrative Agent has received complete Engineering
Reports from the Borrower and has had a reasonable opportunity to determine the
Proposed Borrowing Base in accordance with Section
2.07(c)(ii) and in any event, within fifteen (15) days after the
Administrative Agent has received the required Engineering Report;
and

       

      (B)           in
the case of an Interim Redetermination, promptly, and in any event, within
fifteen (15) days after the Administrative Agent has received the required
Engineering Reports.

       

      (iii)           Any
Proposed Borrowing Base that would increase the Borrowing Base then in effect
must be approved or deemed to have been approved by all of the 

       

      
        
          
          

        

        
          29

          
            

          

        

        
          
          

        

         

        Lenders
as provided in this Section 2.07(c)(iii); and any
Proposed Borrowing Base that would decrease or maintain the Borrowing Base then
in effect must be approved or be deemed to have been approved by the Majority
Lenders as provided in this Section
2.07(c)(iii).  Upon receipt of the Proposed Borrowing Base Notice,
each Lender shall have fifteen (15) days to agree with the Proposed Borrowing
Base or disagree with the Proposed Borrowing Base by proposing an alternate
Borrowing Base.  If at the end of such fifteen (15) days, any Lender
has not communicated its approval or disapproval in writing to the
Administrative Agent, such silence shall be deemed to be an approval of the
Proposed Borrowing Base.  If, at the end of such 15-day period, all of
the Lenders, in the case of a Proposed Borrowing Base that would increase the
Borrowing Base then in effect, or the Majority Lenders, in the case of a
Proposed Borrowing Base that would decrease or maintain the Borrowing Base then
in effect, have approved or deemed to have approved, as aforesaid, then the
Proposed Borrowing Base shall become the new Borrowing Base, effective on the
date specified in Section 2.07(d).  If,
however, at the end of such 15-day period, all of the Lenders or the Majority
Lenders, as applicable, have not approved or deemed to have approved, as
aforesaid, then the Administrative Agent shall poll the Lenders to ascertain the
highest Borrowing Base then acceptable to a number of Lenders sufficient to
constitute the Majority Lenders and, so long as such amount does not increase
the Borrowing Base then in effect, such amount shall become the new Borrowing
Base, effective on the date specified in Section
2.07(d).

      

       

      (d)           Effectiveness of a
Redetermined Borrowing Base.  After a redetermined Borrowing
Base is approved or is deemed to have been approved by all of the Lenders or the
Majority Lenders, as applicable, pursuant to Section
2.07(c)(iii), the Administrative Agent shall notify the Borrower and the
Lenders of the amount of the redetermined Borrowing Base (the “New Borrowing Base
Notice”), and such amount shall become the new Borrowing Base, effective
and applicable to the Borrower, the Administrative Agent, each Issuing Bank and
the Lenders:

       

      (i)           in
the case of a Scheduled Redetermination, (A) if the Administrative Agent shall
have received the Engineering Reports required to be delivered by the Borrower
pursuant to Section 8.12(a) and (c) in a timely and complete manner, then on the
April 1st or October 1st, as applicable, following delivery of the New Borrowing
Base Notice, or (B) if the Administrative Agent shall not have received the
Engineering Reports required to be delivered by the Borrower pursuant to Section
8.12(a) and (c) in a timely and complete manner, then on the Business Day next
succeeding delivery of the New Borrowing Base Notice; and

       

      (ii)           in
the case of an Interim Redetermination, on the Business Day next succeeding
delivery of such notice.

       

      Such
amount shall then become the Borrowing Base until the next Scheduled
Redetermination Date, the next Interim Redetermination date or the next
adjustment to the Borrowing Base under Section
8.13(c) or Section 9.12(d), whichever occurs
first.

       

      (e)           Reduction of Borrowing Base
Upon Termination of Hedge Positions. If the Borrower or any Subsidiary
shall terminate or create any off-setting positions in respect of 

       

      
        
          
          

        

        
          30

          
            

          

        

        
          
          

        

         

        any hedge
positions (whether evidenced by a floor, put or Swap Agreement) upon which the
Lenders relied in determining the Borrowing Base and the net effect of such
action (when taken together with any other Swap Agreements executed
contemporaneously with the taking of such action) would be to reduce the
economic value supporting the Borrowing Base, then the Borrowing Base shall be
simultaneously reduced in an amount reasonably determined by the Majority
Lenders equal to the economic value of such reduction; provided, that the
Borrower shall have the right, no later than 10 Business Days after receiving
notice of such reduction, to initiate an Interim Redetermination in accordance
with Section 2.07(b) and such Interim Redetermination shall not count against
the maximum Interim Redeterminations allowed in any calendar
year.

      

       

      Section
2.08                                Letters of
Credit.

       

      (a)           General.  Subject
to the terms and conditions set forth herein, the Borrower may request any
Issuing Bank to issue Letters of Credit for its own account or for the account
of the Borrower or any of its Subsidiaries, in a form reasonably acceptable to
the Administrative Agent and such Issuing Bank, at any time and from time to
time during the Availability Period; provided that the Borrower
may not request the issuance, amendment, renewal or extension of Letters of
Credit hereunder if a Borrowing Base Deficiency exists at such time or would
exist as a result thereof.  In the event of any inconsistency between
the terms and conditions of this Agreement and the terms and conditions of any
form of letter of credit application or other agreement submitted by the
Borrower to, or entered into by the Borrower with, an Issuing Bank relating to
any Letter of Credit, the terms and conditions of this Agreement shall
control.

       

      (b)           Notice of Issuance,
Amendment, Renewal, Extension; Certain Conditions.  To request
the issuance of a Letter of Credit (or the amendment, renewal or extension of an
outstanding Letter of Credit), the Borrower shall deliver as permitted by Section 12.01(a) (or transmit by electronic
communication, if arrangements for doing so have been approved by the Issuing
Bank) to any Issuing Bank and the Administrative Agent (not less than five (5)
Business Days in advance of the requested date of issuance, amendment, renewal
or extension) a notice:

       

      (i)           requesting
the issuance of a Letter of Credit or identifying the Letter of Credit issued by
such Issuing Bank to be amended, renewed or extended;

       

      (ii)           specifying
the date of issuance, amendment, renewal or extension (which shall be a Business
Day);

       

      (iii)           specifying
the date on which such Letter of Credit is to expire (which shall comply with Section 2.08(c));

       

      (iv)           specifying
the amount of such Letter of Credit;

       

      (v)           specifying
the name and address of the beneficiary thereof and such other information as
shall be necessary to prepare, amend, renew or extend such Letter of Credit;
and

       

      
        
          
          

        

        
          31

          
            

          

        

        
          
          

        

      

       

      (vi)           specifying
the amount of the then effective Borrowing Base and whether a Borrowing Base
Deficiency exists at such time, the current total Revolving Credit Exposures
(without regard to the requested Letter of Credit or the requested amendment,
renewal or extension of an outstanding Letter of Credit) and the pro forma total
Revolving Credit Exposures (giving effect to the requested Letter of Credit or
the requested amendment, renewal or extension of an outstanding Letter of
Credit).

       

      Each
notice shall constitute a representation that after giving effect to the
requested issuance, amendment, renewal or extension, as applicable, (A) the LC
Exposure shall not exceed the LC Commitment and (B) the total Revolving Credit
Exposures shall not exceed the lesser of the Aggregate Maximum Credit Amounts
and the then effective Borrowing Base.

       

      If
requested by any Issuing Bank, the Borrower also shall submit a letter of credit
application on such Issuing Bank’s standard form in connection with any request
for a Letter of Credit.

       

      (c)           Expiration
Date.  Each Letter of Credit shall expire at or prior to the
close of business on the earlier of (i) the date one year after the date of the
issuance of such Letter of Credit (or, in the case of any renewal or extension
thereof, one year after such renewal or extension) and (ii) the date that is
five Business Days prior to the Maturity Date.

       

      (d)           Participations.  By
the issuance of a Letter of Credit (or an amendment to a Letter of Credit
increasing the amount thereof) and without any further action on the part of the
Issuing Bank that issues such Letter of Credit or the Lenders, each Issuing Bank
that issues a Letter of Credit hereunder hereby grants to each Lender, and each
Lender hereby acquires from such Issuing Bank, a participation in such Letter of
Credit equal to such Lender’s Applicable Percentage of the aggregate amount
available to be drawn under such Letter of Credit.  In consideration
and in furtherance of the foregoing, each Lender hereby absolutely and
unconditionally agrees to pay to the Administrative Agent, for the account of
any Issuing Bank that issues a Letter of Credit hereunder, such Lender’s
Applicable Percentage of each LC Disbursement made by such Issuing Bank and not
reimbursed by the Borrower on the date due as provided in Section 2.08(e), or of any reimbursement payment
required to be refunded to the Borrower for any reason.  Each Lender
acknowledges and agrees that its obligation to acquire participations pursuant
to this Section 2.08(d) in respect of Letters of
Credit is absolute and unconditional and shall not be affected by any
circumstance whatsoever, including any amendment, renewal or extension of any
Letter of Credit or the occurrence and continuance of a Default, the existence
of a Borrowing Base Deficiency or reduction or termination of the Commitments,
and that each such payment shall be made without any offset, abatement,
withholding or reduction whatsoever.

       

      (e)           Reimbursement.  If
any Issuing Bank shall make any LC Disbursement in respect of a Letter of Credit
issued by such Issuing Bank, the Borrower shall reimburse such LC Disbursement
by paying to the Administrative Agent an amount equal to such LC Disbursement
not later than 1:00 p.m., Houston time, on the third day after such LC
Disbursement is made, if the Borrower shall have received notice of such LC
Disbursement prior to 9:00 a.m., Houston time, on such date, or, if such notice
has not been received by the Borrower prior to such time on such date, then not
later than 1:00 p.m., Houston time, on (i) the third day after the Borrower

       

      
        
          
          

        

        
          32

          
            

          

        

        
          
          

        

         

        receives
such notice, if such notice is received prior to 9:00 a.m., Houston time, on the
day of receipt, or (ii) the Business Day immediately following the third day
after the Borrower receives such notice, if such notice is not received prior to
such time on the day of receipt; provided that if such LC
Disbursement is not less than $1,000,000, the Borrower shall, subject to the
conditions to Borrowing set forth herein, be deemed to have requested, and the
Borrower does hereby request under such circumstances, that such payment be
financed with a Eurodollar Borrowing with an Interest Period of one month in an
equivalent amount and, to the extent so financed, the Borrower’s obligation to
make such payment shall be discharged and replaced by the resulting Eurodollar
Borrowing.  If the Borrower fails to make such payment when due, the
Administrative Agent shall notify each Lender of the applicable LC Disbursement,
the payment then due from the Borrower in respect thereof and such Lender’s
Applicable Percentage thereof.  Promptly following receipt of such
notice, each Lender shall pay to the Administrative Agent its Applicable
Percentage of the payment then due from the Borrower, in the same manner as
provided in Section 2.05 with respect to Loans made
by such Lender (and Section 2.05 shall apply, mutatis mutandis, to the
payment obligations of the Lenders), and the Administrative Agent shall promptly
pay to the Issuing Bank that issued such Letter of Credit the amounts so
received by it from the Lenders.  Promptly following receipt by the
Administrative Agent of any payment from the Borrower pursuant to this Section 2.08(e), the Administrative Agent shall
distribute such payment to the Issuing Bank that issued such Letter of Credit
or, to the extent that Lenders have made payments pursuant to this Section 2.08(e) to reimburse such Issuing Bank, then
to such Lenders and such Issuing Bank as their interests may
appear.  Any payment made by a Lender pursuant to this Section 2.08(e) to reimburse any Issuing Bank for any
LC Disbursement (other than the funding of ABR Loans as contemplated above)
shall not constitute a Loan and shall not relieve the Borrower of its obligation
to reimburse such LC Disbursement.  Any LC Disbursement not reimbursed
by the Borrower or funded as a Loan prior to 1:00 p.m., Houston time on the date
such Disbursement is made, shall bear interest for each such day such
Disbursement is outstanding at the ABR plus the Applicable
Margin.

      

       

      (f)           Obligations
Absolute.  The Borrower’s obligation to reimburse LC
Disbursements as provided in Section 2.08(e) shall
be absolute, unconditional and irrevocable, and shall be performed strictly in
accordance with the terms of this Agreement under any and all circumstances
whatsoever and irrespective of (i) any lack of validity or enforceability of any
Letter of Credit, any Letter of Credit Agreement or this Agreement, or any term
or provision therein, (ii) any draft or other document presented under a Letter
of Credit proving to be forged, fraudulent or invalid in any respect or any
statement therein being untrue or inaccurate in any respect, (iii) payment by
any Issuing Bank under a Letter of Credit issued by such Issuing Bank against
presentation of a draft or other document that does not comply with the terms of
such Letter of Credit or any Letter of Credit Agreement, or (iv) any other event
or circumstance whatsoever, whether or not similar to any of the foregoing, that
might, but for the provisions of this Section
2.08(f), constitute a legal or equitable discharge of, or provide a right of
setoff against, the Borrower’s obligations hereunder.  Neither the
Administrative Agent, the Lenders nor any Issuing Bank, nor any of their Related
Parties shall have any liability or responsibility by reason of or in connection
with the issuance or transfer of any Letter of Credit or any payment or failure
to make any payment thereunder (irrespective of any of the circumstances
referred to in the preceding sentence), or any error, omission, interruption,
loss or delay in transmission or delivery of any draft, notice or other
communication under or relating to any Letter of Credit (including any document
required to make a drawing thereunder), any error in interpretation of

       

      
        
          
          

        

        
          33

          
            

          

        

        
          
          

        

         

        technical
terms or any consequence arising from causes beyond the control of any Issuing
Bank; provided that the
foregoing shall not be construed to excuse any Issuing Bank from liability to
the Borrower to the extent of any direct damages (as opposed to consequential
damages, claims in respect of which are hereby waived by the Borrower to the
extent permitted by applicable law) suffered by the Borrower that are caused by
such Issuing Bank’s failure to exercise care when determining whether drafts and
other documents presented under a Letter of Credit comply with the terms
thereof.  The parties hereto expressly agree that, in the absence of
gross negligence or willful misconduct on the part of any Issuing Bank (as
finally determined by a court of competent jurisdiction), such Issuing Bank
shall be deemed to have exercised all requisite care in each such
determination.  In furtherance of the foregoing and without limiting
the generality thereof, the parties agree that, with respect to documents
presented which appear on their face to be in substantial compliance with the
terms of a Letter of Credit, the Issuing Bank that issued such Letter of Credit
may, in its sole discretion, either accept and make payment upon such documents
without responsibility for further investigation, regardless of any notice or
information to the contrary, or refuse to accept and make payment upon such
documents if such documents are not in strict compliance with the terms of such
Letter of Credit.

      

       

      (g)           Disbursement
Procedures.  Each Issuing Bank shall, promptly following its
receipt thereof, examine all documents purporting to represent a demand for
payment under a Letter of Credit issued by such Issuing Bank.  Such
Issuing Bank shall promptly notify the Administrative Agent and the Borrower by
telephone (confirmed by telecopy) of such demand for payment and whether such
Issuing Bank has made or will make an LC Disbursement thereunder; provided that any failure to
give or delay in giving such notice shall not relieve the Borrower of its
obligation to reimburse such Issuing Bank and the Lenders with respect to any
such LC Disbursement.

       

      (h)           Interim
Interest.  If any Issuing Bank shall make any LC Disbursement,
then, until the Borrower shall have reimbursed such Issuing Bank for such LC
Disbursement (either with its own funds or a Borrowing under Section 2.08(e)), the unpaid amount thereof shall bear
interest, for each day from and including the date such LC Disbursement is made
to but excluding the date that the Borrower reimburses such LC Disbursement, at
the rate per annum then applicable to ABR Loans.  Interest accrued
pursuant to this Section 2.08(h) shall be for the
account of such Issuing Bank, except that interest accrued on and after the date
of payment by any Lender pursuant to Section
2.08(e) to reimburse such Issuing Bank shall be for the account of such
Lender to the extent of such payment.

       

      (i)           Replacement of an Issuing
Bank.  Any Issuing Bank may be replaced or resign at any time
by written agreement among the Borrower, the Administrative Agent, such
resigning or replaced Issuing Bank and, in the case of a replacement, the
successor Issuing Bank.  The Administrative Agent shall notify the
Lenders of any such resignation or replacement of an Issuing Bank.  At
the time any such resignation or replacement shall become effective, the
Borrower shall pay all unpaid fees accrued for the account of the resigning or
replaced Issuing Bank pursuant to Section
3.05(b).  In the case of the replacement of an Issuing Bank, from
and after the effective date of such replacement, (i) the successor Issuing Bank
shall have all the rights and obligations of the replaced Issuing Bank under
this Agreement with respect to Letters of Credit to be issued thereafter and
(ii) references herein to “Issuing Bank” shall
be deemed to refer to such successor or to any previous Issuing Bank, or to such
successor and all previous 

       

      
        
          
          

        

        
          34

          
            

          

        

        
          
          

        

         

        Issuing
Banks, as the context shall require.  After the resignation or
replacement of an Issuing Bank hereunder, the resigning or replaced Issuing Bank
shall remain a party hereto and shall continue to have all the rights and
obligations of an Issuing Bank under this Agreement with respect to Letters of
Credit issued by it prior to such resignation or replacement, but shall not be
required to issue additional Letters of Credit.

      

       

      (j)           Cash
Collateralization.  If (i) any Event of Default shall occur and
be continuing and the Borrower receives notice from the Administrative Agent or
the Majority Lenders demanding the deposit of cash collateral pursuant to this
Section 2.08(j), or (ii) the Borrower is required
to pay to the Administrative Agent the excess attributable to an LC Exposure in
connection with any prepayment pursuant to Section
3.04(c), then the Borrower shall deposit, in an account with the
Administrative Agent, in the name of the Administrative Agent and for the
benefit of the Lenders, an amount in cash equal to, in the case of an Event of
Default, the LC Exposure, and in the case of a payment required by Section 3.04(c), the amount of such excess as provided
in Section 3.04(c), as of such date plus any
accrued and unpaid interest thereon; provided that the obligation
to deposit such cash collateral shall become effective immediately, and such
deposit shall become immediately due and payable, without demand or other notice
of any kind, upon the occurrence of any Event of Default with respect to the
Borrower or any of its Subsidiaries described in Section 10.01(h) or Section
10.01(i).  The Borrower hereby grants to the Administrative Agent,
for the benefit of each Issuing Bank and the Lenders, an exclusive first
priority and continuing perfected security interest in and Lien on such account
and all cash, checks, drafts, certificates and instruments, if any, from time to
time deposited or held in such account, all deposits or wire transfers made
thereto, any and all investments purchased with funds deposited in such account,
all interest, dividends, cash, instruments, financial assets and other Property
from time to time received, receivable or otherwise payable in respect of, or in
exchange for, any or all of the foregoing, and all proceeds, products,
accessions, rents, profits, income and benefits therefrom, and any substitutions
and replacements therefor.  The Borrower’s obligation to deposit
amounts pursuant to this Section 2.08(j) 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 or any of its
Subsidiaries may now or hereafter have against any such beneficiary, any Issuing
Bank, the Administrative Agent, the Lenders or any other Person for any reason
whatsoever.  Such deposit shall be held as collateral securing the
payment and performance of the Borrower’s and any Guarantor’s obligations under
this Agreement and the other Loan Documents.  The Administrative Agent
shall have exclusive dominion and control, including the exclusive right of
withdrawal, over such account; provided that investments of
funds in such account in investments permitted by Section 9.05(c) or Section
9.05(e) may be made at the option of the Borrower at its direction, risk and
expense.  Interest or profits, if any, on such investments shall
accumulate in such account.  Moneys in such account shall be applied
by the Administrative Agent to reimburse, on a pro rata basis, each Issuing Bank
for LC Disbursements for which it has not been reimbursed and, to the extent not
so applied, shall be held for the satisfaction of the reimbursement obligations
of the Borrower for the LC Exposure at such time or, if the maturity of the
Loans has been accelerated, be applied to satisfy other obligations of the
Borrower and the Guarantors, if any, under this Agreement or the other Loan
Documents.  If the Borrower is required to provide an amount of cash
collateral hereunder as a result of the occurrence of an 

       

      
        
          
          

        

        
          35

          
            

          

        

        
          
          

        

         

        Event of
Default, and the Borrower is not otherwise required to pay to the Administrative
Agent the excess attributable to an LC Exposure in connection with any
prepayment pursuant to Section 3.04(c), then such
amount (to the extent not applied as aforesaid) shall be returned to the
Borrower within three Business Days after all Events of Default have been cured
or waived.

      

       

      ARTICLE
III

       

      PAYMENTS
OF PRINCIPAL AND INTEREST; PREPAYMENTS; FEES

       

      Section
3.01                                Repayment of
Loans.  The Borrower hereby unconditionally promises to pay to
the Administrative Agent for the account of each Lender the then unpaid
principal amount of each Loan on the Termination Date.

       

      Section
3.02                                Interest.

       

      (a)           ABR
Loans.  Each ABR Loan comprising an ABR Borrowing shall bear
interest at the Alternate Base Rate plus the Applicable Margin, but in no event
to exceed the Highest Lawful Rate.

       

      (b)           Eurodollar
Loans.  Each Eurodollar Loan comprising a Eurodollar Borrowing
shall bear interest at the Adjusted LIBO Rate for the Interest Period in effect
for such Eurodollar Loan plus the Applicable Margin, but in no event to exceed
the Highest Lawful Rate.

       

      (c)           Post-Default and Borrowing
Base Deficiency Rate.  Notwithstanding the foregoing, (i) if an
Event of Default has occurred and is continuing, or if any principal of or
interest on any Loan or any fee or other amount payable by the Borrower or any
Guarantor hereunder or under any other Loan Document is not paid when due,
whether at stated maturity, upon acceleration or otherwise, and including any
payments in respect of a Borrowing Base Deficiency under Section 3.04(c), then all Loans outstanding, in the
case of an Event of Default, and such overdue amount, in the case of a failure
to pay amounts when due, shall bear interest, after as well as before judgment,
at the Alternate Base Rate plus two percent (2%), but in no event to exceed the
Highest Lawful Rate, and (ii) during any Borrowing Base Deficiency, the amount
of such Borrowing Base Deficiency shall bear interest, after as well as before
judgment, at the rate then applicable to such Loans, plus the Applicable Margin,
if any, plus an additional two percent (2%), but in no event to exceed the
Highest Lawful Rate.

       

      (d)           Interest Payment
Dates.  Accrued interest on each Loan shall be payable in
arrears on:  (i) with respect to any ABR Loan, the last day of each
March, June, September and December; (ii) with respect to any Eurodollar Loan,
the last day of the Interest Period applicable to the Borrowing of which such
Loan is a part but, in the case of any Interest Period longer than three months,
each successive date three months after the first day of such Interest Period,
and (iii) in any case, on the Termination Date; provided that (A) interest
accrued pursuant to Section 3.02(c)(i) shall be
payable on demand, (B) in the event of any repayment or prepayment of any Loan
(other than an optional prepayment of an ABR Loan prior to the Termination
Date), accrued interest on the principal amount repaid or prepaid shall be
payable on the date of such repayment or prepayment, and (C) in the event of any
conversion of any Eurodollar Loan prior to the end of the current Interest
Period therefor, accrued interest on such Loan shall be payable on the effective
date of such conversion.

       

      
        
          
          

        

        
          36

          
            

          

        

        
          
          

        

      

       

      (e)           Interest Rate
Computations.  All interest hereunder shall be computed on the
basis of a year of 360 days, unless such computation would exceed the Highest
Lawful Rate, in which case interest shall be computed on the basis of a year of
365 days (or 366 days in a leap year), except that interest computed by
reference to the Alternate Base Rate shall be computed on the basis of a year of
365 days (or 366 days in a leap year), and in each case shall be payable for the
actual number of days elapsed (including the first day but excluding the last
day).  The applicable Alternate Base Rate or Adjusted LIBO Rate shall
be determined by the Administrative Agent, and such determination shall be
conclusive absent manifest error, and be binding upon the parties
hereto.

       

      Section
3.03                                Alternate Rate of
Interest.  If prior to the commencement of any Interest Period
for a Eurodollar Borrowing:

       

      (a)           the
Administrative Agent determines (which determination shall be conclusive absent
manifest error) that adequate and reasonable means do not exist for ascertaining
the Adjusted LIBO Rate or the LIBO Rate for such Interest Period;
or

       

      (b)           the
Administrative Agent is advised by the Majority Lenders that the Adjusted LIBO
Rate or LIBO Rate, as applicable, for such Interest Period will not adequately
and fairly reflect the cost to such Lenders of making or maintaining their Loans
included in such Borrowing for such Interest Period;

       

      then the
Administrative Agent shall give notice thereof to the Borrower and the Lenders
by telephone or telecopy as promptly as practicable thereafter and, until the
Administrative Agent notifies the Borrower and the Lenders that the
circumstances giving rise to such notice no longer exist, (i) any Interest
Election Request that requests the conversion of any Borrowing to, or
continuation of any Borrowing as, a Eurodollar Borrowing shall be ineffective,
and (ii) if any Borrowing Request requests a Eurodollar Borrowing, such
Borrowing shall be made as an ABR Borrowing.

       

      Section
3.04                                Prepayments.

       

      (a)           Optional
Prepayments.  The Borrower shall have the right at any time and
from time to time to prepay any Borrowing in whole or in part, subject to prior
notice in accordance with Section 3.04(b) and
payment of applicable breakage costs, if any, under Section 5.02.

       

      (b)           Notice and Terms of Optional
Prepayment.  The Borrower shall notify the Administrative Agent
by telephone (confirmed by telecopy) of any prepayment hereunder (i) in the case
of prepayment of a Eurodollar Borrowing, not later than 12:00 noon, Houston
time, three Business Days before the date of prepayment, or (ii) in the case of
prepayment of an ABR Borrowing, not later than 12:00 noon, Houston time, one
Business Day before the date of prepayment.  Each such notice shall be
irrevocable and shall specify the prepayment date and the principal amount of
each Borrowing or portion thereof to be prepaid.  Promptly following
receipt of any such notice relating to a Borrowing, the Administrative Agent
shall advise the Lenders of the contents thereof.  Each partial
prepayment of any Borrowing shall be in an amount that would be permitted in the
case of an advance of a Borrowing of the same Type as provided in 

       

      
        
          
          

        

        
          37

          
            

          

        

        
          
          

        

         

        Section 2.02.  Each prepayment of a
Borrowing shall be applied ratably to the Loans included in the prepaid
Borrowing.  Prepayments shall be accompanied by accrued interest to
the extent required by Section
3.02.

      

       

      (c)           Mandatory
Prepayments.

       

      (i)           If,
after giving effect to any termination or reduction of the Aggregate Maximum
Credit Amounts pursuant to Section 2.06(b), the
total Revolving Credit Exposures exceeds the total Commitments, then the
Borrower shall (A) prepay the Borrowings on the date of such termination or
reduction in an aggregate principal amount equal to such excess, and (B) if any
excess remains after prepaying all of the Borrowings as a result of an LC
Exposure, pay to the Administrative Agent on behalf of the Lenders an amount
equal to such excess to be held as cash collateral as provided in Section 2.08(j).

       

      (ii)           Upon
any redetermination of or adjustment to the amount of the Borrowing Base in
accordance with Section 2.07(a) through (d) or Section 8.13(c), if the total Revolving Credit
Exposures exceeds the redetermined or adjusted Borrowing Base, then the Borrower
shall (A) prepay the Borrowings in an aggregate principal amount equal to such
excess, and (B) if any excess remains after prepaying all of the Borrowings as a
result of an LC Exposure, pay to the Administrative Agent on behalf of the
Lenders an amount equal to such excess to be held as cash collateral as provided
in Section 2.08(j).  The Borrower shall
be obligated to make such prepayment and/or deposit of cash collateral within
one hundred twenty (120) days following the later of its receipt of the New
Borrowing Base Notice in accordance with Section
2.07(d) or the date the adjustment occurs; provided that all payments
required to be made pursuant to this Section
3.04(c)(ii) must be made on or prior to the Termination Date.

       

      (iii)           Upon
any adjustments to the Borrowing Base pursuant to Section 2.07(e) or Section
9.12(d), if the total Revolving Credit Exposures exceed the Borrowing Base as
adjusted, then the Borrower shall (A) prepay the Borrowings in an aggregate
principal amount equal to such excess, and (B) if any excess remains after
prepaying all of the Borrowings as a result of an LC Exposure, pay to the
Administrative Agent on behalf of the Lenders an amount equal to such excess to
be held as cash collateral as provided in Section
2.08(j).  The Borrower shall be obligated to make such prepayment
and/or deposit of cash collateral on the date it or any Subsidiary receives cash
proceeds as a result of such termination, creation of offsetting positions or
disposition, as applicable; provided that all payments
required to be made pursuant to this Section
3.04(c)(iii) must be made on or prior to the Termination Date.

       

      (iv)           Notwithstanding
anything to the contrary herein, if the Borrower or any of its Subsidiaries
sells any Property when a Borrowing Base Deficiency or Event of Default exists,
then the Borrower shall (A) prepay the Borrowings in an aggregate principal
amount equal to the net cash proceeds received from such sale, and (B) if any
excess remains after prepaying all of the Borrowings as a result of an LC
Exposure, pay to the Administrative Agent on behalf of the Lenders an amount
equal to such excess to be held as cash collateral as provided in Section 2.08(j).  The Borrower shall be
obligated 

       

      
        
          
          

        

        
          38

          
            

          

        

        
          
          

        

         

        to make
such prepayment and/or deposit of cash collateral on the date it or any
Subsidiary receives cash proceeds as a result of such sale; provided that all payments
required to be made pursuant to this Section
3.04(c)(iii) must be made on or prior to the Termination
Date.

      

       

      (v)           Each
prepayment of Borrowings pursuant to this Section
3.04(c) shall be applied, first, ratably to any ABR Borrowings then
outstanding, and, second, to any Eurodollar Borrowings then outstanding, and if
more than one Eurodollar Borrowing is then outstanding, to each such Eurodollar
Borrowing in order of priority beginning with the Eurodollar Borrowing with the
least number of days remaining in the Interest Period applicable thereto and
ending with the Eurodollar Borrowing with the most number of days remaining in
the Interest Period applicable thereto.

       

      (vi)           Each
prepayment of Borrowings pursuant to this Section
3.04(c) shall be applied ratably to the Loans included in the prepaid
Borrowings.  Prepayments pursuant to this Section 3.04(c) shall be accompanied by accrued
interest to the extent required by Section
3.02.

       

      (d)           No Premium or
Penalty.  Prepayments permitted or required under this Section 3.04 shall be without premium or penalty,
except as required under Section 5.02.

       

      Section
3.05                                Fees.

       

      (a)           Commitment
Fees.  The Borrower agrees to pay to the Administrative Agent
for the account of each Lender (subject to Section 4.04(c)(i)) a commitment fee,
which shall accrue at a rate per annum equal to 0.50% on the average daily
amount of the unused amount of the Commitment of such Lender during the period
from and including the date of this Agreement to but excluding the Termination
Date.  Accrued commitment fees shall be payable in arrears on the last
day of March, June, September and December of each year and on the Termination
Date, commencing on the first such date to occur after the date
hereof.  All commitment fees shall be computed on the basis of a year
of 360 days, unless such computation would exceed the Highest Lawful Rate, in
which case interest shall be computed on the basis of a year of 365 days (or 366
days in a leap year), and shall be payable for the actual number of days elapsed
(including the first day but excluding the last day).

       

      (b)           Letter of Credit
Fees.  The Borrower agrees to pay (i) to the Administrative
Agent for the account of each Lender (subject to Section 4.04(c)(iii)) a
participation fee with respect to its participations in Letters of Credit, which
shall accrue at the same Applicable Margin used to determine the interest rate
applicable to Eurodollar Loans on the average daily amount of such Lender’s LC
Exposure (excluding any portion thereof attributable to unreimbursed LC
Disbursements) during the period from and including the date of this Agreement
to but excluding the later of the date on which such Lender’s Commitment
terminates and the date on which such Lender ceases to have any LC Exposure,
(ii) to each Issuing Bank a fronting fee equal to 0.50% per annum on the face
amount of each Letter of Credit issued by such Issuing Bank hereunder, provided that in no event
shall such fee be less than $500 and (iii) to each Issuing Bank, for its own
account, its standard fees with respect to the amendment, renewal or extension
of any Letter of Credit issued by such Issuing Bank or processing of

       

      
        
          
          

        

        
          39

          
            

          

        

        
          
          

        

         

        drawings
thereunder.  Participation fees and fronting fees accrued through and
including the last day of March, June, September and December of each year shall
be payable on the third Business Day following such last day, commencing on the
first such date to occur after the date of this Agreement; provided that all such fees
shall be payable on the Termination Date and any such fees accruing after the
Termination Date shall be payable on demand.  Any other fees payable
to an Issuing Bank pursuant to this Section 3.05(b)
shall be payable within 10 days after demand.  All participation fees
and fronting fees shall be computed on the basis of a year of 360 days, unless
such computation would exceed the Highest Lawful Rate, in which case such fees
shall be computed on the basis of a year of 365 days (or 366 days in a leap
year), and shall be payable for the actual number of days elapsed (including the
first day but excluding the last day).

      

       

      (c)           Administrative Agent
Fees.  The Borrower agrees to pay to the Administrative Agent,
for its own account, fees payable in the amounts and at the times separately
agreed upon between the Borrower and the Administrative Agent.

       

      ARTICLE
IV

       

      PAYMENTS;
PRO RATA TREATMENT; SHARING OF SET-OFFS.

       

      Section
4.01                                Payments Generally; Pro Rata
Treatment; Sharing of Set-offs.

       

      (a)           Payments by the
Borrower.  The Borrower shall make each payment required to be
made by it hereunder (whether of principal, interest, fees or reimbursement of
LC Disbursements, or of amounts payable under Section
5.01, Section 5.02, Section 5.03 or otherwise) prior to 1:00 p.m., Houston
time, on the date when due, in immediately available funds, without defense,
deduction, recoupment, set-off or counterclaim.  Fees, once paid,
shall be fully earned and shall not be refundable under any
circumstances.  Any amounts received after such time on any date may,
in the discretion of the Administrative Agent, be deemed to have been received
on the next succeeding Business Day for purposes of calculating interest
thereon.  All such payments shall be made to the Administrative Agent
at its offices specified in Section 12.01, except
payments to be made directly to an Issuing Bank as expressly provided herein and
except that payments pursuant to Section 5.01, Section 5.02, Section
5.03 and Section 12.03 shall be made directly
to the Persons entitled thereto.  The Administrative Agent shall
distribute any such payments received by it for the account of any other Person
to the appropriate recipient promptly following receipt thereof.  If
any payment hereunder shall be due on a day that is not a Business Day, the date
for payment shall be extended to the next succeeding Business Day, and, in the
case of any payment accruing interest, interest thereon shall be payable for the
period of such extension.  All payments hereunder shall be made in
dollars.

       

      (b)           Application of Insufficient
Payments.  If at any time insufficient funds are received by
and available to the Administrative Agent to pay fully all amounts of principal,
unreimbursed LC Disbursements, interest and fees then due hereunder, such funds
shall be applied (i) first, towards payment of interest and fees then due
hereunder, ratably among the parties entitled thereto in accordance with the
amounts of interest and fees then due to such parties, and (ii) second, towards
payment of principal and unreimbursed LC Disbursements then due hereunder,
ratably among the parties entitled thereto in accordance with the amounts of
principal and unreimbursed LC Disbursements then due to such
parties.

       

      
        
          
          

        

        
          40

          
            

          

        

        
          
          

        

      

       

      (c)           Sharing of Payments by
Lenders.  If any Lender shall, by exercising any right of
set-off or counterclaim or otherwise, obtain payment in respect of any principal
of or interest on any of its Loans or participations in LC Disbursements
resulting in such Lender receiving payment of a greater proportion of the
aggregate amount of its Loans and participations in LC Disbursements and accrued
interest thereon than the proportion received by any other Lender, then the
Lender receiving such greater proportion shall purchase (for cash at face value)
participations in the Loans and participations in LC Disbursements of other
Lenders to the extent necessary so that the benefit of all such payments shall
be shared by the Lenders ratably in accordance with the aggregate amount of
principal of and accrued interest on their respective Loans and participations
in LC Disbursements; provided that (i) if any such
participations are purchased and all or any portion of the payment giving rise
thereto is recovered, such participations shall be rescinded and the purchase
price restored to the extent of such recovery, without interest, and (ii) the
provisions of this Section 4.01(c) shall not be
construed to apply to any payment made by the Borrower pursuant to and in
accordance with the express terms of this Agreement or any payment obtained by a
Lender as consideration for the assignment of or sale of a participation in any
of its Loans or participations in LC Disbursements to any assignee or
participant, other than to the Borrower or any Subsidiary or Affiliate thereof
(as to which the provisions of this Section 4.01(c)
shall apply).  The Borrower consents to the foregoing and agrees, to
the extent it may effectively do so under applicable law, that any Lender
acquiring a participation pursuant to the foregoing arrangements may exercise
against the Borrower rights of set-off and counterclaim with respect to such
participation as fully as if such Lender were a direct creditor of the Borrower
in the amount of such participation.

       

      Section
4.02                                Presumption of Payment by
the Borrower.  Unless the Administrative Agent shall have
received notice from the Borrower prior to the date on which any payment is due
to the Administrative Agent for the account of the Lenders or any Issuing Bank
that the Borrower will not make such payment, the Administrative Agent may
assume that the Borrower has made such payment on such date in accordance
herewith and may, in reliance upon such assumption, distribute to the Lenders or
such Issuing Bank, as the case may be, the amount due.  In such event,
if the Borrower has not in fact made such payment, then each of the Lenders or
such Issuing Bank, as the case may be, severally agrees to repay to the
Administrative Agent forthwith on demand the amount so distributed to such
Lender or such Issuing Bank with interest thereon, for each day from and
including the date such amount is distributed to it to but excluding the date of
payment to the Administrative Agent, at the greater of the Federal Funds
Effective Rate and a rate determined by the Administrative Agent in accordance
with banking industry rules on interbank compensation.

       

      Section
4.03                                Certain Deductions by the
Administrative Agent.  If any Lender shall fail to make any
payment required to be made by it pursuant to Section
2.05(b), Section 2.08(d), Section 2.08(e) or Section
4.02 then the Administrative Agent may, in its discretion (notwithstanding
any contrary provision hereof), apply any amounts thereafter received by the
Administrative Agent for the account of such Lender to satisfy such Lender’s
obligations under such Sections until all such unsatisfied obligations are fully
paid.

       

      Section
4.04                                Payments and Deductions to a
Defaulting Lender.

       

      
        
          
          

        

        
          41

          
            

          

        

        
          
          

        

      

       

      (a)           The
Borrower shall have the right, to the extent permitted by applicable law, to
setoff any amounts owed to it by any Defaulting Lender or any of such Defaulting
Lender’s Affiliates in respect of deposit liabilities against amounts due by the
Borrower or any Guarantor to such Defaulting Lender or its Affiliates under this
Agreement, provided that the amount of such set-off shall not exceed the amount
of such Defaulting Lender’s Revolving Credit Exposures and
interest.  Further, if any Lender shall fail to make any payment
required to be made by it pursuant to Section 2.05(a), Section 2.08(d), Section
2.08(e) or Section 4.02 then the Administrative Agent may, in its discretion
(notwithstanding any contrary provision hereof), apply any amounts thereafter
received by the Administrative Agent for the account of such Lender to satisfy
such Lender’s obligations under such Sections until all such unsatisfied
obligations are fully paid in cash.

       

      (b)           If
a Defaulting Lender (or a Lender who would be a Defaulting Lender but for the
expiration of the relevant grace period) as a result of the exercise of a
set-off shall have received a payment in respect of its Revolving Credit
Exposure which results in its Revolving Credit Exposure being less than its
Applicable Percentage of the aggregate Revolving Credit Exposures, then no
payments will be made to such Defaulting Lender until such time as all amounts
due and owing to the Lenders have been equalized in accordance with each of the
Lenders respective pro rata share of the Indebtedness.  Further, if at
any time prior to the acceleration or maturity of the Loans, the Administrative
Agent shall receive any payment in respect of principal of a Loan or a
reimbursement of an LC Disbursement while one or more Defaulting Lenders shall
be party to this Agreement, the Administrative Agent shall apply such payment
first to the Borrowing(s) for which such Defaulting Lender(s) shall have failed
to fund its pro rata share until such time as such Borrowing(s) are paid in full
or each Lender (including each Defaulting Lender) is owed its Applicable
Percentage of all Loans then outstanding.  After acceleration or
maturity of the Loans, subject to the first sentence of this Section 4.04(b),
all principal will be paid ratably as provided in Section 10.02(c).

       

      (c)           Notwithstanding
any provision of this Agreement to the contrary, if any Lender becomes a
Defaulting Lender, then the following provisions shall apply for so long as such
Lender is a Defaulting Lender:

       

      (i)           Fees
shall cease to accrue on the unfunded portion of the Commitment of such
Defaulting Lender pursuant to Section 3.05.

       

      (ii)           The
Commitment of such Defaulting Lender shall not be included in determining
whether all Lenders or the Majority Lenders, as applicable, have taken or may
take any action hereunder (including any consent to any amendment or waiver
pursuant to Section 12.02), provided that any waiver, amendment or modification
requiring the consent of all Lenders or each affected Lender which affects such
Defaulting Lender differently than other affected Lenders shall require the
consent of such Defaulting Lender.

       

      (iii)           if
any LC Exposure exists at the time a Lender becomes a Defaulting Lender
then:

       

      
        
          
          

        

        
          42

          
            

          

        

        
          
          

        

      

       

      (A)           all
or any part of such LC Exposure shall be reallocated among the Non-Defaulting
Lenders in accordance with their respective Applicable Percentages but only to
the extent (I) the sum of all Non-Defaulting Lenders’ Revolving Credit Exposures
plus such Defaulting Lender’s LC Exposure does not exceed the total of all
Non-Defaulting Lenders’ Commitments and (II) the conditions set forth in Section
6.02 are satisfied at such time;

       

      (B)           if
the reallocation described in clause (A) above cannot, or can only partially, be
effected, then the Borrower shall within one Business Day following notice by
the Administrative Agent cash collateralize such Defaulting Lender’s LC Exposure
(after giving effect to any partial reallocation pursuant to clause (A) above)
in accordance with the procedures set forth in Section 2.08(e) for so long as
such LC Exposure is outstanding;

       

      (C)           if
the Borrower cash collateralizes any portion of such Defaulting Lender’s LC
Exposure pursuant to this Section 4.04 then the Borrower shall not be required
to pay any fees to such Defaulting Lender pursuant to Section 3.05(b) with
respect to such Defaulting Lender’s LC Exposure during the period such
Defaulting Lender’s LC Exposure is cash collateralized;

       

      (D)           if
the LC Exposure of the Non-Defaulting Lenders is reallocated pursuant to Section
4.04(c), then the fees payable to the Lenders pursuant to Section 3.05(a) and
Section 3.05(b) shall be adjusted in accordance with such Non-Defaulting
Lenders’ Applicable Percentages; or

       

      (E)           if
any Defaulting Lender’s LC Exposure is neither cash collateralized nor
reallocated pursuant to Section 4.04(c)(iii), then, without prejudice to any
rights or remedies of the Issuing Bank or any Lender hereunder, all commitment
fees that otherwise would have been payable to such Defaulting Lender (solely
with respect to the portion of such Defaulting Lender’s Commitment that was
utilized by such LC Exposure) and letter of credit fees payable under
Section 3.05(b) with respect to such Defaulting Lender’s LC Exposure shall be
payable to the Issuing Bank until such LC Exposure is cash collateralized and/or
reallocated.

       

      (d)           So
long as any Lender is a Defaulting Lender, the Issuing Bank shall not be
required to issue, amend or increase any Letter of Credit, unless it is
satisfied that the related exposure will be 100% covered by the Commitments of
the Non-Defaulting Lenders and/or cash collateral will be provided by the
Borrower in accordance with Section 4.04(c), and participating interests in any
such newly issued or increased Letter of Credit shall be allocated among
Non-Defaulting Lenders in a manner consistent with Section 2.08(d) (and
Defaulting Lenders shall not participate therein).

       

      (e)           In
the event that the Administrative Agent, the Borrower and the Issuing Bank each
agrees that a Defaulting Lender has adequately remedied all matters that caused
such Lender to be a Defaulting Lender, then the LC Exposure of the Lenders shall
be readjusted to reflect the inclusion of such Lender’s Commitment and on such
date such Lender shall purchase 

       

      
        
          
          

        

        
          43

          
            

          

        

        
          
          

        

         

        at par
such of the Loans of the other Lenders as the Administrative shall determine may
be necessary in order for such Lender to hold such Loans in accordance with its
Applicable Percentage.

      

       

      ARTICLE
V

       

      INCREASED
COSTS; BREAK FUNDING PAYMENTS; TAXES; ILLEGALITY

       

      Section
5.01                                Increased
Costs.

       

      (a)           Eurodollar Changes in
Law.  If any Change in Law shall:

       

      (i)           impose,
modify or deem applicable any reserve (including marginal, special, emergency or
supplemental reserves), special deposit or similar requirement against assets
of, deposits with or for the account of, or credit extended by, any Lender for
Eurocurrency liabilities under Regulation D of the Board (as the same may be
amended, supplemented or replaced from time to time) or otherwise;
or

       

      (ii)           impose
on any Lender or the London interbank market any other condition affecting this
Agreement or Eurodollar Loans made by such Lender;

       

      and the
result of any of the foregoing shall be to increase the cost to such Lender of
making or maintaining any Eurodollar Loan (or of maintaining its obligation to
make any such Loan) or to reduce the amount of any sum received or receivable by
such Lender (whether of principal, interest or otherwise), then the Borrower
will pay to such Lender such additional amount or amounts as will compensate
such Lender for such additional costs incurred or reduction
suffered.

       

      (b)           Capital
Requirements.  If any Lender or any Issuing Bank determines
that any Change in Law regarding capital requirements has or would have the
effect of reducing the rate of return on such Lender’s or such Issuing Bank’s
capital or on the capital of such Lender’s or such Issuing Bank’s holding
company, if any, as a consequence of this Agreement or the Loans made by, or
participations in Letters of Credit held by, such Lender, or the Letters of
Credit issued by such Issuing Bank, to a level below that which such Lender or
such Issuing Bank or such Lender’s or such Issuing Bank’s holding company could
have achieved but for such Change in Law (taking into consideration such
Lender’s or such Issuing Bank’s policies and the policies of such Lender’s or
such Issuing Bank’s holding company with respect to capital adequacy), then from
time to time the Borrower will pay to such Lender or such Issuing Bank, as the
case may be, such additional amount or amounts as will compensate such Lender or
such Issuing Bank or such Lender’s or such Issuing Bank’s holding company for
any such reduction suffered.

       

      (c)           Certificates.  A
certificate of a Lender or any Issuing Bank setting forth in reasonable detail
the basis of its request and the amount or amounts necessary to compensate such
Lender or such Issuing Bank or its holding company, as the case may be, as
specified in Section 5.01(a) or (b) shall be delivered to the Borrower and shall be
conclusive absent manifest error.  The Borrower shall pay such Lender
or such Issuing Bank, as the case may be, the amount shown as due on any such
certificate within 10 days after receipt thereof.

       

      
        
          
          

        

        
          44

          
            

          

        

        
          
          

        

      

       

      (d)           Effect of Failure or Delay
in Requesting Compensation.  Failure or delay on the part of
any Lender or any Issuing Bank to demand compensation pursuant to this Section 5.01 shall not constitute a waiver of such
Lender’s or such Issuing Bank’s right to demand such compensation, provided that no Lender may
make any such demand more than 180 days after the Termination Date, nor for any
amount which has accrued more than 270 days prior to such Lender or Issuing Bank
delivering the certificate required in Section
5.01(c).

       

      Section
5.02                                Break Funding
Payments.  In the event of (a) the payment of any principal of
any Eurodollar Loan other than on the last day of an Interest Period applicable
thereto (including as a result of an Event of Default), (b) the conversion of
any Eurodollar Loan into an ABR Loan other than on the last day of the Interest
Period applicable thereto, or (c) the failure to borrow, convert, continue or
prepay any Eurodollar Loan on the date specified in any notice delivered
pursuant hereto, then, in any such event, the Borrower shall compensate each
Lender for the loss, cost and expense attributable to such event.  In
the case of a Eurodollar Loan, such loss, cost or expense to any Lender shall be
deemed to include an amount determined by such Lender to be the excess, if any,
of (i) the amount of interest which would have accrued on the principal amount
of such Loan had such event not occurred, at the Adjusted LIBO Rate that would
have been applicable to such Loan, for the period from the date of such event to
the last day of the then current Interest Period therefor (or, in the case of a
failure to borrow, convert or continue, for the period that would have been the
Interest Period for such Loan), over (ii) the amount of interest which would
accrue on such principal amount for such period at the interest rate which such
Lender would bid were it to bid, at the commencement of such period, for dollar
deposits of a comparable amount and period from other banks in the eurodollar
market.

       

      A
certificate of any Lender setting forth any amount or amounts that such Lender
is entitled to receive pursuant to this Section
5.02 shall be delivered to the Borrower and shall be conclusive absent
manifest error.  The Borrower shall pay such Lender the amount shown
as due on any such certificate within 10 days after receipt
thereof.

       

      Section
5.03                                Taxes.

       

      (a)           Payments Free of
Taxes.  Any and all payments by or on account of any obligation
of the Borrower or any Guarantor under any Loan Document shall be made free and
clear of and without deduction for any Indemnified Taxes or Other Taxes; provided that if the Borrower
or any Guarantor shall be required to deduct any Indemnified Taxes or Other
Taxes from such payments, then (i) the sum payable shall be increased as
necessary so that after making all required deductions (including deductions
applicable to additional sums payable under this Section 5.03(a)), the Administrative Agent, Lender or
Issuing Bank (as the case may be) receives an amount equal to the sum it would
have received had no such deductions been made, (ii) the Borrower or such
Guarantor shall make such deductions and (iii) the Borrower or such Guarantor
shall pay the full amount deducted to the relevant Governmental Authority in
accordance with applicable law.

       

      (b)           Payment of Other Taxes by
the Borrower.  The Borrower shall pay any Other Taxes to the
relevant Governmental Authority in accordance with applicable law.

       

      
        
          
          

        

        
          45

          
            

          

        

        
          
          

        

      

       

      (c)           Indemnification by the
Borrower.  The Borrower shall indemnify the Administrative
Agent, each Lender and each Issuing Bank, within 10 days after written demand
therefor, for the full amount of any Indemnified Taxes or Other Taxes paid by
the Administrative Agent, such Lender or such Issuing Bank, as the case may be,
on or with respect to any payment by or on account of any obligation of the
Borrower hereunder (including Indemnified Taxes or Other Taxes imposed or
asserted on or attributable to amounts payable under this Section 5.03) and any penalties, interest and
reasonable expenses arising therefrom or with respect thereto, whether or not
such Indemnified Taxes or Other Taxes were correctly or legally imposed or
asserted by the relevant Governmental Authority.  A certificate of the
Administrative Agent, a Lender or an Issuing Bank as to the basis of such
Indemnified Taxes and Other Taxes and the amount of such payment or liability
under this Section 5.03 shall be delivered to the
Borrower and shall be conclusive absent manifest error.

       

      (d)           Evidence of
Payments.  As soon as practicable after any payment of
Indemnified Taxes or Other Taxes by the Borrower or a Guarantor to a
Governmental Authority, the Borrower shall deliver to the Administrative Agent
the original or a certified copy of a receipt issued by such Governmental
Authority evidencing such payment, a copy of the return reporting such payment
or other evidence of such payment reasonably satisfactory to the Administrative
Agent.

       

      (e)           Foreign
Lenders.  Any Foreign Lender that is entitled to an exemption
from or reduction of withholding tax under the law of the jurisdiction in which
the Borrower is located, or any treaty to which such jurisdiction is a party,
with respect to payments under this Agreement or any other Loan Document shall
deliver to the Borrower (with a copy to the Administrative Agent), at the time
or times prescribed by applicable law, such properly completed and executed
documentation prescribed by applicable law or reasonably requested by the
Borrower as will permit such payments to be made without withholding or at a
reduced rate.

       

      Section
5.04                                Designation of Different
Lending Office.  If any Lender requests compensation under Section 5.01, or if the Borrower is required to pay
any additional amount to any Lender or any Governmental Authority for the
account of any Lender pursuant to Section 5.03,
then such Lender shall use reasonable efforts to designate a different lending
office for funding or booking its Loans hereunder or to assign its rights and
obligations hereunder to another of its offices, branches or affiliates, if, in
the judgment of such Lender, such designation or assignment (a) would eliminate
or reduce amounts payable pursuant to Section 5.01
or Section 5.03, as the case may be, in the future
and (b) would not subject such Lender to any unreimbursed cost or expense and
would not otherwise be disadvantageous to such Lender.  The Borrower
hereby agrees to pay all reasonable costs and expenses incurred by any Lender in
connection with any such designation or assignment.

       

      Section
5.05                                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 Eurodollar Loans either generally or having a particular Interest
Period hereunder, then (a) such Lender shall promptly notify the Borrower and
the Administrative Agent thereof and such Lender’s obligation to make such
Eurodollar Loans shall be suspended (the “Affected Loans”)
until such time as such Lender may again make and maintain such Eurodollar Loans
and (b) all Affected Loans which would otherwise be made by 

       

      
        
          
          

        

        
          46

          
            

          

        

        
          
          

        

         

        such
Lender shall be made instead as ABR Loans (and, if such Lender so requests by
notice to the Borrower and the Administrative Agent, all Affected Loans of such
Lender then outstanding shall be automatically converted into ABR 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) ABR Loans, all payments of principal
which would otherwise be applied to such Lender’s Affected Loans shall be
applied instead to its ABR Loans.

      

       

      Section
5.06                                Replacement of Lenders Under
Certain Circumstances.

       

      (a)           If
at any time (i) the Borrower becomes obligated to pay additional amounts or
indemnity payments described in Sections 5.01 or 5.03 as a result of any
condition described in such Sections or any Lender ceases to make Eurodollar
Loans as a result of any condition described in Section 5.05, (ii) any Lender
becomes a Defaulting Lender, or (iii) any Lender’s Cost of Funds exceeds the
Alternate Base Rate (without reference to the Reference Bank Cost of Funds Rate)
then the Borrower may, on 10 Business Days’ prior written notice to the
Administrative Agent and such Lender, replace such Lender by requiring such
Lender to (and such Lender shall be obligated to) assign pursuant to Section
12.04(b) (with the assignment fee to be paid by the Borrower in each such
instance) all of its rights and obligations under this Agreement to one or more
assignees; provided that neither the Administrative Agent nor any Lender shall
have any obligation to the Borrower to find a replacement Lender or other such
Person; and provided further that in the case of any such assignment resulting
from a claim for compensation under Section 5.01 or payments required to be made
pursuant to Section 5.03, such assignment will result in a reduction in such
compensation or payments.

       

      (b)           Any
Lender being replaced pursuant to Section 5.06(a) above shall (i) execute and
deliver an Assignment and Assumption with respect to such Lender’s applicable
Commitment, outstanding Loans and participations in L/C Exposure in respect
thereof, and (ii) deliver any Notes evidencing such Loans to the Borrower or to
the Administrative Agent.

       

      (c)           Notwithstanding
anything to the contrary contained above, any Lender that acts as an Issuing
Bank may not be replaced hereunder at any time that it has any Letter of Credit
outstanding hereunder unless arrangements reasonably satisfactory to such
Issuing Bank (including the furnishing of a back-up standby letter of credit in
form and substance, and issued by an issuer reasonably satisfactory to such
Issuing Bank or the depositing of cash collateral into a cash collateral account
in amounts and pursuant to arrangements reasonably satisfactory to such Issuing
Bank) have been made with respect to each such outstanding Letter of Credit and
the Lender that acts as the Administrative Agent may not be replaced hereunder
except in accordance with the terms of Section 11.06.

       

      ARTICLE
VI

       

      CONDITIONS
PRECEDENT

       

      Section
6.01                                Effective
Date.  The obligations of the Lenders to make the initial Loans
and of any Issuing Bank to issue Letters of Credit hereunder shall not become
effective until the date on which each of the following conditions is satisfied
(or waived in accordance with Section
12.02):

       

      
        
          
          

        

        
          47

          
            

          

        

        
          
          

        

      

       

      (a)           The
Arranger, the Administrative Agent and the Lenders shall have received all fees
and other amounts due and payable on or prior to the Effective Date, including,
to the extent invoiced, reimbursement or payment of all out-of-pocket expenses
required to be reimbursed or paid by the Borrower hereunder.

       

      (b)           The
Administrative Agent shall have received a certificate of the Borrower and of
each Guarantor setting forth (i) resolutions of the board of directors or other
managing body with respect to the authorization of the Borrower or 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
individuals (A) who are authorized to sign the Loan Documents to which the
Borrower or such Guarantor is a party and (B) who will, until replaced by
another individual 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 other Loan Documents to
which it is a party, (iii) specimen signatures of such authorized individuals,
and (iv) the articles or certificate of incorporation or formation and bylaws,
operating agreement or partnership agreement, as applicable, of the Borrower and
each Guarantor, in each case, certified as being true and
complete.  The Administrative Agent and the Lenders may conclusively
rely on such certificate until the Administrative Agent receives notice in
writing from the Borrower to the contrary.

       

      (c)           The
Administrative Agent shall have received certificates of the appropriate State
agencies with respect to the existence, qualification and good standing of the
Borrower and each Guarantor, if any.

       

      (d)           The
Administrative Agent shall have received a compliance certificate, which shall
be substantially in the form of Exhibit B, duly and properly executed by a
Responsible Officer and dated as of the Effective Date.

       

      (e)           The
Administrative Agent shall have received from each party hereto counterparts (in
such number as may be requested by the Administrative Agent) of this Agreement
signed on behalf of such party.

       

      (f)           The
Administrative Agent shall have received from each party thereto duly executed
counterparts (in such number as may be requested by the Administrative Agent) of
the Security Instruments, including the Guaranty Agreements, the Pledge
Agreement, and the other Security Instruments described on Exhibit
C.  In connection with the execution and delivery of the Security
Instruments, the Administrative Agent shall be reasonably satisfied that the
Security Instruments create first priority, perfected Liens (subject only to
Excepted Liens identified in clauses (a) to (d) and (f) of the definition
thereof, but subject to the provisos at the end of such definition) on at least
80% of the total value of the Oil and Gas Properties evaluated in the Initial
Reserve Report.

       

      (g)           The
Administrative Agent shall have received an opinion of (i) Andrews Kurth, LLP,
special counsel to the Borrower, (ii) Cotton, Bledsoe, Tighe & Dawson, P.C.,
special New Mexico counsel and (iii) Commercial Law Group, P.C., special
Oklahoma counsel, each in form and substance satisfactory to the Administrative
Agent, as to such matters incident to the Transactions as the Administrative
Agent may reasonably request.

       

      
        
          
          

        

        
          48

          
            

          

        

        
          
          

        

      

       

      (h)           The
Administrative Agent shall have received a certificate of insurance coverage of
the Borrower evidencing that the Borrower is carrying insurance in accordance
with Section 7.12.

       

      (i)           The
Administrative Agent shall have received such information as the Administrative
Agent may reasonably require, all of which shall be reasonably satisfactory to
the Administrative Agent in form and substance, on the title to not less than
80% of the Oil and Gas Properties evaluated in the Initial Reserve
Report.

       

      (j)           The
Administrative Agent shall be reasonably satisfied with the environmental
condition of the Oil and Gas Properties of the Borrower and its
Subsidiaries.

       

      (k)           The
Administrative Agent shall have received a certificate of a Responsible Officer
certifying that the Borrower has received all consents and approvals required by
Section 7.03.

       

      (l)           The
Administrative Agent shall have received satisfactory audited financial
statements for the Borrower and its Consolidated Subsidiaries for the year ended
December 31, 2008 and the Initial Reserve Reports.

       

      (m)           The
Administrative Agent shall have received appropriate UCC search certificates
reflecting no prior Liens encumbering the Properties of the Borrower, and its
Subsidiaries for each of the following jurisdictions:  Texas, Delaware
and any other jurisdiction requested by the Administrative Agent; other than
those being assigned or released on or prior to the Effective Date or Liens
permitted by Section 9.03.

       

      (n)           The
Administrative Agent shall have received such other documents as the
Administrative Agent or special counsel to the Administrative Agent may
reasonably request.

       

      The
Administrative Agent shall notify the Borrower and the Lenders of the Effective
Date, and such notice shall be conclusive and
binding.  Notwithstanding the foregoing, the obligations of the
Lenders to make Loans and of each Issuing Bank to issue Letters of Credit
hereunder shall not become effective unless each of the foregoing conditions is
satisfied (or waived pursuant to Section 12.02) at
or prior to 1:00 p.m., Houston time, on March 27, 2009 (and, in the event such
conditions are not so satisfied or waived, the Commitments shall terminate at
such time).

       

      Section
6.02                                Each Credit
Event.  The obligation of each Lender to make a Loan on the
occasion of any Borrowing (including the initial funding), and of each Issuing
Bank to issue, amend, renew or extend any Letter of Credit, is subject to the
satisfaction of the following conditions:

       

      (a)           At
the time of and immediately after giving effect to such Borrowing or the
issuance, amendment, renewal or extension of such Letter of Credit, as
applicable, no Default shall have occurred and be continuing.

       

      
        
          
          

        

        
          49

          
            

          

        

        
          
          

        

      

       

      (b)           At
the time of and immediately after giving effect to such Borrowing or the
issuance, amendment, renewal or extension of such Letter of Credit, as
applicable, no Material Adverse Effect shall have occurred.

       

      (c)           The
representations and warranties of the Borrower and the Guarantors, if any, set
forth in this Agreement and in the other Loan Documents shall be true and
correct on and as of the date of such Borrowing or the date of issuance,
amendment, renewal or extension of such Letter of Credit, as applicable, except
to the extent any such representations and warranties are expressly limited to
an earlier date, in which case, on and as of the date of such Borrowing or the
date of issuance, amendment, renewal or extension of such Letter of Credit, as
applicable, such representations and warranties shall continue to be true and
correct as of such specified earlier date.

       

      (d)           The
making of such Loan or the issuance, amendment, renewal or extension of such
Letter of Credit, as applicable, would not conflict with, or cause any Lender or
any Issuing Bank to violate or exceed, any applicable Governmental Requirement,
and no Change in Law shall have occurred, and no litigation shall be pending or
threatened, which does or, with respect to any threatened litigation, seeks to,
enjoin, prohibit or restrain, the making or repayment of any Loan, the issuance,
amendment, renewal, extension or repayment of any Letter of Credit or any
participations therein or the consummation of the transactions contemplated by
this Agreement or any other Loan Document.

       

      (e)           The
receipt by the Administrative Agent of a Borrowing Request in accordance with Section 2.03 or a request for a Letter of Credit in
accordance with Section 2.08(b), as
applicable.

       

      Each
request for a Borrowing and each issuance, amendment, renewal or extension of
any Letter of Credit shall be deemed to constitute a representation and warranty
by the Borrower on the date thereof as to the matters specified in Section
6.02(a) through (e).

       

      ARTICLE
VII

       

      REPRESENTATIONS
AND WARRANTIES

       

      The
Borrower represents and warrants to the Lenders that:

       

      Section
7.01                                Organization;
Powers.  Each of the Borrower and its Subsidiaries is duly
organized, validly existing and, if applicable, in good standing under the laws
of the jurisdiction of its organization, has all requisite power and authority,
and has all material governmental licenses, authorizations, consents and
approvals necessary, to own its assets and to carry on its business as now
conducted, and is qualified to do business in, and is in good standing in, every
jurisdiction where such qualification is required, except where failure to have
such power, authority, licenses, authorizations, consents, approvals and
qualifications could not reasonably be expected to have a Material Adverse
Effect.

       

      Section
7.02                                Authority;
Enforceability.  The Transactions are within the Borrower’s and
each Guarantor’s corporate powers and have been duly authorized by all necessary
corporate and, if required, member action (including, without limitation, any
action required to be taken by any class of directors of the Borrower or any
other Person, whether interested or disinterested, in 

       

      
        
          
          

        

        
          50

          
            

          

        

        
          
          

        

         

        order to
ensure the due authorization of the Transactions).  When executed and
delivered, each Loan Document to which the Borrower and any Guarantor is a party
will have been duly executed and delivered by the Borrower and such Guarantor
and will constitute a legal, valid and binding obligation of the Borrower and
such Guarantor, as applicable, enforceable in accordance with its terms, subject
to applicable bankruptcy, insolvency, reorganization, moratorium or other laws
affecting creditors’ rights generally and subject to general principles of
equity, regardless of whether considered in a proceeding in equity or at
law.

      

       

      Section
7.03                                Approvals; No
Conflicts.  The Transactions (a) do not require any consent or
approval of, registration or filing with, or any other action by, any
Governmental Authority or any other third Person (including the members or any
class of directors of the Borrower or any other Person, whether interested or
disinterested), nor is any such consent, approval, registration, filing or other
action necessary for the validity or enforceability of any Loan Document or the
consummation of the transactions contemplated thereby, except such as have been
obtained or made and are in full force and effect, and except for the filing and
recording of Security Instruments to perfect the Liens created hereby, (b) will
not violate any applicable law or regulation or the charter, by-laws or other
organizational documents of the Borrower or any of its Subsidiaries or any order
of any Governmental Authority, (c) will not violate or result in a default under
any indenture, agreement or other instrument binding upon the Borrower or any of
its Subsidiaries or their Properties, or give rise to a right thereunder to
require any payment to be made by the Borrower or such Subsidiary and (d) will
not result in the creation or imposition of any Lien on any Property of the
Borrower or any of its Subsidiaries (other than the Liens created by the Loan
Documents).

       

      Section
7.04                                Financial Position; No
Material Adverse Change.

       

      (a)           The
Borrower has heretofore furnished to the Lenders the audited financial
statements of Borrower ended December 31, 2008.  Such financial
statements present fairly, in all material respects, the financial position and
results of operations and cash flows of Borrower and its Consolidated
Subsidiaries as of such date and for such period in accordance with
GAAP.

       

      (b)           Since
December 31, 2008, (i) there has been no event, development or circumstance that
has had or could reasonably be expected to have a Material Adverse Effect and
(ii) the business of the Borrower and its Subsidiaries has been conducted only
in the ordinary course consistent with past business practices.

       

      (c)           Neither
the Borrower nor any of its Subsidiaries has on the date hereof any material
Debt (including Disqualified Capital Stock), or any contingent liabilities,
off-balance sheet liabilities or partnerships, 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.

       

      Section
7.05                                Litigation.  Except
as set forth on Schedule 7.05, there are no actions, suits, investigations or
proceedings by or before any arbitrator or Governmental Authority pending
against or, to the knowledge of the Borrower, threatened against or affecting
the Borrower or any of its Subsidiaries (a) as to which there is a reasonable
possibility of an adverse determination that, if adversely determined, could
reasonably be expected, individually or in the 

       

      
        
          
          

        

        
          51

          
            

          

        

        
          
          

        

         

        aggregate,
to result in a Material Adverse Effect or (b) that involve any Loan Document or
the Transactions.  Since the date of this Agreement, there has been no
change in the status of the matters disclosed in Schedule 7.05 that,
individually or in the aggregate, has resulted in, or materially increased the
likelihood of, a Material Adverse Effect.

      

       

      Section
7.06                                Environmental
Matters.  Except as could not be reasonably expected to have a
Material Adverse Effect (or with respect to (c), (d) and (e) below, where
the failure to take such actions could not be reasonably expected to have a
Material Adverse Effect):

       

      (a)           neither
any Property of the Borrower or any of its Subsidiaries nor the operations
conducted thereon violate any order or requirement of any court or Governmental
Authority or any Environmental Laws.

       

      (b)           no
Property of the Borrower or any of its Subsidiaries nor the operations currently
conducted thereon or, to the 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, exemptions, approvals 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 of its Subsidiaries, including,
without limitation, past or present treatment, storage, disposal or release of a
hazardous substance, oil and gas waste or solid waste into the environment, have
been duly obtained or filed or requested, and the Borrower and each of its
Subsidiaries 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 waste, if any, generated at
any and all Property of the Borrower or any of its Subsidiaries 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 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 oil, hazardous substances, solid waste or oil and gas waste,
have been disposed of or otherwise released and there has been no threatened
release of any oil, hazardous substances, solid waste or oil and gas waste on or
to any Property of the Borrower or any of its Subsidiaries except in 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 of its Subsidiaries
currently satisfies all design, operation, and equipment requirements imposed by
the OPA, and the Borrower does not have any reason to believe that such
Property, to the extent 

       

      
        
          
          

        

        
          52

          
            

          

        

        
          
          

        

         

        subject
to the OPA, will not be able to maintain compliance with the OPA requirements
during the term of this Agreement.

      

       

      (g)           neither
the Borrower nor any of its Subsidiaries has any known contingent liability or
Remedial Work in connection with any release or threatened release of any oil,
hazardous substance, solid waste or oil and gas waste into the
environment.

       

      Section
7.07                                Compliance with the Laws and
Agreements; No Defaults.

       

      (a)           Each
of the Borrower and its Subsidiaries is in compliance with all Governmental
Requirements applicable to it or its Property and all agreements and other
instruments binding upon it or its Property, and possesses all licenses,
permits, franchises, exemptions, approvals and other authorizations granted by
Governmental Authorities necessary for the ownership of its Property and the
present conduct of its business, except where the failure to do so, individually
or in the aggregate, could not reasonably be expected to result in a Material
Adverse Effect.

       

      (b)           Neither
the Borrower nor any of its Subsidiaries 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 or would
require the Borrower or any of its Subsidiaries to Redeem or make any offer to
Redeem all or any portion of any Debt outstanding under any indenture, note,
credit agreement or instrument pursuant to which any Material Indebtedness is
outstanding or by which the Borrower or any of its Subsidiaries or any of their
Properties is bound.

       

      (c)           No
Default has occurred and is continuing.

       

      Section
7.08                                Investment Company
Act.  Neither the Borrower nor any of its Subsidiaries is an
“investment company” or a company “controlled” by an “investment company,”
within the meaning of, or subject to regulation under, the Investment Company
Act of 1940, as amended.

       

      Section
7.09                                Taxes.  Each
of the Borrower and its Subsidiaries has timely filed or caused to be filed all
Tax returns and reports required to have been filed and has paid or caused to be
paid all Taxes required to have been paid by it, except (a) Taxes that are being
contested in good faith by appropriate proceedings and for which the Borrower or
such Subsidiary, as applicable, has set aside on its books adequate reserves in
accordance with GAAP or (b) to the extent that the failure to do so could not
reasonably be expected to result in a Material Adverse Effect.  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 reasonable
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 or other such governmental charge.

       

      Section
7.10                                ERISA.

       

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

       

      
        
          
          

        

        
          53

          
            

          

        

        
          
          

        

      

       

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

       

      (c)           No
act, omission or transaction has occurred that could result in imposition on the
Borrower, any of its Subsidiaries or any ERISA Affiliate (whether directly or
indirectly) of (i) either a civil penalty assessed pursuant to subsections (c),
(i) or (l) of section 502 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 of its Subsidiaries or any ERISA Affiliate has been or
is expected by the Borrower, any of its Subsidiaries 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 of its
Subsidiaries or any ERISA Affiliate is required under the terms of each Plan, if
any, or applicable law to have paid as contributions to such Plan as of the date
hereof, 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, if any,
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)           Neither
the Borrower, its Subsidiaries nor 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, any of its Subsidiaries or any ERISA Affiliate in its sole discretion
at any time without any material liability.

       

      (h)           Neither
the Borrower, its Subsidiaries nor any ERISA Affiliate sponsors, maintains or
contributes to, or has at any time in the six-year period preceding the date
hereof sponsored, maintained or contributed to, any Multiemployer
Plan.

       

      (i)           Neither
the Borrower, its Subsidiaries nor 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
7.11                                Disclosure; No Material
Misstatements.  None of the reports, financial statements,
certificates or other information furnished by or on behalf of the Borrower or
any of its Subsidiaries to the Administrative Agent or any Lender or any of
their Affiliates in connection with the negotiation of this Agreement or any
other Loan Document or delivered hereunder or under any other Loan Document (as
modified or supplemented by other 

       

      
        
          
          

        

        
          54

          
            

          

        

        
          
          

        

         

        information
so furnished) contains any material misstatement of fact or omits to state any
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided that, with respect
to projected financial information, the Borrower represents only that such
information was prepared in good faith based upon assumptions believed to be
reasonable at the time.  There is no fact peculiar to the Borrower or
any of its Subsidiaries that could reasonably be expected to have a Material
Adverse Effect or in the future is reasonably likely to have a Material Adverse
Effect and which has not been set forth in this Agreement or the Loan Documents
or the other documents, certificates and statements furnished to the
Administrative Agent or the Lenders by or on behalf of the Borrower or any of
its Subsidiaries prior to, or on, the date hereof in connection with the
transactions contemplated hereby.  There are no statements or
conclusions in any Reserve Report which are based upon or include misleading
information or fail to take into account material information regarding the
matters reported therein.

      

       

      Section
7.12                                Insurance.  The
Borrower has, and has caused all of its Subsidiaries to have, (a) all insurance
policies sufficient for the compliance by each of them with all material
Governmental Requirements and all material agreements and (b) insurance coverage
in at least amounts and against such risk (including, without limitation, public
liability) that are usually insured against by companies similarly situated and
engaged in the same or a similar business for the assets and operations of the
Borrower and its Subsidiaries.  The Administrative Agent and the
Lenders have been named as additional insureds in respect of such liability
insurance policies and the Administrative Agent has been named as loss payee
with respect to Property loss insurance.

       

      Section
7.13                                Restriction on
Liens.  Neither the Borrower nor any of its Subsidiaries is a
party to any material agreement or arrangement, or subject to any order,
judgment, writ or decree, which either restricts or purports to restrict its
ability to grant Liens to the Administrative Agent and the Lenders on or in
respect of their Properties to secure the Indebtedness and the Loan
Documents.

       

      Section
7.14                                Subsidiaries.  Except
as set forth on Schedule 7.14 or as disclosed in writing to the Administrative
Agent (which shall promptly furnish a copy to the Lenders), which shall be a
supplement to Schedule 7.14, the Borrower has no Subsidiaries.  The
Borrower has no Foreign Subsidiaries or foreign operations.

       

      Section
7.15                                Location of Business and
Offices.  The Borrower’s jurisdiction of organization is
Delaware; the name of the Borrower as listed in the public records of its
jurisdiction of organization is Legacy Reserves LP, and the organizational
identification number of the Borrower in its jurisdiction of organization is
4038949 (or as set forth in a notice delivered to the Administrative Agent
pursuant to Section 8.01(m)).  The
Borrower’s principal place of business and chief executive offices are located
at the address specified in Section 12.01 (or as
set forth in a notice delivered pursuant to Section
8.01(m)).  Each Subsidiary’s jurisdiction of organization, name as
listed in the public records of its jurisdiction of organization, organizational
identification number in its jurisdiction of organization, and the location of
its principal place of business and chief executive office is stated on Schedule
7.15 (or as set forth in a notice delivered pursuant to Section 8.01(m)).

       

      
        
          
          

        

        
          55

          
            

          

        

        
          
          

        

      

       

      Section
7.16                                Properties; Titles,
Etc.

       

      (a)           Each
of the Borrower and its Subsidiaries has good and defensible title to its Oil
and Gas Properties evaluated in the most recently delivered Reserve Report and
good title to all its personal Properties, in each case, free and clear of all
Liens except Liens permitted by Section
9.03.  After giving full effect to the Excepted Liens, the
Borrower or any of its Subsidiaries specified as the owner owns the net
interests in production attributable to the Hydrocarbon Interests as reflected
in the most recently delivered Reserve Report, and the ownership of such
Properties shall not in any material respect obligate the Borrower or any of its
Subsidiaries 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 that is not offset by a corresponding proportionate increase in
the Borrower’s or any of its Subsidiaries’ net revenue interest in such
Property.

       

      (b)           All
material leases and agreements necessary for the present conduct of the business
of the Borrower and its Subsidiaries are valid and subsisting, in full force and
effect, 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
under any such lease or leases, which could reasonably be expected to have a
Material Adverse Effect.

       

      (c)           The
rights and Properties presently owned, leased or licensed by the Borrower and
its Subsidiaries including, without limitation, all easements and rights of way,
include all rights and Properties necessary to permit the Borrower and its
Subsidiaries to conduct their business in all material respects as of the date
hereof.

       

      (d)           All
of the material Properties of the Borrower and each of its Subsidiaries that are
reasonably necessary for the operation of their businesses are in good working
condition and are maintained in accordance with prudent business
standards.

       

      (e)           The
Borrower and each of its Subsidiaries owns, or is licensed to use, all
trademarks, tradenames, copyrights, patents and other intellectual Property
material to its business, and the use thereof by the Borrower and such
Subsidiary does not infringe upon the rights of any other Person, except for any
such infringements that, individually or in the aggregate, could not reasonably
be expected to result in a Material Adverse Effect.  The Borrower and
its Subsidiaries either own or have valid licenses or other rights to use all
databases, geological data, geophysical data, engineering data, seismic data,
maps, interpretations and other technical information used in their businesses
as presently conducted, subject to the limitations contained in the agreements
governing the use of the same, which limitations are customary for companies
engaged in the business of the exploration and production of Hydrocarbons, with
such exceptions as could not reasonably be expected to have a Material Adverse
Effect.

       

      Section
7.17                                Maintenance of
Properties.  Except for such acts or failures to act as could
not be reasonably expected to have a Material Adverse Effect, the Oil and Gas
Properties (and Properties unitized therewith) have been maintained, operated
and developed in a good and workmanlike manner and in conformity with all
Government Requirements and in conformity 

       

      
        
          
          

        

        
          56

          
            

          

        

        
          
          

        

         

        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 the
Oil and Gas Properties.  Specifically in connection with the
foregoing, except as could not reasonably be expected to have a Material Adverse
Effect, (a) no 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) and (b) none of the wells comprising a part of the Oil
and Gas Properties (or Properties unitized therewith) is deviated from the
vertical more than the maximum permitted by Government Requirements, and such
wells are, in fact, bottomed under and are producing from, and the well bores
are wholly within, the Oil and Gas Properties (or in the case of wells located
on Properties unitized therewith, such unitized Properties).  All
pipelines, wells, gas processing plants, platforms and other material
improvements, fixtures and equipment owned in whole or in part by the Borrower
or any of its Subsidiaries that are necessary to conduct normal operations are
being maintained in a state adequate to conduct normal operations, and with
respect to such of the foregoing which are operated by the Borrower or any of
its Subsidiaries, in a manner consistent with the Borrower’s or its
Subsidiaries’ past practices (other than those the failure of which to maintain
in accordance with this Section 7.17 could not
reasonably be expect to have a Material Adverse Effect).

      

       

      Section
7.18                                Gas Imbalances,
Prepayments.  As of the date hereof, except as set forth on
Schedule 7.18 or on the most recent certificate delivered pursuant to Section 8.12(c), on a net basis there are no gas
imbalances, take or pay or other prepayments which would require the Borrower or
any of its Subsidiaries to deliver, in the aggregate, two percent (2%) or more
of the monthly production from Hydrocarbons produced from the Oil and Gas
Properties at some future time without then or thereafter receiving full payment
therefor.

       

      Section
7.19                                Marketing of
Production.  Except for contracts listed and in effect on the
date hereof on Schedule 7.19, and thereafter either disclosed in writing to the
Administrative Agent or included in the most recently delivered Reserve Report
(with respect to all of which contracts the Borrower represents that it or its
Subsidiaries are receiving a price for all production sold thereunder which is
computed substantially in accordance with the terms of the relevant contract and
are not having deliveries curtailed substantially below the subject Property’s
delivery capacity), no material agreements exist which are not cancelable on 60
days notice or less without penalty or detriment for the sale of production from
the Borrower’s or its Subsidiaries’ Hydrocarbons (including, without limitation,
calls on or other rights to purchase, production, whether or not the same are
currently being exercised) that (a) pertain to the sale of production at a fixed
price and (b) have a maturity or expiry date of more than six (6) months from
the date hereof.

       

      Section
7.20                                Swap
Agreements.  Schedule 7.20, as of the date hereof, and after
the date hereof, each report required to be delivered by the Borrower pursuant
to Section 8.01(e), sets forth, a true and complete
list of all Swap Agreements of the Borrower and each of its Subsidiaries, the
material terms thereof (including the type, term, effective date, termination
date and notional amounts or volumes), the net marked-to-market value thereof,
all credit support agreements relating thereto (including any margin required or
supplied) and the counterparty to each such agreement.

       

      
        
          
          

        

        
          57

          
            

          

        

        
          
          

        

      

       

      Section
7.21                                Use of Loans and Letters of
Credit.  The proceeds of the Loans and the Letters of Credit
shall be used (a) for general corporate purposes of the Borrower and its
Subsidiaries, and (b) for any distribution advances of Available Cash, provided that if the
Borrowing Base Utilization Percentage is equal to or exceeds 90% before or after
giving effect to the requested Loan or Letter of Credit, then no proceeds of any
Loan or any Letter of Credit may be used to fund Restricted Payments under Section 9.04.  The Borrower and its
Subsidiaries are not engaged principally, or as one of its or their 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).  No part of the
proceeds of any Loan or Letter of Credit will be used for any purpose which
violates the provisions of Regulations T, U or X of the Board.

       

      Section
7.22                                Solvency.  After
giving effect to the transactions contemplated hereby, (a) the aggregate assets
(after giving effect to amounts that could reasonably be received by reason of
indemnity, offset, insurance or any similar arrangement), at a fair valuation,
of the Borrower and the Guarantors, taken as a whole, will exceed the aggregate
Debt of the Borrower and the Guarantors on a consolidated basis, as the Debt
becomes absolute and matures, (b) each of the Borrower and the Guarantors will
not have incurred or intended to incur, and will not believe that it will incur,
Debt beyond its ability to pay such Debt (after taking into account the timing
and amounts of cash to be received by each of the Borrower and the Guarantors
and the amounts to be payable on or in respect of its liabilities, and giving
effect to amounts that could reasonably be received by reason of indemnity,
offset, insurance or any similar arrangement) as such Debt becomes absolute and
matures and (c) each of the Borrower and the Guarantors will not have (and will
have no reason to believe that it will have thereafter) unreasonably small
capital for the conduct of its business.

       

      ARTICLE
VIII

       

      AFFIRMATIVE
COVENANTS

       

      Until the
Commitments have expired or been terminated and the principal of and interest on
each Loan and all fees payable hereunder and all other amounts payable under the
Loan Documents shall have been paid in full and all Letters of Credit shall have
expired or terminated and all LC Disbursements shall have been reimbursed, the
Borrower covenants and agrees with the Lenders that:

       

      Section
8.01                                Financial Statements; Other
Information.  The Borrower will furnish to the Administrative
Agent and each Lender:

       

      (a)           Annual Financial
Statements.  As soon as available, but in any event not later
than 90 days after the end of each fiscal year, the Borrower’s audited
consolidated balance sheet and related statements of operations, members’ equity
and cash flows as of the end of and for such year, setting forth in each case in
comparative form the figures for the previous fiscal year, all reported on by
independent public accountants of recognized national standing and reasonably
acceptable to the Administrative Agent (without a “going concern” or like
qualification or exception and without any qualification or exception as to the
scope of such audit) to the effect that such consolidated financial statements
present fairly in all material 

       

      
        
          
          

        

        
          58

          
            

          

        

        
          
          

        

         

        respects
the financial position and results of operations of the Borrower and its
Consolidated Subsidiaries on a consolidated basis in accordance with GAAP
consistently applied.

      

       

      (b)           Quarterly Financial
Statements.  As soon as available, but in any event not later
than 45 days after the end of each of the first three fiscal quarters of each
fiscal year of the Borrower, its consolidated balance sheet and related
statements of operations, members’ equity and cash flows as of the end of and
for such quarter and the then elapsed portion of the fiscal year, setting forth
in each case in comparative form the figures for the corresponding period or
periods of (or, in the case of the balance sheet, as of the end of) the previous
fiscal year, all certified by a Financial Officer as presenting fairly in all
material respects
the financial position and results of operations of the Borrower and its
Consolidated Subsidiaries on a consolidated basis in accordance with GAAP
consistently applied, subject to normal year-end audit adjustments and the
absence of footnotes.

       

      (c)           Certificate of Financial
Officer – Compliance.  Concurrently with any delivery of
financial statements under Section 8.01(a) or Section 8.01(b), a certificate of a Financial Officer
in substantially the form of Exhibit B hereto (i) certifying as to whether a
Default has occurred and, if a Default has occurred, specifying the details
thereof and any action taken or proposed to be taken with respect thereto, (ii)
setting forth reasonably detailed calculations demonstrating compliance with Section 9.01 and (iii) stating whether any change in
GAAP or in the application thereof has occurred since the Effective Date and, if
any such change has occurred, specifying the effect of such change on the
financial statements accompanying such certificate.

       

      (d)           Certificate of Accounting
Firm – Defaults.  Concurrently with any delivery of financial
statements under Section 8.01(a), a certificate of
the accounting firm that reported on such financial statements stating whether
they obtained knowledge during the course of their examination of such financial
statements of any Default (which certificate may be limited to the extent
required by accounting rules or guidelines).

       

      (e)           Certificate of Financial
Officer – Swap Agreements.  Concurrently with any delivery of
financial statements under Section 8.01(a) and Section 8.01(b), a certificate of a Financial Officer,
in form and substance satisfactory to the Administrative Agent, setting forth as
of the last Business Day of such calendar month or fiscal year, a true and
complete list of all Swap Agreements of the Borrower and each of its
Subsidiaries, the material terms thereof (including the type, term, effective
date, termination date and notional amounts or volumes), the net mark-to-market
value therefor, any new credit support agreements relating thereto not listed on
Schedule 7.20, any margin required or supplied under any credit support
document, and the counterparty to each such agreement.

       

      (f)           Certificate of Insurer –
Insurance Coverage.  Concurrently with any delivery of
financial statements under Section 8.01(a), a
certificate of insurance coverage from each insurer with respect to the
insurance required by Section 8.07, in form and
substance satisfactory to the Administrative Agent, and, if requested by the
Administrative Agent or any Lender, all copies of the applicable
policies.

       

      
        
          
          

        

        
          59

          
            

          

        

        
          
          

        

      

       

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

       

      (h)           SEC and Other Filings;
Reports to Shareholders.  Promptly
after the same become publicly available, copies of all periodic and other
reports, proxy statements and other materials filed by the Borrower or any
Subsidiary with the SEC, or with any national securities exchange, or
distributed by the Borrower to its shareholders generally, as the case may
be.

       

      (i)           Notices Under Material
Instruments.  Promptly after the furnishing thereof, copies of
any financial statement, report or notice furnished to or by any Person pursuant
to the terms of any preferred stock designation, 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.

       

      (j)           Lists of
Purchasers.  Concurrently with the delivery of any Reserve
Report to the Administrative Agent pursuant to Section
8.12, a list of all Persons purchasing Hydrocarbons from the Borrower or any
of its Subsidiaries.

       

      (k)           Notice of Sales of Oil and
Gas Properties.  In the event the Borrower or any of its
Subsidiaries intends to sell, transfer, assign or otherwise dispose of any Oil
or Gas Properties included in the most recently delivered Reserve Report (or any
Equity Interests in any Subsidiary owning interests in such Oil and Gas
Properties) during any period between two successive Scheduled Redetermination
Dates having a fair market value, individually or in the aggregate, in excess of
$250,000, prior written notice of such disposition, the price thereof, the
anticipated date of closing, and any other details thereof requested by the
Administrative Agent or any Lender.

       

      (l)           Notice of Casualty
Events.  Prompt written notice, and in any event within three
Business Days, of the occurrence of any Casualty Event or the commencement of
any action or proceeding that could reasonably be expected to result in a
Casualty Event.

       

      (m)           Information Regarding
Borrower and Guarantors.  Prompt written notice (and in any
event within 30 days prior thereto) of any change (i) in the Borrower or any
Guarantor’s corporate name or in any trade name used to identify such Person in
the conduct of its business or in the ownership of its Properties, (ii) in the
location of the Borrower or any Guarantor’s chief executive office or principal
place of business, (iii) in the Borrower or any Guarantor’s identity or
corporate structure or in the jurisdiction in which such Person is incorporated
or formed, (iv) in the Borrower or any Guarantor’s jurisdiction of organization
or such Person’s organizational identification number in such jurisdiction of
organization, and (v) in the Borrower or any Guarantor’s federal taxpayer
identification number, if any.

       

      (n)           Production Report and Lease
Operating Statements.  Within 30 days after the end of each
fiscal quarter, a report setting forth, for each calendar month during the
then-current fiscal year to date, the volume of production and sales
attributable to production (and the 

       

      
        
          
          

        

        
          60

          
            

          

        

        
          
          

        

         

        prices at
which such sales were made and the revenues derived from such sales) for each
such calendar month from the Oil and Gas Properties, and setting forth the
related ad valorem, severance and production taxes and lease operating expenses
attributable thereto and incurred for each such calendar
month.

      

       

      (o)           Notices of Certain
Changes.  Promptly, but in any event within five (5) Business
Days after the execution thereof, copies of any amendment, modification or
supplement to the certificate or articles of incorporation, by-laws, any
preferred stock designation or any other organic document of the Borrower or any
of its Subsidiaries.

       

      (p)           Annual
Budget.  Promptly, but in any event within 90 days after the
end of each fiscal year, a budget for the then current fiscal year, including a
pro forma balance sheet and income and cash flow projections.

       

      (q)           Certificate of Financial
Officer – Available Cash.  As soon as available, but in any
event not later than 45 days after the end of each fiscal quarter, commencing
with the quarter ending on June 30, 2009, a certificate of a financial officer
(i) setting forth reasonably detailed calculations of Available Cash with
respect to such quarter and (ii) the distributions to holders of Borrower’s
Equity Interests with respect to such quarter.

       

      (r)           Other Requested
Information.  Promptly following any request therefor, such
other information regarding the operations, business affairs and financial
condition of the Borrower or any of its Subsidiaries (including, without
limitation, any Plan or Multiemployer Plan and any reports or other information
required to be filed under ERISA), or compliance with the terms of this
Agreement or any other Loan Document, as the Administrative Agent or any Lender
may reasonably request.

       

      Section
8.02                                Notices of Material
Events.  The Borrower will furnish to the Administrative Agent
and each Lender, promptly after the Borrower obtains knowledge thereof, written
notice of the following:

       

      (a)           the
occurrence of any Default;

       

      (b)           the
filing or commencement of, or the threat in writing of, any action, suit,
investigation, arbitration or proceeding by or before any arbitrator or
Governmental Authority against or affecting the Borrower or any Subsidiary
thereof, or any material adverse development in any action, suit, proceeding,
investigation or arbitration (whether or not previously disclosed to the
Lenders), that, in either case, if adversely determined, could reasonably be
expected to result in liability in excess of $500,000;

       

      (c)           the
occurrence of any ERISA Event that, alone or together with any other ERISA
Events that have occurred, could reasonably be expected to result in liability
of the Borrower and its Subsidiaries in an aggregate amount exceeding $500,000;
and

       

      (d)           any
other development that results in, or could reasonably be expected to result in,
a Material Adverse Effect.

       

      
        
          
          

        

        
          61

          
            

          

        

        
          
          

        

      

       

      Each
notice delivered under this Section 8.02 shall be
accompanied by a statement of a Responsible Officer setting forth the details of
the event or development requiring such notice and any action taken or proposed
to be taken with respect thereto.

       

      Section
8.03                                Existence; Conduct of
Business.  The Borrower will, and will cause each of its
Subsidiaries to, do or cause to be done all things necessary to preserve, renew
and keep in full force and effect its legal existence and the rights, licenses,
permits, privileges and franchises material to the conduct of its business and
maintain, if necessary, its qualification to do business in each other
jurisdiction in which any of its Oil and Gas Properties is located or the
ownership of its Properties requires such qualification, except where the
failure to so qualify could not reasonably be expected to have a Material
Adverse Effect; provided that the foregoing
shall not prohibit any merger, consolidation, liquidation or dissolution
permitted under Section 9.12.

       

      Section
8.04                                Payment of
Obligations.  The Borrower will, and will cause each of its
Subsidiaries to, pay its obligations, including Tax liabilities of the Borrower
and all of its Subsidiaries before the same shall become delinquent or in
default, except where (a) the validity or amount thereof is being contested in
good faith by appropriate proceedings, (b) the Borrower or such Subsidiary has
set aside on its books adequate reserves with respect thereto in accordance with
GAAP and (c) the failure to make payment pending such contest could not
reasonably be expected to result in a Material Adverse Effect or result in the
seizure or levy of any Property of the Borrower or any of its
Subsidiaries.

       

      Section
8.05                                Performance of Obligations
under Loan Documents.  The Borrower will pay the Notes
according to the reading, tenor and effect thereof, and the Borrower will, and
the Borrower will cause each of its Subsidiaries to do and perform every act and
discharge all of the obligations to be performed and discharged by them under
the Loan Documents, including, without limitation, this Agreement, at the time
or times and in the manner specified.

       

      Section
8.06                                Operation and Maintenance of
Properties.  The Borrower will, and will cause each of its
Subsidiaries to:

       

      (a)           operate
its Oil and Gas Properties and other material Properties or cause such Oil and
Gas Properties and other material Properties to be operated in a careful and
efficient manner in accordance with the practices of the industry and in
compliance with all applicable contracts and agreements and in compliance with
all Governmental Requirements, including, without limitation, applicable
proration requirements and Environmental Laws, and all applicable laws, rules
and regulations of every other Governmental Authority from time to time
constituted to regulate the development and operation of its Oil and Gas
Properties and the production and sale of Hydrocarbons and other minerals
therefrom, except, in each case, where the failure to comply could not
reasonably be expected to have a Material Adverse Effect.

       

      (b)           keep
and maintain all Property material to the conduct of its business in good
working order and condition, ordinary wear and tear excepted preserve, maintain
and keep in good repair, working order and efficiency (ordinary wear and tear
excepted) all of its material Oil and Gas Properties and other material
Properties, including, without limitation, all material equipment, machinery and
facilities.

       

      
        
          
          

        

        
          62

          
            

          

        

        
          
          

        

      

       

      (c)           promptly
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 and will do all other things necessary to keep unimpaired their
rights with respect thereto and prevent any forfeiture thereof or default
thereunder.

       

      (d)           promptly
perform or make reasonable and customary efforts to cause to be performed, in
accordance with industry standards and in all material respects, 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.

       

      (e)           to
the extent the Borrower or one of its Subsidiaries is not the operator of any
Property, the Borrower shall use reasonable efforts to cause the operator to
comply with this Section 8.06.

       

      Section
8.07                                Insurance.  The
Borrower will, and will cause each of its Subsidiaries to, maintain, with
financially sound and reputable insurance companies, insurance in such amounts
and against such risks as are customarily maintained by companies engaged in the
same or similar businesses operating in the same or similar
locations.  The loss payable clauses or provisions in said insurance
policy or policies insuring any of the collateral for the Loans shall be
endorsed in favor of and made payable to the Administrative Agent as its
interests may appear and such policies shall name the Administrative Agent and
the Lenders as “additional insureds” and provide that the insurer will give at
least 30 days prior notice of any cancellation to the Administrative
Agent.

       

      Section
8.08                                Books and Records;
Inspection Rights.  The Borrower will, and will cause each of
its Subsidiaries to, keep proper books of record and account in which full, true
and correct entries are made of all dealings and transactions in relation to its
business and activities.  The Borrower will, and will cause each of
its Subsidiaries to, permit any representatives designated by the Administrative
Agent or any Lender, upon reasonable prior notice, to visit and inspect its
Properties, to examine and make extracts from its books and records, and to
discuss its affairs, finances and condition with its officers and independent
accountants, all at such reasonable times and as often as reasonably
requested.

       

      Section
8.09                                Compliance with
Laws.  The Borrower will, and will cause each of its
Subsidiaries to, comply with all laws, rules, regulations and orders of any
Governmental Authority applicable to them or their Property, except where the
failure to do so, individually or in the aggregate, could not reasonably be
expected to result in a Material Adverse Effect.

       

      Section
8.10                                Environmental
Matters.

       

      (a)           The
Borrower shall, and shall cause each of its Subsidiaries to:  (i)
comply, and shall cause its Properties and operations and each of its
Subsidiaries and each Subsidiary’s Properties and operations to comply, with all
applicable Environmental Laws, the breach of which could be reasonably expected
to have a Material Adverse Effect; (ii) not dispose of or otherwise release, and
shall cause each Subsidiary not to dispose of or otherwise release, any oil, oil
and gas waste, hazardous substance, or solid waste on, under, about or from any
of 

       

      
        
          
          

        

        
          63

          
            

          

        

        
          
          

        

         

        the
Borrower’s or its Subsidiaries’ Properties or any other Property to the extent
caused by the Borrower’s or any of its Subsidiaries’ operations except in
compliance with applicable Environmental Laws, the disposal or release of which
could reasonably be expected to have a Material Adverse Effect; (iii) timely
obtain or file, and shall cause each of its Subsidiaries to timely obtain or
file, all notices, permits, licenses, exemptions, approvals, registrations or
other authorizations, if any, required under applicable Environmental Laws to be
obtained or filed in connection with the operation or use of the Borrower’s or
its Subsidiaries’ Properties, which failure to obtain or file could reasonably
be expected to have a Material Adverse Effect; (iv) promptly commence and
diligently prosecute to completion, and shall cause each of its Subsidiaries to
promptly commence and diligently prosecute to completion, any assessment,
evaluation, investigation, monitoring, containment, cleanup, removal, repair,
restoration, remediation or other remedial obligations (collectively, the “Remedial Work”) in
the event any Remedial Work is required or reasonably necessary under applicable
Environmental Laws because of or in connection with the actual or suspected
past, present or future disposal or other release of any oil, oil and gas waste,
hazardous substance or solid waste on, under, about or from any of the
Borrower’s or its Subsidiaries’ Properties, which failure to commence and
diligently prosecute to completion could reasonably be expected to have a
Material Adverse Effect; and (v) establish and implement, and shall cause each
of its Subsidiaries to establish and implement, such procedures as may be
reasonably necessary to continuously determine and assure that the Borrower’s
and its Subsidiaries’ obligations under this Section
8.10(a) are timely and fully satisfied, which failure to establish and
implement could reasonably be expected to have a Material Adverse
Effect.

      

       

      (b)           The
Borrower will promptly, but in no event later than five days after the
occurrence thereof, notify the Administrative Agent and the Lenders in writing
of any threatened action, investigation or inquiry by any Governmental Authority
or any threatened demand or lawsuit by any landowner or other third party
against the Borrower or its Subsidiaries or their Properties of which the
Borrower has knowledge in connection with any Environmental Laws (excluding
routine testing and corrective action) if the Borrower reasonably anticipates
that such action will result in liability (whether individually or in the
aggregate) in excess of $500,000, not fully covered by insurance, subject to
normal deductibles.

       

      (c)           The
Borrower will, and will cause each of its Subsidiaries to, provide environmental
audits and tests in accordance with American Society of Testing Materials
standards upon request by the Administrative Agent and the Lenders (or as
otherwise required to be obtained by the Administrative Agent or the Lenders by
any Governmental Authority), in connection with any future acquisitions of Oil
and Gas Properties or other material Properties.

       

      Section
8.11                                Further
Assurances.

       

      (a)           The
Borrower at its sole expense will, and will cause each of its Subsidiaries to,
promptly execute and deliver to the Administrative Agent all such other
documents, agreements and instruments reasonably requested by the Administrative
Agent to comply with, cure any defects or accomplish the conditions precedent,
covenants and agreements of the Borrower or any of its Subsidiaries, as the case
may be, in the Loan Documents, including the Notes, or to further evidence and
more fully describe the collateral intended as security for the Indebtedness, or
to correct any omissions in this Agreement or the Security Instruments, or to

       

      
        
          
          

        

        
          64

          
            

          

        

        
          
          

        

         

        state
more fully the obligations secured therein, or to perfect, protect or preserve
any Liens created pursuant to this Agreement or any of the Security Instruments
or the priority thereof, or to make any recordings, file any notices or obtain
any consents, all as may be reasonably necessary or appropriate, in the sole
discretion of the Administrative Agent, in connection
therewith.

      

       

      (b)           The
Borrower hereby authorizes the Administrative Agent to file one or more
financing or continuation statements, and amendments thereto, relative to all or
any part of the Mortgaged Property without the signature of the Borrower or any
other Guarantor where permitted by law.  A carbon, photographic or
other reproduction of the Security Instruments or any financing statement
covering the Mortgaged Property or any part thereof shall be sufficient as a
financing statement where permitted by law.  The Administrative Agent
will promptly send the Borrower any financing or continuation statements it
files without the signature of the Borrower or any other Guarantor and the
Administrative Agent will promptly send the Borrower the filing or recordation
information with respect thereto.

       

      Section
8.12                                Reserve
Reports.

       

      (a)           On
or before March 1st and September 1st of each year, commencing September 1,
2009, the Borrower shall furnish to the Administrative Agent and the Lenders a
Reserve Report as of the immediately preceding December 31 or June 30, as
applicable.  The Reserve Report as of December 31 of each year shall
be prepared by one or more independent petroleum engineers reasonably acceptable
to the Administrative Agent and the June 30 Reserve Report of each year shall be
prepared by or under the supervision of the “Manager of Acquisitions and
Planning” 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 December 31 Reserve Report.

       

      (b)           In
the event of an Interim Redetermination, the Borrower shall furnish to the
Administrative 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 January 1 Reserve
Report.  For any Interim Redetermination requested by the
Administrative Agent or the Borrower pursuant to Section 2.07(b), the Borrower shall provide such
Reserve Report with an “as of” date as required by the Administrative Agent as
soon as possible, but in any event no later than thirty (30) days following the
receipt of such request.

       

      (c)           With
the delivery of each Reserve Report, the Borrower shall provide to the
Administrative Agent and the Lenders a certificate from a Responsible Officer
certifying that in all material respects:  (i) the information
contained in the Reserve Report and any other information delivered in
connection therewith is true and correct, (ii) the Borrower or its Subsidiaries
owns 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 9.03, (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 in excess of the volume specified
in Section 7.18 with respect to their Oil and Gas
Properties evaluated in such Reserve Report that would require the Borrower or
any of its Subsidiaries to deliver Hydrocarbons either generally or produced

       

      
        
          
          

        

        
          65

          
            

          

        

        
          
          

        

         

        from such
Oil and Gas Properties at some future time without then or thereafter receiving
full payment therefor, (iv) none of their 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
Administrative Agent, (v) attached to the certificate is a list of all marketing
agreements entered into subsequent to the later of the date hereof or the most
recently delivered Reserve Report that the Borrower could reasonably be expected
to have been obligated to list on Schedule 7.19 had such agreement been in
effect on the date hereof and (vi) attached thereto is a schedule of the Oil and
Gas Properties evaluated by such Reserve Report that are Mortgaged Properties
and demonstrating the percentage of the present value that such Mortgaged
Properties represent.

      

       

      Section
8.13                                Title
Information.

       

      (a)           On
or before the delivery to the Administrative Agent and the Lenders of each
Reserve Report required by Section 8.12(a), to the extent requested by the
Administrative Agent, the Borrower will deliver title information in form and
substance acceptable to the Administrative 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 Administrative Agent shall
have received together with title information previously delivered to the
Administrative Agent, satisfactory title information on at least 80% of the
total value of the Oil and Gas Properties evaluated by such Reserve
Report.

       

      (b)           If
the Borrower has provided title information for additional Properties under Section 8.13(a), the Borrower shall, within 60 days of
notice from the Administrative Agent that title defects or exceptions exist with
respect to such additional Properties, either (i) cure any such title defects or
exceptions (including defects or exceptions as to priority) which are not
permitted by Section 9.03 raised by such
information, (ii) substitute acceptable Mortgaged Properties with no title
defects or exceptions except for Excepted Liens (other than Excepted Liens
described in clauses (e), (g) and (h) of such definition) having an equivalent
value or (iii) deliver title information in form and substance reasonably
acceptable to the Administrative Agent so that the Administrative Agent shall
have received, together with title information previously delivered to the
Administrative Agent, satisfactory title information on at least 80% of the
value of the Oil and Gas Properties evaluated by such Reserve
Report.

       

      (c)           If
the Borrower is unable to cure any title defect requested by the Administrative
Agent or the Lenders to be cured within the 60-day period or the Borrower does
not comply with the requirements to provide acceptable title information
covering 80% of the value of the Oil and Gas Properties evaluated in the most
recent Reserve Report, such default shall not be a Default, but instead the
Administrative Agent and/or the Majority Lenders 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 Administrative Agent or the
Lenders.  To the extent that the Administrative Agent or the Majority
Lenders are not reasonably satisfied with title to any Mortgaged Property after
the 60-day period has elapsed, such unacceptable Mortgaged Property shall not
count towards the 80% requirement, and the Administrative 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 

       

      
        
          
          

        

        
          66

          
            

          

        

        
          
          

        

         

        by the
Majority Lenders to cause the Borrower to be in compliance with the requirement
to provide acceptable title information on 80% of the value of the Oil and Gas
Properties.  This new Borrowing Base shall become effective
immediately after receipt of such notice.

      

       

      Section
8.14                                Additional Collateral;
Additional Guarantors.

       

      (a)           In
connection with each redetermination of the Borrowing Base, the Borrower shall
review the Reserve Report and the list of current Mortgaged Properties (as
described in Section 8.12(c)(vi)) to ascertain
whether the Mortgaged Properties represent at least 80% of the total value of
the Oil and Gas Properties evaluated in the most recently completed Reserve
Report after giving effect to exploration and production activities,
acquisitions, dispositions and production.  In the event that the
Mortgaged Properties do not represent at least 80% of such total value, then the
Borrower shall, and shall cause its Subsidiaries to, grant to the Administrative
Agent or its designee as security for the Indebtedness a first-priority Lien
interest (provided the
Excepted Liens of the type described in clauses (a) to (d) and (f) of the
definition thereof may exist, but subject to the provisos at the end of such
definition) on additional Oil and Gas Properties not already subject to a Lien
of the Security Instruments such that after giving effect thereto, the Mortgaged
Properties will represent at least 80% of such total value.  All such
Liens will be created and perfected by and in accordance with the provisions of
deeds of trust, security agreements and financing statements or other Security
Instruments, all in form and substance reasonably satisfactory to the
Administrative Agent or its designee and in sufficient executed (and
acknowledged where necessary or appropriate) counterparts for recording
purposes.  In order to comply with the foregoing, if any Subsidiary
places a Lien on its Oil and Gas Properties and such Subsidiary is not a
Guarantor, then it shall become a Guarantor and comply with Section 8.14(b).

       

      (b)           In
the event that (i) the Borrower determines that any Subsidiary is a Material
Domestic Subsidiary or (ii) any Domestic Subsidiary incurs or guarantees any
Debt, then the Borrower shall promptly cause such Subsidiary to guarantee the
Indebtedness pursuant to the Guaranty Agreement.  In connection with
any such guaranty, the Borrower shall, or shall cause such Subsidiary to, (A)
execute and deliver a supplement to the Guaranty Agreement executed by such
Subsidiary, (B) pledge all of the Equity Interests of such Subsidiary
(including, without limitation, delivery of original stock certificates
evidencing the Equity Interests of such Subsidiary, together with an appropriate
undated stock powers for each certificate duly executed in blank by the
registered owner thereof) and (C) execute and deliver such other additional
closing documents, certificates and legal opinions as shall reasonably be
requested by the Administrative Agent or its designee.

       

      Section
8.15                                ERISA
Compliance.  The Borrower will promptly furnish, and will cause
its Subsidiaries and any ERISA Affiliate to promptly furnish, to the
Administrative Agent (a) 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, if any, or any trust
created thereunder, (b) 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 the President or the principal
Financial Officer of the Borrower, its Subsidiaries or the ERISA Affiliate, as
the case may be, specifying the nature thereof, what action the 

       

      
        
          
          

        

        
          67

          
            

          

        

        
          
          

        

         

            Borrower, its
Subsidiaries 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 u)
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, if any (other than a Multiemployer
Plan), the Borrower will, and the Borrower will cause each of its Subsidiaries
and ERISA Affiliates to, (1) 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 (2) 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
8.16                                Marketing
Activities.  The Borrower will not, and will not permit any of
its Subsidiaries to, engage in marketing activities for any Hydrocarbons or
enter into any contracts related thereto other than (a) contracts for the sale
of Hydrocarbons scheduled or reasonably estimated to be produced from their
proved Oil and Gas Properties during the period of such contract, (b) contracts
for the sale of Hydrocarbons scheduled or reasonably estimated to be produced
from proved Oil and Gas Properties of third parties during the period of such
contract associated with the Oil and Gas Properties of the Borrower and its
Subsidiaries that the Borrower or one of its Subsidiaries has the right to
market pursuant to joint operating agreements, unitization agreements or other
similar contracts that are usual and customary in the oil and gas business and
(c) other contracts for the purchase and/or sale of Hydrocarbons of third
parties (i) which have generally offsetting provisions (i.e., corresponding pricing
mechanics, delivery dates and points and volumes) such that no “position” is
taken and (ii) for which appropriate credit support has been taken to alleviate
the material credit risks of the counterparty thereto.

       

      ARTICLE
IX

       

      NEGATIVE
COVENANTS

       

      Until the
Commitments have expired or been terminated and the principal of and interest on
each Loan and all fees payable hereunder and all other amounts payable under the
Loan Documents have been paid in full and all Letters of Credit have expired or
terminated and all LC Disbursements shall have been reimbursed, the Borrower
covenants and agrees with the Lenders that:

       

      Section
9.01                                Financial
Covenants.

       

      (a)           Ratio of EBITDA to Interest
Expense.  The Borrower will not, as of the last day of any
fiscal quarter, permit its ratio of EBITDA for the four quarters then ending to
Interest Expense for such period to be less than 2.5 to 1.0.

       

      (b)           Current
Ratio.  The Borrower will not permit, as of the last day of any
fiscal quarter, its ratio of (i) consolidated current assets (including the
unused amount of the total Commitments, but excluding non-cash assets under FAS
133) to (ii) consolidated current 

       

      
        
          
          

        

        
          68

          
            

          

        

        
          
          

        

         

        liabilities
(excluding non-cash obligations under FAS 133 and current maturities under this
Agreement) to be less than 1.0 to 1.0.

      

       

      (c)           Ratio of Total Debt to
EBITDA.  The Borrower will not, on any date of determination,
permit its ratio of Total Debt as of such date to EBITDA for the four fiscal
quarters ending on the last day of the fiscal quarter immediately preceding the
date of determination for which financial statements are available to be greater
than 3.75 to 1.00.

       

      Section
9.02                                Debt.  Neither
the Borrower nor any of its Subsidiaries will incur, create, assume or suffer to
exist any Debt, except:

       

      (a)           the
Notes or other Indebtedness arising under the Loan Documents or any guaranty of
or suretyship arrangement for the Notes or other Indebtedness arising under the
Loan Documents.

       

      (b)           accounts
payable and other accrued expenses, liabilities or other obligations to pay (for
the deferred purchase price of Property or services) from time to time incurred
in the ordinary course of business which are not greater than 90 days past the
date of invoice or delinquent or which are being contested in good faith by
appropriate action and for which adequate reserves have been maintained in
accordance with GAAP.

       

      (c)           intercompany
Debt between the Borrower and any of its Subsidiaries or between Subsidiaries to
the extent permitted by Section 9.05(g); provided that such Debt is
not held, assigned, transferred, negotiated or pledged to any Person other than
the Borrower or one of their Wholly-Owned Subsidiaries, and, provided further, that any
such Debt owed by either the Borrower or a Guarantor shall be subordinated to
the Indebtedness on terms set forth in the Guaranty Agreement.

       

      (d)           endorsements
of negotiable instruments for collection in the ordinary course of
business.

       

      (e)           other
Debt not to exceed $2,000,000 in the aggregate at any one time
outstanding.

       

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

       

      (a)           Liens
securing the payment of any Indebtedness.

       

      (b)           Excepted
Liens.

       

      (c)           Liens
on Property not constituting collateral for the Indebtedness and not otherwise
permitted by the foregoing clauses of this Section
9.03; provided that
the aggregate principal or face amount of all Debt secured under this Section 9.03(c) shall not exceed $100,000 at any
time.

       

      
        
          
          

        

        
          69

          
            

          

        

        
          
          

        

      

       

      Section
9.04                                Dividends, Distributions and
Redemptions.  The Borrower will not, and will not permit any of
its Subsidiaries to, declare or make, or agree to pay or make, directly or
indirectly, any Restricted Payment, return any capital to its stockholders or
make any distribution of their Property to their respective Equity Interest
holders, except (a) the Borrower may declare and pay dividends or distributions
with respect to its Equity Interests payable solely in additional shares of its
Equity Interests (other than Disqualified Capital Stock), (b) Subsidiaries may
declare and pay dividends or distributions ratably with respect to their Equity
Interests, and (c) so long as no Borrowing Base Deficiency, Default or Event of
Default has occurred and is continuing or would result therefrom, and, subject
to the proviso in Section 7.21(b), the Borrower may declare and pay quarterly
cash dividends to its partners of Available Cash in accordance with the
Partnership Agreement.

       

      Section
9.05                                Investments, Loans and
Advances.  Neither the Borrower nor any of its Subsidiaries
will make or permit to remain outstanding any Investments in or to any Person,
except that the foregoing restriction shall not apply to:

       

      (a)           Investments
reflected in the Financial Statements.

       

      (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 S&P or Moody’s.

       

      (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 $250,000,000 (as of the date of such 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 S&P or Moody’s, respectively.

       

      (f)           deposits
in money market funds investing exclusively in Investments described in Section 9.05(c), Section
9.05(d) or Section 9.05(e).

       

      (g)           Investments
(i) made by the Borrower in or to the Guarantors, (ii) made by any Subsidiary in
or to the Borrower or any Guarantor, and (iii) made by the Borrower or any
Guarantor in Subsidiaries that are not Guarantors, provided that the aggregate
of all Investments made by the Borrower and the Guarantors in or to all
Subsidiaries that are not Guarantors shall not exceed $2,000,000 at any time,
and only to the extent an Event of Default or Borrowing Base Deficiency does not
exist and would not result from making such Investments.

       

      (h)           Investments
(including, without limitation, capital contributions) in general or limited
partnerships or other types of entities (each a “venture”) entered
into by the Borrower or any of its Subsidiaries with others in the ordinary
course of business; provided that 

       

      
        
          
          

        

        
          70

          
            

          

        

        
          
          

        

         

        (i) any
such venture is engaged exclusively in oil and gas exploration, development,
production, processing and related activities, including transportation, (ii)
the interest in such venture is acquired in the ordinary course of business and
on fair and reasonable terms and (iii) such venture interests acquired and
capital contributions made (valued as of the date such interest was acquired or
the contribution made) do not exceed, in the aggregate at any time outstanding
an amount equal to $2,000,000, and only to the extent an Event of Default or
Borrowing Base Deficiency does not exist and would not result from making such
Investments.

      

       

      (i)           subject
to the limits in Section 9.06, Investments in
direct ownership interests in additional Oil and Gas Properties and gas
gathering systems related thereto or related to farm-out, farm-in, joint
operating, joint venture or area of mutual interest agreements, gathering
systems, pipelines or other similar arrangements which are usual and customary
in the oil and gas exploration and production business located within the
geographic boundaries of the United States of America, and only to the extent an
Event of Default or Borrowing Base Deficiency does not exist and would not
result from making such Investments.

       

      (j)           loans
or advances to employees, officers or directors in the ordinary course of
business of the Borrower or any of its Subsidiaries, in each case only as
permitted by applicable law, including Section 402 of the Sarbanes Oxley Act of
2002, but in any event not to exceed $250,000 in the aggregate at any
time.

       

      (k)           Investments
in stock, obligations or securities received in settlement of debts arising from
Investments permitted under this Section 9.05 owing
to the Borrower or any of its Subsidiaries as a result of a bankruptcy or other
insolvency proceeding of the obligor in respect of such debts or upon the
enforcement of any Lien in favor of the Borrower or any of its Subsidiaries;
provided that the
Borrower shall give the Administrative Agent prompt written notice in the event
that the aggregate amount of all investments held at any one time under this Section 9.05(i) exceeds $250,000.

       

      Section
9.06                                Nature of
Business.  Neither the Borrower nor any of its Subsidiaries
will allow any material change to be made in the character of its business as an
independent oil and gas exploration and production company.  The
Borrower will not, and will not permit any of its Subsidiaries to, operate its
business outside the geographical boundaries of the United States.

       

      Section
9.07                                Limitation on
Leases.  Neither the Borrower nor any of its Subsidiaries will
create, incur, assume or suffer to exist any obligation for the payment of rent
or hire of Property of any kind whatsoever (real or personal but excluding
leases of Hydrocarbon Interests), 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 leases or lease agreements, including, without
limitation, any residual payments at the end of any lease, to exceed $5,000,000
in any period of twelve consecutive calendar months during the life of such
leases.

       

      Section
9.08                                Proceeds of
Notes.  The Borrower will not permit the proceeds of the Notes
to be used for any purpose other than those permitted by Section 7.21.  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 Regulations T, U or X or any
other 

       

      
        
          
          

        

        
          71

          
            

          

        

        
          
          

        

         

        regulation
of the Board 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.  If requested by the Administrative
Agent, the Borrower will furnish to the Administrative Agent and each Lender a
statement to the foregoing effect in conformity with the requirements of FR Form
U-1 or such other form referred to in Regulation U, Regulation T or Regulation X
of the Board, as the case may be.

      

       

      Section
9.09                                ERISA
Compliance.  The Borrower and its Subsidiaries will not at any
time:

       

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

       

      (b)           terminate,
or permit any 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 of
the Borrower, any of its Subsidiaries or any ERISA Affiliate to the
PBGC.

       

      (c)           fail
to make, or permit any 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, any of its Subsidiaries or any ERISA Affiliate
is required to pay as contributions thereto.

       

      (d)           permit
to exist, or allow any 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 ERISA Affiliate to permit, the actuarial present value of the
benefit liabilities under any Plan maintained by the Borrower, any of its
Subsidiaries 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.

       

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

       

      (g)           acquire,
or permit any ERISA Affiliate to acquire, an interest in any Person that causes
such Person to become an ERISA Affiliate with respect to the Borrower or any of
its Subsidiaries or with respect to any ERISA Affiliate of the Borrower or any
of its Subsidiaries 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, (i) any Multiemployer Plan, or (ii) 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.

       

      
        
          
          

        

        
          72

          
            

          

        

        
          
          

        

      

       

      (h)           incur,
or permit any 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 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.

       

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

       

      Section
9.10                                Sale or Discount of
Receivables.  Except for receivables obtained by the Borrower
or any of its Subsidiaries out of the ordinary course of business or the
settlement of joint interest billing accounts in the ordinary course of business
or discounts granted to settle collection of accounts receivable or the sale of
defaulted accounts arising in the ordinary course of business in connection with
the compromise or collection thereof and not in connection with any financing
transaction, neither the Borrower nor any of its Subsidiaries will discount or
sell (with or without recourse) any of its notes receivable or accounts
receivable.

       

      Section
9.11                                Mergers,
Etc.  Neither the Borrower nor any of its Subsidiaries will
merge into or with or consolidate with any other Person, or sell, lease or
otherwise dispose of (whether in one transaction or in a series of transactions)
all or substantially all of its Property to any other Person, except that any
Wholly-Owned Subsidiary may merge with any other Wholly-Owned Subsidiary and
that the Borrower may merge with any Wholly-Owned Subsidiary so long as the
Borrower is the survivor.

       

      Section
9.12                                Sale of
Properties.  The Borrower will not, and will not permit any of
its Subsidiaries to, sell, assign, farm-out, convey or otherwise transfer any
Property except for: (a) the sale of Hydrocarbons in the ordinary course of
business; (b) farmouts of undeveloped acreage and assignments in connection with
such farmouts; (c) the sale or transfer of equipment that is no longer necessary
for the business of the Borrower or such Subsidiary or is replaced by equipment
of at least comparable value and use; provided that the total fair
market value of such equipment being sold or transferred does not exceed
$100,000 during any 12-month period; (d) sales or other dispositions (including
Casualty Events) of Oil and Gas Properties or any interest therein or
Subsidiaries owning Oil and Gas Properties; provided that (i) 100% of the
consideration received in respect of such sale or other disposition shall be
cash, (ii) the consideration received in respect of such sale or other
disposition shall be equal to or greater than the fair market value of the Oil
and Gas Property, interest therein or Subsidiary subject of such sale or other
disposition (as reasonably determined by the board of directors of the Borrower
and, if requested by the Administrative Agent, the Borrower shall deliver a
certificate of a Responsible Officer of the Borrower certifying to that effect),
(iii) if such sale or other disposition of Oil and Gas Property or Subsidiary
owning Oil and Gas Properties included in the most recently delivered Reserve
Report during any period between two successive Scheduled Redetermination Dates
has a fair market value (as determined by the Administrative Agent),
individually or in the aggregate, in excess of 5% of the Borrowing Base, the
Borrowing Base shall be reduced, effective 

       

      
        
          
          

        

        
          73

          
            

          

        

        
          
          

        

         

        immediately
upon such sale or disposition, by an amount equal to the value, if any, assigned
such Property, as determined by the Majority Lenders in the most recently
delivered Reserve Report; (iv) if any such sale or other disposition is of a
Subsidiary owning Oil and Gas Properties, such sale or other disposition shall
include all the Equity Interests of such Subsidiary; and (v) such sales under
this Section 9.12(d) shall be allowed only to the
extent an Event of Default or Borrowing Base Deficiency does not exist and would
not result from such sale or transfer; and (e) sales and other dispositions of
Properties not regulated by Section 9.12(a) to (d) having a total fair market value not to exceed
$250,000 during any 12-month period.

      

       

      Section
9.13                                Environmental
Matters.  The Borrower will not, and will not permit any
Subsidiary to, violate or permit any of its Property to be in violation of, or
do anything or permit anything to be done which will subject any such Property
to any Remedial Work 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 violations or
remedial obligations could reasonably be expected to have a Material Adverse
Effect.

       

      Section
9.14                                Transactions with
Affiliates.  The Borrower will not, and will not permit any
Subsidiary to, enter into any transaction, including, without limitation, any
purchase, sale, lease or exchange of Property or the rendering of any service,
with any Affiliate (other than the Guarantors and Wholly-Owned Subsidiaries of
the Borrower) unless such transactions are otherwise permitted under this
Agreement 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
9.15                                Subsidiaries.  The
Borrower shall have no Subsidiaries other than Wholly-Owned
Subsidiaries.  The Borrower shall not, and shall not permit its
Subsidiaries to, create or acquire any additional Subsidiary unless the Borrower
gives written notice to the Administrative Agent of such creation or acquisition
and complies with Section 8.14(b).  The
Borrower shall not, and shall not permit any of its Subsidiaries to, sell,
assign or otherwise dispose of any Equity Interests in any of its
Subsidiaries.  The Borrower shall have no Foreign
Subsidiaries.

       

      Section
9.16                                Negative Pledge Agreements;
Dividend Restrictions.  Neither the Borrower nor any of its
Subsidiaries will create, incur, assume or suffer to exist any contract,
agreement or understanding (other than this Agreement or the Security
Instruments) that in any way prohibits or restricts the granting, conveying,
creation or imposition of any Lien on any of its Property in favor of the
Administrative Agent and the Lenders or restricts any Subsidiary from paying
dividends or making distributions to the Borrower or any Guarantor, or which
requires the consent of or notice to other Persons in connection
therewith.

       

      Section
9.17                                Gas Imbalances, Take-or-Pay
or Other Prepayments.  The Borrower will not, and will not
permit any of its Subsidiaries to, allow gas imbalances, take-or-pay or other
prepayments with respect to the Oil and Gas Properties of the Borrower or any of
its Subsidiaries that would require the Borrower or such Subsidiary to deliver,
in the aggregate, two percent (2%) or more of the monthly production of
Hydrocarbons at some future time without then or thereafter receiving full
payment therefor.

       

      
        
          
          

        

        
          74

          
            

          

        

        
          
          

        

      

       

      Section
9.18                                Swap
Agreements.  Neither the Borrower nor any of its Subsidiaries
will enter into any Swap Agreements with any Person other than (a) Swap
Agreements in respect of commodities (i) with an Approved Counterparty and (ii)
the notional volumes for which (when aggregated with other commodity Swap
Agreements then in effect other than basis differential swaps on volumes already
hedged pursuant to other Swap Agreements) do not exceed, as of the date such
Swap Agreement is executed, 85% of the reasonably anticipated projected
production from Proved Developed Producing Properties for each month during the
period during which such Swap Agreement is in effect for each of crude oil and
natural gas, calculated separately, for each of the next five succeeding
calendar years, provided that puts and put
options may be purchased on production that is subject of an acquisition,
pending the completion of such acquisition, and puts, excluding the effect of
the provision for pending acquisitions, may be purchased limited to total
notional volumes of all Swap Agreements and puts options not exceeding 100% of
projected production from Proved Developed Producing Properties as described in
(a)(ii) above, and (b) Swap Agreements in respect of interest rates with an
Approved Counterparty, which effectively convert interest rates from floating to
fixed, the notional amounts of which (when aggregated with all other Swap
Agreements of the Borrower and its Subsidiaries then in effect effectively
converting interest rates from floating to fixed) do not exceed 90% of the then
outstanding principal amount of the Borrower’s Debt for borrowed money which
bears interest at a floating rate.  In no event shall any Swap
Agreement contain any requirement, agreement or covenant for the Borrower or any
of its Subsidiaries to post collateral or margin to secure their obligations
under such Swap Agreement or to cover market exposures.

       

      Section
9.19                                Swap Agreement
Termination.  The Borrower shall, and shall require its
Subsidiaries to, maintain the hedged positions established pursuant to Swap
Agreements used to calculate the then effective Borrowing Base and shall, and
shall require its Subsidiaries to, neither assign, terminate or unwind any such
Swap Agreements nor sell any Swap Agreements if the effect of such action (when
taken together with any other Swap Agreements executed contemporaneously with
the taking of such action) would have the effect of reducing the economic value
supporting the Borrowing Base; provided that notwithstanding the foregoing, the
Borrower may, and may permit its Subsidiaries to, assign, terminate or unwind
Swap Agreements with the effect of reducing the economic value supporting the
Borrowing Base if it provides not less than 10 Business Days prior written
notice of such intent to the Administrative Agent and the Lenders, and
concurrently with such notice the Majority Lenders shall have the right to
adjust the Borrowing Base in accordance with Section 2.07(e).

       

      Section
9.20                                Tax Status as Partnership;
Partnership Agreement.  The Borrower shall not alter its status
as a partnership for purposes of United States Federal Income
taxes.  The Borrower shall not, and shall not permit any Subsidiary
to, amend or modify any provision of the Partnership Agreement or any other
organizational document, or any agreements with Affiliates of the type referred
to in Section 9.14, if such amendment or
modification could reasonably be expected to have a Material Adverse
Effect.

       

      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”:

       

      
        
          
          

        

        
          75

          
            

          

        

        
          
          

        

      

       

      (a)           the
Borrower shall fail to pay any principal of any Loan or any reimbursement
obligation in respect of any LC Disbursement when and as the same shall become
due and payable, whether at the due date thereof or at a date fixed for
prepayment thereof or otherwise.

       

      (b)           the
Borrower shall fail to pay any interest on any Loan or any fee or any other
amount (other than an amount referred to in Section
10.01(a)) payable under any Loan Document, when and as the same shall become
due and payable, and such failure shall continue unremedied for a period of five
Business Days.

       

      (c)           any
representation or warranty made or deemed made by or on behalf of the Borrower
or any of its Subsidiaries in or in connection with any Loan Document or any
amendment or modification of any Loan Document or waiver under such Loan
Document, or in any report, certificate, financial statement or other document
furnished pursuant to or in connection with any Loan Document or any amendment
or modification thereof or waiver thereunder, shall prove to have been incorrect
when made or deemed made.

       

      (d)           the
Borrower or any of its Subsidiaries shall fail to observe or perform any
covenant, condition or agreement contained in, Section
8.01(m), Section 8.01(n), Section 8.02, Section
8.03 or in ARTICLE IX.

       

      (e)           the
Borrower or any of its Subsidiaries shall fail to observe or perform any
covenant, condition or agreement contained in this Agreement (other than those
specified in Section 10.01(a), Section 10.01(b) or Section
10.01(d)) or any other Loan Document, and such failure shall continue
unremedied for a period of 30 days after the earlier to occur of (i) notice
thereof from the Administrative Agent to the Borrower (which notice will be
given at the request of any Lender) or (ii) a Responsible Officer of the
Borrower or any of its Subsidiaries otherwise becoming aware of such
default.

       

      (f)           the
Borrower or any of its Subsidiaries shall fail to make any payment (whether of
principal or interest and regardless of amount) in respect of any Material
Indebtedness, when and as the same shall become due and payable (after giving
effect to any applicable notice and cure period).

       

      (g)           any
event or condition occurs (after giving effect to any notice or cure period)
that results in any Material Indebtedness becoming due prior to its scheduled
maturity or that enables or permits (with or without the giving of notice, the
lapse of time or both) the holder or holders of any Material Indebtedness or any
trustee or agent on its or their behalf to cause any Material Indebtedness to
become due, or to require the Redemption thereof or any offer to Redeem to be
made in respect thereof, prior to its scheduled maturity or require the Borrower
or any of its Subsidiaries to make an offer in respect thereof.

       

      (h)           an
involuntary proceeding shall be commenced or an involuntary petition shall be
filed seeking (i) liquidation, reorganization or other relief in respect of the
Borrower or any of its Subsidiaries or its debts, or of a substantial part of
its assets, under any  Federal, state or foreign bankruptcy,
insolvency, receivership or similar law now or hereafter in effect or (ii) the
appointment of a receiver, trustee, custodian, sequestrator, conservator or
similar official for 

       

      
        
          
          

        

        
          76

          
            

          

        

        
          
          

        

         

        the
Borrower or any of its Subsidiaries or for a substantial part of its assets,
and, in any such case, such proceeding or petition shall continue undismissed
for 60 days or an order or decree approving or ordering any of the foregoing
shall be entered.

      

       

      (i)           the
Borrower or any of its Subsidiaries shall (i) voluntarily commence any
proceeding or file any petition seeking liquidation, reorganization or other
relief under any Federal, state or foreign bankruptcy, insolvency, receivership
or similar law now or hereafter in effect, (ii) consent to the institution of,
or fail to contest in a timely and appropriate manner, any proceeding or
petition described in Section 10.01(h), (iii) apply
for or consent to the appointment of a receiver, trustee, custodian,
sequestrator, conservator or similar official for the Borrower or any of its
Subsidiaries or for a substantial part of its assets, (iv) file an answer
admitting the material allegations of a petition filed against it in any such
proceeding, (v) make a general assignment for the benefit of creditors or (vi)
take any action for the purpose of effecting any of the foregoing; or any member
of the Borrower shall make any request or take any action for the purpose of
calling a meeting of the members of the Borrower to consider a resolution to
dissolve and wind-up the Borrower’s affairs.

       

      (j)           the
Borrower or any of its Subsidiaries shall become unable, admit in writing its
inability or fail generally to pay its debts as they become due.

       

      (k)           (i)
one or more judgments for the payment of money in an aggregate amount in excess
of $1,000,000 (to the extent not covered by independent third party insurance
provided by insurers of the highest claims paying rating or financial strength
as to which the insurer does not dispute coverage and is not subject to an
insolvency proceeding) or (ii) any one or more non monetary judgments that have,
or could reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect, shall be rendered against the Borrower, any of its
Subsidiaries or any combination thereof; and, in case of each of clause (i) or
(ii), the same shall remain undischarged for a period of 30 consecutive days
during which execution shall not be effectively stayed, or any action shall be
legally taken by a judgment creditor to attach or levy upon any assets of the
Borrower or any of its Subsidiaries to enforce any such judgment.

       

      (l)           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 against the Borrower or a
Guarantor party thereto or shall be repudiated by them, or cease to create a
valid and perfected Lien of the priority required thereby on any of the
collateral purported to be covered thereby, except to the extent permitted by
the terms of this Agreement, or the Borrower or any of its Subsidiaries shall so
state in writing.

       

      (m)           an
ERISA Event shall have occurred that, in the opinion of the Majority Lenders,
when taken together with all other ERISA Events that have occurred, could
reasonably be expected to result in liability of the Borrower and its
Subsidiaries in an aggregate amount exceeding $1,000,000 in any
year.

       

      (n)           a
Change in Control shall occur.

       

      
        
          
          

        

        
          77

          
            

          

        

        
          
          

        

      

       

      Section
10.02                                Remedies.

       

      (a)           In
the case of an Event of Default other than one described in Section 10.01(h), Section
10.01(i) or Section 10.01(j), at any time
thereafter during the continuance of such Event of Default, the Administrative
Agent may, and at the request of the Majority Lenders, shall, by notice to the
Borrower, take either or both of the following actions, at the same or different
times:  (i) terminate the Commitments, and thereupon the Commitments
shall terminate immediately, and (ii) declare the Notes and the Loans then
outstanding to be due and payable in whole (or in part, in which case any
principal not so declared to be due and payable may thereafter be declared to be
due and payable), and thereupon the principal of the Loans so declared to be due
and payable, together with accrued interest thereon and all fees and other
obligations of the Borrower and the Guarantors accrued hereunder and under the
Notes and the other Loan Documents (including, without limitation, the payment
of cash collateral to secure the LC Exposure as provided in Section 2.08(j)), shall become due and payable
immediately, without presentment, demand, protest, notice of intent to
accelerate, notice of acceleration or other notice of any kind, all of which are
hereby waived by the Borrower and each Guarantor; and in case of an Event of
Default described in Section 10.01(h), Section 10.01(i) or  Section 10.01(j), the Commitments shall automatically
terminate and the Notes and the principal of the Loans then outstanding,
together with accrued interest thereon and all fees and the other obligations of
the Borrower and the Guarantors accrued hereunder and under the Notes and the
other Loan Documents (including, without limitation, the payment of cash
collateral to secure the LC Exposure as provided in Section 2.08(j)), shall automatically become due and
payable, without presentment, demand, protest or other notice of any kind, all
of which are hereby waived by the Borrower and each Guarantor.

       

      (b)           In
the case of the occurrence of an Event of Default, the Administrative Agent and
the Lenders will have all other rights and remedies available at law and
equity.

       

      (c)           All
proceeds realized from the liquidation or other disposition of collateral or
otherwise 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 Indebtedness referred to in clause (b) of the
definition of Indebtedness owing to a Lender or an Affiliate of a Lender; fifth,
to any other Indebtedness; sixth, to serve as cash collateral to be held by the
Administrative Agent to secure the LC Exposure; and any excess shall be paid to
the Borrower or as otherwise required by any Governmental
Requirement.

       

      Section
10.03                                Disposition of
Proceeds.  The Security Instruments contain an assignment by
the Borrower and/or the Guarantors unto and in favor of the Administrative Agent
for the benefit of the Lenders of all of the Borrower’s or each Guarantor’s
interest in and to production and all proceeds attributable thereto which may be
produced from or allocated to the Mortgaged Property.  The Security
Instruments further provide in general for the application of such proceeds to
the satisfaction of the Indebtedness and other obligations described therein and
secured thereby.  Notwithstanding the assignment contained in such
Security Instruments, except after the occurrence and during the continuance of
an Event of Default, (a) the Administrative Agent and the Lenders agree that
they will neither notify the purchaser or purchasers of such 

       

      
        
          
          

        

        
          78

          
            

          

        

        
          
          

        

         

        production
nor take any other action to cause such proceeds to be remitted to the
Administrative Agent or the Lenders, but the Lenders will instead permit such
proceeds to be paid to the Borrower and its Subsidiaries and (b) the Lenders
hereby authorize the Administrative Agent to take such actions as may be
necessary to cause such proceeds to be paid to the Borrower and/or its
Subsidiaries.

      

       

      ARTICLE
XI

       

      THE
AGENTS

       

      Section
11.01                                Appointment;
Powers.  Each of the Lenders and each Issuing Bank hereby
irrevocably appoints the Administrative Agent as its agent and authorizes the
Administrative Agent to take such actions on its behalf and to exercise such
powers as are delegated to the Administrative Agent by the terms hereof and the
other Loan Documents, together with such actions and powers as are reasonably
incidental thereto.

       

      Section
11.02                                Duties and Obligations of
Administrative Agent.  The Administrative Agent shall have no
duties or obligations except those expressly set forth in the Loan
Documents.  Without limiting the generality of the foregoing, (a) the
Administrative Agent shall not be subject to any fiduciary or other implied
duties, regardless of whether a Default has occurred and is continuing (the use
of the term “agent” herein and in
the other Loan Documents with reference to the Administrative Agent is not
intended to connote any fiduciary or other implied (or express) obligations
arising under agency doctrine of any applicable law; rather, such term is used
merely as a matter of market custom, and is intended to create or reflect only
an administrative relationship between independent contracting parties), (b) the
Administrative Agent shall have no duty to take any discretionary action or
exercise any discretionary powers, except as provided in Section 11.03, and (c) except as expressly set forth
herein, the Administrative Agent shall have no duty to disclose, and shall not
be liable for the failure to disclose, any information relating to the Borrower
or any of its Subsidiaries that is communicated to or obtained by the bank
serving as Administrative Agent or any of its Affiliates in any
capacity.  The Administrative Agent shall be deemed not to have
knowledge of any Default unless and until written notice thereof is given to the
Administrative Agent by the Borrower or a Lender, and shall not be responsible
for or have any duty to ascertain or inquire into (i) any statement, warranty or
representation made in or in connection with this Agreement or any other Loan
Document, (ii) the contents of any certificate, report or other document
delivered hereunder or under any other Loan Document or in connection herewith
or therewith, (iii) the performance or observance of any of the covenants,
agreements or other terms or conditions set forth herein or in any other Loan
Document, (iv) the validity, enforceability, effectiveness or genuineness of
this Agreement, any other Loan Document or any other agreement, instrument or
document, (v) the satisfaction of any condition set forth in ARTICLE VI or elsewhere herein, other than to confirm
receipt of items expressly required to be delivered to the Administrative Agent,
(vi) the existence, value, perfection or priority of any collateral security or
the financial or other condition of the Borrower and its Subsidiaries or any
other obligor or guarantor, or (vii) any failure by the Borrower or any other
Person (other than itself) to perform any of its obligations hereunder or under
any other Loan Document or the performance or observance of any covenants,
agreements or other terms or conditions set forth herein or
therein.  For purposes of determining compliance with the conditions
specified in ARTICLE VI, each Lender shall be
deemed to have consented to, approved or accepted or to be satisfied with,

       

      
        
          
          

        

        
          79

          
            

          

        

        
          
          

        

         

        each
document or other matter required thereunder to be consented to or approved by
or acceptable or satisfactory to a Lender unless the Administrative Agent shall
have received written notice from such Lender prior to the proposed closing date
specifying its objection thereto.

      

       

      Section
11.03                                Action by Administrative
Agent.  The Administrative Agent shall have no duty to take any
discretionary action or exercise any discretionary powers, except discretionary
rights and powers expressly contemplated hereby or by the other Loan Documents
that the Administrative Agent is required to exercise in writing as directed by
the Majority Lenders (or such other number or percentage of the Lenders as shall
be necessary under the circumstances as provided in Section 12.02) and in all cases the Administrative
Agent shall be fully justified in failing or refusing to act hereunder or under
any other Loan Documents unless it shall (a) receive written instructions from
the Majority Lenders or the Lenders, as applicable, (or such other number or
percentage of the Lenders as shall be necessary under the circumstances as
provided in Section 12.02) specifying the action to
be taken and (b) 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 as aforesaid
and any action taken or failure to act pursuant thereto by the Administrative
Agent shall be binding on all of the Lenders.  If a Default has
occurred and is continuing, then the Administrative Agent shall take such action
with respect to such Default as shall be directed by the requisite Lenders in
the written instructions (with indemnities) described in this Section 11.03, provided that, unless and
until the Administrative Agent shall have received such directions, the
Administrative 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 Administrative Agent be required to take any action which exposes the
Administrative Agent to personal liability or which is contrary to this
Agreement, the Loan Documents or applicable law.  If a Default has
occurred and is continuing, neither the Syndication Agent nor the Documentation
Agent shall have any obligation to perform any act in respect
thereof.  The Administrative Agent shall not be liable for any action
taken or not taken by it with the consent or at the request of the Majority
Lenders or the Lenders (or such other number or percentage of the Lenders as
shall be necessary under the circumstances as provided in Section 12.02), and otherwise the Administrative Agent
shall not be liable for any action taken or not taken by it hereunder or under
any other Loan Document or under any other document or instrument referred to or
provided for herein or therein or in connection herewith or therewith INCLUDING
ITS OWN ORDINARY NEGLIGENCE, except for its own gross negligence or willful
misconduct.

       

      Section
11.04                                Reliance by Administrative
Agent.  The Administrative Agent shall be entitled to rely
upon, and shall not incur any liability for relying upon, any notice, request,
certificate, consent, statement, instrument, document or other writing believed
by it to be genuine and to have been signed or sent by the proper
Person.  The Administrative Agent also may rely upon any statement
made to it orally or by telephone and believed by it to be made by the proper
Person, and shall not incur any liability for relying thereon and each of the
Borrower, the Lenders and each Issuing Bank hereby waives the right to dispute
the Administrative Agent’s record of such statement, except in the case of gross
negligence or willful misconduct by the Administrative Agent.  The
Administrative Agent may consult with legal counsel (who may be counsel for the
Borrower), independent accountants and other experts selected by it, and shall
not 

       

      
        
          
          

        

        
          80

          
            

          

        

        
          
          

        

         

        be liable
for any action taken or not taken by it in accordance with the advice of any
such counsel, accountants or experts.  The Administrative 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 Administrative
Agent.

      

       

      Section
11.05                                Subagents.  The
Administrative Agent may perform any and all its duties and exercise its rights
and powers by or through any one or more sub-agents appointed by the
Administrative Agent.  The Administrative Agent and any such sub-agent
may perform any and all its duties and exercise its rights and powers through
their respective Related Parties.  The exculpatory provisions of the
preceding Sections of this ARTICLE XI shall apply
to any such sub-agent and to the Related Parties of the Administrative Agent and
any such sub-agent, and shall apply to their respective activities in connection
with the syndication of the credit facilities provided for herein as well as
activities as Administrative Agent.

       

      Section
11.06                                Resignation or Removal of
Administrative Agent.  Subject to the appointment and
acceptance of a successor Administrative Agent as provided in this Section 11.06, the Administrative Agent may resign at
any time by notifying the Lenders, each Issuing Bank and the Borrower, and the
Administrative Agent may be removed at any time with or without cause by the
Majority Lenders.  Upon any such resignation or removal, the Majority
Lenders shall have the right, in consultation with the Borrower, to appoint a
successor.  If no successor shall have been so appointed by the
Majority Lenders and shall have accepted such appointment within 30 days after
the retiring Administrative Agent gives notice of its resignation or removal of
the retiring Administrative Agent, then the retiring Administrative Agent may,
on behalf of the Lenders and each Issuing Bank, appoint a successor
Administrative Agent.  Upon the acceptance of its appointment as
Administrative Agent hereunder by a successor, such successor shall succeed to
and become vested with all the rights, powers, privileges and duties of the
retiring Administrative Agent, and the retiring Administrative Agent shall be
discharged from its duties and obligations hereunder.  The fees
payable by the Borrower to a successor Administrative Agent shall be the same as
those payable to its predecessor unless otherwise agreed between the Borrower
and such successor.  After the Administrative Agent’s resignation
hereunder, the provisions of this ARTICLE XI and Section 12.03 shall continue in effect for the benefit
of such retiring Administrative Agent, its sub-agents and their respective
Related Parties in respect of any actions taken or omitted to be taken by any of
them while it was acting as Administrative Agent.

       

      Section
11.07                                Administrative Agent and
Lenders.  Each bank serving as an Agent hereunder shall have
the same rights and powers in its capacity as a Lender as any other Lender and
may exercise the same as though it were not an Agent, and such bank and its
Affiliates may accept deposits from, lend money to and generally engage in any
kind of business with the Borrower or any Subsidiary or other Affiliate thereof
as if it were not an Agent hereunder.

       

      Section
11.08                                No
Reliance.  Each Lender acknowledges that it has, independently
and without reliance upon the Administrative Agent, any other Agent or any other
Lender and based on such documents and information as it has deemed appropriate,
made its own credit analysis and decision to enter into this Agreement and each
other Loan Document to which it is a party.  Each Lender also
acknowledges that it will, independently and without reliance upon the

       

      
        
          
          

        

        
          81

          
            

          

        

        
          
          

        

         

        Administrative
Agent, any other Agent or any other Lender and based on such documents and
information as it shall from time to time deem appropriate, continue to make its
own decisions in taking or not taking action under or based upon this Agreement,
any other Loan Document, any related agreement or any document furnished
hereunder or thereunder.  The Agents shall not be required to keep
themselves informed as to the performance or observance by the Borrower or any
of its Subsidiaries of this Agreement, the Loan Documents or any other document
referred to or provided for herein or to inspect the Properties or books of the
Borrower or its Subsidiaries.  Except for notices, reports and other
documents and information expressly required to be furnished to the Lenders by
the Administrative Agent hereunder, no Agent nor the Arranger shall 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 such
Agent or any of its Affiliates.  In this regard, each Lender
acknowledges that Vinson & Elkins L.L.P. is acting in this transaction as
special counsel to the Administrative Agent only, except to the extent otherwise
expressly stated in any legal opinion or any Loan Document.  Each
other party hereto will consult with its own legal counsel to the extent that it
deems necessary in connection with the Loan Documents and the matters
contemplated therein.

      

       

      Section
11.09                                Administrative Agent May
File Proofs of Claim.  In case of the pendency of any
receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement,
adjustment, composition or other judicial proceeding relative to the Borrower or
any of its Subsidiaries, the Administrative Agent (irrespective of whether the
principal of any Loan shall then be due and payable as herein expressed or by
declaration or otherwise and irrespective of whether the Administrative Agent
shall have made any demand on the Borrower) shall be entitled and empowered, by
intervention in such proceeding or otherwise:

       

      (a)           to
file and prove a claim for the whole amount of the principal and interest owing
and unpaid in respect of the Loans and all other Indebtedness that are owing and
unpaid and to file such other documents as may be necessary or advisable in
order to have the claims of the Lenders and the Administrative Agent (including
any claim for the reasonable compensation, expenses, disbursements and advances
of the Lenders and the Administrative Agent and their respective agents and
counsel and all other amounts due the Lenders and the Administrative Agent under
Section 12.03) allowed in such judicial proceeding;
and

       

      (b)           to
collect and receive any monies or other property payable or deliverable on any
such claims and to distribute the same;

       

      and any
custodian, receiver, assignee, trustee, liquidator, sequestrator or other
similar official in any such judicial proceeding is hereby authorized by each
Lender to make such payments to the Administrative Agent and, in the event that
the Administrative Agent shall consent to the making of such payments directly
to the Lenders, to pay to the Administrative Agent any amount due for the
reasonable compensation, expenses, disbursements and advances of the
Administrative Agent and its agents and counsel, and any other amounts due the
Administrative Agent under Section
12.03.

       

      Nothing
contained herein shall be deemed to authorize the Administrative Agent to
authorize or consent to or accept or adopt on behalf of any Lender any plan of
reorganization, 

       

      
        
          
          

        

        
          82

          
            

          

        

        
          
          

        

         

        arrangement,
adjustment or composition affecting the Indebtedness or the rights of any Lender
or to authorize the Administrative Agent to vote in respect of the claim of any
Lender in any such proceeding.

      

       

      Section
11.10                                Authority of Administrative
Agent to Release Collateral and Liens.  Each Lender and each
Issuing Bank hereby authorizes the Administrative Agent to release any
collateral that is permitted to be sold or released pursuant to the terms of the
Loan Documents.  Each Lender and each Issuing Bank hereby authorizes
the Administrative Agent to execute and deliver to the Borrower, at the
Borrower’s sole cost and expense, any and all releases of Liens, termination
statements, assignments or other documents reasonably requested by the Borrower
in connection with any sale or other disposition of Property to the extent such
sale or other disposition is permitted by the terms of Section 9.12 or is otherwise authorized by the terms
of the Loan Documents.

       

      Section
11.11                                The Arranger, the Syndication Agent and
the Documentation Agent.  The Arranger, the Syndication Agent
and the Documentation Agent shall have no duties, responsibilities or
liabilities under this Agreement and the other Loan Documents other than their
duties, responsibilities and liabilities in their capacity as a Lender hereunder
to the extent they are a party to this Agreement as a Lender.

       

      ARTICLE
XII

       

      MISCELLANEOUS

       

      Section
12.01                                Notices.

       

      (a)           Except
in the case of notices and other communications expressly permitted to be given
by telephone (and subject to Section 12.01(b)), all
notices and other communications provided for herein shall be in writing and
shall be delivered by hand or overnight courier service, mailed by certified or
registered mail or sent by telecopy, as follows:

       

      (i)           if
to the Borrower, to it at

       

      Legacy
Reserves LP

      303 West
Wall Street, Suite 1400

      Midland,
Texas  79701

      Attention:  Steven
H. Pruett, President and CFO

      Email:  spruett@legacyLP.com

      Phone:  432.689.5217

      Fax:  432.689.5299

      

      (ii)           if
to the Administrative Agent, to it at

       

      525
Washington Blvd.

      Jersey
City New Jersey 07310

      Attention:  Carolyn
Verni, Assistant Vice President

      Email:  Agency_LS_Support@americas.bnpparibas.com

      Telecopy:  201.850.4020

       

      
        
          
          

        

        
          83

          
            

          

        

        
          
          

        

      

       

      with a
copies to the Administrative Agent at:

      

      1200
Smith Street, Suite 3100

      Houston,
Texas  77002

      Attention:  Russell
Otts

      Email:  russell.otts@americas.bnpparibas.com

      Telecopy:  713.659.6915

      

      1200
Smith Street, Suite 3100

      Houston,
Texas  77002

      Attention:  Donna
Verwold

      Email:  donna.verwold@americas.bnpparibas.com

      Telecopy:  713.659.6915

      

      (iii)           if
to any other Lender, in its capacity as such, or any other Lender in its
capacity as an Issuing Bank, to it at its address (or telecopy number) set forth
in its Administrative Questionnaire.

       

      (b)           Notices
and other communications to the Lenders hereunder may be delivered or furnished
by electronic communications pursuant to procedures approved by the
Administrative Agent; provided that the foregoing
shall not apply to notices pursuant to ARTICLE II,
ARTICLE III, ARTICLE
IV and ARTICLE V unless otherwise agreed by the
Administrative Agent and the applicable Lender.  The Administrative
Agent or the Borrower may, in its discretion, agree to accept notices and other
communications to it hereunder by electronic communications pursuant to
procedures approved by it; provided that approval of
such procedures may be limited to particular notices or
communications.

       

      (c)           Any
party hereto may change its address or telecopy number for notices and other
communications hereunder by notice to the other parties hereto.  All
notices and other communications given to any party hereto in accordance with
the provisions of this Agreement shall be deemed to have been given on the date
of receipt.

       

      Section
12.02                                Waivers;
Amendments.

       

      (a)           No
failure on the part of the Administrative Agent, any other Agent, any Issuing
Bank or any Lender to exercise and no delay in exercising, and no course of
dealing with respect to, any right, power or privilege, or any abandonment or
discontinuance of steps to enforce such 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 rights and remedies of the
Administrative Agent, each other Agent, each Issuing Bank and the Lenders
hereunder and under the other Loan Documents are cumulative and are not
exclusive of any rights or remedies that they would otherwise
have.  No waiver of any provision of this Agreement or any other Loan
Document or consent to any departure by the Borrower therefrom shall in any
event be effective unless the same shall be permitted by Section 12.02(b), and then such waiver or consent
shall be effective only in the specific instance and for the purpose for which
given.  Without limiting the generality of the 

       

      
        
          
          

        

        
          84

          
            

          

        

        
          
          

        

         

        foregoing,
the making of a Loan or issuance of a Letter of Credit shall not be construed as
a waiver of any Default, regardless of whether the Administrative Agent, any
other Agent, any Lender or any Issuing Bank may have had notice or knowledge of
such Default at the time.

      

       

      (b)           In
each instance subject to Section 4.04(c)(ii), neither this Agreement nor any
provision hereof nor any Security Instrument nor any provision thereof may be
waived, amended or modified except pursuant to an agreement or agreements in
writing entered into by the Borrower and the Majority Lenders or by the Borrower
and the Administrative Agent with the consent of the Majority Lenders; provided that no such
agreement shall (i) increase the Maximum Credit Amount of any Lender without the
written consent of such Lender, (ii) increase the Borrowing Base without the
written consent of each Lender, decrease or maintain the Borrowing Base without
the consent of the Majority Lenders, or modify in any manner Section 2.07 without the consent of each Lender, (iii)
reduce the principal amount of any Loan or LC Disbursement or reduce the rate of
interest thereon, or reduce any fees payable hereunder, or reduce any other
Indebtedness hereunder or under any other Loan Document, without the written
consent of each Lender affected thereby, (iv) postpone the scheduled date of
payment of the principal amount of any Loan or LC Disbursement, or any interest
thereon, or any fees payable hereunder, or any other Indebtedness hereunder or
under any other Loan Document, or reduce the amount of, waive or excuse any such
payment, or postpone or extend the Termination Date or the Maturity Date without
the written consent of each Lender affected thereby, (v) change Section 4.01(b) or Section
4.01(c) in a manner that would alter the pro rata sharing of payments
required thereby, without the written consent of each Lender, (vi) waive or
amend Section 4.04, Section 6.01, Section 10.02(c) or Section
8.14 or change the definition of the terms “Domestic Subsidiary”,
“Foreign
Subsidiary”, “Material Domestic
Subsidiary” or “Subsidiary”, without
the written consent of each Lender, (vii) release any Guarantor (except as set
forth in the Guaranty Agreement), release all or substantially all of the
collateral (other than as provided in Section
11.09), or reduce the percentage set forth in Section 8.14(a) to less than 80%, without the written
consent of each Lender, or (viii) change any of the provisions of this Section 12.02(b) or the definition of “Majority Lenders” or
any other provision hereof specifying the number or percentage of Lenders
required to waive, amend or modify any rights hereunder or under any other Loan
Documents or make any determination or grant any consent hereunder or any other
Loan Documents, without the written consent of each Lender; provided further that no such
agreement shall amend, modify or otherwise affect the rights or duties of the
Administrative Agent, any other Agent or any Issuing Bank hereunder or under any
other Loan Document without the prior written consent of the Administrative
Agent, such other Agent or such Issuing Bank, as the case may
be.  Notwithstanding the foregoing, any supplement to Schedule 7.14
(Subsidiaries) shall be effective simply by delivering to the Administrative
Agent a supplemental schedule clearly marked as such and, upon receipt, the
Administrative Agent will promptly deliver a copy thereof to the
Lenders.

       

      Section
12.03                                Expenses, Indemnity; Damage
Waiver.

       

      (a)           The
Borrower shall pay (i) all reasonable out-of-pocket expenses incurred by the
Administrative Agent and its Affiliates, including, without limitation, the
reasonable fees, charges and disbursements of counsel and other outside
consultants for the Administrative Agent, the reasonable travel, photocopy,
mailing, courier, telephone and other similar expenses and, in connection with
the syndication of the credit facilities provided for herein, the 

       

      
        
          
          

        

        
          85

          
            

          

        

        
          
          

        

         

        preparation,
negotiation, execution, delivery and administration (both before and after the
execution hereof and including advice of counsel to the Administrative Agent as
to the rights and duties of the Administrative Agent and the Lenders with
respect thereto) of this Agreement and the other Loan Documents and any
amendments, modifications or waivers of or consents related to the provisions
hereof or thereof (whether or not the transactions contemplated hereby or
thereby shall be consummated), (ii) all out-of-pocket costs, expenses, Taxes,
assessments and other charges incurred by any Agent or any Lender in connection
with any filing, registration, recording or perfection of any security interest
contemplated by this Agreement or any Security Instrument or any other document
referred to therein, (iii) all reasonable out-of-pocket expenses incurred by
each Issuing Bank in connection with the issuance, amendment, renewal or
extension of any Letter of Credit issued by such Issuing Bank or any demand for
payment thereunder, (iv) all out-of-pocket expenses incurred by any Agent, any
Issuing Bank or any Lender, including the fees, charges and disbursements of any
counsel for any Agent, any Issuing Bank or any Lender, in connection with the
enforcement or protection of its rights in connection with this Agreement or any
other Loan Document, including its rights under this Section 12.03, or in connection with the Loans made or
Letters of Credit issued hereunder, including, without limitation, all such
out-of-pocket expenses incurred during any workout, restructuring or
negotiations in respect of such Loans or Letters of Credit.

      

       

      (b)           THE
BORROWER SHALL INDEMNIFY EACH AGENT, THE ARRANGER, EACH ISSUING BANK AND EACH
LENDER, AND EACH RELATED PARTY OF ANY OF THE FOREGOING PERSONS (EACH SUCH PERSON
BEING CALLED AN “INDEMNITEE”) AGAINST,
AND HOLD EACH INDEMNITEE HARMLESS FROM, ANY AND ALL LOSSES, CLAIMS, DAMAGES,
LIABILITIES AND RELATED EXPENSES, INCLUDING THE FEES, CHARGES AND DISBURSEMENTS
OF ANY COUNSEL FOR ANY INDEMNITEE, INCURRED BY OR ASSERTED AGAINST ANY
INDEMNITEE ARISING OUT OF, IN CONNECTION WITH, OR AS A RESULT OF (i) THE
EXECUTION OR DELIVERY OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR ANY
AGREEMENT OR INSTRUMENT CONTEMPLATED HEREBY OR THEREBY, THE PERFORMANCE BY THE
PARTIES HERETO OR THE PARTIES TO ANY OTHER LOAN DOCUMENT OF THEIR RESPECTIVE
OBLIGATIONS HEREUNDER OR THEREUNDER OR THE CONSUMMATION OF THE TRANSACTIONS
CONTEMPLATED HEREBY OR BY ANY OTHER LOAN DOCUMENT, (ii) THE FAILURE OF THE
BORROWER OR ANY OF ITS SUBSIDIARIES TO COMPLY WITH THE TERMS OF ANY LOAN
DOCUMENT, INCLUDING THIS AGREEMENT, OR WITH ANY GOVERNMENTAL REQUIREMENT, (iii)
ANY INACCURACY OF ANY REPRESENTATION OR ANY BREACH OF ANY WARRANTY OR COVENANT
OF THE BORROWER OR ANY GUARANTOR SET FORTH IN ANY OF THE LOAN DOCUMENTS OR ANY
INSTRUMENTS, DOCUMENTS OR CERTIFICATIONS DELIVERED IN CONNECTION THEREWITH, (iv)
ANY LOAN OR LETTER OF CREDIT OR THE USE OF THE PROCEEDS THEREFROM, INCLUDING,
WITHOUT LIMITATION, (A) ANY REFUSAL BY ANY ISSUING BANK TO HONOR A DEMAND FOR
PAYMENT UNDER A LETTER OF CREDIT ISSUED BY SUCH ISSUING BANK IF THE DOCUMENTS
PRESENTED IN CONNECTION WITH SUCH DEMAND DO NOT STRICTLY COMPLY WITH THE TERMS
OF SUCH LETTER OF CREDIT, OR (B) THE PAYMENT OF A DRAWING UNDER ANY LETTER OF
CREDIT NOTWITHSTANDING THE NON-COMPLIANCE, NON-DELIVERY OR OTHER IMPROPER
PRESENTATION OF THE 

       

      
        
          
          

        

        
          86

          
            

          

        

        
          
          

        

         

        DOCUMENTS
PRESENTED IN CONNECTION THEREWITH, (v) ANY OTHER ASPECT OF THE LOAN DOCUMENTS,
(vi) THE OPERATIONS OF THE BUSINESS OF THE BORROWER AND ITS SUBSIDIARIES BY THE
BORROWER AND ITS SUBSIDIARIES, (vii) ANY ASSERTION THAT THE LENDERS WERE NOT
ENTITLED TO RECEIVE THE PROCEEDS RECEIVED PURSUANT TO THE SECURITY INSTRUMENTS,
(viii) ANY ENVIRONMENTAL LAW APPLICABLE TO THE BORROWER OR ITS SUBSIDIARIES OR
ANY OF THEIR PROPERTIES, INCLUDING WITHOUT LIMITATION, THE PRESENCE, GENERATION,
STORAGE, RELEASE, THREATENED RELEASE, USE, TRANSPORT, DISPOSAL, ARRANGEMENT OF
DISPOSAL OR TREATMENT OF OIL, OIL AND GAS WASTES, SOLID WASTES OR HAZARDOUS
SUBSTANCES ON ANY OF THEIR PROPERTIES, (ix) THE BREACH OR NON-COMPLIANCE BY THE
BORROWER OR ANY OF ITS SUBSIDIARIES WITH ANY ENVIRONMENTAL LAW APPLICABLE TO THE
BORROWER OR ANY OF ITS SUBSIDIARIES, (x) THE PAST OWNERSHIP BY THE BORROWER OR
ANY OF ITS SUBSIDIARIES 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, (xi) THE PRESENCE, USE, RELEASE, STORAGE,
TREATMENT, DISPOSAL, GENERATION, THREATENED RELEASE, TRANSPORT, ARRANGEMENT FOR
TRANSPORT OR ARRANGEMENT FOR DISPOSAL OF OIL, OIL AND GAS WASTES, SOLID WASTES
OR HAZARDOUS SUBSTANCES ON OR AT ANY OF THE PROPERTIES OWNED OR OPERATED BY THE
BORROWER OR ANY OF ITS SUBSIDIARIES OR ANY ACTUAL OR ALLEGED PRESENCE OR RELEASE
OF HAZARDOUS MATERIALS ON OR FROM ANY PROPERTY OWNED OR OPERATED BY THE BORROWER
OR ANY OF ITS SUBSIDIARIES, (xii) ANY ENVIRONMENTAL LIABILITY RELATED IN ANY WAY
TO THE BORROWER OR ANY OF ITS SUBSIDIARIES, OR (xiii) ANY OTHER ENVIRONMENTAL,
HEALTH OR SAFETY CONDITION IN CONNECTION WITH THE LOAN DOCUMENTS, OR (xiv) ANY
ACTUAL OR PROSPECTIVE CLAIM, LITIGATION, INVESTIGATION OR PROCEEDING RELATING TO
ANY OF THE FOREGOING, WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY AND
REGARDLESS OF WHETHER ANY INDEMNITEE IS A PARTY THERETO, AND SUCH INDEMNITY
SHALL EXTEND TO EACH INDEMNITEE 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 INDEMNITEES OR BY REASON OF STRICT LIABILITY IMPOSED WITHOUT
FAULT ON ANY ONE OR MORE OF THE INDEMNITEES; PROVIDED THAT SUCH INDEMNITY
SHALL NOT, AS TO ANY INDEMNITEE, BE AVAILABLE TO THE EXTENT THAT SUCH LOSSES,
CLAIMS, DAMAGES, LIABILITIES OR RELATED EXPENSES ARE DETERMINED BY A COURT OF
COMPETENT JURISDICTION BY FINAL AND NONAPPEALABLE JUDGMENT TO HAVE RESULTED FROM
THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCH
INDEMNITEE.

      

       

      (c)           To
the extent that the Borrower fails to pay any amount required to be paid by it
to any Agent, the Arranger or any Issuing Bank under Section 12.03(a) or (b),
each Lender severally agrees to pay to such Agent, the Arranger or such Issuing
Bank, as the case may be, such Lender’s Applicable Percentage (determined as of
the time that the applicable unreimbursed 

       

      
        
          
          

        

        
          87

          
            

          

        

        
          
          

        

         

        expense
or indemnity payment is sought) of such unpaid amount; provided that the
unreimbursed expense or indemnified loss, claim, damage, liability or related
expense, as the case may be, was incurred by or asserted against such Agent, the
Arranger or such Issuing Bank in its capacity as such.

      

       

      (d)           To
the extent permitted by applicable law, the Borrower shall not assert, and
hereby waives, any claim against any Indemnitee, on any theory of liability, for
special, indirect, consequential or punitive damages (as opposed to direct or
actual damages) arising out of, in connection with, or as a result of, this
Agreement, any other Loan Document or any agreement or instrument contemplated
hereby or thereby, the Transactions, any Loan or Letter of Credit or the use of
the proceeds thereof.

       

      (e)           All
amounts due under this Section 12.03 shall be
payable within ten (10) Business Days of written demand therefor.

       

      Section
12.04                                Successors and
Assigns.

       

      (a)           The
provisions of this Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns permitted hereby
(including any Affiliate of any Issuing Bank that issues any Letter of Credit),
except that (i)  the Borrower may not assign or otherwise transfer any
of its rights or obligations hereunder without the prior written consent of each
Lender (and any attempted assignment or transfer by the Borrower without such
consent shall be null and void) and (ii) no Lender may assign or otherwise
transfer its rights or obligations hereunder except in accordance with this Section 12.04.  Nothing in this Agreement,
expressed or implied, shall be construed to confer upon any Person (other than
the parties hereto, their respective successors and assigns permitted hereby
(including any Affiliate of any Issuing Bank that issues any Letter of Credit),
Participants (to the extent provided in Section
12.04(c)) and, to the extent expressly contemplated hereby, the Related
Parties of each of the Administrative Agent, each Issuing Bank and the Lenders)
any legal or equitable right, remedy or claim under or by reason of this
Agreement.

       

      (b)           (i)  Subject
to the conditions set forth in Section
12.04(b)(ii), any Lender may assign to one or more assignees all or a
portion of its rights and obligations under this Agreement (including all or a
portion of its Commitment and the Loans at the time owing to it) with the prior
written consent (such consent not to be unreasonably withheld) of:

       

      (A)           the
Borrower, provided that no consent of the Borrower shall be required if such
assignment is to a Lender or an Affiliate of a Lender or, if an Event of Default
has occurred and is continuing, is to any other assignee; and

       

      (B)           the
Administrative Agent, provided that no consent of the Administrative Agent shall
be required for an assignment to an assignee that is a Lender or any Affiliate
of a Lender, immediately prior to giving effect to such assignment.

       

      (ii)           Assignments
shall be subject to the following additional conditions:

       

      
        
          
          

        

        
          88

          
            

          

        

        
          
          

        

      

       

      (A)           except
in the case of an assignment to a Lender or an Affiliate of a Lender or an
assignment of the entire remaining amount of the assigning Lender’s Commitment,
the amount of the Commitment of the assigning Lender subject to each such
assignment (determined as of the date the Assignment and Assumption with respect
to such assignment is delivered to the Administrative Agent) shall not be less
than $5,000,000 unless each of the Borrower and the Administrative Agent
otherwise consent, provided that no such consent
of the Borrower shall be required if an Event of Default has occurred and is
continuing;

       

      (B)           each
partial assignment shall be made as an assignment of a proportionate part of all
the assigning Lender’s rights and obligations under this Agreement;

       

      (C)           the
parties to each assignment shall execute and deliver to the Administrative Agent
an Assignment and Assumption, together with a processing and recordation fee of
$3,500; and

       

      (D)           the
assignee, if it shall not be a Lender, shall deliver to the Administrative Agent
an Administrative Questionnaire.

       

      (iii)           Subject
to Section 12.04(b)(iv) and the acceptance and
recording thereof, from and after the effective date specified in each
Assignment and Assumption the assignee thereunder shall be a party hereto and,
to the extent of the interest assigned by such Assignment and Assumption, have
the rights and obligations of a Lender under this Agreement, and the assigning
Lender thereunder shall, to the extent of the interest assigned by such
Assignment and Assumption, be released from its obligations under this Agreement
(and, in the case of an Assignment and Assumption covering all of the assigning
Lender’s rights and obligations under this Agreement, such Lender shall cease to
be a party hereto but shall continue to be entitled to the benefits of Section 5.01, Section
5.02, Section 5.03 and Section 12.03).  Any assignment or transfer
by a Lender of rights or obligations under this Agreement that does not comply
with this Section 12.04 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
12.04(c).

       

      (iv)           The
Administrative Agent, acting for this purpose as an agent of the Borrower, shall
maintain at one of its offices a copy of each Assignment and Assumption
delivered to it and a register for the recordation of the names and addresses of
the Lenders, and the Maximum Credit Amount of, and principal amount of the Loans
and LC Disbursements owing to, each Lender pursuant to the terms hereof from
time to time (the “Register”).  The
entries in the Register shall be conclusive, and the Borrower, the
Administrative Agent, each Issuing Bank and the Lenders may treat each Person
whose name is recorded in the Register pursuant to the terms hereof as a Lender
hereunder for all purposes of this Agreement, notwithstanding notice to the
contrary.  The Register shall be available for inspection by the
Borrower, any Issuing Bank and any Lender, at any reasonable time and from time
to time upon reasonable prior notice.  In connection with any changes
to the Register, if necessary, the Administrative Agent will 

       

      
        
          
          

        

        
          89

          
            

          

        

        
          
          

        

         

        reflect
the revisions on Annex I and forward a copy of such revised Annex I to the
Borrower, each Issuing Bank and each Lender.

      

       

      (v)           Upon
its receipt of a duly completed Assignment and Assumption executed by an
assigning Lender and an assignee, the assignee’s completed Administrative
Questionnaire (unless the assignee shall already be a Lender hereunder), the
processing and recordation fee referred to in Section
12.04(b) and any written consent to such assignment required by Section 12.04(b), the Administrative Agent shall
accept such Assignment and Assumption and record the information contained
therein in the Register.  No assignment shall be effective for
purposes of this Agreement unless it has been recorded in the Register as
provided in this Section 12.04(b).

       

      (c)           (i)  Any
Lender may, without the consent of the Borrower the Administrative Agent or any
Issuing Bank, sell participations to one or more banks or other entities (a
“Participant”)
in all or a portion of such Lender’s rights and obligations under this Agreement
(including all or a portion of its Commitment and the Loans owing to it); provided that (A) such
Lender’s obligations under this Agreement shall remain unchanged, (B) such
Lender shall remain solely responsible to the other parties hereto for the
performance of such obligations and (C) the Borrower, the Administrative Agent,
each Issuing Bank 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 this Agreement and to approve any
amendment, modification or waiver of any provision of this Agreement; 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 described in the
proviso to Section 12.02 that affects such
Participant.  In addition such agreement must provide that the
Participant be bound by the provisions of Section
12.03.  Subject to Section
12.04(c)(ii) the Borrower agrees that each Participant shall be entitled to
the benefits of Section 5.01, Section 5.02 and Section
5.03 to the same extent as if it were a Lender and had acquired its interest
by assignment pursuant to Section
12.04(b).  To the extent permitted by law, each Participant also
shall be entitled to the benefits of Section 12.08
as though it were a Lender, provided such Participant
agrees to be subject to Section 4.01(c) as though
it were a Lender.

       

      (ii)           A
Participant shall not be entitled to receive any greater payment under Section 5.01 or Section
5.03 than the applicable Lender would have been entitled to receive with
respect to the participation sold to such Participant, unless the sale of the
participation to such Participant is made with the Borrower’s prior written
consent.  A Participant that would be a Foreign Lender if it were a
Lender shall not be entitled to the benefits of Section
5.03 unless the Borrower is notified of the participation sold to such
Participant and such Participant agrees, for the benefit of the Borrower, to
comply with Section 5.03(e) as though it were a
Lender.

       

      (d)           Any
Lender may at any time pledge or assign a security interest in all or any
portion of its rights under this Agreement to secure obligations of such Lender,
including any pledge or assignment to secure obligations to a Federal Reserve
Bank, and this Section 12.04(d) shall not apply to
any such pledge or assignment of a security interest; provided that no

       

      
        
          
          

        

        
          90

          
            

          

        

        
          
          

        

         

        such
pledge or assignment of a security interest shall release a Lender from any of
its obligations hereunder or substitute any such pledgee or assignee for such
Lender as a party hereto.

      

       

      Section
12.05                                Survival; Revival;
Reinstatement.

       

      (a)           All
covenants, agreements, representations and warranties made by the Borrower
herein and in the certificates or other instruments delivered in connection with
or pursuant to this Agreement or any other Loan Document shall be considered to
have been relied upon by the other parties hereto and shall survive the
execution and delivery of this Agreement and the making of any Loans and
issuance of any Letters of Credit, regardless of any investigation made by any
such other party or on its behalf and notwithstanding that the Administrative
Agent, any other Agent, any Issuing Bank or any Lender may have had notice or
knowledge of any Default or incorrect representation or warranty at the time any
credit is extended hereunder, and shall continue in full force and effect as
long as the principal of or any accrued interest on any Loan or any fee or any
other amount payable under this Agreement is outstanding and unpaid or any
Letter of Credit is outstanding and so long as the Commitments have not expired
or terminated.  The provisions of Section
5.01, Section 5.02, Section 5.03 and Section
12.03 and ARTICLE XI shall survive and remain
in full force and effect regardless of the consummation of the transactions
contemplated hereby, the repayment of the Loans, the expiration or termination
of the Letters of Credit and the Commitments or the termination of this
Agreement, any other Loan Document or any provision hereof or
thereof.

       

      (b)           To
the extent that any payments on the Indebtedness 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 Indebtedness so satisfied shall be revived and continue as if
such payment or proceeds had not been received and the Administrative Agent’s
and the Lenders’ Liens, security interests, rights, powers and remedies under
this Agreement and each Loan Document shall continue in full force and
effect.  In such event, each Loan Document shall be automatically
reinstated and the Borrower shall take such action as may be reasonably
requested by the Administrative Agent and the Lenders to effect such
reinstatement.

       

      Section
12.06                                Counterparts; Integration;
Effectiveness.

       

      (a)           This
Agreement may be executed in counterparts (and by different parties hereto on
different counterparts), each of which shall constitute an original, but all of
which when taken together shall constitute a single contract.

       

      (b)           This
Agreement, the other Loan Documents and any separate letter agreements with
respect to fees payable to the Administrative Agent constitute the entire
contract among the parties relating to the subject matter hereof and thereof and
supersede any and all previous agreements and understandings, oral or written,
relating to the subject matter hereof and thereof.  THIS AGREEMENT AND
THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES HERETO
AND THERETO AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR

       

      
        
          
          

        

        
          91

          
            

          

        

        
          
          

        

         

        SUBSEQUENT
ORAL AGREEMENTS OF THE PARTIES.  THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES.

      

       

      (c)           Except
as provided in Section 6.01, this Agreement shall
become effective when it shall have been executed by the Administrative Agent
and when the Administrative Agent shall have received counterparts hereof which,
when taken together, bear the signatures of each of the other parties hereto,
and thereafter shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns.  Delivery of an
executed counterpart of a signature page of this Agreement by telecopy shall be
effective as delivery of a manually executed counterpart of this
Agreement.

       

      Section
12.07                                Severability.  Any
provision of this Agreement or any other Loan Document held to be invalid,
illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity, illegality or unenforceability
without affecting the validity, legality and enforceability of the remaining
provisions hereof or thereof; and the invalidity of a particular provision in a
particular jurisdiction shall not invalidate such provision in any other
jurisdiction.

       

      Section
12.08                                Right of
Setoff.  If an Event of Default shall have occurred and be
continuing, each Lender and each of its Affiliates is hereby authorized at any
time and from time to time, to the fullest extent permitted by law, to set off
and apply any and all deposits (general or special, time or demand, provisional
or final) at any time held and other obligations (of whatsoever kind, including,
without limitations obligations under Swap Agreements) at any time owing by such
Lender or Affiliate to or for the credit or the account of the Borrower or any
of its Subsidiaries against any of and all the obligations of the Borrower or
any of its Subsidiaries owed to such Lender now or hereafter existing under this
Agreement or any other Loan Document, irrespective of whether or not such Lender
shall have made any demand under this Agreement or any other Loan Document and
although such obligations may be unmatured.  The rights of each Lender
under this Section 12.08 are in addition to other
rights and remedies (including other rights of setoff) which such Lender or its
Affiliates may have.

       

      Section
12.09                                GOVERNING LAW; JURISDICTION;
CONSENT TO SERVICE OF PROCESS.

       

      (a)           THIS
AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF TEXAS EXCEPT TO THE EXTENT THAT UNITED STATES FEDERAL
LAW PERMITS ANY LENDER TO CONTRACT FOR, CHARGE, RECEIVE, RESERVE OR TAKE
INTEREST AT THE RATE ALLOWED BY THE LAWS OF THE STATE WHERE SUCH LENDER IS
LOCATED.  CHAPTER 346 OF THE TEXAS FINANCE CODE (WHICH REGULATES
CERTAIN REVOLVING CREDIT LOAN ACCOUNTS AND REVOLVING TRI-PARTY ACCOUNTS) SHALL
NOT APPLY TO THIS AGREEMENT OR THE NOTES.

       

      (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, HOUSTON DIVISION, AND, BY EXECUTION AND DELIVERY OF
THIS 

       

      
        
          
          

        

        
          92

          
            

          

        

        
          
          

        

         

        AGREEMENT,
EACH PARTY 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.  EACH PARTY 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 A PARTY FROM OBTAINING JURISDICTION OVER ANOTHER PARTY IN ANY
COURT OTHERWISE HAVING JURISDICTION.

      

       

      (c)           EACH
PARTY 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 IT AT THE ADDRESS
SPECIFIED IN SECTION 12.01 OR SUCH OTHER ADDRESS AS IS SPECIFIED PURSUANT TO
SECTION 12.01 (OR ITS ASSIGNMENT AND ASSUMPTION), SUCH SERVICE TO BECOME
EFFECTIVE THIRTY (30) DAYS AFTER SUCH MAILING.  NOTHING HEREIN SHALL
AFFECT THE RIGHT OF A PARTY 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 ANOTHER PARTY IN ANY OTHER JURISDICTION.

       

      (d)           EACH
PARTY HEREBY (i) IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT
PERMITTED BY LAW, TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO
THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN; (ii)
IRREVOCABLY WAIVES, 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) CERTIFIES THAT NO PARTY HERETO NOR ANY REPRESENTATIVE OR
AGENT OF 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) ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO
ENTER INTO THIS AGREEMENT, THE LOAN DOCUMENTS AND THE TRANSACTIONS CONTEMPLATED
HEREBY AND THEREBY BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS
CONTAINED IN THIS SECTION 12.09.

       

      Section
12.10                                Headings.  Article
and Section headings and the Table of Contents used herein are for convenience
of reference only, are not part of this Agreement and shall not affect the
construction of, or be taken into consideration in interpreting, this
Agreement.

       

      Section
12.11                                Confidentiality.  The
Administrative Agent, each other Agent, each Issuing Bank and the Lenders agrees
to maintain the confidentiality of the Information (as defined below), except
that Information may be disclosed nn) to its and its Affiliates’ directors,

       

      
        
          
          

        

        
          93

          
            

          

        

        
          
          

        

         

        officers,
employees and agents, including accountants, legal counsel and other advisors
(it being understood that the Persons to whom such disclosure is made will be
informed of the confidential nature of such Information and instructed to keep
such Information confidential), (b) to the extent requested by any regulatory
authority, (c) to the extent required by applicable laws or regulations or by
any subpoena or similar legal process, (d) to any other party to this Agreement
or any other Loan Document, (e) in connection with the exercise of any remedies
hereunder or under any other Loan Document or any suit, action or proceeding
relating to this Agreement or any other Loan Document or the enforcement of
rights hereunder or thereunder, (f) subject to an agreement containing
provisions substantially the same as those of this Section 12.11, to (i) any assignee of or Participant
in, or any prospective assignee of or Participant in, any of its rights or
obligations under this Agreement or (ii) any actual or prospective counterparty
(or its advisors) to any Swap Agreement relating to the Borrower and their
obligations, (g) with the consent of the Borrower or (h) to the extent such
Information (i) becomes publicly available other than as a result of a breach of
this Section 12.11 or (ii) becomes available to the
Administrative Agent, any other Agent, any Issuing Bank or any Lender on a
nonconfidential basis from a source other than the Borrower.  For the
purposes of this Section 12.11, “Information” means
all information received from the Borrower or any of its Subsidiaries relating
to the Borrower or any of its Subsidiaries and their businesses, other than any
such information that is available to the Administrative Agent, any other Agent,
any Issuing Bank or any Lender on a nonconfidential basis prior to disclosure by
the Borrower or any of its Subsidiaries; provided that, in the case of
information received from the Borrower, or any of its Subsidiaries after the
date hereof, such information is clearly identified at the time of delivery as
confidential.  Any Person required to maintain the confidentiality of
Information as provided in this Section 12.11 shall
be considered to have complied with its obligation to do so if such Person has
exercised the same degree of care to maintain the confidentiality of such
Information as such Person would accord to its own confidential
information.

      

       

      Section
12.12                                Interest Rate
Limitation.  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:  (a) 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 Indebtedness (or, to the extent
that the principal amount of the Indebtedness shall have been or would thereby
be paid in full, refunded by such Lender to the Borrower); and (b) 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 

       

      
        
          
          

        

        
          94

          
            

          

        

        
          
          

        

         

        the date
of such acceleration or prepayment and, if theretofore paid, shall be credited
by such Lender on the principal amount of the Indebtedness (or, to the extent
that the principal amount of the Indebtedness 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 stated 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 12.12 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 12.12.  To the
extent that Chapter 303 of the Texas Finance Code is relevant for the purpose of
determining the Highest Lawful Rate applicable to a Lender, such Lender elects
to determine the applicable rate ceiling under such Chapter by the weekly
ceiling from time to time in effect.  Chapter 346 of the Texas Finance
Code does not apply to the Borrower’s obligations hereunder.

      

       

      Section
12.13                                EXCULPATION
PROVISIONS.  EACH OF THE PARTIES HERETO SPECIFICALLY AGREES
THAT IT HAS A DUTY TO READ THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS AND
AGREES THAT IT IS CHARGED WITH NOTICE AND KNOWLEDGE OF THE TERMS OF THIS
AGREEMENT AND THE OTHER LOAN DOCUMENTS; 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 OF ITS CHOICE THROUGHOUT THE NEGOTIATIONS PRECEDING ITS EXECUTION OF
THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS; AND HAS RECEIVED THE ADVICE OF ITS
ATTORNEY IN ENTERING INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS; AND THAT
IT RECOGNIZES THAT CERTAIN OF THE TERMS OF THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS 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 OTHER LOAN DOCUMENTS ON THE BASIS THAT THE PARTY HAD NO NOTICE
OR KNOWLEDGE OF SUCH PROVISION OR THAT THE PROVISION IS NOT “CONSPICUOUS.”

       

      Section
12.14                                Collateral Matters; Swap
Agreements.  The benefit of the Security Instruments and of the
provisions of this Agreement relating to any collateral securing the
Indebtedness shall also extend to and be available to those Lenders or their
Affiliates which are 

       

      
        
          
          

        

        
          95

          
            

          

        

        
          
          

        

         

        counterparties
to any Swap Agreement with the Borrower or any of its Subsidiaries on a pro rata
basis in respect of any obligations of the Borrower or any of its Subsidiaries
which arise under any such Swap Agreement while such Person or its Affiliate is
a Lender, but only while such Person or its Affiliate is a Lender, including any
Swap Agreements between such Persons in existence prior to the date hereof;
provided that if a Person or its Affiliate ceases to be a Lender solely because
the Revolving Credit Exposures have been paid in full and the Commitments
terminated, then the Liens securing such Swap Agreements shall continue in favor
of such Person until those obligations are paid in full in cash or otherwise
expire or are terminated.  No Lender or any Affiliate of a Lender
shall have any voting rights under any Loan Document as a result of the
existence of obligations owed to it under any such Swap
Agreements.  For the avoidance of doubt it is understood and agreed
that all Swap Agreements between the Lenders (as defined in the Existing Credit
Agreement) or their Affiliates and the Borrower or any of its Subsidiaries
entered into prior to the date hereof shall be deemed Swap Agreements hereunder
and the benefit of the Security Instruments and the provisions of this Agreement
relating to any collateral securing the Indebtedness shall also extend to and be
available to such Lenders or their Affiliates as provided herein and in the
Security Instruments notwithstanding that any such Lender (as defined in the
Existing Credit Agreement) is not a Lender hereunder.

      

       

      Section
12.15                                No Third Party
Beneficiaries.  This Agreement, the other Loan Documents, and
the agreement of the Lenders to make Loans and the Issuing Bank to issue, amend,
renew or extend Letters of Credit hereunder are solely for the benefit of the
Borrower, and no other Person (including, without limitation, any Subsidiary of
the Borrower, any obligor, contractor, subcontractor, supplier or materialsman)
shall have any rights, claims, remedies or privileges hereunder or under any
other Loan Document against the Administrative Agent, the other Agents, the
Issuing Bank or any Lender for any reason whatsoever.  There are no
third party beneficiaries.

       

      Section
12.16                                USA Patriot Act
Notice.  Each 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 the Borrower, which
information includes the name and address of the Borrower and other information
that will allow such Lender to identify the Borrower in accordance with the
Act.

       

      [SIGNATURES
BEGIN NEXT PAGE]

       

      
        
          
          

        

        
          96

          
            

          

        

        
          
          

        

      

       

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

         

        
          
            	BORROWER:	
                    LEGACY RESERVES
      LP

                     

                    By:  Legacy Reserves GP, LLC,

                            its general
      partner

                  	 
	 	 	 	 
	
                     

                  	
                    By:
      

                  	/s/ Steven
      H. Pruett	 
	 	 	Steven
      H. Pruett 	 
	 	 	
                    President,
      Chief Financial Officer

                    and Secretary

                  	 
	 	 	 	 

          

        

      

    

     

     

    
      
        
        

      

      
        
          Signature
Page 1

          Amended and Restated Credit Agreement

        

        
          

        

      

      
        
        

      

    

     

    
      
        
          	ADMINISTRATIVE AGENT:	BNP PARIBAS, as Administrative
      Agent	 
	 	 	 	 
	
                   

                	
                  By:
      

                	/s/ Russell
      Otts	 
	 	 	Russell
      Otts	 
	 	 	Director 	 

        

      

    

    
      
        
          	 	 	 	 
	
                   

                	
                  By:
      

                	/s/ Brian
      M. Malone	 
	 	 	Brian
      M. Malone	 
	 	 	Managing
      Director	 
	 	 	 	 

        

      

    

     

    
      
        
        

      

      
        
          Signature
Page 2

          Amended and Restated Credit Agreement

        

        
          

        

      

      
        
        

      

    

     

    
      
        	SYNDICATION
      AGENT:	WACHOVIA BANK, N.A., as
      Syndication Agent	 
	 	 	 	 
	
                 

              	
                By:
      

              	/s/ Leanne
      S. Phillips	 
	 	 	Leanne
      S. Phillips	 
	 	 	Director	 
	 	 	 	 

      

    

     

     

    
      
        
        

      

      
        
          Signature
Page 3

          Amended and Restated Credit Agreement

        

        
          

        

      

      
        
        

      

    

     

    
      
        	DOCUMENTATION AGENT: 	COMPASS BANK, as Documentation
      Agent	 
	 	 	 	 
	
                 

              	
                By:
      

              	/s/ Kathleen
      J. Bowen	 
	 	 	Kathleen
      J. Bowen	 
	 	 	Senior
      Vice President	 
	 	 	 	 

      

    

     

     

    
      
        
        

      

      
        
          Signature
Page 4

          Amended and Restated Credit Agreement

        

        
          

        

      

      
        
        

      

    

     

    
      
        
          	LENDERS: 	BNP PARIBAS	 
	 	 	 	 
	
                   

                	
                  By:
      

                	/s/ Brian
      M. Malone	 
	 	 	Brian
      M. Malone	 
	 	 	Managing
      Director	 

        

      

    

    
      
        	 	 	 	 
	
                 

              	
                By:
      

              	/s/ Russell
      Otts	 
	 	 	Russell
      Otts	 
	 	 	Director	 
	 	 	 	 

      

    

     

     

    
      
        
        

      

      
        
          Signature
Page 5

          Amended and Restated Credit Agreement

        

        
          

        

      

      
        
        

      

    

     

    
      
        	 	WACHOVIA BANK,
      N.A.	 
	 	 	 	 
	
                 

              	
                By:
      

              	/s/ Leanne
      S. Phillips	 
	 	 	Leanne
      S. Phillips	 
	 	 	Director	 
	 	 	 	 

      

    

     

     

    
      
        
        

      

      
        
          Signature
Page 6

          Amended and Restated Credit Agreement

        

        
          

        

      

      
        
        

      

    

     

    
      
        	 	COMPASS BANK	 
	 	 	 	 
	
                 

              	
                By:
      

              	/s/ Kathleen
      J. Bowen	 
	 	 	Kathleen
      J. Bowen	 
	 	 	Senior
      Vice President	 
	 	 	 	 

      

    

     

     

    
      
        
        

      

      
        
          Signature
Page 7

          Amended and Restated Credit Agreement

        

        
          

        

      

      
        
        

      

    

     

    
      
        	 	BANK OF AMERICA
      N.A.	 
	 	 	 	 
	
                 

              	
                By:
      

              	/s/ Scott
      A. Mackey	 
	 	 	Scott
      A. Mackey	 
	 	 	Vice
      President	 
	 	 	 	 

      

    

     

     

    
      
        
        

      

      
        
          Signature
Page 8

          Amended and Restated Credit Agreement

        

        
          

        

      

      
        
        

      

    

     

    
      
        	 	THE BANK OF NOVA
      SCOTIA	 
	 	 	 	 
	
                 

              	
                By:
      

              	/s/ David
      G. Mills	 
	 	 	David
      G. Mills	 
	 	 	Managing
      Director	 
	 	 	 	 

      

    

     

     

    
      
        
        

      

      
        
          Signature
Page 9

          Amended and Restated Credit Agreement

        

        
          

        

      

      
        
        

      

    

     

    
      
        	 	ROYAL BANK OF
      CANADA	 
	 	 	 	 
	
                 

              	
                By:
      

              	/s/ Don
      J. McKinnerney	 
	 	 	Don
      J. McKinnerney	 
	 	 	Authorized
      Signatory	 
	 	 	 	 

      

    

     

     

    
      
        
        

      

      
        
          Signature
Page 10

          Amended and Restated Credit Agreement

        

        
          

        

      

      
        
        

      

    

     

    
      
        	 	U.S. BANK NATIONAL
      ASSOCIATION	 
	 	 	 	 
	
                 

              	
                By:
      

              	/s/ Mark
      E. Thompson	 
	 	 	Mark
      E. Thompson	 
	 	 	Senior
      Vice President	 
	 	 	 	 

      

    

     

     

    
      
        
        

      

      
        
          Signature
Page 11

          Amended and Restated Credit Agreement

        

        
          

        

      

      
        
        

      

    

     

    
      
        	 	KEYBANK NATIONAL
      ASSOCIATION	 
	 	 	 	 
	
                 

              	
                By:
      

              	/s/ Todd
      Coker	 
	 	 	Todd
      Coker	 
	 	 	AVP	 
	 	 	 	 

      

    

     

     

    
      
        
        

      

      
        
          Signature
Page 12

          Amended and Restated Credit Agreement

        

        
          

        

      

      
        
        

      

    

     

    
      
        	 	WEST TEXAS NATIONAL
      BANK	 
	 	 	 	 
	
                 

              	
                By:
      

              	/s/ Gary
      Walker	 
	 	 	Gary
      Walker	 
	 	 	Senior
      Vice President	 
	 	 	 	 

      

    

     

     

    
      
        
        

      

      
        
          Signature
Page 13

          Amended and Restated Credit Agreement

        

        
          

        

      

      
        
        

      

    

     

    
      ANNEX
I

       

      LIST
OF MAXIMUM CREDIT AMOUNTS

       

      Aggregate
Maximum Credit Amounts

       

      
        
          	
                  Name
      of Lender

                	
                  Applicable
      Percentage

                	
                  Maximum
      Credit Amount

                
	
                  BNP
      Paribas

                	
                  17.94117647%

                	
                  $107,647,058.82

                
	
                  Wachovia
      Bank, N. A.

                	
                  14.70588235%

                	
                  $88,235,294.12

                
	
                  Compass
      Bank

                	
                  14.70588235%

                	
                  $88,235,294.12

                
	
                  Bank
      of America N.A.

                	
                  12.35294118%

                	
                  $74,117,647.06

                
	
                  The
      Bank of Nova Scotia

                	
                  10.29411765%

                	
                  $61,764,705.88

                
	
                  Royal
      Bank of Canada

                	
                  10.29411765%

                	
                  $61,764,705.88

                
	
                  U.S.
      Bank National Association

                	
                  10.29411765%

                	
                  $61,764,705.88

                
	
                  KeyBank
      N.A.

                	
                  7.35294118%

                	
                  $44,117,647.06

                
	
                  West
      Texas National Bank

                	
                  2.0588235%

                	
                  $12,352,941.18

                
	
                   

                  TOTAL

                	
                   

                  100.0000000%

                	
                   

                  $600,000,000.00

                

        

      

      

       

      
        
          
          

        

        
          Annex I -
1

          
            

          

        

        
          
          

        

      

      

       

      EXHIBIT
A

       

      [FORM
OF] NOTE

       

      $[          ]                                                                                                                                                                       [          ],
200[     ]

       

      FOR VALUE
RECEIVED, Legacy Reserves LP, a Delaware limited partnership (the “Borrower”), hereby
promises to pay to the order of
[          ] (the “Lender”), at the
principal office of BNP Paribas, as administrative agent (the “Administrative
Agent”), the principal sum of
[          ] Dollars
($[          ]) (or such
lesser amount as shall equal the aggregate unpaid principal amount of the Loans
made by the Lender to the Borrower under the Credit Agreement, as hereinafter
defined), in lawful money of the United States of America and in immediately
available funds, on the dates and in the principal amounts provided in the
Credit Agreement, and to pay interest on the unpaid principal amount of each
such Loan, at such office, in like money and funds, for the period commencing on
the date of such Loan until such Loan shall be paid in full, at the rates per
annum and on the dates provided in the Credit Agreement.

       

      The date,
amount, Type, interest rate, Interest Period and maturity of each Loan made by
the Lender to the Borrower, and each payment made on account of the principal
thereof, shall be recorded by the Lender on its books and, prior to any transfer
of this Note, may be endorsed by the Lender on the schedules attached hereto or
any continuation thereof or on any separate record maintained by the
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 Loans or affect the validity of such transfer by any Lender of this
Note.

       

      This Note
is one of the Notes referred to in the Amended and Restated Credit Agreement
dated as of March 27, 2009 among the Borrower, the Administrative Agent, the
other Agents, and the lenders signatory thereto (including the Lender), and
evidences Loans made by the Lender thereunder (such Credit Agreement as the same
may be amended, supplemented or restated from time to time, the “Credit Agreement”)
and replaces and supersedes any Notes issued by the Borrower to the Lender under
the Existing Credit Agreement.  Capitalized terms used in this Note
have the respective meanings assigned to them in the Credit
Agreement.

       

      This Note
is issued pursuant to, and is subject to the terms and conditions set forth in,
the Credit Agreement and is entitled to the benefits provided for in the Credit
Agreement and the other Loan Documents.  The Credit Agreement provides
for the acceleration of the maturity of this Note upon the occurrence of certain
events, for prepayments of Loans upon the terms and conditions specified therein
and other provisions relevant to this Note.

       

      
        
          
          

        

        
          Exhibit A
- 1

          
            

          

        

        
          
          

        

      

       

      THIS NOTE
SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
TEXAS.

       

      
        	 	
                LEGACY RESERVES
      LP

                 

                By:  Legacy Reserves GP, LLC,

                        its general
      partner

              	 
	 	 	 	 
	
                 

              	
                By:
      

              	 	 
	 	 	Name 	 
	 	 	Title 	 
	 	 	 	 

      

    

    
       

      
 

      
        
          
          

        

        
          Exhibit A
- 2

          
            

          

        

        
          
          

        

      

       

      EXHIBIT
B

       

      [FORM
OF]

       

      COMPLIANCE
CERTIFICATE

       

      Each of
the undersigned hereby certifies that he/she is the
[          ] of Legacy
Reserves LP, a Delaware limited partnership (the “Borrower”), and that
as such he/she is authorized to execute this certificate on behalf of the
Borrower.  With reference to the Amended and Restated Credit Agreement
dated as of March 27, 2009 (together with all amendments, supplements or
restatements thereto being the “Agreement”) among the
Borrower, BNP Paribas, as Administrative Agent, the other Agents, and the
lenders (the “Lenders”) which are
or become a party thereto, and such Lenders, each of the undersigned represents
and warrants as follows (each capitalized term used herein having the same
meaning given to it in the Agreement unless otherwise specified):

       

      (a)           The
representations and warranties of the Borrower contained in ARTICLE VII of the Agreement and in the Loan Documents
and otherwise made in writing by or on behalf of the Borrower or any other
Guarantor pursuant to the Agreement and the Loan Documents were true and correct
when made, and are repeated at and as of the time of delivery hereof and are
true and correct in all material respects at and as of the time of delivery
hereof, except to the extent such representations and warranties are expressly
limited to an earlier date or the Majority Lenders have expressly consented in
writing to the contrary.

       

      (b)           The
Borrower has performed and complied with all agreements and conditions contained
in the Agreement and in the Loan Documents required to be performed or complied
with by it prior to or at the time of delivery hereof [or specify default and
describe].

       

      (c)           Since
December 31, 2008, no change has occurred, either in any case or in the
aggregate, in the condition, financial or otherwise, of the Borrower or any of
its Subsidiaries that could reasonably be expected to have a Material Adverse
Effect [or specify event].

       

      (d)           There
exists no Default or Event of Default [or specify Default and
describe].

       

      (e)           Attached
hereto are the detailed computations necessary to determine whether the Borrower
is in compliance with Section 9.01 and Section 8.14 as of the end of the fiscal quarter
ending
[          ].

       

      EXECUTED
AND DELIVERED this
[          ] day of
[          ].

       

      
        	 	
                LEGACY RESERVES
      LP

                 

                By:  Legacy Reserves GP, LLC,

                        its general
      partner

              	 
	 	 	 	 
	
                 

              	
                By:
      

              	 	 
	 	 	Name 	 
	 	 	Title 	 
	 	 	 	 

      

    

     

    
      
        
        

      

      
        Exhibit B
- 1

        
          

        

      

      
        
        

      

    

    
      

      EXHIBIT
C

       

      SECURITY
INSTRUMENTS

       

      1)           Amended
and Restated Guaranty Agreement dated as of March 27, 2009 among Legacy Reserves
Operating LP, Legacy Reserves Operating GP LLC, Legacy Reserves Services, Inc.,
and the Administrative Agent

       

      2)           Amended
and Restated Pledge Agreement dated as of March 27, 2009 among the Borrower,
Legacy Reserves Operating GP LLC, Legacy Reserves Operating LP, and the
Administrative Agent pledging limited partner interests in Legacy Reserves
Operating LP, membership interests in Legacy Reserves Operating GP LLC, general
partner interests in Legacy Reserves Operating LP, common stock of Legacy
Reserves Services, Inc., general partner interests in Pan-Ellis Properties, Ltd,
limited partner interests in Pan-Ellis Properties, Ltd. and membership interests
in Pantwist, LLC

       

      3)           Pledge
Agreement Financing Statements:

       

      (a)           Borrower

       

      (b)           Legacy
Reserves Operating GP LLC

       

      4)           Deed
of Trust, Mortgage, Line of Credit Mortgage, Assignment of As-Extracted
Collateral, Security Agreement, Fixture Filing and Financing Statement (New
Mexico), dated as of March 27, 2009 by Legacy Reserves Operating LP in favor of
Paribas North America, Inc., as Mortgagee and Administrative Agent

       

      5)           New
Mexico UCC-1, to be filed with the Delaware Secretary of State

       

      6)           Deed
of Trust, Mortgage, Assignment of As-Extracted Collateral, Security Agreement,
Fixture Filing and Financing Statement (Texas), dated as of March 27, 2009 by
Legacy Reserves Operating LP in favor of BNP Paribas, as Mortgagee and
Administrative Agent

       

      7)           Texas
UCC-1, to be filed with the Delaware Secretary of State

       

      8)           Deed
of Trust, Mortgage, Assignment of As-Extracted Collateral, Security Agreement,
Fixture Filing and Financing Statement (Oklahoma), dated as of March 27, 2009 by
Legacy Reserves Operating LP in favor of BNP Paribas, as Mortgagee and
Administrative Agent

       

      9)           Oklahoma
UCC-1, to be filed with the Delaware Secretary of State

       

      10)           Deed
of Trust, Mortgage, Assignment of As-Extracted Collateral, Security Agreement,
Fixture Filing and Financing Statement (Texas), dated as of March 27, 2009 by
Pantwist, LLC in favor of BNP Paribas, as Mortgagee and Administrative
Agent

       

      11)           Texas
UCC-1, to be filed with the Texas Secretary of State

       

      12)           Fee
Letter among BNP Paribas, BNP Paribas Securities Corp. and the Borrower dated
February 23, 2009

       

      

       

      
        
          
          

        

        
          Exhibit C
- 1

          
            

          

        

        
          
          

        

      

      

       

      EXHIBIT
D

       

      [FORM
OF] ASSIGNMENT AND ASSUMPTION

       

      This
Assignment and Assumption (the “Assignment and
Assumption”) is dated as of the Effective Date set forth below and is
entered into by and between [Insert name of Assignor] (the “Assignor”) and
[Insert name of Assignee] (the “Assignee”).  Capitalized
terms used but not defined herein shall have the meanings given to them in the
Credit Agreement identified below (as amended, the “Credit Agreement”),
receipt of a copy of which is hereby acknowledged by the
Assignee.  The Standard Terms and Conditions set forth in Annex 1
attached hereto are hereby agreed to and incorporated herein by reference and
made a part of this Assignment and Assumption as if set forth herein in
full.

       

      The
Assignor named on the reverse hereof hereby sells and assigns, without recourse,
to the Assignee named on the reverse hereof, and the Assignee hereby purchases
and assumes, without recourse, from the Assignor, effective as of the Assignment
Date set forth on the reverse hereof, the interests set forth on the reverse
hereof (the “Assigned
Interest”) in the Assignor’s rights and obligations under the Credit
Agreement, including, without limitation, the interests set forth on the reverse
hereof in the Commitment of the Assignor on the Assignment Date and Loans owing
to the Assignor which are outstanding on the Assignment Date, together with the
participations in Letters of Credit and LC Disbursements held by the Assignor on
the Assignment Date, but excluding accrued interest and fees to and excluding
the Assignment Date.  The Assignee hereby acknowledges receipt of a
copy of the Credit Agreement.  From and after the Assignment Date (i)
the Assignee shall be a party to and be bound by the provisions of the Credit
Agreement and, to the extent of the Assigned Interest, have the rights and
obligations of a Lender thereunder and (ii) the Assignor shall, to the extent of
the Assigned Interest, relinquish its rights and be released from its
obligations under the Credit Agreement.

       

      This
Assignment and Assumption is being delivered to the Administrative Agent
together with (i) if the Assignee is a Foreign Lender, any documentation
required to be delivered by the Assignee pursuant to Section 5.03(e) of the Credit Agreement, duly
completed and executed by the Assignee, and (ii) if the Assignee is not already
a Lender under the Credit Agreement, an Administrative Questionnaire in the form
supplied by the Administrative Agent, duly completed by the
Assignee.  The [Assignee/Assignor] shall pay the fee payable to the
Administrative Agent pursuant to Section 12.04(b)
of the Credit Agreement.

       

      This
Assignment and Assumption shall be governed by and construed in accordance with
the laws of the State of Texas.

       

      
        	
                Credit
      Agreement:

              	
                Amended
      And Restated Credit Agreement dated as of March 27, 2009, is among Legacy
      Reserves LP, each of the Lenders from time to time party thereto, BNP
      Paribas as administrative agent for the Lenders, and the other Agents
      party thereto

              

      

       

      Legal
Name of Assignor:

       

      Legal
Name of Assignee:

       

      Assignee’s
Address for Notices:

       

      
        
          
          

        

        
          Exhibit D
- 1

          
            

          

        

        
          
          

        

      

       

      Assignment
Date:

       

      
        	
                Facility

              	
                Principal
      Amount Assigned

              	
                Percentage
      Assigned of Facility/Commitment (set forth, to at least 8 decimals, as a
      percentage of the Facility and the aggregate Commitments of all Lenders
      thereunder)

              
	
                Commitment
      Assigned:

              	
                $

              	
                %

              
	
                Loans:

              	 
      	 
      

      

      

       

      The terms
set forth above and on the reverse side hereof are hereby agreed
to:

       

      [Name of Assignor], as
Assignor

      

      

      By:______________________________

      Name:

      Title:

      

      

      [Name of Assignee], as
Assignee

      

      

      By:
______________________________

      Name:

      Title:

      

      

      The
undersigned hereby consent to the within assignment:

      

      Legacy
Reserves
LP                                                                     BNP
Paribas,

      as Administrative Agent

      By:
Legacy Reserves GP, LLC,

      as General Partner

      

      
        	
                By:
      ______________________________

                Name:____________________________

                Title:_____________________________

                 

              	
                By:
      ______________________________

                Name:____________________________

                Title:_____________________________

                 

              
	 
      	
                By:
      ______________________________

                Name:____________________________

                Title:_____________________________

                 

              

      

       

      
        
          
          

        

        
          Exhibit D
- 2

          
            

          

        

        
          
          

        

      

      
 

      LEGACY
RESERVES LP

       

      CREDIT
AGREEMENT

       

      STANDARD
TERMS AND CONDITIONS FOR

       

      ASSIGNMENT
AND ASSUMPTION

       

      1.           Representations and
Warranties.

       

      1.1           Assignor.  The
Assignor (a) represents and warrants that (i) it is the legal and beneficial
owner of the Assigned Interest, (ii) the Assigned Interest is free and clear of
any lien, encumbrance or other adverse claim and (iii) it has full power and
authority, and has taken all action necessary, to execute and deliver this
Assignment and Assumption and to consummate the transactions contemplated
hereby; and (b) assumes no responsibility with respect to (i) any statements,
warranties or representations made in or in connection with the Credit Agreement
or any other Loan Document, (ii) the execution, legality, validity,
enforceability, genuineness, sufficiency or value of the Loan Documents or any
collateral thereunder, (iii) the financial condition of the Borrower, any of its
Subsidiaries or Affiliates or any other Person obligated in respect of any Loan
Document or (iv) the performance or observance by the Borrower, any of its
Subsidiaries or Affiliates or any other Person of any of their respective
obligations under any Loan Document.

       

      1.2.           Assignee.  The
Assignee (a) represents and warrants that (i) it has full power and authority,
and has taken all action necessary, to execute and deliver this Assignment and
Assumption and to consummate the transactions contemplated hereby and to become
a Lender under the Credit Agreement, (ii) it satisfies the requirements, if any,
specified in the Credit Agreement that are required to be satisfied by it in
order to acquire the Assigned Interest and become a Lender, (iii) from and after
the Effective Date, it shall be bound by the provisions of the Credit Agreement
as a Lender thereunder and, to the extent of the Assigned Interest, shall have
the obligations of a Lender thereunder, (iv) it has received a copy of the
Credit Agreement, together with copies of the most recent financial statements
delivered pursuant to Section 8.01 thereof, as
applicable, and such other documents and information as it has deemed
appropriate to make its own credit analysis and decision to enter into this
Assignment and Assumption and to purchase the Assigned Interest on the basis of
which it has made such analysis and decision independently and without reliance
on the Administrative Agent or any other Lender, and (v) if it is a Foreign
Lender, attached to the Assignment and Assumption is any documentation required
to be delivered by it pursuant to the terms of the Credit Agreement, duly
completed and executed by the Assignee; and (b) agrees that (i) it will,
independently and without reliance on the Administrative Agent, the Assignor or
any other Lender, and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking action under the Loan Documents, and (ii) it will perform in
accordance with their terms all of the obligations which by the terms of the
Loan Documents are required to be performed by it as a Lender.

       

      2.           Payments.  From
and after the Effective Date, the Administrative Agent shall make all payments
in respect of the Assigned Interest (including payments of principal, interest,
fees and other amounts) to the Assignor for amounts which have accrued to but
excluding the 

       

      
        
          
          

        

        
          
            Credit
Agreement - 1

            Standard Terms and Conditions for Assignment and Assumption

          

          
            

          

        

        
          
          

        

         

        Effective
Date and to the Assignee for amounts which have accrued from and after the
Effective Date.

      

       

      3.           General
Provisions.  This Assignment and Assumption shall be binding
upon, and inure to the benefit of, the parties hereto and their respective
successors and assigns.  This Assignment and Assumption may be
executed in any number of counterparts, which together shall constitute one
instrument.  Delivery of an executed counterpart of a signature page
of this Assignment and Assumption by telecopy shall be effective as delivery of
a manually executed counterpart of this Assignment and
Assumption.  This Assignment and Assumption shall be governed by, and
construed in accordance with, the law of the State of Texas.

       

      

      
        
          
          

        

        
          
            Credit
Agreement - 2

            Standard Terms and Conditions for Assignment and Assumption

          

          
            

          

        

        
          
          

        

      

       

      

       

      SCHEDULE
7.05

       

      LITIGATION

       

      None.

       

      

       

      

      
        
          
          

        

        
          Schedule
7.05 - 1

          
            

          

        

        
          
          

        

      

       

      

       

      SCHEDULE
7.14

       

      SUBSIDIARIES

       

      Subsidiaries
of Legacy Reserves LP

       

      

       

      
        	
                Entity
      Name

              	
                Jurisdiction
      of Organization

              	
                Location
      of Chief Executive Offices

              	
                Organizational
      ID

              
	
                Legacy
      Reserves Operating GP LLC

              	
                Delaware

              	
                303
      W. Wall

                Suite
      1400

                Midland,
      Texas 79701

              	
                4096662

              
	
                Legacy
      Reserves Operating LP

              	
                Delaware

              	
                303
      W. Wall

                Suite
      1400

                Midland,
      Texas 79701

              	
                4096664

              
	
                Legacy
      Reserves Services, Inc.

              	
                Texas

              	
                303
      W. Wall

                Suite
      1400

                Midland,
      Texas 79701

              	
                800619799

              
	
                Pantwist,
      LLC

              	
                Texas

              	
                303
      W. Wall

                Suite
      1400

                Midland,
      Texas 79701

              	
                800646872

              
	
                Pan-Ellis
      Properties, Ltd.

              	
                Texas

              	
                303
      W. Wall

                Suite
      1400

                Midland,
      Texas 79701

              	
                10721210

              

      

      

       

      
        
          
          

        

        
          Schedule
7.14 - 1

          
            

          

        

        
          
          

        

      

       

      SCHEDULE
7.15

       

      LOCATION
OF BUSINESSES

       

      See Schedule 7.14.

       

      
 

      
        
          
          

        

        
          Schedule
7.15 - 1

          
            

          

        

        
          
          

        

      

       

      SCHEDULE
7.18

       

      GAS
IMBALANCES

       

      There are
no gas imbalances or prepayments that would require Legacy to deliver 2% or more
of monthly hydrocarbon production without then receiving payment

       

      

       

       

       

      
        
          
          

        

        
          Schedule
7.18 - 1

          
            

          

        

        
          
          

        

      

       

      SCHEDULE
7.19

       

      MARKETING
CONTRACTS

       

      Below is
a summary of the natural gas sales contracts Legacy Reserves has entered into,
the vast majority of which are not cancelable within 60 days.  Please see
the notation describing our “Evergreen” status (denoted by “*”).  The
majority of these contracts are beyond their primary term and may be cancelled
by either party on their yearly anniversary date.  All oil contracts
are cancellable within 60 days.

       

      

       

      
        
          	 
      	 
      	 
      	 
      	
                  Aug
      - 08

                	
                  Residue

                	
                  NGL

                
	 
      	
                  Processor

                	
                  Contract

                	
                  Leases

                	
                  MCFD

                	
                  POP

                	
                  POP

                
	 
      	
                  Agave

                	
                  GP0403

                	
                  Arnquist

                	
                  120

                	
                  100.0%

                	 
      
	 
      	 
      	 
      	 
      	 
      	 
      	 
      
	 
      	
                  Atlas

                	
                  1570

                	
                  Elkin/Midkiff/Ringo/Rocker

                	
                  228

                	
                  80.0%

                	
                  80.0%

                
	 
      	
                  Atlas

                	
                  8251

                	
                  DM
      Oldham/Leeson

                	
                  50

                	
                  80.0%

                	
                  80.0%

                
	 
      	
                  Atlas

                	
                  958

                	
                  Aldwell/Newmont

                	
                  44

                	
                  70.0%

                	
                  70.0%

                
	 
      	
                  Atlas

                	
                  6725

                	
                  Ray

                	
                  17

                	
                  85.0%

                	
                  85.0%

                
	 
      	 
      	 
      	 
      	 
      	 
      	 
      
	 
      	
                  Chevron

                	
                  1300187

                	
                  Cheri/Diane/Elaine

                	
                  102

                	
                  75.0%

                	
                  75.0%

                
	 
      	 
      	 
      	 
      	 
      	 
      	 
      
	 
      	
                  Clayton
      Williams

                	
                  None

                	
                  Avary/Monroe

                	
                  126

                	
                  100.0%

                	 
      
	 
      	 
      	 
      	 
      	 
      	 
      	 
      
	 
      	
                  DCP
      West Texas

                	 
      	 
      	 
      	 
      	 
      
	 
      	
                  DCP
      Midstream

                	
                  SPR
      1046

                	
                  Bird/Currie

                	
                  341

                	
                  75.0%

                	
                  75.0%

                
	 
      	
                  DCP
      Midstream

                	
                  RRH
      0003-00*

                	
                  TXL
      G/Sanders

                	
                  317

                	
                  80.0%

                	
                  60.0%

                
	 
      	
                  DCP
      Midstream

                	
                  SPR
      1110-00R

                	
                  Connell/Deck/Donovan/Neal/Ray

                	
                  245

                	
                  82.0%

                	
                  82.0%

                
	 
      	
                  DCP
      Midstream

                	
                  PEG
      0084-00R

                	
                  Canon
      #1

                	
                  154

                	
                  82.0%

                	
                  82.0%

                
	 
      	
                  DCP
      Midstream

                	
                  AND
      0544-00*

                	
                  University
      Consolidated XIII

                	
                  115

                	
                  90.0%

                	
                  100.0%

                
	 
      	
                  DCP
      Midstream

                	
                  SPR
      1068-00R

                	
                  Barrett/Davidson/Elkin/Roy

                	
                  109

                	
                  85.0%

                	
                  85.0%

                
	 
      	
                  DCP
      Midstream

                	
                  SPR
      1014-00R

                	
                  Barwest/Nordic

                	
                  96

                	
                  78.0%

                	
                  78.0%

                
	 
      	
                  DCP
      Midstream

                	
                  GLD
      0435, et al

                	
                  West
      Jordan

                	
                  73

                	
                  56.0%

                	
                  56.0%

                
	 
      	
                  DCP
      Midstream

                	
                  MAR
      0103-00R

                	
                  Orson/Fuller/McMooris

                	
                  63

                	
                  75.0%

                	
                  75.0%

                
	 
      	
                  DCP
      Midstream

                	
                  FUL
      05740-00

                	
                  Fuhrman

                	
                  59

                	
                  70.0%

                	
                  70.0%

                
	 
      	
                  DCP
      Midstream

                	
                  SPR
      0991-00R

                	
                  Nichols/Elkin

                	
                  55

                	
                  72.0%

                	
                  72.0%

                
	 
      	
                  DCP
      Midstream

                	
                  SPR
      0728-00A

                	
                  KEN

                	
                  47

                	
                  70.0%

                	
                  70.0%

                
	 
      	
                  DCP
      Midstream

                	
                  SPR
      0881-00B

                	
                  Fasken/Taylor

                	
                  47

                	
                  72.0%

                	
                  72.0%

                
	 
      	
                  DCP
      Midstream

                	
                  SPR
      0882-00

                	
                  Cole

                	
                  44

                	
                  75.0%

                	
                  75.0%

                
	 
      	
                  DCP
      Midstream

                	
                  PEG
      0083-00R

                	
                  Powell
      34-1

                	
                  39

                	
                  75.0%

                	
                  75.0%

                
	 
      	
                  DCP
      Midstream

                	
                  SPR
      1012-00R

                	
                  Braden/Neal/Ratliff

                	
                  34

                	
                  70.0%

                	
                  70.0%

                
	 
      	
                  DCP
      Midstream

                	
                  SPR
      1108-00*

                	
                  Palm/Cave

                	
                  33

                	
                  74.0%

                	
                  74.0%

                
	 
      	
                  DCP
      Midstream

                	
                  SPR
      1113

                	
                  Koonce

                	
                  33

                	
                  83.0%

                	
                  83.0%

                
	 
      	
                  DCP
      Midstream

                	
                  SPR
      1031-00*

                	
                  Crowley/Bayliss/Keegan

                	
                  32

                	
                  80.0%

                	
                  80.0%

                
	 
      	
                  DCP
      Midstream

                	
                  SPR
      1130

                	
                  Morrison

                	
                  28

                	
                  83.0%

                	
                  83.0%

                
	 
      	
                  DCP
      Midstream

                	
                  GLD
      0991

                	
                  York
      B

                	
                  27

                	
                  71.0%

                	
                  71.0%

                
	 
      	
                  DCP
      Midstream

                	
                  PEG
      0072-00*

                	
                  Arco/Davidson

                	
                  25

                	
                  80.0%

                	
                  60.0%

                
	 
      	
                  DCP
      Midstream

                	
                  SPR
      1045-00*

                	
                  WILLIS

                	
                  18

                	
                  75.0%

                	
                  75.0%

                
	 
      	
                  DCP
      Midstream

                	
                  FUL
      0493

                	
                  Stark

                	
                  15

                	
                  35.0%

                	
                  35.0%

                
	 
      	
                  DCP
      Midstream

                	
                  SPR
      0970-00*

                	
                  DAMERON
      UNIT

                	
                  8

                	
                  36.5%

                	
                  73.0%

                
	 
      	
                  DCP
      Midstream

                	
                  AND
      0321

                	
                  Univ
      #I/L

                	
                  2

                	
                  35.0%

                	
                  25.0%

                
	 
      	
                  DCP
      Midstream

                	
                  SPR
      0804-00*

                	
                  MARCHBANKS
      UNIT 1

                	
                  0

                	 
      	 
      
	 
      	 
      	 
      	 
      	 
      	 
      	 
      
	 
      	
                  DCP
      New Mexico

                	 
      	 
      	 
      	 
      	 
      
	 
      	
                  DCP
      Midstream

                	
                  RED
      0014

                	
                  Osudo

                	
                  433

                	
                  87.0%

                	
                  87.0%

                
	 
      	
                  DCP
      Midstream

                	
                  LIN
      0227

                	
                  Lea/State/Hamon/Keohane

                	
                  320

                	
                  82.0%

                	
                  82.0%

                
	 
      	
                  DCP
      Midstream

                	
                  AVA
      0050

                	
                  Bell
      State

                	
                  149

                	
                  95.0%

                	 
      
	 
      	
                  DCP
      Midstream

                	
                  ART
      0570

                	
                  Two
      Forks/Kyle/NMDU

                	
                  68

                	
                  79.0%

                	
                  79.0%

                
	 
      	
                  DCP
      Midstream

                	
                  ART
      0599-00*

                	
                  Empire
      29 Fed #1

                	
                  48

                	
                  85.0%

                	
                  85.0%

                

        

      

      

       

      
        
          
          

        

        
          Schedule
7.19 - 1

          
            

          

        

        
          
          

        

      

      

       

      
        	 
      	 
      	 
      	 
      	
                Aug-08

              	
                Residue

              	
                NGL

              
	 
      	
                Processor

              	
                Contract

              	
                Leases

              	
                MCFD

              	
                POP

              	
                POP

              
	 
      	
                DCP
      Panhandle

              	 
      	 
      	 
      	 
      	 
      
	 
      	
                DCP
      Midstream

              	
                PAM
      0605-00R

              	
                Combs/Finley/Jackson/Palmer

              	
                466

              	
                90.0%

              	
                90.0%

              
	 
      	
                DCP
      Midstream

              	
                PAM
      0550-00R

              	
                Faulkner/Moody/Powell/Wright

              	
                284

              	
                65.0%

              	
                65.0%

              
	 
      	
                DCP
      Midstream

              	
                PAM
      0622-00*

              	
                Arnold/Dauer/Latham/McConnell

              	
                236

              	
                74.0%

              	
                74.0%

              
	 
      	
                DCP
      Midstream

              	
                BOR-0376-00A

              	
                Sneed

              	
                206

              	
                85.0%

              	 
      
	 
      	
                DCP
      Midstream

              	
                BOR
      1270-00R

              	
                Pool

              	
                180

              	
                75.0%

              	
                75.0%

              
	 
      	
                DCP
      Midstream

              	
                PAM
      05615-00

              	
                Dan/Jackson/Palmer/Wood

              	
                66

              	
                72.0%

              	
                72.0%

              
	 
      	
                DCP
      Midstream

              	
                PAM
      0636-00

              	
                CLARK
      #2

              	
                65

              	
                75.0%

              	
                75.0%

              
	 
      	
                DCP
      Midstream

              	
                PAM
      0591-00R

              	
                Chapman/Jackson

              	
                59

              	
                70.0%

              	
                70.0%

              
	 
      	
                DCP
      Midstream

              	
                BOR
      1253-00*

              	
                Sneed

              	
                47

              	
                75.0%

              	
                75.0%

              
	 
      	
                DCP
      Midstream

              	
                BOR
      0616-00B

              	
                Burnett

              	
                45

              	
                70.0%

              	
                70.0%

              
	 
      	
                DCP
      Midstream

              	
                BOR
      1416-00*

              	
                Allen

              	
                43

              	
                70.0%

              	
                70.0%

              
	 
      	
                DCP
      Midstream

              	
                BOR
      0969-00*

              	
                Whittenburg

              	
                38

              	
                74.0%

              	
                74.0%

              
	 
      	
                DCP
      Midstream

              	
                BOR
      0972-00A

              	
                Whittenburg

              	
                34

              	
                78.0%

              	
                78.0%

              
	 
      	
                DCP
      Midstream

              	
                PAM
      0018-00C

              	
                MCLAUGHLIN
      #19

              	
                30

              	
                65.0%

              	
                65.0%

              
	 
      	
                DCP
      Midstream

              	
                PAM
      0598-00*

              	
                SHAW
      #4

              	
                28

              	
                80.0%

              	
                80.0%

              
	 
      	
                DCP
      Midstream

              	
                PAM
      0606-00R

              	
                JB
      Bowers 8, 12, 13

              	
                28

              	
                81.0%

              	
                81.0%

              
	 
      	
                DCP
      Midstream

              	
                PAM
      0608-00R

              	
                BINKLEY
      O E #3

              	
                27

              	
                65.0%

              	
                65.0%

              
	 
      	
                DCP
      Midstream

              	
                BOR
      1244-00*

              	
                Johnson

              	
                27

              	
                75.0%

              	
                75.0%

              
	 
      	
                DCP
      Midstream

              	
                BOR
      1212-00R

              	
                Beard

              	
                27

              	
                85.0%

              	 
      
	 
      	
                DCP
      Midstream

              	
                PAM
      037301C

              	
                BOWERS
      #3

              	
                26

              	
                67.0%

              	
                67.0%

              
	 
      	
                DCP
      Midstream

              	
                PAM
      0481-00*

              	
                JACKSON,
      WEST

              	
                21

              	
                60.0%

              	
                60.0%

              
	 
      	
                DCP
      Midstream

              	
                PAM
      0499-00*

              	
                Doss
      #5A

              	
                19

              	
                85.0%

              	 
      
	 
      	
                DCP
      Midstream

              	
                PAM
      0524-00*

              	
                JACKSON,
      WEST #5

              	
                16

              	
                75.0%

              	
                75.0%

              
	 
      	
                DCP
      Midstream

              	
                PAM
      0568-00R

              	
                TAYLOR
      #1

              	
                15

              	
                55.0%

              	
                55.0%

              
	 
      	
                DCP
      Midstream

              	
                BOR
      0277-00C

              	
                JA
      Whittenburg

              	
                14

              	
                70.0%

              	
                70.0%

              
	 
      	
                DCP
      Midstream

              	
                BOR
      11605-00

              	
                Weatherly/Johnson

              	
                13

              	
                80.0%

              	
                80.0%

              
	 
      	
                DCP
      Midstream

              	
                BOR
      03454-01*

              	
                Harbert

              	
                13

              	
                76.8%

              	 
      
	 
      	
                DCP
      Midstream

              	
                BOR
      1373-00*

              	
                Clark

              	
                0

              	 
      	 
      
	 
      	 
      	 
      	 
      	 
      	 
      	 
      
	 
      	
                Eagle
      Rock

              	
                50039

              	
                Andy/Bednorz/Husted/Seiber

              	
                513

              	
                77.0%

              	
                77.0%

              
	 
      	
                Eagle
      Rock

              	
                50049

              	
                Carol/Darsey/Parker

              	
                467

              	
                80.0%

              	
                80.0%

              
	 
      	
                Eagle
      Rock

              	
                50037

              	
                BOST
      #1

              	
                44

              	
                85.0%

              	
                85.0%

              
	 
      	
                Eagle
      Rock

              	
                50036

              	
                Harlan/Haynes/Rob

              	
                41

              	
                85.0%

              	
                85.0%

              
	 
      	
                Eagle
      Rock

              	
                50041

              	
                CRUTCHFIELD
      #1

              	
                23

              	
                75.0%

              	
                75.0%

              
	 
      	
                Eagle
      Rock

              	
                50038

              	
                MCCONNELL,
      GIRTHA

              	
                18

              	
                75.0%

              	
                75.0%

              
	 
      	
                Eagle
      Rock

              	
                14019KG

              	
                MCCONNELL
      #2

              	
                8

              	
                86.0%

              	 
      
	 
      	
                Eagle
      Rock

              	
                50050

              	
                SAUNDERS
      G H 1

              	
                7

              	
                52.5%

              	
                52.5%

              
	 
      	
                Eagle
      Rock

              	
                50035

              	
                SCHAFER
      RANCH EAST

              	
                0

              	 
      	 
      

      

      

       

      
        
          
          

        

        
          Schedule
7.19 - 2

          
            

          

        

        
          
          

        

      

       

      
        	 
      	 
      	 
      	 
      	
                Aug-08

              	
                Residue

              	
                NGL

              
	 
      	
                Processor

              	
                Contract

              	
                Leases

              	
                MCFD

              	
                POP

              	
                POP

              
	 
      	
                Enterprise

              	 
      	
                EFFIE
      SIBLEY #1

              	
                88

              	
                100.0%

              	 
      
	 
      	 
      	 
      	 
      	 
      	 
      	 
      
	 
      	
                Feagan

              	
                none
      listed

              	
                A
      P

              	
                0

              	
                100.0%

              	 
      
	 
      	 
      	 
      	 
      	 
      	 
      	 
      
	 
      	
                Frontier

              	
                30036

              	
                Love/Johnson/Tamano

              	
                175

              	
                75.0%

              	
                75.0%

              
	 
      	 
      	 
      	 
      	 
      	 
      	 
      
	 
      	
                Kinder
      Morgan

              	
                10040

              	
                PLK
      32

              	
                62

              	
                100.0%

              	
                40.0%

              
	 
      	 
      	 
      	 
      	 
      	 
      	 
      
	 
      	
                Oxy

              	
                129745000

              	
                Conoco
      Dean

              	
                118

              	
                50.0%

              	
                33.3%

              
	 
      	
                Oxy

              	 
      	
                DEAN
      COOP

              	
                0

              	 
      	 
      
	 
      	 
      	 
      	 
      	 
      	 
      	 
      
	 
      	
                PVR

              	
                8102

              	
                McCoy

              	
                13

              	
                82.0%

              	
                65.0%

              
	 
      	 
      	 
      	 
      	 
      	 
      	 
      
	 
      	
                Regency

              	
                WAH
      0145

              	
                Univ
      32-21/American Exploration

              	
                67

              	
                85.0%

              	
                85.0%

              
	 
      	 
      	 
      	 
      	 
      	 
      	 
      
	 
      	
                SUG

              	
                4397

              	
                SJU
      Satellite #1

              	
                1,816

              	
                88.0%

              	
                88.0%

              
	 
      	
                SUG

              	
                K786

              	
                Flying
      W

              	
                439

              	
                84.0%

              	
                84.0%

              
	 
      	
                SUG

              	
                01P110

              	
                WILSON
      102

              	
                119

              	
                100.0%

              	
                85.0%

              
	 
      	
                SUG

              	
                1P49

              	
                Fidelity
      Trust

              	
                77

              	
                84.0%

              	
                84.0%

              
	 
      	
                SUG

              	
                K588

              	
                HOGG
      J C

              	
                15

              	
                68.6%

              	
                30.0%

              
	 
      	
                SUG

              	
                4361

              	
                Anderson

              	
                6

              	
                50.0%

              	
                50.0%

              
	 
      	
                SUG

              	
                L550

              	
                SCARBOROUGH
      -O- 3

              	
                0

              	 
      	 
      
	 
      	 
      	 
      	 
      	 
      	 
      	 
      
	 
      	
                Targa

              	
                18930

              	
                Chevelle
      48/Lynch/Crump

              	
                730

              	
                84.0%

              	
                84.0%

              
	 
      	
                Targa

              	
                18255

              	
                Tweedy/Winterbotham/Foster

              	
                688

              	
                78.0%

              	
                78.0%

              
	 
      	
                Versado

              	
                14865

              	
                LMPSU

              	
                293

              	
                70.0%

              	
                70.0%

              
	 
      	
                Targa

              	
                18234

              	
                Brooks/Hoyt

              	
                279

              	
                75.0%

              	
                75.0%

              
	 
      	
                Targa

              	
                17127

              	
                SMB
      TRUST 1 38412

              	
                202

              	
                83.0%

              	
                83.0%

              
	 
      	
                Versado

              	
                13354

              	
                SJU

              	
                70

              	
                80.0%

              	
                80.0%

              
	 
      	
                Versado

              	
                3945

              	
                ME
      Dallas

              	
                56

              	
                80.0%

              	
                80.0%

              
	 
      	
                Versado

              	
                5541

              	
                Lynch

              	
                53

              	
                80.0%

              	
                80.0%

              
	 
      	
                Versado

              	
                19142

              	
                Tract
      41-1

              	
                36

              	
                80.0%

              	
                80.0%

              
	 
      	
                Targa

              	
                18176

              	
                PAC
      54

              	
                21

              	
                70.0%

              	
                70.0%

              
	 
      	
                Versado

              	
                5498

              	
                MeTex
      Supply

              	
                9

              	
                50.0%

              	
                50.0%

              
	 
      	 
      	 
      	 
      	 
      	 
      	 
      
	 
      	
                WTG

              	
                Denton

              	
                Simpson/Denton

              	
                710

              	
                100.0%

              	
                33.3%

              
	 
      	
                WTG

              	
                Big
      Lake

              	
                University
      2

              	
                592

              	
                69.0%

              	
                69.0%

              
	 
      	
                WTG

              	
                42-00002A

              	
                BARNETT
      21-3

              	
                362

              	
                84.0%

              	
                84.0%

              
	 
      	
                WTG

              	
                10-0035

              	
                UNIVERSITY
      AMBER et al

              	
                306

              	
                80.0%

              	
                80.0%

              
	 
      	
                WTG

              	
                411859

              	
                Clayton
      Johnson

              	
                84

              	
                100.0%

              	
                50.0%

              
	 
      	
                WTG

              	
                412066A

              	
                Meador/Underwood

              	
                83

              	
                75.0%

              	
                75.0%

              
	 
      	
                WTG

              	
                42-00002A

              	
                AMACKER,
      ROBERT P

              	
                67

              	
                84.0%

              	
                84.0%

              
	 
      	
                WTG

              	
                360034A

              	
                STOKER
      C

              	
                36

              	
                100.0%

              	 
      
	 
      	
                WTG

              	
                7-003

              	
                Texon

              	
                33

              	
                90.0%

              	
                70.0%

              
	 
      	
                WTG

              	
                Schleicher

              	
                AB
      Thomerson

              	
                31

              	
                64.0%

              	
                64.0%

              
	 
      	
                WTG

              	
                43-16812

              	
                Whitten
      B #1-26

              	
                20

              	
                80.0%

              	
                80.0%

              
	 
      	
                WTG

              	
                360004

              	
                ELMER
      HITT

              	
                11

              	
                100.0%

              	 
      
	 
      	
                WTG

              	
                4389

              	
                Cochran
      A-3

              	
                7

              	
                80.0%

              	
                50.0%

              
	 
      	
                WTG

              	
                56154389

              	
                COCHRAN
      #2

              	
                7

              	
                80.0%

              	
                50.0%

              
	 
      	
                WTG

              	
                410032

              	
                Madison

              	
                7

              	
                50.0%

              	
                50.0%

              

      

      

      
        
          
          

        

        
          Schedule
7.19 - 3

          
            

          

        

        
          
          

        

      

       

      SCHEDULE
7.20

       

      SWAP
AGREEMENTS

       

      

       

      
        	
                Oil
      Derivatives

              
	
                Contract
      #

              	
                Trade
      Date

              	
                Type

              	
                Remaining
      Hedged Volume (Bbls)

              	
                Effective
      Date

              	
                Term
      Date

              	
                Commodity

              	
                Volume
      (Bbls)

              	
                Avg
      Price

              
	
                89737

              	
                9/14/2005

              	
                Swap

              	
                 79,008

              	
                 4/1/2009

              	
                12/31/2009

              	
                WTI

              	
                 79,008

              	
                 $61.05

              
	
                98133

              	
                1/13/2006

              	
                Swap

              	
                 109,450

              	
                 4/1/2009

              	
                12/31/2009

              	
                WTI

              	
                 109,450

              	
                 $63.22

              
	
                98135

              	
                1/13/2006

              	
                Swap

              	
                 155,375

              	
                 4/1/2009

              	
                12/31/2009

              	
                WTI

              	
                 155,375

              	
                 $63.22

              
	
                89738

              	
                9/14/2005

              	
                Swap

              	
                 95,267

              	
                1/1/2010

              	
                12/31/2010

              	
                WTI

              	
                 95,267

              	
                 $60.15

              
	
                98134

              	
                1/13/2006

              	
                Swap

              	
                 136,875

              	
                1/1/2010

              	
                12/31/2010

              	
                WTI

              	
                 136,875

              	
                 $61.90

              
	
                98136

              	
                1/13/2006

              	
                Swap

              	
                 194,545

              	
                1/1/2010

              	
                12/31/2010

              	
                WTI

              	
                 194,545

              	
                 $61.90

              
	
                110737

              	
                6/30/2006

              	
                Swap

              	
                 85,700

              	
                 4/1/2009

              	
                12/31/2009

              	
                WTI

              	
                 85,700

              	
                 $71.40

              
	
                131407

              	
                2/23/2007

              	
                Swap

              	
                 99,998

              	
                1/1/2010

              	
                12/31/2010

              	
                WTI

              	
                 99,998

              	
                 $66.70

              
	
                134266

              	
                3/26/2007

              	
                Swap

              	
                 27,540

              	
                 4/1/2009

              	
                12/31/2009

              	
                WTI

              	
                 27,540

              	
                 $68.47

              
	
                134216

              	
                3/26/2007

              	
                Swap

              	
                 39,330

              	
                 4/1/2009

              	
                12/31/2009

              	
                WTI

              	
                 39,330

              	
                 $68.00

              
	
                134264

              	
                3/26/2007

              	
                Swap

              	
                 48,360

              	
                1/1/2010

              	
                12/31/2010

              	
                WTI

              	
                 48,360

              	
                 $67.80

              
	
                134371

              	
                3/26/2007

              	
                Swap

              	
                 44,640

              	
                1/1/2011

              	
                12/31/2011

              	
                WTI

              	
                 44,640

              	
                 $67.33

              
	
                179523

              	
                5/18/2007

              	
                Swap

              	
                 64,800

              	
                 4/1/2009

              	
                12/31/2009

              	
                WTI

              	
                 64,800

              	
                 $70.47

              
	
                179525

              	
                5/18/2007

              	
                Swap

              	
                 80,400

              	
                1/1/2010

              	
                12/31/2010

              	
                WTI

              	
                 80,400

              	
                 $69.08

              
	
                179527

              	
                5/18/2007

              	
                Swap

              	
                 74,400

              	
                1/1/2011

              	
                12/31/2011

              	
                WTI

              	
                 74,400

              	
                 $68.21

              
	
                179531

              	
                5/18/2007

              	
                Swap

              	
                 69,600

              	
                1/1/2012

              	
                12/31/2012

              	
                WTI

              	
                 69,600

              	
                 $67.72

              
	
                180977

              	
                6/14/2007

              	
                Swap

              	
                 390,000

              	
                1/1/2011

              	
                12/31/2011

              	
                WTI

              	
                 390,000

              	
                 $71.40

              
	
                180979

              	
                6/14/2007

              	
                Swap

              	
                 330,000

              	
                1/1/2012

              	
                12/31/2012

              	
                WTI

              	
                 330,000

              	
                 $71.15

              
	
                181452

              	
                6/21/2007

              	
                Swap

              	
                 60,000

              	
                1/1/2010

              	
                12/31/2010

              	
                WTI

              	
                 60,000

              	
                 $71.15

              
	
                181454

              	
                6/21/2007

              	
                Swap

              	
                 20,250

              	
                 4/1/2009

              	
                12/31/2009

              	
                WTI

              	
                 20,250

              	
                 $72.00

              
	
                149975

              	
                9/7/2007

              	
                Swap

              	
                 130,500

              	
                 4/1/2009

              	
                12/31/2009

              	
                WTI

              	
                 130,500

              	
                 $70.30

              
	
                149976

              	
                9/7/2007

              	
                Swap

              	
                 168,000

              	
                1/1/2010

              	
                12/31/2010

              	
                WTI

              	
                 168,000

              	
                 $69.25

              
	
                149977

              	
                9/7/2007

              	
                Swap

              	
                 156,000

              	
                1/1/2011

              	
                12/31/2011

              	
                WTI

              	
                 156,000

              	
                 $68.85

              
	
                185415

              	
                9/7/2007

              	
                Swap

              	
                 150,000

              	
                1/1/2012

              	
                12/31/2012

              	
                WTI

              	
                 150,000

              	
                 $68.67

              
	
                195103

              	
                11/26/2007

              	
                Swap

              	
                 28,800

              	
                4/1/2009

              	
                12/31/2009

              	
                WTI

              	
                 28,800

              	
                 $86.75

              
	
                195103

              	
                11/26/2007

              	
                Swap

              	
                 36,000

              	
                1/1/2010

              	
                12/31/2010

              	
                WTI

              	
                 36,000

              	
                 $86.75

              
	
                195103

              	
                11/26/2007

              	
                Swap

              	
                 33,600

              	
                1/1/2011

              	
                12/31/2011

              	
                WTI

              	
                 33,600

              	
                 $86.75

              
	
                195103

              	
                11/26/2007

              	
                Swap

              	
                 31,200

              	
                1/1/2012

              	
                12/31/2012

              	
                WTI

              	
                 31,200

              	
                 $86.75

              
	
                204829

              	
                1/14/2008

              	
                Swap

              	
                 49,500

              	
                4/1/2009

              	
                12/31/2009

              	
                WTI

              	
                 49,500

              	
                 $87.65

              
	
                204829

              	
                1/14/2008

              	
                Swap

              	
                 61,200

              	
                1/1/2010

              	
                12/31/2010

              	
                WTI

              	
                 61,200

              	
                 $87.65

              
	
                204829

              	
                1/14/2008

              	
                Swap

              	
                 56,400

              	
                1/1/2011

              	
                12/31/2011

              	
                WTI

              	
                 56,400

              	
                 $87.65

              
	
                204829

              	
                1/14/2008

              	
                Swap

              	
                 52,800

              	
                1/1/2012

              	
                12/31/2012

              	
                WTI

              	
                 52,800

              	
                 $87.65

              
	
                208771

              	
                3/13/2008

              	
                Swap

              	
                 108,900

              	
                4/1/2009

              	
                12/31/2009

              	
                WTI

              	
                 108,900

              	
                 $101.47

              
	
                208771

              	
                3/13/2008

              	
                Swap

              	
                 134,400

              	
                1/1/2010

              	
                12/31/2010

              	
                WTI

              	
                 134,400

              	
                 $101.47

              
	
                208771

              	
                3/13/2008

              	
                Swap

              	
                 124,800

              	
                1/1/2011

              	
                12/31/2011

              	
                WTI

              	
                 124,800

              	
                 $101.47

              
	
                208771

              	
                3/13/2008

              	
                Swap

              	
                 116,400

              	
                1/1/2012

              	
                12/31/2012

              	
                WTI

              	
                 116,400

              	
                 $101.47

              
	
                216412

              	
                7/10/2008

              	
                Swap

              	
                 110,000

              	
                 4/1/2009

              	
                12/31/2009

              	
                WTI

              	
                 110,000

              	
                 $140.00

              
	
                216412

              	
                7/10/2008

              	
                Swap

              	
                 146,000

              	
                1/1/2010

              	
                12/31/2010

              	
                WTI

              	
                 146,000

              	
                 $140.00

              
	
                216412

              	
                7/10/2008

              	
                Swap

              	
                 146,000

              	
                1/1/2011

              	
                12/31/2011

              	
                WTI

              	
                 146,000

              	
                 $140.00

              
	
                219123

              	
                9/5/2008

              	
                Swap

              	
                 46,000

              	
                 4/1/2009

              	
                12/31/2009

              	
                WTI

              	
                 46,000

              	
                 $109.05

              
	
                219123

              	
                9/5/2008

              	
                Swap

              	
                 57,850

              	
                1/1/2010

              	
                12/31/2010

              	
                WTI

              	
                 57,850

              	
                 $109.05

              
	
                219123

              	
                9/5/2008

              	
                Swap

              	
                 54,850

              	
                1/1/2011

              	
                12/31/2011

              	
                WTI

              	
                 54,850

              	
                 $109.05

              
	
                219123

              	
                9/5/2008

              	
                Swap

              	
                 52,300

              	
                1/1/2012

              	
                12/31/2012

              	
                WTI

              	
                 52,300

              	
                 $109.05

              
	
                5314600

              	
                9/5/2008

              	
                Swap

              	
                 46,000

              	
                 4/1/2009

              	
                12/31/2009

              	
                WTI

              	
                 46,000

              	
                 $109.20

              
	
                5314600

              	
                9/5/2008

              	
                Swap

              	
                 57,850

              	
                1/1/2010

              	
                12/31/2010

              	
                WTI

              	
                 57,850

              	
                 $109.20

              
	
                5314600

              	
                9/5/2008

              	
                Swap

              	
                 54,850

              	
                1/1/2011

              	
                12/31/2011

              	
                WTI

              	
                 54,850

              	
                 $109.20

              
	
                5314600

              	
                9/5/2008

              	
                Swap

              	
                 52,300

              	
                1/1/2012

              	
                12/31/2012

              	
                WTI

              	
                 52,300

              	
                 $109.20

              
	
                220131

              	
                9/22/2008

              	
                Swap

              	
                 16,767

              	
                4/1/2009

              	
                12/31/2009

              	
                WTI

              	
                 16,767

              	
                 $108.50

              
	
                220131

              	
                9/22/2008

              	
                Swap

              	
                 21,228

              	
                1/1/2010

              	
                12/31/2010

              	
                WTI

              	
                 21,228

              	
                 $108.50

              
	
                220131

              	
                9/22/2008

              	
                Swap

              	
                 20,172

              	
                1/1/2011

              	
                12/31/2011

              	
                WTI

              	
                 20,172

              	
                 $108.50

              
	
                220131

              	
                9/22/2008

              	
                Swap

              	
                 19,212

              	
                1/1/2012

              	
                12/31/2012

              	
                WTI

              	
                 19,212

              	
                 $108.50

              
	
                575356

              	
                11/26/2008

              	
                Swap

              	
                 96,000

              	
                1/1/2012

              	
                12/31/2012

              	
                WTI

              	
                 96,000

              	
                 $80.05

              
	
                575356

              	
                11/26/2008

              	
                Swap

              	
                 240,000

              	
                1/1/2013

              	
                1/31/2013

              	
                WTI

              	
                 240,000

              	
                 $82.00

              
	
                215387

              	
                6/24/2008

              	
                Call

              	
                 56,800

              	
                4/1/2009

              	
                12/31/2009

              	
                WTI

              	
                 56,800

              	
                 $156.30

              
	
                215388

              	
                6/24/2008

              	
                Call

              	
                 71,800

              	
                1/1/2010

              	
                12/31/2010

              	
                WTI

              	
                 71,800

              	
                 $156.30

              
	
                215389

              	
                6/24/2008

              	
                Call

              	
                 68,300

              	
                1/1/2011

              	
                12/31/2011

              	
                WTI

              	
                 68,300

              	
                 $156.30

              
	
                215390

              	
                6/24/2008

              	
                Call

              	
                 65,100

              	
                1/1/2012

              	
                12/31/2012

              	
                WTI

              	
                 65,100

              	
                 $156.30

              
	
                215387

              	
                6/24/2008

              	
                Put

              	
                 56,800

              	
                4/1/2009

              	
                12/31/2009

              	
                WTI

              	
                 56,800

              	
                 $120.00

              
	
                215388

              	
                6/24/2008

              	
                Put

              	
                 71,800

              	
                1/1/2010

              	
                12/31/2010

              	
                WTI

              	
                 71,800

              	
                 $120.00

              
	
                215389

              	
                6/24/2008

              	
                Put

              	
                 68,300

              	
                1/1/2011

              	
                12/31/2011

              	
                WTI

              	
                 68,300

              	
                 $120.00

              
	
                215390

              	
                6/24/2008

              	
                Put

              	
                 65,100

              	
                1/1/2012

              	
                12/31/2012

              	
                WTI

              	
                 65,100

              	
                 $120.00

              

      

      

       

      
        
          
          

        

        
          1

          
            

          

        

        
          
          

        

      

      

       

      
        	
                Natural
      Gas Derivatives

              
	
                Contract
      #

              	
                Trade
      Date

              	
                Type

              	
                Remaining
      Hedged Volume (MMBtu)

              	
                Effective
      Date

              	
                Term
      Date

              	
                Commodity

              	
                Volume
      (MMBtu)

              	
                Avg
      Price

              
	
                89713

              	
                9/14/2005

              	
                Swap

              	
                 360,374

              	
                4/1/2009

              	
                12/31/2009

              	
                NYMEX

              	
                 360,374

              	
                 $7.77

              
	
                98138

              	
                1/13/2006

              	
                Swap

              	
                 260,975

              	
                4/1/2009

              	
                12/31/2009

              	
                NYMEX

              	
                 260,975

              	
                 $8.29

              
	
                98129

              	
                1/13/2006

              	
                Swap

              	
                 370,425

              	
                4/1/2009

              	
                12/31/2009

              	
                NYMEX

              	
                 370,425

              	
                 $8.29

              
	
                89714

              	
                9/14/2005

              	
                Swap

              	
                 434,879

              	
                1/1/2010

              	
                12/31/2010

              	
                NYMEX

              	
                 434,879

              	
                 $7.37

              
	
                98139

              	
                1/13/2006

              	
                Swap

              	
                 324,120

              	
                1/1/2010

              	
                12/31/2010

              	
                NYMEX

              	
                 324,120

              	
                 $8.34

              
	
                98130

              	
                1/13/2006

              	
                Swap

              	
                 459,900

              	
                1/1/2010

              	
                12/31/2010

              	
                NYMEX

              	
                 459,900

              	
                 $8.33

              
	
                134917

              	
                3/30/2007

              	
                Swap

              	
                 180,000

              	
                4/1/2009

              	
                12/31/2009

              	
                ANR-OK

              	
                 180,000

              	
                 $7.64

              
	
                134917

              	
                3/30/2007

              	
                Swap

              	
                 135,000

              	
                1/1/2010

              	
                12/31/2010

              	
                ANR-OK

              	
                 135,000

              	
                 $7.45

              
	
                134917

              	
                3/30/2007

              	
                Swap

              	
                 130,000

              	
                1/1/2011

              	
                12/31/2011

              	
                ANR-OK

              	
                 130,000

              	
                 $7.23

              
	
                N205765

              	
                5/18/2007

              	
                Swap

              	
                 135,000

              	
                4/1/2009

              	
                12/31/2009

              	
                WAHA

              	
                 135,000

              	
                 $8.23

              
	
                N205765

              	
                5/18/2007

              	
                Swap

              	
                 159,720

              	
                1/1/2010

              	
                12/31/2010

              	
                WAHA

              	
                 159,720

              	
                 $7.83

              
	
                N205765

              	
                5/18/2007

              	
                Swap

              	
                 144,000

              	
                1/1/2011

              	
                12/31/2011

              	
                WAHA

              	
                 144,000

              	
                 $7.51

              
	
                N205765

              	
                5/18/2007

              	
                Swap

              	
                 132,000

              	
                1/1/2012

              	
                12/31/2012

              	
                WAHA

              	
                 132,000

              	
                 $7.30

              
	
                MUR
      551528

              	
                7/17/2007

              	
                Swap

              	
                 117,000

              	
                4/1/2009

              	
                12/31/2009

              	
                WAHA

              	
                 117,000

              	
                 $7.41

              
	
                MUR
      551528

              	
                7/17/2007

              	
                Swap

              	
                 144,000

              	
                1/1/2010

              	
                12/31/2010

              	
                WAHA

              	
                 144,000

              	
                 $7.41

              
	
                MUR
      551528

              	
                7/17/2007

              	
                Swap

              	
                 132,000

              	
                1/1/2011

              	
                12/31/2011

              	
                WAHA

              	
                 132,000

              	
                 $7.41

              
	
                MUR
      565436

              	
                9/7/2007

              	
                Swap

              	
                 93,537

              	
                4/1/2009

              	
                12/31/2009

              	
                WAHA

              	
                 93,537

              	
                 $7.16

              
	
                MUR
      565436

              	
                9/7/2007

              	
                Swap

              	
                 114,672

              	
                1/1/2010

              	
                12/31/2010

              	
                WAHA

              	
                 114,672

              	
                 $7.16

              
	
                MUR
      565436

              	
                9/7/2007

              	
                Swap

              	
                 107,220

              	
                1/1/2011

              	
                12/31/2011

              	
                WAHA

              	
                 107,220

              	
                 $7.16

              
	
                MUR
      565436

              	
                9/7/2007

              	
                Swap

              	
                 99,936

              	
                1/1/2012

              	
                12/31/2012

              	
                WAHA

              	
                 99,936

              	
                 $7.16

              
	
                257723

              	
                9/7/2007

              	
                Swap

              	
                 150,300

              	
                4/1/2009

              	
                12/31/2009

              	
                ANR-OK

              	
                 150,300

              	
                 $6.85

              
	
                257723

              	
                9/7/2007

              	
                Swap

              	
                 190,464

              	
                1/1/2010

              	
                12/31/2010

              	
                ANR-OK

              	
                 190,464

              	
                 $6.85

              
	
                257723

              	
                9/7/2007

              	
                Swap

              	
                 180,804

              	
                1/1/2011

              	
                12/31/2011

              	
                ANR-OK

              	
                 180,804

              	
                 $6.85

              
	
                257723

              	
                9/7/2007

              	
                Swap

              	
                 172,500

              	
                1/1/2012

              	
                12/31/2012

              	
                ANR-OK

              	
                 172,500

              	
                 $6.85

              
	
                195110

              	
                11/26/2007

              	
                Swap

              	
                 85,500

              	
                4/1/2009

              	
                12/31/2009

              	
                WAHA

              	
                 85,500

              	
                 $7.57

              
	
                195110

              	
                11/26/2007

              	
                Swap

              	
                 103,200

              	
                1/1/2010

              	
                12/31/2010

              	
                WAHA

              	
                 103,200

              	
                 $7.57

              
	
                195110

              	
                11/26/2007

              	
                Swap

              	
                 94,800

              	
                1/1/2011

              	
                12/31/2011

              	
                WAHA

              	
                 94,800

              	
                 $7.57

              
	
                195110

              	
                11/26/2007

              	
                Swap

              	
                 88,800

              	
                1/1/2012

              	
                12/31/2012

              	
                WAHA

              	
                 88,800

              	
                 $7.57

              
	
                204846

              	
                1/15/2008

              	
                Swap

              	
                 144,900

              	
                4/1/2009

              	
                12/31/2009

              	
                ANR-OK

              	
                 144,900

              	
                 $7.51

              
	
                204846

              	
                1/15/2008

              	
                Swap

              	
                 180,000

              	
                1/1/2010

              	
                12/31/2010

              	
                ANR-OK

              	
                 180,000

              	
                 $7.51

              
	
                204846

              	
                1/15/2008

              	
                Swap

              	
                 168,000

              	
                1/1/2011

              	
                12/31/2011

              	
                ANR-OK

              	
                 168,000

              	
                 $7.51

              
	
                204846

              	
                1/15/2008

              	
                Swap

              	
                 158,400

              	
                1/1/2012

              	
                12/31/2012

              	
                ANR-OK

              	
                 158,400

              	
                 $7.51

              
	
                382250

              	
                3/13/2008

              	
                Swap

              	
                 299,529

              	
                4/1/2009

              	
                12/31/2009

              	
                WAHA

              	
                 299,529

              	
                 $8.70

              
	
                382250

              	
                3/13/2008

              	
                Swap

              	
                 364,404

              	
                1/1/2010

              	
                12/31/2010

              	
                WAHA

              	
                 364,404

              	
                 $8.70

              
	
                382250

              	
                3/13/2008

              	
                Swap

              	
                 951,792

              	
                1/1/2011

              	
                12/31/2011

              	
                WAHA

              	
                 951,792

              	
                 $8.70

              
	
                382250

              	
                3/13/2008

              	
                Swap

              	
                 719,400

              	
                1/1/2012

              	
                12/31/2012

              	
                WAHA

              	
                 719,400

              	
                 $8.70

              
	
                510758

              	
                8/28/2008

              	
                Swap

              	
                 181,800

              	
                4/1/2009

              	
                12/31/2009

              	
                ANR-OK

              	
                 181,800

              	
                 $8.10

              
	
                510758

              	
                8/28/2008

              	
                Swap

              	
                 230,500

              	
                1/1/2010

              	
                12/31/2010

              	
                ANR-OK

              	
                 230,500

              	
                 $8.10

              
	
                510758

              	
                8/28/2008

              	
                Swap

              	
                 218,700

              	
                1/1/2011

              	
                12/31/2011

              	
                ANR-OK

              	
                 218,700

              	
                 $8.10

              
	
                510758

              	
                8/28/2008

              	
                Swap

              	
                 208,700

              	
                1/1/2012

              	
                12/31/2012

              	
                ANR-OK

              	
                 208,700

              	
                 $8.10

              
	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      
	
                Henry
      Hub Natural Gas Basis Swaps

              
	
                Contract
      #

              	
                Trade
      Date

              	
                Type

              	
                Remaining
      Hedged Volume (MMBtu)

              	
                Effective
      Date

              	
                Term
      Date

              	
                Commodity

              	
                Volume
      (MMBtu)

              	
                Avg
      Price

              
	
                93156

              	
                12/5/2008

              	
                Swap

              	
                 480,000

              	
                1/1/2010

              	
                12/31/2010

              	
                ANR
      OK

              	
                 480,000

              	
                 $(0.87)

              
	
                93661

              	
                12/5/2008

              	
                Swap

              	
                 360,000

              	
                4/1/2009

              	
                12/31/2009

              	
                ANR
      OK

              	
                 360,000

              	
                 $(1.09)

              
	
                111523

              	
                7/14/2006

              	
                Swap

              	
                 990,000

              	
                4/1/2009

              	
                12/31/2009

              	
                Waha

              	
                 990,000

              	
                 $(0.68)

              
	
                111523

              	
                7/14/2006

              	
                Swap

              	
                 1,200,000

              	
                1/1/2010

              	
                12/31/2010

              	
                Waha

              	
                 1,200,000

              	
                 $(0.68)

              
	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      
	
                Natural
      Gas Liquid Derivatives

              
	
                Contract
      #

              	
                Trade
      Date

              	
                Type

              	
                Remaining
      Hedged Volume (Gal)

              	
                Effective
      Date

              	
                Term
      Date

              	
                Commodity

              	
                Volume
      (Gal)

              	
                Avg
      Price

              
	
                135001

              	
                3/30/2007

              	
                Swap

              	
                 203,742

              	
                4/1/2009

              	
                12/31/2009

              	
                Purity
      Ethane

              	
                 203,742

              	
                 $1.15

              
	
                135018

              	
                3/30/2007

              	
                Swap

              	
                 577,584

              	
                4/1/2009

              	
                12/31/2009

              	
                Propane

              	
                 577,584

              	
                 $1.15

              
	
                135020

              	
                3/30/2007

              	
                Swap

              	
                 153,090

              	
                4/1/2009

              	
                12/31/2009

              	
                Iso
      Butane

              	
                 153,090

              	
                 $1.15

              
	
                135021

              	
                3/30/2007

              	
                Swap

              	
                 339,822

              	
                4/1/2009

              	
                12/31/2009

              	
                Butane

              	
                 339,822

              	
                 $1.15

              
	
                135022

              	
                3/30/2007

              	
                Swap

              	
                 424,872

              	
                4/1/2009

              	
                12/31/2009

              	
                Gasoline

              	
                 424,872

              	
                 $1.15

              

      

      

       

      
        
          
          

        

        
          2

          
            

          

        

        
          
          

        

      

      

       

      
        	
                LIBOR
      Swap Summary

              
	
                Amount

              	
                Counterparty

              	
                Maturity

              	
                Rate

              
	
                 $29.00

              	
                BNP

              	
                10/16/2013

              	
                4.090%

              
	
                 $13.00

              	
                BNP

              	
                10/16/2013

              	
                4.110%

              
	
                 $12.00

              	
                BNP

              	
                11/28/2013

              	
                4.110%

              
	
                 $60.00

              	
                Fortis

              	
                4/1/2013

              	
                2.650%

              
	
                 $50.00

              	
                Wachovia

              	
                10/10/2013

              	
                3.090%

              
	
                 $50.00

              	
                BNP

              	
                10/10/2013

              	
                3.100%

              
	
                 $50.00

              	
                RBC

              	
                12/18/2013

              	
                2.295%

              
	
                 $264.00

              	
                Weighted
      Average Rate

              	
                3.048%

              

      

    

     

     

    
      
        
        

      

      
        3Exhibit 4.1

Exhibit 4.1

As of April 25, 2009

AMENDED AND RESTATED

CAPITAL PLAN

of the

Federal Home Loan Bank of New York

	 	 	 
	FHLBNY Capital Plan

	 	4/25/2009

 

 

 

Table of Contents

	 	 	 	 	 
	Definitions 
	 	iii
	1. Overview 
	 	 	1	 
	2. The Capital Structure 
	 	 	2	 
	2.1 Authorized Stock 
	 	 	2	 
	2.1.1 Par Value 
	 	 	2	 
	2.1.2 Ownership of Retained Earnings 
	 	 	2	 
	2.2 Purchase, Redemption and Repurchase of Stock 
	 	 	2	 
	2.2.1 Purchase of Capital Stock 
	 	 	2	 
	2.2.2 Redemption of Capital Stock by Members 
	 	 	3	 
	2.2.3 Repurchase of Excess Stock by the FHLBNY 
	 	 	4	 
	2.2.4 Limitations on Redemptions and Repurchases 
	 	 	5	 
	2.2.5 Retirement of Redeemed and Repurchased Stock 
	 	 	6	 
	2.2.6 Transfer of Capital Stock 
	 	 	6	 
	2.2.7 Limitation on Converting or Exchanging Excess
Stock as Between Subclasses 
	 	 	6	 
	2.3 Dividends 
	 	 	7	 
	2.4 Rights Upon Liquidation, Merger or Consolidation of the FHLBNY 
	 	 	7	 
	2.4.1 Liquidation of the FHLBNY 
	 	 	7	 
	2.4.2 FHLBNY Acquired by another Federal Home Loan Bank 
	 	 	7	 
	2.4.3 FHLBNY Acquires Other Federal Home Loan Bank 
	 	 	7	 
	3. Responsibilities of Directors and Management and Voting of Stock 
	 	 	8	 
	3.1 Responsibilities of Directors and Management 
	 	 	8	 
	3.2 Voting Rights 
	 	 	9	 
	4. Member Stock Purchase Requirements 
	 	 	10	 
	4.1 Membership Stock Purchase Requirement 
	 	 	10	 
	4.2 Activity-Based Stock Purchase Requirement 
	 	 	10	 
	4.3 Periodic Review of Capital Stock Purchase Requirements 
	 	 	11	 
	4.4 Member Compliance with Adjusted Requirements 
	 	 	12	 
	5. Capital Requirements of the FHLBNY 
	 	 	13	 
	5.1 Statutory Capital Requirements 
	 	 	13	 
	5.1.1 Total Capital Requirement 
	 	 	13	 
	5.1.2 Leverage Capital Requirement 
	 	 	13	 
	5.1.3 Permanent Capital Requirement 
	 	 	13	 
	5.1.4 FHFB Authority to Require More Capital 
	 	 	13	 
	5.2 Risk-Based Capital Requirement 
	 	 	13	 
	5.2.1 Credit Risk Capital Requirement 
	 	 	14	 
	5.2.2 Market Risk Capital Requirement 
	 	 	15	 
	5.2.3 Operations Risk Capital Requirement 
	 	 	15	 
	6. Reporting Requirements to the Finance Board 
	 	 	16	 
	6.1. Changes in Membership 
	 	 	16	 
	6.2 Leverage and Risk Based Capital 
	 	 	16	 
	6.3 Voting Shares 
	 	 	16	 

	 	 	 
	FHLBNY Capital Plan

	 	4/25/2009

 

i

 

	 	 	 	 	 
	7. Termination of Membership in the FHLBNY 
	 	 	17	 
	7.1 Voluntary Withdrawal from Membership 
	 	 	17	 
	7.1.1 Written Notification 
	 	 	17	 
	7.1.2 Access to Benefits of Membership 
	 	 	17	 
	7.1.3 Finance Board Notification 
	 	 	17	 
	7.1.4 Finance Board Certification 
	 	 	17	 
	7.1.5 Disposition of Claims 
	 	 	17	 
	7.1.6 Effective Date of Withdrawal 
	 	 	18	 
	7.2 Involuntary Termination of Membership 
	 	 	18	 
	7.2.1 Written Notification 
	 	 	18	 
	7.2.2 Access to Benefits of Membership 
	 	 	18	 
	7.2.3 Disposition of Claims 
	 	 	18	 
	7.3 Merger or Consolidation of Members 
	 	 	19	 
	7.3.1 Termination of Charter and Stock Redemption Period 
	 	 	19	 
	7.3.2 Capital Stock Requirement of Surviving Member 
	 	 	20	 
	7.4 Merger or Consolidation of Member into a Member of another Federal
Home Loan Bank or into a Nonmember 
	 	 	20	 
	7.4.1 General 
	 	 	20	 
	7.4.2 Disposition of Claims 
	 	 	20	 
	7.4.3 Acquiring Institution Applies for FHLBNY Membership 
	 	 	21	 
	7.5 Relocation of Principal Place of Business 
	 	 	21	 
	7.5.1 General 
	 	 	21	 
	7.5.2 Disposition of Claims 
	 	 	22	 
	8. The Transition Plan 
	 	 	23	 
	8.1 Transition Process 
	 	 	23	 
	8.1.1 Member Election 
	 	 	23	 
	8.1.2 Plan of Reorganization 
	 	 	26	 
	8.1.3 Post-Transition Stock Purchases 
	 	 	27	 
	9. Reviews of the FHLBNY’s Capital Plan 
	 	 	28	 
	9.1 Independent CPA Review 
	 	 	28	 
	9.2 NRSRO Review 
	 	 	28	 
	9.3 Internal Market Risk Model Review 
	 	 	28	 
	9.4 Internal Market Risk Model & Risk Management Procedure
Approval by FHFB 
	 	 	28	 
	9.5 FHLBNY Determination regarding the Capital Plan 
	 	 	28	 
	10. Amendments to the Capital Plan and Notices 
	 	 	29	 
	10.1 Amendments to the Capital Plan 
	 	 	29	 
	10.2 Notices Relating to the Capital Plan 
	 	 	29	 
	10.2.1 Notices by the FHLBNY 
	 	 	29	 
	10.2.2 Notices to the FHLBNY 
	 	 	29	 
	Appendix I — Member Stock Purchase Requirements 
	 	 	30	 
	A. Membership Stock Purchase Requirement 
	 	 	30	 
	B. Activity-Based Stock Purchase Requirement 
	 	 	31	 

	 	 	 
	FHLBNY Capital Plan

	 	4/25/2009

 

ii

 

Definitions

For purposes of the Capital Plan, all capitalized terms used but not defined elsewhere have the
meanings set forth below. In the Capital Plan unless the context otherwise requires, words
describing the singular number include the plural and vice versa.

Activity-Based Stock means Capital Stock that is purchased and held by a Member to meet the
Member’s Activity-Based Stock Purchase Requirement.

Activity-Based Stock Purchase Requirement means the requirement under which a Member must acquire
and maintain a specific amount of Activity-Based Stock based on the specified value of certain
transactions of the Member with the FHLBNY as described in Section 4.2 of the Capital Plan.

Acquired Member Assets or AMA means assets acquired by the FHLBNY from a Member through either a
purchase or funding transaction under Part 955 of the Regulations, and includes assets acquired
through transactions undertaken through the FHLBNY’s “Community Mortgage Asset” program.

Advances Agreement means the Bank’s Advances, Collateral Pledge and Security Agreement, as may be
amended from time to time. For avoidance of doubt, the term “advances” for purposes of the Capital
Plan shall include funding agreements between the FHLBNY and life insurance company Members.

Bank Act means the Federal Home Loan Bank Act, as amended.

Bank Stock means the capital stock of the FHLBNY outstanding prior to the Effective Date.

Board of Directors means the Board of Directors of the FHLBNY.

Calculation Date means the business day immediately prior to the Effective Date.

Capital Plan means the capital plan of the FHLBNY as adopted by the Board of Directors and approved
by the Finance Board, as amended from time to time.

Capital Stock means all shares of Class B Stock issued by the FHLBNY, including subclasses, in
accordance with the Bank Act, the Regulations and the Capital Plan.

Class B Stock means the capital stock that has the characteristics of Class B stock as described in
the Bank Act and the Regulations, and as specified in Section 2.1 of the Capital Plan.

Credit Risk Capital Requirement means the amount of Permanent Capital that is required to support
the FHLBNY’s credit risk, as defined by Section 932.4 of the Regulations.

DDA Account means a Member’s Demand Deposit Account established at the FHLBNY.

Derivative Contract means a financial contract the value of which is derived from the values of one
or more underlying assets, reference rates, or indices of asset values, or credit-related events.

Effective Date means the date selected by the Board of Directors that shall be within eighteen
months of the Finance Board’s written approval of this Capital Plan, upon which outstanding shares
of Bank Stock are exchanged for shares of Capital Stock in accordance with the Capital Plan.

	 	 	 
	FHLBNY Capital Plan

	 	4/25/2009

 

iii

 

Excess Stock means the shares of each subclass of Capital Stock held by a Member, or Other
Institution, that exceeds the Member’s, or Other Institution’s, Membership Stock Purchase
Requirement or Activity-Based Stock Purchase Requirement related to the respective subclass.

FHFB or Finance Board means the Federal Housing Finance Board, the regulatory and supervisory
agency for the Federal Home Loan Banks.

FHLBNY means the Federal Home Loan Bank of New York.

GAAP means Generally Accepted Accounting Principles in the United States of America.

General Allowance for Losses means an allowance established by the FHLBNY in accordance with GAAP
for expected losses, but does not include any amounts held against specific assets of the FHLBNY.

Market Risk Capital Requirement means the amount of Permanent Capital to support the FHLBNY’s
market risk, as required by Section 932.5 of the Regulations.

Member means an institution that: (i) has been approved for membership by the FHLBNY in accordance
with Part 925 of the Regulations and which has purchased the required amount of Bank Stock, or
(ii) has purchased the required amount of Bank Stock, or (iii) has satisfied the Membership Stock
Purchase Requirement, as applicable.

Membership means all the rights, privileges and obligations associated with being a Member.

Membership Stock means Capital Stock that is purchased and held by each Member to meet the
Membership Stock Purchase Requirement.

Membership Stock Purchase Requirement means the level of Membership Stock that must be purchased
and maintained by a Member as a condition of Membership as described in Section 4.1 of the Capital
Plan.

Member Stock Purchase Requirements means, respectively, the Activity-Based Stock Purchase
Requirement and the Membership Stock Purchase Requirement.

Minimum Regulatory Capital Requirement means a minimum regulatory capital requirement for the
FHLBNY established by the Regulations, as referred to in Sections 5.1.1, 5.1.2, 5.1.3 and 5.2 of
the Capital Plan, or on a basis specifically applicable to the FHLBNY by the Finance Board, as
referred to in Section 5.1.4 of the Capital Plan.

Minimum Stock Investment Requirement means the Capital Stock that a Member or Other Institution is
required, as applicable, to hold to meet its Membership Stock Purchase Requirement and the Capital
Stock that a Member or Other Institution is required, as applicable, to hold to meet its
Activity-Based Stock Purchase Requirement. For avoidance of doubt, in order for a Member or Other
Institution to be deemed to satisfy its Minimum Stock
Investment Requirement it must at the relevant point in time hold both the number of shares of
Membership Stock required to meet, to the extent applicable, the Member’s or Other Institution’s
Membership Stock Purchase Requirement and the number of shares of Activity-Based Stock required to
meet, to the extent applicable, the Member’s or Other Institution’s Activity-Based Stock Purchase
Requirement.

	 	 	 
	FHLBNY Capital Plan

	 	4/25/2009

 

iv

 

Mortgage-related Assets means loans and participations in loans secured by residential real
property and mortgage-backed securities, all as defined in Section 950.1 of the Regulations; loans
secured by manufactured housing; certain other mortgage-related securities; and certain loans
secured by nonresidential nonfarm real property, as listed and described in Appendix I.

Opt-Out Date means the date that is ten days prior to the Effective Date.

Operations Risk Capital Requirement means the amount of Permanent Capital that is required to
support the FHLBNY’s operations risk, as required by Section 932.6 of the Regulations.

Other Institution means a financial institution that is not a Member and that acquires, receives or
retains Capital Stock under the Capital Plan.

Par Value means $100 per share of Capital Stock.

Permanent Capital means the retained earnings of the FHLBNY, determined in accordance with GAAP,
plus the amount paid-in for the FHLBNY’s Class B stock (whether required or excess).

Record Date means December 31st of the calendar year preceding the election of
directors.

Redemption Cancellation Fee means as applicable (i) a fee of $500, which may be imposed in the
event that a Member cancels a Redemption Notice, or a Member’s Redemption Notice is subject to
automatic cancellation, or (ii) a fee of $500 that may be imposed in the event that a Member
cancels its notification of intent to withdraw from Membership.

Redemption Notice means a written notice provided by a Member to the FHLBNY in accordance with
Section 2.2.2 of the Capital Plan requesting redemption of a specified number of shares of Capital
Stock, subject to the time limits prescribed in the Bank Act, for Class B Stock and the other
restrictions set forth in the Act, the Regulations and the Capital Plan.

Risk-based Capital Requirement means the amount of Permanent Capital that the FHLBNY must maintain
in accordance with Section 932.3 of the Regulations.

Regulations means the regulations promulgated by the Finance Board, as amended from time to time.

Stock Redemption Period means the five-year period, as applicable, following: (i) the FHLBNY’s
receipt of a Member’s Redemption Notice, (ii) the FHLBNY’s (or as applicable, the Finance Board’s)
receipt of a Member’s written notice to the FHLBNY (or as applicable, the Finance Board) of intent
to withdraw from Membership, or the date of acquisition or receipt of any additional shares of
Capital Stock after the FHLBNY’s (or as applicable, the Finance Board’s) receipt of such notice,
(iii) a Member’s termination from Membership as a result of merger or consolidation into a member
of another Federal Home Loan Bank or a nonmember,
or the date of acquisition or receipt of any additional shares of Capital Stock after such
termination from Membership, (iv) a Member’s termination from Membership as a result of the
relocation of its principal place of business, or the date of acquisition or receipt of any
additional shares of Capital Stock after such termination of Membership, or (v) a Member’s
involuntary termination from Membership, or the date of acquisition or receipt of any additional
shares of Capital Stock after such termination of Membership.

Total Assets means the total assets of the FHLBNY, as determined in accordance with GAAP.

Total Capital of the FHLBNY means the sum of Permanent Capital, the amount of any General Allowance
for Losses, and the amount of other instruments identified in the Capital Plan that the FHFB has
determined to be available to absorb losses incurred by the FHLBNY.

	 	 	 
	FHLBNY Capital Plan

	 	4/25/2009

 

v

 

	1.	 	Overview

Pursuant to the Bank Act and the Regulations, the Board hereby establishes this Capital Plan
to:

	 	•	 	provide a new statutory capital structure for the FHLBNY that can be implemented
as described herein; and

	 
	 	•	 	ensure that the FHLBNY is able to comply with each of its Minimum Regulatory
Capital Requirements at all times after implementation.

In developing this Capital Plan, the Board of Directors has kept in mind the cooperative
nature of the FHLBNY. The Board of Directors hereby reaffirms the FHLBNY’s continuing use
of the cooperative business model.

This document takes into account the Bank Act and the Regulations, and is not intended to
contradict the same. Under Section 26 of the Bank Act, the Finance Board has the authority
to liquidate or reorganize a Federal Home Loan Bank and the provisions of this Capital Plan
are subject to that authority. In addition, certain discretionary decisions of the Board of
Directors under this plan may be subject to Finance Board review and/or approval. Nothing
in this plan may be construed as abrogating, nullifying or otherwise interfering with such
Finance Board authorities.

All references to the Regulations hereunder shall be deemed to include any successor
regulations.

	 	 	 
	FHLBNY Capital Plan

	 	4/25/2009

 

 

 

	2.	 	The Capital Structure

	 
	2.1	 	Authorized Stock

The Board of Directors hereby authorizes one class of Capital Stock, Class B Stock. Shares of
Class B Stock shall be redeemable in cash at Par Value five years following the FHLBNY’s
receipt of a Member’s Redemption Notice, or in accordance with a termination of Membership as
provided in Section 7 of the Capital Plan, or in accordance with Sections 8.1.1.2, 8.1.1.4 and
8.1.1.5 of the Capital Plan. Class B Stock will have two distinct subclasses:

	 	•	 	Membership Stock will be purchased and held by each Member to meet the
Membership Stock Purchase Requirement established by the FHLBNY as a condition of
membership.

	 
	 	•	 	Activity-Based Stock will be purchased and held by a Member to meet the
Activity-Based Stock Purchase Requirement established by the FHLBNY for certain
transactions with Members.

The Board of Directors may determine in the future that it wishes to authorize the issuance of
additional subclasses of Class B Stock or to authorize the issuance of Class A stock,
including one or more subclasses of Class A stock. In such cases, an amendment to this
Capital Plan will be submitted to the FHFB for approval in accordance with Section 10.1 of the
Capital Plan.

	 	2.1.1	 	Par Value

All Capital Stock will be issued, redeemed, repurchased or transferred pursuant to Section
2.2.6 of the Capital Plan at Par Value.

	 	2.1.2	 	Ownership of Retained Earnings

The retained earnings, surplus, undivided profits and equity reserves, if any, of the FHLBNY
shall be owned by the holders of Class B Stock in an amount proportional to each holder’s
share of the total shares of Class B Stock; however, the holders shall have no right to
receive any portion of those items, except through the declaration of a dividend or capital
distribution approved by the Board of Directors or through the liquidation of the FHLBNY.

	2.2	 	Purchase, Redemption and Repurchase of Stock

All Members are required to purchase and redeem Capital Stock in accordance with the
requirements of the Bank Act, the Regulations and this Capital Plan.

	 	2.2.1	 	Purchase of Capital Stock

Each Member of the FHLBNY will be required to maintain a minimum investment in Membership
Stock as a condition of membership in accordance with the requirements of Section 4 of this
Capital Plan and Appendix I hereto; in addition, each Member engaged in certain transactions
with the FHLBNY will also be required to maintain a minimum investment in Activity-Based Stock
in accordance with the requirements of Section 4 of
this Capital Plan and Appendix I hereto.

	 	 	 
	FHLBNY Capital Plan

	 	4/25/2009

 

2

 

The FHLBNY will not issue stock other than in accordance with 12 C.F.R. §931.2 and the Capital
Plan. Capital Stock shall be issued to and owned only by Members, with the exception of Other
Institutions. Capital Stock may be traded only between the FHLBNY and its Members. All
Capital Stock will be issued in book entry form only. The FHLBNY will act as its own transfer
agent.

	 	2.2.2	 	Redemption of Capital Stock by Members

A Member may redeem shares of its Capital Stock by providing a Redemption Notice to the
FHLBNY. A redemption of Capital Stock may also occur in accordance with Sections 7, 8.1.1.2
and 8.1.1.5 of the Capital Plan. The FHLBNY shall (subject to the restrictions contained in
Section 2.2.4 below) redeem Capital Stock in accordance with the two preceding sentences upon
the expiration of the applicable Stock Redemption Period, provided that the FHLBNY shall not
be obligated to redeem Capital Stock unless all applicable conditions contained in the Bank
Act, the Regulations and the Capital Plan are met.

	 	•	 	Redemption Notice

A Member that provides a Redemption Notice to the FHLBNY shall identify in that Redemption
Notice the particular shares that are the subject of the Redemption Notice by reference to
the subclass, the date acquired and the manner in which the shares were acquired. If a
Member fails to identify the particular shares within a subclass to be redeemed, the
 shares subject to redemption shall be determined using a last acquired, first redeemed
method of identification within the subclass specified by the Member. Capital Stock will
be redeemed upon the expiration of the applicable Stock Redemption Period subject to the
conditions and limitations set forth in Sections 2.2.4 and 2.2.5 of the Capital Plan. A
Member may not have more than one Redemption Notice outstanding at any time with respect
to the same shares of Capital Stock.

	 	•	 	Cancellation of Redemption Notice

A Member may cancel its Redemption Notice by providing written notice of such cancellation
to the FHLBNY at any time prior to the expiration of the applicable Stock Redemption
Period. The FHLBNY will assess a Redemption Cancellation Fee unless the Board of
Directors determines that it has a bona fide business purpose for waiving the Redemption
Cancellation Fee, and the waiver is consistent with Section 7(j) of the Bank Act.

	 	•	 	Repurchase of Shares Subject to a Redemption Notice

To the extent that the FHLBNY repurchases pursuant to Section 2.2.3 of the Capital Plan
 shares of Capital Stock that are subject to a Redemption Notice or Notices, the respective
repurchased shares of Capital Stock shall be deducted from the outstanding Redemption
Notice or Notices.

	 	•	 	Automatic Cancellation of a Redemption Notice

A Redemption Notice will be automatically cancelled if the FHLBNY is prevented from
redeeming the Capital Stock within five business days of the expiration of the
applicable Stock Redemption Period because the Member would not be in compliance with its
Minimum Stock Investment Requirement. In the event of an automatic cancellation of a
Member’s Redemption Notice as provided in the preceding sentence, the FHLBNY will assess a
Redemption Cancellation Fee unless the Board of Directors determines it has a bona fide
business purpose for waiving the Redemption Cancellation Fee, and the waiver is consistent
with Section 7(j) of the Bank Act.

	 	 	 
	FHLBNY Capital Plan

	 	4/25/2009

 

3

 

	 	2.2.3	 	Repurchase of Excess Stock by the FHLBNY

	 	•	 	Repurchase of Activity-Based Stock

The FHLBNY will, after the close of business on the Effective Date, and thereafter from
time to time but not less than monthly, calculate with respect to each Member, or Other
Institution, the amount, if any, of outstanding Activity-Based Stock that is Excess Stock.
The FHLBNY will then automatically repurchase for cash all such Excess Stock at its Par
Value on the same day as the calculation, subject to the provisions of Section 2.2.4 of
the Capital Plan. Subsequent to the initial repurchase made after the close of business
on the Effective Date under this provision, the FHLBNY will notify members of all other
repurchases no less than fifteen business days prior to such repurchase.

	 	•	 	Repurchase of Membership Stock

Upon written application by a Member, or Other Institution, to the FHLBNY or on its own
initiative, the FHLBNY may in its discretion repurchase for cash at Par Value some or all
of the outstanding shares of Membership Stock that are determined by the FHLBNY to be in
excess of the Member’s, or Other Institution’s, Membership Stock Purchase Requirement,
subject to Section 2.2.4 of the Capital Plan. If the FHLBNY determines that it will not
repurchase any or all shares of Membership Stock requested to be repurchased under a
written application by a Member, or Other Institution, the FHLBNY will promptly notify the
Member, or Other Institution, that such Membership Stock will not be repurchased. No
prior notice of repurchase of shares of Membership Stock under a written application by a
Member, or Other Institution will be given. The FHLBNY shall transmit, send or give
written notice to the Member, or Other Institution, of repurchases of shares of Membership
Stock undertaken on its own initiative at least 10 business days prior to the date of the
repurchase.

	 	•	 	Identification of Repurchased Shares

If a Member, or Other Institution, has one or more Redemption Notices outstanding as of
the date that the FHLBNY is to repurchase shares of Capital Stock pursuant to this Section
2.2.3 of the Capital Plan, the FHLBNY shall repurchase shares of Capital Stock by first
repurchasing shares of a Member, or Other Institution, that are subject to a Redemption
Notice applicable to the subclass that is to be repurchased that has been outstanding for
the longest period of time and then, to the extent necessary, by repurchasing shares that
are subject to a Redemption Notice applicable to the subclass to be repurchased that was
outstanding for the next longest period of time and continuing in that order, to the
extent necessary, until there are no remaining outstanding Redemption Notices with respect
to the subclass to be repurchased in which instance the shares to be repurchased shall be
determined by the FHLBNY using a last acquired, first repurchased method of
identification. If a Member, or Other
Institution, does not have any Redemption Notices applicable to the subclass to be
repurchased outstanding as of the date that the FHLBNY is to repurchase shares of Capital
Stock the shares to be repurchased shall be determined by the FHLBNY using a last
acquired, first repurchased method of identification.

	 	 	 
	FHLBNY Capital Plan

	 	4/25/2009

 

4

 

	 	2.2.4	 	Limitations on Redemptions and Repurchases

	 	•	 	Prohibitions on Redemptions and Repurchases

The FHLBNY will not redeem or repurchase any shares of Capital Stock, if following the
redemption or repurchase the FHLBNY would not be in compliance with each of its Minimum
Regulatory Capital Requirements.

The FHLBNY will not redeem or repurchase any shares of Capital Stock if, following such
redemption or repurchase, the Member, or Other Institution, would not be in compliance
with the Member’s, or Other Institution’s, Minimum Stock Investment Requirement.

The FHLBNY will not redeem or repurchase any shares of Capital Stock without the prior
written approval of the FHFB if the FHFB or the Board of Directors has determined that the
FHLBNY has incurred or is likely to incur losses that result in or are likely to result in
“charges against the capital of the Bank,” as that phrase is defined in the Regulations.
This prohibition shall apply even if the FHLBNY is in compliance with its Minimum
Regulatory Capital Requirements, and shall remain in effect for however long the FHLBNY
continues to incur such charges, or until the FHFB determines that such charges are not
expected to continue.

	 	•	 	FHLBNY’s Discretion to Suspend Redemptions of Capital Stock

The Board of Directors may suspend the redemption of Capital Stock, if the FHLBNY
reasonably believes that continued redemption of Capital Stock would cause the FHLBNY to
fail to meet its Minimum Regulatory Capital Requirements, would prevent the FHLBNY from
maintaining adequate capital against a potential risk that may not be adequately reflected
in its Minimum Regulatory Capital Requirements, or would otherwise prevent the FHLBNY from
operating in a safe and sound manner. If a decision is made to suspend redemption of
Capital Stock, the FHLBNY shall notify the Finance Board in writing within two business
days of the decision, informing the Finance Board of the reasons for the suspension and of
the FHLBNY’s strategies and time frames for addressing the conditions that led to the
suspension, as indicated in Section 931.8(b) of the Regulations. The Finance Board may
require the FHLBNY to re-institute the redemption of Capital Stock. The FHLBNY may not
repurchase any Capital Stock without the written permission of the Finance Board during
any period in which the FHLBNY has suspended the redemption of Capital Stock as provided
for in this section of the Capital Plan.

	 	•	 	Retention of Redemption or Repurchase Proceeds as Collateral

If the FHLBNY reasonably determines that there is an existing or anticipated collateral
deficiency related to any obligations owed by the Member, or Other Institution, to the
FHLBNY and the Member, or Other Institution, has failed to deliver additional collateral
to resolve the existing or anticipated collateral deficiency to the FHLBNY’s satisfaction
the FHLBNY may retain the proceeds of redemption or repurchase of Capital Stock
as additional collateral until all such obligations have been satisfied or the existing or
anticipated deficiency is resolved to the FHLBNY’s satisfaction.

	 	 	 
	FHLBNY Capital Plan

	 	4/25/2009

 

5

 

	 	•	 	Limitations on Redemptions and Repurchases Related to Terminations of Membership

The restrictions on redemptions and repurchases set forth in the preceding provisions of
this Section 2.2.4 of the Capital Plan apply with respect to redemptions pursuant to a
Redemption Notice as well as to redemptions in connection with a termination of Membership
in accordance with Section 7 of the Capital Plan and to redemptions in accordance with
Sections 8.1.1.2, 8.1.1.4 and 8.1.1.5 of the Capital Plan and to all repurchases of
Capital Stock held by Members and by Other Institutions.

If a Member whose Membership is terminated pursuant to Sections 7.1, 7.2, 7.4 or 7.5 of
the Capital Plan has one or more Redemption Notices outstanding as of the effective date
of its termination from Membership such Redemption Notice or Notices shall not be subject
to automatic cancellation in accordance with Section 2.2.2 of the Capital Plan. Such
Redemption Notices shall remain pending until they can be satisfied in accordance with
this Section 2.2.4 of the Capital Plan.

	 	•	 	Pro Rata Allocation of Redemptions

If at any time more than one Member or Other Institution has outstanding a Redemption
Notice in accordance with Section 2.2.2 of the Capital Plan or redemption of Capital Stock
in connection with a termination of Membership in accordance with Sections 7.1, 7.2, 7.4
and 7.5 of the Capital Plan or redemption of Capital Stock in accordance with Sections
8.1.1.2, 8.1.1.4 and 8.1.1.5 of the Capital Plan as to which the applicable Stock
Redemption Period has expired, and if the redemption by the FHLBNY of all of the shares of
Capital Stock subject to such Redemption Notice or termination of Membership would cause
the FHLBNY to fail to be in compliance with any of its Minimum Regulatory Capital
Requirements, then the FHLBNY shall fulfill such redemptions as the FHLBNY is able to do
so from time to time, beginning with such redemptions as to which the Stock Redemption
Period expired on the earliest date and fulfilling such redemptions relating to that date
on a pro rata basis from time to time until fully satisfied, and then fulfilling such
redemptions as to which the Stock Redemption Period expired on the next earliest date in
the same manner, and continuing in that order until all such redemptions as to which the
Stock Redemption Period has expired have been fulfilled.

	 	  2.2.5	 	Retirement of Redeemed and Repurchased Stock

All shares of Capital Stock that are acquired by the FHLBNY pursuant to redemption or
repurchase shall be retired.

	 	  2.2.6	 	Transfer of Capital Stock

A Member, or Other Institution, may not transfer any Capital Stock to any other person or
entity, including another Member, except for transfers of Capital Stock occurring pursuant to
Sections 7.3 and 7.4 of the Capital Plan. Such transfers shall be deemed to be approved by
the FHLBNY as of the cancellation of the disappearing Member’s charter.

	 	  2.2.7	 	Limitation on Converting or Exchanging Excess Stock as Between Subclasses

A member shall not convert or exchange (i) shares of Membership Stock that are in excess of
its Membership Stock Purchase Requirement into shares of Activity-Based Stock or (ii) shares
of Activity-Based Stock that are in excess of its Activity-Based Stock Purchase Requirement
into shares of Membership Stock.

	 	 	 
	FHLBNY Capital Plan

	 	4/25/2009

 

6

 

	2.3	 	Dividends

The Board of Directors, in its discretion, subject to the provisions of this Section 2.3 of
the Capital Plan, may declare dividends to be paid on the Capital Stock on a quarterly basis
or as otherwise determined by the Board of Directors. Each Member, or Other Institution, that
continues to hold Capital Stock is entitled to receive dividends that are declared on all
Capital Stock held during the applicable period for the period of time the Member, or Other
Institution, owns the Capital Stock. Dividends are non-cumulative with respect to payment
obligations.

Dividends may be paid only in accordance with the Bank’s Retained Earnings and Dividend
Policy, as such may be amended by the Bank’s Board of Directors from time to time. Dividend
payments may be in the form of cash, additional shares of Capital Stock, or a combination
thereof as determined by the Board of Directors. The Board of Directors may not declare or
pay a dividend if the FHLBNY is not at the time in compliance with each of its Minimum
Regulatory Capital Requirements or if following such declaration or payment of such a dividend
the FHLBNY would not be in compliance with each of its Minimum Regulatory Capital
Requirements.

	2.4	 	Rights Upon Liquidation, Merger or Consolidation of the FHLBNY

	 	2.4.1	 	Liquidation of the FHLBNY

Upon the liquidation of the FHLBNY, following the retirement of all outstanding liabilities of
the FHLBNY to its creditors, all shares of Capital Stock are to be redeemed at Par Value,
provided that if sufficient funds are not available to accomplish the redemption in full of
the Capital Stock, then such redemption shall occur on a pro rata basis among all holders of
Capital Stock. Following the redemption in full of all Capital Stock any remaining assets
will be distributed on a pro rata basis to holders of Capital Stock immediately prior to such
liquidation. This provision does not limit the authority granted the Finance Board under 12
U.S.C. § 1446 to prescribe rules, regulations or orders governing the liquidation of a Federal
Home Loan Bank that modify, restrict or eliminate any of the rights set forth above.

	 	2.4.2	 	FHLBNY Acquired by another Federal Home Loan Bank

In the event that the FHLBNY is merged or consolidated into another Federal Home Loan Bank,
the holders of the outstanding Capital Stock of the FHLBNY will be entitled to the rights and
benefits set forth in any applicable plan of merger and/or terms established or approved by
the Finance Board.

	 	2.4.3	 	FHLBNY Acquires Other Federal Home Loan Bank

In the event that another Federal Home Loan Bank is merged or consolidated into the FHLBNY,
the holders of the outstanding stock of the other Federal Home Loan Bank will be entitled to
the rights and benefits set forth in any applicable plan of merger and/or
terms established or approved by the Finance Board.

	 	 	 
	FHLBNY Capital Plan

	 	4/25/2009

 

7

 

	3.	 	Responsibilities of Directors and Management and Voting of Stock

	3.1	 	Responsibilities of Directors and Management

The Board of Directors

The duties and responsibilities of the FHLBNY’s Board of Directors under the Capital Plan
include:

	 	•	 	approval of:

	 	•	 	the initial Capital Plan;

	 	•	 	authorization to issue Capital Stock;

	 	•	 	“operating ratios” for leverage and risk based capital to be specified in the
FHLBNY’s risk management policy in accordance with 12 C.F.R. § 917.3;

	 	•	 	initial minimum Member Stock Purchase Requirements;

	 	•	 	policy limits for market and credit risk;

	 	•	 	involuntary terminations of membership; and

	 	•	 	dividend distributions.

	 	•	 	periodic review and approval of:

	 	•	 	amendments to the Capital Plan to be submitted for Finance Board approval;

	 	•	 	adjustments to the minimum Member Stock Purchase Requirements; and

	 	•	 	independent annual validations of the FHLBNY’s internal risk measurement model.

	 	•	 	monitoring of compliance with the terms and conditions of the Capital Plan, including
a continuing obligation to review and adjust the Member Stock Purchase Requirements, as
necessary to ensure that the FHLBNY remains in compliance with its Minimum Regulatory
Capital Requirements.

	 	 	 
	FHLBNY Capital Plan

	 	4/25/2009

 

8

 

FHLBNY Management

Upon approval of this Capital Plan by the FHFB, the Board of Directors will approve specific
delegations to the management of the FHLBNY to implement the Capital Plan. Such delegations
will provide authority to manage:

	 	(1)	 	the transition from the current capital structure to the new capital structure,
which will involve:

	 	•	 	transition from existing stock ownership to the Member Stock Purchase
Requirements described in the Capital Plan;

	 	•	 	establishment of the internal risk measurement model in accordance with the
Regulations;

	 	•	 	development of procedures and systems to support the purchase and redemption of
stock under the new capital structure; and

	 	•	 	development of new reporting systems and procedures for Member Stock Purchase
Requirements and stock ownership.

	 	(1)	 	the development of an effective internal control system to provide:

	 	•	 	Member compliance with Member Stock Purchase Requirements;

	 	•	 	the FHLBNY’s compliance with its Minimum Regulatory Capital Requirements at all
times; and

	 
	 	•	 	timely reporting to the Finance Board and the Board of Directors.

	3.2	 	Voting Rights

Holders of Capital Stock that are Members as of the Record Date shall be entitled to vote for
the election of directors to the Board of Directors in accordance with Part 915 of the
Regulations. For purposes of applying Part 915 of the Regulations, the Capital Stock that a
Member is “required to hold” shall be the Member’s Minimum Stock Investment Requirement as of
the Record Date, provided that if the Capital Plan was not in effect as of the Record Date,
the number of shares of Bank Stock that the Member was required to hold as of the Record Date
shall be as determined in accordance with Sections 925.20 and 925.22 of the Regulations. The
number of shares of Capital Stock that a particular Member, or Other Institution (to the
extent such institution is permitted to vote under Part 915 of the Regulations), may vote in
connection with an election of directors shall be subject to the limitations set forth in the
Bank Act and Part 915 of the Regulations.

	 	 	 
	FHLBNY Capital Plan

	 	4/25/2009

 

9

 

	4.	 	Member Stock Purchase Requirements

The FHLBNY requires all Members to purchase Capital Stock of the FHLBNY. The FHLBNY’s Member
Stock Purchase Requirements are based on the potential and actual volume of, and risks
inherent in, the financial products and services provided by the FHLBNY to its Members.
Therefore:

	 	•	 	a Member will be required to maintain a minimum Capital Stock investment of Membership
Stock for as long as the institution remains a Member of the FHLBNY, irrespective of the
volume of activity with the FHLBNY; and

	 	•	 	a Member will also be required to purchase Activity-Based Stock in proportion to that
Member’s transactions with the FHLBNY.

	4.1	 	Membership Stock Purchase Requirement

As a condition of Membership, each Member is required to purchase and maintain a minimum
investment in Membership Stock. The Membership Stock Purchase Requirement will be equal to a
specified percentage of the Mortgage-related Assets held by the Member, in all events rounded
up to the next even $100 increment. The FHLBNY will perform calculations of the Membership
Stock Purchase Requirement for each Member on at least an annual basis and may recalculate
such Requirement for any one or more Members more frequently as the Board of Directors may
determine from time to time. The Board of Directors may increase or decrease the Membership
Stock Purchase Requirement from time to time. Except as provided in Sections 7.2.3 and 7.4.2
of this Capital Plan, in no event will the requirement be less than the greater of (i) $1,000
or (ii) an amount to be determined by the Board of Directors that will be no less than 0.10%
or more than 0.25% of the Mortgage-related Assets held by the Member.

The currently approved Membership Stock Purchase Requirement is specified in Appendix I
attached hereto. Notice of changes to the Membership Stock Purchase Requirement will be
transmitted, sent or given to Members and Other Institutions at least 10 days prior to the
effective date of such changes.

	4.2	 	Activity-Based Stock Purchase Requirement

From time to time, the FHLBNY will adopt one or more percentages or amounts for the
calculation of the Activity-Based Stock Purchase Requirement, which will require a Member or
Other Institution to purchase and maintain Activity-Based Stock in an amount equal to:

	 	•	 	a specified percentage (but in no event less than 4.0% or more than 5.0%) of the
outstanding principal balance of advances under the Advances Agreement between the FHLBNY
and the Member; and

	 	•	 	a specified percentage (but in no event less than 4.0% or more than 5.0%) of the
outstanding principal balance of Acquired Member Assets originated for or sold to the
FHLBNY by a Member that remain on the FHLBNY’s balance sheet plus the principal amount of
delivery commitments issued to the Member by FHLBNY for Acquired Member Assets to be held
on the FHLBNY’s balance sheet, provided that the outstanding principal balance of
Acquired Member Assets originated for or sold to the
FHLBNY by a Member that are on the FHLBNY’s balance sheet as of the Calculation Date will
not be subject to this requirement; and

	 	 	 
	FHLBNY Capital Plan

	 	4/25/2009

 

10

 

	 	•	 	a specified dollar amount ranging between (a) zero and (b) the FHLBNY’s Credit Risk
Capital Requirement for any off-balance sheet items (excluding the principal amount of
delivery commitments issued to the Member by the FHLBNY for Acquired Member Assets)
listed in Section 932.4(f), Table 2, of the Regulations which the FHLBNY has transacted
on a Member’s behalf and which are continuing, with such Credit Risk Capital Requirement
being calculated in accordance with Section 932.4(c) of the Regulations; and

	 	•	 	a specified percentage (but in no event less than 0% or more than 5.0%) of the
carrying value on the Bank’s balance sheet of Derivative Contracts between the Member and
the FHLBNY, as determined by the FHLBNY under GAAP,

in all events rounded up to the next even $100 increment.

The Board of Directors may increase or decrease one or more of the percentages or amounts for
the calculation of the Activity-Based Stock Purchase Requirement from time to time within the
foregoing ranges.

The currently approved percentages and amounts for the calculation of the Activity-Based Stock
Purchase Requirement are specified in Appendix I attached hereto. Notice of changes to any of
the components of the Activity-Based Stock Purchase Requirement will be transmitted, sent or
given to Members and Other Institutions at least 10 days prior to the effective date of such
changes.

	4.3	 	Periodic Review of Capital Stock Purchase Requirements

The Board of Directors will review the FHLBNY’s Capital Plan on a continuing basis to
ascertain whether changes to the Member Stock Purchase Requirements are required in order to
ensure that the FHLBNY is in compliance with its Minimum Regulatory Capital Requirements, and
shall make adjustments as necessary.

The Board of Directors may at any time modify:

	 	•	 	the Membership Stock Purchase Requirement within the limits defined in Section 4.1
above; and/or

	 	•	 	the applicable percentage or amount for any of the components of the Activity-Based
Stock Purchase Requirement, so long as such requirement is within the limits defined in
Section 4.2 above.

With regard to any changes made to the Membership Stock Purchase Requirement, such changes
shall be applied to all Members without preference.

With regard to any changes made to any components of the Activity-Based Stock Purchase
Requirement, such changes shall be applied to all outstanding activity at the time that such
changes become effective, provided that such changes shall not apply to the outstanding
principal balance of Acquired Member Assets originated for or sold to the
FHLBNY by a Member that are on the FHLBNY’s balance sheet as of the Calculation Date.

	 	 	 
	FHLBNY Capital Plan

	 	4/25/2009

 

11

 

	4.4	 	Member Compliance with Adjusted Requirements

Each Member must comply promptly with any adjusted Membership Stock Purchase Requirement or
Activity-Based Stock Purchase Requirement established by the Board of Directors as described
above; however, Members will be allowed a reasonable time (as determined by the Board of
Directors from time to time, but in no event longer than three months), which period of time
shall be specified in any notice provided in accordance with Sections 4.1 or 4.2 of the
Capital Plan, to come into compliance. Each Other Institution must comply promptly with any
adjusted Activity-Based Stock Purchase Requirement established by the Board of Directors as
described above; however, Other Institutions will be allowed a reasonable time (as determined
by the Board of Directors from time to time, but in no event longer than three months) which
period of time shall be specified in any notice provided in accordance with Section 4.2 of the
Capital Plan to come into compliance. Members and Other Institutions may reduce their
outstanding activity with the FHLBNY as an alternative to purchasing additional Activity-Based
Stock.

In the event that a Member or Other Institution does not comply with any adjusted
Activity-Based Stock Purchase Requirement by the expiration of the time period specified in a
notice provided in accordance with Section 4.2 of the Capital Plan, the FHLBNY is hereby
authorized, in its discretion, to issue a notice of noncompliance to the Member or Other
Institution and, ten business days after transmitting, sending or giving such notice of
noncompliance to the Member or Other Institution, to accelerate the maturity of an amount of
advances sufficient to reduce the Member’s or Other Institution’s Activity-Based Stock
Purchase Requirement to an amount not more than the Activity-Based Stock then held by the
Member or Other Institution. Without regard to the discretion conferred on the Board of
Directors under the foregoing sentence, and without in any respect limiting the Board of
Directors’ authority under Section 7.2.1 of the Capital Plan, the Board of Directors in its
discretion may determine that a Member’s failure to comply with any adjusted Membership Stock
Purchase Requirement or Activity-Based Stock Purchase Requirement by the expiration of the
period of time specified in any notice provided in accordance with Sections 4.1 or 4.2 of the
Capital Plan constitutes the basis for a determination to terminate the Membership of a Member
for a failure to comply with a requirement of the Capital Plan.

	 	 	 
	FHLBNY Capital Plan

	 	4/25/2009

 

12

 

	5.	 	Capital Requirements of the FHLBNY

The FHLBNY is required to maintain Permanent Capital and Total Capital to:

	 	•	 	provide for the safe and sound operation of the FHLBNY;

	 	•	 	protect the FHLBNY’s creditors against potential loss;

	 	•	 	generate earnings sufficient to meet the FHLBNY’s community support and public purpose
obligations; and

	 	•	 	comply with regulatory requirements as established by the Finance Board.

	5.1	 	Statutory Capital Requirements

	 	5.1.1	 	Total Capital Requirement

Total Capital must be equal to at least 4.0% of the FHLBNY’s Total Assets.

	 	5.1.2	 	Leverage Capital Requirement

The FHLBNY must maintain a leverage ratio of Total Capital to Total Assets of at least 5.0% of
the FHLBNY’s Total Assets. For purposes of determining the leverage ratio, Total Capital
shall be computed by multiplying by 1.5 the FHLBNY’s Permanent Capital, and adding to the
product all other components of Total Capital.

	 	5.1.3	 	Permanent Capital Requirement

Permanent Capital must at all times be equal to or exceed the value of the FHLBNY’s Risk-based
Capital Requirement, calculated in accordance with Section 5.2 below.

	 	5.1.4	 	FHFB Authority to Require More Capital

The FHFB may, in its discretion, require the FHLBNY to hold more Total Capital or Permanent
Capital than is indicated in Sections 5.1.1 or 5.1.3 of the Capital Plan.

	5.2	 	Risk-Based Capital Requirement

The FHLBNY’s Risk-based Capital Requirement shall be equal to the sum of:

	 	•	 	the FHLBNY’s Credit Risk Capital Requirement,

	 	•	 	the FHLBNY’s Market Risk Capital Requirement, and

	 	•	 	the FHLBNY’s Operations Risk Capital Requirement as defined by the FHFB.

Unless otherwise directed by the FHFB, the FHLBNY will measure its Credit, Market and Operations
Risk Capital Requirements as of the close of business of the last business day of the month for
which the credit risk capital charge is being calculated.

	 	 	 
	FHLBNY Capital Plan

	 	4/25/2009

 

13

 

	 	5.2.1	 	Credit Risk Capital Requirement

The Credit Risk Capital Requirement shall be equal to the sum of the credit risk capital charges
for all assets, off-balance sheet items and derivative contracts. Credit risk percentage
requirements are established by the FHFB from time to time.

Assets

The credit risk capital charge for an asset on the FHLBNY’s balance sheet is equal to the book
value of the asset multiplied by the credit risk percentage requirement assigned to that asset
class in the Regulations.

Off-balance sheet items

The credit risk capital charge for an off-balance sheet item is equal to the credit equivalent
amount of the item (based on conversion factors provided by the FHFB) multiplied by the credit risk
percentage requirement assigned to that item in the Regulations.

Off balance sheet items include:

	 	•	 	Asset sales with recourse where the credit risk remains with the FHLBNY

	 	•	 	Commitments to make advances

	 	•	 	Commitments to make or purchase other loans

	 	•	 	Standby letters of credit

	 	•	 	Other commitments with original maturity of over 1 year

	 	•	 	Other commitments with original maturity of 1 year or less

Derivative Contracts

The credit risk capital charge for Derivative Contracts is equal to:

	 	•	 	the current credit exposure for the Derivative Contract multiplied by the credit risk
percentage requirement assigned to that derivative contract, as determined in accordance
with Section 932.4 of the Regulations, plus

	 	•	 	the potential future credit exposure for the Derivative Contract multiplied by the
credit risk percentage requirement assigned to that Derivative Contract, as determined in
accordance with Section 932.4 of the Regulations.

Guidelines for calculating capital charges on Derivative Contracts are defined by the FHFB from
time to time.

	 	 	 
	FHLBNY Capital Plan

	 	4/25/2009

 

14

 

	 	5.2.2	 	Market Risk Capital Requirement

The Market Risk Capital Requirement shall equal the sum of:

	 	•	 	the market value of the FHLBNY’s portfolio at risk from movements in market rates and
prices that could occur during periods of market stress. The market value of the FHLBNY’s
portfolio at risk is determined using an internal market risk model (VaR model) that that
has been approved by the FHFB; and

	 	•	 	the amount, if any, by which the FHLBNY’s current market value of Total Capital is less
than 85% of the FHLBNY’s book value of Total Capital, where:

	 	•	 	the current market value of the FHLBNY’s Total Capital is calculated using the
internal market risk model approved by the FHFB; and

	 	•	 	the book value of Total Capital is the same as the amount of Total Capital
reported by the FHLBNY to the FHFB on a monthly basis.

The internal market risk model will:

	 	•	 	estimate the market value of the FHLBNY’s assets and liabilities, off-balance sheet
items, and Derivative Contracts, including any related options, and

	 	•	 	measure the market value of the FHLBNY’s portfolio at risk, including all assets,
liabilities, off-balance sheet items, and Derivative Contracts that represent a source of
material market risk.

	 	5.2.3	 	Operations Risk Capital Requirement

The FHLBNY is required to meet its Operations Risk Capital Requirement to cover unexpected losses
associated with:

	 	•	 	human error

	 	•	 	fraud

	 	•	 	unenforceability of legal contracts

	 	•	 	deficiencies in internal controls

	 	•	 	deficiencies in information controls

The FHLBNY will meet its Operations Risk Capital Requirement through maintenance of an amount of
Permanent Capital equal to 30% of the sum of its Credit Risk and Market Risk Capital Requirements
subject to modification as set forth below.

With FHFB approval, the FHLBNY may have an Operations Risk Capital Requirement equal to less than
30% but no less than 10% of the sum of the FHLBNY’s Credit Risk and Market Risk Capital
Requirements if (i) the FHLBNY provides an alternative methodology for assessing and quantifying an
Operations Risk Capital Requirement or (ii) if the FHLBNY obtains insurance to cover operations
risk from an insurer rated at least the second highest investment grade credit rating by an NRSRO.

	 	 	 
	FHLBNY Capital Plan

	 	4/25/2009

 

15

 

	6.	 	Reporting Requirements to the Finance Board

The following are the FHLBNY’s specific reporting requirements to the Finance Board
pertaining to the Capital Plan.

	6.1	 	Changes in Membership

The FHLBNY shall notify the FHFB within 10 calendar days of receipt of any notice of
withdrawal or notice of cancellation of withdrawal from Membership.

	6.2	 	Leverage and Risk Based Capital

The FHLBNY shall report to the FHFB by the 15th business day of each month:

	 	•	 	Risk-based Capital Requirement by component amounts, and

	 	•	 	actual Total Capital and Permanent Capital outstanding.

Both measures are calculated as of the close of business on the last business day of the
preceding month, or more frequently, as may be required by the FHFB.

	6.3	 	Voting Shares

On or before April 10 of each year, the FHLBNY shall submit to the FHFB a Capital Stock
report that indicates, as of the Record Date:

	 	•	 	the number of Members located in each voting state in the FHLBNY’s district,

	 	•	 	the number of shares of Capital Stock that each Member (identified by its docket
number) was required to hold, and

	 	•	 	the number of shares of Capital Stock that all Members located in each voting state
were required to hold. Excess Stock will not be included in the calculation of
outstanding Capital Stock for purposes of voting.

The FHLBNY shall certify to the FHFB that, to the best of its knowledge, the information
provided in the Capital Stock report is accurate and complete, and that it has notified each
Member of its minimum Capital Stock holdings pursuant to this Capital Plan.

	 	 	 
	FHLBNY Capital Plan

	 	4/25/2009

 

16

 

	7.	 	Termination of Membership in the FHLBNY

	7.1	 	Voluntary Withdrawal from Membership

	 	7.1.1	 	Written Notification

A Member may withdraw from Membership at any time by providing written notice of its intent
to withdraw from Membership to the FHLBNY. A Member may cancel a notice of withdrawal prior
to its effective date by providing the FHLBNY with written notice of such cancellation. Any
such cancellation will result in a Redemption Cancellation Fee with respect to the Member’s
Capital Stock unless the Board of Directors determines it has a bona fide business purpose
for waiving the imposition of the fee, and the waiver is consistent with Section 7(j) of the
Bank Act.

	 	7.1.2	 	Access to Benefits of Membership

Until the effective date of a Member’s withdrawal from the FHLBNY, such Member will continue
to have access to the benefits of Membership. On and after the effective date of the
Member’s withdrawal, regardless of whether the Other Institution is required to maintain an
investment in the Capital Stock, the Other Institution will no longer have the benefits of
Membership including access to the FHLBNY’s products and services and will no longer have
any voting rights other than as provided in the Regulations, but the Other Institution will
still be entitled to any and all dividends declared on its Capital Stock until the Capital
Stock is redeemed or repurchased by the FHLBNY.

	 	7.1.3	 	Finance Board Notification

The FHLBNY shall notify the Finance Board within ten calendar days of the receipt of any
notice of intent to withdraw from Membership or cancellation of a notice of withdrawal from
Membership.

	 	7.1.4	 	Finance Board Certification

No Member may withdraw from Membership unless, on the date that the Membership is to
terminate, there is in effect a certification from the Finance Board that the withdrawal of
the Member will not cause the Bank System to fail to satisfy its requirements under 12
U.S.C. §1441b(f)(2)(c) to contribute toward the interest payments owed on obligations issued
by the Resolution Funding Corporation.

	 	7.1.5	 	Disposition of Claims

The FHLBNY shall determine an orderly manner for the disposition of transactions outstanding
with a Member that withdraws from Membership. The Stock Redemption Period for the Capital
Stock held by a Member as of the date of the FHLBNY’s receipt of the written notification of
the Member’s intent to withdraw from Membership and not already subject to a Redemption
Notice shall commence as of that date. The Stock Redemption Period for shares of Capital
Stock acquired or received by such a withdrawing Member after the date that its notice of
intent to withdraw is received by the FHLBNY will commence on the date such shares are
acquired or received. If transactions remain outstanding beyond the effective date of the
termination of Membership, the FHLBNY will not redeem any Activity-Based Stock that the
Other Institution is required to hold to comply with the Activity-Based Stock Purchase
Requirement corresponding to such outstanding transactions.

	 	 	 
	FHLBNY Capital Plan

	 	4/25/2009

 

17

 

Upon the effective date of a Member’s withdrawal from Membership, it shall become an Other
Institution under this Capital Plan. Such Other Institution shall not be deemed to be
subject to the Membership Stock Purchase Requirement and the FHLBNY may repurchase
Membership Stock held by the Other Institution, that has not otherwise been redeemed by the
FHLBNY upon the expiration of an applicable Stock Redemption Period. The FHLBNY may
repurchase the Other Institution’s Activity-Based Stock, that has not otherwise been
redeemed by the FHLBNY upon the expiration of an applicable Stock Redemption Period, if the
stock is not needed to comply with the Activity-Based Stock Purchase Requirement
corresponding to such outstanding transactions, and not subject to any of the limitations on
redemption or repurchase in Section 2.2.4.

	 	7.1.6	 	Effective Date of Withdrawal

The Membership of a Member that has submitted a notice of intent to withdraw, and that has
not cancelled such notice, shall terminate as of the date on which the last applicable Stock
Redemption Period ends for Capital Stock that the Member is required to hold under the
Membership Stock Purchase Requirement as of the date that the Member’s written notification
of its intent to withdraw from Membership was received by the FHLBNY.

	7.2	 	Involuntary Termination of Membership

	 	7.2.1	 	Written Notification

The Board of Directors may terminate the Membership of any Member that: (i) fails to comply
with any requirement of the Bank Act, any Regulation, or any requirement of the Capital
Plan, (ii) becomes insolvent or otherwise subject to the appointment of a conservator,
receiver, or other legal custodian under federal or state law, or (iii) would jeopardize the
safety and soundness of the FHLBNY if it were to remain a Member.

	 	7.2.2	 	Access to Benefits of Membership

A Member whose Membership is terminated involuntarily shall cease being a Member of the
FHLBNY as of the date on which the Board of Directors acts to terminate the Membership.
After that date, such terminated Member shall become an Other Institution under this Capital
Plan. Such Other Institution shall have no right to obtain any of the benefits of
Membership including access to the FHLBNY’s products and services and will no longer have
any voting rights, other than as provided in the Regulations, but shall be entitled to
receive any dividends declared on its Capital Stock until the Capital Stock is redeemed or
repurchased by the FHLBNY.

	 	7.2.3	 	Disposition of Claims

The FHLBNY shall determine an orderly manner for the disposition of transactions outstanding
with the Other Institution. The Stock Redemption Period for the Capital Stock owned by a
Member as of the date of its termination and not already subject to a Redemption Notice
shall commence on the date that the Member’s Membership is terminated. The Stock Redemption
Period for Capital Stock acquired or received by the Other Institution after the date of the
termination of its Membership shall commence on the date of such acquisition or receipt. If
transactions remain outstanding beyond the effective date of the termination of Membership,
the FHLBNY will not redeem any
Activity-Based Stock to the extent that the Other Institution is required to hold such stock
to comply with the Activity-Based Stock Purchase Requirement corresponding to such
outstanding transactions.

	 	 	 
	FHLBNY Capital Plan

	 	4/25/2009

 

18

 

Capital Stock held by the Member as of the effective date of its termination shall not be
deemed automatically to be Excess Stock solely by virtue of the termination of the Member’s
Membership; provided however, that on and after the effective date of termination, any
Membership Stock that is not required to meet the Other Institution’s Membership Stock
Purchase Requirement on the date on which the Member’s Membership was terminated that has
not otherwise been redeemed by the FHLBNY upon the expiration of an applicable Stock
Redemption Period, or any Activity-Based Stock not required to meet the Other Institution’s
Activity-Based Stock Purchase Requirement that has not otherwise been redeemed by the FHLBNY
upon the expiration of an applicable Stock Redemption Period, shall be Excess Stock that
shall be subject to repurchase by the FHLBNY; and provided further that effective upon the
expiration of the Stock Redemption Period that commences on the date that the Member’s
Membership is terminated, the terminated Member’s Membership Stock Purchase Requirement
shall be deemed to be zero. However, notwithstanding any other provision of this Capital
Plan, in the event that (a) a receiver or conservator has been appointed for the Member,
and (b) the Bank has terminated the Member’s Membership, then the terminated Member’s
Membership Stock Purchase Requirement shall be deemed to be zero. Further,
notwithstanding any of the foregoing, any repurchases and redemptions of stock permitted
hereunder shall remain subject to the limitations in Section 2.2.4 of the Capital Plan.

	7.3	 	Merger or Consolidation of Members

	 	7.3.1	 	Termination of Charter and Stock Redemption Period

If a Member’s Membership is terminated as a result of a Member’s merger or other
consolidation into another Member, the Membership shall terminate upon cancellation of the
disappearing Member’s charter. On that date, the Capital Stock held by the disappearing
Member will be transferred on the books of the FHLBNY into the name of the surviving Member.
The Stock Redemption Period for the Capital Stock previously held by the disappearing
Member shall not be deemed to commence on the date on which the disappearing Member’s
charter is cancelled, but shall commence only upon: (i) the FHLBNY’s receipt of a
Redemption Notice from the surviving Member, (ii) the FHLBNY’s receipt of the surviving
Member’s written notice of its intent to withdraw from Membership, (iii) the surviving
Member’s termination of Membership as a result of merger or consolidation into a member of
another Federal Home Loan Bank or into a nonmember, (iv) the surviving Member’s termination
of Membership as a result of the relocation of its principal place of business, or (v) the
involuntary termination of the surviving Member’s Membership. Stock Redemption Periods
applicable to a Redemption Notice or Notices received by the FHLBNY from the disappearing
Member prior to the effective date of the cancellation of the disappearing Member’s charter
shall continue to run with respect to the surviving Member from the date such Redemption
Notice was received by the FHLBNY, subject to the provisions of Section 2.2.2 of the Capital
Plan.

	 	 	 
	FHLBNY Capital Plan

	 	4/25/2009

 

19

 

	 	7.3.2	 	Capital Stock Requirement of Surviving Member

As of the effective date of the cancellation of the disappearing Member’s charter, the
surviving Member’s Membership Stock Purchase Requirement shall be immediately increased by
the amount of the disappearing Member’s Membership Stock Purchase Requirement immediately
prior to the cancellation of its charter. Future calculations of the surviving Member’s
Membership Stock Purchase Requirement shall be as determined in accordance with Section 4.1
of the Capital Plan, provided that if the mostly recently available data from the regulatory
reports for the surviving Member does not include the assets of the disappearing Member,
then, in that event, the Membership Stock Purchase Requirement for the surviving Member will
be calculated by adding together the most recently available regulatory report data for the
disappearing Member and for the surviving Member. As of the effective date of the
cancellation of the disappearing Member’s charter, the surviving Member’s Activity-Based
Stock Purchase Requirement will be calculated based on its current outstanding transactions
with the FHLBNY including those acquired from the disappearing Member.

	7.4	 	Merger or Consolidation of Member into a Member of another Federal Home Loan Bank or into a
Nonmember

	 	7.4.1	 	General

If a Member’s Membership is terminated as a result of the Member’s merger or consolidation
into a member of another Federal Home Loan Bank or a nonmember, the Membership shall
terminate as of the date on which the Member’s charter is cancelled. On that date, the
Capital Stock held by the disappearing Member will be transferred on the books of the FHLBNY
into the name of the surviving institution. After that date the Other Institution shall
have no right to obtain any of the benefits of Membership including access to the FHLBNY’s
products and services and will no longer have any voting rights other than as provided in
the Regulations, but shall be entitled to receive any dividends declared on its Capital
Stock until the Capital Stock is redeemed or repurchased by the FHLBNY.

	 	7.4.2	 	Disposition of Claims

The FHLBNY shall determine an orderly manner for the disposition of transactions outstanding
with the Other Institution. The Stock Redemption Period for the Capital Stock then held by
the Other Institution and not already subject to a Redemption Notice shall be deemed to
commence on the date on which the Member’s charter is cancelled. The Stock Redemption
Period for any Capital Stock acquired or received by the Other Institution after the date of
the termination of the Member’s Membership shall commence on the date of acquisition or
receipt. If transactions remain outstanding beyond the effective date of the termination of
Membership, the FHLBNY will not redeem any Activity-Based Stock that the Other Institution
is required to hold to comply with the Activity-Based Stock Purchase Requirement
corresponding to such outstanding transactions.

	 	 	 
	FHLBNY Capital Plan

	 	4/25/2009

 

20

 

Capital Stock held by the Member as of the effective date of its termination shall not be
deemed automatically to be Excess Stock solely by virtue of the termination of the Member’s
Membership; provided however, that on and after the effective date of termination any
Membership Stock that is not required to meet the Other Institution’s Membership Stock
Purchase Requirement on the date on which the Other Institution’s Membership was terminated
that has not otherwise been redeemed by the FHLBNY upon the expiration of an applicable
Stock Redemption Period, or any Activity-Based Stock not required to meet the Other
Institution’s Activity-Based Stock Purchase
Requirement that has not otherwise been redeemed by the FHLBNY upon the expiration of an
applicable Stock Redemption Period, shall be Excess Stock that shall be subject to
repurchase by the FHLBNY. In lieu of the formula specified in Section 4.1 and section A of
Appendix I of this Capital Plan, if the corporate existence of a Member is terminated as a
result of its merger into a nonmember, the FHLBNY in its discretion may, at any time after
thirty days subsequent to the merger, recalculate the Membership Stock Purchase Requirement
based solely on Mortgage-related Assets, and in doing so may use zero dollars ($0.00) as the
amount of the Mortgage-related Assets held by the former Member, and may thereafter
repurchase any resulting Excess Stock. Notwithstanding the foregoing, any repurchases and
redemptions of stock permitted hereunder shall remain subject to the limitations in Section
2.2.4 of the Capital Plan and the provisions, if applicable, of Section 7.4.3 of this
Capital Plan.

	 	7.4.3	 	
Acquiring Institution Applies for FHLBNY Membership

If the institution into which the Member merges or is consolidated is eligible for
Membership and intends to become a Member of the FHLBNY, it must provide written
notification to the FHLBNY of its intention to apply for Membership within sixty calendar
days of the cancellation of the charter of the former Member.

Following the submission of this notification, the application for Membership must be
submitted within sixty calendar days. If the institution is approved for Membership, then
it must purchase the appropriate amounts, if any, of Capital Stock to comply with its
Minimum Stock Investment Requirement. Such purchase of Membership Stock must be made within
sixty days of approval for Membership and with respect to any Activity-Based Stock Purchase
Requirement, prior to engage in such transactions.

If the institution does not provide required notification and application for Membership
within the respective required time periods, or is disapproved for Membership, the
provisions of Section 7.4.2 of the Capital Plan will apply with respect to the disposition
of outstanding transactions and redemption and repurchase of Capital Stock.

	7.5	 	Relocation of Principal Place of Business

	 	7.5.1	 	General

If a Member’s Membership is terminated as a result of the relocation of the Member’s
principal place of business, as defined in the Regulations, the Membership shall terminate
on the date on which the transfer of Membership under such Regulations becomes effective.
After that date the Other Institution shall have no right to obtain any of the benefits of
Membership including access to the FHLBNY’s products and services and will no longer have
any voting rights other than as provided in the Regulations, but shall be entitled to
receive any dividends declared on its Capital Stock until the Capital Stock is redeemed or
repurchased by the FHLBNY.

	 	 	 
	FHLBNY Capital Plan

	 	4/25/2009

 

21

 

	 	7.5.2	 	Disposition of Claims

The FHLBNY shall determine an orderly manner for the disposition of transactions outstanding
with the Other Institution. The Stock Redemption Period for the Capital Stock then held by
the Other Institution and not already subject to a Redemption Notice shall be deemed to
commence on the date on which the Member’s Membership terminates. The Stock Redemption
Period for any Capital Stock acquired or received
by the Other Institution after the date of the termination of its Membership shall commence
on the date of acquisition or receipt. If transactions remain outstanding beyond the
effective date of the termination of Membership, the FHLBNY will not redeem any
Activity-Based Stock that the Other Institution is required to hold to comply with the
Activity-Based Stock Purchase Requirement corresponding to such outstanding transactions.

Capital Stock held by the Member as of the effective date of its termination shall not be
deemed automatically to be Excess Stock solely by virtue of the termination of the Member’s
Membership; provided however, that on and after the effective date of termination, any
Membership Stock that is not required to meet the Other Institution’s Membership Stock
Purchase Requirement on the date on which the Member’s Membership was terminated that has
not otherwise been redeemed by the FHLBNY upon the expiration of an applicable Stock
Redemption Period, or any Activity-Based Stock not required to meet the Other Institution’s
Activity-Based Stock Purchase Requirement that has not otherwise been redeemed by the FHLBNY
upon the expiration of an applicable Stock Redemption Period, shall be Excess Stock that
shall be subject to repurchase by the FHLBNY; and provided further that effective upon the
expiration of the Stock Redemption Period that commences on the date that the Member’s
Membership is terminated, the Other Institution’s Membership Stock Purchase Requirement
shall be deemed to be zero. Notwithstanding the foregoing, any repurchases and redemptions
of stock hereunder shall remain subject to the limitations in Section 2.2.4 of the Capital
Plan.

	 	 	 
	FHLBNY Capital Plan

	 	4/25/2009

 

22

 

	8.	 	The Transition Plan

The FHLBNY intends to transition to the new capital structure on the Effective Date which shall be
a date determined by the Board of Directors. As a general rule, each Member and Other Institution
must comply with its Minimum Stock Investment Requirement on the Effective Date except as allowed
below in Section 8.1.1.1 of the Capital Plan.

	8.1	 	Transition Process

The following steps will be taken to implement the FHLBNY’s Capital Plan:

 8.1.1 Member Election

8.1.1.1 Notification to Members

The Board of Directors has established the date that is ten days prior to the Effective Date
as the Opt-Out Date. Not less than forty-five days nor more than sixty days prior to the
Opt-Out Date, a copy of the Capital Plan as approved by the Finance Board and the
disclosures required by Section 933.5 of the Regulations, including a description of a
Member’s option to withdraw from Membership prior to the implementation of the Capital Plan
will be transmitted, sent or given to each Member. Included with these materials each
Member will also receive a preliminary calculation of the Member’s Membership Stock Purchase
Requirement and Activity-Based Stock Purchase Requirement. These preliminary requirements
will be calculated as follows:

	 	•	 	The data used for the preliminary calculations of the Membership Stock Purchase
Requirement will be data from the immediately preceding December 31st.

	 	•	 	The data used for the preliminary calculations of the Activity-Based Stock Purchase
Requirement will be data from the immediately preceding month-end.

Any Member that became a Member on or prior to November 12, 1999 will be advised of its
option to meet its additional Minimum Stock Investment Requirement, if any, in two equal
installments over a period of six months following the Effective Date, with the first
installment to be paid three months following the Effective Date and the second installment
to be paid six months following the Effective Date. Members will be required to advise the
FHLBNY in writing as to whether this option will be exercised by a date to be specified in
the notice to Members. Members that elect this option will nevertheless be required to
purchase any Activity-Based Stock or AMA-Based Stock required to support new transactions
that a Member enters into with the FHLBNY beginning on the Effective Date. Any institution
that became a Member after November 12, 1999 but prior to the Effective Date
must comply with the Minimum Stock Investment Requirement specified in this Capital Plan as
of the Effective Date, and as such cannot exercise this option.

	 	8.1.1.2	 	Member Notification of Intent to Withdraw

Members will be informed that written notice of the Member’s intent to withdraw from
Membership must be received by the Finance Board and the FHLBNY no later than the Opt-Out
Date. The Membership of a Member whose written notice of intent to withdraw
from Membership is received by the Finance Board and the FHLBNY on or before the Opt-Out
Date shall terminate at the earlier of (i) the Effective Date or (ii) six months after the
Member’s written notice of intent to withdraw was received by the Finance Board and the
FHLBNY, and such Member’s Bank Stock shall be redeemed and retired and shall not be
exchanged for Capital Stock.

	 	 	 
	FHLBNY Capital Plan

	 	4/25/2009

 

23

 

Notwithstanding the preceding sentence, if an institution described in the preceding
sentence continues to have transactions outstanding with the FHLBNY on the Effective Date
that are subject to an Activity-Based Stock Purchase Requirement, all shares of such
institution’s Bank Stock shall be exchanged for shares of Activity-Based Stock in accordance
with the applicable provisions of Section 8.1.2 of the Capital Plan. Any such institution
shall be deemed to have consented to the provisions of the Capital Plan, including, but not
limited to, the exchange described in the preceding sentence. The Stock Redemption Period
for the Activity-Based Stock issued to such an institution in exchange for shares of Bank
Stock that the Member held as of the date that its notice of intent to withdraw is received
will be deemed to commence on the date that the notice to withdraw is received by the
Finance Board and the FHLBNY. If such an institution acquires or receives any additional
 shares of Bank Stock after the date its notice of withdrawal is received by the Finance
Board and the FHLBNY and before the Effective Date, the Stock Redemption Period for the
Activity-Based Stock issued to such institution in exchange for such Bank Stock will be
deemed to commence on the date such shares of Bank Stock were acquired or received. If such
an institution acquires or receives any shares of Capital Stock on or after the Effective
Date, the Stock Redemption Period for such shares shall commence on the date such shares of
Capital Stock were acquired or received.

On and after the Effective Date such institution shall not be subject to a Membership Stock
Purchase Requirement. To the extent that the Activity-Based Stock held by such an
institution upon the Effective Date is not sufficient to satisfy the Activity-Based Stock
Purchase Requirement applicable to such institution’s outstanding transactions with the
FHLBNY such institution shall be required to purchase additional shares of Activity-Based
Stock in order to satisfy the Activity-Based Stock Purchase Requirement and such institution
shall be required to purchase additional shares of Activity-Based Stock necessary to comply
with any adjustments in the Activity-Based Stock Purchase Requirement that occur while
transactions remain outstanding. To the extent such an institution would not be subject to
an Activity-Based Stock Purchase Requirement on the Effective Date, in the event that the
FHLBNY reasonably determines that there is an existing or anticipated collateral deficiency
related to any obligations owed by such an institution to the FHLBNY and the institution has
failed to deliver additional collateral to resolve the existing or anticipated collateral
deficiency to the FHLBNY’s satisfaction, upon redeeming the institution’s Bank Stock the
FHLBNY shall remit the proceeds to a deposit account as collateral security for such
obligations until all such obligations have been satisfied or the existing or anticipated
deficiency is resolved to the FHLBNY’s satisfaction.

	 	8.1.1.3	 	Affirmative Election to Exchange Shares

Any Member whose written notice of intent to withdraw from Membership is not received by the
Finance Board and the FHLBNY on or prior to the Opt-Out Date shall be deemed to have
affirmatively elected to exchange its existing Bank Stock to Capital Stock on the Effective
Date pursuant to the Capital Plan.

	 	 	 
	FHLBNY Capital Plan

	 	4/25/2009

 

24

 

	 	8.1.1.4	 	Notice of Intent to Withdraw after Opt-Out Date

In the event a Member that is deemed to have affirmatively elected to exchange its existing
Bank Stock to Capital Stock files written notice of its intent to withdraw from Membership
that is received by the Finance Board and the FHLBNY after the Opt-Out Date, the Stock
Redemption Period for the Capital Stock issued to the Member in exchange for shares of Bank
Stock that the Member held as of the date its notice of intent to withdraw is received will
be deemed to commence on the date that the notice of intent to withdraw is received by the
Finance Board and the FHLBNY. If a Member described in the preceding sentence acquires or
receives any additional shares of the Bank Stock after the date its notice of withdrawal is
received by the Finance Board and the FHLBNY and before the Effective Date, the Stock
Redemption Period for the Capital Stock issued to the Member in exchange for such Bank Stock
will be deemed to commence on the date that such shares of Bank Stock were acquired or
received. If a Member described in the second preceding sentence acquires or receives any
 shares of Capital Stock on or after the Effective Date other than through the exchange
occurring on the Effective Date, the Stock Redemption Period for such shares shall commence
on the date such shares of Capital Stock were acquired or received.

	 	8.1.1.5	 	Treatment of Former Members

With respect to any institution the Membership of which has terminated on or prior to the
Effective Date other than by virtue of Section 8.1.1.2 of the Capital Plan that continues to
hold Bank Stock, such Bank Stock shall be redeemed for cash and retired on or before the
Effective Date and shall not be exchanged for Capital Stock.

Notwithstanding the preceding sentence, if an institution described in the preceding sentence
continues to have transactions outstanding with the FHLBNY on the Effective Date that are
subject to an Activity-Based Stock Purchase Requirement, all shares of such institution’s
Bank Stock shall be exchanged for shares of Activity-Based Stock in accordance with the
applicable provisions of Section 8.1.2 of the Capital Plan. Any such institution shall be
deemed to have consented to the provisions of the Capital Plan, including, but not limited
to, the exchange described in the preceding sentence. The Stock Redemption Period for the
Activity-Based Stock issued to such an institution in exchange for shares of Bank Stock that
the Member held as of the date of its termination from Membership will be deemed to commence
on such date of termination. If such an institution acquires or receives any additional
 shares of Bank Stock after the date of its termination from Membership and before the
Effective Date, the Stock Redemption Period for the Activity-Based Stock issued to such
institution in exchange for such Bank Stock will be deemed to commence on the date such
 shares of Bank Stock were acquired or received. If such an institution acquires or receives
any shares of Capital Stock on or after the Effective Date, the Stock Redemption Period for
such shares shall commence on the date such shares of Capital Stock were acquired or
received.

On and after the Effective Date such institution shall not be subject to a Membership Stock
Purchase Requirement. To the extent that the Activity-Based Stock held by such an
institution upon the Effective Date is not sufficient to satisfy the Activity-Based Stock
Purchase Requirement applicable to such institution’s outstanding transactions with the
FHLBNY such institution shall be required to purchase additional shares of Activity-Based
Stock in order to satisfy the Activity-Based Stock Purchase Requirement and such institution
shall be required to purchase additional shares of Activity-Based Stock necessary to comply
with any adjustments in the Activity-Based Stock Purchase Requirement that occur while
transactions remain outstanding. To the extent such an
institution would not be subject to an Activity-Based Stock Purchase Requirement on the
Effective Date, in the event that the FHLBNY reasonably determines that there is an existing
or anticipated collateral deficiency related to any obligations owed by such an institution
to the FHLBNY and the institution has failed to deliver additional collateral to resolve the
existing or anticipated collateral deficiency to the FHLBNY’s satisfaction, upon redeeming
the institution’s Bank Stock the FHLBNY shall remit the proceeds to a deposit account as
collateral security for such obligations until all such obligations have been satisfied or
the existing or anticipated deficiency is resolved to the FHLBNY’s satisfaction.

	 	 	 
	FHLBNY Capital Plan

	 	4/25/2009

 

25

 

	 	8.1.2	 	Plan of Reorganization

The following actions, which constitute the FHLBNY’s Plan of Reorganization within the
meaning of Section 368 of the Internal Revenue Code of 1986, as amended, and the regulations
thereunder, are to be taken in order to implement the Capital Plan.

	 	8.1.2.1	 	Final Calculation of Initial Minimum Stock Investment Requirement

Each Member’s initial Minimum Stock Investment Requirement on the Effective Date will be
calculated as follows:

	 	•	 	The data used for the calculations of the Membership Stock Purchase Requirement
calculations will be data from the immediately preceding December 31st,
subject to the following exceptions: (1) If a Member has merged or consolidated with
another Member between the immediately preceding December 31st and the
Effective Date, then the Membership Stock Purchase Requirement of the surviving Member
will be calculated as of the date when the two entities were combined, provided,
however, that if the most recently available regulatory report of the surviving Member
does not reflect the combination of the two entities, then the Membership Stock Purchase
Requirement for the surviving Member will be calculated by adding together the most
recently available regulatory report data for the disappearing Member and for the
surviving Member. (2) If an entity becomes a Member between the immediately preceding
December 31st and the Effective Date, then the Membership Stock Purchase
Requirement for such new Member shall be calculated using data from the immediately
preceding December 31st or the most recent call report data submitted by the
entity as part of its Membership application, whichever is later.

	 	•	 	The data used for the calculations of the Activity-Based Stock Purchase Requirement
will be data from the close of business on the Calculation Date.

	 	8.1.2.2	 	Exchange of Bank Stock for Capital Stock and Purchase of Additional Stock

On the Effective Date, prior to the opening of FHLBNY business, each Member’s existing Bank
Stock, in an amount equal to the Member’s Membership Stock Purchase Requirement, shall
automatically be exchanged on the FHLBNY’s books for shares of an equal amount of Membership
Stock without any action on the part of the Member and such exchanged shares of Bank Stock
shall be retired.

	 	 	 
	FHLBNY Capital Plan

	 	4/25/2009

 

26

 

A Member whose investment in Bank Stock on the Effective Date is less than the Membership
Stock Purchase Requirement for the Member on the Effective Date will, if the Member has not
by prior notice exercised its option to meet its additional Membership Stock Purchase
Requirement via the installment plan described in Section 8.1.1.1 of the
Capital Plan, have its DDA Account debited in a dollar amount sufficient to purchase any
additional Membership Stock required. The Par Value of any purchases of Membership Stock made
as a result will be credited to the FHLBNY’s capital accounts in the Member’s name.

If the Member’s existing balance of Bank Stock exceeds the Member’s Membership Stock Purchase
Requirement, the remaining balance of Bank Stock shall automatically be exchanged on the
FHLBNY’s books for shares of an equal amount of Par Value of Activity-Based Stock without any
action on the part of the Member and such exchanged shares of Bank Stock shall be retired. A
Member whose investment in Activity-Based Stock after taking into account the exchange, if
any, described in the preceding sentence is less than the Activity-Based Stock Purchase
Requirement for the Member on the Effective Date will, if the Member has not by prior notice
exercised its option to fully cover its Activity-Based Stock Purchase Requirement via the
installment plan described in Section 8.1.1.1 of the Capital Plan, have its DDA Account
debited in a dollar amount sufficient to purchase any additional Activity-Based Stock
required. The Par Value of any purchases of Activity-Based Stock made as a result will be
credited to the FHLBNY’s capital accounts in the Member’s name. To the extent that a Member
following any exchange that occurs pursuant to this paragraph holds shares of Activity-Based
Stock that are Excess Stock such shares shall be subject to repurchase by the FHLBNY in
accordance with Section 2.2.3 of the Capital Plan.

	 	8.1.3	 	Post-Transition Stock Purchases

After the Effective Date, any institution approved for Membership must comply with the Minimum
Stock Investment Requirement in order to become a Member.

Any Member that initiates a business activity with the FHLBNY on or after the Effective Date
for which Activity-Based Stock is required must comply with the Activity-Based Stock Purchase
Requirement at the time the transaction occurs.

	 	 	 
	FHLBNY Capital Plan

	 	4/25/2009

 

27

 

	9.	 	Reviews of the FHLBNY’s Capital Plan

The FHLBNY shall obtain the following reviews prior to the implementation of the Capital Plan:

	9.1	 	Independent CPA Review

Prior to submitting its Capital Plan, the FHLBNY shall engage an independent certified
public accountant to conduct a review of the Capital Plan to ensure, to the extent possible,
that the implementation of the Capital Plan will not result in any write-down of the
redeemable stock owned by its Members. A copy of the CPA’s report shall be provided to the
FHFB along with the Capital Plan.

	9.2	 	NRSRO Review

Prior to submitting its Capital Plan, the FHLBNY shall engage at least one NRSRO to conduct
a review of the plan in order to determine, to the extent possible, that implementation of
the Capital Plan will not have a material effect on the credit rating of the FHLBNY. A copy
of the NRSRO’s report shall be provided to the FHFB along with the Capital Plan.

	9.3	 	Internal Market Risk Model Review

The FHLBNY will obtain an independent validation of its internal market risk model or
internal cash flow model from an independent third party.

The internal market risk model or internal cash flow model will be validated on an annual
basis (or more frequently if required by the FHFB) by an independent third party.

Results of these validations shall be reviewed by the Board of Directors and provided
promptly to the FHFB.

	9.4	 	Internal Market Risk Model & Risk Management Procedure Approval by FHFB

The FHLBNY shall obtain FHFB approval of the internal market risk model or internal cash
flow model used to calculate the market risk component of its risk-based capital
requirement, including subsequent material adjustments to the model made by the FHLBNY,
prior to the use of any such model. The FHLBNY shall make such adjustments to its model as
may be directed by the FHFB. The FHLBNY shall also obtain FHFB approval for the risk
assessment procedures and controls to be used to manage its credit, market and operations
risks.

	9.5	 	FHLBNY Determination regarding the Capital Plan

Management of the FHLBNY has made a good faith determination that the FHLBNY will be able to
implement the Capital Plan and that the FHLBNY will be in compliance with its Minimum
Regulatory Capital Requirements on the Effective Date. An analysis of the FHLBNY’s
projected capital position after implementation of the Capital Plan has been provided to the
Finance Board.

	 	 	 
	FHLBNY Capital Plan

	 	4/25/2009

 

28

 

	10.	 	Amendments to the Capital Plan and Notices

	 
	10.1	 	Amendments to the Capital Plan

Any amendment to the Capital Plan must be approved by the Board of Directors and submitted
to the Finance Board. The effective date for any proposed amendment shall be contained in
any request for approval that is submitted to the Finance Board. In order to become
effective, any amendment to the Capital Plan must be approved by the Finance Board. The
FHLNBY will transmit, send or give its Members notice in writing at least thirty days prior
to the effective date of any amendment to the Capital Plan.

	10.2	 	Notices Relating to the Capital Plan

	 	10.2.1	 	Notices by the FHLBNY

Written notices transmitted, sent or given by the FHLBNY under this Capital Plan shall be
addressed to the chief executive officer of the Member, or Other Institution, or such other
person, designated by the Member, or Other Institution. Such written notices shall be
directed to the postal address, physical address or fax number appearing in the FHLBNY’s
records from time to time.

	 	10.2.2	 	Notices to the FHLBNY

Written notices given to the FHLBNY in accordance with the provisions of the Capital Plan
shall be addressed to the President of the FHLBNY and delivered to 101 Park Avenue, New
York, NY, 10178 or sent via fax to a fax number to be provided on the FHLBNY’s web site, and
shall be deemed to have been received by the FHLBNY in each case upon actual receipt by the
FHLBNY. The FHLBNY may from time to time change the address or fax number at which it will
receive such written notices by transmitting, sending or giving written notice to the
Member, or Other Institution.

	 	 	 
	FHLBNY Capital Plan

	 	4/25/2009

 

29

 

Appendix I — Member Stock Purchase Requirements

(Note: This Appendix I to the Capital Plan is effective as of April 21, 2005. Call report
locations set forth below are correct as of the above date, but are subject to change by the
regulatory agencies.)

A. Membership Stock Purchase Requirement

Each Member is required to purchase Membership Stock equal to the greater of (i) $1,000 or (ii)
0.20% of the Mortgage-related Assets held by the Member, as listed and described below:

	 	 	 
	Asset Description	 	FDIC Call Report Location
	 
	 	 
	Home Equity Loans
	 	RC-C 1.c.(1)
	1 to 4 family Closed-end First Liens
	 	RC-C 1.c.(2)(a)
	1 to 4 family Closed-end Junior Liens
	 	RC-C 1.c.(2)(b)
	Multifamily (5+) Residential Loans
	 	RC-C 1.d.
	Nonfarm & Nonresidential Real Estate Loans
	 	RC-C 1.e.
	MBS Pass-Throughs:
	 	 
	GNMA Guaranteed
	 	RC-B 4.a.(1) Column A + Column C
	Issued by FNMA or FHLMC
	 	RC-B 4.a.(2) Column A + Column C
	Other Pass-Throughs
	 	RC-B 4.a.(3) Column A + Column C
	Other MBS
	 	 
	GSE-Issued or Guaranteed
	 	RC-B 4.b.(1) Column A + Column C
	Collateralized by GSE-Issued or Guaranteed
	 	RC-B 4.b.(2) Column A + Column C
	All Other
	 	RC-B 4.b.(3) Column A + Column C

	 	 	 
	Asset Description	 	OTS Thrift Financial Report Location
	 
	 	 
	Mortgage Loans:
	 	 
	1 to 4 family Closed-End 1st Liens
	 	SC254
	1 to 4 Family Closed-End Junior Liens
	 	SC255
	1 to 4 family Revolving, Open-End
	 	SC251
	Multifamily (5 or More Units)
	 	SC256
	Nonresidential Property, Excluding Land
	 	SC260
	MBS Pass-Throughs:
	 	 
	GSE-Insured or Guaranteed
	 	SC210
	Other
	 	SC215
	Other MBS:
	 	 
	GSE Issued or Guaranteed
	 	SC217
	Collateralized by GSE Issued or Guaranteed
	 	SC219
	Other
	 	SC222

	 	 	 
	FHLBNY Capital Plan

	 	4/25/2009

 

30

 

	 	 	 	 	 
	Asset Description	 	NCUA Call Report Location
	 
	First Mortgage Real Estate Loans
	 	Assets: line 18	 	Acct Code: 703
	Other Real Estate Loans/Lines of Credit
	 	Assets: line 19	 	Acct Code: 386
	Mortgage Pass-through Securities
	 	Schedule C: line 13	 	Acct Code: 732
	CMOs/REMICs
	 	Schedule C: line 14	 	Acct Code: 733

Other Types of Institutions

Members not filing an FDIC or NCUA Call Report or an OTS Thrift Financial Report will be required
to file with the Bank an annual, year-end information statement regarding holdings of
Mortgage-related Assets using the FDIC Call Report definitions.

B. Activity-Based Stock Purchase Requirement

Each Member is required to purchase Activity-Based Stock in the following amounts:

	1.	 	Advances

Members are required to purchase Activity-Based Stock equal to 4.50% of the dollar amount of
any outstanding advances under the Advances Agreement.

	2.	 	Acquired Member Assets

Members are required to purchase Activity-Based Stock equal to 4.50% of the outstanding
principal balance of the Acquired Member Assets originated for or sold to the FHLBNY by a
Member that remain on the FHLBNY’s balance sheet plus the principal amount of delivery
commitments issued to the Member by FHLBNY for Acquired Member Assets to be held on the
FHLBNY’s balance sheet, provided that the outstanding principal balance of Acquired Member
Assets originated for or sold to the FHLBNY by a Member that are on the FHLBNY’s balance sheet
as of the Calculation Date will not be subject to this requirement.

	3.	 	Off-Balance Sheet Items

Members are required to purchase Activity-Based Stock equal to the credit equivalent amount of
any off-balance sheet items listed in Section 932.4(f), Table 2 of the Regulations which the
FHLBNY has transacted on a Member’s behalf and which are continuing, excluding the principal
amount of delivery commitments issued to the Member by FHLBNY for Acquired Member Assets,
multiplied by zero.

	4.	 	Derivative Contracts

Members are required to purchase Activity-Based Stock equal to 0% of the carrying value on the
FHLBNY’s balance sheet of Derivative Contracts between the Member and FHLBNY, as determined by
FHLBNY under GAAP.

	 	 	 
	FHLBNY Capital Plan

	 	4/25/2009

 

31

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00156-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00156-of-00352.parquet"}]]