Document:

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                                                                  Execution Copy

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                                CREDIT AGREEMENT

                           DATED AS OF APRIL 26, 2005

                                  BY AND AMONG

                           TRUNKLINE LNG HOLDINGS LLC

                                 AS THE BORROWER

                     PANHANDLE EASTERN PIPE LINE COMPANY, LP

                                 AS A GUARANTOR

                           TRUNKLINE LNG COMPANY, LLC

                                 AS A GUARANTOR

                                       AND

                             THE BANKS NAMED HEREIN

                                  AS THE BANKS

                                       AND

              BAYERISCHE HYPO- UND VEREINSBANK AG, NEW YORK BRANCH

                                  AS THE AGENT,

                 THE SOLE BOOK RUNNER AND THE SOLE LEAD ARRANGER

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                                TABLE OF CONTENTS

<TABLE>
<S>                                                                           <C>
1.  CERTAIN DEFINITIONS ...................................................    1

   1.1    Defined Terms ...................................................    1
   1.2    Computation of Time Periods; Other Definitional Provisions ......   15
   1.3    Accounting Terms ................................................   15

2.  AMOUNTS AND TERMS OF THE LOANS ........................................   15

   2.1    The Loans .......................................................   15
   2.2    Making of the Loans .............................................   16
   2.3    Repayment of Loans ..............................................   17
   2.4    Termination of the Commitments ..................................   17
   2.5    Prepayments .....................................................   17
   2.6    Interest ........................................................   17
   2.7    Fees ............................................................   18
   2.8    Conversion of Loans .............................................   18
   2.9    Increased Costs, Etc. ...........................................   19
   2.10   Payments and Computations .......................................   20
   2.11   Taxes ...........................................................   22
   2.12   Sharing of Payments, Etc. .......................................   25
   2.13   Use of Proceeds .................................................   25
   2.14   Evidence of Debt ................................................   26
   2.15   Replacement of Banks ............................................   27

3.  REPRESENTATIONS AND WARRANTIES OF THE LOAN PARTIES ....................   27

   3.1    Organization and Qualification. Such Loan Party: ................   27
   3.2    Authorization, Validity, Etc. ...................................   27
   3.3    Conflicting or Adverse Agreements or Restrictions ...............   28
   3.4    No Consents Required ............................................   28
   3.5    Financial Statements ............................................   28
   3.6    Litigation ......................................................   29
   3.7    Default .........................................................   29
   3.8    Compliance ......................................................   29
   3.9    Title to Assets .................................................   29
   3.10   Payment of Taxes ................................................   29
   3.11   Investment Company Act Not Applicable ...........................   29
   3.12   Public Utility Holding Company Act Not Applicable ...............   29
   3.13   Regulations G, T, U and X .......................................   30
   3.14   ERISA ...........................................................   30
   3.15   No Financing of Certain Security Acquisitions ...................   30
   3.16   Franchises, Co-Licenses, Etc. ...................................   30
   3.17   Environmental Matters ...........................................   31
   3.18   Borrower Liens ..................................................   31
</TABLE>

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<TABLE>
<S>                                                                           <C>
   3.19   Disclosure ......................................................   31
   3.20   Insurance .......................................................   31
   3.21   Subsidiaries ....................................................   31

4.  CONDITIONS TO FUNDING .................................................   32

   4.1    Representations True and No Defaults ............................   32
   4.2    Intentionally Omitted ...........................................   32
   4.3    Compliance With Law .............................................   32
   4.4    Notice of Borrowing and Other Documents .........................   32
   4.5    Payment of Fees and Expenses ....................................   32
   4.6    Repayment of Debt ...............................................   32
   4.7    Loan Documents, Opinions and Other Instruments ..................   33

5.  AFFIRMATIVE COVENANTS OF THE LOAN PARTIES .............................   33

   5.1    Financial Statements and Information. Deliver to the Banks ......   33
   5.2    Books and Records ...............................................   34
   5.3    Insurance .......................................................   34
   5.4    Maintenance of Property .........................................   34
   5.5    Inspection of Property and Records ..............................   34
   5.6    Existence, Laws, Obligations, Taxes .............................   35
   5.7    Notice of Certain Matters .......................................   35
   5.8    ERISA ...........................................................   35
   5.9    Compliance with Environmental Laws ..............................   36

6.  NEGATIVE COVENANTS OF PANHANDLE EASTERN ...............................   37

   6.1    Financial Covenants .............................................   37
   6.2    Liens, Etc. .....................................................   37
   6.3    Debt ............................................................   38
   6.4    Change in Nature of Business ....................................   38
   6.5    Mergers, Consolidation ..........................................   38
   6.6    Sale of Assets ..................................................   38
   6.7    Restricted Payments .............................................   39
   6.8    Sales and Leasebacks ............................................   39
   6.9    Transactions with Related Parties ...............................   39
   6.10   Hazardous Materials .............................................   39

7.  NEGATIVE COVENANTS OF THE BORROWER ....................................   39

   7.1    Liens, Etc. .....................................................   40
   7.2    Debt ............................................................   40
   7.3    Merger, Consolidation ...........................................   41
   7.4    Sale of Assets ..................................................   41
   7.5    Restricted Payment ..............................................   42
   7.6    Securities Credit Regulations ...................................   42
   7.7    Nature of Business ..............................................   42
</TABLE>

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<TABLE>
<S>                                                                           <C>
   7.8    Transactions with Related Parties ...............................   42
   7.9    Hazardous Materials .............................................   42
   7.10   Use of Proceeds .................................................   42
   7.11   Other Documents .................................................   43

8.  EVENTS OF DEFAULT; REMEDIES ...........................................   43

   8.1    Failure to Pay Obligations When Due .............................   43
   8.2    Intentionally Omitted ...........................................   43
   8.3    Failure to Pay Other Debt .......................................   43
   8.4    Misrepresentation or Breach of Warranty .........................   43
   8.5    Violation of Certain Covenants ..................................   43
   8.6    Violation of Other Covenants, Etc. ..............................   44
   8.7    Bankruptcy and Other Matters ....................................   44
   8.8    Dissolution .....................................................   44
   8.9    Undischarged Judgment ...........................................   44
   8.10   Loan Documents ..................................................   44
   8.11   Change of Control. Any of the following events shall occur: .....   45
   8.12   Other Remedies ..................................................   45
   8.13   Remedies Cumulative .............................................   45

9.  THE AGENT .............................................................   45

   9.1    Authorization and Action ........................................   46
   9.2    Agent's Reliance, Etc. ..........................................   46
   9.3    Defaults ........................................................   46
   9.4    HVB and Affiliates ..............................................   47
   9.5    Non-Reliance on Agent and Other Banks ...........................   47
   9.6    Indemnification .................................................   47
   9.7    Successor Agent .................................................   48
   9.8    Agent's Reliance ................................................   48

10. GUARANTY ..............................................................   48

   10.1   Guaranty ........................................................   48
   10.2   Guaranty Absolute ...............................................   49
   10.3   Waivers and Acknowledgments .....................................   50
   10.4   Subrogation .....................................................   51
   10.5   Subordination ...................................................   51
   10.6   Continuing Guaranty .............................................   52

11. MISCELLANEOUS .........................................................   52

   11.1   Amendments, Waivers, Etc. .......................................   52
   11.2   Reimbursement of Expenses .......................................   53
   11.3   Notices .........................................................   54
   11.4   Governing Law ...................................................   56
   11.5   Waiver of Jury Trial ............................................   56
</TABLE>

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<TABLE>
<S>                                                                           <C>
   11.6   Consent to Jurisdiction .........................................   56
   11.7   Survival of Representations, Warranties and Covenants ...........   57
   11.8   Counterparts ....................................................   57
   11.9   Severability ....................................................   57
   11.10  Descriptive Headings ............................................   57
   11.11  Accounting Terms ................................................   57
   11.12  Limitation of Liability .........................................   57
   11.13  Set-Off .........................................................   58
   11.14  Sale or Assignment ..............................................   58
   11.15  Interest ........................................................   63
   11.16  Indemnification .................................................   64
   11.17  Payments Set Aside ..............................................   64
   11.18  Loan Agreement Controls .........................................   64
   11.19  Obligations Several .............................................   64
   11.20  Final Agreement .................................................   64

          Exhibit A  Note

          Exhibit B  Notice of Borrowing

          Exhibit C  Assignment and Acceptance

          Disclosure Schedule 3.10     Tax Matters

          Disclosure Schedule 3.14     ERISA Matters

          Disclosure Schedule 3.17(b)  Environmental Matters
</TABLE>

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<PAGE>

                                CREDIT AGREEMENT

     CREDIT AGREEMENT dated as of April 26, 2005 among TRUNKLINE LNG HOLDINGS
LLC a limited liability company organized under the laws of Delaware (the
"BORROWER"), PANHANDLE EASTERN PIPE LINE COMPANY, LP, a limited partnership
organized under the laws of Delaware ("PANHANDLE EASTERN"), TRUNKLINE LNG
COMPANY, LLC, a limited liability company organized under the laws of Delaware
("TLNG"), the financial institutions listed on the signature pages hereof
(collectively, the "Banks" and individually, a "BANK"), and BAYERISCHE HYPO- UND
VEREINSBANK AG, NEW YORK BRANCH ("HVB"), in its capacity as administrative agent
(the "AGENT") for the Banks hereunder:

                             PRELIMINARY STATEMENTS:

     1. The Borrower desires to obtain from the Banks a senior term loan
financing (the "FINANCING") in an aggregate principal amount of $255,626,300,
the proceeds of which will be used to repay in full the existing indebtedness of
the Borrower under the Existing Credit Agreement (as defined below).

     2. The Banks have indicated their willingness to provide the Financing, but
only on and subject to the terms and conditions of this Agreement, including the
guaranty set forth herein.

     NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements contained herein, the parties hereto hereby agree as
follows:

1.   CERTAIN DEFINITIONS.

     1.1 DEFINED TERMS. As used in this Agreement, the following terms shall
have the following meanings:

     "AFFILIATE" shall mean any Person controlling, controlled by or under
common control with any other Person. For purposes of this definition, "control"
(including "controlled by" and "under common control with") means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities or otherwise. If any Person shall own, directly
or indirectly, beneficially or of record, twenty percent (20%) or more of the
voting equity (whether outstanding capital stock, partnership interests or
otherwise) of another Person, such Person shall be deemed to be an Affiliate.

     "AGENT" shall have the meaning set forth in the preamble hereto.

     "AGREEMENT" shall mean this Credit Agreement, as the same may be amended,
modified, supplemented or restated from time to time.

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     "ALTERNATE BASE RATE" means, for any day, a rate per annum equal to the
greater of: (a) the Prime Rate in effect on such day and (b) 1/2 of 1% per annum
above the Federal Funds Rate in effect on such day. The Alternate Base Rate is
an index rate and is not necessarily intended to be the lowest or best rate of
interest charged to other customers in connection with extensions of credit or
to other banks. Any change in the Alternate Base Rate due to a change in the
Prime Rate or the Federal Funds Rate shall be effective from and including the
effective date of such change in the Prime Rate or the Federal Funds Rate,
respectively.

     "ALTERNATE BASE RATE LOAN" shall mean any Loan which bears interest as
described in Section 2.6(a)(i) (Interest).

     "APPLICABLE LENDING OFFICE" shall mean, with respect to each Bank, such
Bank's (a) Domestic Lending Office in the case of an Alternate Base Rate Loan;
and (b) Eurodollar Lending Office in the case of a Eurodollar Rate Loan.

     "APPLICABLE MARGIN" shall mean with respect to (a) Alternate Base Rate
Loans, a percentage per annum set forth below under the caption "Alternate Base
Rate Loans" and (b) Eurodollar Rate Loans, subject to the proviso set forth
below, a percentage per annum set forth below under the caption "Eurodollar Rate
Loans," in each case determined by reference to the rating of Panhandle
Eastern's unsecured, non-credit enhanced Senior Funded Debt (effective from and
after the date the applicable change of such a debt rating is first announced by
the applicable rating agency):

<TABLE>
<CAPTION>
 RATING OF PANHANDLE EASTERN'S UNSECURED, NON-CREDIT ENHANCED SENIOR    EURODOLLAR RATE   ALTERNATE BASE
                             FUNDED DEBT                                      LOAN           RATE LOAN
 -------------------------------------------------------------------    ---------------   --------------
<S>                                                                     <C>               <C>
Equal or greater to Baa1 by Moody's Investor Service, Inc. and/or
equal or greater to BBB+ by Standard and Poor's Ratings Group                0.550%               0%

Baa2 by Moody's Investor Service, Inc. or BBB by Standard and Poor's
Ratings Group                                                                0.625%               0%

Baa3 by Moody's Investor Service, Inc. or BBB- by Standard and Poor's
Ratings Group                                                                0.750%               0%

Ba1 by Moody's Investor Service, Inc. or BB+ by Standard and Poor's
Ratings Group                                                                1.125%           0.125%

Ba2 by Moody's Investor Service, Inc. or BB by Standard and Poor's
Ratings Group                                                                1.375%           0.375%

Below Ba2 by Moody's Investor Service, Inc. or below BB by Standard
and Poor's Ratings Group                                                     1.625%           0.750%
</TABLE>

provided that, for the period beginning on the Funding Date and ending on the
six-month anniversary of the Funding Date, the Applicable Margin for Eurodollar
Rate Loans shall not be less than 0.625%.

     Notwithstanding the foregoing provisions, in the event that ratings of
Panhandle Eastern's unsecured, non-credit enhanced Senior Funded Debt under
Standard & Poor's Ratings Group and under Moody's Investor Service, Inc. fall
within different rating categories which are

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not functional equivalents, the Eurodollar Rate shall be based on the higher of
such ratings if there is only one category differential between the functional
equivalents of such ratings, and if there is a two category differential between
the functional equivalents of such ratings, the component of pricing from the
grid set forth above shall be based on the rating category which is then in the
middle of or between the two category ratings which are then in effect, and if
there is greater than a two category differential between the functional
equivalents of such ratings, the component of pricing from the grid set forth
above shall be based on the rating category which is then one rating category
above the lowest of the two category ratings which are then in effect.
Additionally, in the event that Panhandle Eastern withdraws from having its
unsecured, non-credit enhanced Senior Funded Debt being rated by Moody's
Investor Service, Inc. or Standard and Poor's Ratings Group, so that one or both
of such ratings services fails to rate Panhandle Eastern's unsecured, non-credit
enhanced Senior Funded Debt, (a) the Applicable Margin for all Eurodollar Rate
Loans for all Interest Periods commencing thereafter shall be 1.625% and (b) the
Applicable Margin for all Alternate Base Rate Loans shall be 0.750% effective
immediately, in each case continuing until such time as Panhandle Eastern
subsequently causes its unsecured, non-credit enhanced Senior Funded Debt to be
rated by both of said ratings services.

     "APPROVED FUND" means any Person (other than a natural person) that is
engaged in making, purchasing, holding or investing in bank loans and similar
extensions of credit in the ordinary course of its business and that is
administered or managed by (a) a Bank, (b) an Affiliate of a Bank or (c) an
entity or an Affiliate of an entity that administers or manages a Bank.

     "ASSIGNMENT AND ACCEPTANCE" shall mean and Assignment and Acceptance
substantially in the form of Exhibit C hereto.

     "ATTRIBUTABLE INDEBTEDNESS" means, with respect to any Sale-Leaseback
Transaction, the present value (discounted at the rate set forth or implicit in
the terms of the lease included in such Sale-Leaseback Transaction) of the total
obligations of the lessee for rental payments (other than amounts required to be
paid on account of taxes, maintenance, repairs, insurance, assessments,
utilities, operating and labor costs and other items that do not constitute
payments for property rights) during the remaining term of the lease included in
such Sale-Leaseback Transaction (including any period for which such lease has
been extended). In the case of any lease that is terminable by the lessee upon
payment of a penalty, the Attributable Indebtedness shall be the lesser of the
(a) Attributable Indebtedness determined assuming termination on the first date
such lease may be terminated (in which case the Attributable Indebtedness shall
also include the amount of the penalty, but no rent shall be considered as
required to be paid under such lease subsequent to the first date on which it
may be so terminated) and (b) the Attributable Indebtedness determined assuming
no such termination.

     "BANK" shall have the meaning set forth in the preamble hereto and shall
include the Agent, in its individual capacity.

     "BORROWER" shall have the meaning set forth in the preamble hereto.

     "BUSINESS DAY" shall mean a day when the Agent is open for business,
provided that, if the applicable Business Day relates to any Eurodollar Rate
Loan, it shall mean a day when the

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Agent is open for business and banks are open for business in the London
interbank market and in New York City.

     "CAPITAL LEASE" shall mean any lease of any Property (whether real,
personal, or mixed) which, in conformity with GAAP, is accounted for as a
capital lease on the balance sheet of the lessee.

     "CAPITALIZED LEASE OBLIGATIONS" shall mean, for any Person, any of their
obligations that should, in accordance with GAAP, be recorded as Capital Leases.

     "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
such date or (c) compliance by any Bank with any request, guideline or directive
(whether or not having the force of law) of any Governmental Authority made or
issued after such date.

     "CLOSING DATE" means the date hereof.

     "CODE" shall mean the Internal Revenue Code of 1986, as amended, as now or
hereafter in effect, together with all regulations, rulings and interpretations
thereof or thereunder issued by the Internal Revenue Service.

     "COMMITMENT" means, with respect to any Bank, the commitment of such Bank
to make a Loan on the Funding Date, in the amount set forth opposite such Bank's
name on the signature pages hereto, and the aggregate amount of all the
Commitments is $255,626,300.

     "CONSOLIDATED" refers to the consolidation of accounts in accordance with
GAAP.

     "CONSOLIDATED NET INCOME" of any Person means, for any period, the
aggregate net income (or loss) from continuing operations of such Person and its
Subsidiaries on a Consolidated basis.

     "CONSOLIDATED NET TANGIBLE ASSETS" means, at any date of determination, the
total amount of assets of Panhandle Eastern and its Subsidiaries after deducting
therefrom:

          (a) all current liabilities (excluding (i) any current liabilities
     that by their terms are extendable or renewable at the option of the
     obligor thereon to a time more than 12 months after the time as of which
     the amount thereof is being computed, and (ii) current maturities of
     Long-Term Debt); and

          (b) the value (net of any applicable reserves) of all goodwill, trade
     names, trademarks, patents and other like intangible assets,

all as set forth on the Consolidated balance sheet of Panhandle Eastern and its
Subsidiaries for Panhandle Eastern's most recently completed fiscal quarter,
prepared in accordance with GAAP.

     "CONSOLIDATED TOTAL CAPITALIZATION" means, at any time, an amount equal to
the sum of (a) Consolidated Debt for Borrowed Money of Panhandle Eastern and its
Subsidiaries at such

                                       4

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time plus (b) an amount equal to the sum of all amounts which, in accordance
with GAAP, would be included under owner's equity on a Consolidated balance
sheet of Panhandle Eastern and its Subsidiaries; provided, however, that
consistent with past practice, any loans made to Southern Union by Panhandle
Eastern up to but not exceeding $50,000,000 in the aggregate at any time
outstanding shall not be deemed to reduce owner's equity for purposes of this
definition.

     "CONVERSION", "CONVERT" and "CONVERTED" each refer to a conversion of Loans
of one Type into Loans of the other Type pursuant to Section 2.8 (Conversion of
Loans).

     "DEBT" means (without duplication), for any Person, indebtedness for money
borrowed determined in accordance with GAAP but in any event including, (a)
indebtedness of such Person for borrowed money or arising out of any extension
of credit to or for the account of such Person (including, without limitation,
extensions of credit in the form of reimbursement or payment obligations of such
Person relating to letters of credit issued for the account of such Person) or
for the deferred purchase price of property or services, except indebtedness
which is owing to trade creditors in the ordinary course of business; (b)
indebtedness of the kind described in clause (a) of this definition which is
secured by (or for which the holder of such Debt has any existing right,
contingent or otherwise, to be secured by) any Lien upon or in Property
(including, without limitation, accounts and contract rights) owned by such
Person, whether or not such Person has assumed or become liable for the payment
of such indebtedness or obligations; (c) Capitalized Lease Obligations of such
Person; and (d) obligations under direct or indirect Guaranties. Whenever the
definition of Debt is being used herein in order to compute a financial ratio or
covenant applicable to the consolidated business of Panhandle Eastern and its
Subsidiaries, Debt which is already included in such computation by virtue of
the fact that it is owed by a Subsidiary of Panhandle Eastern will not also be
added by virtue of the fact that Panhandle Eastern has executed a guaranty with
respect to such Debt that would otherwise require such guaranteed indebtedness
to be considered Debt hereunder. Nothing contained in the foregoing sentence is
intended to limit the other provisions of this Agreement which contain
limitations on the amount and types of Debt which may be incurred by any Loan
Party.

     "DEBT FOR BORROWED MONEY" of any Person means, at any date of
determination, the sum without duplication of (i) all items that, in accordance
with GAAP, would be classified as indebtedness on a Consolidated balance sheet
of such Person, (ii) all Guarantees by such Person of Debt of another Person and
(iii) all letter of credit reimbursement obligations of such Person.

     "DEBT/CAPITALIZATION RATIO" means, as of any date of determination, the
ratio of (a) the aggregate amount of outstanding Consolidated Debt for Borrowed
Money of Panhandle Eastern and its Subsidiaries as of such date to (b)
Consolidated Total Capitalization of Panhandle Eastern and its Subsidiaries as
of such date.

     "DEBTOR LAWS" shall mean all applicable liquidation, conservatorship,
bankruptcy, moratorium, arrangement, receivership, insolvency, reorganization,
or similar laws, or general equitable principles from time to time in effect
affecting the rights of creditors generally.

     "DEFAULT" shall mean any of the events specified in Section 8 (Events of
Default; Remedies), whether or not there has been satisfied any requirement in
connection with such

                                       5

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event for the giving of notice, or the lapse of time, or the happening of any
further condition, event or act.

     "DOLLARS" and "$" shall mean lawful currency of the United States of
America.

     "DOMESTIC LENDING OFFICE" shall mean, with respect to each Bank, the office
of such Bank located at its "Address for Notices" set forth below the name of
such Bank on the signature pages hereof or such other office of such Bank as
such Bank may from time to time specify to the Borrower and the Agent.

     "EBITDA" means, for any period for any Person, (a) Consolidated Net Income
for such period, plus (b) without duplication and to the extent reflected as a
charge in the statement of such Consolidated Net Income for such period, the sum
of (i) income tax expense, (ii) interest expense, amortization or write-off of
debt discount and debt issuance costs and commissions, discounts and other fees
and charges associated with Debt (including the Loans), (iii) depreciation and
amortization expense, (iv) amortization of intangibles (including, but not
limited to, goodwill) and organization costs, (v) any extraordinary or
non-recurring charges, (vi) any non-cash expenses or losses, and (vii) losses on
sales of assets, minus (c) to the extent included in the statement of such
Consolidated Net Income for such period, the sum of (i) any extraordinary,
unusual or non-recurring income or gains (including, whether or not otherwise
includable as a separate item in the statement of such Consolidated Net Income
for such period, gains on the sales of assets outside of the ordinary course of
business), (ii) income tax credits (to the extent not netted from income tax
expense), and (iii) any other non-cash income, and minus (d) any cash payments
made during such period in respect of items described in sub-clause (a)(vi)
above subsequent to the fiscal quarter in which the relevant non-cash expenses
or losses were reflected as a charge in the statement of Consolidated Net
Income, all as determined on a consolidated basis.

     "ELIGIBLE ASSIGNEE" shall mean: (i) any Bank, or any Affiliate of any Bank,
any Approved Fund, or any institution 100% of the voting stock of which is
directly, or indirectly owned by such Bank or by the immediate or remote parent
of such Bank; or (ii) a commercial bank, a foreign branch of a United States
commercial bank, a domestic branch of a foreign commercial bank or other
financial institution having in each case assets in excess of $1,000,000,000.

     "ENVIRONMENTAL LAW" shall mean (a) the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 (as amended by the Superfund
Amendments and Reauthorization Act of 1986, 42 U.S.C.A. Section 9601 et seq.),
as amended from time to time, and any and all rules and regulations issued or
promulgated thereunder ("CERCLA"); (b) the Resource Conservation and Recovery
Act (as amended by the Hazardous and Solid Waste Amendment of 1984, 42 U.S.C.A.
Section 6901 et seq.), as amended from time to time, and any and all rules and
regulations promulgated thereunder ("RCRA"); (c) the Clean Air Act, 42 U.S.C.A.
Section 7401 et seq., as amended from time to time, and any and all rules and
regulations promulgated thereunder; (d) the Clean Water Act of 1977, 33 U.S.CA
Section 1251 et seq., as amended from time to time, and any and all rules and
regulations promulgated thereunder; (e) the Toxic Substances Control Act, 15
U.S.C.A. Section 2601 et seq., as amended from time to time, and any and all
rules and regulations promulgated thereunder; or (f) any other federal or state
law, statute, rule, or

                                       6

<PAGE>

emulation enacted in connection with or relating to the protection or regulation
of the environment (including, without limitation, those laws, statutes, rules,
and regulations regulating the disposal, removal, production, storing, refining,
handling, transferring, processing, or transporting of Hazardous Materials) and
any rules and regulations issued or promulgated in connection with any of the
foregoing by any governmental authority, and "ENVIRONMENTAL LAWS" shall mean
each of the foregoing.

     "EPA" shall mean the Environmental Protection Agency, or any successor
organization.

     "EQUITY INTERESTS" means, with respect to any Person, shares of capital
stock of (or other ownership or profit interests in) such Person, warrants,
options or other rights for the purchase or other acquisition from such Person
of shares of capital stock of (or other ownership or profit interests in) such
Person, securities convertible into or exchangeable for shares of capital stock
of (or other ownership or profit interests in) such Person or warrants, rights
or options for the purchase or other acquisition from such Person of such shares
(or such other interests), and other ownership or profit interests in such
Person (including, without limitation, partnership, member or trust interests
therein), whether voting or non-voting, and whether or not such shares,
warrants, options, rights or other interests are authorized or otherwise
existing on any date of determination.

     "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended from time to time, and all rules, regulations, rulings and
interpretations thereof issued by the Internal Revenue Service or the Department
of Labor thereunder.

     "EUROCURRENCY LIABILITIES" shall have the meaning assigned to that term in
Regulation D of the Board of Governors of the Federal Reserve System, as in
effect from time to time.

     "EURODOLLAR LENDING OFFICE" shall mean, with respect to each Bank, the
office of such Bank located at its "Address for Notices" set forth below the
name of such Bank on the signature pages hereof, or such other office of such
Bank as such Bank may from time to time specify to the Borrower and the Agent.

     "EURODOLLAR RATE" means, for any Interest Period in effect for each
Eurodollar Rate Loan comprising part of the same Borrowing, an interest rate per
annum equal to the rate determined by the Agent to be the offered rate which
appears on the display designated as page "BBAM1" on the Bloomberg service (or
on any successor or substitute page of such display, or any successor to or
substitute for such display, providing rate quotations comparable to those
currently provided on such page of such screen, as determined by the 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 "Eurodollar Rate" with respect to such Eurodollar Rate
Loans for such Interest Period shall be the rate at which dollar deposits of
$5,000,000 and for a maturity comparable to such Interest Period are offered by
the principal London office of the 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.

                                       7

<PAGE>

     "EURODOLLAR RATE LOAN" means a Loan that bears interest as provided in
Section 2.6(a)(ii) (Interest).

     "EVENT OF DEFAULT" shall mean any of the events specified in Section 8
(Events of Default; Remedies), provided that there has been satisfied any
requirement in connection with such event for the giving of notice, or the lapse
of time, or the happening of any further condition, event or act.

     "EXISTING CREDIT AGREEMENT" shall have the meaning set forth in Section
2.13 (Use of Proceeds).

     "FEDERAL FUNDS 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 Agent from three federal funds brokers of recognized standing
selected by it.

     "FEE LETTER" shall mean that certain fee letter dated as of the date hereof
by and between the Borrower and HVB.

     "FUNDED DEBT" means all Debt of a Person which matures more than one year
from the date of creation or matures within one year from such date but is
renewable or extendible, at the option of such Person, by its terms or by the
terms of any instrument or agreement relating thereto, to a date more than one
year from such date or arises under a revolving credit or similar agreement
which obligates Banks to extend credit during a period of more than one year
from such date, including, without limitation, all amounts of any Funded Debt
required to be paid or prepaid within one year from the date of determination of
the existence of any such Funded Debt.

     "FUNDING DATE" shall mean the date on which each of the conditions
precedent set forth in Section 4 (Conditions to Funding) shall have been
satisfied or waived by the Banks.

     "GAAP" has the meaning specified in Section 1.3 (Accounting Terms).

     "GOVERNMENTAL AUTHORITY" shall mean any (domestic or foreign) federal,
state, county, municipal, parish, provincial, or other government, or any
department, commission, board, court, agency (including, without limitation, the
EPA), or any other instrumentality of any of them or any other political
subdivision thereof, and any entity exercising executive, legislative, judicial,
regulatory, or administrative functions of, or pertaining to, government,
including, without limitation, any arbitration panel, any court, or any
commission.

     "GOVERNMENTAL REQUIREMENT" means any order, permit, law, statute
(including, without limitation, any Environmental Protection Statute), code,
ordinance, rule, regulation, certificate, or other direction or requirement of
any Governmental Authority.

     "GUARANTEED OBLIGATIONS" shall have the meaning set forth in Section 10.1.

                                       8

<PAGE>

     "GUARANTOR" means each of Panhandle Eastern and TLNG.

     "GUARANTY" means, with respect to any Person, any obligation, contingent or
otherwise, of such Person directly or indirectly guaranteeing any Debt of
another Person, including, without limitation, by means of an agreement to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Debt or to maintain financial covenants, or to assure the payment of such Debt
by an agreement to make payments in respect of goods or services regardless of
whether delivered or to purchase or acquire the Debt of another, or otherwise,
provided that the term "Guaranty" shall not include endorsements for deposit or
collection in the ordinary course of business.

     "HAZARDOUS MATERIALS" shall mean any substance which, pursuant to any
Environmental Laws, requires special handling in its collection, use, storage,
treatment or disposal, including but not limited to any of the following: (a)
any "hazardous waste" as defined by RCRA; (b) any "hazardous substance" as
defined by CERCLA; (c) asbestos; (d) polychlorinated biphenyls; (e) any
flammables, explosives or radioactive materials; and (f) any substance, the
presence of which on any of Loan Parties' properties is prohibited by any
Governmental Authority.

     "HEDGE AGREEMENTS" means interest rate, commodity or currency swap, cap or
collar agreements, future or option contracts and other hedging agreements
(including, without limitation, all "swap agreements" as defined in 11 U.S.C.
Section 101).

     "HIGHEST LAWFUL RATE" shall mean, with respect to each Bank, the maximum
non-usurious interest rate, if any, that at any time or from time to time may be
contracted for, taken, reserved, charged, or received with respect to the Notes
or on other amounts, if any, due to such Bank pursuant to this Agreement, under
laws applicable to such Bank 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 non-usurious interest rate than applicable laws now
allow.

     "HVB" shall have the meaning set forth in the preamble

     "INDEMNIFIED PARTIES" shall have the meaning set forth in Section 11.16
(Indemnification).

     "INTEREST COVERAGE RATIO" means, as of any date of determination, the ratio
of (a) Consolidated EBITDA of Panhandle Eastern to (b) Consolidated Interest
Expense of Panhandle Eastern, in each case for the four fiscal quarters then
ended.

     "INTEREST EXPENSE" of any Person means, for any period, total cash interest
expense (including that attributable to Capitalized Leases) of such Person for
such period with respect to all outstanding Debt of such Person (including all
commissions, discounts and other fees and charges owed with respect to letters
of credit and bankers' acceptance financing and net costs and benefits under
Hedge Agreements in respect of interest rates to the extent such net costs and
benefits are allocable to such period in accordance with GAAP).

     "INTEREST PERIOD" means, for each Eurodollar Rate Loan comprising part of
the same borrowing, the period commencing on the date of such Eurodollar Rate
Loan or the date of the

                                       9

<PAGE>

Conversion of any Alternate Base Rate Loan into such Eurodollar Rate Loan, and
ending on the last day of the period selected by the Borrower pursuant to the
provisions below and, thereafter, each subsequent period commencing on the last
day of the immediately preceding Interest Period and ending on the last day of
the period selected by the Borrower pursuant to the provisions below. The
duration of each such Interest Period shall be one, two, three or six months
(or, if available to each Bank, nine or twelve months), as the Borrower may,
upon notice received by the Agent not later than 11:00 A.M. (New York City time)
on the third Business Day prior to the first day of such Interest Period,
select; provided, however, that:

          (a) whenever the last day of any Interest Period would otherwise occur
     on a day other than a Business Day, the last day of such Interest Period
     shall be extended to occur on the next succeeding Business Day, provided,
     however, that, if such extension would cause the last day of such Interest
     Period to occur in the next following calendar month, the last day of such
     Interest Period shall occur on the next preceding Business Day; and

          (b) whenever the first day of any Interest Period occurs on a day of
     an initial calendar month for which there is no numerically corresponding
     day in the calendar month that succeeds such initial calendar month by the
     number of months equal to the number of months in such Interest Period,
     such Interest Period shall end on the last Business Day of such succeeding
     calendar month.

     "INVENTORY" means, with respect to Borrower or any Subsidiary, all of such
Person's now owned or hereafter acquired or created inventory in all of its
forms and of every nature, wherever located, whether acquired by purchase,
merger, or otherwise, and all raw materials, work in process therefor and
finished goods thereof, and all supplies, materials, and products of every
nature and description used, usable, or consumed in connection with the
manufacture, packing, shipping, advertising, selling, leasing, furnishing, or
production of such goods, and shall include, in any event, all "inventory"
(within the meaning of such term in the Uniform Commercial Code in effect in any
applicable jurisdiction), whether in mass or joint, or other interest or right
of any kind in goods which are returned to, repossessed by, or stopped in
transit by such Person, and all accessions to any of the foregoing and all
products of any of the foregoing.

     "INVESTMENT" of any Person means any investment so classified under GAAP,
and, whether or not so classified, includes (a) any direct or indirect loan
advance made by it to any other Person; (b) any direct or indirect Guaranty for
the benefit of such Person; (c) any capital contribution to any other Person;
and (d) any ownership or similar interest in any other Person; and the amount of
any Investment shall be the original principal or capital amount thereof (plus
any subsequent principal or capital amount) minus all cash returns of principal
or capital thereof.

     "LIEN" shall mean any mortgage, deed of trust, pledge, security interest,
encumbrance, lien (including without limitation, any such interest arising under
any Environmental Law), or similar charge of any kind (including without
limitation, any agreement to give any of the foregoing, any conditional sale or
other title retention agreement or any lease in the nature thereof), or the
interest of the lessor under any Capital Lease.

                                       10

<PAGE>

     "LOAN" or "LOANS" shall mean a loan or loans, respectively, from the Banks
to the Borrower made under Section 2.1 (The Loans).

     "LOAN DOCUMENT" shall mean this Agreement, any Note, the Fee Letter and any
other document, agreement or instrument now or hereafter executed and delivered
by any Loan Party in connection with any of the transactions contemplated by any
of the foregoing, as any of the foregoing may hereafter be amended, modified, or
supplemented, and "LOAN DOCUMENTS" shall mean, collectively, each of the
foregoing.

     "LOAN PARTY" shall mean TLNG, Panhandle Eastern, the Borrower and its
Subsidiaries.

     "LONG-TERM DEBT" means any Debt that, in accordance with GAAP, constitutes
(or, when incurred, constituted) a long-term liability.

     "MAJORITY BANKS" shall mean at any time Banks holding more than 50% of the
unpaid principal amounts outstanding under the Notes, or, if no such amounts are
outstanding, more than 50% of the Pro Rata Percentages.

     "MATERIAL ADVERSE CHANGE" means, for any Person, any material adverse
change in the business, operations, financial condition or assets of such Person
and its Subsidiaries, taken as a whole.

     "MATERIAL ADVERSE EFFECT" shall mean any material adverse effect on (a) the
financial condition, business, properties, assets or operations of Panhandle
Eastern and its Subsidiaries, taken as a whole, or (b) the ability of Panhandle
Eastern, Borrower or TLNG to perform its obligations under this Agreement, any
Note or any other Loan Document on a timely basis.

     "MATURITY DATE" shall mean March 15, 2007.

     "NOTE" or "NOTES" shall mean a promissory note or notes, respectively, of
the Borrower, executed and delivered under this Agreement.

     "NOTICE OF BORROWING" shall have the meaning set forth in Section 2.2(a)
(Making the Loans).

     "OBLIGATIONS" shall mean all obligations of Panhandle Eastern, Borrower and
TLNG to the Banks under this Agreement, the Notes and all other Loan Documents
to which any of them is a party.

     "OFFICER'S CERTIFICATE" shall mean a certificate signed in the name of the
applicable Loan Party, by either its President, one of its Vice Presidents, its
Treasurer, its Secretary, or one of its Assistant Treasurers or Assistant
Secretaries.

     "PANHANDLE EASTERN" shall have the meaning given in the preamble hereto.

     "PERMITTED LIENS" means any of the following Liens:

          (a) Any Lien:

                                       11

<PAGE>

               (i) arising by reason of deposits with or the giving of any form
          of security to any Governmental Authority in connection with the
          financing of the acquisition or construction of property to be used in
          the business of a Loan Party;

               (ii) for current taxes and assessments or taxes and assessments
          not at the time delinquent and for which adequate reserves have been
          established to the extent required by GAAP; or

               (iii) for taxes and assessments which are delinquent but the
          validity of which is being contested at the time by a Loan Party in
          good faith and by appropriate proceedings and for which adequate
          reserves have been established to the extent required by GAAP;

          (b) Leases, whether now or hereafter existing, in the ordinary course
     of business, of property and assets now and hereafter owned by a Loan Party
     (excluding Capitalized Leases) and any renewals or extensions thereof;

          (c) Liens reserved in leases, or arising by operation of law, for rent
     and for compliance with the terms of the lease in the case of the leasehold
     estates;

          (d) Liens arising by reason of deposits with or the giving of any form
     of security to any Governmental Authority or any other governmental body
     created or approved by law or governmental regulation for any purpose at
     any time as required by law or governmental regulation as a condition to
     the transaction of any business or the exercise of any privilege or
     license, or to enable a Loan Party to maintain self-insurance or to
     participate in any fund for liability on any insurance risks or in
     connection with workmen's compensation, unemployment insurance, old age
     pensions or other social security or to share in the privileges or benefits
     required for companies participating in such arrangements;

          (e) (i) Mechanics', materialmen's, warehousemen's, landlord's or
     similar Liens or any Lien arising by reason of pledges or deposits to
     secure payment of workmen's compensation or other insurance or social
     security legislation, (ii) good faith deposits or downpayments in
     connection with tenders or leases of real estate, bids or contracts (other
     than contracts for the payment of money), including contracts for the
     acquisition of machinery and equipment, (iii) deposits to secure public or
     statutory obligations, (iv) deposits to secure or in lieu of surety, stay
     or appeal bonds, (v) margin deposits (provided that all such margin
     deposits shall not exceed $2,000,000 in the aggregate at any time) and (vi)
     deposits as security for the payment of taxes or assessments or other
     similar charges;

          (f) Liens of any judgments not constituting an Event of Default under
     Section 8.9 (Undischarged Judgment);

          (g) Any obligation or duties, affecting the property of a Loan Party,
     to any Governmental Authority with respect to any franchise, grant, lease,
     license, permit or similar arrangement with such Governmental Authority;

                                       12

<PAGE>

          (h) Rights reserved to or vested in any Governmental Authority by the
     terms of any right, power, franchise, grant, license or permit or by any
     provision of law, to terminate or to require annual or other periodic
     payments as a condition to the continuance of such right, power, franchise,
     grant, license or permit;

          (i) Rights reserved to or vested in any Governmental Authority to
     control or regulate any property of a Loan Party, or to use such property
     in any manner which does not materially impair the use of such property for
     the purpose for which it is held by a Loan Party;

          (j) Zoning laws and ordinances;

          (k) Restrictive covenants, easements on, exceptions to or reservations
     in respect of any property of a Loan Party granted or reserved for the
     purpose of electric lines, fiber optic lines, water and sewer lines,
     pipelines, other utilities, roads, streets, alleys, highways, railroad
     purposes, the removal of oil, gas, hydrocarbon, coal or other minerals, and
     other like purposes, or for the use of real property or interests therein,
     facilities and equipment, which do not materially impair the use thereof
     for the purposes for which it is held by a Loan Party, and any and all
     rents, royalties, reservations, Liens and rights or interests of third
     parties, in each case not securing any Debt, arising in the ordinary course
     of business of a Loan Party by virtue of any lease or exploration,
     development, drilling, unitization, communitization or operating agreement
     relating to or affecting any oil, gas, hydrocarbon, coal or other mineral
     properties in which a Loan Party has an interest;

          (l) Defects or irregularities of title, and inaccuracies of legal
     descriptions, affecting any portion of the property of a Loan Party or any
     of its Subsidiaries that individually or in the aggregate do not materially
     interfere with the operation, value of use of the properties of such Loan
     Party or such Subsidiaries taken as a whole;

          (m) Liens securing Debt with respect to Debt of any Person that
     becomes a Subsidiary of a Loan Party, provided that such Liens were in
     existence prior to the date on which such Person becomes a Subsidiary of
     such Loan Party and were not created in contemplation of such Person
     becoming a Subsidiary of such Loan Party;

          (n) Liens on any office equipment, data processing equipment
     (including computer and computer peripheral equipment), or motor vehicles
     purchased in the ordinary course of the applicable Loan Party's business;
     and

          (o) Liens created in the ordinary course of business in favor of banks
     and other financial institutions over credit balances or any bank accounts
     of a Loan Party held at such banks or financial institutions.

     "PERSON" shall mean an individual, partnership, joint venture, corporation,
joint stock company, bank, trust, unincorporated organization and/or a
government or any department or agency thereof.

                                       13

<PAGE>

     "PLAN" shall mean any plan subject to Title IV of ERISA and maintained for
employees of any Loan Party or of any member of a "controlled group of
corporations," as such term is defined in the Code, of which a Loan Party is a
member, or any such plan to which a Loan Party thereof is required to contribute
on behalf of its employees.

     "PRIME RATE" shall mean, on any day, the rate determined by the Agent and
announced to its customers as being its prime rate for that day. Without notice
to the Borrower or any other Person, the Prime Rate shall change automatically
from time to time as and in the amount by which said Prime Rate shall fluctuate,
with each such change to be effective as of the date of each change in such
Prime Rate. The Prime Rate is a reference rate and does not necessarily
represent the lowest or best rate actually charged to any customer. The Agent
may make commercial or other loans at rates of interest at, above or below the
Prime Rate.

     "PRIORITY OBLIGATIONS AMOUNT" means the sum (without duplication) of (i)
all Attributable Indebtedness with respect to any Sale-Leaseback Transaction
entered into by Panhandle Eastern or any of its Subsidiaries, (ii) all Debt of
Panhandle Eastern or any of its Subsidiaries secured by a Lien (other than Liens
permitted by clauses (a) through (c) of Section 6.2 (Liens, Etc.)) and (iii) all
Debt of Subsidiaries (other than Borrower or TLNG), other than such Debt owed to
Panhandle Eastern or another Subsidiary.

     "PRO-RATA PERCENTAGE" shall mean with respect to any Bank, a fraction
(expressed as a percentage), the numerator of which shall be the amount of such
Bank's outstanding Loans (or Commitment) and the denominator of which shall be
the aggregate amount of all the outstanding Loans (or Commitments) of the Banks,
as adjusted from time to time in accordance herewith.

     "PROPERTY" shall mean any interest or right in any kind of property or
asset, whether real, personal, or mixed, owned or leased, tangible or
intangible, and whether now held or hereafter acquired.

     "REGISTER" shall have the meaning set forth in Section 11.14(d).

     "RELEASE" shall mean a "release", as such term is defined in CERCLA.

     "RESTRICTED PAYMENT" shall mean a Person's declaration or payment of any
dividends, the purchase, redemption, retirement, defeasance or other acquisition
for value of any of its Equity Interests now or hereafter outstanding, return
any capital to its stockholders, partners or members (or the equivalent Persons
thereof) as such, making any distribution of assets, Equity Interests,
obligations or securities to its stockholders, partners or members (or the
equivalent Persons thereof) as such or making of any interest payment on any
Debt owing to its direct or indirect parent (or any equity owner thereof).

     "REQUIRED BANKS" means, at any time, Banks having more than 66-2/3% of the
aggregate amount of the Loans outstanding at such time.

     "SALE-LEASEBACK TRANSACTION" has the meaning set forth in Section 6.8
(Sales and Leasebacks).

                                       14

<PAGE>

     "SENIOR FUNDED DEBT" shall mean Funded Debt of Panhandle Eastern excluding
Debt that is contractually subordinated in right of payment to any other Debt of
Panhandle Eastern.

     "SOUTHERN UNION" shall mean Southern Union Company.

     "SUBSIDIARY" of any Person means any corporation, partnership, joint
venture, limited liability company, trust or estate of which (or in which) more
than 50% of (a) the issued and outstanding capital stock having ordinary voting
power to elect a majority of the Board of Directors of such Person (irrespective
of whether at the time capital stock of any other class or classes of such
Person shall or might have voting power upon the occurrence of any contingency),
(b) the interest in the capital or profits of such partnership, joint venture or
limited liability company or (c) the beneficial interest in such trust or estate
is at the time directly or indirectly owned or controlled by such Person, by
such Person and one or more of its other Subsidiaries or by one or more of such
Person's other Subsidiaries.

     "TLNG" shall have the meaning given in the preamble hereto.

     "TYPE" shall mean, with respect to any Loan, any Alternate Base Rate Loan
or any Eurodollar Rate Loan.

     1.2 COMPUTATION OF TIME PERIODS; OTHER DEFINITIONAL PROVISIONS. In this
Agreement and the other Loan Documents in the computation of periods of time
from a specified date to a later specified date, the word "FROM" means "from and
including" and the words "TO" and "UNTIL" each mean "to but excluding".
References in the Loan Documents to any agreement or contract "AS AMENDED" shall
mean and be a reference to such agreement or contract as amended, amended and
restated, supplemented or otherwise modified from time to time in accordance
with its terms.

     1.3 ACCOUNTING TERMS. All accounting terms not specifically defined herein
shall be construed in accordance with generally accepted accounting principles
in effect from time to time in the United States of America ("GAAP"). If, at any
time after the date of this Agreement, any material change is made to GAAP or
Panhandle Eastern's or the Borrower's accounting practices that would affect in
any material respect the determination of compliance with the covenants set
forth in this Agreement, the Borrower and the Agent shall negotiate in good
faith to amend any such covenant to restore the Borrower and the Banks to the
position they occupied before the implementation of such material change in GAAP
or accounting practices if the Borrower notifies the Agent of such change (or if
the Agent notifies the Borrower that the Required Banks request an amendment to
any such covenant for such purpose); provided that, until so amended, such
covenant shall continue to be computed on the basis of GAAP as in effect and
applied immediately before such change shall have become effective.

2.   AMOUNTS AND TERMS OF THE LOANS

     2.1 THE LOANS. Each Bank severally agrees, on the terms and conditions
hereinafter set forth, to make a single Loan (a "LOAN") to the Borrower on the
Funding Date in an amount equal to such Bank's Commitment at such time. The
initial Borrowing shall consist of Loans made simultaneously by the Banks
ratably according to their Commitments. Amounts borrowed under this Section 2.1
and repaid or prepaid may not be reborrowed.

                                       15

<PAGE>

     2.2 MAKING OF THE LOANS.

          (a) The initial Borrowing shall be made on notice, given not later
     than 11:00 A.M. (New York City time) on the third Business Day prior to the
     date of such Borrowing in the case of a Borrowing consisting of Eurodollar
     Rate Loans, or not later than 9:00 A.M. (New York City time) on the date of
     such Borrowing in the case of a Borrowing consisting of Alternate Base Rate
     Loans, by the Borrower to the Agent, which shall give to each Bank prompt
     notice thereof. The notice of the initial Borrowing (the "NOTICE OF
     BORROWING") shall be in writing, in substantially the form of Exhibit B
     hereto, specifying therein the requested (i) date of such Borrowing, (ii)
     Type of Loans comprising such Borrowing, (iii) aggregate amount of such
     Borrowing, which shall not exceed the aggregate amount of the Commitments
     and (iv) in the case of a Borrowing consisting of Eurodollar Rate Loans,
     initial Interest Period for each such Loan. Each Bank shall, before 11:00
     A.M. (New York City time) on the date of such Borrowing, make available for
     the account of its Applicable Lending Office to the Agent at the Agent's
     account, in same day funds, such Bank's portion of such Borrowing in
     accordance with Section 2.1 (The Loans). After the Agent's receipt of such
     funds and upon fulfillment of the applicable conditions set forth in
     Section 4 (Conditions to Funding), the Agent will make such funds available
     to the Borrower by electronic transfer of same day funds to the Borrower's
     account.

          (b) The Notice of Borrowing shall be irrevocable and binding on the
     Borrower. If the Notice of Borrowing specifies the initial Borrowing is to
     be comprised of Eurodollar Rate Loans, the Borrower shall indemnify each
     Bank against any loss, cost or expense incurred by such Bank as a result of
     any failure to fulfill on or before the date specified in the Notice of
     Borrowing the applicable conditions set forth in Section 4 (Conditions to
     Funding), including, without limitation, any loss, cost or expense incurred
     by reason of the liquidation or reemployment of deposits or other funds
     acquired by such Bank to fund the Loan to be made by such Bank as part of
     such Borrowing when such Loan, as a result of such failure, is not made on
     such date.

          (c) Unless the Agent shall have received written notice from a Bank
     prior to the date of the initial Borrowing that such Bank will not make
     available to the Agent such Bank's ratable portion of such Borrowing, the
     Agent may assume that such Bank has made such portion available to the
     Agent on the date of such Borrowing in accordance with clause (a) of this
     Section 2.2 and the Agent may, in reliance upon such assumption, make
     available to the Borrower on such date a corresponding amount. If and to
     the extent that such Bank shall not have so made such ratable portion
     available to the Agent, such Bank and the Borrower severally agree to repay
     or pay to the Agent forthwith on demand such corresponding amount and to
     pay interest thereon, for each day from the date such amount is made
     available to the Borrower until the date such amount is repaid or paid to
     the Agent, at (i) in the case of the Borrower, the interest rate applicable
     at such time under Section 2.6 (Interest) to Loans comprising such
     Borrowing and (ii) in the case of such Bank, the Federal Funds Rate. If
     such Bank shall pay to the Agent such corresponding amount, such amount so
     paid shall constitute such Bank's Loan as part of such Borrowing for all
     purposes.

                                       16

<PAGE>

          (d) The failure of any Bank to make the Loan to be made by it as part
     of the initial Borrowing shall not relieve any other Bank of its
     obligation, if any, hereunder to make its Loan on the date of such
     Borrowing, but no Bank shall be responsible for the failure of any other
     Bank to make the Loan to be made by such other Bank on the date of such
     Borrowing.

     2.3 REPAYMENT OF LOANS. The Borrower shall repay to the Agent for the
ratable account of the Banks the aggregate outstanding principal amount of the
Loans on the Maturity Date.

     2.4 TERMINATION OF THE COMMITMENTS. The Commitment of each Bank shall be
automatically and permanently reduced to $0 on the Funding Date.

     2.5 PREPAYMENTS. The Borrower may, upon at least three Business Days'
notice in the case of Eurodollar Rate Loans and at least one Business Day's
notice in the case of Alternate Base Rate Loans, in each case to the Agent
stating the proposed date and aggregate principal amount of the prepayment, and
if such notice is given the Borrower shall, prepay the outstanding aggregate
principal amount of the Loans comprising part of the same Borrowing in whole or
ratably in part, together with accrued interest to the date of such prepayment
on the aggregate principal amount prepaid; provided, however, that (i) each
partial prepayment shall be in an aggregate principal amount of $1,000,000 in
the case of Eurodollar Rate Loans and $1,000,000 in the case of Alternate Base
Rate Loans, or in each case an integral multiple of $1,000,000 in excess thereof
and (ii) if any prepayment of a Eurodollar Rate Loan is made on a date other
than the last day of an Interest Period for such Loan, the Borrower shall also
pay any amounts owing pursuant to Section 11.2(b) (Expenses). Each such
prepayment of any Loans shall be applied to installments thereof as directed by
the Borrower. The Agent shall promptly notify each Bank of any notice received
from Borrower pursuant to this Section 2.5.

     2.6 INTEREST.

          (a) The Borrower shall pay interest on the unpaid principal amount of
     each Loan owing to each Bank from the date of such Loan until such
     principal amount shall be paid in full, at the following rates per annum:

               (i) During such periods as such Loan is an Alternate Base Rate
          Loan, a rate per annum equal at all times to the sum of (a) the
          Alternate Base Rate in effect from time to time plus (b) the
          Applicable Margin in effect from time to time, payable in arrears
          quarterly on the last day of each March, June, September and December
          during such periods and on the date such Alternate Base Rate Loan
          shall be Converted or paid in full.

               (ii) During such periods as such Loan is a Eurodollar Rate Loan,
          a rate per annum equal at all times during each Interest Period for
          such Loan to the sum of (a) the Eurodollar Rate for such Interest
          Period for such Loan 0 (b) the Applicable Margin in effect on the
          first day of such Interest Period, payable in arrears on the last day
          of such Interest Period and, if such Interest Period has a duration of
          more than three months, on each day that occurs during such Interest

                                       17

<PAGE>

          Period every three months from the first day of such Interest Period
          and on the date such Eurodollar Rate Loan shall be Converted or paid
          in full.

          (b) To the fullest extent permitted by applicable law, the amount of
     any principal, interest, fee or other amount payable under this Agreement
     or any other Loan Document to any Agent or any Bank that is not paid when
     due, from the date such amount shall be due until such amount shall be paid
     in full, payable in arrears on the date such amount shall be paid in full
     and on demand, at a rate per annum equal at all times to 2% per annum above
     the rate per annum required to be paid, in the case of principal or
     interest, on the Type of Loan relating to such principal or interest
     pursuant to clause (i) or (ii) of clause (a) above, as applicable, and, in
     all other cases, on Alternate Base Rate Loans pursuant to clause (i) of
     clause (a) above.

          (c) Promptly after receipt of the Notice of Borrowing pursuant to
     Section 2.2(a) (Making of the Loans), a notice of Conversion pursuant to
     Section 2.8 (Conversion of Loans) or a notice of selection of an Interest
     Period pursuant to the terms of the definition of "Interest Period", the
     Agent shall give notice to the Borrower and each Bank of the applicable
     Interest Period and the applicable interest rate determined by the Agent
     for purposes of clause (a)(i) or (a)(ii) above. If the Borrower shall fail
     to select the duration of any Interest Period for any Eurodollar Rate Loans
     in accordance with the provisions contained in the definition of "Interest
     Period", the Agent will forthwith so notify the Borrower and the Banks,
     whereupon the Borrower shall be deemed to have selected a one-month
     Interest Period for each such Eurodollar Rate Loan.

     2.7 FEES.

          (a) The Borrower shall pay to the Agent for its own account such fees
     as may from time to time be agreed between the Borrower and the Agent,
     including the fees specified in the Fee Letter.

          (b) All fees payable hereunder shall be paid on the dates due, in
     immediately available funds, to the Agent. Fees paid shall not be
     refundable under any circumstances.

     2.8 CONVERSION OF LOANS.

          (a) The Borrower may on any Business Day, upon notice given to the
     Agent not later than 11:00 A.M. (New York City time) on the third Business
     Day prior to the date of the proposed Conversion and subject to the
     provisions of Section 2.6 (Interest) and 2.9 (Increased Costs), Convert all
     or any portion of the Loans of one Type comprising the same borrowing into
     Loans of the other Type; provided, however, that any Conversion of
     Eurodollar Rate Loans into Alternate Base Rate Loans shall be made only on
     the last day of an Interest Period for such Eurodollar Rate Loans and each
     Conversion of Loans shall be made ratably among the Banks in accordance
     with their Pro Rata Percentages; and also provided that, upon giving effect
     to such Conversions, no more than five Interest Periods shall be in effect.
     Each such notice of Conversion shall, within the restrictions specified
     above, specify (i) the date of such Conversion, (ii) the Loans to be
     Converted and (iii) if such Conversion is into Eurodollar Rate Loans, the

                                       18

<PAGE>

     duration of the initial Interest Period for such Loans. Each notice of
     Conversion shall be in writing and shall be irrevocable and binding on the
     Borrower. The Agent shall promptly notify each Bank of any notice received
     from Borrower pursuant to this Section 2.8.

          (b) Upon the occurrence and during the continuation of any Default and
     if the Required Banks shall so direct, (i) each Eurodollar Rate Loan will
     automatically, on the last day of the then existing Interest Period
     therefor, Convert into an Alternate Base Rate Loan and (ii) the obligation
     of the Banks to make, or to Convert Loans into, Eurodollar Rate Loans shall
     be suspended.

     2.9 INCREASED COSTS, ETC.

          (a) If, due to a Change in Law, there shall be any increase in the
     cost to any Bank of agreeing to make or of making, funding or maintaining
     Eurodollar Rate Loans (excluding, for purposes of this Section 2.9, any
     such increased costs resulting from (i) Taxes or Other Taxes (as to which
     Section 2.11 (Taxes) shall govern), (ii) changes in the rate of taxation or
     basis of taxation of overall net income or overall gross income by the
     United States or by the foreign jurisdiction or state under the laws of
     which such Bank is organized or has its principal office or Applicable
     Lending Office or any political subdivision thereof and (iii) reserve
     requirements contemplated by Section 2.9(b) (Taxes)), then the Borrower
     shall from time to time, within 10 days of receipt of a certificate from
     such Bank setting forth in reasonable detail a calculation of the amount
     necessary to compensate such Bank (with a copy of such certificate to the
     Agent), pay to the Agent for the account of such Bank additional amounts
     sufficient to compensate such Bank for such increased cost; provided,
     however, that a Bank claiming additional amounts under this Section 2.9(a)
     agrees to use reasonable efforts (consistent with its internal policy and
     legal and regulatory restrictions) to designate a different Applicable
     Lending Office if the making of such a designation would avoid the need
     for, or reduce the amount of, such increased cost that may thereafter
     accrue and would not, in the reasonable judgment of such Bank, be otherwise
     disadvantageous to such Bank. A certificate as to the amount of such
     increased cost, submitted to the Borrower by such Bank, shall be conclusive
     and binding for all purposes, absent manifest error.

          (b) The Borrower shall pay to each Bank, as long as such Bank shall be
     required to maintain reserves with respect to liabilities or assets
     consisting of or including Eurocurrency funds or deposits (currently known
     as "EUROCURRENCY LIABILITIES"), additional interest on the unpaid principal
     amount of each Eurodollar Rate Loan equal to the actual costs of such
     reserves allocated to such Loan by such Bank (as determined by such Bank in
     good faith, which determination shall be conclusive), which shall be due
     and payable on each date on which interest is payable on such Loan,
     provided the Borrower shall have received at least 10 days' prior notice
     (with a copy to the Agent) of such additional interest from such Bank
     (which notice shall contain a calculation of such additional interest in
     reasonable detail). If a Bank fails to give notice 10 days prior to the
     relevant date on which interest is payable, such additional interest shall
     be due and payable 10 days from receipt of such notice.

                                       19

<PAGE>

          (c) If, with respect to any Eurodollar Rate Loans, the Majority Banks
     notify the Agent that the Eurodollar Rate for any Interest Period for such
     Loans will not adequately reflect the cost to the Banks of making, funding
     or maintaining their Eurodollar Rate Loans for such Interest Period, the
     Agent shall forthwith so notify the Borrower and the Banks, whereupon (i)
     each such Eurodollar Rate Loan will automatically, on the last day of the
     then existing Interest Period therefor, Convert into an Alternate Base Rate
     Loan and (ii) the obligation of the Banks to make, or to Convert Loans
     into, Eurodollar Rate Loans shall be suspended until the Agent shall notify
     the Borrower that the Banks have determined that the circumstances causing
     such suspension no longer exist.

          (d) Notwithstanding any other provision of this Agreement, if the
     introduction or effectiveness of or any change in or in the interpretation
     of any law or regulation shall make it unlawful, or any central bank or
     other Governmental Authority shall assert that it is unlawful, for any Bank
     or its Eurodollar Lending Office to perform its obligations hereunder to
     make Eurodollar Rate Loans or to continue to fund or maintain Eurodollar
     Rate Loans hereunder, then, on notice thereof and demand therefor by such
     Bank to the Borrower through the Agent, (i) each Eurodollar Rate Loan will
     automatically, upon such demand, Convert into an Alternate Base Rate Loan
     and (ii) the obligation of the Banks to make, or to Convert Loans into,
     Eurodollar Rate Loans shall be suspended until the Agent shall notify the
     Borrower that such Bank has determined that the circumstances causing such
     suspension no longer exist; provided, however, that, before making any such
     demand, such Bank agrees to use reasonable efforts (consistent with its
     internal policy and legal and regulatory restrictions) to designate a
     different Eurodollar Lending Office if the making of such a designation
     would allow such Bank or its Eurodollar Lending Office to continue to
     perform its obligations to make Eurodollar Rate Loans or to continue to
     fund or maintain Eurodollar Rate Loans and would not, in the judgment of
     such Bank, be otherwise disadvantageous to such Bank.

          (e) A Bank shall only be entitled to recover increased costs pursuant
     to Section 2.9 (Increased Costs) to the extent such costs were incurred
     during any time or period commencing not more than 120 days prior to the
     date on which such Bank notifies the Agent and the Borrower that it
     proposes to demand such compensation and identifies to the Agent and the
     Borrower the statute, regulation or other basis upon which the claimed
     compensation is or will be based; provided that, if the Change in Law
     giving rise to such increased costs is retroactive, then the 120-day period
     referred to above shall be extended to include the period of retroactive
     effect thereof.

     2.10 PAYMENTS AND COMPUTATIONS.

          (a) The Borrower shall make each payment hereunder and under the
     Notes, irrespective of any right of counterclaim or set-off, not later than
     12:00 P.M. (New York City time) on the day when due in U.S. dollars to the
     Agent at the Agent's account in same day funds, with payments being
     received by the Agent after such time being deemed to have been received on
     the next succeeding Business Day. The Agent will promptly thereafter cause
     like funds to be distributed (x) if such payment by the Borrower is in
     respect of principal, interest or any other Obligation then payable

                                       20

<PAGE>

     hereunder and under the Notes to more than one Bank, to such Banks for the
     account of their respective Applicable Lending Offices ratably in
     accordance with the amounts of such respective Obligations then payable to
     such Banks and (y) if such payment by the Borrower is in respect of any
     Obligation then payable hereunder to one Bank, to such Bank for the account
     of its Applicable Lending Office, in each case to be applied in accordance
     with the terms of this Agreement. Upon its acceptance of an Assignment and
     Acceptance and recording of the information contained therein in the
     Register pursuant to Section 11.14(d) (Sale or Assignment), from and after
     the effective date of such Assignment and Acceptance, the Agent shall make
     all payments hereunder and under the Notes in respect of the interest
     assigned thereby to the Bank assignee thereunder, and the parties to such
     Assignment and Acceptance shall make all appropriate adjustments in such
     payments for periods prior to such effective date directly between
     themselves.

          (b) The Borrower hereby authorizes each Bank and each of its
     Affiliates, if and to the extent payment owed to such Bank is not made when
     due hereunder or, in the case of a Bank, under the Note held by such Bank,
     to charge from time to time, to the fullest extent permitted by law,
     against any or all of the Borrower's accounts with such Bank or such
     Affiliate any amount so due.

          (c) All computations of interest based on the Prime Rate shall be made
     by the Agent on the basis of a year of 365 or 366 days, as the case may be,
     and all computations of interest based on the Eurodollar Rate or the
     Federal Funds Rate shall be made by the Agent on the basis of a year of 360
     days, in each case for the actual number of days (including the first day
     but excluding the last day) occurring in the period for which such interest
     is payable. Each determination by the Agent of an interest rate hereunder
     shall be conclusive and binding for all purposes, absent manifest error.

          (d) Whenever any payment hereunder or under the Notes shall be stated
     to be due on a day other than a Business Day, such payment shall be made on
     the next succeeding Business Day, and such extension of time shall in such
     case be included in the computation of payment of interest; provided,
     however, that if such extension would cause payment of interest on or
     principal of Eurodollar Rate Loans to be made in the next following
     calendar month, such payment shall be made on the next preceding Business
     Day.

          (e) Unless the Agent shall have received notice from the Borrower
     prior to the date on which any payment is due to any Bank hereunder that
     the Borrower will not make such payment in full, the Agent may assume that
     the Borrower has made such payment in full to the Agent on such date and
     the Agent may, in reliance upon such assumption, cause to be distributed to
     each such Bank on such due date an amount equal to the amount then due such
     Bank. If and to the extent the Borrower shall not have so made such payment
     in full to the Agent, each such Bank shall repay to the Agent forthwith on
     demand such amount distributed to such Bank together with interest thereon,
     for each day from the date such amount is distributed to such Bank until
     the date such Bank repays such amount to the Agent, at the Federal Funds
     Rate.

                                       21

<PAGE>

          (f) If the Agent receives funds for application to the Obligations of
     the Loan Parties under or in respect of the Loan Documents under
     circumstances for which the Loan Documents do not specify the Loans to
     which, or the manner in which, such funds are to be applied, the Agent may,
     but shall not be obligated to, elect to distribute such funds to each of
     the Banks in accordance with such Bank's pro rata share of the aggregate
     principal amount of all Loans outstanding at such time, for application to
     such principal repayment installments thereof, as the Agent shall direct.

     2.11 TAXES.

          (a) Any and all payments by any Loan Party to or for the account of
     any Bank or any Agent hereunder or under the Notes or any other Loan
     Document shall be made, in accordance with Section 2.10 (Payments and
     Computations) or the applicable provisions of such other Loan Document, if
     any, free and clear of and without deduction for any and all present or
     future taxes, levies, imposts, deductions, charges or withholdings, and all
     liabilities with respect thereto, excluding, in the case of each Bank and
     each Agent, taxes that are imposed on its overall net income by the United
     States (and franchise taxes imposed in lieu thereof) and taxes that are
     imposed on its overall net income (and franchise taxes imposed in lieu
     thereof) by the state or foreign jurisdiction under the laws of which such
     Bank or such Agent, as the case may be, is organized or any political
     subdivision thereof and, in the case of each Bank, taxes that are imposed
     on its overall net income (and franchise taxes imposed in lieu thereof) by
     the state or foreign jurisdiction of such Bank's principal office or
     Applicable Lending Office or any political subdivision thereof (all such
     non-excluded taxes, levies, imposts, deductions, charges, withholdings and
     liabilities in respect of payments hereunder or under the Notes being
     hereinafter referred to as "TAXES"). If any Loan Party shall be required by
     law to deduct any Taxes from or in respect of any sum payable hereunder or
     under any Note or any other Loan Document to any Bank or any Agent, (i) the
     sum payable by such Loan Party shall be increased as may be necessary so
     that after such Loan Party and the Agent have made all required deductions
     (including deductions applicable to additional sums payable under this
     Section 2.11) such Bank or such Agent, as the case may be, receives an
     amount equal to the sum it would have received had no such deductions been
     made, (ii) such Loan Party shall make all such deductions and (iii) such
     Loan Party shall pay the full amount deducted to the relevant taxation
     authority or other authority in accordance with applicable law.

          (b) In addition, a Loan Party shall pay any present or future stamp,
     documentary, excise, property or similar taxes, charges or levies that
     arise from any payment made by such Loan Party hereunder or under any Notes
     or any other Loan Documents or from the execution, delivery or registration
     of, performance under, or otherwise with respect to, this Agreement, the
     Notes or the other Loan Documents (hereinafter referred to as "OTHER
     TAXES").

          (c) Panhandle Eastern, Borrower and TLNG shall indemnify each Bank and
     each Agent for and hold them harmless against the full amount of Taxes and
     Other Taxes, imposed on or paid by such Bank or such Agent (as the case may
     be) with respect to any payment by or on account of any obligation of the
     Loan Parties hereunder (including

                                       22

<PAGE>

     Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts
     payable under this Section 2.11) and any liability (including penalties,
     additions to tax, interest and expenses) arising therefrom or with respect
     thereto. This indemnification shall be made within 30 days from the date
     such Bank or such Agent (as the case may be) makes written demand therefor.

          (d) Within 30 days after the date of any payment of Taxes, the
     appropriate Loan Party shall furnish to the Agent, at its address referred
     to in Section 11.3 (Notices), the original or a certified copy of a receipt
     evidencing such payment, to the extent such a receipt is issued therefor,
     or other written proof of payment thereof that is reasonably satisfactory
     to the Agent. In the case of any payment hereunder or under the Notes or
     the other Loan Documents by or on behalf of a Loan Party through an account
     or branch outside the United States or by or on behalf of a Loan Party by a
     payor that is not a United States person, if such Loan Party determines
     that no Taxes are payable in respect thereof, such Loan Party shall
     furnish, or shall cause such payor to furnish, to the Agent, at such
     address, an opinion of counsel reasonably acceptable to the Agent stating
     that such payment is exempt from Taxes. For purposes of subsections (d) and
     (e) of this Section 2.11, the terms "UNITED STATES" and "UNITED STATES
     PERSON" shall have the meanings specified in Section 7701 of the Internal
     Revenue Code.

          (e) Each Bank organized under the laws of a jurisdiction outside the
     United States shall, on or prior to the date of its execution and delivery
     of this Agreement or on the date of the Assignment and Acceptance pursuant
     to which it becomes a Bank, as the case may be, and from time to time
     thereafter as reasonably requested in writing by a Loan Party (but only so
     long thereafter as such Bank remains lawfully able to do so), or upon the
     obsolescence or invalidity of any form previously provided provide each of
     the Agent and such Loan Party with two original Internal Revenue Service
     Forms W-8BEN or W-8ECI, as appropriate, or any other form prescribed by the
     Internal Revenue Service, certifying that such Bank is exempt from or
     entitled to a reduced rate of United States withholding tax on payments
     pursuant to this Agreement or the Notes or any other Loan Document, or (in
     the case of a Bank that is claiming exemption from U.S. federal withholding
     with respect to payments of "portfolio interest" and has certified in
     writing to the Agent that it is not (i) a "bank" as defined in Section
     881(c)(3)(A) of the Internal Revenue Code, (ii) a 10-percent shareholder
     (within the meaning of Section 871(h)(3)(B) of the Internal Revenue Code)
     of such Loan Party or (iii) a controlled foreign corporation related to
     such Loan Party (within the meaning of Section 864(d)(4) of the Internal
     Revenue Code)) Internal Revenue Service Form W-8BEN, or any successor or
     other form prescribed by the Internal Revenue Service, or, in the case of a
     Bank that has certified that it is not a "bank" as described above,
     certifying that such Bank is a foreign corporation, partnership, estate or
     trust. If the forms provided by a Bank at the time such Bank first becomes
     a party to this Agreement indicate a United States interest withholding tax
     rate in excess of zero, withholding tax at such rate shall be considered
     excluded from Taxes unless and until such Bank provides the appropriate
     forms certifying that a lesser rate applies, whereupon withholding tax at
     such lesser rate only shall be considered excluded from Taxes for periods
     governed by such forms; provided, however, that if, at the effective date
     of the Assignment and Acceptance pursuant to which a Bank becomes a party
     to this Agreement, the Bank assignor was entitled to

                                       23

<PAGE>

     payments under subsection (a) of this Section 2.11 in respect of United
     States withholding tax with respect to interest paid at such date, then, to
     such extent, the term Taxes shall include (in addition to withholding taxes
     that may be imposed in the future or other amounts otherwise includable in
     Taxes) United States withholding tax, if any, applicable with respect to
     the Bank assignee on such date. If any form or document referred to in this
     subsection (e) requires the disclosure of information, other than
     information necessary to compute the tax payable and information required
     on the date hereof by Internal Revenue Service Form W-8BEN or W-8ECI or the
     related certificate described above, that the applicable Bank reasonably
     considers to be confidential, such Bank shall give notice thereof to the
     applicable Loan Party and shall not be obligated to include in such form or
     document such confidential information.

          (f) For any period with respect to which a Bank has failed to provide
     a Loan Party with the appropriate form, certificate or other document
     described in subsection (e) above (other than if such failure is due to a
     change in law, or in the interpretation or application thereof, occurring
     after the date on which a form, certificate or other document originally
     was required to be provided or if such form, certificate or other document
     otherwise is not required under subsection (e) above), such Bank shall not
     be entitled to indemnification under subsection (a) or (c) of this Section
     2.11 with respect to Taxes imposed by the United States by reason of such
     failure; provided, however, that should a Bank become subject to Taxes
     because of its failure to deliver a form, certificate or other document
     required hereunder, the Loan Parties shall, at the sole expense of such
     Bank, take such steps as such Bank shall reasonably request to assist such
     Bank to recover such Taxes.

          (g) Any Bank claiming any additional amounts payable pursuant to this
     Section 2.11 agrees to use reasonable efforts (consistent with its internal
     policy and legal and regulatory restrictions) to change the jurisdiction of
     its Applicable Lending Office or assign its rights and obligations under
     this Agreement to another of its offices, branches or Affiliates if the
     making of such a change or assignment would avoid the need for, or reduce
     the amount of, any such additional amounts that may thereafter accrue and
     would not, in the reasonable judgment of such Bank, be otherwise
     disadvantageous to such Bank.

          (h) If a Bank or Agent actually receives a refund of any Taxes or
     Other Taxes as to which it has been indemnified by a Loan Party or with
     respect to which a Loan Party has paid additional amounts pursuant to this
     Section 2.11, it shall pay over such refund to the Loan Party (but only to
     the extent of indemnity payments made, or additional amounts paid, by the
     Loan Party under this Section 2.11 with respect to the Taxes or Other Taxes
     giving rise to such refund), net of all out-of-pocket expenses of the Agent
     or such Bank or Agent and without interest (other than any interest paid by
     the relevant Governmental Authority with respect to such refund); provided
     that the Loan Party, upon the request of the Agent or such Bank or Agent,
     agrees to repay the amount paid over to the Loan Party (plus any penalties,
     interest or other charges imposed by the relevant Governmental Authority)
     to the Agent or such Bank or Agent in the event the Agent or such Bank or
     Agent is required to repay such refund to such Governmental Authority. This
     Section 2.11(h) shall not be construed to require the Agent or any Bank

                                       24

<PAGE>

     or Agent to claim a refund or make available its tax returns (or any other
     information relating to its taxes which it deems confidential) to the Loan
     Parties or any other Person.

     2.12 SHARING OF PAYMENTS, ETC. If any Bank shall obtain at any time any
payment (whether voluntary, involuntary, through the exercise of any right of
set-off, or otherwise, other than as a result of an assignment pursuant to
Section 11.14 (Sale and Assignment)) (a) on account of Obligations due and
payable to such Bank hereunder and under the Notes and the other Loan Documents
at such time in excess of its ratable share (according to the proportion of (i)
the amount of such Obligations due and payable to such Bank at such time to (ii)
the aggregate amount of the Obligations due and payable to all Banks hereunder
and under the Notes and the other Loan Documents at such time) of payments on
account of the Obligations due and payable to all Banks hereunder and under the
Notes at such time obtained by all the Banks at such time or (b) on account of
Obligations owing (but not due and payable) to such Bank hereunder and under the
Notes and the other Loan Documents at such time in excess of its ratable share
(according to the proportion of (i) the amount of such Obligations owing to such
Bank at such time to (ii) the aggregate amount of the Obligations owing (but not
due and payable) to all Banks hereunder and under the Notes and the other Loan
Documents at such time) of payments on account of the Obligations owing (but not
due and payable) to all Banks hereunder and under the Notes at such time
obtained by all of the Banks at such time, such Bank shall forthwith purchase
from the other Banks such interests or participating interests in the
Obligations due and payable or owing to them, as the case may be, as shall be
necessary to cause such purchasing Bank to share the excess payment ratably with
each of them; provided, however, that if all or any portion of such excess
payment is thereafter recovered from such purchasing Bank, such purchase from
each other Bank shall be rescinded and such other Bank shall repay to the
purchasing Bank the purchase price to the extent of such Bank's ratable share
(according to the proportion of (i) the purchase price paid to such Bank to (ii)
the aggregate purchase price paid to all Banks) of such recovery together with
an amount equal to such Bank's ratable share (according to the proportion of (i)
the amount of such other Bank's required repayment to (ii) the total amount so
recovered from the purchasing Bank) of any interest or other amount paid or
payable by the purchasing Bank in respect of the total amount so recovered;
provided, further that, so long as the Obligations under the Loan Documents
shall not have been accelerated, any excess payment received by any Bank shall
be shared on a pro rata basis only with other Banks. The Borrower agrees that
any Bank so purchasing an interest or participating interest from another Bank
pursuant to this Section 2.12 may, to the fullest extent permitted by law,
exercise all its rights of payment (including the right of set-off) with respect
to such interest or participating interest, as the case may be, as fully as if
such Bank were the direct creditor of the Borrower in the amount of such
interest or participating interest, as the case may be.

     2.13 USE OF PROCEEDS. The Borrower agrees that the proceeds of the Loans
shall be used to repay in full the existing Debt of the Borrower under its
Credit Agreement dated as of December 21, 2001 by and among the Borrower, as the
borrower, TLNG, as the guarantor, the lenders party thereto, and Credit Suisse
First Boston, as the administrative agent, the collateral agent and the issuing
bank (the "EXISTING CREDIT AGREEMENT").

                                       25

<PAGE>

     2.14 EVIDENCE OF DEBT.

          (a) (i) Each Bank shall maintain in accordance with its usual practice
     an account or accounts evidencing the indebtedness of the Borrower to such
     Bank resulting from each Loan owing to such Bank from time to time,
     including the amounts of principal and interest payable and paid to such
     Bank from time to time hereunder. The Borrower agrees that upon request by
     any Bank to the Borrower (with a copy of such request to the Agent) to the
     effect that a promissory note or other evidence of indebtedness is required
     or appropriate in order for such Bank to evidence (whether for purposes of
     pledge, enforcement or otherwise) the Loans owing to, or to be made by,
     such Bank, the Borrower shall promptly execute and deliver to such Bank,
     with a copy to the Agent, a Note payable to the order of such Bank in a
     principal amount equal to the Loans of such Bank. All references to Notes
     in the Loan Documents shall mean Notes, if any, to the extent issued
     hereunder.

          (b) The Register maintained by the Agent pursuant to Section 11.14(d)
     (Sale and Assignment) shall include a control account, and a subsidiary
     account for each Bank, in which accounts (taken together) shall be recorded
     (i) the date and amount of each Borrowing made hereunder, the Type of Loans
     comprising such Borrowing and, if appropriate, the Interest Period
     applicable thereto, (ii) the terms of each Assignment and Acceptance
     delivered to and accepted by it, (iii) the amount of any principal or
     interest due and payable or to become due and payable from the Borrower to
     each Bank hereunder, and (iv) the amount of any sum received by the Agent
     from the Borrower hereunder and each Bank's share thereof.

          (c) Entries made in good faith by the Agent in the Register pursuant
     to subsection (b) above, and by each Bank in its account or accounts
     pursuant to subsection (a) above, shall be prima facie evidence of the
     amount of principal and interest due and payable or to become due and
     payable from the Borrower to, in the case of the Register, each Bank and,
     in the case of such account or accounts, such Bank, under this Agreement,
     absent manifest error; provided, however, that the failure of the Agent or
     such Bank to make an entry, or any finding that an entry is incorrect, in
     the Register or such account or accounts shall not limit or otherwise
     affect the obligations of the Borrower under this Agreement.

     2.15 REPLACEMENT OF BANKS. If (a) any Bank requests compensation under
Section 2.9 (Increased Costs) or asserts, pursuant to Section 2.9(d) that it is
unlawful for such Bank to make Eurodollar Rate Loans, (b) the Borrower is
required to pay any additional amount to any Bank or any Governmental Authority
for the account of any Bank pursuant to Section 2.11 (Taxes), (c) any Bank
defaults in its obligation to fund Loans hereunder, or (d) with respect of any
Bank that does not approve any amendment or waiver of any provision of any Loan
Document that requires the unanimous consent of all of the Banks pursuant to
Section 11.1 (Amendments; Waivers, Etc.), if such amendment or waiver is agreed
to by the Required Banks, then the Borrower may, at its sole expense, upon prior
notice to such Bank and the Agent, require such Bank to assign and delegate,
without recourse (in accordance with and subject to the restrictions contained
in Section 11.14 (Sale and Assignment)), all its interests, rights and
obligations under this Agreement to an assignee that shall assume such
obligations (which

                                       26

<PAGE>

assignee may be another Bank, if a Bank accepts such assignment); provided that
(i) to the extent required under Section 11.14 (Sale and Assignment), the
Borrower shall have received the prior written consent of the Agent, which
consent shall not unreasonably be withheld, (ii) such Bank shall have received
payment of an amount equal to the outstanding principal of its Loans, accrued
interest thereon, accrued fees and all other amounts payable to it hereunder,
from the assignee (to the extent of such outstanding principal and accrued
interest and fees) or the Borrower (in the case of all other amounts) and (iii)
in the case of any such assignment resulting from a claim for compensation under
Section 2.9 (Increased Costs) or payments required to be made pursuant to
Section 2.11 (Taxes), such assignment will result in a reduction in such
compensation or payments. A Bank shall not be required to make any such
assignment and delegation if, prior thereto, as a result of a waiver by such
Bank or otherwise, the circumstances entitling the Borrower to require such
assignment and delegation cease to apply.

3.   REPRESENTATIONS AND WARRANTIES OF THE LOAN PARTIES

     Each of Panhandle Eastern, Borrower and TLNG represents and warrants that:

     3.1 ORGANIZATION AND QUALIFICATION. Such Loan Party:

          (a) is duly organized, validly existing, and in good standing under
     the laws of its state of organization;

          (b) has the corporate or organizational power to own its properties
     and to carry on its respective businesses as now conducted; and

          (c) is duly qualified as a foreign limited partnership or limited
     liability company, as applicable, to do business and is in good standing in
     every jurisdiction where such qualification is necessary except when the
     failure to so qualify would not or does not have a Material Adverse Effect.

The Borrower has the Subsidiaries as applicable listed on Schedule 3.1 attached
hereto and made a part hereof for all purposes, and no others, each of which is
a Delaware limited liability company unless otherwise noted on Schedule 3.1.

     3.2 AUTHORIZATION, VALIDITY, ETC. Each such Loan Party has the limited
liability company or limited partnership power and authority to make, execute,
deliver and perform under this Agreement and the Loan Documents to which it is a
party and the transactions contemplated herein and therein, and all such action
has been duly authorized by all necessary limited partnership or limited
liability company proceedings on its part. Each Loan Document has been duly and
validly executed and delivered by such Loan Party and constitutes the valid and
legally binding agreement of such Loan Party enforceable against such Loan Party
in accordance with its terms, except as limited by Debtor Laws.

     3.3 CONFLICTING OR ADVERSE AGREEMENTS OR RESTRICTIONS. No Loan Party is a
party to any contract or agreement or subject to any restriction which would
materially adversely affect the ability of any Loan Party to perform its
obligations under the Loan Documents to which it is a party. Neither the
execution and delivery of this Agreement or any other Loan Document by any Loan
Party that is or is to become a party thereto, nor the consummation of the
transactions

                                       27

<PAGE>

contemplated hereby or thereby, nor the fulfillment of and compliance with the
respective terms, conditions and provisions hereof or thereof or of any
instruments required hereby will conflict with or result in a breach of any of
the terms, conditions or provisions of, or constitute a default under, or result
in any violation of, or result in the creation or imposition of any lien (other
than as contemplated or permitted by this Agreement) on any of the property of
such Loan Party pursuant to (a) the charter or bylaws or similar organizational
documents applicable to such Loan Party; (b) any law or any regulation of any
Government Authority; (c) any order, writ, injunction or decree of any court; or
(d) the terms, conditions or provisions of any agreement or instrument to which
such Loan Party is a party or by which it is bound or to which it is subject,
except in the case of clauses (b), (c) and (d) for conflicts, breaches,
defaults, violations or the creation or imposition of liens that could not be
reasonably expected to have a Material Adverse Effect.

     3.4 NO CONSENTS REQUIRED. No action, approval, consent, waiver, exemption,
variance, franchise, order, permit, authorization, right or license of or from a
Governmental Authority, and no notice to or filing with, any Governmental
Authority (including without limitation the SEC under PUHCA) or any other third
party is required for (a) the due execution, delivery or performance by any Loan
Party of any Loan Document to which it is or is to be a party, or for the
consummation of the transactions contemplated hereby, including without
limitation the incurrence of Debt under this Agreement and the borrowing and
repayment of Loans hereunder; or (b) the exercise by any Agent or any Bank of
its rights under the Loan Documents, except for those authorizations, approvals,
actions, notices and filings (A) which have been duly obtained or made or which
are not required under the terms of the Loan Documents to have been obtained or
made on or prior to such date or (B) with respect to the consummation of the
transactions contemplated hereby, the failure of which to be obtained or made
could not reasonably be expected to have a Material Adverse Effect.

     3.5 FINANCIAL STATEMENTS.

          (a) Panhandle Eastern has furnished the Banks with its audited
     financial report as of the fiscal year ending December 31, 2004. These
     statements are complete and correct and present fairly, in all material
     respects, in accordance with GAAP, consistently applied throughout the
     periods involved, the Consolidated financial position of Panhandle Eastern
     and its Subsidiaries and the results of their operations as at the dates
     and for the periods indicated.

          (b) The Borrower has furnished the Banks with the Borrower's unaudited
     financial report as of the fiscal year ending December 31, 2004. These
     statements are complete and correct and present fairly, in all material
     respects, in accordance with GAAP, consistently applied throughout the
     periods involved, the Consolidated financial position of the Borrower and
     its Subsidiary and the results of their operations as at the dates and for
     the periods indicated.

          (c) Since December 31, 2004, there has not occurred any event or
     condition which, individually or in the aggregate, has resulted in, or
     could reasonably be expected to result in, a Material Adverse Change
     respecting Panhandle Eastern, Borrower or TLNG.

                                       28

<PAGE>

     3.6 LITIGATION. Except as disclosed on Schedule 3.6 or pursuant to Section
3.17 (Environmental Matters), there is no: (a) action or proceeding pending or,
to the knowledge of Panhandle Eastern, Borrower and TLNG, threatened against any
Loan Party before any court, administrative agency or arbitrator which is
reasonably expected to have a Material Adverse Effect; (b) unsatisfied judgment
outstanding against such Loan Party for the payment of money; or (c) other
outstanding judgment, order or decree affecting such Loan Party before or by any
administrative or governmental authority, compliance with or satisfaction of
which may reasonably be expected to have a Material Adverse Effect.

     3.7 DEFAULT. No Loan Party is in default under or in violation of the
provisions of any instrument evidencing any Debt or of any agreement relating
thereto or any judgment, order, writ, injunction or decree of any court or any
order, regulation or demand of any administrative or governmental
instrumentality, which default or violation could reasonably be expected to have
a Material Adverse Effect.

     3.8 COMPLIANCE. Each Loan Party is in compliance with all laws, regulations
and orders of any Governmental Authority applicable to it or its 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.

     3.9 TITLE TO ASSETS. Each Loan Party has good title to its respective
assets, subject to no Liens except those permitted in Section 6.2 (Liens, Etc.)
and Section 7.1 (Liens, Etc.) and Permitted Encumbrances. For purposes of this
Section 3.9, "PERMITTED ENCUMBRANCES" shall mean easements, rights-of-way,
restrictions, minor defects or irregularities in title and other similar charges
or encumbrances not interfering in any material respect with the ordinary
conduct of the business of such Loan Party.

     3.10 PAYMENT OF TAXES. Each Loan Party has filed all material tax returns
required to be filed and has paid all taxes shown on said returns and all
assessments which are due and payable (except such as are being contested in
good faith by appropriate proceedings for which adequate reserves for their
payment have been provided in a manner consistent with the accounting practices
followed by the applicable Loan Party as of December 31, 2004). No Loan Party is
aware of any pending investigation by any taxing authority or of any claims by
any Governmental Authority for any unpaid taxes. Except as disclosed on Schedule
3.10, no Loan Party is party to any tax sharing agreement or arrangement.

     3.11 INVESTMENT COMPANY ACT NOT APPLICABLE. No Loan Party is an "investment
company" or a company "controlled" by an "investment company", within the
meaning of the Investment Company Act of 1940, as amended.

     3.12 PUBLIC UTILITY HOLDING COMPANY ACT NOT APPLICABLE. No Loan Party is a
"holding company", or a "subsidiary company" of a "holding company", or an
"affiliate" of a "holding company", or an "affiliate" of a "subsidiary company"
of a "holding company", as such terms are defined in the Public Utility Holding
Company Act of 1935, as amended.

     3.13 REGULATIONS G, T, U AND X. No Loan shall be a "purpose credit secured
directly or indirectly by margin stock" within the meaning of Regulation U of
the Board of

                                       29

<PAGE>

Governors of the Federal Reserve System ("margin stock"); none of the proceeds
of any Loan will be used by any Loan Party to extend credit to others for the
purpose of purchasing or carrying any margin stock, or for any other purpose
which would constitute this transaction a "purpose credit secured directly or
indirectly by margin stock" within the meaning of said Regulation U, as now in
effect or as the same may hereafter be in effect. No Loan Party will take or
permit any action which would involve the Banks in a violation of Regulation G,
Regulation T, Regulation U, Regulation X or any other regulation of the Board of
Governors of the Federal Reserve System or a violation of the Securities
Exchange Act of 1934, in each case as now or hereafter in effect.

     3.14 ERISA. No Reportable Event (as defined in Section 4043(c) of ERISA)
has occurred with respect to any Plan. Except as provided in Disclosure Schedule
3.14, each Plan complies in all material respects with applicable provisions of
ERISA, and each Loan Party has filed all reports required by ERISA and the Code
to be filed with respect to each Plan. Except as provided in Disclosure Schedule
3.14, no Loan Party has any knowledge of any event which could result in a
liability of a Loan Party to the Pension Benefit Guaranty Corporation. Each Loan
Party has met all requirements with respect to funding the Plans imposed by
ERISA or the Code. Since the effective date of Title IV of ERISA, there have not
been any, nor are there now existing any, events or conditions that would permit
any Plan to be terminated under circumstances which would cause the lien
provided under Section 4068 of ERISA to attach to any property of a Loan Party.

     3.15 NO FINANCING OF CERTAIN SECURITY ACQUISITIONS. None of the proceeds of
any Loan will be used to acquire any security in any transaction that is subject
to Section 13 or Section 14 of the Securities Exchange Act of 1934, as amended.

     3.16 FRANCHISES, CO-LICENSES, ETC. Each Loan Party owns or has obtained all
the material governmental permits, certificates of authority, leases, patents,
trademarks, service marks, trade names, copyrights, franchises and licenses, and
rights with respect thereto, required or necessary (or, in the sole and
independent judgment of the Borrower, prudent) in connection with the conduct of
their respective businesses as presently conducted or as proposed to be
conducted, except where the failure to have any of the foregoing could not be
reasonably expected to have a Material Adverse Effect.

     3.17 ENVIRONMENTAL MATTERS. Except as disclosed in Schedule 3.17(b), (a)
all facilities and property owned or leased by a Loan Party have been and
continue to be, owned or leased and operated by such Loan Party in material
compliance with all Environmental Laws; (b) there has not been (during the
period of such Loan Party's ownership or lease) any Release of Hazardous
Materials at, on, under or from any property now (or, to such Loan Party's
knowledge, previously) owned or leased by such Loan Party (i) that required, or
may reasonably be expected to require, such Loan Party to expend funds on
remediation or cleanup activities pursuant to any Environmental Law except for
remediation or clean-up activities that would not be reasonably expected to have
a Material Adverse Effect, or (ii) that otherwise, singly or in the aggregate,
has, or may reasonably be expected to have, a Material Adverse Effect; (c) each
Loan Party has been issued and is in material compliance with all permits,
certificates, approvals, orders, licenses and other authorizations relating to
environmental matters necessary for the conduct of its businesses; (d) there are
no polychlorinated biphenyls (PCB's) or asbestos-

                                       30

<PAGE>

containing materials or surface impoundments in any of the facilities now (or,
to the knowledge of such Loan Party, previously) owned or leased by such Loan
Party, except for PCB's and asbestos-containing materials of the type and in
quantities that, to the knowledge of such Loan Party, do not currently require
remediation, and if remediation of such PCB's and asbestos-containing materials
is hereafter required for any reason, such remediation activities would not
reasonably be expected to have a Material Adverse Effect; (e) Hazardous
Materials have not been generated, used, treated, recycled, stored or disposed
of at, on, under or from any of the facilities or property now (or, to the
knowledge of such Loan Party, previously) owned or leased by such Loan Party
during the time of such Loan Party's ownership or lease of such property that
may require remediation or clean-up activities that would be reasonably expected
to have a Material Adverse Effect; and (f) all underground storage tanks located
on the property now (or, to the knowledge of such Loan Party, previously) owned
or leased by such Loan Party have been (and to the extent currently owned or
leased are) operated in material compliance with all applicable Environmental
Laws.

     3.18 BORROWER LIENS. After application of the proceeds from the Loan to the
repayment of the Existing Debt, there shall not exist any Liens on any Property
of the Borrower or its Subsidiaries.

     3.19 DISCLOSURE. No written information (other than any projections)
concerning any Loan Party and the transactions contemplated hereby furnished by
or on behalf of such Loan Party to the Agent or any Bank in connection with the
negotiation of this Agreement or delivered hereunder (as modified or
supplemented by other information so furnished), taken as a whole, contains any
untrue statement of a material fact or omits to state a material fact necessary
in order to make the statements contained therein not misleading in any material
respect in light of the circumstances under which such statements were or are
made. The projections were prepared by or on behalf of each Loan Party in good
faith based upon assumptions that such Loan Party believes to be reasonable as
of the Closing Date and the Funding Date (it being understood that such
projections are subject to significant uncertainties and contingencies, many of
which are beyond such Loan Party's control, and accordingly no assurance can be
given and no representations are made that the assumptions are correct or that
the projections will be realized).

     3.20 INSURANCE. Each Loan Party has insurance with a responsible and
reputable insurer covering its assets against loss or damage of the kinds
customarily insured against by companies similarly situated in the industry in
which such Person conducts its business, in such amounts and with such
deductibles as are customary for similarly situated companies; and such Person
(a) has not received notice from any insurer or agent of such insurer that any
material capital improvements or other material expenditures are required or
necessary to be made in order to continue such insurance or (b) does not have
any reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage at
commercially available rates from similar insurers as may be necessary to
continue its business.

     3.21 SUBSIDIARIES. TLNG is wholly owned by the Borrower. The Borrower is
wholly owned by Panhandle Eastern.

                                       31

<PAGE>

4.   CONDITIONS TO FUNDING

     The obligation of the Banks to make any Loans is subject to the following
conditions:

     4.1 REPRESENTATIONS TRUE AND NO DEFAULTS.

          (a) The representations and warranties contained in Section 3
     (Representations and Warranties of the Loan Parties) shall be true and
     correct on and as of the Funding Date as though made on and as of each such
     date;

          (b) None of Panhandle Eastern, Borrower or TLNG shall be in default in
     the due performance of any covenant on its part contained in this
     Agreement;

          (c) No Material Adverse Change shall have occurred with respect to (i)
     Panhandle Eastern reflected in the Consolidated annual financial statements
     of Panhandle Eastern dated December 31, 2004 (copies of such audited
     financial statements having been supplied to the Agent and each Bank) or
     (ii) the Borrower reflected in the Consolidated annual financial statements
     of the Borrower dated December 31, 2004 (copies of such unaudited financial
     statements having been supplied to the Agent and each Bank); and

          (d) No Event of Default or Default shall have occurred and be
     continuing.

     4.2 INTENTIONALLY OMITTED.

     4.3 COMPLIANCE WITH LAW. The business and operations of each Loan Party as
conducted at all times relevant to the transactions contemplated by this
Agreement to and including the close of business on the Funding Date shall have
been and shall be in compliance in all material respects with all applicable
State and Federal laws, regulations and orders affecting such Loan Party and the
business and operations of any of them.

     4.4 NOTICE OF BORROWING AND OTHER DOCUMENTS. The Banks shall have received
(a) the Notice of Borrowing; and (b) such other documents and certificates
relating to the transactions herein contemplated as the Banks may reasonably
request.

     4.5 PAYMENT OF FEES AND EXPENSES. The Borrower shall have paid (a) all
expenses of the type described in Section 11.2 (Reimbursement of Expenses)
through the date of such Loan and (b) all closing, structuring and other
invoiced fees owed as of the Funding Date to the Agent or any of the Banks by
the Borrower under this Agreement or any other written agreement between a Loan
Party and the Agent, the applicable Bank(s), or any of their Affiliates.

     4.6 REPAYMENT OF DEBT. Simultaneously with the funding of the Loans, (i)
the Borrower shall repay all of the obligations under the Existing Credit
Agreement and the commitments of the lenders thereunder shall be terminated,
(ii) the Borrower shall terminate, or shall have terminated, all of its Hedge
Agreements, (iii) the Agent shall receive a "pay-off" letter reasonably
satisfactory to it with respect to the Existing Credit Agreement, and (iv) there
shall be in place arrangements for the release of any liens and security
interests in respect of the Existing Credit Agreement satisfactory to the Agent.

                                       32

<PAGE>

     4.7 LOAN DOCUMENTS, OPINIONS AND OTHER INSTRUMENTS. As of the Funding Date,
the Loan Parties shall have delivered to the Agent the following:

          (a) this Agreement, each of the Notes and all other Loan Documents
     required by the Agent and the Banks to be executed and delivered by the
     applicable Loan Parties in connection with this Agreement;

          (b) a certificate from the Secretary of State of the State of Delaware
     as to the continued existence and good standing of Panhandle Eastern,
     Borrower and TLNG in the State of Delaware;

          (c) a certificate from Secretary of State of the States of Louisiana
     and Texas as to the good standing of TLNG as a foreign entity to do
     business in each such State;

          (d) a Secretary's Certificate executed by the duly elected Secretary
     or a duly elected Assistant Secretary of Panhandle Eastern, Borrower and
     TLNG, in a form acceptable to the Agent, whereby such Secretary or
     Assistant Secretary certifies that one or more resolutions adopted by the
     Board of Managers of such Loan Party (or, in the case of Panhandle Eastern,
     the Board of Managers of its general partner) remain in full force and
     effect authorizing such Loan Party to enter into the transactions
     contemplated hereby and perform its obligations under the Loan Documents;
     and

          (e) a legal opinion from in-house counsel for the Borrower and each
     Guarantor, dated as of the Funding Date, addressed to the Agent and the
     Banks and otherwise acceptable in all respects to the Agent in its
     discretion.

5.   AFFIRMATIVE COVENANTS OF THE LOAN PARTIES

     Each of Panhandle Eastern, Borrower and TLNG covenants and agrees that, so
long as the Borrower may borrow hereunder and until payment in full of the
Obligations, each of Panhandle Eastern, Borrower and/or TLNG, as applicable,
will:

     5.1 FINANCIAL STATEMENTS AND INFORMATION. DELIVER TO THE BANKS:

          (a) as soon as available, and in any event within 120 days after the
     end of each fiscal year of Panhandle Eastern, a copy of the annual audit
     report of Panhandle Eastern and its Subsidiaries for such fiscal year
     containing a balance sheet, statement of income and stockholders equity and
     a cash flow statement, all in reasonable detail and certified by
     PriceWaterhouseCoopers or another independent certified public accountant
     of recognized standing reasonably satisfactory to the Banks; and

          (b) as soon as available, and in any event within 120 days after the
     end of each fiscal year of the Borrower, an unaudited financial report of
     the Borrower and its Subsidiary for such fiscal year containing a balance
     sheet, statement of income and stockholders equity and cash flow statement,
     all in reasonable detail and certified by a financial officer of such Loan
     Party to have been prepared in accordance with GAAP, except as may be
     explained in such certificate; and

                                       33

<PAGE>

          (c) as soon as available, and in any event within 60 days after the
     end of each quarterly accounting period in each fiscal year of Panhandle
     Eastern and the Borrower (excluding the fourth quarter), an unaudited
     financial report of Panhandle Eastern and its Subsidiaries and the Borrower
     and its Subsidiaries as at the end of such quarter and for the period then
     ended, containing a balance sheet, statements of income and stockholders
     equity and a cash flow statement, all in reasonable detail and certified by
     a financial officer of such Loan Party to have been prepared in accordance
     with GAAP, except as may be explained in such certificate; and

          (d) such additional financial or other information as the Banks may
     reasonably request.

All financial statements specified in clauses (a), (b) and (c) above shall be
furnished in Consolidated form for Panhandle Eastern and its Subsidiaries and
the Borrower and its Subsidiaries with comparative Consolidated figures for the
corresponding period in the preceding year. Together with each delivery of
financial statements required by clauses (a), (b) and (c) above, each of
Panhandle Eastern and the Borrower, as applicable, will deliver to the Banks an
Officer's Certificate stating that there exists no Event of Default or Default,
or, if any such Event of Default or Default exists, stating the nature thereof,
the period of existence thereof and what action the Borrower has taken or
proposes to take with respect thereto. The Banks are authorized to deliver a
copy of any financial statement delivered to it to any regulatory body having
jurisdiction over them, and to disclose same to any prospective assignees or
participant Banks.

     5.2 BOOKS AND RECORDS. Maintain, and cause each of its Subsidiaries to
maintain, proper books of record and account in accordance with sound accounting
practices in which true, full and correct entries will be made of all their
respective dealings and business affairs.

     5.3 INSURANCE. Maintain, and cause each of its Subsidiaries to maintain,
insurance with financially sound, responsible and reputable companies in such
types and amounts and against such casualties, risks and contingencies as is
customarily carried by owners of similar businesses and properties.

     5.4 MAINTENANCE OF PROPERTY. Maintain and preserve, and cause each of its
Subsidiaries to maintain and preserve, all of its properties that are used or
useful in the conduct of its business in accordance with such Loan Party's
established maintenance plan as in effect from time to time consistent with past
practices.

     5.5 INSPECTION OF PROPERTY AND RECORDS. Permit any officer, director or
agent of the Agent or any Bank, on written notice and at such Bank's expense, to
visit and inspect during normal business hours any of the properties, corporate
books and financial records of each Loan Party and discuss their respective
affairs and finances with their principal officers, all at such times as the
Agent or any Bank may reasonably request.

     5.6 EXISTENCE, LAWS, OBLIGATIONS, TAXES. Maintain, and cause each of its
Subsidiaries to maintain, its corporate existence and franchises, and any
license agreements and tariffs that permit the recovery of a return that such
Loan Party considers to be fair (and as to

                                       34

<PAGE>

licenses, franchises, and tariffs that are subject to regulatory determinations
of recovery of returns, such Loan Party has presented or is presenting favorable
defense thereof); and to comply, and cause each of its Subsidiaries to comply,
with all statutes and governmental regulations noncompliance with which might
have a Material Adverse Effect, and pay, and cause each of its Subsidiaries to
pay, all taxes, assessments, governmental charges, claims for labor, supplies,
rent and other obligations which if unpaid might become a lien against the
property of such Loan Party and its Subsidiaries except liabilities being
contested in good faith.

     5.7 NOTICE OF CERTAIN MATTERS. Notify the Agent immediately upon acquiring
knowledge of the occurrence of any of the following events:

          (a) the institution or threatened institution of any lawsuit or
     administrative proceeding affecting a Loan Party that is not covered by
     insurance (less applicable deductible amounts) and which, if determined
     adversely to such Loan Party, could reasonably be expected to have a
     Material Adverse Effect;

          (b) the occurrence of any Material Adverse Change, or of any event
     that in the good faith opinion of such Loan Party is likely to result in a
     Material Adverse Change, affecting such Loan Party;

          (c) the occurrence of any Event of Default or any Default;

          (d) a change by Moody's Investors Service, Inc. or by Standard and
     Poor's Ratings Group in the rating of the Funded Debt of Panhandle Eastern;

          (e) copies of all regular, periodic and special reports, and all
     registration statements, that such Loan Party files with the SEC or any
     governmental authority that may be substituted therefor, or with any
     national securities exchange;

          (f) such other information respecting the business, financial
     condition, operations or assets of the Loan Parties as any Agent, or any
     Bank through the Agent, may from time to time reasonably request.

     5.8 ERISA. At all times:

          (a) to the extent required of a Loan Party under applicable law,
     maintain and keep in full force and effect each Plan, subject to Southern
     Union's right, in accordance with applicable legal requirements, (i) to
     amend any such Plans, (ii) to merge any such Plans, and to (iii) cease
     benefit accruals under any such Plans;

          (b) to the extent required of a Loan Party under applicable law, make
     contributions to each Plan in a timely manner and in an amount sufficient
     to comply with the minimum funding standards requirements of ERISA;

          (c) immediately upon acquiring knowledge of any "reportable event" or
     of any "prohibited transaction" (as such terms are defined in Section 4043
     and Section 406 of ERISA) in connection with any Plan, furnish the Banks
     with a statement executed by the president or chief financial officer of a
     Loan Party setting forth the details thereof and the action

                                       35

<PAGE>

     which the Borrower proposes to take with respect thereto and, when known,
     any action taken by the Internal Revenue Service with respect thereto;

          (d) notify the Banks promptly upon receipt by a Loan Party or its
     Subsidiary of any notice of the institution of any proceeding or other
     action which may result in the termination of any Plan and furnish to the
     Banks copies of such notice;

          (e) to the extent required of a Loan Party under applicable law,
     acquire and maintain Pension Benefit Guaranty Corporation employer
     liability coverage insurance required under ERISA;

          (f) furnish the Banks with copies of the summary annual report for
     each Plan filed with the Internal Revenue Service as the Agent or the Banks
     may request; and

          (g) furnish the Banks with copies of any request for waiver of the
     funding standards or extension of the amortization periods required by
     Section 303 and Section 304 of ERISA or Section 412 of the Code promptly
     after the request is submitted to the Secretary of the Treasury, the
     Department of Labor or the Internal Revenue Service, as the case may be.

     5.9 COMPLIANCE WITH ENVIRONMENTAL LAWS. At all times:

          (a) (i) use and operate, and cause each of its Subsidiaries to use and
     operate, all of their respective facilities and properties in material
     compliance with all Environmental Laws; (ii) keep, and cause each of its
     Subsidiaries to keep, all necessary permits, approvals, orders,
     certificates, licenses and other authorizations relating to environmental
     matters in effect and remain in material compliance therewith; (iii)
     handle, and cause each of its Subsidiaries to handle, all Hazardous
     Materials in material compliance with all applicable Environmental Laws;
     and (iv) dispose, and cause each of its Subsidiaries to dispose, of all
     Hazardous Materials with carriers that maintain valid permits, approvals,
     certificates, licenses or other authorizations for such disposal in
     material compliance with applicable Environmental Laws;

          (b) promptly notify the Agent and provide copies upon receipt of all
     written claims, complaints, notices or inquiries relating to the condition
     of the facilities and properties of such Loan Party under, or their
     respective compliance with, applicable Environmental Laws wherein the
     condition or the noncompliance that is the subject of such claim,
     complaint, notice, or inquiry involves, or could reasonably be expected to
     involve, liability of or expenditures of (1) in the case of Borrower, TLNG
     or any of their respective Subsidiaries, $10,000,000 or more, and (2) in
     the case of Panhandle Eastern and its Subsidiaries taken as a whole,
     $30,000,000 or more, to the extent in each case that such matters are not
     reflected in the financial statements provided pursuant to Sections 3.5 (a)
     and (b) hereof for the period ended December 31, 2004; and

          (c) provide such information and certifications which the Banks may
     reasonably request from time to time to evidence compliance with this
     Section 5.9.

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6.   NEGATIVE COVENANTS OF PANHANDLE EASTERN

     So long as the Borrower may borrow hereunder and until payment in full of
the Obligations, except with the written consent of the Banks:

     6.1 FINANCIAL COVENANTS. Panhandle Eastern will not

          (a) Permit the Interest Coverage Ratio as of the end of any fiscal
     quarter to be less than 2.00 to 1.00.

          (b) Permit the Debt/Capitalization Ratio as of the last day of any
     fiscal quarter to be greater than 65.0%.

     6.2 LIENS, ETC. Panhandle Eastern will not, and will not permit any of its
Subsidiaries to create, incur, assume or suffer to exist any Lien on or with
respect to any of its Property, or sign or file or suffer to exist, under the
Uniform Commercial Code of any jurisdiction, a financing statement that names
Panhandle Eastern or any of its Subsidiaries as debtor, or sign or suffer to
exist any security agreement authorizing any secured party thereunder to file
such financing statement, or assign any accounts or other right to receive
income, except:

          (a) Permitted Liens for Panhandle Eastern and its Subsidiaries;

          (b) Liens existing on the date hereof and any replacement, extension
     or renewal of the indebtedness secured by such Lien, provided that the
     amount of Debt or other obligations secured thereby is not increased and is
     not secured by any additional assets; and

          (c) Liens arising in connection with Capitalized Leases; provided that
     no such Lien shall extend to or cover any assets other than the assets
     subject to such Capitalized Leases) and purchase money Liens upon or in
     real property, equipment or other fixed or capital assets acquired or held
     by Panhandle Eastern or any of its Subsidiaries to secure the purchase
     price of such property, equipment or other fixed or capital assets or to
     secure Debt incurred for the purpose of financing the acquisition,
     construction or improvement of any such property, equipment or other fixed
     or capital assets, or Liens existing on any such property, equipment or
     other fixed or capital assets at the time of acquisition, or extensions,
     renewals or replacements of any of the foregoing for the same or a lesser
     amount (provided that no such Lien shall extend to or cover any property
     other than the property, equipment or other fixed or capital assets being
     acquired, constructed or improved, and no such extension, renewal or
     replacement shall extend to or cover any property not theretofore subject
     to the Lien being extended, renewed or replaced); provided that the
     aggregate principal amount of the Debt secured by Liens permitted by this
     clause (c) shall not exceed $50,000,000 at any time outstanding;

provided, however, that Panhandle Eastern or any of its Subsidiaries may create
or assume any other Lien securing Debt if, after giving effect to such Debt, the
Priority Obligations Amount does not exceed 10% of the Consolidated Net Tangible
Assets.

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     6.3 DEBT. Panhandle Eastern will not, and will not permit any Subsidiary
(other than the Borrower or TLNG) to, create, incur, assume or suffer to exist
any Debt, unless if after giving effect to such Debt, the Priority Obligations
Amount does not exceed 10% of the Consolidated Net Tangible Assets.

     6.4 CHANGE IN NATURE OF BUSINESS. Panhandle Eastern will not make any
material change in the nature of Panhandle Eastern's business as carried on at
the date hereof.

     6.5 MERGERS, CONSOLIDATION. Panhandle Eastern will not merge into or
consolidate with any Person or permit any Person to merge into it, or liquidate,
wind up or dissolve itself (or suffer any liquidation or dissolution), or permit
any of its Subsidiaries to do so, except that:

          (a) any Subsidiary of Panhandle Eastern may merge into or consolidate
     with Panhandle Eastern, provided that Panhandle Eastern is the continuing
     or surviving Person;

          (b) any Subsidiary of Panhandle Eastern may merge into or consolidate
     with any other Subsidiary of Panhandle Eastern; provided that if such
     Subsidiary is the Borrower, such transaction shall comply with Section
     7.3(c);

          (c) any Subsidiary of Panhandle Eastern may be liquidated or dissolved
     if Panhandle Eastern determines in good faith that such liquidation or
     dissolution is in the best interest of Panhandle Eastern and is not
     materially disadvantageous to the Banks;

          (d) any Subsidiary of Panhandle Eastern may merge into or consolidate
     with any other Person or permit any other Person to merge into or
     consolidate with it; provided that either (i) the Person surviving such
     merger shall be a Subsidiary of Panhandle Eastern or (ii) such transaction
     complies with Sections 6.6 (b), 7.3 and 7.4; and

          (e) Panhandle Eastern may merge with any Person; provided that if
     Panhandle Eastern is not the surviving entity, the surviving entity agrees
     to assume and be bound by the terms and conditions of this Agreement
     pursuant to documentation satisfactory to the Agent to such effect;

provided, however, that in each case, immediately before and after giving effect
thereto, no Default or Event of Default shall have occurred and be continuing
and such transaction shall not cause or have caused a Material Adverse Effect.

     6.6 SALE OF ASSETS. Panhandle Eastern will not, and will not permit any of
its Subsidiaries to, sell, lease, transfer or otherwise dispose of, in one
transaction or in a series of transactions, assets representing all or
substantially all of the Consolidated assets of Panhandle Eastern, except:

          (a) in a transaction authorized by Section 6.5 (Mergers); and

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<PAGE>

          (b) sales, transfers or other dispositions of assets among Panhandle
     Eastern and its Subsidiaries.

     6.7 RESTRICTED PAYMENTS. Panhandle Eastern will not, and will not permit
any of its Subsidiaries to, pay or declare any Restricted Payment, except that,
(a) any of its Subsidiaries may make Restricted Payments to Panhandle Eastern or
another Subsidiary of Panhandle Eastern (except that the Borrower may not make
any such payment to any Person other than Panhandle Eastern and Subsidiaries of
the Borrower may not make any such payment to any Person other than Borrower or
Panhandle Eastern) and (b) so long as no Event of Default has occurred and is
continuing and Panhandle Eastern is in pro forma compliance with Section 6.1(b)
(Financial Covenants) after giving effect to such Restricted Payments, Panhandle
Eastern may make distributions to Southern Union and Southern Union Panhandle,
LLC.

     6.8 SALES AND LEASEBACKS. Panhandle Eastern will not enter into any
arrangement with any Person (other than Subsidiaries of Panhandle Eastern)
providing for the leasing by Panhandle Eastern or any Subsidiary of real or
personal property that has been or is to be sold or transferred by Panhandle
Eastern or such Subsidiary to such Person or to any other Person to whom funds
have been or are to be advanced by such Person on the security of such property
or rental obligations of Panhandle Eastern or such Subsidiary (each a
"SALE-LEASEBACK TRANSACTION"), unless if after giving effect to such
Sale-Leaseback Transaction, the Priority Obligations Amount does not exceed 10%
of the Consolidated Net Tangible Assets.

     6.9 TRANSACTIONS WITH RELATED PARTIES. Panhandle Eastern will not, and will
not permit any Subsidiary to, enter into any transaction or agreement with any
officer, director or holder (other than Southern Union and its Subsidiaries) of
ten percent (10%) or more of any class of the outstanding capital stock of
Panhandle Eastern or any Subsidiary (or any Affiliate of any such Person) unless
the same is upon terms substantially similar to those obtainable from wholly
unrelated sources.

     6.10 HAZARDOUS MATERIALS. Panhandle Eastern will not, and will not permit
any Subsidiary to, (a) cause or permit any Hazardous Materials to be placed,
held, used, located, or disposed of on, under or at any of such Person's
property or any part thereof by any Person in a manner which could reasonably be
expected to have a Material Adverse Effect; (b) cause or permit any part of any
of such Person's property to be used as a manufacturing, storage, treatment or
disposal site for Hazardous Materials, where such action could reasonably be
expected to have a Material Adverse Effect; or (c) cause or suffer any liens to
be recorded against any of such Person's property as a consequence of, or in any
way related to, the presence, remediation, or disposal of Hazardous Materials in
or about any of such Person's property, including any so-called state, federal
or local "superfund" lien relating to such matters, where such recordation could
reasonably be expected to have a Material Adverse Effect.

7.   NEGATIVE COVENANTS OF THE BORROWER

     So long as the Borrower may borrow hereunder and until payment in full of
the Notes, except with the written consent of the Banks:

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<PAGE>

     7.1 LIENS, ETC. The Borrower will not, and will not permit any Subsidiary
to create, incur, assume or suffer to exist any Lien on or with respect to any
of its Property, or sign or file or suffer to exist, under the Uniform
Commercial Code of any jurisdiction, a financing statement that names the
Borrower or any of its Subsidiaries as debtor, or sign or suffer to exist any
security agreement authorizing any secured party thereunder to file such
financing statement, or assign any accounts or other right to receive income,
except:

          (a) Permitted Liens for the Borrower and its Subsidiaries;

          (b) Liens existing on the date hereof and any replacement, extension
     or renewal of the indebtedness secured by such Lien, provided that the
     amount of Debt or other obligations secured thereby is not increased and is
     not secured by any additional assets; and

          (c) Liens arising in connection with Capitalized Leases; provided that
     no such Lien shall extend to or cover any assets other than the assets
     subject to such Capitalized Leases) and purchase money Liens upon or in
     real property, equipment or other fixed or capital assets acquired or held
     by the Borrower or any of its Subsidiaries to secure the purchase price of
     such property, equipment or other fixed or capital assets or to secure Debt
     incurred for the purpose of financing the acquisition, construction or
     improvement of any such property, equipment or other fixed or capital
     assets, or Liens existing on any such property, equipment or other fixed or
     capital assets at the time of acquisition, or extensions, renewals or
     replacements of any of the foregoing for the same or a lesser amount
     (provided that no such Lien shall extend to or cover any property other
     than the property, equipment or other fixed or capital assets being
     acquired, constructed or improved, and no such extension, renewal or
     replacement shall extend to or cover any property not theretofore subject
     to the Lien being extended, renewed or replaced); provided that the
     aggregate principal amount of the Debt secured by Liens permitted by this
     clause (c) shall not exceed $10,000,000 at any time outstanding.

     7.2 DEBT. The Borrower will not, and will not permit any Subsidiary to,
incur or permit to exist any Debt, except:

          (a) Debt under this Agreement;

          (b) Debt of TLNG to the Borrower and unsecured Debt of the Borrower to
     any Subsidiary;

          (c) Debt existing as of December 31, 2004 as reflected on the
     Borrower's financial statements delivered under Section 3.2 (Financial
     Statements) and refinancings thereof, other than Debt under the Existing
     Credit Agreement;

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

          (e) Debt of TLNG or other Subsidiaries of the Borrower subordinated to
     the Loans on terms and pursuant to documentation satisfactory to the Agent;

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<PAGE>

          (f) Unsecured Debt of the Borrower; and

          (g) Capitalized Leases of the Borrower with Subsidiaries as permitted
     pursuant to 7.1(c).

     7.3 MERGER, CONSOLIDATION. The Borrower will not, and will not permit any
Subsidiary to, merge or consolidate with any other Person or sell, lease,
transfer or otherwise dispose of (whether in one transaction or a series of
transactions) all or a substantial part of its assets or acquire (whether in one
transaction or a series of transactions) all or a substantial part of the assets
of any Person, except that:

          (a) any Subsidiary of the Borrower may merge or consolidate with the
     Borrower (provided that the Borrower shall be the continuing or surviving
     corporation) or with any one or more Subsidiaries of the Borrower;

          (b) any Subsidiary of the Borrower may sell, lease, transfer or
     otherwise dispose of any of its assets to the Borrower or another
     Subsidiary of the Borrower;

          (c) the Borrower may acquire the assets of or merge with any Person,
     provided that if Borrower is not the surviving entity, the surviving entity
     agrees to assume and be bound by the terms and conditions of this Agreement
     pursuant to documentation satisfactory to the Agent.

          (d) the Borrower or any Subsidiary of the Borrower may sell, lease,
     assign or otherwise dispose of assets as otherwise permitted under Section
     7.4 (Sale of Assets), which shall include without limitation the transfer
     of assets to a Subsidiary and the subsequent sale of the equity interests
     in such Subsidiary;

     provided that, after giving effect to any transaction, no Default or Event
     of Default shall have occurred and be continuing and such transaction shall
     not cause or have caused a Material Adverse Effect.

     7.4 SALE OF ASSETS. The Borrower will not, and will not permit any
Subsidiary to, except as permitted under this Section 7.4, sell, assign, lease,
or otherwise dispose of (whether in one transaction or in a series of
transactions) all or any part of its Property (whether now owned or hereafter
acquired); provided, however, that

          (a) the Borrower or any Subsidiary may in the ordinary course of
     business dispose of (i) Property consisting of Inventory; and (ii) Property
     consisting of goods or equipment that are, in the opinion of the Borrower
     or any Subsidiary of the Borrower, obsolete or unproductive, but if in the
     good faith judgment of the Borrower or any Subsidiary of the Borrower such
     disposition without replacement thereof would have a Material Adverse
     Effect, such goods and equipment shall be replaced, or their utility and
     function substituted, by new or existing goods or equipment; and

          (b) the Borrower or any Subsidiary may dispose of Property other than
     Inventory (in consideration of such amount as in the good faith judgment of
     the Borrower or such Subsidiary represents a fair consideration therefor),
     provided that the aggregate

                                       41

<PAGE>

     value of such property disposed of (determined after depreciation and in
     accordance with GAAP) after the Funding Date does not exceed ten percent
     (10%) of the aggregate value of all of the Borrower's and its Subsidiaries'
     real property and tangible personal property other than Inventory
     considered on a Consolidated basis and determined after depreciation and in
     accordance with GAAP, as of December 31, 2004.

     7.5 RESTRICTED PAYMENT. The Borrower will not pay or declare any Restricted
Payment to any Person other than to Panhandle Eastern. The Borrower will not
permit any Subsidiary to pay or declare any Restricted Payment to any Person
other than the Borrower.

     7.6 SECURITIES CREDIT REGULATIONS. Neither the Borrower nor any Subsidiary
will take or permit any action which might cause the Loans or this Agreement to
violate Regulation G, Regulation T, Regulation U, Regulation X or any other
regulation of the Board of Governors of the Federal Reserve System or a
violation of the Securities Exchange Act of 1934, in each case as now or
hereafter in effect.

     7.7 NATURE OF BUSINESS. The Borrower will not, and will not permit any
Subsidiary, to make any material change in the nature of the Borrower's business
as carried on at the date hereof.

     7.8 TRANSACTIONS WITH RELATED PARTIES. The Borrower will not, and will not
permit any Subsidiary to, enter into any transaction or agreement with any
officer director or holder (other than Southern Union and its Subsidiaries) of
ten percent (10%) or more of any class of the outstanding capital stock of the
Borrower or any Subsidiary (or any Affiliate of any such Person) unless the same
is upon terms substantially similar to those obtainable from wholly unrelated
sources.

     7.9 HAZARDOUS MATERIALS. The Borrower will not, and will not permit any
Subsidiary to, (a) cause or permit any Hazardous Materials to be placed, held,
used, located, or disposed of on, under or at any of such Person's property or
any part thereof by any Person in a manner which could reasonably be expected to
have a Material Adverse Effect; (b) cause or permit any part of any of such
Person's property to be used as a manufacturing, storage, treatment or disposal
site for Hazardous Materials, where such action could reasonably be expected to
have a Material Adverse Effect; or (c) cause or suffer any liens to be recorded
against any of such Person's property as a consequence of, or in any way related
to, the presence, remediation, or disposal of Hazardous Materials in or about
any of such Person's property, including any so-called state, federal or local
"superfund" lien relating to such matters, where such recordation could
reasonably be expected to have a Material Adverse Effect.

     7.10 USE OF PROCEEDS. The Borrower will not, and will not permit any
Subsidiary to, use the proceeds of any Loan for any purpose other than for
purposes set forth in Section 2.13 (Use of Proceeds); or use any such proceeds
in a manner which violates or results in a violation of any law or regulation.

     7.11 OTHER DOCUMENTS. The Borrower will not, and will not permit any
Subsidiary to, amend, restate or otherwise modify or waive any provision or
condition of any instrument or agreement relating to any secured Debt of such
Person if the effect of such modification or

                                       42

<PAGE>

     waiver is to increase the obligations of such Person in a manner that is
     adverse to the Banks without the consent of the Majority Banks.

8.   EVENTS OF DEFAULT; REMEDIES

     If any of the following events shall occur, then the Agent shall at the
request, or may with the consent, of the Majority Banks, declare the Notes and
all interest accrued and unpaid thereon, and all other amounts payable under the
Notes, this Agreement and the other Loan Documents, to be forthwith due and
payable, whereupon the Notes, all such interest and all such other amounts,
shall become and be forthwith due and payable without presentment, demand,
protest, or further notice of any kind (including, without limitation, notice of
default, notice of intent to accelerate and notice of acceleration), all of
which are hereby expressly waived by the Borrower; provided, however, that with
respect to any Event of Default described in Sections 8.7 (Bankruptcy) or 8.8
(Dissolution) hereof, the entire unpaid principal amount of the Notes, all
interest accrued and unpaid thereon, and all such other amounts payable under
the Notes, this Agreement and the other Loan Documents, shall automatically
become immediately due and payable, without presentment, demand, protest, or any
notice of any kind (including, without limitation, notice of default, notice of
intent to accelerate and notice of acceleration), all of which are hereby
expressly waived by the Borrower:

     8.1 FAILURE TO PAY OBLIGATIONS WHEN DUE. The Borrower fails to pay, repay
or prepay any principal on the date when due, or any other Obligation within
five Business Days after the date when due.

     8.2 INTENTIONALLY OMITTED.

     8.3 FAILURE TO PAY OTHER DEBT. (a) The Borrower or any Subsidiary of the
Borrower fails to pay principal or interest on any unsecured Debt aggregating
more than $10,000,000 or any secured Debt when due and any related grace period
has expired, or the holder of any of such other Debt declares such Debt due
prior to its stated maturity because of the Borrower's or any Subsidiary's
default thereunder and the expiration of any related grace period or (b)
Panhandle Eastern or any of its Subsidiaries fails to pay principal or interest
on any other Debt aggregating more than $50,000,000 when due and any related
grace period has expired, or the holder of any of such other Debt declares such
Debt due prior to its stated maturity because of Panhandle Eastern's or any such
Subsidiary's default thereunder and the expiration of any related grace period.

     8.4 MISREPRESENTATION OR BREACH OF WARRANTY. Any representation or warranty
made by any Loan Party herein or otherwise furnished to the Bank in connection
with this Agreement or any other Loan Document shall be incorrect, false or
misleading in any material respect when made.

     8.5 VIOLATION OF CERTAIN COVENANTS. Any Loan Party violates any covenant,
agreement or condition contained in Sections 5.6 (Existence), 5.7(c) (Notice of
Defaults), 6.1 (Financial Covenants), 6.2 (Liens), 6.3 (Debt), 6.5 (Merger), 6.6
(Sale of Assets), 6.7 (Restricted Payments), 7.1 (Liens), 7.2 (Debt), 7.3
(Merger, Consolidation), 7.4 (Sale of Assets) or 7.5 (Restricted Payments).

                                       43

<PAGE>

     8.6 VIOLATION OF OTHER COVENANTS, ETC. Any Loan Party violates any other
covenant, agreement or condition contained herein (other than the covenants,
agreements and conditions set forth or described in Sections 8.1 (Failure to Pay
Obligations When Due), 8.3 (Cross Default), 8.4 (Representations), and 8.5
(Certain Covenants) above) or in any other Loan Document and such violation
shall not have been remedied within (30) days after the earlier of (i) actual
discovery by a Loan Party of such violation or (ii) written notice has been
received by the Borrower from the Bank or the holder of the Note.

     8.7 BANKRUPTCY AND OTHER MATTERS. Any Loan Party or Southern Union (a)
makes an assignment for the benefit of creditors; or (b) admits in writing its
inability to pay its debts generally as they become due; or (c) generally fails
to pay its debts as they become due; or (d) files a petition or answer seeking
for itself, or consenting to or acquiescing in, any reorganization, arrangement,
composition, readjustment, liquidation, dissolution, or similar relief under any
applicable Debtor Law (including, without limitation, the Federal Bankruptcy
Code); or (e) there is appointed a receiver, custodian, liquidator, fiscal
agent, or trustee of any Loan Party or Southern Union or of the whole or any
substantial part of their respective assets; or (f) any court enters an order,
judgment or decree approving a petition filed against any Loan Party or Southern
Union seeking reorganization, arrangement, composition, readjustment,
liquidation, dissolution, or similar relief under any Debtor Law and either such
order, decree or judgment so filed against it is not dismissed or stayed (unless
and until such stay is no longer in effect) within thirty (30) days of entry
thereof or an order for relief is entered pursuant to any such law.

     8.8 DISSOLUTION. Any order is entered in any proceeding against any Loan
Party or Southern Union decreeing the dissolution, liquidation, winding-up or
split-up of any Loan Party or Southern Union, and such order remains in effect
for thirty (30) days.

     8.9 UNDISCHARGED JUDGMENT. (a) A final judgment or judgments in the
aggregate, that might be or give rise to Liens on any property of the Borrower
or any of its Subsidiaries, for the payment of money in excess of $10,000,000
shall be rendered against the Borrower or any of its Subsidiaries and the same
shall remain undischarged for a period of sixty (60) days during which execution
shall not be effectively stayed or (b) a final judgment or judgments in the
aggregate, that might be or give rise to Liens on any property of Panhandle
Eastern or any of its Subsidiaries, for the payment of money in excess of
$50,000,000shall be rendered against Panhandle Eastern or any of its
Subsidiaries and the same shall remain undischarged for a period of sixty (60)
days during which execution shall not be effectively stayed.

     8.10 LOAN DOCUMENTS. Any material provision in any Loan Document shall for
any reason cease to be valid and binding on any party thereto except upon
fulfillment of such party's obligations thereunder (or any such party shall so
state in writing), or shall be declared null and void, or the validity or
enforceability thereof shall be contested by any party thereto (other than the
Agent and the Banks) or any Governmental Authority, or any such party shall deny
in writing that it has any liability or obligation thereunder, except upon
fulfillment of its obligations thereunder.

                                       44

<PAGE>

     8.11 CHANGE OF CONTROL. ANY OF THE FOLLOWING EVENTS SHALL OCCUR:

          (a) Panhandle Eastern shall cease to own or control, directly or
     indirectly, 100% of the Equity Interests and voting power of the Borrower
     and TLNG;

          (b) Southern Union shall cease to own or control, directly or
     indirectly, more than 50% of the Equity Interests and voting power of
     Panhandle Eastern;

          (c) (i) any entity, person or group shall acquire or control 25% or
     more of the common stock of Southern Union, (ii) the election or
     appointment, within a twelve-month period, of persons to Southern Union's
     board of directors who were not directors of Southern Union at the
     beginning of such twelve-month period, and whose election or appointment
     was not approved by a majority of those persons who were directors at the
     beginning of such period, where such newly elected or appointed directors
     constitute 30% or more of the directors of the board of directors of
     Southern Union.

     8.12 OTHER REMEDIES. In addition to and cumulative of any rights or
remedies expressly provided for in this Section 8, if any one or more Events of
Default shall have occurred, the Agent shall at the request, and may with the
consent, of the Majority Banks proceed to protect and enforce the rights of the
Banks hereunder by any appropriate proceedings. The Agent shall at the request,
and may with the consent, of the Majority Banks also proceed either by the
specific performance of any covenant or agreement contained in this Agreement or
by enforcing the payment of the Notes or by enforcing any other legal or
equitable right provided under this Agreement or the Notes or otherwise existing
under any law in favor of the holder of the Notes.

     8.13 REMEDIES CUMULATIVE. No remedy, right or power conferred upon the
Banks is intended to be exclusive of any other remedy, right or power given
hereunder or now or hereafter existing at law, in equity, or otherwise, and all
such remedies, rights and powers shall be cumulative.

9.   THE AGENT

     9.1 AUTHORIZATION AND ACTION. Each Bank hereby appoints HVB as its Agent
under and irrevocably authorizes the Agent (subject to this Section 9.1 and
Section 9.7 (Successor Agent)) to take such action as the Agent on its behalf
and to exercise such powers under this Agreement, the Loan Documents and the
Notes as are delegated to the Agent by the terms thereof, together with such
powers as are reasonably incidental thereto. Without limitation of the
foregoing, each Bank expressly authorizes the Agent to execute, deliver, and
perform its obligations under this Agreement and the Loan Documents, and to
exercise all rights, powers, and remedies that the Agent may have hereunder and
thereunder. As to any matters not expressly provided for by this Agreement
(including, without limitation, enforcement or collection of the Notes), the
Agent shall not be required to exercise any discretion or take any action, but
shall be required to act, or to refrain from acting (and shall be fully
protected in so acting or refraining from acting), upon the instructions of the
Majority Banks, and such instructions shall be binding upon all the Banks and
all holders of any Note; provided, however, that the Agent shall not be required
to take any action which exposes the Agent to personal

                                       45

<PAGE>

liability or which is contrary to this Agreement or applicable law. The Agent
agrees to give to each Bank prompt notice of each notice given to it by the
Borrower pursuant to the terms of this Agreement.

     9.2 AGENT'S RELIANCE, ETC. Neither the Agent nor any of its directors,
officers, agents, or employees shall be liable to any Bank for any action taken
or omitted to be taken by it or them under or in connection with this Agreement,
the Notes and the other Loan Documents, except for its or their own gross
negligence or willful misconduct. Without limitation of the generality of the
foregoing, the Agent: (a) may treat the original or any successor holder of any
Note as the holder thereof until the Agent receives notice from the Bank which
is the payee of such Note concerning the assignment of such Note; (b) may employ
and consult with legal counsel (including counsel for the Borrower), independent
public accountants, and other experts selected by it and shall not be liable to
any Bank for any action taken, or omitted to be taken, in good faith by it or
them in accordance with the advice of such counsel, accountants, or experts
received in such consultations and shall not be liable for any negligence or
misconduct of any such counsel, accountants, or other experts; (c) makes no
warranty or representation to any Bank and shall not be responsible to any Bank
for any opinions, certifications, statements, warranties, or representations
made in or in connection with this Agreement; (d) shall not have any duty to any
Bank to ascertain or to inquire as to the performance or observance of any of
the terms, covenants, or conditions of this Agreement or any other instrument or
document furnished pursuant thereto or to satisfy itself that all conditions to
and requirements for any Loan have been met or that the Borrower is entitled to
any Loan or to inspect the property (including the books and records) of the
Borrower or any Subsidiary; (e) shall not be responsible to any Bank for the due
execution, legality, validity, enforceability, genuineness, sufficiency, or
value of this Agreement or any other instrument or document furnished pursuant
thereto; and (f) shall incur no liability under or in respect of this Agreement
by acing upon any notice, consent, certificate, or other instrument or writing
believed by it to be genuine and signed or sent by the proper party or parties.

     9.3 DEFAULTS. The Agent shall not be deemed to have knowledge of the
occurrence of a Default (other than the nonpayment of principal of or interest
hereunder or of any fees) unless the Agent has received notice from a Bank or
the Borrower specifying such Default and stating that such notice is a Notice of
Default. In the event that the Agent receives such a notice of the occurrence of
a Default, the Agent shall give prompt notice thereof to the Banks (and shall
give each Bank prompt notice of each such nonpayment). The Agent shall (subject
to Section 9.7 (Successor Agent)) take such action with respect to such Default;
provided that, unless and until the Agent shall have received the directions
referred to in Sections 9.1 (Authorization and Action) or 9.7 (Successor Agent),
the Agent may (but shall not be obligated to) take such action, or refrain from
taking such action, with respect to such Default as it shall deem advisable and
in the best interest of the Banks.

     9.4 HVB AND AFFILIATES. With respect to its Commitment, any Loan made by
it, and the Note issued to it, HVB shall have the same rights and powers under
this Agreement as any other Bank and may exercise the same as though it were not
the Agent; and the term "Bank" or "Banks" shall, unless otherwise expressly
indicated, include HVB in its individual capacity. HVB and its respective
Affiliates may accept deposits from, lend money to, act as trustee under
indentures of, and generally engage in any kind of business with, the Borrower,
any of its

                                       46

<PAGE>

respective Affiliates and any Person who may do business with or own securities
of the Borrower or any such Affiliate, all as if HVB were not the Agent and
without any duty to account therefor to the Banks.

     9.5 NON-RELIANCE ON AGENT AND OTHER BANKS. Each Bank agrees that it has,
independently and without reliance on the Agent or any other Bank, and based on
such documents and information as it has deemed appropriate, made its own credit
analysis of the Borrower and each Subsidiary and its decision to enter into the
transactions contemplated by this Agreement and that it will, independently and
without reliance upon the Agent or any other Bank, and based on such documents
and information as it shall deem appropriate at the time, continue to make its
own analysis and decisions in taking or not taking action under this Agreement.
The Agent shall not be required to keep itself informed as to the performance or
observance by the Borrower of this Agreement or to inspect the properties or
books of Panhandle Eastern, the Borrower or any Subsidiary. Except for notices,
reports, and other documents and information expressly required to be furnished
to the Banks by the Agent hereunder, the Agent shall not have any duty or
responsibility to provide any Bank with any credit or other information
concerning the affairs, financial condition, or business of Southern Union,
Panhandle Eastern, the Borrower or any Subsidiary (or any of their Affiliates)
which may come into the possession of the Agent or any of its Affiliates.

     9.6 INDEMNIFICATION. Notwithstanding anything to the contrary herein
contained, the Agent shall be fully justified in failing or refusing to take any
action hereunder unless it shall first be indemnified to its satisfaction by the
Banks against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses, and disbursements of any kind or
nature whatsoever which may be imposed on, incurred by or asserted against the
Agent in any way relating to or arising out of its taking or continuing to take
any action. Each Bank agrees to indemnify the Agent (to the extent not
reimbursed by the Borrower), according to such Bank's Pro Rata Percentage, from
and against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses, and disbursements of any kind or
nature whatsoever which may be imposed on, incurred by, or asserted against the
Agent in any way relating to or arising out of this Agreement or the Notes or
any action taken or omitted by the Agent under this Agreement or the Notes;
provided that no Bank shall be liable for any portion of such liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses, or disbursements resulting from the gross negligence or willful
misconduct of the person being indemnified; and provided, further, that it is
the intention of each Bank to indemnify the Agent against the consequences of
the Agent's own negligence, whether such negligence be sole, joint, concurrent,
active or passive. Without limitation of the foregoing, each Bank agrees to
reimburse the Agent promptly upon demand for its Pro Rata Percentage of any
out-of-pocket expenses (including attorneys' fees) incurred by the Agent in
connection with the preparation, administration, or enforcement of, or legal
advice in respect of rights or responsibilities under, this Agreement and the
Notes, to the extent that the Agent is not reimbursed for such expenses by the
Borrower.

     9.7 SUCCESSOR AGENT. The Agent may resign at any time as Agent under this
Agreement by giving written notice thereof to the Banks and the Borrower and may
be removed at any time with or without cause by the Majority Banks. Upon any
such resignation or removal, the Majority Banks shall have the right to appoint
a successor Agent. If no successor Agent shall

                                       47

<PAGE>

have been so appointed by the Majority Banks or shall have accepted such
appointment within thirty (30) days after the retiring Agent's giving of notice
of resignation or the Majority Banks' removal of the retiring Agent, then the
retiring Agent may, on behalf of the Banks, appoint a successor Agent, which
shall be a commercial bank organized under the laws of the United States of
America or of any State thereof and having a combined capital and surplus of at
least $500,000,000. Upon the acceptance of any appointment as Agent hereunder by
a successor Agent, such successor Agent shall thereupon succeed to and become
vested with all the rights, powers, privileges and duties of the retiring Agent,
and the retiring Agent shall be discharged from its duties and obligations under
this Agreement. After any retiring Agent's resignation or removal hereunder as
Agent, the provisions of this Section 9 shall inure to its benefit as to any
actions taken or omitted to be taken by it while it was Agent under this
Agreement.

     9.8 AGENT'S RELIANCE. The Borrower shall notify the Agent in writing of the
names of its officers and employees authorized to request a Loan on behalf of
the Borrower and shall provide the Agent with a specimen signature of each such
officer or employee. The Agent shall be entitled to rely conclusively on such
officer's or employee's authority to request a Loan on behalf of the Borrower
until the Agent receives written notice from the Borrower to the contrary. The
Agent shall have no duty to verify the authenticity of the signature appearing
on any Notice of Borrowing, and, with respect to any oral request for a Loan,
the Agent shall have no duty to verify the identity of any Person representing
himself as one of the officers or employees authorized to make such request on
behalf of the Borrower. Neither the Agent nor any Bank shall incur any liability
to the Borrower in acting upon any telephonic notice referred to above which the
Agent or such Bank believes in good faith to have been given by a duly
authorized officer or other Person authorized to borrow on behalf of the
Borrower or for otherwise acting in good faith.

10.  GUARANTY

     10.1 GUARANTY. Each Guarantor hereby absolutely, unconditionally and
irrevocably guarantees the punctual payment when due, whether at scheduled
maturity or by acceleration, demand or otherwise, of all Obligations of the
Borrower now or hereafter existing under or in respect of the Loan Documents
(including, without limitation, any extensions, modifications, substitutions,
amendments or renewals of any or all of the foregoing Obligations), whether
direct or indirect, absolute or contingent, and whether for principal, interest,
premiums, fees, indemnities, contract causes of action, costs, expenses or
otherwise (such Obligations being the "GUARANTEED OBLIGATIONS").

     10.2 GUARANTY ABSOLUTE. Each Guarantor guarantees that the Guaranteed
Obligations will be paid strictly in accordance with the terms of the Loan
Documents, regardless of any law, regulation or order now or hereafter in effect
in any jurisdiction affecting any of such terms or the rights of any Bank with
respect thereto. The Obligations of each Guarantor under or in respect of this
Guaranty are independent of any Obligations of the Borrower under or in respect
of the Loan Documents, and a separate action or actions may be brought and
prosecuted against each Guarantor to enforce this Guaranty, irrespective of
whether any action is brought against the Borrower or whether the Borrower is
joined in any such action or actions. The liability of each Guarantor under this
Guaranty shall be irrevocable, absolute and unconditional

                                       48

<PAGE>

irrespective of, and each Guarantor hereby irrevocably waives any defenses it
may now have or hereafter acquire in any way relating to, any or all of the
following:

          (a) any lack of validity or enforceability of any Loan Document or any
     agreement or instrument relating thereto;

          (b) any change in the time, manner or place of payment of, or in any
     other term of, all or any of the Guaranteed Obligations or any other
     Obligations of the Borrower under or in respect of the Loan Documents, or
     any other amendment or waiver of or any consent to departure from any Loan
     Document, including, without limitation, any increase in the Guaranteed
     Obligations resulting from the extension of additional credit to any Loan
     Party or any of its Subsidiaries or otherwise;

          (c) any taking, exchange, release or non-perfection of any collateral,
     or any taking, release or amendment or waiver of, or consent to departure
     from, any other guaranty, for all or any of the Guaranteed Obligations;

          (d) any manner of application of any collateral, or proceeds thereof,
     to all or any of the Guaranteed Obligations, or any manner of sale or other
     disposition of any collateral for all or any of the Guaranteed Obligations
     or any other Obligations of any Loan Party under the Loan Documents or any
     other assets of any Loan Party or any of its Subsidiaries;

          (e) any change, restructuring or termination of the corporate
     structure or existence of any Loan Party or any of its Subsidiaries;

          (f) any failure of any Bank to disclose to any Loan Party any
     information relating to the business, operations, financial condition,
     assets or prospects of any other Loan Party now or hereafter known to such
     Bank (each Guarantor waiving any duty on the part of the Banks to disclose
     such information);

          (g) the failure of any other Person to execute or deliver any other
     guaranty or agreement or the release or reduction of liability of any other
     guarantor or surety with respect to the Guaranteed Obligations; or

          (h) any other circumstance (including, without limitation, any statute
     of limitations) or any existence of or reliance on any representation by
     any Bank that might otherwise constitute a defense available to, or a
     discharge of, any Loan Party or any other guarantor or surety.

This Guaranty shall continue to be effective or be reinstated, as the case may
be, if at any time any payment of any of the Guaranteed Obligations is rescinded
or must otherwise be returned by any Bank or any other Person upon the
insolvency, bankruptcy or reorganization of the Borrower or otherwise, all as
though such payment had not been made.

                                       49

<PAGE>

     10.3 WAIVERS AND ACKNOWLEDGMENTS.

          (a) Each Guarantor hereby unconditionally and irrevocably waives
     promptness, diligence, notice of acceptance, presentment, demand for
     performance, notice of nonperformance, default, acceleration, protest or
     dishonor and any other notice with respect to any of the Guaranteed
     Obligations and this Guaranty and any requirement that any Bank protect,
     secure, perfect or insure any Lien or any property subject thereto or
     exhaust any right or take any action against any Loan Party or any other
     Person or any collateral.

          (b) Each Guarantor hereby unconditionally and irrevocably waives any
     right to revoke this Guaranty and acknowledges that this Guaranty is
     continuing in nature and applies to all Guaranteed Obligations, whether
     existing now or in the future.

          (c) Each Guarantor hereby unconditionally and irrevocably waives (i)
     any defense arising by reason of any claim or defense based upon an
     election of remedies by any Bank that in any manner impairs, reduces,
     releases or otherwise adversely affects the subrogation, reimbursement,
     exoneration, contribution or indemnification rights of each Guarantor or
     other rights of such Guarantor to proceed against the Borrower, any other
     guarantor or any other Person and (ii) any defense based on any right of
     set-off or counterclaim against or in respect of the Obligations of such
     Guarantor hereunder.

          (d) Each Guarantor hereby unconditionally and irrevocably waives any
     duty on the part of any Bank to disclose to any Guarantor any matter, fact
     or thing relating to the business, operations, financial condition, assets
     or prospects of the Borrower or any of its Subsidiaries now or hereafter
     known by such Bank.

          (e) Each Guarantor acknowledges that it will receive substantial
     direct and indirect benefits from the financing arrangements contemplated
     by the Loan Documents and that the waivers set forth in Section 10.2
     (Guaranty Absolute) and this Section 10.3 are knowingly made in
     contemplation of such benefits.

     10.4 SUBROGATION. Each Guarantor hereby unconditionally and irrevocably
agrees not to exercise any rights that it may now have or hereafter acquire
against the Borrower that arise from the existence, payment, performance or
enforcement of such Guarantor's Obligations under or in respect of this Guaranty
or any other Loan Document, including, without limitation, any right of
subrogation, reimbursement, exoneration, contribution or indemnification and any
right to participate in any claim or remedy of any Bank against the Borrower or
any other insider guarantor, whether or not such claim, remedy or right arises
in equity or under contract, statute or common law, including, without
limitation, the right to take or receive from the Borrower, directly or
indirectly, in cash or other property or by set-off or in any other manner,
payment or security on account of such claim, remedy or right, unless and until
all of the Guaranteed Obligations and all other amounts payable under this
Guaranty shall have been paid in full in cash and the Commitments shall have
expired or been terminated. If any amount shall be paid to any Guarantor in
violation of the immediately preceding sentence at any time prior to the later
of (a) the payment in full in cash of the Guaranteed Obligations and all other
amounts payable under this Guaranty and (b) the Maturity Date, such amount shall
be received and held in trust

                                       50

<PAGE>

for the benefit of the Banks, shall be segregated from other property and funds
of such Guarantor and shall forthwith be paid or delivered to the Agent in the
same form as so received (with any necessary endorsement or assignment) to be
credited and applied to the Guaranteed Obligations and all other amounts payable
under this Guaranty, whether matured or unmatured, in accordance with the terms
of the Loan Documents or other amounts payable under this Guaranty thereafter
arising. If (i) any Guarantor shall make payment to any Bank of all or any part
of the Guaranteed Obligations, (ii) all of the Guaranteed Obligations and all
other amounts payable under this Guaranty shall have been paid in full in cash
and (iii) the Maturity Date shall have occurred, the Banks will, at such
Guarantor's request and expense, execute and deliver to such Guarantor
appropriate documents, without recourse and without representation or warranty,
necessary to evidence the transfer by subrogation to such Guarantor of an
interest in the Guaranteed Obligations resulting from such payment made by such
Guarantor pursuant to this Guaranty.

     10.5 SUBORDINATION. Each Guarantor hereby subordinates any and all debts,
liabilities and other Obligations owed to such Guarantor by the Borrower (the
"SUBORDINATED OBLIGATIONS") to the Guaranteed Obligations to the extent and in
the manner hereinafter set forth in this Section 10.5:

          (a) Except during the continuance of a Default (including the
     commencement and continuation of any proceeding under any Debtor Law
     relating to the Borrower), a Guarantor may receive regularly scheduled
     payments from the Borrower on account of the Subordinated Obligations.
     After the occurrence and during the continuance of any Default (including
     the commencement and continuation of any proceeding under any Debtor Law
     relating to the Borrower), however, unless the Agent otherwise agrees, no
     Guarantor shall demand, accept or take any action to collect any payment on
     account of the Subordinated Obligations.

          (b) In any proceeding under any Debtor Law relating to the Borrower,
     each Guarantor agrees that the Banks shall be entitled to receive payment
     in full in cash of all Guaranteed Obligations (including all interest and
     expenses accruing after the commencement of a proceeding under any Debtor
     Law, whether or not constituting an allowed claim in such proceeding ("POST
     PETITION INTEREST")) before any Guarantor receives payment of any
     Subordinated Obligations.

          (c) After the occurrence and during the continuance of any Default
     (including the commencement and continuation of any proceeding under any
     Debtor Law relating to the Borrower), each Guarantor shall, if the Agent so
     requests, collect, enforce and receive payments on account of the
     Subordinated Obligations as trustee for the Banks and deliver such payments
     to the Agent on account of the Guaranteed Obligations (including all Post
     Petition Interest), together with any necessary endorsements or other
     instruments of transfer, but without reducing or affecting in any manner
     the liability of such Guarantor under the other provisions of this
     Guaranty.

          (d) After the occurrence and during the continuance of any Default
     (including the commencement and continuation of any proceeding under any
     Debtor Law relating to the Borrower), the Agent is authorized and empowered
     (but without any obligation to so

                                       51

<PAGE>

     do), in its discretion, (i) in the name of a Guarantor, to collect and
     enforce, and to submit claims in respect of, Subordinated Obligations and
     to apply any amounts received thereon to the Guaranteed Obligations
     (including any and all Post Petition Interest), and (ii) to require each
     Guarantor (A) to collect and enforce, and to submit claims in respect of,
     Subordinated Obligations and (B) to pay any amounts received on such
     obligations to the Agent for application to the Guaranteed Obligations
     (including any and all Post Petition Interest).

     10.6 CONTINUING GUARANTY. This Guaranty is a continuing guaranty and shall
remain in full force and effect until the later of (a) the payment in full in
cash of the Guaranteed Obligations and all other amounts payable under this
Guaranty and (b) the Maturity Date.

11.  MISCELLANEOUS

     11.1 AMENDMENTS, WAIVERS, ETC. No amendment or waiver of any provision of
any Loan Document, nor consent to any departure by the Borrower therefrom, shall
in any event be effective unless the same shall be in writing and signed by the
Borrower and the Majority Banks, and then such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given; provided, however, that no amendment, waiver or consent shall, unless in
writing and signed by each Bank, do any of the following:

          (a) waive any of the conditions specified in Section 4 (Conditions to
     Funding);

          (b) increase the Commitment of any Bank or alter the term thereof, or
     subject any Bank to any additional or extended obligations;

          (c) change the principal of, or rate of interest on, the Loans or any
     Note, or any fees or other amounts payable hereunder;

          (d) postpone any date fixed for any payment of principal of, or
     interest on, the Loans or any Note, or any fees (including, without
     limitation, any fee) or other amounts payable hereunder;

          (e) change the definition of "Majority Banks" or the number of Banks
     which shall be required for Banks, or any of them, to take any action
     hereunder;

          (f) amend this Section 11.1; or

          (g) reduce or limit the obligations of any Guarantor under the Loan
     Documents or release any Guarantor from its obligations under the Loan
     Documents;

and provided, further, that no amendment, waiver or consent shall, unless in
writing and signed by the Agent in addition to each Bank, affect the rights or
duties of the Agent under any Loan Document. No failure or delay on the part of
any Bank or the Agent in exercising any power or right hereunder shall operate
as a waiver thereof nor shall any single or partial exercise of any such right
or power, or any abandonment or discontinuance of steps to enforce such a right
or power, preclude any other or further exercise thereof or the exercise of any
other right or power.

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<PAGE>

No course of dealing between the Borrower and any Bank or the Agent shall
operate as a waiver of any right of any Bank or the Agent. No modification or
waiver of any provision of this Agreement or the Note nor consent to any
departure by the Borrower therefrom shall in any event be effective unless the
same shall be in writing, and then such waiver or consent shall be effective
only in the specific instance and for the purpose for which given. No notice to
or demand on the Borrower in any case shall entitle the Borrower to any other or
further notice or demand in similar or other circumstances.

     11.2 REIMBURSEMENT OF EXPENSES.

          (a) The Borrower agrees to pay on demand (and whether or not the
     Funding Date occurs) (1) all reasonable and documented out-of-pocket costs
     and expenses of the Agent, including reasonable and documented fees and
     expenses of a single counsel for the Agent, in connection with the
     syndication of the credit facilities provided for herein, the preparation
     and administration of this Agreement or any amendments, modifications or
     waivers of the provisions hereof, and (2) all costs and expenses of the
     Agent and each Bank in connection with the enforcement of the Loan
     Documents, whether in any action, suit or litigation, or any bankruptcy,
     insolvency or other similar proceeding affecting creditors' rights
     generally (including, without limitation, the reasonable fees and expenses
     of counsel for the Agent and each Bank with respect thereto). The Borrower
     further agrees to pay any stamp or other taxes that may be payable in
     connection with the execution or delivery of any Loan Document.

          (b) If any payment of principal of, or Conversion of, any Eurodollar
     Rate Loan is made by the Borrower to or for the account of a Bank other
     than on the last day of the Interest Period for such Loan, as a result of a
     payment or Conversion pursuant to Section 2.5 (Prepayments), 2.8
     (Conversion of Loans) or 2.9(d) (Increased Costs, Etc.), acceleration of
     the maturity of the Notes pursuant to Section 8 (Events of Default;
     Remedies) or for any other reason, or by an Eligible Assignee to a Bank
     other than on the last day of the Interest Period for such Loan upon an
     assignment of rights and obligations under this Agreement pursuant to
     Section 11.14 (Sale or Assignment) as a result of a demand by the Borrower
     pursuant to Section 11.14(a), or if the Borrower fails to make any payment
     or prepayment of a Loan for which a notice of prepayment has been given,
     whether pursuant to Section 2.3 (Repayment of Loans), 2.5 (Prepayments) or
     Section 8 (Events of Default; Remedies) or otherwise, the Borrower shall,
     upon demand by such Bank (with a copy of such demand to the Agent), pay to
     the Agent for the account of such Bank any amounts required to compensate
     such Bank for any additional losses, costs or expenses reasonably incurred
     by such Bank as a result of such payment or Conversion or such failure to
     pay or prepay, as the case may be, including, without limitation, any loss,
     cost or expense incurred by reason of the liquidation or reemployment of
     deposits or other funds acquired by any Bank to fund or maintain such Loan.

          (c) The obligations of the Borrower under this Section 11.2 shall
     survive the termination of this Agreement and/or the payment of the Notes.

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<PAGE>

     11.3 NOTICES. Any communications between the parties hereto or notices
provided herein to be given shall be given to the following addresses:

     (a)  If to Panhandle Eastern, to:  Panhandle Eastern Pipe Line Company, LP
                                        5444 Westheimer
                                        Suite 500
                                        Houston, Texas 77056-5306
                                        Attn: Gary W. Lefelar
                                        Phone: (713) 989-7710
                                        Fax: (713) 989-1129

          with copies to:               Southern Union Company
                                        One PEI Center
                                        Wilkes-Barre, Pennsylvania 18711
                                        Attn: Richard N. Marshall
                                        Phone: (570) 829-8795
                                        Fax: (570) 829-8914

                                        and

                                        Panhandle Eastern Pipe Line Company, LP
                                        5444 Westheimer
                                        Suite 500
                                        Houston, Texas 77056-5306
                                        Attn: General Counsel
                                        Phone: (713) 989-7560
                                        Fax: (713) 989-1189

     (b)  If to the Borrower, to:       Trunkline LNG Holdings LLC
                                        c/o Panhandle Eastern Pipe Line Company,
                                        LP
                                        5444 Westheimer
                                        Suite 500
                                        Houston, Texas 77056-5306
                                        Attn: Gary W. Lefelar
                                        Phone: (713) 989-7710
                                        Fax: (713) 989-1129

          with copies to:               Southern Union Company
                                        One PEI Center
                                        Wilkes-Barre, Pennsylvania 18711
                                        Attn: Richard N. Marshall
                                        Phone: (570) 829-8795
                                        Fax: (570) 829-8914

                                        and

                                       54

<PAGE>

                                        Panhandle Eastern Pipe Line Company, LP
                                        5444 Westheimer
                                        Suite 500
                                        Houston, Texas 77056-5306
                                        Attn: General Counsel
                                        Phone: (713) 989-7560
                                        Fax: (713) 989-1189

     (c)  If to TLNG, to:               Trunkline LNG Holdings LLC
                                        c/o Panhandle Eastern Pipe Line Company,
                                        LP
                                        5444 Westheimer
                                        Suite 500
                                        Houston, Texas 77056-5306
                                        Attn: Gary W. Lefelar
                                        Phone: (713) 989-7710
                                        Fax: (713) 989-1129

          with copies to:               Southern Union Company
                                        One PEI Center
                                        Wilkes-Barre, Pennsylvania 18711
                                        Attn: Richard N. Marshall
                                        Phone: (570) 829-8795
                                        Fax: (570) 829-8914

                                        and

                                        Panhandle Eastern Pipe Line Company, LP
                                        5444 Westheimer
                                        Suite 500
                                        Houston, Texas 77056-5306
                                        Attn: General Counsel
                                        Phone: (713) 989-7560
                                        Fax: (713) 989-1189

          If to the Agent, to:          Bayerische Hypo- und Vereinsbank AG,
                                        New York Branch
                                        150 East 42nd Street
                                        New York, NY 10017-4679
                                        Attn: Agency Services, Jennifer Larrow
                                        Tel: 212-672-6031
                                        Fax: 212-672-6024

and if to any Bank, at the address specified below its name on the signature
pages hereof, or as to the Borrower or the Agent, to such other address as shall
be designated by such party in a written notice to the other party and, as to
each other party, at such other address as shall be designated by such party in
a written notice to the Borrower and the Agent. All notices or other
communications required or permitted to be given hereunder shall be in writing
and shall be

                                       55

<PAGE>

considered as properly given (a) if delivered in person, (b) if sent by
overnight delivery service (including Federal Express, UPS, ETA, Emery, DHL,
AirBorne and other similar overnight delivery services), (c) if mailed by first
class United States Mail, postage prepaid, registered or certified with return
receipt requested or (d) if sent by facsimile or other electronic transmission.
Notice so given shall be effective upon receipt by the addressee, except that
communication or notice so transmitted by direct written electronic means shall
be deemed to have been validly and effectively given on the day (if a Business
Day and, if not, on the next following Business Day) on which it is transmitted
if transmitted before 4:00 p.m. (New York time), recipient's time, and if
transmitted after that time, on the next following Business Day; provided,
however, that if any notice is tendered to an addressee and the delivery thereof
is refused by such addressee, such notice shall be effective upon such tender.
Any party shall have the right to change its address for notice hereunder to any
other location within the continental United States by giving of 30 days' notice
to the other parties in the manner set forth above.

     11.4 GOVERNING LAW. This Agreement, and any instrument or agreement
required hereunder (to the extent not otherwise expressly provided for therein),
shall be governed by, and construed under, the laws of the State of New York,
without reference to conflicts of laws (other than Section 5-1401 and Section
5-1402 of the New York General Obligations Law).

     11.5 WAIVER OF JURY TRIAL. THE AGENT, THE BANKS AND EACH LOAN PARTY HEREBY
KNOWINGLY, VOLUNTARILY, AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A
TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF,
UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY
COURSE OR CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN), OR
ACTIONS, OF THE AGENT, THE BANKS OR THE LOAN PARTIES. THIS PROVISION IS A
MATERIAL INDUCEMENT FOR THE BANKS TO ENTER INTO THIS AGREEMENT.

     11.6 CONSENT TO JURISDICTION. The Agent, the Banks and each Loan Party
agree that any legal action or proceeding by or against any Loan Party or with
respect to or arising out of this Agreement or any other Loan Document may be
brought in or removed to the Supreme Court of the State of New York, in and for
the County of New York, or the United States District Court for the Southern
District of New York, and any court of appeals from either therefrom as the
Agent may elect. By execution and delivery of the Agreement, each of the Banks,
the Agent and each Loan Party accepts, for themselves and in respect of their
property, generally and unconditionally, the jurisdiction of the aforesaid
courts. The Agent, the Banks and each Loan Party irrevocably consent to the
service of process out of any of the aforementioned courts in any manner
permitted by law. Nothing herein shall affect the right of the Agent and the
Banks to bring legal action or proceedings in any other competent jurisdiction.
The Agent, the Banks and each Loan Party further agree that the aforesaid courts
of the State of New York and of the United States of America shall have
exclusive jurisdiction with respect to any claim or counterclaim of any Loan
Party based upon the assertion that the rate of interest charged by the Banks on
or under this Agreement, the Loans and/or the other Loan Documents is usurious.
The Agent, the Banks and each Loan Party hereby waive any right to stay or
dismiss any action or proceeding under or in connection with this Agreement or
any other Loan Document brought before the foregoing courts on the basis of an
inconvenient forum.

                                       56

<PAGE>

     11.7 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. All
representations, warranties and covenants contained herein or made in writing by
any Loan Party in connection herewith shall survive the execution and delivery
of the Loan Documents and the Notes, and will bind and inure to the benefit of
the respective successors and assigns of the parties hereto, whether so
expressed or not, provided that the undertaking of the Banks to make the Loans
to the Borrower shall not inure to the benefit of any successor or assign of the
Borrower. No investigation at any time made by or on behalf of the Banks shall
diminish the Banks' rights to rely on any representations made herein or in
connection herewith. All statements contained in any certificate or other
written instrument delivered by any Loan Party or by any Person authorized by
the Borrower under or pursuant to this Agreement or in connection with the
transactions contemplated hereby shall constitute representations and warranties
hereunder as of the time made by such Loan Party.

     11.8 COUNTERPARTS. This Agreement may be executed in several counterparts,
and by the parties hereto on separate counterparts, and each counterpart, when
so executed and delivered, shall constitute an original instrument and all such
separate counterparts shall constitute but one and the same instrument.

     11.9 SEVERABILITY. Should any clause, sentence, paragraph or section of
this Agreement be judicially declared to be invalid, unenforceable or void, such
decision shall not have the effect of invalidating or voiding the remainder of
this Agreement, and the parties hereto agree that the part or parts of this
Agreement so held to be invalid, unenforceable or void will be deemed to have
been stricken herefrom and the remainder will have the same force and
effectiveness as if such part or parts had never been included herein. Each
covenant contained in this Agreement shall be construed (absent an express
contrary provision herein) as being independent of each other covenant contained
herein, and compliance with any one covenant shall not (absent such an express
contrary provision) be deemed to excuse compliance with one or more other
covenants.

     11.10 DESCRIPTIVE HEADINGS. The section headings in this Agreement have
been inserted for convenience only and shall be given no substantive meaning or
significance whatsoever in construing the terms and provisions of this
Agreement.

     11.11 ACCOUNTING TERMS. All accounting terms used herein which are not
expressly defined in the Agreement, or the respective meanings of which are not
otherwise qualified, shall have the respective meanings given to them in
accordance with GAAP.

     11.12 LIMITATION OF LIABILITY. No claim may be made by any Person for any
special, indirect, consequential, or punitive damages in respect to any claim
for breach of contract arising out of or related to the transactions
contemplated by this Agreement, or any act, omission, or event occurring in
connection herewith and the parties hereto hereby waive, release, and agree not
to sue upon any claim for any such damages, whether or not accrued and whether
or not known or suspected to exist in its favor.

     11.13 SET-OFF. Each Loan Party hereby gives and confirms to each Bank a
right of set-off of all moneys, securities and other property of such Loan Party
(whether special, general or limited) and the proceeds thereof, now or hereafter
delivered to remain with or in transit in any

                                       57

<PAGE>

manner to such Bank, its Affiliates, correspondents or agents from or for such
Loan Party, whether for safekeeping, custody, pledge, transmission, collection
or otherwise or coming into possession of such Bank, its Affiliates,
correspondents or agents in any way, and also, any balance of any deposit
accounts and credits of such Loan Party with, and any and all claims of security
for the payment of the Loans and of all other liabilities and obligations now or
hereafter owed by any Loan Party to such Bank, contracted with or acquired by
such Bank, whether such liabilities and obligations be joint, several, absolute,
contingent, secured, unsecured, matured or unmatured, and each Loan Party hereby
authorizes each Bank, its Affiliates, correspondents or agents at any time or
times, without prior notice, to apply such money, securities, other property,
proceeds, balances, credits of claims, or any part of the foregoing, to such
liabilities in such amounts as it may select, whether such liabilities be
contingent, unmatured or otherwise, and whether any collateral security therefor
is deemed adequate or not. The rights described herein shall be in addition to
any collateral security, if any, described in any separate agreement executed by
any Loan Party.

     11.14 SALE OR ASSIGNMENT.

          (a) Each Bank may assign and, so long as no Default shall have
     occurred and be continuing pursuant to Section 8.1 (Failure to Pay
     Obligations When Due) or 8.7 (Bankruptcy and Other Matters), if demanded by
     the Borrower (pursuant to Section 2.15 (Replacement of Banks)) upon at
     least five Business Days' notice to such Bank and the Agent, a Bank will
     assign, to one or more Eligible Assignees all or a portion of its rights
     and obligations under this Agreement and the other Loan Documents
     (including, without limitation, all or a portion of the Loans owing to it
     and the Note or Notes held by it) ; provided, however, that

               (i) each such assignment shall be of a uniform, and not a
          varying, percentage of all rights and obligations under and in respect
          of the Loan Agreement;

               (ii) except in the case of an assignment of all of a Bank's
          rights and obligations under this Agreement or any assignment to any
          Bank, an Affiliate of any Bank or an Approved Fund, the aggregate
          amount of the Loans being assigned to such assignee pursuant to such
          assignment (determined as of the date of the Assignment and Acceptance
          with respect to such assignment) shall in no event be less than
          $1,000,000;

               (iii) except in the case of an assignment to a Person that,
          immediately prior to such assignment, was a Bank, an Affiliate of any
          Bank or an Approved Fund, such assignment shall be approved by the
          Agent, and so long as no Default shall have occurred and be continuing
          pursuant to Section 8.1 (Failure to Pay Obligations When Due) or 8.7
          (Bankruptcy and Other Matters) at the time of effectiveness of such
          assignment, the Borrower (in each case such approvals not to be
          unreasonably withheld or delayed); provided that no Borrower approval
          shall be required for any assignment made by HVB to any Eligible
          Assignee from the Closing Date through and including the two-month
          anniversary of the Funding Date;

                                       58

<PAGE>

               (iv) each such assignment made as a result of a demand by the
          Borrower pursuant to this Section 11.14 shall be made in accordance
          with Section 2.15 (Replacement of Banks);

               (v) no Bank shall be obligated to make any such assignment as a
          result of a demand by the Borrower pursuant to this Section 11.14
          unless and until such Bank shall have received one or more payments
          from either the Borrower or one or more assignees in an aggregate
          amount at least equal to the aggregate outstanding principal amount of
          the Loans owing to such Bank, together with accrued interest thereon
          to the date of payment of such principal amount and all other amounts
          payable to such Bank under this Agreement;

               (vi) the parties to each such assignment shall execute and
          deliver to the Agent, for its acceptance and recording in the
          Register, an Assignment and Acceptance, together with any Note or
          Notes subject to such assignment and a processing and recordation fee
          of $3,500 (provided, however, that for each such assignment made as a
          result of a demand by the Borrower pursuant to this Section 11.14, the
          Borrower shall pay to the Agent the applicable processing and
          recordation fee); and

               (vii) the assignee, if it shall not be a Bank, shall deliver to
          the Agent an administrative questionnaire in the form prepared by the
          Agent.

          (b) Upon such execution, delivery, acceptance and recording, from and
     after the effective date specified in such Assignment and Acceptance,

               (i) the assignee thereunder shall be a party hereto and, to the
          extent that rights and obligations hereunder have been assigned to it
          pursuant to such Assignment and Acceptance, have the rights and
          obligations of a Bank hereunder and

               (ii) the Bank assignor thereunder shall, to the extent that
          rights and obligations hereunder have been assigned by it pursuant to
          such Assignment and Acceptance, relinquish its rights (other than its
          rights under Sections 2.9 (Increased Costs), 2.11 (Taxes) and 11.2
          (Reimbursement of Expenses)) to the extent any claim thereunder
          relates to an event arising prior to such assignment) and be released
          from its obligations under this Agreement (and, in the case of an
          Assignment and Acceptance covering all of the remaining portion of an
          assigning Bank's rights and obligations under this Agreement, such
          Bank shall cease to be a party hereto).

          (c) By executing and delivering an Assignment and Acceptance, each
     Bank assignor thereunder and each assignee thereunder confirm to and agree
     with each other and the other parties thereto and hereto as follows:

               (i) other than as provided in such Assignment and Acceptance,
          such assigning Bank makes no representation or warranty and assumes no
          responsibility with respect to any statements, warranties or
          representations made

                                       59

<PAGE>

          in or in connection with any Loan Document or the execution, legality,
          validity, enforceability, genuineness, sufficiency or value of, or the
          perfection or priority of any lien or security interest created or
          purported to be created under or in connection with, any Loan Document
          or any other instrument or document furnished pursuant thereto;

               (ii) such assigning Bank makes no representation or warranty and
          assumes no responsibility with respect to the financial condition of
          any Loan Party or the performance or observance by any Loan Party of
          any of its obligations under any Loan Document or any other instrument
          or document furnished pursuant thereto;

               (iii) such assignee confirms that it has received a copy of this
          Agreement, together with copies of the financial statements most
          recently delivered hereunder and such other documents and information
          as it has deemed appropriate to make its own credit analysis and
          decision to enter into such Assignment and Acceptance;

               (iv) such assignee will, independently and without reliance upon
          any Agent, such assigning Bank or any other Bank 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 this Agreement;

               (v) such assignee confirms that it is an Eligible Assignee;

               (vi) such assignee appoints and authorizes the Agent to take such
          action as agent on its behalf and to exercise such powers and
          discretion under the Loan Documents as are delegated to such Agent by
          the terms hereof and thereof, together with such powers and discretion
          as are reasonably incidental thereto; and

               (vii) such assignee agrees that it will perform in accordance
          with their terms all of the obligations that by the terms of this
          Agreement are required to be performed by it as a Bank.

          (d) The Agent shall maintain at its address a copy of each Assignment
     and Acceptance delivered to and accepted by it and a register for the
     recordation of the names and addresses of the Banks and the principal
     amount of the Loans owing to, each Bank from time to time (the "REGISTER").
     The entries in the Register shall be conclusive and binding for all
     purposes, absent manifest error, and the Borrower, the Agent and the Banks
     may treat each Person whose name is recorded in the Register as a Bank
     hereunder for all purposes of this Agreement. The Register shall be
     available for inspection by the Borrower or any Agent or any Bank at any
     reasonable time and from time to time upon reasonable prior notice.

          (e) Upon its receipt of an Assignment and Acceptance executed by an
     assigning Bank and an assignee, together with any Note or Notes subject to
     such assignment, the Agent shall, if such Assignment and Acceptance has
     been completed and is in substantially the form of Exhibit C hereto, (1)
     accept such Assignment and

                                       60

<PAGE>

     Acceptance, (2) record the information contained therein in the Register
     and (3) give prompt notice thereof to the Borrower. In the case of any
     assignment by a Bank, within five Business Days after its receipt of such
     notice, the Borrower, at its own expense, shall execute and deliver to the
     Agent in exchange for the surrendered Note or Notes a new Note to the order
     of such Eligible Assignee in an amount equal to the Loans assumed by it
     pursuant to such Assignment and Acceptance and, if any assigning Bank has
     retained any Loans hereunder, a new Note to the order of such assigning
     Bank in an amount equal to the Loans retained by it hereunder. Such new
     Note or Notes shall be in an aggregate principal amount equal to the
     aggregate principal amount of such surrendered Note or Notes and shall be
     dated the effective date of such Assignment and Acceptance. No assignment
     shall be effective for purposes of this Agreement unless it has been
     recorded in the Register as provided in this Section 11.14.

          (f) Each Bank may sell participations to one or more Persons (other
     than any Loan Party or any of its Affiliates) in or to all or a portion of
     its rights and obligations under this Agreement (including, without
     limitation, all or a portion of its Commitments, the Loans owing to it and
     the Note or Notes (if any) held by it); provided, however, that (1) such
     Bank's obligations under this Agreement shall remain unchanged, (2) such
     Bank shall remain solely responsible to the other parties hereto for the
     performance of such obligations, (3) such Bank shall remain the holder of
     any such Note for all purposes of this Agreement, (4) the Borrower, the
     Agent and the other Banks shall continue to deal solely and directly with
     such Bank in connection with such Bank's rights and obligations under this
     Agreement and (5) no participant under any such participation shall have
     any right to approve any amendment or waiver of any provision of any Loan
     Document, or any consent to any departure by any Loan Party therefrom,
     except to the extent that such amendment, waiver or consent would reduce
     the principal of, or interest on, the Notes or any fees or other amounts
     payable hereunder, in each case to the extent subject to such
     participation, postpone any date fixed for any payment of principal of, or
     interest on, the Notes or any fees or other amounts payable hereunder, in
     each case to the extent subject to such participation, or release any
     Guarantor. Subject to the last two sentences of this clause (f), the
     Borrower agrees that each participant shall be entitled to the benefits of
     Section 2.9 (Increased Costs), 2.11 (Taxes) and 11.2(b) (Costs and
     Expenses) to the same extent as if it were a Bank and had acquired its
     interest by assignment. To the extent permitted by law, each participant
     also shall be entitled to the benefits of Section 11.13 (Set-Off) as though
     it were a Bank, provided such participant agrees to be subject to Section
     2.12 (Sharing of Payments, Etc.) as though it were a Bank. A participant
     shall not be entitled to receive any greater payment under Section 2.9
     (Increased Costs) or 2.11 (Taxes) than the applicable Bank 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 is
     organized under the laws of a jurisdiction outside the United States shall
     not be entitled to the benefits of Section 2.11 (Taxes) 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
     2.11(e) as though it were a Bank.

          (g) Any Bank may, in connection with any assignment or participation
     or proposed assignment or participation pursuant to this Section 11.14,
     disclose to the

                                       61

<PAGE>

     assignee or participant or proposed assignee or participant any information
     relating to the Borrower furnished to such Bank by or on behalf of the
     Borrower; provided, however, that, prior to any such disclosure, the
     assignee or participant or proposed assignee or participant shall agree to
     preserve the confidentiality of any Confidential Information received by it
     from such Bank.

          (h) Notwithstanding any other provision to the contrary set forth in
     this Agreement, any Bank may at any time create a security interest in all
     or any portion of its rights under this Agreement and the other Loan
     Documents (including, without limitation, the Loans owing to it and the
     Note or Notes held by it) in favor of any Federal Reserve Bank.

          (i) Notwithstanding anything to the contrary contained herein, any
     Bank that is a fund that invests in bank loans may create a security
     interest in all or any portion of the Loans owing to it and the Note or
     Notes held by it to the trustee for holders of obligations owed, or
     securities issued, by such fund as security for such obligations or
     securities, provided, that unless and until such trustee actually becomes a
     Bank in compliance with the other provisions of this Section 11.14, (1) no
     such pledge shall release the pledging Bank from any of its obligations
     under the Loan Documents and (2) such trustee shall not be entitled to
     exercise any of the rights of a Bank under the Loan Documents even though
     such trustee may have acquired ownership rights with respect to the pledged
     interest through foreclosure or otherwise.

     11.15 INTEREST. All agreements between a Loan Party, the Agent or any Bank,
whether now existing or hereafter arising and whether written or oral, are
hereby expressly limited so that in no contingency or event whatsoever, whether
by reason of demand being made on any Note or otherwise, shall the amount paid,
or agreed to be paid, to the Agent or any Bank for the use, forbearance, or
detention of the money to be loaned under this Agreement or otherwise or for the
payment or performance of any covenant or obligation contained herein or in any
document related hereto exceed the amount permissible at the Highest Lawful
Rate. If, as a result of any circumstances whatsoever, fulfillment of any
provision hereof or of any of such documents, at the time performance of such
provision shall be due, shall involve transcending the limit of validity
prescribed by applicable usury law, then, ipso facto, the obligation to be
filled shall be reduced to the limit of such validity, and if, from any such
circumstance, the Agent or any Bank shall ever receive interest or anything
which might be deemed interest under applicable law which would exceed the
amount permissible at the Highest Lawful Rate, such amount which would be
excessive interest shall be applied to the reduction of the principal amount
owing on account of the Notes or the amounts owing on other obligations of the
Borrower to the Agent or any Bank under this Agreement or any document related
hereto and not to the payment of interest, or if such excessive interest exceeds
the unpaid principal balance of the Notes and the amounts owing on other
obligations of the Borrower to the Agent or any Bank under this Agreement or any
document related hereto, as the case may be, such excess shall be refunded to
the Borrower. All sums paid or agreed to be paid to the Agent or any Bank for
the use, forbearance, or detention of the indebtedness of the Borrower to the
Agent or any Bank shall, to the extent permitted by applicable law, be
amortized, prorated, allocated, and spread throughout the full term of such
indebtedness until payment in full of the principal thereof (Including the
period of any renewal or extension thereof) so that the interest on account of
such indebtedness

                                       62

<PAGE>

shall not exceed the Highest Lawful Rate. The terms and provisions of this
Section 11.15 shall control and supersede every other provision of all
agreements between the Borrower and the Banks.

     11.16 INDEMNIFICATION. THE BORROWER AGREES TO INDEMNIFY, DEFEND, AND SAVE
HARMLESS THE AGENT, EACH BANK AND THEIR RESPECTIVE OFFICERS, DIRECTORS,
EMPLOYEES, AGENTS, AND ATTORNEYS, AND EACH OF THEM (THE "INDEMNIFIED PARTIES"),
FROM AND AGAINST ALL CLAIMS, ACTIONS, SUITS, AND OTHER LEGAL PROCEEDINGS,
DAMAGES, COSTS, INTEREST, CHARGES, TAXES, COUNSEL FEES, AND OTHER EXPENSES AND
PENALTIES (INCLUDING WITHOUT LIMITATION ALL ATTORNEY FEES AND COSTS OR EXPENSES
OF SETTLEMENT) WHICH ANY OF THE INDEMNIFIED PARTIES MAY SUSTAIN OR INCUR BY
REASON OF OR ARISING OUT OF (a) THE MAKING OF ANY LOAN HEREUNDER, THE EXECUTION
AND DELIVERY OF THIS AGREEMENT AND THE NOTES AND THE CONSUMMATION OF THE
TRANSACTIONS CONTEMPLATED HEREBY AND THE EXERCISE OF ANY OF THE BANKS' RIGHTS
UNDER THIS AGREEMENT AND THE NOTES OR OTHERWISE, INCLUDING, WITHOUT LIMITATION,
DAMAGES, COSTS, AND EXPENSES INCURRED BY ANY OF THE INDEMNIFIED PARTIES IN
INVESTIGATING, PREPARING FOR, DEFENDING AGAINST, OR PROVIDING EVIDENCE,
PRODUCING DOCUMENTS, OR TAKING ANY OTHER ACTION IN RESPECT OF ANY COMMENCED OR
THREATENED LITIGATION UNDER ANY FEDERAL SECURITIES LAW OR ANY SIMILAR LAW OF ANY
JURISDICTION OR AT COMMON LAW OR (b) ANY AND ALL CLAIMS OR PROCEEDINGS (WHETHER
BROUGHT BY A PRIVATE PARTY, GOVERNMENTAL AUTHORITY OR OTHERWISE) FOR BODILY
INJURY, PROPERTY DAMAGE, ABATEMENT, REMEDIATION, ENVIRONMENTAL DAMAGE, OR
IMPAIRMENT OR ANY OTHER INJURY OR DAMAGE RESULTING FROM OR RELATING TO THE
RELEASE OF ANY HAZARDOUS MATERIALS LOCATED UPON, MIGRATING INTO, FROM, OR
THROUGH OR OTHERWISE RELATING TO ANY PROPERTY OWNED OR LEASED BY THE BORROWER OR
ANY SUBSIDIARY (WHETHER OR NOT THE RELEASE OF SUCH HAZARDOUS MATERIALS WAS
CAUSED BY THE BORROWER, ANY SUBSIDIARY, A TENANT, OR SUBTENANT OF THE BORROWER
OR ANY SUBSIDIARY, A PRIOR OWNER, A TENANT, OR SUBTENANT OF ANY PRIOR OWNER OR
ANY OTHER PARTY AND WHETHER OR NOT THE ALLEGED LIABILITY IS ATTRIBUTABLE TO THE
HANDLING, STORAGE, GENERATION, TRANSPORTATION, OR DISPOSAL OF ANY HAZARDOUS
MATERIALS OR THE MERE PRESENCE OF ANY HAZARDOUS MATERIALS ON SUCH PROPERTY;
PROVIDED THAT THE BORROWER SHALL NOT BE LIABLE TO THE INDEMNIFIED PARTIES WHERE
THE RELEASE OF SUCH HAZARDOUS MATERIALS OCCURS AT ANY TIME AT WHICH THE BORROWER
OR ANY SUBSIDIARY CEASES TO OWN OR LEASE SUCH PROPERTY); AND PROVIDED FURTHER
THAT NO INDEMNIFIED PARTY SHALL BE ENTITLED TO THE BENEFITS OF THIS SECTION
11.16 TO THE EXTENT ITS OWN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT CONTRIBUTED
TO ITS LOSS; AND PROVIDED FURTHER THAT IT IS THE INTENTION OF THE BORROWER TO
INDEMNIFY THE INDEMNIFIED PARTIES AGAINST THE CONSEQUENCES OF THEIR OWN
NEGLIGENCE. THIS AGREEMENT IS INTENDED TO PROTECT AND INDEMNIFY THE INDEMNIFIED
PARTIES AGAINST ALL RISKS HEREBY ASSUMED

                                       63

<PAGE>

BY THE BORROWER. THE OBLIGATIONS OF THE BORROWER UNDER THIS SECTION 10.16 SHALL
SURVIVE ANY TERMINATION OF THIS AGREEMENT AND THE REPAYMENT OF THE NOTES.

     11.17 PAYMENTS SET ASIDE. To the extent that the Borrower makes a payment
or payments to the Agent or any Bank or the Agent or any Bank exercises its
right of set off, and such payment or payments or the proceeds of such set off
or any part thereof are subsequently invalidated, declared to be fraudulent or
preferential, set aside and/or required to be repaid to a trustee, receiver or
any other Person under any Debtor Law or equitable cause, then, to the extent of
such recovery, the obligation or part thereof originally intended to be
satisfied, and all rights and remedies therefor, shall be revived and shall
continue in full force and effect as if such payment had not been made or set
off had not occurred.

     11.18 LOAN AGREEMENT CONTROLS. If there are any conflicts or
inconsistencies among this Agreement and any other document executed in
connection with the transactions connected herewith, the provisions of this
Agreement shall prevail and control.

     11.19 OBLIGATIONS SEVERAL. The obligations of each Bank under this
Agreement and the Note to which it is a party are several, and no Bank shall be
responsible for any obligation or Commitment of any other Bank under this
Agreement and the Note to which it is a party. Nothing contained in this
Agreement or the Note to which it is a party, and no action taken by any Bank
pursuant thereto, shall be deemed to constitute the Banks to be a partnership,
an association, a joint venture, or any other kind of entity.

     11.20 FINAL AGREEMENT. THIS WRITTEN AGREEMENT REPRESENTS THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENT'S OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

                                       64

<PAGE>

     IN WITNESS WHEREOF, the parties hereto, by their respective officers
thereunto duly authorized, have executed this Agreement on the dates set forth
below to be effective as of April 26, 2005.

                                        TRUNKLINE LNG HOLDINGS LLC
                                        As Borrower

                                        By: /s/ Richard N. Marshall
                                            ------------------------------------
                                        Name:   Richard N. Marshall
                                              ----------------------------------
                                        Title:  Vice President and Treasurer
                                               ---------------------------------

                                        PANHANDLE EASTERN PIPE LINE COMPANY, LP
                                        As a Guarantor

                                        By: /s/ Richard N. Marshall
                                            ------------------------------------
                                        Name:   Richard N. Marshall
                                              ----------------------------------
                                        Title:  Vice President and Treasurer
                                               ---------------------------------

                                        TRUNKLINE LNG COMPANY, LLC
                                        As a Guarantor

                                        By: /s/ Richard N. Marshall
                                            ------------------------------------
                                        Name:   Richard N. Marshall
                                              ----------------------------------
                                        Title:  Vice President and Treasurer
                                               ---------------------------------

Commitment: $255,626,300                BAYERISCHE HYPO UND- VEREINSBANK AG,
                                        NEW YORK BRANCH
                                        For itself and as Agent for the Banks

                                        By: /s/ William W. Hunter
                                            ------------------------------------
                                        Name:   William W. Hunter
                                              ----------------------------------
                                        Title:  Director
                                               ---------------------------------

                                        By: /s/ Shannon Batchman
                                            ------------------------------------
                                        Name:   Shannon Batchman
                                              ----------------------------------
                                        Title:  Director
                                               ---------------------------------

                                        ADDRESS FOR NOTICES IN ITS CAPACITY AS
                                        A BANK:

                                       65

<PAGE>

                                        Bayerische Hypo- und Vereinsbank AG,
                                        New York Branch
                                        150 East 42nd Street
                                        New York, NY 10017-4679
                                        Attn: Yoram Dankner and William Hunter
                                        Tel: 212-672-5446 and 212-672-5340
                                        Fax: 212-672-5530

                                       66<PAGE>
                                                                    Exhibit 10.1

                            SMITH INTERNATIONAL, INC.
                            1989 LONG-TERM INCENTIVE
                                COMPENSATION PLAN

               (AS AMENDED AND RESTATED EFFECTIVE JANUARY 1, 2005)
<PAGE>
                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>                                                                         <C>
SECTION 1 GENERAL PROVISIONS RELATING TO PLAN GOVERNANCE,
          COVERAGE AND BENEFITS..........................................     1
   1.1    Background and Purpose.........................................     1
   1.2    Definitions....................................................     1
          (a)   Authorized Officer.......................................     2
          (b)   Board....................................................     2
          (c)   Cause....................................................     2
          (d)   CEO......................................................     2
          (e)   Change in Control........................................     2
          (f)   Code.....................................................     2
          (g)   Committee................................................     2
          (h)   Common Stock.............................................     3
          (i)   Company..................................................     3
          (j)   Covered Employee.........................................     3
          (k)   Disability...............................................     3
          (l)   Employee.................................................     3
          (m)   Employment...............................................     3
          (n)   Exchange Act.............................................     3
          (o)   Fair Market Value........................................     3
          (p)   Grantee..................................................     4
          (q)   Immediate Family.........................................     4
          (r)   Incentive Award or Award.................................     4
          (s)   Incentive Agreement......................................     4
          (t)   Independent SAR or SAR...................................     4
          (u)   Insider..................................................     4
          (v)   Nonstatutory Stock Option................................     4
          (w)   Option Price.............................................     5
          (x)   Other Stock-Based Award..................................     5
          (y)   Outside Director.........................................     5
          (z)   Parent...................................................     5
          (aa)  Performance-Based Exception..............................     5
          (bb)  Performance-Based Restricted Stock.......................     5
          (cc)  Performance Criteria.....................................     5
          (dd)  Performance Period.......................................     5
          (ee)  Plan.....................................................     5
          (ff)  Publicly Held Corporation................................     5
          (gg)  Restricted Stock.........................................     5
          (hh)  Restricted Stock Award...................................     5
          (ii)  Restriction Period.......................................     6
          (jj)  Retirement...............................................     6
          (kk)  Share....................................................     6
          (ll)  Share Pool...............................................     6
</TABLE>

                                        i
<PAGE>
<TABLE>
<S>                                                                          <C>
          (mm)  Spread...................................................     6
          (nn)  Stock Appreciation Right or SAR..........................     6
          (oo)  Stock Option or Option...................................     6
          (pp)  Subsidiary...............................................     6
          (qq)  Supplemental Payment.....................................     6
   1.3    Plan Administration............................................     6
          (a)   Authority of the Committee...............................     6
          (b)   Meetings.................................................     7
          (c)   Decisions Binding........................................     7
          (d)   Modification of Outstanding Incentive Awards.............     7
          (e)   Delegation of Authority..................................     7
          (f)   Expenses of Committee....................................     7
          (g)   Surrender of Previous Incentive Awards...................     8
          (h)   Indemnification..........................................     8
   1.4    Shares of Common Stock Available for Incentive Awards..........     8
   1.5    Share Pool Adjustments for Awards and Payouts..................     9
   1.6    Common Stock Available.........................................    10
   1.7    Eligibility....................................................    10
   1.8    Types of Incentive Awards......................................    10

SECTION 2 STOCK OPTIONS AND STOCK APPRECIATION RIGHTS....................    10
   2.1    Grant of Stock Options.........................................    10
   2.2    Stock Option Terms.............................................    11
          (a)   Written Agreement........................................    11
          (b)   Number of Shares.........................................    11
          (c)   Exercise Price...........................................    11
          (d)   Term.....................................................    11
          (e)   Exercise.................................................    11
   2.3    Stock Option Exercises.........................................    11
          (a)   Method of Exercise and Payment...........................    11
          (b)   Restrictions on Share Transferability....................    12
          (c)   Proceeds of Option Exercise..............................    13
   2.4    Stock Appreciation Rights......................................    13
          (a)   Grant....................................................    13
          (b)   General Provisions.......................................    13
          (c)   Exercise.................................................    13
          (d)   Settlement...............................................    13
   2.5    Supplemental Payment on Exercise of Nonstatutory Stock
          Options or Stock Appreciation Rights...........................    14

SECTION 3 RESTRICTED STOCK...............................................    14
   3.1    Award of Restricted Stock......................................    14
          (a)   Grant....................................................    14
          (b)   Immediate Transfer Without Immediate Delivery of
                Restricted Stock.........................................    14
   3.2    Restrictions...................................................    15
          (a)   Forfeiture of Restricted Stock...........................    15
</TABLE>

                                       ii
<PAGE>
<TABLE>
<S>                                                                          <C>
          (b)   Issuance of Certificates.................................    16
          (c)   Removal of Restrictions..................................    16
   3.3    Delivery of Shares of Common Stock.............................    16
   3.4    Supplemental Payment on Vesting of Restricted Stock............    16

SECTION 4 OTHER STOCK-BASED AWARDS.......................................    17
   4.1    Grant of Other Stock-Based Awards..............................    17
   4.2    Other Stock-Based Award Terms..................................    17
          (a)   Written Agreement........................................    17
          (b)   Purchase Price...........................................    17
          (c)   Performance Criteria and Other Terms.....................    17
          (d)   Payment..................................................    17

SECTION 5 PERFORMANCE CRITERIA...........................................    18

SECTION 6 PROVISIONS RELATING TO PLAN PARTICIPATION......................    19
   6.1    Incentive Agreement............................................    19
   6.2    No Right to Employment.........................................    20
   6.3    Securities Requirements........................................    20
   6.4    Transferability................................................    21
   6.5    Rights as a Stockholder........................................    21
          (a)   No Stockholder Rights....................................    21
          (b)   Representation of Ownership..............................    22
   6.6    Change in Stock and Adjustments................................    22
          (a)   Changes in Law or Circumstances..........................    22
          (b)   Exercise of Corporate Powers.............................    22
          (c)   Recapitalization of the Company..........................    22
          (d)   Issue of Common Stock by the Company.....................    23
          (e)   Assumption under the Plan of Outstanding Stock Options...    23
          (f)   Assumption of Incentive Awards by a Successor............    23
   6.7    Termination of Employment, Death, Disability and Retirement....    25
          (a)   Termination of Employment................................    25
          (b)   Termination of Employment for Cause......................    25
          (c)   Voluntary Resignation....................................    25
          (d)   Retirement...............................................    25
          (e)   Disability or Death......................................    26
          (f)   Continuation.............................................    26
   6.8    Change in Control..............................................    26
   6.9    Exchange of Incentive Awards...................................    29
   6.10   Financing......................................................    29

SECTION 7 GENERAL........................................................    29
   7.1    Effective Date and Grant Period................................    29
   7.2    Funding and Liability of Company...............................    29
   7.3    Withholding Taxes..............................................    30
          (a)   Tax Withholding..........................................    30
          (b)   Share Withholding........................................    30
</TABLE>

                                       iii
<PAGE>
<TABLE>
<S>                                                                          <C>
          (c)   Loans....................................................    30
   7.4    No Guarantee of Tax Consequences...............................    30
   7.5    Designation of Beneficiary by Participant......................    30
   7.6    Deferrals......................................................    31
   7.7    Amendment and Termination......................................    31
   7.8    Requirements of Law............................................    31
          (a)   Governmental Entities and Securities Exchanges...........    31
          (b)   Securities Act Rule 701..................................    32
   7.9    Rule 16b-3 Securities Law Compliance for Insiders..............    32
   7.10   Compliance with Code Section 162(m) for Publicly Held
          Corporation....................................................    32
   7.11   Notices........................................................    33
   7.12   Pre-Clearance Agreement with Brokers...........................    33
   7.13   Successors to Company..........................................    33
   7.14   Miscellaneous Provisions.......................................    33
   7.15   Severability...................................................    34
   7.16   Gender, Tense and Headings.....................................    34
   7.17   Governing Law..................................................    34
</TABLE>

                                       iv
<PAGE>
                            SMITH INTERNATIONAL, INC.
                   1989 LONG-TERM INCENTIVE COMPENSATION PLAN

                                    SECTION 1

                         GENERAL PROVISIONS RELATING TO
                     PLAN GOVERNANCE, COVERAGE AND BENEFITS

1.1  BACKGROUND AND PURPOSE

     Smith International, Inc., (the "COMPANY"), previously established and
adopted the Smith International, Inc. 1989 Long-Term Incentive Compensation Plan
(the "PLAN"). The Plan has been amended from time to time but not previously
amended and restated.

     The Company hereby amends and restates the Plan under the form of this plan
document, effective as of January 1, 2005 (the "EFFECTIVE DATE"), to incorporate
various amendments for the benefit of the Company and the participants in the
Plan.

     Effective as of the Effective Date, outstanding stock options and any other
Incentive Awards granted under the Plan, prior to this amendment and
restatement, are assumed and continued hereunder. All outstanding Incentive
Awards that are assumed and continued under the Plan, as amended and restated,
shall remain subject to their individual Incentive Agreements for each such
outstanding Incentive Award.

     The purpose of the Plan is to foster and promote the long-term financial
success of the Company and to increase stockholder value by: (a) encouraging the
commitment of selected key Employees, (b) motivating superior performance of key
Employees by means of long-term performance related incentives, (c) encouraging
and providing key Employees with a program for obtaining ownership interests in
the Company which link and align their personal interests to those of the
Company's stockholders, (d) attracting and retaining key Employees by providing
competitive compensation opportunities, and (e) enabling key Employees to share
in the long-term growth and success of the Company.

     The Plan provides for payment of various forms of compensation. It is not
intended to be a plan that is subject to the Employee Retirement Income Security
Act of 1974, as amended (ERISA). The Plan will be interpreted, construed and
administered consistent with its status as a plan that is not subject to ERISA.

     The Plan will remain in effect, subject to the right of the Board to amend
or terminate the Plan at any time pursuant to Section 7.7, until all Shares
subject to the Plan have been purchased or acquired according to its provisions.

1.2  DEFINITIONS

     The following terms shall have the meanings set forth below:
<PAGE>
          (a) AUTHORIZED OFFICER. The Chairman of the Board, the CEO or any
     other senior officer of the Company to whom either of them delegate the
     authority to execute any Incentive Agreement for and on behalf of the
     Company. No officer or director shall be an Authorized Officer with respect
     to any Incentive Agreement for himself.

          (b) BOARD. The Board of Directors of the Company.

          (c) CAUSE. When used in connection with the termination of a Grantee's
     Employment, shall mean the termination of the Grantee's Employment by the
     Company or any Subsidiary by reason of (i) the conviction of the Grantee by
     a court of competent jurisdiction as to which no further appeal can be
     taken of a crime involving moral turpitude or a felony; (ii) the proven
     commission by the Grantee of a material act of fraud upon the Company or
     any Subsidiary, or any customer or supplier thereof; (iii) the
     misappropriation of any funds or property of the Company or any Subsidiary,
     or any customer or supplier thereof; (iv) the willful and continued failure
     by the Grantee to perform the material duties assigned to him that is not
     cured to the reasonable satisfaction of the Company within 30 days after
     written notice of such failure is provided to Grantee by the Board or CEO
     (or by another officer of the Company or a Subsidiary who has been
     designated by the Board or CEO for such purpose); (v) the knowing
     engagement by the Grantee in any direct and material conflict of interest
     with the Company or any Subsidiary without compliance with the Company's or
     Subsidiary's conflict of interest policy, if any, then in effect; or (vi)
     the knowing engagement by the Grantee, without the written approval of the
     Board or CEO, in any material activity which competes with the business of
     the Company or any Subsidiary or which would result in a material injury to
     the business, reputation or goodwill of the Company or any Subsidiary.

          (d) CEO. The Chief Executive Officer of the Company.

          (e) CHANGE IN CONTROL. Any of the events described in and subject to
     Section 6.8.

          (f) CODE. The Internal Revenue Code of 1986, as amended, and the
     regulations and other authority promulgated thereunder by the appropriate
     governmental authority. References herein to any provision of the Code
     shall refer to any successor provision thereto.

          (g) COMMITTEE. A committee appointed by the Board to administer the
     Plan. While the Company is a Publicly Held Corporation, the Plan shall be
     administered by a Committee appointed by the Board consisting of not less
     than two directors who fulfill the "nonemployee director" requirements of
     Rule 16b-3 under the Exchange Act and the "outside director" requirements
     of Code Section 162(m). In either case, the Committee may be the
     Compensation and Benefits Committee of the Board, or any subcommittee of
     the Compensation and Benefits Committee, provided that the members of the
     Committee satisfy the requirements of the previous provisions of this
     paragraph.

          The Board shall have the power to fill vacancies on the Committee
     arising by resignation, death, removal or otherwise. The Board, in its sole
     discretion, may bifurcate

                                        2
<PAGE>
     the powers and duties of the Committee among one or more separate
     committees, or retain all powers and duties of the Committee in a single
     Committee. The members of the Committee shall serve at the discretion of
     the Board.

          (h) COMMON STOCK. The common stock of the Company, $1.00 par value per
     share, and any class of common stock into which such common shares may
     hereafter be converted, reclassified or recapitalized.

          (i) COMPANY. Smith International, Inc. and any successor in interest
     thereto.

          (j) COVERED EMPLOYEE. A named executive officer who is one of the
     group of covered employees, as defined in Code Section 162(m) and Treasury
     Regulation Section 1.162-27(c) (or its successor), during any period that
     the Company is a Publicly Held Corporation.

          (k) DISABILITY. As determined by the Committee in its discretion
     exercised in good faith, a physical or mental condition of the Grantee that
     would entitle him to payment of disability income payments under the
     Company's long term disability insurance policy or plan for employees, as
     then effective, if any; or in the event that the Grantee is not covered,
     for whatever reason, under the Company's long-term disability insurance
     policy or plan, "Disability" means a permanent and total disability as
     defined in Code Section 22(e)(3). A determination of Disability may be made
     by a physician selected or approved by the Committee and, in this respect,
     the Grantee shall submit to any reasonable examination(s) required by such
     physician upon request.

          (l) EMPLOYEE. Any full-time, salaried employee of the Company (or any
     Parent or Subsidiary) within the meaning of Code Section 3401(c) who, in
     the opinion of the Committee, is in a position to contribute to the growth,
     development or financial success of the Company (or any Parent or
     Subsidiary), including, without limitation, officers who are members of the
     Board.

          (m) EMPLOYMENT. Employment means that the individual is employed as an
     Employee by the Company or any Parent or Subsidiary. In this regard,
     neither the transfer of a Grantee from Employment by the Company to
     Employment by any Parent or Subsidiary, nor the transfer of a Grantee from
     Employment by any Parent or Subsidiary to Employment by the Company, shall
     be deemed to be a termination of Employment of the Grantee. Moreover, the
     Employment of a Grantee shall not be deemed to have been terminated because
     of an approved leave of absence from active Employment on account of
     temporary illness, authorized vacation or granted for reasons of
     professional advancement, education, or health, or during any period
     required to be treated as a leave of absence by virtue of any applicable
     statute, Company personnel policy or written agreement. All determinations
     regarding Employment, and the termination of Employment hereunder, shall be
     made by the Committee.

          (n) EXCHANGE ACT. The Securities Exchange Act of 1934, as amended.

          (o) FAIR MARKET VALUE. While the Company is a Publicly Held
     Corporation, the Fair Market Value of one Share of Common Stock on the date
     in question is deemed

                                        3
<PAGE>
     to be (i) the average of the high and low prices of a Share on the date as
     of which Fair Market Value is to be determined, or if no such sales were
     made on such date, the closing sales price on the immediately preceding
     business day of a Share as reported on the New York Stock Exchange or other
     principal securities exchange on which Shares are then listed or admitted
     to trading, or (ii) the closing sales price for a Share on the date of
     grant as quoted on the National Association of Securities Dealers Automated
     Quotation System ("NASDAQ"), or (iii) if not quoted on NASDAQ, the average
     of the closing bid and asked prices for a Share as quoted by the National
     Quotation Bureau's "Pink Sheets" or the National Association of Securities
     Dealers' OTC Bulletin Board System. If there was no public trade of Common
     Stock on the date in question, Fair Market Value shall be determined by
     reference to the last preceding date on which such a trade was so reported.

          If the Company is not a Publicly Held Corporation at the time a
     determination of the Fair Market Value of the Common Stock is required to
     be made hereunder, the determination of Fair Market Value for purposes of
     the Plan shall be made by the Committee in its sole and absolute
     discretion. In this respect, the Committee may rely on such financial data,
     appraisals, valuations, experts, and other sources as, in its sole and
     absolute discretion, it deems advisable under the circumstances.

          (p) GRANTEE. Any Employee who is granted an Incentive Award under the
     Plan.

          (q) IMMEDIATE FAMILY. With respect to a Grantee, the Grantee's child,
     stepchild, grandchild, parent, stepparent, grandparent, spouse, former
     spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law,
     brother-in-law, or sister-in-law, including adoptive relationships.

          (r) INCENTIVE AWARD OR AWARD. A grant of an award under the Plan to a
     Grantee, including any Nonstatutory Stock Option, Stock Appreciation Right
     (SAR), Restricted Stock Award, Performance-Based Restricted Stock Award, or
     Other Stock-Based Award, as well as any Supplemental Payment with respect
     thereto.

          (s) INCENTIVE AGREEMENT. The written agreement entered into between
     the Company and the Grantee setting forth the terms and conditions pursuant
     to which an Incentive Award is granted under the Plan, as such agreement is
     further defined in Section 6.1(a).

          (t) INDEPENDENT SAR OR SAR. A Stock Appreciation Right described in
     Section 2.4.

          (u) INSIDER. If the Company is a Publicly Held Corporation, an
     individual who is, on the relevant date, an officer, director or ten
     percent (10%) beneficial owner of any class of the Company's equity
     securities that is registered pursuant to Section 12 of the Exchange Act,
     all as defined under Section 16 of the Exchange Act.

          (v) NONSTATUTORY STOCK OPTION. A Stock Option granted by the Committee
     to a Grantee under Section 2.

                                        4
<PAGE>
          (w) OPTION PRICE. The exercise price at which a Share may be purchased
     by the Grantee of a Stock Option.

          (x) OTHER STOCK-BASED AWARD. An award granted by the Committee to a
     Grantee under Section 4.1 that is valued in whole or in part by reference
     to, or is otherwise based upon, Common Stock.

          (y) OUTSIDE DIRECTOR. A member of the Board who is not at the time of
     grant of an Incentive Award, an employee of the Company or any Parent or
     Subsidiary.

          (z) PARENT. Any corporation (whether now or hereafter existing) which
     constitutes a "parent" of the Company, as defined in Code Section 424(e).

          (aa) PERFORMANCE-BASED EXCEPTION. The performance-based exception from
     the tax deductibility limitations of Code Section 162(m), as prescribed in
     Code Section 162(m)(4)(C) and Treasury Regulation Section 1.162-27(e) (or
     its successor), which is applicable during such period that the Company is
     a Publicly Held Corporation.

          (bb) PERFORMANCE-BASED RESTRICTED STOCK. Shares of Restricted Stock
     awarded to a Grantee pursuant to Section 3, the grant of which is
     contingent upon the attainment of specified Performance Criteria, and/or
     the vesting of which are subject to a risk of forfeiture if the specified
     Performance Criteria are not met within the Performance Period.

          (cc) PERFORMANCE CRITERIA. The business criteria that are specified by
     the Committee pursuant to Section 5 for an Incentive Award that is intended
     to qualify for the Performance-Based Exception; the satisfaction of such
     business criteria during the Performance Period being required for the
     grant or vesting of the particular Incentive Award to occur, as specified
     in the Incentive Agreement.

          (dd) PERFORMANCE PERIOD. A period of time determined by the Committee
     over which performance is measured for the purpose of determining a
     Grantee's right to and the payment value of any Performance-Based
     Restricted Stock Award or Other Stock-Based Award that is intended to
     qualify for the Performance-Based Exception.

          (ee) PLAN. Smith International, Inc. 1989 Long-Term Incentive
     Compensation Plan, as set forth herein and as it may be amended from time
     to time.

          (ff) PUBLICLY HELD CORPORATION. A corporation issuing any class of
     common equity securities required to be registered under Section 12 of the
     Exchange Act.

          (gg) RESTRICTED STOCK. Shares of Common Stock issued or transferred to
     a Grantee pursuant to Section 3.

          (hh) RESTRICTED STOCK AWARD. An authorization by the Committee to
     issue or transfer Restricted Stock to a Grantee pursuant to Section 3.

                                        5
<PAGE>
          (ii) RESTRICTION PERIOD. The period of time determined by the
     Committee and set forth in the Incentive Agreement during which the
     transfer of Restricted Stock by the Grantee is restricted.

          (jj) RETIREMENT. The voluntary termination of Employment from the
     Company and any Parent or Subsidiary constituting retirement for age (i) on
     any date after the Employee attains the normal retirement age of 65 years,
     (ii) an earlier retirement date for age as expressly agreed to by the
     Committee prior to termination of Employment, or (iii) or such other age as
     may be designated by the Committee in the Employee's individual Incentive
     Agreement.

          (kk) SHARE. A share of the Common Stock of the Company.

          (ll) SHARE POOL. The number of shares authorized for issuance under
     Section 1.4, as adjusted for awards and payouts under Section 1.5 and as
     adjusted for changes in corporate capitalization under Section 6.6.

          (mm) SPREAD. The difference between the exercise price per Share
     specified in a SAR grant and the Fair Market Value of a Share on the date
     of exercise of the SAR.

          (nn) STOCK APPRECIATION RIGHT OR SAR. A Stock Appreciation Right as
     described in Section 2.4.

          (oo) STOCK OPTION OR OPTION. Pursuant to Section 2, a Nonstatutory
     Stock Option which provides the Grantee with the right to purchase Shares
     of Common Stock upon specified terms. The Plan does not provide for grants
     of "incentive stock options" as described in Code Section 422.

          (pp) SUBSIDIARY. Any corporation (whether now or hereafter existing)
     which constitutes a "subsidiary" of the Company, as defined in Code Section
     424(f) of the Code, and any limited liability company, partnership, or
     other entity in which the Company controls fifty percent (50%) or more of
     the voting power or equity interests.

          (qq) SUPPLEMENTAL PAYMENT. Any amount, as described in Sections 2.5,
     3.4 and/or 4.2(c), that is dedicated to payment of income taxes which are
     payable by the Grantee resulting from an Incentive Award.

1.3  PLAN ADMINISTRATION

          (a) AUTHORITY OF THE COMMITTEE. Except as may be limited by law and
     subject to the provisions herein, the Committee shall have full power to
     (i) select Grantees who shall participate in the Plan; (ii) determine the
     sizes, duration and types of Incentive Awards; (iii) determine the terms
     and conditions of Incentive Awards and Incentive Agreements; (iv) determine
     whether any Shares subject to Incentive Awards will be subject to any
     restrictions on transfer; (v) construe and interpret the Plan and any
     Incentive Agreement or other agreement entered into under the Plan; and
     (vi) establish, amend, or waive rules for the Plan's administration.
     Further, the Committee shall make

                                        6
<PAGE>
     all other determinations which may be necessary or advisable for the
     administration of the Plan.

          (b) MEETINGS. The Committee shall designate a chairman from among its
     members who shall preside at its meetings, and shall designate a secretary,
     without regard to whether that person is a member of the Committee, who
     shall keep the minutes of the proceedings and all records, documents, and
     data pertaining to its administration of the Plan. Meetings shall be held
     at such times and places as shall be determined by the Committee and the
     Committee may hold telephonic meetings. The Committee may take any action
     otherwise proper under the Plan by the affirmative vote, taken with or
     without a meeting, of a majority of its members. The Committee may
     authorize any one or more of its members or any officer of the Company to
     execute and deliver documents on behalf of the Committee.

          (c) DECISIONS BINDING. All determinations and decisions of the
     Committee shall be made in its discretion pursuant to the terms and
     provisions of the Plan, and shall be final, conclusive and binding on all
     persons including the Company, its shareholders, Employees, Grantees, and
     their estates and beneficiaries. The Committee's decisions with respect to
     any Incentive Award need not be uniform and may be made selectively among
     Incentive Awards and Grantees, whether or not such Incentive Awards are
     similar or such Grantees are similarly situated.

          (d) MODIFICATION OF OUTSTANDING INCENTIVE AWARDS. Subject to the
     stockholder approval requirements of Section 7.7 if applicable, the
     Committee may, in its discretion, provide for the extension of the
     exercisability of an Incentive Award, accelerate the vesting or
     exercisability of an Incentive Award (except for an Incentive Award in the
     form of a SAR which is subject to Code Section 409A), eliminate or make
     less restrictive any restrictions contained in an Incentive Award, waive
     any restriction or other provisions of an Incentive Award, or otherwise
     amend or modify an Incentive Award in any manner that is either (i) not
     adverse to the Grantee to whom such Incentive Award was granted or (ii)
     consented to by such Grantee. Notwithstanding the above provisions of this
     subsection, no amendment or modification of an Incentive Award shall be
     made to the extent such modification results in any Stock Option with an
     exercise price less than 100% of the Fair Market Value per Share on the
     date of grant.

          (e) DELEGATION OF AUTHORITY. The Committee may delegate to designated
     officers or other employees of the Company any of its duties and authority
     under the Plan pursuant to such conditions or limitations as the Committee
     may establish from time to time; provided, however, the Committee may not
     delegate to any person the authority (i) to grant Incentive Awards or (ii)
     if the Company is a Publicly Held Corporation, to take any action which
     would contravene the requirements of Rule 16b-3 under the Exchange Act, the
     Performance-Based Exception under Code Section 162(m), or the
     Sarbanes-Oxley Act of 2002.

          (f) EXPENSES OF COMMITTEE. The Committee may employ legal counsel,
     including, without limitation, independent legal counsel and counsel
     regularly employed by the Company, and other agents as the Committee may
     deem appropriate for the

                                        7
<PAGE>
     administration of the Plan. The Committee may rely upon any opinion or
     computation received from any such counsel or agent. All expenses incurred
     by the Committee in interpreting and administering the Plan, including,
     without limitation, meeting expenses and professional fees, shall be paid
     by the Company.

          (g) SURRENDER OF PREVIOUS INCENTIVE AWARDS. The Committee may, in its
     absolute discretion, grant Incentive Awards to Grantees on the condition
     that such Grantees surrender to the Committee for cancellation such other
     Incentive Awards (including, without limitation, Incentive Awards with
     higher exercise prices) as the Committee directs. Incentive Awards granted
     on the condition precedent of surrender of outstanding Incentive Awards
     shall not count against the limits set forth in Section 1.4 until such time
     as such previous Incentive Awards are surrendered and cancelled.

          (h) INDEMNIFICATION. Each person who is or was a member of the
     Committee shall be indemnified by the Company against and from any damage,
     loss, liability, cost and expense that may be imposed upon or reasonably
     incurred by him in connection with or resulting from any claim, action,
     suit, or proceeding to which he may be a party or in which he may be
     involved by reason of any action taken or failure to act under the Plan,
     except for any such act or omission constituting willful misconduct or
     gross negligence. Each such person shall be indemnified by the Company for
     all amounts paid by him in settlement thereof, with the Company's approval,
     or paid by him in satisfaction of any judgment in any such action, suit, or
     proceeding against him, provided he shall give the Company an opportunity,
     at its own expense, to handle and defend the same before he undertakes to
     handle and defend it on his own behalf. The foregoing right of
     indemnification shall not be exclusive of any other rights of
     indemnification to which such persons may be entitled under the Company's
     Articles or Certificate of Incorporation or Bylaws, as a matter of law, or
     otherwise, or any power that the Company may have to indemnify them or hold
     them harmless.

1.4  SHARES OF COMMON STOCK AVAILABLE FOR INCENTIVE AWARDS

     Subject to adjustment under Section 6.6, there shall be available for
Incentive Awards that are granted wholly or partly in Common Stock (including
rights or Stock Options that may be exercised for or settled in Common Stock)
Fourteen Million Four Hundred Thousand (14,400,000) Shares of Common Stock. The
number of Shares of Common Stock that are the subject of Incentive Awards under
this Plan, which are forfeited or terminated, expire unexercised, are settled in
cash in lieu of Common Stock or in a manner such that all or some of the Shares
covered by an Incentive Award are not issued to a Grantee or are exchanged for
Incentive Awards that do not involve Common Stock, shall again immediately
become available for Incentive Awards hereunder. The Committee may from time to
time adopt and observe such procedures concerning the counting of Shares against
the Plan maximum as it may deem appropriate.

     During any period that the Company is a Publicly Held Corporation, then
unless and until the Committee determines that a particular Incentive Award
granted to a Covered Employee is not intended to comply with the
Performance-Based Exception, the following rules shall apply to grants of
Incentive Awards to Covered Employees:

                                        8
<PAGE>
          (a) Subject to adjustment as provided in Section 6.6, the maximum
     aggregate number of Shares of Common Stock (including Stock Options, SARs,
     Restricted Stock, Performance-Based Restricted Stock, and Other Stock-Based
     Awards that are paid out in Shares) that may be granted (in the case of
     Stock Options and SARs) or that may vest (in the case of Restricted Stock,
     Performance-Based Restricted Stock or other Stock-Based Awards), as
     applicable, in any calendar year pursuant to any Incentive Award held by
     any individual Covered Employee shall be One Million (1,000,000) Shares.

          (b) The maximum aggregate cash payout (including SARs or Other
     Stock-Based Awards that are paid out in cash) with respect to Incentive
     Awards granted in any calendar year which may be made to any Covered
     Employee shall be Ten Million dollars ($10,000,000).

          (c) With respect to any Stock Option or SAR granted to a Covered
     Employee that is canceled or repriced, the number of Shares subject to such
     Stock Option or SAR shall continue to count against the maximum number of
     Shares that may be the subject of Stock Options or SARs granted to such
     Covered Employee hereunder and, in this regard, such maximum number shall
     be determined in accordance with Code Section 162(m).

          (d) The limitations of subsections (a), (b) and (c) above shall be
     construed and administered so as to comply with the Performance-Based
     Exception.

1.5  SHARE POOL ADJUSTMENTS FOR AWARDS AND PAYOUTS.

     The following Incentive Awards and payouts shall reduce, on a one Share for
one Share basis, the number of Shares authorized for issuance under the Share
Pool:

          (a) Stock Option;

          (b) SAR;

          (c) Restricted Stock;

          (d) Performance-Based Restricted Stock; and

          (e) A payout of an Other Stock-Based Award in Shares.

     The following transactions shall restore, on a one Share for one Share
basis, the number of Shares authorized for issuance under the Share Pool:

          (a) A Payout of a SAR, Restricted Stock Award, Performance-Based
     Restricted Stock Award, or Other Stock-Based Award in the form of cash (but
     not the "cashless" exercise of a Stock Option as provided in Section
     2.3(a));

          (b) A cancellation, termination, expiration, forfeiture, or lapse for
     any reason of any Shares subject to an Incentive Award; and

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<PAGE>
          (c) Payment of an Option Price by withholding Shares which otherwise
     would be acquired on exercise (i.e., the Share Pool shall be increased by
     the number of Shares withheld in payment of the Option Price).

1.6  COMMON STOCK AVAILABLE.

     The Common Stock available for issuance or transfer under the Plan shall be
made available from Shares now or hereafter (a) held in the treasury of the
Company, (b) authorized but unissued shares, or (c) shares to be purchased or
acquired by the Company. No fractional shares shall be issued under the Plan;
payment for fractional shares shall be made in cash.

1.7  ELIGIBILITY.

     Full-time salaried Employees who have been determined by the Committee to
be key Employees shall be eligible to receive Incentive Awards under the Plan.
The Committee shall from time to time designate those Employees to be granted
Incentive Awards under the Plan, the type of Incentive Awards granted, the
number of Shares, Stock Options, rights or units, as the case may be, which
shall be granted to each such person, and any other terms or conditions relating
to the Incentive Awards as it may deem appropriate to the extent consistent with
the provisions of the Plan. A Grantee who has been granted an Incentive Award
may, if otherwise eligible, be granted additional Incentive Awards at any time.

     No Insider shall be eligible to be granted an Incentive Award that is
subject to Rule 16a-3 under the Exchange Act unless and until such Insider has
granted a limited power of attorney to those officers of the Company who have
been designated by the Committee for purposes of future required filings under
the Exchange Act.

1.8  TYPES OF INCENTIVE AWARDS

     The types of Incentive Awards under the Plan are Stock Options, Stock
Appreciation Rights and Supplemental Payments as described in Section 2,
Restricted Stock, Performance-Based Restricted Stock and Supplemental Payments
as described in Section 3, Other Stock-Based Awards and Supplemental Payments as
described in Section 4, or any combination of the foregoing.

                                    SECTION 2

                   STOCK OPTIONS AND STOCK APPRECIATION RIGHTS

2.1  GRANT OF STOCK OPTIONS

     The Committee is authorized to grant Nonstatutory Stock Options to
Employees in accordance with the terms and conditions of the Plan, and with such
additional terms and conditions, not inconsistent with the Plan, as the
Committee shall determine in its discretion. Successive grants may be made to
the same Grantee regardless of whether any Stock Option previously granted to
such person remains unexercised.

                                       10
<PAGE>
2.2  STOCK OPTION TERMS

          (a) WRITTEN AGREEMENT. Each grant of a Stock Option shall be evidenced
     by a written Incentive Agreement. Among its other provisions, each
     Incentive Agreement shall set forth the extent to which the Grantee shall
     have the right to exercise the Stock Option following termination of the
     Grantee's Employment. Such provisions shall be determined in the discretion
     of the Committee, shall be included in the Grantee's Incentive Agreement,
     and need not be uniform among all Stock Options issued pursuant to the
     Plan.

          (b) NUMBER OF SHARES. Each Stock Option shall specify the number of
     Shares of Common Stock to which it pertains.

          (c) EXERCISE PRICE. The exercise price per Share of Common Stock under
     each Stock Option shall be determined by the Committee, but in no event
     shall the exercise price be less than 100% of the Fair Market Value per
     Share on the date the Stock Option is granted. Each Stock Option shall
     specify the method of exercise which shall be consistent with the
     requirements of Section 2.3(a).

          (d) TERM. In the Incentive Agreement, the Committee shall fix the term
     of each Stock Option, not to exceed ten (10) years from the date of grant.
     In the event no term is fixed, such term shall be ten (10) years from the
     date of grant.

          (e) EXERCISE. The Committee shall determine the time or times at which
     a Stock Option may be exercised, in whole or in part. Each Stock Option may
     specify the required period of continuous Employment and/or the performance
     objectives to be achieved before the Stock Option or portion thereof will
     become exercisable. Each Stock Option, the exercise of which, or the timing
     of the exercise of which, is dependent, in whole or in part, on the
     achievement of designated performance objectives, may specify a minimum
     level of achievement in respect of the specified performance objectives
     below which no Stock Options will be exercisable and a method for
     determining the number of Stock Options that will be exercisable if
     performance is at or above such minimum but short of full achievement of
     the performance objectives. All such terms and conditions shall be set
     forth in the Incentive Agreement.

2.3  STOCK OPTION EXERCISES

          (a) METHOD OF EXERCISE AND PAYMENT. Stock Options shall be exercised
     by the delivery of a signed written notice of exercise to the Company as of
     a date set by the Company in advance of the effective date of the proposed
     exercise. The notice shall set forth the number of Shares with respect to
     which the Option is to be exercised, accompanied by full payment for the
     Shares.

          The Option Price upon exercise of any Stock Option shall be payable to
     the Company in full either: (i) in cash or its equivalent; or (ii) subject
     to prior approval by the Committee in its discretion, by tendering
     previously acquired Shares having an aggregate Fair Market Value at the
     time of exercise equal to the Option Price (provided that the Shares which
     are tendered must have been held by the Grantee for at least six (6) months

                                       11
<PAGE>
     prior to their tender to satisfy the Option Price); or (iii) subject to
     prior approval by the Committee in its discretion, by withholding Shares
     which otherwise would be acquired on exercise having an aggregate Fair
     Market Value at the time of exercise equal to the total Option Price; or
     (iv) subject to prior approval by the Committee in its discretion, by a
     combination of (i), (ii), and (iii) above.

          Any payment in Shares shall be effected by the surrender of such
     Shares to the Company in good form for transfer and shall be valued at
     their Fair Market Value on the date when the Stock Option is exercised.
     Unless otherwise permitted by the Committee in its discretion, the Grantee
     shall not surrender, or attest to the ownership of, Shares in payment of
     the Option Price if such action would cause the Company to recognize
     compensation expense (or additional compensation expense) with respect to
     the Stock Option for financial accounting reporting purposes.

          The Committee, in its discretion, also may allow the Option Price to
     be paid with such other consideration as shall constitute lawful
     consideration for the issuance of Shares (including, without limitation,
     effecting a "cashless exercise" with a broker of the Option), subject to
     applicable securities law restrictions and tax withholdings, or by any
     other means which the Committee determines to be consistent with the Plan's
     purpose and applicable law. At the direction of the Grantee, the broker
     will either (i) sell all of the Shares received when the Option is
     exercised and pay the Grantee the proceeds of the sale (minus the Option
     Price, withholding taxes and any fees due to the broker); or (ii) sell
     enough of the Shares received upon exercise of the Option to cover the
     Option Price, withholding taxes and any fees due the broker and deliver to
     the Grantee (either directly or through the Company) a stock certificate
     for the remaining Shares. Dispositions to a broker effecting a cashless
     exercise are not exempt under Section 16 of the Exchange Act if the Company
     is a Publicly Held Corporation. Moreover, in no event will the Committee
     allow the Option Price to be paid with a form of consideration, including a
     loan or a "cashless exercise," if such form of consideration would violate
     the Sarbanes-Oxley Act of 2002 as determined by the Committee.

          As soon as practicable after receipt of a written notification of
     exercise and full payment, the Company shall deliver, or cause to be
     delivered, to or on behalf of the Grantee, in the name of the Grantee or
     other appropriate recipient, evidence of ownership for the number of Shares
     purchased under the Stock Option.

          Subject to Section 6.4, during the lifetime of a Grantee, each Option
     granted to him shall be exercisable only by the Grantee (or his legal
     guardian in the event of his Disability) or by a broker-dealer acting on
     his behalf pursuant to a cashless exercise under the foregoing provisions
     of this Section 2.3(a).

          (b) RESTRICTIONS ON SHARE TRANSFERABILITY. The Committee may impose
     such restrictions on any grant of Stock Options or on any Shares acquired
     pursuant to the exercise of a Stock Option as it may deem advisable,
     including, without limitation, restrictions under (i) any stockholders'
     agreement, buy/sell agreement, right of first refusal, non-competition, and
     any other agreement between the Company and any of its securities holders
     or employees; (ii) any applicable federal securities laws; (iii) the

                                       12
<PAGE>
     requirements of any stock exchange or market upon which such Shares are
     then listed and/or traded; or (iv) any blue sky or state securities law
     applicable to such Shares. Any certificate issued to evidence Shares issued
     upon the exercise of an Incentive Award may bear such legends and
     statements as the Committee shall deem advisable to assure compliance with
     federal and state laws and regulations.

          Any Grantee or other person exercising an Incentive Award shall be
     required, if requested by the Committee, to give a written representation
     that the Incentive Award and the Shares subject to the Incentive Award will
     be acquired for investment and not with a view to public distribution;
     provided, however, that the Committee, in its discretion, may release any
     person receiving an Incentive Award from any such representations either
     prior to or subsequent to the exercise of the Incentive Award.

          (c) PROCEEDS OF OPTION EXERCISE. The proceeds received by the Company
     from the sale of Shares pursuant to Stock Options exercised under the Plan
     shall be used for general corporate purposes.

2.4  STOCK APPRECIATION RIGHTS

          (a) GRANT. The Committee may grant Stock Appreciation Rights that are
     independent of Nonstatutory Stock Options ("SARs"), but only with respect
     to Shares that are traded on an established securities exchange. All SARs
     granted under the Plan are intended to satisfy the requirements of
     Q&A-4(d)(iv) of Internal Revenue Service Notice 2005-1 or other authority,
     and therefore not provide for any deferral of compensation subject to Code
     Section 409A.

          (b) GENERAL PROVISIONS. The terms and conditions of each SAR shall be
     evidenced by an Incentive Agreement. The exercise price Per Share shall be
     not less than one hundred percent (100%) of the Fair Market Value of a
     Share on the grant date of the SAR. The term of the SAR shall be determined
     by the Committee. The Committee cannot include any feature for the deferral
     of compensation other than the deferral of recognition of income until
     exercise of the SAR.

          (c) EXERCISE. SARs shall be exercisable subject to such terms and
     conditions as the Committee shall specify in the Incentive Agreement for
     the SAR grant. No SAR granted to an Insider may be exercised prior to six
     (6) months from the date of grant, except in the event of his death or
     Disability which occurs prior to the expiration of such six-month period if
     so permitted under the Incentive Agreement.

          (d) SETTLEMENT. Effective for any SARs issued on or after January 1,
     2005, upon exercise of the SAR, the Grantee shall receive an amount equal
     to the Spread. The Spread, less applicable withholdings, shall be payable
     only in Shares within 30 calendar days of the exercise date. In no event
     shall any SAR be settled in any manner other than by delivery of Shares
     that are traded on an established securities market. In addition, the
     Incentive Agreement under which such SARs are awarded, or any other
     agreements or arrangements, shall not provide that the Company will
     purchase any Shares delivered as a result of the exercise or vesting of a
     SAR. Any SARs issued under the Plan prior to

                                       13
<PAGE>
     January 1, 2005 shall be subject to the settlement provisions of the Plan
     as in effect prior to January 1, 2005, but only to the extent that such
     settlement is not considered a payment of deferred compensation that would
     be subject to Code Section 409A after December 31, 2004.

2.5  SUPPLEMENTAL PAYMENT ON EXERCISE OF NONSTATUTORY STOCK OPTIONS OR STOCK
     APPRECIATION RIGHTS

     The Committee, either at the time of grant or exercise of any Nonstatutory
Stock Option, may provide in the Incentive Agreement for a Supplemental Payment
by the Company to the Grantee with respect to the exercise of any Nonstatutory
Stock Option. The Supplemental Payment shall be in the amount specified by the
Committee, which amount shall not exceed the amount necessary to pay the federal
and state income tax payable with respect to both the exercise of the
Nonstatutory Stock Option and the receipt of the Supplemental Payment, assuming
the holder is taxed at either the maximum effective income tax rate applicable
thereto or at a lower tax rate as deemed appropriate by the Committee in its
discretion. No Supplemental Payments will be made with respect to any SARs.

                                    SECTION 3

                                RESTRICTED STOCK

3.1  AWARD OF RESTRICTED STOCK

          (a) GRANT. In consideration of the performance of Employment by the
     Grantee, Shares of Restricted Stock, which may be Performance-Based
     Restricted Stock as designated by the Committee in its discretion, may be
     awarded by the Committee with such restrictions during the Restriction
     Period as the Committee shall designate in its discretion. Any such
     restrictions may differ with respect to a particular Grantee. Restricted
     Stock shall be awarded for no additional consideration or such additional
     consideration as the Committee may determine, which consideration may be
     less than, equal to or more than the Fair Market Value of the shares of
     Restricted Stock on the grant date. The terms and conditions of each grant
     of Restricted Stock shall be evidenced by an Incentive Agreement and,
     during the Restriction Period, such Shares of Restricted Stock must remain
     subject to a "substantial risk of forfeiture" within the meaning given to
     such term under Code Section 83. Any Restricted Stock Award may, at the
     time of grant, be designated by the Committee as Performance-Based
     Restricted Stock that is intended to qualify for the Performance-Based
     Exception.

          (b) IMMEDIATE TRANSFER WITHOUT IMMEDIATE DELIVERY OF RESTRICTED STOCK.
     Unless otherwise specified in the Grantee's Incentive Agreement, each
     Restricted Stock Award shall constitute an immediate transfer of the record
     and beneficial ownership of the Shares of Restricted Stock to the Grantee
     in consideration of the performance of services as an Employee, entitling
     such Grantee to all voting and other ownership rights in such Shares.

                                       14
<PAGE>
          As specified in the Incentive Agreement, a Restricted Stock Award may
     limit the Grantee's dividend rights during the Restriction Period in which
     the shares of Restricted Stock are subject to a "substantial risk of
     forfeiture" (within the meaning given to such term under Code Section 83)
     and restrictions on transfer. In the Incentive Agreement, the Committee may
     apply any restrictions to the dividends that the Committee deems
     appropriate. Without limiting the generality of the preceding sentence, if
     the grant or vesting of Shares of Performance-Based Restricted Stock
     granted to a Covered Employee, is designed to comply with the requirements
     of the Performance-Based Exception, the Committee may apply any
     restrictions it deems appropriate to the payment of dividends declared with
     respect to such Shares of Restricted Stock, such that the dividends and/or
     the Shares of Restricted Stock maintain eligibility for the
     Performance-Based Exception. In the event that any dividend constitutes a
     derivative security or an equity security pursuant to the rules under
     Section 16 of the Exchange Act, if applicable, such dividend shall be
     subject to a vesting period equal to the remaining vesting period of the
     Shares of Restricted Stock with respect to which the dividend is paid.

          Shares awarded pursuant to a grant of Restricted Stock or
     Performance-Based Restricted Stock may be issued in the name of the Grantee
     and held, together with a stock power endorsed in blank, by the Committee
     or Company (or their delegates) or in trust or in escrow pursuant to an
     agreement satisfactory to the Committee, as determined by the Committee,
     until such time as the restrictions on transfer have expired. All such
     terms and conditions shall be set forth in the particular Grantee's
     Incentive Agreement. The Company or Committee (or their delegates) shall
     issue to the Grantee a receipt evidencing the certificates held by it which
     are registered in the name of the Grantee.

3.2  RESTRICTIONS

          (a) FORFEITURE OF RESTRICTED STOCK. Restricted Stock awarded to a
     Grantee may be subject to the following restrictions until the expiration
     of the Restriction Period: (i) a restriction that constitutes a
     "substantial risk of forfeiture" (as defined in Code Section 83), or a
     restriction on transferability; (ii) unless otherwise specified by the
     Committee in the Incentive Agreement, the Restricted Stock that is subject
     to restrictions which are not satisfied shall be forfeited and all rights
     of the Grantee to such Shares shall terminate; and (iii) any other
     restrictions that the Committee determines in advance are appropriate,
     including, without limitation, rights of repurchase or first refusal in the
     Company or provisions subjecting the Restricted Stock to a continuing
     substantial risk of forfeiture in the hands of any transferee. Any such
     restrictions shall be set forth in the particular Grantee's Incentive
     Agreement.

                                       15
<PAGE>
          (b) ISSUANCE OF CERTIFICATES. Reasonably promptly after the date of
     grant with respect to Shares of Restricted Stock, the Company shall cause
     to be issued a stock certificate, registered in the name of the Grantee to
     whom such Shares of Restricted Stock were granted, evidencing such Shares;
     provided, however, that the Company shall not cause to be issued such a
     stock certificate unless it has received a stock power duly endorsed in
     blank with respect to such Shares. Each such stock certificate shall bear
     the following legend or any other legend approved by the Company:

          The transferability of this certificate and the shares of stock
          represented hereby are subject to the restrictions, terms and
          conditions (including forfeiture and restrictions against transfer)
          contained in the Smith International, Inc. 1989 Long-Term Incentive
          Compensation Plan and an Incentive Agreement entered into between the
          registered owner of such shares and Smith International, Inc. A copy
          of the Plan and Incentive Agreement are on file in the main corporate
          office of Smith International, Inc.

     Such legend shall not be removed from the certificate evidencing such
     Shares of Restricted Stock unless and until such Shares vest pursuant to
     the terms of the Incentive Agreement.

          (c) REMOVAL OF RESTRICTIONS. The Committee, in its discretion, shall
     have the authority to remove any or all of the restrictions on the
     Restricted Stock if it determines that, by reason of a change in applicable
     law or another change in circumstance arising after the grant date of the
     Restricted Stock, such action is necessary or appropriate.

3.3  DELIVERY OF SHARES OF COMMON STOCK

     Subject to withholding taxes under Section 7.3 and to the terms of the
Incentive Agreement, a stock certificate evidencing the Shares of Restricted
Stock with respect to which the restrictions in the Incentive Agreement have
been satisfied shall be delivered to the Grantee or other appropriate recipient
free of restrictions.

3.4  SUPPLEMENTAL PAYMENT ON VESTING OF RESTRICTED STOCK

     The Committee, either at the time of grant or vesting of Restricted Stock,
may provide for a Supplemental Payment by the Company to the holder in an amount
specified by the Committee, which amount shall not exceed the amount necessary
to pay the federal and state income tax payable with respect to both the vesting
of the Restricted Stock and receipt of the Supplemental Payment, assuming the
Grantee is taxed at either the maximum effective income tax rate applicable
thereto or at a lower tax rate as deemed appropriate by the Committee in its
discretion.

                                       16
<PAGE>
                                    SECTION 4

                            OTHER STOCK-BASED AWARDS

4.1  GRANT OF OTHER STOCK-BASED AWARDS

     Other Stock-Based Awards may be awarded by the Committee to selected
Grantees that are payable in Shares, as determined by the Committee to be
consistent with the goals of the Company. Other types of Stock-Based Awards
include, without limitation, purchase rights, Shares of Common Stock awarded
that are not subject to any restrictions or conditions, convertible or
exchangeable debentures, other rights convertible into Shares, Incentive Awards
valued by reference to the performance of a specified Subsidiary, division or
department of the Company, and settlement in cancellation of rights of any
person with a vested interest in any other plan, fund, program or arrangement
that is or was sponsored, maintained or participated in by the Company or any
Parent or Subsidiary. As is the case with other types of Incentive Awards, Other
Stock-Based Awards may be awarded either alone or in addition to or in
conjunction with any other Incentive Awards. Other Stock-Based Awards are not
intended to be deferred compensation that is subject to Code Section 409A unless
otherwise determined by the Committee.

4.2  OTHER STOCK-BASED AWARD TERMS

          (a) WRITTEN AGREEMENT. The terms and conditions of each grant of an
     Other Stock-Based Award shall be evidenced by an Incentive Agreement.

          (b) PURCHASE PRICE. Except to the extent that an Other Stock-Based
     Award is granted in substitution for an outstanding Incentive Award or is
     delivered upon exercise of a Stock Option, the amount of consideration
     required to be received by the Company shall be either (i) no consideration
     other than services actually rendered (in the case of authorized and
     unissued shares) or to be rendered, or (ii) as otherwise specified in the
     Incentive Agreement.

          (c) PERFORMANCE CRITERIA AND OTHER TERMS. In its discretion, the
     Committee may specify Performance Criteria for (i) vesting in Other
     Stock-Based Awards and (ii) payment thereof to the Grantee, as it may
     determine in its discretion. The extent to which any such Performance
     Criteria have been met shall be determined and certified by the Committee
     in accordance with the requirements to qualify for the Performance-Based
     Exception under Code Section 162(m). All terms and conditions of Other
     Stock-Based Awards shall be determined by the Committee and set forth in
     the Incentive Agreement. The Committee may also provide for a Supplemental
     Payment similar to such payment as described in Section 3.4.

          (d) PAYMENT. Other Stock-Based Awards shall be paid in Shares, in a
     single payment or in installments on such dates as determined by the
     Committee; all as specified in the Incentive Agreement.

                                       17
<PAGE>
                                    SECTION 5

                              PERFORMANCE CRITERIA

     As determined by the Committee at the time of grant, Performance-Based
Restricted Stock Awards, Other Stock-Based Awards and other types of Incentive
Awards made under the Plan may be granted subject to performance objectives
relating to one or more of the following within the meaning of Code Section
162(m) in order to qualify for the Performance-Based Exception (the "Performance
Criteria"):

     (a) profits (including, but not limited to, profit growth, net operating
profit or economic profit);

     (b) profit-related return ratios;

     (c) return measures (including, but not limited to, return on assets,
capital, equity, investment or sales);

     (d) cash flow (including, but not limited to, operating cash flow, free
cash flow or cash flow return on capital or investments);

     (e) earnings (including but not limited to, total shareholder return,
earnings per share or earnings before or after taxes);

     (f) net sales growth;

     (g) net earnings or income (before or after taxes, interest, depreciation
and/or amortization);

     (h) gross, operating or net profit margins;

     (i) productivity ratios;

     (j) share price (including, but not limited to, growth measures and total
shareholder return);

     (k) turnover of assets, capital, or inventory;

     (l) expense targets;

     (m) margins;

     (n) measures of health, safety or environment;

     (o) operating efficiency;

     (p) customer service or satisfaction;

     (q) market share;

                                       18
<PAGE>
     (r) credit quality; and

     (s) working capital targets.

     Performance Criteria may be stated in absolute terms or relative to
comparison companies or indices to be achieved during a Performance Period.

     The Committee shall establish one or more Performance Criteria for each
Incentive Award that is intended to qualify for the Performance-Based Exception
on the date of its grant. In establishing the Performance Criteria for each
applicable Incentive Award, the Committee may provide that the effect of
specified extraordinary or unusual events will be included or excluded
(including, but not limited to, all items of gain, loss or expense determined to
be extraordinary or unusual in nature or infrequent in occurrence or related to
the disposal of a segment of business or related to a change in accounting
principle, all as determined in accordance with standards by Opinion No. 30 of
the Accounting Principles Board (APB Opinion 30) or other authoritative
financial accounting standards). The terms of the stated Performance Criteria
for each applicable Incentive Award must preclude the Committee's discretion to
increase the amount payable to any Grantee that would otherwise be due upon
attainment of the Performance Criteria. The Performance Criteria specified in
any Incentive Agreement need not be applicable to all Incentive Awards, and may
be particular to an individual Grantee's function or business unit. The
Committee may establish the Performance Criteria of the Company or any entity
which is affiliated by common ownership with the Company as determined and
designated by the Committee, in its discretion, in the Incentive Agreement.

                                    SECTION 6

                    PROVISIONS RELATING TO PLAN PARTICIPATION

6.1  INCENTIVE AGREEMENT.

     Each Grantee to whom an Incentive Award is granted shall be required to
enter into an Incentive Agreement with the Company, in such a form as is
provided by the Committee. The Incentive Agreement shall contain specific terms
as determined by the Committee, in its discretion, with respect to the Grantee's
particular Incentive Award. Such terms need not be uniform among all Grantees or
any similarly situated Grantees. The Incentive Agreement may include, without
limitation, vesting, forfeiture and other provisions particular to the
particular Grantee's Incentive Award, as well as, for example, provisions to the
effect that the Grantee (a) shall not disclose any confidential information
acquired during Employment with the Company, (b) shall abide by all the terms
and conditions of the Plan and such other terms and conditions as may be imposed
by the Committee, (c) shall not interfere with the employment or other service
of any employee, (d) shall not compete with the Company or become involved in a
conflict of interest with the interests of the Company, (e) shall forfeit an
Incentive Award if terminated for Cause, (f) shall not be permitted to make an
election under Code Section 83(b) when applicable, and (g) shall be subject to
any other agreement between the Grantee and the Company regarding Shares that
may be acquired under an Incentive Award including, without limitation, a
stockholders' agreement, buy-sell agreement, or other agreement restricting the
transferability of Shares by Grantee. An Incentive Agreement shall include such
terms and conditions as are

                                       19
<PAGE>
determined by the Committee, in its discretion, to be appropriate with respect
to any individual Grantee. The Incentive Agreement shall be signed by the
Grantee to whom the Incentive Award is made and by an Authorized Officer.

6.2  NO RIGHT TO EMPLOYMENT.

     Nothing in the Plan or any instrument executed pursuant to the Plan shall
create any Employment rights (including without limitation, rights to continued
Employment) in any Grantee or affect the right of the Company to terminate the
Employment of any Grantee at any time without regard to the existence of the
Plan.

6.3  SECURITIES REQUIREMENTS.

     The Company shall be under no obligation to effect the registration
pursuant to the Securities Act of 1933 of any Shares to be issued hereunder or
to effect similar compliance under any state laws. Notwithstanding anything
herein to the contrary, the Company shall not be obligated to cause to be issued
or delivered any certificates evidencing Shares pursuant to the Plan unless and
until the Company is advised by its counsel that the issuance and delivery of
such certificates is in compliance with all applicable laws, regulations of
governmental authorities, and the requirements of any securities exchange on
which Shares are traded. The Committee may require, as a condition of the
issuance and delivery of certificates evidencing Shares pursuant to the terms
hereof, that the recipient of such Shares make such covenants, agreements and
representations, and that such certificates bear such legends, as the Committee,
in its discretion, deems necessary or desirable.

     The Committee may, in its discretion, defer the effectiveness of any
exercise of an Incentive Award in order to allow the issuance of Shares to be
made pursuant to registration or an exemption from registration or other methods
for compliance available under federal or state securities laws. The Committee
shall inform the Grantee in writing of its decision to defer the effectiveness
of the exercise of an Incentive Award. During the period that the effectiveness
of the exercise of an Incentive Award has been deferred, the Grantee may, by
written notice to the Committee, withdraw such exercise and obtain the refund of
any amount paid with respect thereto.

     If the Shares issuable on exercise of an Incentive Award are not registered
under the Securities Act of 1933, the Company may imprint on the certificate for
such Shares the following legend or any other legend which counsel for the
Company considers necessary or advisable to comply with the Securities Act of
1933:

     THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
     UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("ACT"), OR THE SECURITIES
     LAWS OF ANY STATE. THE SECURITIES MAY NOT BE TRANSFERRED EXCEPT PURSUANT TO
     AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE
     SECURITIES LAWS OR PURSUANT TO ANY APPLICABLE EXEMPTION FROM THE
     REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS OR PURSUANT TO A
     WRITTEN

                                       20
<PAGE>
     OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH
     REGISTRATION IS NOT REQUIRED.

6.4  TRANSFERABILITY

     Incentive Awards granted under the Plan shall not be transferable or
assignable other than: (a) by will or the laws of descent and distribution or
(b) pursuant to a qualified domestic relations order (as defined under Code
Section 414(p)); provided, however, only with respect to Incentive Awards
consisting of Nonstatutory Stock Options, the Committee may, in its discretion,
authorize all or a portion of the Nonstatutory Stock Options to be granted on
terms which permit transfer by the Grantee to (i) the members of the Grantee's
Immediate Family, (ii) a trust or trusts for the exclusive benefit of Immediate
Family members, (iii) a partnership in which such Immediate Family members are
the only partners, or (iv) any other entity owned solely by Immediate Family
members; provided that (A) there may be no consideration for any such transfer,
(B) the Incentive Agreement pursuant to which such Nonstatutory Stock Options
are granted must be approved by the Committee, and must expressly provide for
transferability in a manner consistent with this Section 6.4, (C) subsequent
transfers of transferred Nonstatutory Stock Options shall be prohibited except
in accordance with clauses (a) and (b) (above) of this sentence, and (D) there
may be no transfer of any Incentive Award in a listed transaction as described
in IRS Notice 2003-47. Following any permitted transfer, the Nonstatutory Stock
Option shall continue to be subject to the same terms and conditions as were
applicable immediately prior to transfer, provided that the term "Grantee" shall
be deemed to refer to the transferee. The events of termination of employment,
as set out in Section 6.7 and in the Incentive Agreement, shall continue to be
applied with respect to the original Grantee, and the Incentive Award shall be
exercisable by the transferee only to the extent, and for the periods, specified
in the Incentive Agreement.

     Except as may otherwise be permitted under the Code, in the event of a
permitted transfer of a Nonstatutory Stock Option hereunder, the original
Grantee shall remain subject to withholding taxes upon exercise. In addition,
the Company and the Committee shall have no obligation to provide any notices to
any Grantee or transferee thereof, including, for example, notice of the
expiration of an Incentive Award following the original Grantee's termination of
employment.

     The designation by a Grantee of a beneficiary of an Incentive Award shall
not constitute transfer of the Incentive Award. No transfer by will or by the
laws of descent and distribution shall be effective to bind the Company unless
the Committee has been furnished with a copy of the deceased Grantee's
enforceable will or such other evidence as the Committee deems necessary to
establish the validity of the transfer. Any attempted transfer in violation of
this Section 6.4 shall be void and ineffective. All determinations under this
Section 6.4 shall be made by the Committee in its discretion.

6.5  RIGHTS AS A STOCKHOLDER

          (a) NO STOCKHOLDER RIGHTS. Except as otherwise provided in Section
     3.1(b) for grants of Restricted Stock, a Grantee of an Incentive Award (or
     a permitted transferee of such Grantee) shall have no rights as a
     stockholder with respect to any Shares of

                                       21
<PAGE>
     Common Stock until the issuance of a stock certificate or other record of
     ownership for such Shares.

          (b) REPRESENTATION OF OWNERSHIP. In the case of the exercise of an
     Incentive Award by a person or estate acquiring the right to exercise such
     Incentive Award by reason of the death or Disability of a Grantee, the
     Committee may require reasonable evidence as to the ownership of such
     Incentive Award or the authority of such person. The Committee may also
     require such consents and releases of taxing authorities as it deems
     advisable.

6.6  CHANGE IN STOCK AND ADJUSTMENTS

          (a) CHANGES IN LAW OR CIRCUMSTANCES. Subject to Section 6.8 (which
     only applies in the event of a Change in Control), in the event of any
     change in applicable law or any change in circumstances which results in or
     would result in any dilution of the rights granted under the Plan, or which
     otherwise warrants an equitable adjustment because it interferes with the
     intended operation of the Plan, then, if the Board or Committee should so
     determine, in its absolute discretion, that such change equitably requires
     an adjustment in the number or kind of shares of stock or other securities
     or property theretofore subject, or which may become subject, to issuance
     or transfer under the Plan or in the terms and conditions of outstanding
     Incentive Awards, such adjustment shall be made in accordance with such
     determination. Such adjustments may include changes with respect to (i) the
     aggregate number of Shares that may be issued under the Plan, (ii) the
     number of Shares subject to Incentive Awards, and (iii) the Option Price or
     other price per Share for outstanding Incentive Awards, but shall not
     result in the grant of any Stock Option with an exercise price less than
     100% of the Fair Market Value per Share on the date of grant. The Board or
     Committee shall give notice to each applicable Grantee of such adjustment
     which shall be effective and binding.

          (b) EXERCISE OF CORPORATE POWERS. The existence of the Plan or
     outstanding Incentive Awards hereunder shall not affect in any way the
     right or power of the Company or its stockholders to make or authorize any
     or all adjustments, recapitalization, reorganization or other changes in
     the Company's capital structure or its business or any merger or
     consolidation of the Company, or any issue of bonds, debentures, preferred
     or prior preference stocks ahead of or affecting the Common Stock or the
     rights thereof, or the dissolution or liquidation of the Company, or any
     sale or transfer of all or any part of its assets or business, or any other
     corporate act or proceeding whether of a similar character or otherwise.

          (c) RECAPITALIZATION OF THE COMPANY. Subject to Section 6.8 (which
     only applies in the event of a Change in Control), if while there are
     Incentive Awards outstanding, the Company shall effect any subdivision or
     consolidation of Shares of Common Stock or other capital readjustment, the
     payment of a stock dividend, stock split, combination of Shares,
     recapitalization or other increase or reduction in the number of Shares
     outstanding, without receiving compensation therefor in money, services or
     property, then the number of Shares available under the Plan and the number
     of Incentive Awards which may thereafter be exercised shall (i) in the
     event of an increase in the

                                       22
<PAGE>
     number of Shares outstanding, be proportionately increased and the Option
     Price or Fair Market Value of the Incentive Awards awarded shall be
     proportionately reduced; and (ii) in the event of a reduction in the number
     of Shares outstanding, be proportionately reduced, and the Option Price or
     Fair Market Value of the Incentive Awards awarded shall be proportionately
     increased. The Board or Committee shall take such action and whatever other
     action it deems appropriate, in its discretion, so that the value of each
     outstanding Incentive Award to the Grantee shall not be adversely affected
     by a corporate event described in this Section 6.6(c).

          (d) ISSUE OF COMMON STOCK BY THE COMPANY. Except as hereinabove
     expressly provided in this Section 6.6 and subject to Section 6.8 in the
     event of a Change in Control, the issue by the Company of shares of stock
     of any class, or securities convertible into shares of stock of any class,
     for cash or property, or for labor or services, either upon direct sale or
     upon the exercise of rights or warrants to subscribe therefor, or upon any
     conversion of shares or obligations of the Company convertible into such
     shares or other securities, shall not affect, and no adjustment by reason
     thereof shall be made with respect to, the number of, or Option Price or
     Fair Market Value of, any Incentive Awards then outstanding under
     previously granted Incentive Awards; provided, however, in such event,
     outstanding Shares of Restricted Stock shall be treated the same as
     outstanding unrestricted Shares of Common Stock.

          (e) ASSUMPTION UNDER THE PLAN OF OUTSTANDING STOCK OPTIONS.
     Notwithstanding any other provision of the Plan, the Board or Committee, in
     its discretion, may authorize the assumption and continuation under the
     Plan of outstanding and unexercised stock options or other types of
     stock-based incentive awards that were granted under a stock option plan
     (or other type of stock incentive plan or agreement) that is or was
     maintained by a corporation or other entity that was merged into,
     consolidated with, or whose stock or assets were acquired by, the Company
     as the surviving corporation. Any such action shall be upon such terms and
     conditions as the Board or Committee, in its discretion, may deem
     appropriate, including provisions to preserve the holder's rights under the
     previously granted and unexercised stock option or other stock-based
     incentive award; such as, for example, retaining an existing exercise price
     under an outstanding stock option. Any such assumption and continuation of
     any such previously granted and unexercised incentive award shall be
     treated as an outstanding Incentive Award under the Plan and shall thus
     count against the number of Shares reserved for issuance pursuant to
     Section 1.4. In addition, any Shares issued by the Company through the
     assumption or substitution of outstanding grants from an acquired company
     shall reduce the Shares available for grants under Section 1.4.

          (f) ASSUMPTION OF INCENTIVE AWARDS BY A SUCCESSOR. Subject to the
     accelerated vesting and other provisions of Section 6.8 that apply in the
     event of a Change in Control, in the event of a Corporate Event (defined
     below), each Grantee shall be entitled to receive, in lieu of the number of
     Shares subject to Incentive Awards, such shares of capital stock or other
     securities or property as may be issuable or payable with respect to or in
     exchange for the number of Shares which Grantee would have received had he
     exercised the Incentive Award immediately prior to such Corporate Event,
     together with any adjustments (including, without limitation, adjustments
     to the Option

                                       23
<PAGE>
     Price and the number of Shares issuable on exercise of outstanding Stock
     Options). For this purpose, Shares of Restricted Stock shall be treated the
     same as unrestricted outstanding Shares of Common Stock. A "Corporate
     Event" means any of the following: (i) a dissolution or liquidation of the
     Company, (ii) a sale of all or substantially all of the Company's assets,
     or (iii) a merger, consolidation or combination involving the Company
     (other than a merger, consolidation or combination (A) in which the Company
     is the continuing or surviving corporation and (B) which does not result in
     the outstanding Shares being converted into or exchanged for different
     securities, cash or other property, or any combination thereof). The Board
     or Committee shall take whatever other action it deems appropriate to
     preserve the rights of Grantees holding outstanding Incentive Awards.

          Notwithstanding the previous paragraph of this Section 6.6(f), but
     subject to the accelerated vesting and other provisions of Section 6.8 that
     apply in the event of a Change in Control, in the event of a Corporate
     Event (described in the previous paragraph), the Board or Committee, in its
     discretion, shall have the right and power to:

               (i) cancel, effective immediately prior to the occurrence of the
          Corporate Event, each outstanding Incentive Award (whether or not then
          exercisable) and, in full consideration of such cancellation, pay to
          the Grantee an amount in cash equal to the excess of (A) the value, as
          determined by the Board or Committee, of the property (including cash)
          received by the holders of Common Stock as a result of such Corporate
          Event over (B) the exercise price of such Incentive Award, if any;
          provided, however, this subsection (i) shall be inapplicable to an
          Incentive Award granted within six (6) months before the occurrence of
          the Corporate Event if the Grantee is an Insider and such disposition
          is not exempt under Rule 16b-3 (or other rules preventing liability of
          the Insider under Section 16(b) of the Exchange Act) and, in that
          event, the provisions hereof shall be applicable to such Incentive
          Award after the expiration of six (6) months from the date of grant;
          or

               (ii) provide for the exchange or substitution of each Incentive
          Award outstanding immediately prior to such Corporate Event (whether
          or not then exercisable) for another award with respect to the Common
          Stock or other property for which such Incentive Award is exchangeable
          and, incident thereto, make an equitable adjustment as determined by
          the Board or Committee, in its discretion, in the Option Price or
          exercise price of the Incentive Award, if any, or in the number of
          Shares or amount of property (including cash) subject to the Incentive
          Award; or

               (iii) provide for assumption of the Plan and such outstanding
          Incentive Awards by the surviving entity or its parent.

          The Board or Committee, in its discretion, shall have the authority to
     take whatever action it deems to be necessary or appropriate to effectuate
     the provisions of this Section 6.6(f).

                                       24
<PAGE>
6.7  TERMINATION OF EMPLOYMENT, DEATH, DISABILITY AND RETIREMENT

          (a) TERMINATION OF EMPLOYMENT. Unless otherwise expressly provided in
     the Grantee's Incentive Agreement, if the Grantee's Employment is
     terminated (i) involuntarily by the Company without Cause or (ii) for any
     other reason except due to his death, Disability, Retirement, for Cause, or
     his voluntary resignation, as subject to the following provisions of this
     Section 6.7, then any non-vested portion of any Stock Option or other
     Incentive Award at the time of such termination shall automatically expire
     and terminate and no further vesting shall occur after the termination date
     unless the Committee, in its discretion, provides for an extension of
     exercisability or other modification pursuant to Section 1.3(d) or Section
     6.7(f). In such event, except as otherwise expressly provided in his
     Incentive Agreement or as determined by the Committee in its discretion,
     the Grantee shall be entitled to exercise his rights only with respect to
     the vested portion of the Incentive Award for a period that shall end on
     the earlier of (i) the expiration date set forth in the Incentive Agreement
     or (ii) one (1) year after the date of his termination of Employment.

          (b) TERMINATION OF EMPLOYMENT FOR CAUSE. Unless otherwise expressly
     provided in the Grantee's Incentive Agreement, in the event of termination
     of the Grantee's Employment for Cause, all vested and non-vested Stock
     Options and other Incentive Awards granted to such Grantee shall
     immediately expire, and shall not be exercisable to any extent, as of 12:01
     a.m. (CST) on the date of such termination of Employment.

          (c) VOLUNTARY RESIGNATION. Unless otherwise expressly provided in the
     Grantee's Incentive Agreement, in the event of termination of the Grantee's
     Employment due to his voluntary resignation except resulting from his
     Disability or Retirement:

               (i) any non-vested portion of any outstanding Option or other
          Incentive Award shall immediately terminate and no further vesting
          shall occur; and

               (ii) any vested Option or other Incentive Award shall expire on
          the earlier of (A) the expiration date set forth in the Incentive
          Agreement for such Incentive Award, or (B) the expiration of ninety
          (90) days after the date of his termination of Employment.

          (d) RETIREMENT. Unless otherwise expressly provided in the Grantee's
     Incentive Agreement, upon the termination of Employment due to Retirement:

               (i) any non-vested portion of any outstanding Option or other
          Incentive Award shall immediately terminate and no further vesting
          shall occur; and

               (ii) any vested Option or other Incentive Award shall expire on
          the earlier of (A) the expiration date set forth in the Incentive
          Agreement for such Incentive Award, or (B) the expiration of three (3)
          years after the date of his termination of Employment.

                                       25
<PAGE>
          (e) DISABILITY OR DEATH. Unless otherwise expressly provided in the
     Grantee's Incentive Agreement, upon termination of Employment as a result
     of the Grantee's Disability or death:

               (i) any non-vested portion of any outstanding Option or other
          Incentive Award shall immediately terminate upon termination of
          Employment and no further vesting shall occur; and

               (ii) any vested Incentive Award shall expire on the earlier of
          either (A) the expiration date set forth in the Incentive Agreement or
          (B) the three-year anniversary date of the Grantee's termination of
          Employment date.

          In the event that the Grantee dies or becomes permanently and totally
     disabled as determined by the Committee within the one-year period
     specified in Section 6.7(a) (above), then notwithstanding Section 6.7(a),
     the Incentive Award shall expire on the earlier of (A) the expiration date
     set forth in the Incentive Agreement for such Incentive Award or (B) the
     expiration of one (1) year after the date of his death or the date he is
     determined to be permanently and totally disabled as such date is
     determined by the Committee.

          In the event that the Grantee dies or becomes permanently and totally
     disabled as determined by the Committee within the three-year period
     specified in Section 6.7d) (above), then notwithstanding Section 6.7(d),
     the Incentive Award shall expire on the earlier of: (A) the expiration date
     set forth in the Incentive Agreement for such Incentive Award or (B) the
     later of either (i) the expiration of three (3) years after the date of his
     Retirement or (ii) one (1) year from the date of his death or the date he
     is determined to be permanently and totally disabled as such date is
     determined by the Committee.

          (f) CONTINUATION. Subject to the conditions and limitations of the
     Plan and applicable law and regulation, in the event that a Grantee ceases
     to be an Employee, the Committee and Grantee, in their discretion, may
     mutually agree with respect to any outstanding Option or other Incentive
     Award then held by the Grantee (i) for an acceleration or other adjustment
     in any vesting schedule applicable to the Incentive Award; (ii) for a
     continuation of the exercise period following termination for a longer
     period than is otherwise provided under such Incentive Award; or (iii) to
     any other change in the terms and conditions of the Incentive Award. In the
     event of any such change to an outstanding Incentive Award, a written
     amendment to the Grantee's Incentive Agreement shall be required.

6.8  CHANGE IN CONTROL

     Notwithstanding any contrary provision in the Plan, in the event of a
Change in Control (as defined below), the following actions shall automatically
occur as of the day immediately preceding the Change in Control date unless
expressly provided otherwise in the individual Grantee's Incentive Agreement:

                                       26
<PAGE>
          (a) all of the Stock Options and Stock Appreciation Rights then
     outstanding shall become 100% vested and immediately and fully exercisable;

          (b) all of the restrictions and conditions of any Restricted Stock and
     any Other Stock-Based Awards then outstanding shall be deemed satisfied,
     and the Restriction Period with respect thereto shall be deemed to have
     expired, and thus each such Incentive Award shall become free of all
     restrictions and fully vested; and

          (c) all of the Performance-Based Restricted Stock and any Other
     Stock-Based Awards shall become fully vested, deemed earned in full, and
     promptly paid within thirty (30) days to the affected Grantees without
     regard to payment schedules and notwithstanding that the applicable
     performance cycle, retention cycle or other restrictions and conditions
     have not been completed or satisfied.

     For all purposes of this Plan, a "Change in Control" of the Company means
the occurrence of any one or more of the following events:

          (a) The acquisition by any individual, entity or group (within the
     meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act (a "Person"))
     of beneficial ownership (within the meaning of Rule 13d-3 promulgated under
     the Exchange Act) of twenty percent (20%) or more of either (i) the then
     outstanding shares of common stock of the Company (the "Outstanding Company
     Stock") or (ii) the combined voting power of the then outstanding voting
     securities of the Company entitled to vote generally in the election of
     directors (the "Outstanding Company Voting Securities"); provided, however,
     that the following acquisitions shall not constitute a Change in Control:
     (i) any acquisition directly from the Company or any Subsidiary, (ii) any
     acquisition by the Company or any Subsidiary or by any employee benefit
     plan (or related trust) sponsored or maintained by the Company or any
     Subsidiary, or (iii) any acquisition by any corporation pursuant to a
     reorganization, merger, consolidation or similar business combination
     involving the Company (a "Merger"), if, following such Merger, the
     conditions described in Section 6.8(c) (below) are satisfied;

          (b) Individuals who, as of the Effective Date, constitute the Board of
     Directors of the Company (the "Incumbent Board") cease for any reason to
     constitute at least a majority of the Board; provided, however, that any
     individual becoming a director subsequent to the Effective Date whose
     election, or nomination for election by the Company's shareholders, was
     approved by a vote of at least a majority of the directors then comprising
     the Incumbent Board shall be considered as though such individual were a
     member of the Incumbent Board, but excluding, for this purpose, any such
     individual whose initial assumption of office occurs as a result of either
     an actual or threatened election contest (as such terms are used in Rule
     14a-11 of Regulation 14A promulgated under the Exchange Act) or other
     actual or threatened solicitation of proxies or consents by or on behalf of
     a Person other than the Board;

          (c) Consummation of a reorganization, merger or consolidation, or sale
     or other disposition of all or substantially all of the assets of the
     Company (a "Business Combination"), in each case, unless, following such
     Business Combination, (1) all or

                                       27
<PAGE>
     substantially all of the individuals and entities who were the beneficial
     owners, respectively, of the Outstanding Company Stock and Outstanding
     Company Voting Securities immediately prior to such Business Combination
     beneficially own, directly or indirectly, more than 60% of, respectively,
     the then outstanding shares of common stock and the combined voting power
     of the then outstanding voting securities entitled to vote generally in the
     election of directors, as the case may be, of the corporation resulting
     from such Business Combination (including, without limitation, a
     corporation which as a result of such transaction owns the Company or all
     or substantially all of the Company's assets either directly or through one
     or more subsidiaries) in substantially the same proportions as their
     ownership, immediately prior to such Business Combination of the
     Outstanding Company Stock and Outstanding Company Voting Securities, as the
     case may be, (2) no Person (excluding any corporation resulting from such
     Business Combination or any employee benefit plan (or related trust) of the
     Company or such corporation resulting from such Business Combination)
     beneficially owns, directly or indirectly, 20% or more of, respectively,
     the then outstanding shares of common stock of the corporation resulting
     from such Business Combination or the combined voting power of the then
     outstanding voting securities of such corporation except to the extent that
     such ownership existed prior to the Business Combination, and (3) at least
     a majority of the members of the board of directors of the corporation
     resulting from such Business Combination were members of the Incumbent
     Board at the time of the execution of the initial agreement, or the action
     of the Board, providing for such Business Combination;

          (d) The adoption of any plan or proposal for the liquidation or
     dissolution of the Company; or

          (e) Any other event that a majority of the Board, in its sole
     discretion, determines to constitute a Change in Control hereunder.

     Notwithstanding the occurrence of any of the foregoing events set out in
this Section 6.8 which would otherwise result in a Change in Control, the Board
may determine in its discretion, if it deems it to be in the best interest of
the Company, that an event or events otherwise constituting or reasonably
leading to a Change in Control shall not be deemed a Change in Control
hereunder. Such determination shall be effective only if it is made by the Board
(i) prior to the occurrence of an event that otherwise would be, or reasonably
lead to, a Change in Control, or (ii) after such event only if made by the Board
a majority of which is composed of directors who were members of the Board
immediately prior to the event that otherwise would be, or reasonably lead to, a
Change in Control.

     Notwithstanding the foregoing provisions of this Section 6.8, to the extent
that any payment or acceleration hereunder is subject to Code Section 409A for
deferred compensation, Change in Control shall have the meaning set forth in
Code Section 409A(2)(A)(v) and any regulations issued thereunder, which are
incorporated herein by reference, but only to the extent inconsistent with the
foregoing provisions as determined in the discretion of the Committee.

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<PAGE>
6.9  EXCHANGE OF INCENTIVE AWARDS

     The Committee may, in its discretion, permit any Grantee to surrender
outstanding Incentive Awards in order to exercise or realize his rights under
other Incentive Awards or in exchange for the grant of new Incentive Awards, or
require holders of Incentive Awards to surrender outstanding Incentive Awards
(or comparable rights under other plans or arrangements) as a condition
precedent to the grant of new Incentive Awards.

6.10 FINANCING

     Subject to the requirements of the Sarbanes-Oxley Act of 2002, the Company
may extend and maintain, or arrange for and guarantee, the extension and
maintenance of financing to any Grantee to purchase Shares pursuant to exercise
of an Incentive Award upon such terms as are approved by the Committee in its
discretion.

                                    SECTION 7

                                     GENERAL

7.1  EFFECTIVE DATE AND GRANT PERIOD

     This Plan is adopted by the Board effective as of the Effective Date,
subject to the approval of the stockholders of the Company within one year from
the Effective Date. Incentive Awards may be granted under the Plan at any time
prior to receipt of such stockholder approval; provided, however, (a) no Shares
may be issued pursuant to Incentive Awards granted after the Effective Date
until the requisite stockholder approval is obtained, and (b) if the requisite
stockholder approval is not obtained then any Incentive Awards granted hereunder
after the Effective Date shall automatically become null and void and of no
force or effect. Notwithstanding the foregoing, any Incentive Award that is
intended to satisfy the Performance-Based Exception shall not be granted until
the terms of the Plan are disclosed to, and approved by, Shareholders of the
Company in accordance with the requirements of the Performance-Based Exception.

7.2  FUNDING AND LIABILITY OF COMPANY

     No provision of the Plan shall require the Company, for the purpose of
satisfying any obligations under the Plan, to purchase assets or place any
assets in a trust or other entity to which contributions are made, or otherwise
to segregate any assets. In addition, the Company shall not be required to
maintain separate bank accounts, books, records or other evidence of the
existence of a segregated or separately maintained or administered fund for
purposes of the Plan. Although bookkeeping accounts may be established with
respect to Grantees who are entitled to cash, Common Stock or rights thereto
under the Plan, any such accounts shall be used merely as a bookkeeping
convenience. The Company shall not be required to segregate any assets that may
at any time be represented by cash, Common Stock or rights thereto. The Plan
shall not be construed as providing for such segregation, nor shall the Company,
the Board or the Committee be deemed to be a trustee of any cash, Common Stock
or rights thereto. Any liability or obligation of the Company to any Grantee
with respect to an Incentive Award shall be based solely upon any contractual
obligations that may be created by this Plan and any Incentive

                                       29
<PAGE>
Agreement, and no such liability or obligation of the Company shall be deemed to
be secured by any pledge or other encumbrance on any property of the Company.
Neither the Company, the Board nor the Committee shall be required to give any
security or bond for the performance of any obligation that may be created by
the Plan.

7.3  WITHHOLDING TAXES

          (a) TAX WITHHOLDING. The Company shall have the power and the right to
     deduct or withhold, or require a Grantee to remit to the Company, an amount
     sufficient to satisfy federal, state, and local taxes, domestic or foreign,
     required by law or regulation to be withheld with respect to any taxable
     event arising as a result of the Plan or an Incentive Award hereunder. Upon
     the lapse of restrictions on Restricted Stock, the Committee, in its
     discretion, may elect to satisfy the tax withholding requirement, in whole
     or in part, by having the Company withhold Shares having a Fair Market
     Value on the date the tax is to be determined equal to the minimum
     withholding taxes which could be imposed on the transaction as determined
     by the Committee.

          (b) SHARE WITHHOLDING. With respect to tax withholding required upon
     the exercise of Stock Options or SARs, upon the lapse of restrictions on
     Restricted Stock, or upon any other taxable event arising as a result of
     any Incentive Awards, Grantees may elect, subject to the approval of the
     Committee in its discretion, to satisfy the withholding requirement, in
     whole or in part, by having the Company withhold Shares having a Fair
     Market Value on the date the tax is to be determined equal to the minimum
     withholding taxes which could be imposed on the transaction as determined
     by the Committee. All such elections shall be made in writing, signed by
     the Grantee, and shall be subject to any restrictions or limitations that
     the Committee, in its discretion, deems appropriate.

          (c) LOANS. To the extent permitted by the Sarbanes-Oxley Act of 2002
     or other applicable law, the Committee may provide for loans, on either a
     short term or demand basis, from the Company to a Grantee who is an
     Employee or Consultant to permit the payment of taxes required by law.

7.4  NO GUARANTEE OF TAX CONSEQUENCES

     Neither the Company nor the Committee makes any commitment or guarantee
that any federal, state or local tax treatment will apply or be available to any
person participating or eligible to participate hereunder.

7.5  DESIGNATION OF BENEFICIARY BY PARTICIPANT

     Each Grantee may, from time to time, name any beneficiary or beneficiaries
(who may be named contingently or successively) to whom any benefit under the
Plan is to be paid in case of his death before he receives any or all of such
benefit. Each such designation shall revoke all prior designations by the same
Grantee, shall be in a form prescribed by the Committee, and will be effective
only when filed by the Grantee in writing with the Committee during the
Grantee's lifetime. In the absence of any such designation, benefits remaining
unpaid at the Grantee's death shall be paid to the Grantee's estate.

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7.6  DEFERRALS

     The Committee shall not permit a Grantee to defer such Grantee's receipt of
the payment of cash or the delivery of Shares that would otherwise be due to
such Grantee by virtue of the lapse or waiver of restrictions with respect to
Restricted Stock, or the satisfaction of any requirements or goals with respect
to Performance-Based Restricted Stock or Other Stock-Based Awards.

7.7  AMENDMENT AND TERMINATION

     The Board shall have the power and authority to terminate or amend the Plan
at any time; provided, however, the Board shall not, without the approval of the
stockholders of the Company within the time period required by applicable law:

          (a) except as provided in Section 6.6, increase the maximum number of
     Shares which may be issued under the Plan pursuant to Section 1.4;

          (b) amend the requirements as to the class of Employees eligible to
     purchase Common Stock under the Plan;

          (c) extend the term of the Plan; or,

          (d) if the Company is a Publicly Held Corporation (i) increase the
     maximum limits on Incentive Awards to Covered Employees as set for
     compliance with the Performance-Based Exception or (ii) decrease the
     authority granted to the Committee under the Plan in contravention of Rule
     16b-3 under the Exchange Act.

     No termination, amendment, or modification of the Plan shall adversely
affect in any material way any outstanding Incentive Award previously granted to
a Grantee under the Plan, without the written consent of such Grantee or other
designated holder of such Incentive Award.

     In addition, to the extent that the Committee determines that (a) the
listing for qualification requirements of any national securities exchange or
quotation system on which the Company's Common Stock is then listed or quoted,
if applicable, or (b) the Code (or regulations promulgated thereunder), require
stockholder approval in order to maintain compliance with such listing
requirements or to maintain any favorable tax advantages or qualifications, then
the Plan shall not be amended in such respect without approval of the Company's
stockholders.

7.8  REQUIREMENTS OF LAW

          (a) GOVERNMENTAL ENTITIES AND SECURITIES EXCHANGES. The granting of
     Incentive Awards and the issuance of Shares under the Plan shall be subject
     to all applicable laws, rules, and regulations, and to such approvals by
     any governmental agencies or national securities exchanges as may be
     required. Certificates evidencing shares of Common Stock delivered under
     this Plan (to the extent that such shares are so evidenced) may be subject
     to such stop transfer orders and other restrictions as the Committee may
     deem advisable under the rules and regulations of the Securities and
     Exchange Commission, any securities exchange or transaction reporting
     system upon

                                       31
<PAGE>
     which the Common Stock is then listed or to which it is admitted for
     quotation, and any applicable federal or state securities law, if
     applicable. The Committee may cause a legend or legends to be placed upon
     such certificates (if any) to make appropriate reference to such
     restrictions.

          (b) SECURITIES ACT RULE 701. If no class of the Company's securities
     is registered under Section 12 of the Exchange Act, then unless otherwise
     determined by the Committee, grants of Incentive Awards to "Rule 701
     Grantees" (as defined below) and issuances of the underlying shares of
     Common Stock, if any, on the exercise or conversion of such Incentive
     Awards are intended to comply with all applicable conditions of Securities
     Act Rule 701 ("Rule 701 "), including, without limitation, the restrictions
     as to the amount of securities that may be offered and sold in reliance on
     Rule 701, so as to qualify for an exemption from the registration
     requirements of the Securities Act. Any ambiguities or inconsistencies in
     the construction of an Incentive Award or the Plan shall be interpreted to
     give effect to such intention. In accordance with Rule 701, each Grantee
     shall receive a copy of the Plan on or before the date an Incentive Award
     is granted to him, as well as the additional disclosure required by Rule
     701 (e) if the aggregate sales price or amount of securities sold during
     any consecutive 12-month period exceeds $5,000,000 as determined under Rule
     701(e). If Rule 701 (or any successor provision) is amended to eliminate or
     otherwise modify any of the requirements specified in Rule 701, then the
     provisions of this Section 7.8(b) shall be interpreted and construed in
     accordance with Rule 701 as so amended. For purposes of this Section
     7.8(b), as determined in accordance with Rule 701, "Rule 701 Grantees"
     shall mean any Grantee other than a director of the Company, the Company's
     chairman, CEO, president, chief financial officer, controller and any vice
     president of the Company, and any other key employee of the Company who
     generally has access to financial and other business related information
     and possesses sufficient sophistication to understand and evaluate such
     information.

7.9  RULE 16B-3 SECURITIES LAW COMPLIANCE FOR INSIDERS

     If the Company is a Publicly Held Corporation, transactions under the Plan
with respect to Insiders are intended to comply with all applicable conditions
of Rule 16b-3 under the Exchange Act. Any ambiguities or inconsistencies in the
construction of an Incentive Award or the Plan shall be interpreted to give
effect to such intention, and to the extent any provision of the Plan or action
by the Committee fails to so comply, it shall be deemed null and void to the
extent permitted by law and deemed advisable by the Committee in its discretion.

7.10 COMPLIANCE WITH CODE SECTION 162(M) FOR PUBLICLY HELD CORPORATION

     If the Company is a Publicly Held Corporation, unless otherwise determined
by the Committee with respect to any particular Incentive Award, it is intended
that the Plan shall comply fully with the applicable requirements so that any
Incentive Awards subject to Section 162(m) that are granted to Covered Employees
shall qualify for the Performance-Based Exception, except for grants of
Nonstatutory Stock Options with an Option Price set at less than the Fair Market
Value of a Share on the date of grant. If any provision of the Plan or an
Incentive Agreement would disqualify the Plan or would not otherwise permit the
Plan or Incentive Award

                                       32
<PAGE>
to comply with the Performance-Based Exception as so intended, such provision
shall be construed or deemed to be amended to conform to the requirements of the
Performance-Based Exception to the extent permitted by applicable law and deemed
advisable by the Committee; provided, however, no such construction or amendment
shall have an adverse effect on the prior grant of an Incentive Award or the
economic value to a Grantee of any outstanding Incentive Award.

7.11 NOTICES

          (a) NOTICE FROM INSIDERS TO SECRETARY OF CHANGE IN BENEFICIAL
     OWNERSHIP. Within two business days after the date of a change in
     beneficial ownership of the Common Stock issued or delivered pursuant to
     this Plan, an Insider should report to the Secretary of the Company any
     such change to the beneficial ownership of Common Stock that is required to
     be reported with respect to such Insider under Rule 16(a)-3 promulgated
     pursuant to the Exchange Act. Whenever reasonably feasible, Insiders will
     provide the Committee with advance notification of such change in
     beneficial ownership.

          (b) NOTICE TO INSIDERS AND SECURITIES AND EXCHANGE COMMISSION. The
     Company shall provide notice to any Insider, as well as to the Securities
     and Exchange Commission, of any "blackout period," as defined in Section
     306(a)(4) of the Sarbanes-Oxley Act of 2002, in any case in which Insider
     is subject to the requirements of Section 304 of said Act in connection
     with such "blackout period."

7.12 PRE-CLEARANCE AGREEMENT WITH BROKERS

     Notwithstanding anything in the Plan to the contrary, no shares of Common
Stock issued pursuant to this Plan will be delivered to a broker or dealer that
receives such shares for the account of an Insider unless and until the broker
or dealer enters into a written agreement with the Company whereby such broker
or dealer agrees to report immediately to the Secretary of the Company (or other
designated person) a change in the beneficial ownership of such shares.

7.13 SUCCESSORS TO COMPANY

     All obligations of the Company under the Plan with respect to Incentive
Awards granted hereunder shall be binding on any successor to the Company,
whether the existence of such successor is the result of a direct or indirect
purchase, merger, consolidation, or otherwise, of all or substantially all of
the business and/or assets of the Company.

7.14 MISCELLANEOUS PROVISIONS

          (a) No Employee, Consultant, or other person shall have any claim or
     right to be granted an Incentive Award under the Plan. Neither the Plan,
     nor any action taken hereunder, shall be construed as giving any Employee
     or Consultant any right to be retained in the Employment or other service
     of the Company or any Parent or Subsidiary.

          (b) The expenses of the Plan shall be borne by the Company.

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<PAGE>
          (c) By accepting any Incentive Award, each Grantee and each person
     claiming by or through him shall be deemed to have indicated his acceptance
     of the Plan.

7.15 SEVERABILITY

     In the event that any provision of this Plan shall be held illegal, invalid
or unenforceable for any reason, such provision shall be fully severable, but
shall not affect the remaining provisions of the Plan, and the Plan shall be
construed and enforced as if the illegal, invalid, or unenforceable provision
was not included herein.

7.16 GENDER, TENSE AND HEADINGS

     Whenever the context so requires, words of the masculine gender used herein
shall include the feminine and neuter, and words used in the singular shall
include the plural. Section headings as used herein are inserted solely for
convenience and reference and constitute no part of the interpretation or
construction of the Plan.

7.17 GOVERNING LAW

     The Plan shall be interpreted, construed and constructed in accordance with
the laws of the State of Texas without regard to its conflicts of law
provisions, except as may be superseded by applicable laws of the United States.

                            [Signature page follows.]

                                       34
<PAGE>
     IN WITNESS WHEREOF, the Company has caused this Plan to be duly executed in
its name and on its behalf by its duly authorized officer, effective as of
January 1, 2005.

                                 SMITH INTERNATIONAL, INC.

                                 By: /s/ NEAL S. SUTTON
                                     -------------------------------------------
                                 Name: Neal S. Sutton
                                 Title: Senior Vice President - Administration,
                                 General Counsel and Secretary

                                       35

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