Subordinated Credit Agreement

SUBORDINATED CREDIT AGREEMENT Among CANO PETROLEUM, INC. As Borrower,

EXHIBIT 10.6

 

Execution Version

 

$25,000,000

 

SUBORDINATED CREDIT AGREEMENT

 

Among

 

CANO PETROLEUM, INC.

 

as Borrower,

 

THE LENDERS PARTY HERETO FROM TIME TO TIME

 

as Lenders,

 

and

 

UNIONBANCAL EQUITIES, INC.

 

as Administrative Agent

 

March 17, 2008

 



 

TABLE OF CONTENTS

 

 

 

 

 

Page

ARTICLE I

 

DEFINITIONS AND ACCOUNTING TERMS

 

1

 

 

 

Section 1.01

 

Certain Defined Terms

 

1

Section 1.02

 

Computation of Time Periods

 

18

Section 1.03

 

Accounting Terms; Changes in GAAP

 

18

Section 1.04

 

Types of Advances

 

18

Section 1.05

 

Miscellaneous

 

18

 

 

 

 

 

ARTICLE II

 

CREDIT FACILITIES

 

19

 

 

 

 

 

Section 2.01

 

Commitment for Advances

 

19

Section 2.02

 

[Reserved]

 

19

Section 2.03

 

Method of Borrowing

 

19

Section 2.04

 

Reduction of the Commitment

 

22

Section 2.05

 

Prepayment of Advances

 

22

Section 2.06

 

Repayment of Advances

 

23

Section 2.07

 

[Reserved]

 

23

Section 2.08

 

Fees

 

23

Section 2.09

 

Interest

 

23

Section 2.10

 

Payments and Computations

 

25

Section 2.11

 

Sharing of Payments, Etc.

 

26

Section 2.12

 

Breakage Costs

 

26

Section 2.13

 

Increased Costs

 

26

Section 2.14

 

Taxes

 

27

Section 2.15

 

Extension of Maturity Date

 

29

Section 2.16

 

Increase in Commitments

 

30

 

 

 

 

 

ARTICLE III

 

CONDITIONS OF LENDING

 

32

 

 

 

 

 

Section 3.01

 

Conditions Precedent to Initial Credit Extension

 

32

Section 3.02

 

Conditions Precedent to All Borrowings

 

34

 

 

 

 

 

ARTICLE IV

 

REPRESENTATIONS AND WARRANTIES

 

 

 

 

 

 

 

Section 4.01

 

Existence; Subsidiaries

 

35

Section 4.02

 

Power

 

35

Section 4.03

 

Authorization and Approvals

 

36

Section 4.04

 

Enforceable Obligations

 

36

Section 4.05

 

Financial Statements

 

36

Section 4.06

 

True and Complete Disclosure

 

37

Section 4.07

 

Litigation; Compliance with Laws

 

37

Section 4.08

 

Use of Proceeds

 

37

Section 4.09

 

Investment Company Act

 

37

Section 4.10

 

Federal Power Act

 

37

 

i



 

Section 4.11

 

Taxes

 

38

Section 4.12

 

Pension Plans

 

38

Section 4.13

 

Condition of Property; Casualties

 

39

Section 4.14

 

No Burdensome Restrictions; No Defaults

 

39

Section 4.15

 

Environmental Condition

 

39

Section 4.16

 

Permits, Licenses, Etc.

 

40

Section 4.17

 

Gas Contracts

 

40

Section 4.18

 

Liens; Titles, Leases, Etc.

 

40

Section 4.19

 

Solvency and Insurance

 

41

Section 4.20

 

Hedging Agreements

 

41

Section 4.21

 

Material Agreements

 

41

 

 

 

 

 

ARTICLE V

 

AFFIRMATIVE COVENANTS

 

41

 

 

 

 

 

Section 5.01

 

Compliance with Laws, Etc.

 

42

Section 5.02

 

Maintenance of Insurance

 

42

Section 5.03

 

Preservation of Corporate Existence, Etc.

 

43

Section 5.04

 

Payment of Taxes, Etc.

 

43

Section 5.05

 

Visitation Rights

 

43

Section 5.06

 

Reporting Requirements

 

43

Section 5.07

 

Maintenance of Property

 

47

Section 5.08

 

Agreement to Pledge

 

47

Section 5.09

 

Use of Proceeds

 

47

Section 5.10

 

Title Evidence and Opinions

 

47

Section 5.11

 

Further Assurances; Cure of Title Defects

 

48

Section 5.12

 

Hedging Arrangements

 

48

Section 5.13

 

Bank Accounts

 

48

 

 

 

 

 

ARTICLE VI

 

NEGATIVE COVENANTS

 

49

 

 

 

 

 

Section 6.01

 

Liens, Etc.

 

49

Section 6.02

 

Debts, Guaranties, and Other Obligations

 

50

Section 6.03

 

Agreements Restricting Liens and Distributions

 

51

Section 6.04

 

Merger or Consolidation; Asset Sales

 

52

Section 6.05

 

Restricted Payments

 

52

Section 6.06

 

Investments

 

52

Section 6.07

 

Affiliate Transactions

 

53

Section 6.08

 

Compliance with ERISA

 

53

Section 6.09

 

Sale-and-Leaseback

 

54

Section 6.10

 

Change of Business

 

54

Section 6.11

 

Organizational Documents, Name Change

 

54

Section 6.12

 

Use of Proceeds

 

54

Section 6.13

 

Gas Imbalances, Take-or-Pay or Other Prepayments

 

54

Section 6.14

 

Limitation on Speculative Hedging

 

55

Section 6.15

 

Additional Subsidiaries; Additional Oil and Gas Properties

 

55

Section 6.16

 

Account Payables

 

55

Section 6.17

 

Current Ratio

 

55

 

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Section 6.18

 

Leverage Ratio

 

56

Section 6.19

 

Interest Coverage Ratio

 

56

Section 6.20

 

Senior Debt

 

56

Section 6.21

 

Non-Guarantor Subsidiary

 

56

Section 6.22

 

Equity Issuance

 

56

Section 6.23

 

Minimum Asset Coverage Ratio

 

56

 

 

 

 

 

ARTICLE VII

 

EVENTS OF DEFAULT; REMEDIES

 

57

 

 

 

 

 

Section 7.01

 

Events of Default

 

57

Section 7.02

 

Optional Acceleration of Maturity

 

60

Section 7.03

 

Automatic Acceleration of Maturity

 

60

Section 7.04

 

Right of Set-off

 

61

Section 7.05

 

Non-exclusivity of Remedies

 

61

Section 7.06

 

Application of Proceeds

 

61

 

 

 

 

 

ARTICLE VIII

 

THE ADMINISTRATIVE AGENT

 

62

 

 

 

 

 

Section 8.01

 

Authorization and Action

 

62

Section 8.02

 

Administrative Agent’s Reliance, Etc.

 

62

Section 8.03

 

The Administrative Agent and Its Affiliates

 

63

Section 8.04

 

Lender Credit Decision

 

63

Section 8.05

 

Indemnification

 

63

Section 8.06

 

Successor Administrative Agent

 

64

 

 

 

 

 

ARTICLE IX

 

MISCELLANEOUS

 

64

 

 

 

 

 

Section 9.01

 

Amendments, Etc.

 

64

Section 9.02

 

Notices, Etc.

 

65

Section 9.03

 

No Waiver; Remedies

 

65

Section 9.04

 

Costs and Expenses

 

65

Section 9.05

 

Binding Effect

 

65

Section 9.06

 

Lender Assignments and Participations

 

66

Section 9.07

 

Indemnification; Waiver

 

68

Section 9.08

 

Execution in Counterparts

 

69

Section 9.09

 

Survival of Representations, Etc.

 

69

Section 9.10

 

Severability

 

69

Section 9.11

 

Business Loans

 

69

Section 9.12

 

Governing Law; Submission to Jurisdiction

 

69

Section 9.13

 

Subordination and Intercreditor Agreement

 

70

Section 9.14

 

USA Patriot Act

 

70

Section 9.15

 

WAIVER OF JURY TRIAL

 

70

Section 9.16

 

ORAL AGREEMENTS

 

70

 

 

 

 

 

EXHIBITS:

 

Exhibit A

 

-

 

Form of Assignment and Acceptance

Exhibit B

 

-

 

Form of Compliance Certificate

 

iii



 

Exhibit C

 

-

 

Form of Guaranty

Exhibit D

 

-

 

Form of Mortgage

Exhibit E

 

-

 

Form of Note

Exhibit F

 

-

 

Form of Notice of Borrowing

Exhibit G

 

-

 

Form of Notice of Conversion or Continuation

Exhibit H

 

-

 

Form of Pledge Agreement

Exhibit I

 

-

 

Form of Security Agreement

Exhibit J

 

-

 

Form of Transfer Letters

Exhibit K

 

-

 

Form of Borrower’s Counsel Opinion

 

 

 

 

 

SCHEDULES:

 

 

 

 

Schedule I

 

-

 

Pricing Grid

Schedule II

 

-

 

Notice Information and Commitments

Schedule 4.01

 

-

 

Subsidiaries of Borrower

Schedule 4.05

 

-

 

Existing Debt

Schedule 4.07

 

-

 

Litigation

Schedule 4.14(a)

-

 

Material Debt Documents

Schedule 4.20

 

-

 

Hedging Contracts

Schedule 4.21

 

-

 

Material Agreements

Schedule 5.12

 

-

 

Required Hedging Contracts

 

iv



 

SUBORDINATED CREDIT AGREEMENT

 

This Subordinated Credit Agreement dated as of March 17, 2008 (the “Effective Date”) is among Cano Petroleum, Inc., a Delaware corporation (“Borrower”), the lenders party hereto from time to time (“Lenders”), and UnionBanCal Equities, Inc. as administrative agent for such Lenders (in such capacity, the “Administrative Agent”).

 

The parties hereto agree to as follows:

 

ARTICLE I

DEFINITIONS AND ACCOUNTING TERMS

 

Section 1.01                Certain Defined Terms.  As used in this Agreement, the terms defined above shall have the meanings set forth therein and the following terms shall have the following meanings (unless otherwise indicated, such meanings to be equally applicable to both the singular and plural forms of the terms defined):

 

Acceptable Security Interest” in any Property means a Lien which (a) exists in favor of the Administrative Agent for the benefit of the Secured Parties, (b) is superior to all Liens or rights of any other Person in the Property encumbered thereby, other than Permitted Prior Liens, (c) secures the Obligations, and (d) is perfected and enforceable.

 

Acquisition” means the purchase by the Borrower or any of its Subsidiaries of any business, including the purchase of all or substantially all the associated assets or operations or of stock (or other ownership interests) of a Person (other than of a wholly-owned Subsidiary of the Borrower).

 

Adjusted Reference Rate” means, for any day, the fluctuating rate per annum of interest equal to the greater of (a) the Reference Rate in effect on such day and (b) the Federal Funds Rate in effect on such day plus ½ of 1%.

 

Administrative Agent” means UnionBanCal Equities, Inc., in its capacity as agent pursuant to Article VIII, and any successor agent pursuant to Section 8.06.

 

Advance” means an advance by a Lender to the Borrower pursuant to Section 2.01(a) as part of a Borrowing and refers to a Reference Rate Advance or a Eurodollar Rate Advance.

 

Affiliate” means, as to any Person, any other Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such Person or any Subsidiary of such Person.  The term “control” (including the terms “controlled by” or “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 a Person, whether through ownership of a Control Percentage, by contract, or otherwise.  Without limiting the generality of the foregoing, a Person shall be deemed to be controlled by another Person if such other Person possesses, directly or indirectly, the power to vote 10% or more of the securities having ordinary voting power for the election of directors, managing general partners or the equivalent.

 



 

Agreement” means this Subordinated Credit Agreement, as the same may be amended, supplemented, restated, and otherwise modified from time to time.

 

Applicable Margin” means, with respect to any Advance, (a) during any time when an Event of Default exists, 3% per annum plus the rate per annum set forth in the Pricing Grid for the relevant Type of such Advance, and (b) at any other time, the rate per annum set forth in the Pricing Grid for the relevant Type of such Advance.  The Applicable Margin for any Advance shall change when and as any such Event of Default commences or terminates and as otherwise set forth in the Pricing Grid and subject to further adjustments as set forth Section 2.8(d).

 

Assignment and Acceptance” means an assignment and acceptance entered into by a Lender and an Eligible Assignee, and accepted by the Administrative Agent, in substantially the form of the attached Exhibit A.

 

Barnett Shale Properties” means the stratigraphic equivalent of that certain interval described as 100’ above and 100’ below the interval seen between 3,450’ and 3,650’ on the Welex Spectral Density – Dual Spaced Neutron Log dated July 29, 1986 for the Hogtown Moore Unit #13-2 Well located in the George E. Moore Survey, Eastland Conty, Texas, as such stratigraphic equivalent underlies, comprises a portion of or is attributable to the Oil & Gas Properties held by Square One in the Desdemona Field.

 

Borrowing” means a borrowing consisting of Advances made on the same day by the Lenders pursuant to Section 2.01(a).

 

Borrowing Base” shall have the definition given to such term in the Senior Credit Agreement as in effect on the date hereof of as modified in accordance with the Subordination and Intercreditor Agreement.

 

Business Day” means a day of the year on which banks are not required or authorized to close in Dallas, Texas and Los Angeles, California and, if the applicable Business Day relates to any Eurodollar Rate Advances, on which dealings are carried on by banks in the London interbank market.

 

Capital Leases” means, as applied to any Person, any lease of any Property by such Person as lessee which would, in accordance with GAAP, be required to be classified and accounted for as a capital lease on the balance sheet of such Person.

 

CERCLA” means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, state and local analogs, and all rules and regulations and requirements thereunder in each case as now or hereafter in effect.

 

Change in Control” shall mean the occurrence of any of the following events: (a) the Borrower ceases to own, either directly or indirectly, 100% of the Equity Interest in any Subsidiary other than as a result of a sale of assets or merger permitted under Section 6.04, (b) any “person” or “group” (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934) other than a Permitted Holder becomes the “beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, except that a person or group shall be deemed to have “beneficial ownership” of all securities that such person or group has the right to

 

2



 

acquire (such right, an “option right”), whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of 33% or more of the Equity Interest of the Borrower entitled to vote for members of the board of directors or equivalent governing body of the Borrower on a fully-diluted basis (and taking into account all such securities that such person or group has the right to acquire pursuant to any option right), or (c) during any period of 12 consecutive months, a majority of the members of the board of directors or other equivalent governing body of the Borrower cease to be composed of individuals (i) who were members of that board or equivalent governing body on the first day of such period, (ii) whose election or nomination to that board or equivalent governing body was approved by individuals referred to in clause (i) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body or (iii) whose election or nomination to that board or other equivalent governing body was approved by individuals referred to in clauses (i) and (ii) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body.   For purposes of this definition, “Permitted Holder” means any of the following: (A) any Person that is the “beneficial owner” (as referred to above) of an Equity Interest in the Borrower on the date hereof, (B) any such Person’s estate, spouse and lineal descendants and the legal representative of any of the foregoing, (C) the trustees of any bona fide trusts of which any of the foregoing are the sole beneficiaries and grantors, and (D) any corporation, limited partnership, limited liability company, or similar entity, all of the Voting Securities of which is owned by any of the foregoing.

 

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

 

Collateral” means (a) all “Collateral”, “Pledged Collateral” and “Mortgaged Properties” (as defined in each of the Mortgages, the Security Agreements, and the Pledge Agreement, as applicable) or similar terms used in the Security Instruments, and (b) all amounts contained in the Borrower’s and its Subsidiaries’ bank accounts.

 

Commitment” means the amount set opposite such Lender’s name on the Schedule II hereof as its Commitment, or if such Lender has entered into any Assignment and Acceptance, as set forth for such Lender as its Commitment in the Register maintained by the Administrative Agent pursuant to Section 9.06(c), or if such Lender has increased its Commitment under Section 2.16 below, as set forth in the agreement increasing such Commitment or joinder agreement, as applicable, as such amount may be reduced, increased or terminated pursuant to Section 2.04, 2.16 or Article VII or otherwise under this Agreement.

 

Compliance Certificate” means a compliance certificate in the form of the attached Exhibit B signed by a Responsible Officer of the Borrower.

 

Consolidated Net Income” means, with respect to the Borrower and its consolidated Subsidiaries, for any period, the net income for such period after taxes, as determined in accordance with GAAP, excluding, however, (a) extraordinary items, including (i) any net non-cash gain or loss during such period arising from the sale, exchange, retirement or other disposition of capital assets (such term to include all fixed assets and all securities) other than in the ordinary course of business, and (ii) any write-up or write-down of assets and (b) the cumulative effect of any change in GAAP.

 

3



 

Control Percentage” means, with respect to any Person, the percentage of the outstanding Equity Interest (including any options, warrants or similar rights to purchase such Equity Interest) of such Person having ordinary voting power which gives the direct or indirect holder of such Equity Interest the power to elect a majority of the board of directors (or other applicable governing body) of such Person.

 

Controlled Group” means all members of a controlled group of corporations and all businesses (whether or not incorporated) under common control which, together with the Borrower, are treated as a single employer under Section 414 of the Code.

 

Convert,” “Conversion,” and “Converted” each refers to a conversion of Advances of one Type into Advances of another Type pursuant to Section 2.03(b).

 

Credit Extensions” means an Advance made by any Lender.

 

Debt,” for any Person, means without duplication:

 

(a)                                  indebtedness of such Person for borrowed money;

 

(b)                                 obligations of such Person evidenced by bonds, debentures, notes or other similar instruments;

 

(c)                                  obligations of such Person to pay the deferred purchase price of Property or services (including, without limitation, obligations that are non-recourse to the credit of such Person but are secured by the assets of such Person, but excluding trade accounts payable);

 

(d)                                 obligations of such Person as lessee under Capital Leases and obligations of such Person in respect of synthetic leases;

 

(e)                                  obligations of such Person under letters of credit and agreements relating to the issuance of letters of credit or acceptance financing

 

(f)                                    obligations of such Person under any Hedge Contract;

 

(g)                                 obligations of such Person owing in respect of redeemable preferred stock or other preferred Equity Interest of such Person;

 

(h)                                 any obligations of such Person owing in connection with any volumetric or production prepayments;

 

(i)                                     obligations of such Person under direct or indirect guaranties in respect of, and obligations (contingent or otherwise) of such Person to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness or obligations of others of the kinds referred to in clauses (a) through (h) above;

 

(j)                                     indebtedness or obligations of others of the kinds referred to in clauses (a) through (i) above secured by any Lien on or in respect of any Property of such Person; and

 

4



 

(k)                                  all liabilities of such Person in respect of unfunded vested benefits under any Plan.

 

Debt Issuance” means the issuance by the Borrower of Debt in the form of convertible notes.

 

Debt Issuance Proceeds” means, with respect to any Debt Issuance, all cash and cash equivalent investments received by the Borrower from such Debt Issuance after payment of, or provision for, all underwriter fees and expenses, SEC and blue sky fees, printing costs, fees and expenses of accountants, lawyers and other professional advisors, brokerage commissions and other out-of-pocket fees and expenses actually incurred in connection with such Debt Issuance.

 

Default” means (a) an Event of Default or (b) any event or condition which with notice or lapse of time or both would become an Event of Default.

 

Dollars” and “$” means lawful money of the United States of America.

 

EBITDA” means, for any period, without duplication, (a) Consolidated Net Income for such period plus (b) to the extent deducted in determining Consolidated Net Income, Interest Expense, taxes, depreciation, amortization, depletion and other non-cash charges for such period (including any provision for the reduction in the carrying value of assets recorded in accordance with GAAP and including non-cash charges resulting from the requirements of SFAS 133 or 143) for such period minus (c) all non-cash items of income which were included in determining such Consolidated Net Income (including non-cash income resulting from the requirements of SFAS 133 or 143).

 

Eligible Assignee” means (a) any Lender, (b) any Subsidiary or Affiliate of a Lender, and (c) any commercial bank or other financial institution (i) approved by the Administrative Agent in its sole discretion, and (ii) unless an Event of Default has occurred and is continuing, reasonably acceptable to the Borrower.

 

Engineering Report” means either an Independent Engineering Report or an Internal Engineering Report.

 

Environment” or “Environmental” shall have the meanings set forth in 42 U.S.C.  9601(8) (1988).

 

Environmental Claim” means any third party (including governmental agencies and employees) action, lawsuit, claim, demand, regulatory action or proceeding, order, decree, consent agreement or notice of potential or actual responsibility or violation (including claims or proceedings under the Occupational Safety and Health Acts or similar laws or requirements relating to health or safety of employees) which seeks to impose liability under any Environmental Law.

 

Environmental Law” means, as to the Borrower or its Subsidiaries, all Legal Requirements or common law theories applicable to the Borrower or its Subsidiaries arising from, relating to, or in connection with the Environment, health, or safety, including without limitation CERCLA, relating to (a) pollution, contamination, injury, destruction, loss, protection,

 

5



 

cleanup, reclamation or restoration of the air, surface water, groundwater, land surface or subsurface strata, or other natural resources; (b) solid, gaseous or liquid waste generation, treatment, processing, recycling, reclamation, cleanup, storage, disposal or transportation; (c) exposure to pollutants, contaminants, hazardous, or toxic substances, materials or wastes; (d) the safety or health of employees; or (e) the manufacture, processing, handling, transportation, distribution in commerce, use, storage or disposal of hazardous or toxic substances, materials or wastes.

 

Environmental Permit” means any permit, license, order, approval, registration or other authorization under Environmental Law.

 

Equity Interest” means with respect to any Person, any shares, interests, participation, or other equivalents (however designated) of corporate stock, membership interests or partnership interests (or any other ownership interests) of such Person.

 

Equity Issuance” means any issuance of equity securities or any other Equity Interests (including any preferred equity securities) by the Borrower or any of its Subsidiaries other than equity securities issued (i) to the Borrower or one of its Subsidiaries, (ii) pursuant to employee or director and officer stock option plans in the ordinary course of business, and (iii) the conversion of previously issued preferred, convertible Equity Interests or convertible notes to the extent such Equity Interests and notes were issued in compliance with the terms hereof.

 

Equity Issuance Proceeds” means, with respect to any Equity Issuance, all cash and cash equivalent investments received by the Borrower or any of its Subsidiaries from such Equity Issuance after payment of, or provision for, all underwriter fees and expenses, SEC and blue sky fees, printing costs, fees and expenses of accountants, lawyers and other professional advisors, brokerage commissions and other out-of-pocket fees and expenses actually incurred in connection with such Equity Issuance.

 

ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time.

 

Eurocurrency Liabilities” has the meaning assigned to that term in Regulation D of the Federal Reserve Board (or any successor), as in effect from time to time.

 

Eurodollar Rate” means, for the Interest Period for each Eurodollar Rate Advance comprising the same Borrowing, the interest rate per annum (rounded upward to the nearest whole multiple of 1/100 of 1% per annum) set forth on the applicable Telerate Page as the London Interbank Offered Rate, for deposits in Dollars at 11:00 a.m.  (London, England time) two Business Days before the first day of such Interest Period and for a period equal to such Interest Period; provided that, if no such quotation appears on the applicable Telerate Page, the Eurodollar Rate shall be an interest rate per annum equal to the rate per annum at which deposits in Dollars are offered by the principal office of Union Bank of California, N.A.  in London, England to prime banks in the London interbank market at 11:00 a.m.  (London, England time) two Business Days before the first day of such Interest Period in an amount substantially equal to the Eurodollar Rate Advance to be maintained by the Lender that is the

 

6



 

Administrative Agent in respect of such Borrowing and for a period equal to such Interest Period.

 

Eurodollar Rate Advance” means an Advance which bears interest as provided in Section 2.09(b).

 

Eurodollar Rate Reserve Percentage” of any Lender for the Interest Period for any Eurodollar Rate Advance means the reserve percentage applicable during such Interest Period (or if more than one such percentage shall be so applicable, the daily average of such percentages for those days in such Interest Period during which any such percentage shall be so applicable) under regulations issued from time to time by the Federal Reserve Board for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental, or other marginal reserve requirement) for such Lender with respect to liabilities or assets consisting of or including Eurocurrency Liabilities having a term equal to such Interest Period.

 

Event of Default” has the meaning specified in Section 7.01.

 

Federal Funds Rate” means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for any such day on such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it.

 

Federal Reserve Board” means the Board of Governors of the Federal Reserve System or any of its successors.

 

Financial Statements” means the financial statements included in the Form 10-K filed by the Borrower with the SEC on September 11, 2007, including the audited consolidated balance sheet of the Borrower and its consolidated Subsidiaries as of fiscal year ended June 30, 2007, and the related audited consolidated statements of income, cash flow, and retained earnings of the Borrower and its consolidated Subsidiaries for the fiscal year then ended, copies of which have been delivered to the Administrative Agent and the Lenders.

 

Fire Litigation” means those certain lawsuits and claims now pending or hereafter filed against Borrower or any of its Subsidiaries related to or arising from fires beginning on March 12, 2006 in the Texas panhandle.

 

GAAP” means United States generally accepted accounting principles as in effect from time to time, applied on a basis consistent with the requirements of Section 1.03.

 

Governmental Authority” means, as to any Person in connection with any subject, any foreign, national, state or provincial governmental authority, or any political subdivision of any state thereof, or any agency, department, commission, board, authority or instrumentality, bureau or court, in each case having jurisdiction over such Person or such Person’s Property in connection with such subject.

 

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Guarantor” means each Subsidiary of the Borrower executing a Guaranty.

 

Guaranty” means a Guaranty in substantially the form of the attached Exhibit C and executed by a Guarantor, and “Guaranties” shall mean all such guaranties collectively.

 

Hazardous Substance” means the substances identified as such pursuant to CERCLA and those regulated under any other Environmental Law, including without limitation pollutants, contaminants, petroleum, petroleum products, radionuclides, radioactive materials, and medical and infectious waste.

 

Hazardous Waste” means the substances regulated as such pursuant to any Environmental Law.

 

Hedge Contract” means (a) any and all rate swap transactions, basis swaps, credit derivative transactions, forward rate transactions, puts, commodity swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward bond or forward bond price or forward bond index transactions, interest rate options, forward foreign exchange transactions, cap transactions, floor transactions, collar transactions, currency swap transactions, cross-currency rate swap transactions, currency options, spot contracts, or any other similar transactions or any combination of any of the foregoing (including any options to enter into any of the foregoing), whether or not any such transaction is governed by or subject to any master agreement, and (b) any and all transactions of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc., any International Foreign Exchange Master Agreement, or any other master agreement (any such master agreement, together with any related schedules, a “Master Agreement”), including any such obligations or liabilities under any Master Agreement; provided that, a “Hedge Contract” shall not include any “Master Agreement” that provides solely for the sale by the Borrower or its Subsidiaries of physical Hydrocarbons in exchange for cash in the ordinary course of its business.

 

Hydrocarbon Hedge Agreement” means a Hedge Contract which is intended to reduce or eliminate the risk of fluctuations in the price of Hydrocarbons.

 

Hydrocarbons” means oil, gas, coal seam gas, casinghead gas, drip gasoline, natural gasoline, condensate, distillate, and all other liquid and gaseous hydrocarbons produced or to be produced in conjunction therewith from a well bore and all products, by-products, and other substances derived therefrom or the processing thereof, and all other minerals and substances produced in conjunction with such substances, including, but not limited to, sulfur, geothermal steam, water, carbon dioxide, helium, and any and all minerals, ores, or substances of value and the products and proceeds therefrom.

 

Independent Engineer” means (a) Forest Garb & Associates, (b) Miller and Lents, Ltd. or (c) any other engineering firm acceptable to the Administrative Agent.

 

Independent Engineering Report” means a report, in form and substance satisfactory to the Administrative Agent and each of the Lenders, prepared by an Independent Engineer, addressed to the Administrative Agent and the Lenders with respect to the Oil and Gas Properties

 

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owned by the Borrower or its Subsidiaries (or to be acquired by the Borrower or any of its Subsidiaries, as applicable) which are or are to be included in the Borrowing Base, which report shall (a) specify the location, quantity, and type of the estimated Proven Reserves attributable to such Oil and Gas Properties, (b) contain a projection of the rate of production of such Oil and Gas Properties, (c) contain an estimate of the net operating revenues to be derived from the production and sale of Hydrocarbons from such Proven Reserves based on product price and cost escalation assumptions specified by the Administrative Agent and the Lenders, and (d) contain such other information as is customarily obtained from and provided in such reports or is otherwise reasonably requested by the Administrative Agent or any Lender.

 

Interest Expense” means, for the Borrower and its consolidated Subsidiaries for any period, total interest, letter of credit fees, and other fees and expenses incurred in connection with any Debt for such period, whether paid or accrued, including, without limitation, (i) all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers’ acceptance financing, imputed interest under Capital Leases, and net costs under Interest Hedge Agreements, all as determined in conformity with GAAP, and (ii) all interests, dividends, distributions, or other payments made in respect of preferred Equity Interests or Debt Issuances; but excluding (A) dividends payable solely in Equity Interests of the Borrower made in respect of preferred Equity Interests and (B) the expensing of deferred amortized costs pertaining to the payment in full of the Subordinated Debt and pertaining to the Obligations.

 

Interest Hedge Agreement” means a Hedge Contract between the Borrower and one or more financial institutions providing for the exchange of nominal interest obligations between the Borrower and such financial institution or the cap of the interest rate on any Debt of the Borrower.

 

Interest Period” means, for each Eurodollar Rate Advance comprising part of the same Borrowing, the period commencing on the date of such Eurodollar Rate Advance or the date of the Conversion of any Reference Rate Advance into a Eurodollar Rate Advance and ending on the last day of the period selected by the Borrower pursuant to the provisions below and Section 2.03 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 and Section 2.03.  The duration of each such Interest Period shall be three months; provided, however, that:

 

(a)                                  the Borrower may not select any Interest Period which ends after the Maturity Date;

 

(b)                                 Interest Periods commencing on the same date for Advances comprising part of the same Borrowing shall be of the same duration;

 

(c)                                  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 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

 

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(d)                                 any Interest Period which begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month in which it would have ended if there were a numerically corresponding day in such calendar month.

 

Interim Financial Statements” means the financial statements included in the Form 10-Q filed by the Borrower with the SEC on February 8, 2008 including the unaudited consolidated balance sheet of the Borrower and its consolidated Subsidiaries dated December 31, 2007, and the related unaudited consolidated statements of income, cash flow, and retained earnings of the Borrower and its consolidated Subsidiaries for the three months then ended, copies of which have been delivered to the Administrative Agent and the Lenders.

 

Internal Engineering Report” means a report, in form and substance satisfactory to the Administrative Agent and each Lender, prepared by the Borrower and certified by a Responsible Officer of the Borrower, addressed to the Administrative Agent and the Lenders with respect to the Oil and Gas Properties owned by the Borrower or any of its Subsidiaries (or to be acquired by the Borrower or any of its Subsidiaries, as applicable) which are or are to be included in the Borrowing Base, which report shall (a) specify the location, quantity, and type of the estimated Proven Reserves attributable to such Oil and Gas Properties, (b) contain a projection of the rate of production of such Oil and Gas Properties, (c) contain an estimate of the net operating revenues to be derived from the production and sale of Hydrocarbons from such Proven Reserves based on product price and cost escalation assumptions specified by the Administrative Agent and the  Lenders, and (d) contain such other information as is customarily obtained from and provided in such reports or is otherwise reasonably requested by the Administrative Agent or any Lender.

 

Junior Capital Issuance” means either (a) an Equity Issuance permitted under Section 6.22 or (b) a Debt Issuance.

 

Leases” means all oil and gas leases, oil, gas and mineral leases, oil, gas and casinghead gas leases or any other instruments, agreements, or conveyances under and pursuant to which the owner thereof has or obtains the right to enter upon lands and explore for, drill, and develop such lands for the production of Hydrocarbons.

 

Legal Requirement” means, as to any Person, any law, statute, ordinance, decree, requirement, order, judgment, rule, regulation (or official interpretation of any of the foregoing) of, and the terms of any license or permit issued by, any Governmental Authority, including, but not limited to, Regulations D, T, U, and X, which is applicable to such Person.

 

Lenders” means the lenders listed on the signature pages of this Agreement and each Eligible Assignee that shall become a party to this Agreement pursuant to Section 9.06.

 

Lending Office” means, as to any Lender, the office or offices of such Lender described as such in such Lender’s administrative questionnaire requested by the Administrative Agent, or such other office or offices as a Lender may from time to time notify the Borrower and the Administrative Agent.

 

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Leverage Ratio” means, as of the end of any fiscal quarter, the ratio of (a) the consolidated Debt of the Borrower as of such fiscal quarter end to (b) the consolidated EBITDA of the Borrower for the four fiscal quarter period then ended.

 

Lien” means any mortgage, lien, pledge, assignment, charge, deed of trust, security interest, hypothecation, preference, deposit arrangement or encumbrance (or other type of arrangement having the practical effect of the foregoing) to secure or provide for the payment of any obligation of any Person, whether arising by contract, operation of law, or otherwise (including, without limitation, the interest of a vendor or lessor under any conditional sale agreement, synthetic lease, Capital Lease, or other title retention agreement).

 

Liquid Investments” means:

 

(a)           direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States maturing within 180 days from the date of any acquisition thereof;

 

(b)           (i) negotiable or nonnegotiable certificates of deposit, time deposits, or other similar banking arrangements maturing within 180 days from the date of acquisition thereof (“bank debt securities”), issued by (A) any Lender or any Senior Lender (or any Affiliate of any Lender or any Senior Lender) or (B) any other bank or trust company so long as such certificate of deposit is pledged to secure the Borrower’s or any Subsidiaries’ ordinary course of business bonding requirements, or any other bank or trust company which has primary capital of not less than $500,000,000, if at the time of deposit or purchase, such bank debt securities are rated not less than “AA” (or the then equivalent) by the rating service of Standard & Poor’s Ratings Group or of Moody’s Investors Service, Inc., and (ii) commercial paper issued by (A) any Lender or any Senior Lender (or any Affiliate of any Lender or any Senior Lender) or (B) any other Person if at the time of purchase such commercial paper is rated not less than “A-1” (or the then equivalent) by the rating service of Standard & Poor’s Ratings Group or not less than “P-1” (or the then equivalent) by the rating service of Moody’s Investors Service, Inc., or upon the discontinuance of both of such services, such other nationally recognized rating service or services, as the case may be, as shall be selected by the Borrower with the consent of the Majority Lenders;

 

(c)           deposits in money market funds investing exclusively in investments described in clauses (a) and (b) above;

 

(d)           repurchase agreements relating to investments described in clauses (a) and (b) above with a market value at least equal to the consideration paid in connection therewith, with any Person who regularly engages in the business of entering into repurchase agreements and has a combined capital surplus and undivided profit of not less than $500,000,000, if at the time of entering into such agreement the debt securities of such Person are rated not less than “AA” (or the then equivalent) by the rating service of Standard & Poor’s Ratings Group or of Moody’s Investors Service, Inc.; and

 

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(e)           such other instruments (within the meaning of Article 9 of the Texas Business and Commerce Code) as the Borrower may request and the Administrative Agent may approve in writing.

 

Loan Documents” means this Agreement, the Notes, the Guaranties, the Security Instruments, the Subordination and Intercreditor Agreement, and each other agreement, instrument, or document executed by the Borrower, any Guarantor, or any of the Borrower’s or a Guarantor’s Subsidiaries or any of their officers at any time in connection with this Agreement.

 

Majority Lenders” means, (a) at any time when there are more than two Lenders, Lenders holding at least 662/3% of the then aggregate unpaid principal amount of the Notes held by the Lenders at such time; provided that, if no such principal amount is then outstanding, “Majority Lenders” shall mean Lenders having at least 662/3% of the aggregate amount of the Commitments at such time and (b) at any time when there are one or two Lenders, all of the Lenders.

 

Material Adverse Change” means (a) a material adverse change in the business, assets (including the Oil and Gas Properties of the Borrower or any of its Subsidiaries), condition (financial or otherwise), or results of operations of the Borrower or any of its Subsidiaries or (b) a material adverse effect on the Borrower’s or any Subsidiary’s ability to perform its obligations under this Agreement, any Note, any Guaranty, or any other Loan Document.

 

Maturity Date” means March 17, 2011 or such later date as determined from time to time under Section 2.15.

 

Maximum Rate” means the maximum nonusurious interest rate under applicable law (determined under such laws after giving effect to any items which are required by such laws to be construed as interest in making such determination, including without limitation if required by such laws, certain fees and other costs).

 

Mortgage” means each of the Mortgages, Deeds of Trust, Security Agreements, Assignment of Liens and Security Interests, Financing Statements and Assignments of Production or any other mortgage or deed of trust executed by any one or more of the Borrower, a Guarantor or any of their respective Subsidiaries in favor of the Administrative Agent for the ratable benefit of the Secured Parties in substantially the form of the attached Exhibit D or such other form as may be requested by the Administrative Agent, together with any assumptions or assignments of the obligations thereunder by the Borrower, any Guarantor or any of their respective Subsidiaries, and “Mortgages” shall mean all of such Mortgages collectively.

 

Multiemployer Plan” means a “multiemployer plan” as defined in Section 4001(a)(3) of ERISA.

 

Note” means a promissory note of the Borrower payable to the order of any Lender, in substantially the form of the attached Exhibit E, evidencing indebtedness of the Borrower to such Lender resulting from Advances owing to such Lender.

 

Notice of Borrowing” means a notice of borrowing in the form of the attached Exhibit F signed by a Responsible Officer of the Borrower.

 

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Notice of Conversion or Continuation” means a notice of conversion or continuation in the form of the attached Exhibit G signed by a Responsible Officer of the Borrower.

 

NPV means, with respect to any Proven Reserves expected to be produced from any undivided interests in oil and gas properties, the net present value, discounted at 10% per annum, of the future net revenues expected to accrue to the Borrower’s or any of its Subsidiary’s interests in such Proven Reserves (after deducting all existing burdens) during the remaining expected economic lives of such Proven Reserves.  Each calculation of such expected future net revenues shall be made in accordance with the then existing standards of the Society of Petroleum Engineers, provided that in any event (a) appropriate deductions shall be made for severance and ad valorem taxes, and for operating (including purchasing and injecting water), gathering, transportation and marketing costs required for the production and sale of such reserves, and (b) the pricing assumptions and escalations used in determining the NPV for any particular reserves shall be the NYMEX Pricing (or any other pricing assumptions to which the Borrower and Majority Lenders may agree).  NPV shall be calculated hereunder in connection with each Engineering Report, either by the Borrower, by Administrative Agent, or by the third party engineering firm who prepares such Engineering Report; in the event of any conflict, Administrative Agent’s calculation shall be conclusive and final, absent manifest error.

 

NYMEX Pricing” means, as of any date of determination with respect to any month:

 

(i)            for crude oil, the closing settlement price for the Light, Sweet Crude Oil futures contract for the first nearby month, and

 

(ii)           for natural gas, the closing settlement price for the Henry Hub Natural Gas futures contract for the first nearby month,

 

in each case as published by New York Mercantile Exchange (NYMEX) on its website currently located at www.nymex.com, or any successor thereto (as such price may be corrected or revised from time to time by the NYMEX in accordance with its rules and regulations).

 

Obligations” means all principal, interest, fees, reimbursements, indemnifications, and other amounts payable by the Borrower, any Guarantor or any of their respective Subsidiaries to the Administrative Agent, or the Lenders under the Loan Documents.

 

Oil and Gas Properties” means fee mineral interests, term mineral interests, Leases, subleases, farm-outs, royalties, overriding royalties, net profit interests, carried interests, production payments and similar mineral interests, and all unsevered and unextracted Hydrocarbons in, under, or attributable to such oil and gas Properties and interests.

 

Patriot Act” means the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)).

 

PBGC” means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA.

 

PDP Reserves” means Proven Reserves which are categorized as both “Developed” and “Producing” in the definitions promulgated by the Society of Petroleum Evaluation Engineers

 

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and the World Petroleum Congress as in effect at the time in question; “PDNP Reserves” means Proven Reserves which are categorized as both “Developed” and “Non-Producing” in such definitions; and “PUD Reserves” means Proved Reserves which are categorized as “Undeveloped” in such definitions.

 

PDNP NPV” means the NPV attributable to all PDNP Reserves from the Oil and Gas Properties of the Borrower and its Subsidiaries and based on an Engineering Report or other applicable information relating to the Proven Reserves of the Borrower and its Subsidiaries provided by Borrower.

 

PDP Present Value” means the NPV attributable to all PDP Reserves from the Oil and Gas Properties of the Borrower and its Subsidiaries and based on an Engineering Report or other applicable information relating to the Proven Reserves of the Borrower and its Subsidiaries provided by Borrower.

 

Permit” means any approval, certificate of occupancy, consent, waiver, exemption, variance, franchise, order, permit, authorization, right or license of or from any Governmental Authority, including without limitation, an Environmental Permit.

 

Permitted Liens” means the Liens permitted under Section 6.01.

 

Permitted Prior Liens” means the Liens securing the Senior Debt and Liens permitted under paragraphs (c) through (i) of Section 6.01.

 

Person” means an individual, partnership, corporation (including a business trust), joint stock company, limited liability corporation or company, limited liability partnership, trust, unincorporated association, joint venture or other entity, or a government or any political subdivision or agency thereof or any trustee, receiver, custodian or similar official.

 

Plan” means an employee benefit plan (other than a Multiemployer Plan) maintained for employees of the Borrower or any member of the Controlled Group and covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code.

 

Pledge Agreement” means a Pledge Agreement in substantially the form of the attached Exhibit H, executed by the Borrower or any of its Subsidiaries or any of the Guarantors.

 

Pricing Grid” means the pricing information and rules set forth in Schedule I.

 

Projections” means, as to the Borrower and for a given period, the Borrower’s forecasted consolidating balance sheets, profit and loss statements, and cash flow statements, and including therein projections for anticipated income, revenues, expenses, taxes, EBITDA and budgeted capital expenditures during such period, all based on good faith estimates and utilizing the assumptions which are set forth in such Projections and prepared in accordance with GAAP.

 

Property” of any Person means any property or assets (whether real, personal, or mixed, tangible or intangible) of such Person.

 

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Proven Reserves” means, at any particular time, the estimated quantities of Hydrocarbons which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs attributable to Oil and Gas Properties included or to be included in the Borrowing Base under then existing economic and operating conditions (i.e., prices and costs as of the date the estimate is made).

 

PUD Present Value” means the NPV attributable to all PUD Reserves from the Oil and Gas Properties of the Borrower and its Subsidiaries and based on an Engineering Report or other applicable information relating to the Proven Reserves of the Borrower and its Subsidiaries provided by Borrower.

 

Pro Rata Share” means, with respect to any Lender, the ratio (expressed as a percentage) of aggregate Commitments of such Lender to the aggregate Commitments of all the Lenders (or if such Commitments have been terminated or cancelled, the ratio (expressed as a percentage) of outstanding Advances owing to such Lender to the aggregate outstanding Advances owing to all such Lenders.

 

Reference Rate” means a fluctuating interest rate per annum as shall be in effect from time to time equal to the rate of interest publicly announced by Union Bank of California, N.A., as its reference rate, whether or not the Borrower has notice thereof.

 

Reference Rate Advance” means an Advance which bears interest as provided in Section 2.09(a).

 

Register” has the meaning set forth in paragraph (c) of Section 9.06.

 

Regulations D, T, U, and X” mean Regulations D, T, U, and X of the Federal Reserve Board, as the same is from time to time in effect, and all official rulings and interpretations thereunder or thereof.

 

Release” shall have the meaning set forth in CERCLA or under any other Environmental Law.

 

Response” shall have the meaning set forth in CERCLA or under any other Environmental Law.

 

Responsible Officer” means (a) with respect to any Person that is a corporation, such Person’s Chief Executive Officer, President, Chief Financial Officer, or Vice President, (b) with respect to any Person that is a limited liability company, a manager or the Responsible Officer of such Person’s managing member or manager, and (c) with respect to any Person that is a general partnership or a limited liability partnership, the Responsible Officer of such Person’s general partner or partners.

 

Restricted Payment” means, with respect to any Person, (a) any direct or indirect dividend or distribution (whether in cash, securities or other Property) or any direct or indirect payment of any kind or character (whether in cash, securities or other Property) in consideration for or otherwise in connection with any retirement, purchase, redemption or other acquisition of any Equity Interest of such Person, or any options, warrants or rights to purchase or acquire any

 

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such Equity Interest of such Person or (b) principal or interest payments (in cash, Property or otherwise) on,  or redemptions of, subordinated debt of such Person; provided that the term “Restricted Payment” shall not include any dividend or distribution payable solely in Equity Interests of the Borrower or warrants, options or other rights to purchase such Equity Interests.

 

SEC” means the United States Securities and Exchange Commission.

 

Secured Parties” means the Administrative Agent and the Lenders.

 

Security Agreements” means the Security Agreements, each in substantially the form of the attached Exhibit I, executed by the Borrower, any of its Subsidiaries, or any of the Guarantors.

 

Security Instruments” means, collectively, (a) the Mortgages, (b) the Transfer Letters, (c) the Pledge Agreements, (d) the Security Agreements, (e) each other agreement, instrument or document executed at any time in connection with the Pledge Agreements, the Security Agreements, or the Mortgages, and (f) each other agreement, instrument or document executed at any time in connection with securing the Obligations.

 

Senior Administrative Agent” means Union Bank of California, N.A., in its capacity as agent under the Senior Credit Agreement, and any successor agent pursuant thereto.

 

Senior Credit Agreement” means the Credit Agreement dated as of November 29, 2005 among the Borrower, the Senior Administrative Agent, and the Senior Lenders, as heretofore amended and as hereafter amended, modified, restated or supplemented in accordance with the terms of the Subordination and Intercreditor Agreement.

 

Senior Debt” means the “Obligations” as defined in the Senior Credit Agreement as in effect on the date hereof of as modified in accordance with the Subordination and Intercreditor Agreement.

 

Senior Lenders” means the lenders from time to time parties to the Senior Credit Agreement.

 

Senior Loan Documents” means the Senior Credit Agreement, the promissory notes executed and delivered pursuant to the Senior Credit Agreement, all agreements, instruments, or documents executed at any time in connection with securing the Senior Debt, and each other agreement, instrument, or document executed by the Borrower or any of its Subsidiaries or any of their officers in connection with the Senior Credit Agreement.

 

Solvent” means, with respect to any Person as of the date of any determination, that on such date (a) the fair value of the Property of such Person (both at fair valuation and at present fair saleable value) is greater than the total liabilities, including contingent liabilities, of such Person, (b) the present fair saleable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person is able to realize upon its assets and pay its debts and other liabilities, contingent obligations, and other commitments as they mature in the normal course of business, (d) such Person does not intend to, and does not believe that it will, incur debts or

 

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liabilities beyond such Person’s ability to pay as such debts and liabilities mature, and (e) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person’s Property would constitute unreasonably small capital after giving due consideration to current and anticipated future capital requirements and current and anticipated future business conduct and the prevailing practice in the industry in which such Person is engaged.  In computing the amount of contingent liabilities at any time, such liabilities shall be computed at the amount which, in light of the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability.

 

Square One” means Square One Energy, Inc., a Texas corporation and a wholly owned Subsidiary of the Borrower.

 

Subordination and Intercreditor Agreement” means that certain Subordination and Intercreditor Agreement, which shall be in a form acceptable to the Administrative Agent and the Lenders, dated as of the date hereof among the Administrative Agent, the Borrower, the Guarantors, the Lenders, the Senior Agent and the Senior Lenders.

 

Subsidiary” means, with respect to any Person (the “parent”) at any date, any other Person the accounts of which would be consolidated with those of the parent in the parent’s consolidated financial statements if such financial statements were prepared in accordance with GAAP as of such date, as well as any Person, a majority of whose outstanding Voting Securities (other than directors’ qualifying shares) shall at any time be owned by such parent or one or more Subsidiaries of such parentUnless otherwise specified, all references herein to a “Subsidiary” or to “Subsidiaries” shall refer to a Subsidiary or Subsidiaries of the Borrower; provided that Tri-Flow shall not be considered a Subsidiary of the Borrower or any Guarantor.

 

Termination Event” means (a) a Reportable Event described in Section 4043 of ERISA and the regulations issued thereunder (other than a Reportable Event not subject to the provision for 30-day notice to the PBGC under such regulations), (b) the withdrawal of the Borrower or any of its Affiliates from a Plan during a plan year in which it was a “substantial employer” as defined in Section 4001(a)(2) of ERISA, (c) the filing of a notice of intent to terminate a Plan or the treatment of a Plan amendment as a termination under Section 4041 of ERISA, (d) the institution of proceedings to terminate a Plan by the PBGC, or (e) any other event or condition which constitutes grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan.

 

Total Present Value” means an amount, based on the most recent Engineering Report or other applicable information provided by Borrower as of the applicable determination date, equal to the sum of (i) 100% of the PDP NPV plus (ii) 100% of the PDNP NPV plus (iii) 100% of the PUD NPV; provided that, Total Present Value will be limited to the extent that the amount determined under clause (i) shall always constitute at least 60% of the Total Present Value.

 

Transfer Letters” means, collectively, the letters in lieu of transfer orders in substantially the form of the attached Exhibit J and executed by the Borrower, any Guarantor or any of their respective Subsidiaries executing a Mortgage.

 

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Tri-Flow” means Tri-Flow, Inc., an Oklahoma corporation.

 

Type” has the meaning set forth in Section 1.04.

 

Voting Securities” means (a) with respect to any corporation (including any unlimited liability company), capital stock of such corporation having general voting power under ordinary circumstances to elect directors of such corporation (irrespective of whether at the time stock of any other class or classes shall have or might have special voting power or rights by reason of the happening of any contingency), (b) with respect to any partnership, any partnership interest or other ownership interest having general voting power to elect the general partner or other management of the partnership or other Person, and (c) with respect to any limited liability company, membership certificates or interests having general voting power under ordinary circumstances to elect managers of such limited liability company.

 

Section 1.02           Computation of Time Periods.  In this Agreement, with respect to 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 means “to but excluding”.

 

Section 1.03           Accounting Terms; Changes in GAAP.  Except as otherwise expressly provided herein, all accounting terms used herein shall be interpreted, and all financial statements and certificates and reports as to financial matters required to be delivered to the Lenders hereunder shall (unless otherwise disclosed to the Lenders in writing at the time of delivery thereof) be prepared, in accordance with GAAP applied on a basis consistent with those used in the preparation of the latest financial statements furnished to the Lenders hereunder (which prior to the delivery of the first financial statements under Section 5.06 hereof, shall mean the Financial Statements and the Interim Financial Statements).  All calculations made for the purposes of determining compliance with this Agreement shall (except as otherwise expressly provided herein) be made by application of GAAP applied on a basis consistent with those used in the preparation of the annual or quarterly financial statements furnished to the Lenders pursuant to Section 5.06 hereof most recently delivered prior to or concurrently with such calculations (or, prior to the delivery of the first financial statements under Section 5.06 hereof, used in the preparation of the Financial Statements and the Interim Financial Statements).  In addition, all calculations and defined accounting terms used herein shall, unless expressly provided otherwise, when referring to any Person, refer to such Person on a consolidated basis and mean such Person and its consolidated subsidiaries.

 

Section 1.04           Types of Advances.  Advances are distinguished by “Type.”  The “Type” of an Advance refers to the determination whether such Advance is a Eurodollar Rate Advance or Reference Rate Advance.

 

Section 1.05           Miscellaneous.  Article, Section, Schedule, and Exhibit references are to Articles and Sections of and Schedules and Exhibits to this Agreement, unless otherwise specified.  All references to instruments, documents, contracts, and agreements are references to such instruments, documents, contracts, and agreements as the same may be amended, supplemented, and otherwise modified from time to time, unless otherwise specified.  The words “hereof”, “herein”, and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. 

 

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The term “including” means “including, without limitation,”.  Paragraph headings have been inserted in this Agreement as a matter of convenience for reference only and it is agreed that such paragraph headings are not a part of this Agreement and shall not be used in the interpretation of any provision of this Agreement.

 

ARTICLE II

 

CREDIT FACILITIES

 

Section 2.01     Commitment for Advances.

 

(a)           Advances.  Each Lender severally agrees, on the terms and conditions set forth in this Agreement, to make a single advance term loan within one business day of the Effective Date on a non-revolving basis to the Borrower in an amount equal to such Lender’s Commitment.  Any Advances which have been prepaid or repaid may not be reborrowed.

 

(b)           Advances upon Increase in Commitments.  Each Lender that increases its Commitment under Section 2.16 (including any new Lender that joins this Agreement as a Lender pursuant to a joinder agreement as provided in Section 2.16) severally agrees, on the terms and conditions set forth in this Agreement, to make a single advance term loan on the Increase Effective Date on a non-revolving basis to the Borrower in an amount equal to its unfunded Commitment on such Increase Effective Date (after giving effect to such increase).  Any Advances which have been prepaid or repaid may not be reborrowed.

 

(c)           Notes.  The indebtedness of the Borrower to each Lender resulting from the Advance owing to such Lender shall be evidenced by a Note of the Borrower payable to the order of such Lender.

 

Section 2.02     [Reserved].

 

Section 2.03     Method of Borrowing.

 

(a)           Notice.  Each Borrowing shall be made pursuant to a Notice of Borrowing (or by telephone notice promptly confirmed in writing by a Notice of Borrowing), given not later than 10:00 a.m.  (Dallas, Texas time) (i) on the third Business Day before the date of the proposed Borrowing, in the case of a Borrowing comprised of Eurodollar Rate Advances (other than the initial Borrowing to be made on the Effective Date) or (ii) on the Business Day of the proposed Borrowing, in the case of a Borrowing comprised of Reference Rate Advances (or Eurodollar Rate Advances in the case of the Borrowing to be made on the Effective Date), by the Borrower to the Administrative Agent, which shall in turn give to each Lender prompt notice of such proposed Borrowing by telecopier or telex.  Each Notice of a Borrowing shall be given by telecopier or telex, confirmed immediately in writing, specifying the information required therein.  In the case of a proposed Borrowing comprised of Eurodollar Rate Advances, the Administrative Agent shall promptly notify each Lender of the applicable interest rate under Section 2.09(b).  Each Lender shall, before 12:00 p.m.  (Dallas, Texas time) on the date of such Borrowing, make available for the account of its Lending Office to the Administrative Agent at its address referred to in Section 9.02, or such other location as the Administrative Agent may specify by notice to the Lenders, in same day funds, in the case of a Borrowing, such Lender’s

 

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Pro Rata Share of such Borrowing.  After the Administrative Agent’s receipt of such funds and upon fulfillment of the applicable conditions set forth in Article III, the Administrative Agent shall make such funds available to the Borrower at its account with the Administrative Agent.

 

(b)           Conversions and Continuations.  The Borrower may elect to Convert or continue any Borrowing under this Section 2.03 by delivering an irrevocable Notice of Conversion or Continuation to the Administrative Agent at the Administrative Agent’s office no later than 10:00 a.m.  (Dallas, Texas time) (i) on the date which is at least three Business Days in advance of the proposed Conversion or continuation date in the case of a Conversion to or a continuation of a Borrowing comprised of Eurodollar Rate Advances and (ii) on the Business Day of the proposed Conversion in the case of a Conversion to a Borrowing comprised of Reference Rate Advances.  Each such Notice of Conversion or Continuation shall be in writing or by telex or telecopier confirmed immediately in writing specifying the information required therein.  Promptly after receipt of a Notice of Conversion or Continuation under this Section, the Administrative Agent shall provide each Lender with a copy thereof and, in the case of a Conversion to or a continuation of a Borrowing comprised of Eurodollar Rate Advances, notify each Lender of the applicable interest rate under Section 2.09(b).

 

(c)           Certain Limitations.  Notwithstanding anything to the contrary contained in paragraphs (a) and (b) above:

 

(i)            at no time shall there be more than one Interest Period applicable to outstanding Eurodollar Rate Advances and the Borrower may not select Eurodollar Rate Advances for any Borrowing at any time that a Default has occurred and is continuing;

 

(ii)           if any Lender shall, at least one Business Day before the date of any requested Borrowing, Conversion, or continuation, notify the Administrative Agent that the introduction of or any change in or in the interpretation of any law or regulation makes it unlawful, or that any central bank or other Governmental Authority asserts that it is unlawful, for such Lender or its Lending Office to perform its obligations under this Agreement to make Eurodollar Rate Advances or to fund or maintain Eurodollar Rate Advances, the right of the Borrower to select Eurodollar Rate Advances from such Lender shall be suspended until such Lender shall notify the Administrative Agent that the circumstances causing such suspension no longer exist, and the Advance made by such Lender in respect of such Borrowing, Conversion, or continuation shall be a Reference Rate Advance;

 

(iii)          if the Administrative Agent is unable to determine the Eurodollar Rate for Eurodollar Rate Advances comprising any requested Borrowing, the right of the Borrower to select Eurodollar Rate Advances for such Borrowing or for any subsequent Borrowing shall be suspended until the Administrative Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist, and each Advance comprising such Borrowing shall be a Reference Rate Advance;

 

(iv)          if the Majority Lenders shall, at least one Business Day before the date of any requested Borrowing, notify the Administrative Agent that the Eurodollar Rate for Eurodollar Rate Advances comprising such Borrowing will not adequately reflect the cost to such Lenders of making or funding their respective Eurodollar Rate Advances, as the case may

 

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be, for such Borrowing, the right of the Borrower to select Eurodollar Rate Advances for such Borrowing or for any subsequent Borrowing shall be suspended until the Administrative Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist, and each Advance comprising such Borrowing shall be a Reference Rate Advance; and

 

(v)           if the Borrower shall fail to select the duration or continuation of any Interest Period for any Eurodollar Rate Advances in accordance with the provisions contained in the definition of “Interest Period” in Section 1.01 and paragraph (b) above, the Administrative Agent shall forthwith so notify the Borrower and the Lenders and such Advances shall be made available to the Borrower on the date of such Borrowing as Reference Rate Advances or, if an existing Advance, Convert into Reference Rate Advances.

 

(d)           Notices Irrevocable.  Each Notice of Borrowing and Notice of Conversion or Continuation shall be irrevocable and binding on the Borrower.  In the case of any Borrowing for which the related Notice of Borrowing specifies is to be comprised of Eurodollar Rate Advances, the Borrower shall indemnify each Lender against any loss, out-of-pocket cost, or expense incurred by such Lender as a result of any failure by the Borrower to fulfill on or before the date specified in such Notice of Borrowing for such Borrowing the applicable conditions set forth in Article III including, without limitation, any loss (including any loss of anticipated profits), cost, or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to fund the Advance to be made by such Lender as part of such Borrowing when such Advance, as a result of such failure, is not made on such date.

 

(e)           Administrative Agent Reliance.  Unless the Administrative Agent shall have received notice from a Lender before the date of any Borrowing that such Lender shall not make available to the Administrative Agent such Lender’s Pro Rata Share of a Borrowing, the Administrative Agent may assume that such Lender has made its Pro Rata Share of such Borrowing available to the Administrative Agent on the date of such Borrowing in accordance with paragraph (a) of this Section 2.03 and the Administrative 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 Lender shall not have so made its Pro Rata Share of such Borrowing available to the Administrative Agent, such Lender and the Borrower severally agree to immediately repay to the Administrative Agent on demand such corresponding amount, together with interest on such amount, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Administrative Agent, at (i) in the case of the Borrower, the interest rate applicable on such day to Advances comprising such Borrowing and (ii) in the case of such Lender, the Federal Funds Rate for such day.  If such Lender shall repay to the Administrative Agent such corresponding amount and interest as provided above, such corresponding amount so repaid shall constitute such Lender’s Advance as part of such Borrowing for purposes of this Agreement even though not made on the same day as the other Advances comprising such Borrowing.

 

(f)            Lender Obligations Several.  The failure of any Lender to make the Advance to be made by it as part of any Borrowing shall not relieve any other Lender of its obligation, if any, to make its Advance on the date of such Borrowing.  No Lender shall be responsible for the failure

 

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of any other Lender to make the Advance to be made by such other Lender on the date of any Borrowing.

 

Section 2.04     Reduction of the Commitment.  Upon the making of the Advances on the Effective Date, each Lender’s Commitment shall be reduced to $0.

 

Section 2.05     Prepayment of Advances.

 

(a)           Optional.  The Borrower may prepay the Advances, after giving by 10:00 a.m.  (Dallas, Texas, time): (i) in the case of Eurodollar Rate Advances, at least three Business Days’ or (ii) in the case of Reference Rate Advances, same Business Day’s, irrevocable prior written notice to the Administrative Agent stating the proposed date and aggregate principal amount of such prepayment.  If any such notice is given, the Borrower shall prepay the Advances in whole or ratably in part in an aggregate principal amount equal to the amount specified in such notice, together with (i) the accrued interest to the date of such prepayment on the principal amount prepaid, (ii) the amounts, if any, required to be paid pursuant to Section 2.12 as a result of such prepayment being made on such date, (iii) if such prepayment is made on or prior to the first anniversary of the Effective Date, a prepayment premium in an amount equal to 2.00% of the principal amount being prepaid; and (iv) if such prepayment is after the first anniversary of the Effective Date but on or prior to the second anniversary of the Effective Date, a prepayment premium in an amount equal to 1.00% of the principal amount being prepaid; provided, however, that each partial prepayment shall be made in minimum amounts of $2,500,000 and in integral multiples of $2,500,000 in excess thereof and full prepayments of any Borrowing are permitted without restriction of amounts.

 

(b)           Mandatory.  If a Change of Control shall occur and the Borrower has not optionally prepaid in full the outstanding principal amount of the Advances concurrently with the consummation of such Change of Control, at the Lenders’ option (which option may be exercised in their sole discretion) the Borrower shall prepay the outstanding principal amount of the Advances, in whole or in part as elected by the Lenders, together with (i) the accrued interest to the date of such prepayment on the principal amount prepaid, (ii) the amounts, if any, required to be paid pursuant to Section 2.12 as a result of such prepayment being made on such date, (iii) if such Change in Control occurs on or prior to the first anniversary of the Effective Date, a prepayment premium in an amount equal to 2.00% of the principal amount required to be prepaid; and (iv) if such Change in Control occurs after the first anniversary of the Effective Date but on or prior to the second anniversary of the Effective Date, a prepayment premium in an amount equal to 1.00% of the principal amount required to be prepaid.  If the Lenders require the Borrower to prepay the Advances as provided above, the Administrative Agent shall so notify the Borrower in writing, which notice shall specify the amount to be paid by the Borrower pursuant to this Section 2.05(b).  The Borrower shall pay all such amounts in full within two Business Days of receipt of such notice.  The foregoing will not be deemed to be a consent by Lenders to any Change of Control or a waiver of any Default resulting therefrom.

 

(c)           Illegality.  If any Lender shall notify the Administrative Agent and the Borrower that the introduction of or any change in or in the interpretation of any law or regulation makes it unlawful, or that any central bank or other Governmental Authority asserts that it is unlawful for such Lender or its Lending Office to perform its obligations under this Agreement to maintain

 

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any Eurodollar Rate Advances of such Lender then outstanding hereunder, (i) the Borrower shall, no later than 10:00 a.m.  (Dallas, Texas time) (A) if not prohibited by law, on the last day of the Interest Period for each outstanding Eurodollar Rate Advance made by such Lender or (B) if required by such notice, on the second Business Day following its receipt of such notice, prepay all of the Eurodollar Rate Advances made by such Lender then outstanding, together with accrued interest on the principal amount prepaid to the date of such prepayment and amounts, if any, required to be paid pursuant to Section 2.12 as a result of such prepayment being made on such date, (ii) such Lender shall simultaneously make a Reference Rate Advance to the Borrower on such date in an amount equal to the aggregate principal amount of the Eurodollar Rate Advances prepaid to such Lender, and (iii) the right of the Borrower to select Eurodollar Rate Advances from such Lender for any subsequent Borrowing shall be suspended until such Lender gives notice referred to above shall notify the Administrative Agent that the circumstances causing such suspension no longer exist.

 

(d)           No Additional Right; Ratable Prepayment.  The Borrower shall have no right to prepay any principal amount of any Advance except as provided in this Section 2.05, and all notices given pursuant to this Section 2.05 shall be irrevocable and binding upon the Borrower.  Each payment of any Advance pursuant to this Section 2.05 shall be made in a manner such that all Advances comprising part of the same Borrowing are paid in whole or ratably in part.

 

Section 2.06           Repayment of Advances.  The Borrower shall repay to the Administrative Agent for the ratable benefit of the Lenders the outstanding principal amount of each Advance, together with any accrued interest thereon, on the Maturity Date or such earlier date pursuant to Section 7.02 or Section 7.03.

 

Section 2.07     [Reserved].

 

Section 2.08     Fees.  The Borrower shall pay the fees as agreed to between the Borrower and the Administrative Agent in that certain fee letter dated the date hereof.

 

Section 2.09     Interest.

 

(a)           Rates Based on Applicable Margin.  The Borrower shall pay interest on the unpaid principal amount of each Advance made by each Lender from the date of such Advance until such principal amount shall be paid in full, at the following rates per annum:

 

(i)            Reference Rate Advances.  If such Advance is a Reference Rate Advance, a rate per annum equal at all times to the Adjusted Reference Rate in effect from time to time plus the Applicable Margin in effect from time to time, payable quarterly in arrears on the last day of each calendar quarter, commencing with the calendar quarter ending March 31, 2008 and on the date such Reference Rate Advance shall be paid.

 

(ii)           Eurodollar Rate Advances.  If such Advance is a Eurodollar Rate Advance, a rate per annum equal at all times during the Interest Period for such Advance to the Eurodollar Rate for such Interest Period plus the Applicable Margin in effect from time to time, payable on the last day of such Interest Period, and, in the case of six, nine or twelve month Interest Periods, on (i) the day which occurs during such Interest Period three months from the first day of such Interest Period, (ii) the day which occurs during such Interest Period six months

 

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from the first day of such Interest Period, and (iii) the day which occurs during such Interest Period nine months from the first day of such Interest Period.

 

(b)           Additional Interest on Eurodollar Rate Advances.  The Borrower shall pay to each Lender, so long as any such Lender shall be required under regulations of the Federal Reserve Board to maintain reserves with respect to liabilities or assets consisting of or including Eurocurrency Liabilities, additional interest on the unpaid principal amount of each Eurodollar Rate Advance of such Lender, from the effective date of such Advance until such principal amount is paid in full, at an interest rate per annum equal at all times to the remainder obtained by subtracting (i) the Eurodollar Rate for the Interest Period for such Advance from (ii) the rate obtained by dividing such Eurodollar Rate by a percentage equal to 100% minus the Eurodollar Rate Reserve Percentage of such Lender for such Interest Period, payable on each date on which interest is payable on such Advance.  Such additional interest payable to any Lender shall be determined by such Lender and notified to the Borrower through the Administrative Agent (such notice to include the calculation of such additional interest, which calculation shall be conclusive in the absence of manifest error).

 

(c)           Retroactive Adjustments of Applicable MarginIn the event that any financial statement or Compliance Certificate delivered pursuant to Section 5.06 is shown to be inaccurate (regardless of whether this Agreement or the Commitments are in effect when such inaccuracy is discovered), and such inaccuracy, if corrected, would have led to the application of a higher Applicable Margin for any period (an “Applicable Period”) than the Applicable Margin applied for such Applicable Period, then (i) the Borrower shall immediately deliver to the Administrative Agent a corrected Compliance Certificate for such Applicable Period, (ii) the Applicable Margin shall be determined as if the higher Applicable Margin that would have applied were applicable for such Applicable Period (and in any event at Level 6 if the inaccuracy was the result of dishonesty, fraud or willful misconduct), and (iii) the Borrower shall immediately, without further action by the Administrative Agent or any Lender, pay to the Administrative Agent for the account of the applicable Lenders, the accrued additional interest owing as a result of such increased Applicable Margin for such Applicable Period.  This Section 2.09(c) shall not limit the rights of the Administrative Agent and Lenders with respect to the default rate of interest.  The Borrower’s obligations under this Section 2.09(c) shall survive the termination of the Commitments and the repayment of all other Obligations hereunder.

 

(d)           Usury Recapture.

 

(i)            If, with respect to any Lender, the effective rate of interest contracted for under the Loan Documents, including the stated rates of interest and fees contracted for hereunder and any other amounts contracted for under the Loan Documents which are deemed to be interest, at any time exceeds the Maximum Rate, then the outstanding principal amount of the loans made by such Lender hereunder shall bear interest at a rate which would make the effective rate of interest for such Lender under the Loan Documents equal the Maximum Rate until the difference between the amounts which would have been due at the stated rates and the amounts which were due at the Maximum Rate (the “Lost Interest”) has been recaptured by such Lender.

 

(ii)           If, when the loans made hereunder are repaid in full, the Lost Interest has not been fully recaptured by such Lender pursuant to the preceding paragraph, then, to the extent

 

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permitted by law, for the loans made hereunder by such Lender the interest rates charged under Section 2.09 hereunder shall be retroactively increased such that the effective rate of interest under the Loan Documents was at the Maximum Rate since the effectiveness of this Agreement to the extent necessary to recapture the Lost Interest not recaptured pursuant to the preceding sentence and, to the extent allowed by law, the Borrower shall pay to such Lender the amount of the Lost Interest remaining to be recaptured by such Lender.

 

(iii)                               NOTWITHSTANDING THE FOREGOING OR ANY OTHER TERM IN THIS AGREEMENT AND THE LOAN DOCUMENTS TO THE CONTRARY, IT IS THE INTENTION OF EACH LENDER AND THE BORROWER TO CONFORM STRICTLY TO ANY APPLICABLE USURY LAWS.  ACCORDINGLY, IF ANY LENDER CONTRACTS FOR, CHARGES, OR RECEIVES ANY CONSIDERATION WHICH CONSTITUTES INTEREST IN EXCESS OF THE MAXIMUM RATE, THEN ANY SUCH EXCESS SHALL BE CANCELED AUTOMATICALLY AND, IF PREVIOUSLY PAID, SHALL AT SUCH LENDER’S OPTION BE APPLIED TO THE OUTSTANDING AMOUNT OF THE LOANS MADE HEREUNDER BY SUCH LENDER OR BE REFUNDED TO THE BORROWER.

 

Section 2.10                Payments and Computations.

 

(a)                                  Payment Procedures.  The Borrower shall make each payment under this Agreement and under the Notes not later than 10:00 a.m.  (Dallas, Texas time) on the day when due in Dollars to the Administrative Agent at the location referred to in the Notes (or such other location as the Administrative Agent shall designate in writing to the Borrower) in same day funds without deduction, setoff, or counterclaim of any kind.  The Administrative Agent shall promptly thereafter cause to be distributed like funds relating to the payment of principal, interest or fees ratably (other than amounts payable solely to the Administrative Agent or a specific Lender pursuant to Section 2.08(c), 2.09(d), 2.12, 2.13, 2.14, 8.05, or 9.07, but after taking into account payments effected pursuant to Section 9.04) in accordance with each Lender’s Pro Rata Share to the Lenders for the account of their respective Lending Offices, and like funds relating to the payment of any other amount payable to any Lender to such Lender for the account of its Lending Office, in each case to be applied in accordance with the terms of this Agreement.

 

(b)                                 Computations.  All computations of interest based on the Reference Rate and of fees shall be made by the Administrative 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 and the Federal Funds Rate shall be made by the Administrative 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 or fees are payable.  Each determination by the Administrative Agent of an interest rate or fee shall be conclusive and binding for all purposes, absent manifest error.

 

(c)                                  Non-Business Day Payments.  Whenever any payment 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 or fees, as the case may be; provided, however, that if such extension would cause

 

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payment of interest on or principal of Eurodollar Rate Advances to be made in the next following calendar month, such payment shall be made on the next preceding Business Day.

 

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

 

Section 2.11                Sharing of Payments, Etc.  If any Lender shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) on account of the Advances made by it in excess of its Pro Rata Share of payments on account of the Advances obtained by all the Lenders, such Lender shall notify the Administrative Agent and forthwith purchase from the other Lenders such participations in the Advances made or held by them as shall be necessary to cause such purchasing Lender 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 Lender, such purchase from each Lender shall be rescinded and such Lender shall repay to the purchasing Lender the purchase price to the extent of such Lender’s ratable share (according to the proportion of (a) the amount of the participation sold by such Lender to the purchasing Lender as a result of such excess payment to (b) the total amount of such excess payment) of such recovery, together with an amount equal to such Lender’s ratable share (according to the proportion of (i) the amount of such Lender’s required repayment to the purchasing Lender to (ii) the total amount of all such required repayments to the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered.  The Borrower agrees that any Lender so purchasing a participation from another Lender pursuant to this Section 2.11 may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off) with respect to such participation as fully as if such Lender were the direct creditor of the Borrower in the amount of such participation.

 

Section 2.12                Breakage Costs.  If (a) any payment of principal of any Eurodollar Rate Advance is made other than on the last day of the Interest Period for such Advance, whether as a result of any payment pursuant to Section 2.05, the acceleration of the maturity of the Notes pursuant to Article VII, or otherwise, or (b) the Borrower fails to make a principal or interest payment with respect to any Eurodollar Rate Advance on the date such payment is due and payable, the Borrower shall, within 10 days of any written demand sent by any Lender to the Borrower through the Administrative Agent, pay to the Administrative Agent for the account of such Lender any amounts required to compensate such Lender for any additional losses, out-of-pocket costs or expenses which it may reasonably incur as a result of such payment or nonpayment, including, without limitation, any loss (including loss of anticipated profits), cost or

 

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expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by any Lender to fund or maintain such Advance.

 

Section 2.13                Increased Costs.

 

(a)                                  Eurodollar Rate Advances.  If, due to either (i) the introduction of or any change (other than any change by way of imposition or increase of reserve requirements included in the Eurodollar Rate Reserve Percentage) in or in the interpretation of any law or regulation or (ii) the compliance with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law), there shall be any increase in the cost to any Lender of agreeing to make or making, funding, or maintaining Eurodollar Rate Advances, then the Borrower shall from time to time, upon demand by such Lender (with a copy of such demand to the Administrative Agent), immediately pay to the Administrative Agent for the account of such Lender additional amounts sufficient to compensate such Lender for such increased cost.  A certificate as to the amount of such increased cost and detailing the calculation of such cost submitted to the Borrower and the Administrative Agent by such Lender shall be conclusive and binding for all purposes, absent manifest error.

 

(b)                                 Capital Adequacy.  If any Lender determines in good faith that compliance with any law or regulation adopted or changed after the date hereof or any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law) affects or would affect the amount of capital required or expected to be maintained by such Lender or any corporation controlling such Lender and that the amount of such capital is increased by or based upon the existence of such Lender’s commitment to lend and other commitments of this type, then, upon 30 days’ prior written notice by such Lender (with a copy of any such demand to the Administrative Agent), the Borrower shall immediately pay to the Administrative Agent for the account of such Lender, from time to time as specified by such Lender, additional amounts sufficient to compensate such Lender, in light of such circumstances, to the extent that such Lender reasonably determines such increase in capital to be allocable to the existence of such Lender’s commitment to lend under this Agreement.  A certificate as to such amounts and detailing the calculation of such amounts submitted to the Borrower by such Lender shall be conclusive and binding for all purposes, absent manifest error.

 

(c)                                  Reserved.

 

(d)                                 Mitigation.  Each Lender claiming compensation pursuant to this Section 2.13 shall designate a different Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the sole discretion of such Lender, be otherwise disadvantageous to such Lender.

 

Section 2.14                Taxes.

 

(a)                                  No Deduction for Certain Taxes.  Any and all payments by the Borrower shall be made, in accordance with Section 2.10, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Lender and the Administrative Agent, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction under the laws of

 

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which such Lender or the Administrative Agent (as the case may be) is organized or any political subdivision of the jurisdiction (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as “Taxes”) and, in the case of each Lender, Taxes by the jurisdiction of such Lender’s Lending Office or any political subdivision of such jurisdiction.  If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable to any Lender or the Administrative Agent, (i) the sum payable shall be increased as may be necessary so that, after making all required deductions (including deductions applicable to additional sums payable under this Section 2.14), such Lender or the Administrative Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made; provided, however, that if the Borrower’s obligation to deduct or withhold Taxes is caused solely by such Lender’s, or the Administrative Agent’s failure to provide the forms described in paragraph (d) of this Section 2.14 and such Lender or the Administrative Agent could have provided such forms, no such increase shall be required; (ii) the Borrower shall make such deductions; and (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law.

 

(b)                                 Other Taxes.  In addition, the Borrower agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which arise from any payment made or from the execution, delivery or registration of, or otherwise with respect to, this Agreement, the Notes, or the other Loan Documents (hereinafter referred to as “Other Taxes”).

 

(c)                                  IndemnificationTHE BORROWER INDEMNIFIES EACH LENDER AND THE ADMINISTRATIVE AGENT FOR THE FULL AMOUNT OF TAXES OR OTHER TAXES (INCLUDING, WITHOUT LIMITATION, ANY TAXES OR OTHER TAXES IMPOSED BY ANY JURISDICTION ON AMOUNTS PAYABLE UNDER THIS SECTION 2.14) PAID BY SUCH LENDER OR THE ADMINISTRATIVE AGENT (AS THE CASE MAY BE) AND ANY LIABILITY (INCLUDING INTEREST AND EXPENSES) ARISING THEREFROM OR WITH RESPECT THERETO, WHETHER OR NOT SUCH TAXES OR OTHER TAXES WERE CORRECTLY OR LEGALLY ASSERTED.  EACH PAYMENT REQUIRED TO BE MADE BY THE BORROWER IN RESPECT OF THIS INDEMNIFICATION SHALL BE MADE TO THE ADMINISTRATIVE AGENT FOR THE BENEFIT OF ANY PARTY CLAIMING SUCH INDEMNIFICATION WITHIN 30 DAYS FROM THE DATE THE BORROWER RECEIVES WRITTEN DEMAND THEREFOR FROM THE ADMINISTRATIVE AGENT ON BEHALF OF ITSELF AS ADMINISTRATIVE AGENT OR ANY SUCH LENDER.  IF ANY LENDER OR THE ADMINISTRATIVE AGENT RECEIVES A REFUND IN RESPECT OF ANY TAXES PAID BY THE BORROWER UNDER THIS PARAGRAPH (C), SUCH LENDER OR THE ADMINISTRATIVE AGENT, AS THE CASE MAY BE, SHALL PROMPTLY PAY TO THE BORROWER THE BORROWER’S SHARE OF SUCH REFUND.

 

(d)                                 Foreign Lender Withholding Exemption.  Each Lender that is not incorporated under the laws of the United States of America or a state thereof agrees that it shall deliver to the Borrower and the Administrative Agent (i) two duly completed copies of United States Internal Revenue Service Form W8-ECI or W8-BEN or successor applicable form, as the case may be,

 

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certifying in each case that such Lender is entitled to receive payments under this Agreement and the Notes payable to it, without deduction or withholding of any United States federal income taxes, (ii) if applicable, an Internal Revenue Service Form W-8 or W-9 or successor applicable form, as the case may be, to establish an exemption from United States backup withholding tax, and (iii) any other governmental forms which are necessary or required under an applicable tax treaty or otherwise by law to reduce or eliminate any withholding tax, which have been reasonably requested by the Borrower.  Each Lender which delivers to the Borrower and the Administrative Agent a Form W8-ECI or W8-BEN and Form W-8 or W-9 pursuant to the next preceding sentence further undertakes to deliver to the Borrower and the Administrative Agent two further copies of the said letter and Form W8-ECI or W8-BEN and Form W-8 or W-9 , or successor applicable forms, or other manner of certification, as the case may be, on or before the date that any such letter or form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent letter and form previously delivered by it to the Borrower and the Administrative Agent, and such extensions or renewals thereof as may reasonably be requested by the Borrower and the Administrative Agent certifying in the case of a Form W8-ECI or W8-BEN that such Lender is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes.  If an event (including without limitation any change in treaty, law or regulation) has occurred prior to the date on which any delivery required by the preceding sentence would otherwise be required which renders all such forms inapplicable or which would prevent any Lender from duly completing and delivering any such letter or form with respect to it and such Lender advises the Borrower and the Administrative Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax, and in the case of a Form W-8 or W-9, establishing an exemption from United States backup withholding tax, such Lender shall not be required to deliver such letter or forms.  The Borrower shall withhold tax at the rate and in the manner required by the laws of the United States with respect to payments made to a Lender failing to timely provide the requisite Internal Revenue Service forms.

 

Section 2.15                Extension of Maturity Date.

 

(a)                                  Requests for Extension.  The Borrower may, by notice to the Administrative Agent (who shall promptly notify the Lenders) not earlier than 90 days and not later than 75 days prior to the Maturity Date then in effect hereunder (the “Existing Maturity Date”), request that each Lender extend such Lender’s Maturity Date for an additional 364 days from the Existing Maturity Date; provided that, the Borrower may only request two such extensions during the term of this Agreement.

 

(b)                                 Lender Elections to Extend.  Each Lender, acting in its sole and individual discretion, shall, by notice to the Administrative Agent given not earlier than 75 days prior to the Existing Maturity Date and not later than the date (the “Notice Date”) that is 45 days prior to the Existing Maturity Date, advise the Administrative Agent whether or not such Lender agrees to such extension (and each Lender that determines not to so extend its Maturity Date (a “Non-Extending Lender”) shall notify the Administrative Agent of such fact promptly after such determination (but in any event no later than the Notice Date) and any Lender that does not so advise the Administrative Agent on or before the Notice Date shall be deemed to be a Non-Extending Lender.  The election of any Lender to agree to such extension shall not obligate any other Lender to so agree.

 

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(c)                                  Notification by Administrative Agent.  The Administrative Agent shall notify the Borrower of each Lender’s determination under this Section no later than the date 45 days prior to the Existing Maturity Date (or, if such date is not a Business Day, on the next preceding Business Day).

 

(d)                                 Additional Lenders.  The Borrower shall have the right on or before the Existing Maturity Date to replace each Non-Extending Lender with, and add as “Lenders” under this Agreement in place thereof, one or more Eligible Assignees (each, an “Additional Lender”) as provided in Section 9.06, each of which Additional Lenders shall have entered into an Assignment and Acceptance pursuant to which such Additional Lender shall, effective as of the Existing Maturity Date, have acquired the Advances owing to the applicable Non-Extending Lender.

 

(e)                                  Minimum Extension Requirement.  If (and only if) the total of the Advances owing to the Lenders that have agreed so to extend their Maturity Date and the Advances owing to the Additional Lenders shall be more than 662/3 % of the aggregate outstanding amount of the Advances immediately prior to the proposed extension of the Maturity Date, then, effective as of the Existing Maturity Date, the Maturity Date of each Extending Lender and of each Additional Lender shall be extended to the date falling 364 days after the Existing Maturity Date (except that, if such date is not a Business Day, such Maturity Date as so extended shall be the next preceding Business Day) and each Additional Lender shall thereupon become a “Lender” for all purposes of this Agreement.

 

(f)                                    Conditions to Effectiveness of Extensions.  Notwithstanding the foregoing, the extension of the Maturity Date pursuant to this Section shall not be effective with respect to any Lender unless:

 

(i)                                     no Default or Event of Default shall have occurred and be continuing on the date of such extension and after giving effect thereto;

 

(ii)                                  the representations and warranties contained in this Agreement are true and correct, in all material respects, on and as of the date of such extension and after giving effect thereto, as though made on and as of such date (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date); and

 

(iii)                               on the Maturity Date of each Non-Extending Lender whose outstanding Advances were not assigned to an Additional Lender, the Borrower shall prepay any Advances outstanding on such date which is owing to such Non-Extending Lender (and pay any additional amounts required pursuant to Section 2.12).

 

(g)                                 Conflicting Provisions.  This Section shall supersede any provisions in Section 2.11 or 9.01 to the contrary.

 

Section 2.16                Increase in Commitments.

 

(a)                                  Request for Increase.  Provided there exists no Default and subject to the Subordination and Intercreditor Agreement, upon notice to the Administrative Agent (which

 

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shall promptly notify the Lenders), the Borrower may from time to time, request an increase in the aggregate Commitments by an amount (for all such requests) not exceeding $10,000,000; provided that (i) any such request for an increase shall be in a minimum amount of $5,000,000, and (ii) the Company may make a maximum of two such requests.  At the time of sending such notice, the Borrower (in consultation with the Administrative Agent) shall specify the time period within which each Lender is requested to respond (which shall in no event be less than ten Business Days from the date of delivery of such notice to the Lenders).

 

(b)                                 Lender Elections to Increase.  Each Lender shall notify the Administrative Agent within such time period whether or not it agrees to increase its Commitment and, if so, whether by an amount equal to, greater than, or less than its Pro Rata Share of such requested increase.  Any Lender not responding within such time period shall be deemed to have declined to increase its Commitment.

 

(c)                                  Notification by Administrative Agent; Additional Lenders.  The Administrative Agent shall notify the Borrower and each Lender of the Lenders’ responses to each request made hereunder.  To achieve the full amount of a requested increase and subject to the approval of the Administrative Agent, the Borrower may also invite additional Eligible Assignees to become Lenders pursuant to a joinder agreement in form and substance satisfactory to the Administrative Agent and its counsel.

 

(d)                                 Effective Date and Allocations.  If the Commitments are increased in accordance with this Section, the Administrative Agent and the Borrower shall determine the effective date (the “Increase Effective Date”) and the final allocation of such increase.  The Administrative Agent shall promptly notify the Borrower and the Lenders of the final allocation of such increase and the Increase Effective Date.

 

(e)                                  Conditions to Effectiveness of Increase.  An increase the Commitments provided in this Section 2.16 shall become effective on the Increase Effective Date only upon the satisfaction of the following conditions precedent on or prior to such Increase Effective Date:  the receipt by the Administrative Agent of (i) an agreement in form and substance reasonably satisfactory to the Administrative Agent signed by the Borrower, each Lender and each new lender, setting forth its Commitments, if any, increased pursuant to this Section 2.16 and setting forth the agreement of each new lender to become a party to this Agreement and to be bound by all the terms and provisions hereof binding upon each Lender, and (ii) a certificate of each Guarantor and the Borrower dated as of the Increase Effective Date (in sufficient copies for each Lender) signed by a Responsible Officer of such Person certifying and attaching the resolutions adopted by such Person approving or consenting to such increase, and in the case of the Borrower, certifying that, before and after giving effect to such increase, (A) the representations and warranties contained in Article IV and the other Loan Documents are true and correct, in all material respects, on and as of the Increase Effective Date, except to the extent that such representations and warranties specifically refer to an earlier date, in which case they are true and correct, in all material respects, as of such earlier date, and except that for purposes of this Section 2.16, the representations and warranties contained in subsections (b) and (c) of Section 4.05 shall be deemed to refer to the most recent statements furnished pursuant to clauses (a) and (b), respectively, of Section 5.06, and (B) no Default exists.

 

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(f)                                    No Commitment.  This Section 2.16 shall not be construed to create any obligation on the Administrative Agent or any of the Lenders to advance or to commit to advance any credit to the Borrower or to arrange for any other Person to advance or to commit to advance any credit to the Borrower.

 

(g)                                 Conflicting Provisions.  This Section shall supersede any provisions in Section 2.11 or 9.01 to the contrary.

 

ARTICLE III

 

CONDITIONS OF LENDING

 

Section 3.01                Conditions Precedent to Initial Credit ExtensionThe obligation of each Lender to make its Credit Extension on the Effective Date hereunder is subject to satisfaction of the following conditions precedent:

 

(a)                                  Documentation.  The Administrative Agent shall have received the following duly executed by all the parties thereto, in form and substance satisfactory to the Administrative Agent and the Lenders, and, where applicable, in sufficient copies for each Lender:

 

(i)                                     this Agreement, a Note payable to the order of each Lender in the amount of its Commitment, the Guaranties, the Pledge Agreement, the Security Agreements, and Mortgages encumbering substantially all of the Borrower’s and its Subsidiaries’ Proven Reserves and Oil and Gas Properties in which the Senior Administrative Agent has Lien, and each of the other Loan Documents,  and all attached exhibits and schedules;

 

(ii)                                  a favorable opinion of the Borrower’s, its Subsidiaries’ and the Guarantors’ counsel dated as of the date of this Agreement and substantially in the form of the attached Exhibit K covering the matters discussed in such Exhibit and such other matters as any Lender through the Administrative Agent may reasonably request;

 

(iii)                               copies, certified as of the date of this Agreement by a Responsible Officer of the Borrower of (A) the resolutions of the Board of Directors of the Borrower approving the Loan Documents to which the Borrower is a party, (B) the certificate of incorporation of the Borrower, (C) the bylaws of the Borrower and (D) all other documents evidencing other necessary corporate action and governmental approvals, if any, with respect to this Agreement, the Note, and the other Loan Documents;

 

(iv)                              certificates of a Responsible Officer of the Borrower certifying the names and true signatures of the officers of the Borrower authorized to sign this Agreement, the Notes, Notices of Borrowing, Notices of Conversion or Continuation, and the other Loan Documents to which the Borrower is a party;

 

(v)                                 copies, certified as of the date of this Agreement by a Responsible Officer or the secretary or an assistant secretary of each Guarantor of (A) the resolutions of the Board of Directors (or other applicable governing body) of such Guarantor approving the Loan Documents to which it is a party, (B) the articles or certificate (as applicable) of incorporation (or organization) and bylaws of such Guarantor, and (C) all other documents evidencing other

 

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necessary corporate action and governmental approvals, if any, with respect to the Guaranty, the Security Instruments, and the other Loan Documents to which such Guarantor is a party;

 

(vi)                              a certificate of the secretary or an assistant secretary of each Guarantor certifying the names and true signatures of officers of such Guarantor authorized to sign the Guaranty, Security Instruments and the other Loan Documents to which such Guarantor is a party;

 

(vii)                           a certificate dated as of the date of this Agreement from the Responsible Officer of the Borrower stating that the conditions in this Section 3.01 have been met;

 

(viii)                        appropriate UCC-1 Financing Statements covering the Collateral for filing with the appropriate authorities and any other documents, agreements or instruments necessary to create an Acceptable Security Interest in such Collateral;

 

(ix)                                insurance certificates evidencing insurance which meets the requirements of this Agreement and the Security Instruments, and which is otherwise satisfactory to the Administrative Agent;

 

(x)                                   the initial Independent Engineer’s Report dated effective as of a date acceptable to the Administrative Agent;

 

(xi)                                the Subordination and Intercreditor Agreement; and

 

(xii)                             such other documents, governmental certificates, agreements and lien searches as the Administrative Agent or any Lender may reasonably request.

 

(b)                                 Payment of Fees.  On or prior to the date of this Agreement, the Borrower shall have paid the fees required by Section 2.08(c) and all costs and expenses that have been invoiced and are payable pursuant to Section 9.04.

 

(c)                                  Delivery of Financial Statements.  The Administrative Agent and the Lenders shall have received true and correct copies of (i) the Financial Statements, (ii) the Interim Financial Statements, (iii) Projections through June 30, 2012, (iv) pro forma unaudited consolidating financial statements of the Borrower as of the Effective Date after giving effect to the Advances made hereunder and any credit extensions outstanding on the Effective Date under the Senior Credit Agreement, including therein the Borrower’s consolidated balance sheet and statements of income, cash flows, and retained earnings, (v) a sources and uses statement outlining the uses to which the proceeds of the Advances will be applied on the Effective Date, and (vi) such other financial information as the Lenders may reasonably request.

 

(d)                                 Security Instruments.  The Administrative Agent shall have received all appropriate evidence required by the Administrative Agent and the Lenders in their sole discretion necessary to determine that the Administrative Agent (for its benefit and the benefit of the Secured Parties) shall have an Acceptable Security Interest in the Collateral and that all actions or filings necessary to protect, preserve and validly perfect such Liens have been made, taken or obtained, as the case may be, and are in full force and effect.

 

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(e)                                  Due Diligence on Title and Environmental.  The Administrative Agent shall be satisfied with the condition of the Oil and Gas Properties with respect to the Borrower’s and its Subsidiaries’ compliance with Environmental Laws and the Borrower’s and its Subsidiaries’ title to such properties.

 

(f)                                    No Default.  No Default shall have occurred and be continuing.

 

(g)                                 Representations and Warranties.  The representations and warranties contained in Article IV hereof and in each other Loan Document shall be true and correct in all material respects.

 

(h)                                 Material Adverse Change.  No event or circumstance that could cause a Material Adverse Change shall have occurred.

 

(i)                                     No Proceeding or Litigation; No Injunctive Relief.  No action, suit, investigation or other proceeding (including, without limitation, the enactment or promulgation of a statute or rule) by or before any arbitrator or any Governmental Authority shall be threatened or pending and no preliminary or permanent injunction or order by a state or federal court shall have been entered (i) in connection with this Agreement or any transaction contemplated hereby or (ii) other than the litigation proceedings set forth on Schedule 4.07, which in the judgment of the Administrative Agent, could reasonably be expected to result in a Material Adverse Change.

 

(j)                                     Consents, Licenses, Approvals, etc.  The Administrative Agent shall have received true copies (certified to be such by the Borrower or other appropriate party) of all consents, licenses and approvals required in accordance with applicable law, or in accordance with any document, agreement, instrument or arrangement to which the Borrower, the Guarantors and their respective Subsidiaries is a party, in connection with the execution, delivery, performance, validity and enforceability of this Agreement and the other Loan Documents.  In addition, the Borrower, the Guarantors and their respective Subsidiaries shall have all such material consents, licenses and approvals required in connection with the continued operation of the Borrower, the Guarantors and respective Subsidiaries, and such approvals shall be in full force and effect, and all applicable waiting periods shall have expired without any action being taken or threatened by any competent authority which would restrain, prevent or otherwise impose adverse conditions on this Agreement and the actions contemplated hereby.

 

(k)                                  Hedging Arrangements.  The Borrower shall have entered into the Hydrocarbon Hedge Agreements and the Interest Hedge Agreements required by Section 5.12.

 

(l)                                     Material Contracts.  The Borrower shall have delivered to the Administrative Agent copies of all material contracts, agreements or instruments listed on the attached Schedule 4.21.

 

(m)                               Notice of Borrowing.  The Administrative Agent shall have received a Notice of Borrowing from the Borrower in the form of Exhibit F, with appropriate insertions and executed by a duly authorized Responsible Officer of the Borrower.

 

(n)                                 USA Patriot Act.  The Borrower has delivered to each Lender that is subject to the Patriot Act such information requested by such Lender in order to comply with the Patriot Act.

 

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Section 3.02                Conditions Precedent to All Borrowings.  The obligation of each Lender to make an Advance on the occasion of each Borrowing shall be subject to the further conditions precedent that on the date of such Borrowing:

 

(a)                                  the following statements shall be true (and each of the giving of the applicable Notice of Borrowing and Notice of Conversion or Continuation and the acceptance by the Borrower of the proceeds of such Borrowing shall constitute a representation and warranty by the Borrower that on the date of such Borrowing such statements are true):

 

(i)                                     the representations and warranties contained in Article IV of this Agreement and the representations and warranties contained in the Security Instruments, the Guaranties, and each of the other Loan Documents are true and correct in all material respects on and as of the date of such Borrowing before and after giving effect to such Borrowing and to the application of the proceeds from such Borrowing, as though made on and as of such date except to the extent that any such representation or warranty expressly relates solely to an earlier date, in which case it shall have been true and correct in all material respects as of such earlier date; and

 

(ii)                                  no Default has occurred and is continuing or would result from such Borrowing or from the application of the proceeds therefrom, and

 

(b)                                 the Administrative Agent shall have received such other approvals, opinions, or documents reasonably deemed necessary or desirable by any Lender as a result of circumstances occurring after the date of this Agreement, as any Lender through the Administrative Agent may reasonably request.

 

ARTICLE IV

 

REPRESENTATIONS AND WARRANTIES

 

The Borrower represents and warrants as follows:

 

Section 4.01                Existence; Subsidiaries.  The Borrower is a corporation duly organized, validly existing and in good standing under the laws of Delaware and in good standing and qualified to do business in each other jurisdiction where its ownership or lease of Property or conduct of its business requires such qualification except where the failure to be so qualified could not, individually or in the aggregate, reasonably be expected to cause a Material Adverse Change.  Each Subsidiary of the Borrower is duly organized, validly existing, and in good standing under the laws of its jurisdiction of formation and in good standing and qualified to do business in each jurisdiction where its ownership or lease of Property or conduct of its business requires such qualification except where the failure to be so qualified could not, individually or in the aggregate, reasonably be expected to cause a Material Adverse Change.  As of the date hereof, the Borrower has no Subsidiaries other than those listed identified in Schedule 4.01.

 

Section 4.02                Power.  The execution, delivery, and performance by the Borrower of this Agreement, the Notes, and the other Loan Documents to which it is a party and by the Guarantors of the Guaranties and the other Loan Documents to which they are a party and the consummation of the transactions contemplated hereby and thereby (a) are within the Borrower’s

 

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and such Guarantors’ governing powers, (b) have been duly authorized by all necessary governing action, (c) do not contravene (i) the Borrower’s or any Guarantor’s certificate or articles of incorporation, bylaws, limited liability company agreement, or other similar governance documents or (ii) any law or any contractual restriction binding on or affecting the Borrower or any Guarantor, and (d) will not result in or require the creation or imposition of any Lien prohibited by this Agreement.  At the time of each Advance, such Advance and the use of the proceeds of such Advance, will be within the Borrower’s governing powers, will have been duly authorized by all necessary corporate action, will not contravene (i) the Borrower’s certificate of incorporation and bylaws or other organizational documents or (ii) any law or any contractual restriction binding on or affecting the Borrower and will not result in or require the creation or imposition of any Lien prohibited by this Agreement.

 

Section 4.03                Authorization and Approvals.  No consent, order, authorization, or approval or other action by, and no notice to or filing with, any Governmental Authority or any other Person is required for the due execution, delivery, and performance by the Borrower of this Agreement, the Notes, or the other Loan Documents to which the Borrower is a party or by each Guarantor of its Guaranty or the other Loan Documents to which it is a party or the consummation of the transactions contemplated thereby.  At the time of each Borrowing, no authorization or approval or other action by, and no notice to or filing with, any Governmental Authority will be required for such Borrowing or the use of the proceeds of such Borrowing.

 

Section 4.04                Enforceable Obligations.  This Agreement, the Notes, and the other Loan Documents to which the Borrower is a party have been duly executed and delivered by the Borrower and the Guaranties and the other Loan Documents to which each Guarantor is a party have been duly executed and delivered by the Guarantors.  Each Loan Document is the legal, valid, and binding obligation of the Borrower and each Guarantor which is a party to it enforceable against the Borrower and each such Guarantor in accordance with its terms, except as such enforceability may be limited by any applicable bankruptcy, insolvency, reorganization, moratorium, or similar law affecting creditors’ rights generally and by general principles of equity.

 

Section 4.05                Financial Statements.

 

(a)                                  The Borrower has delivered to the Administrative Agent and the Lenders copies of the Financial Statements and the Interim Financial Statements, and the Financial Statements and the Interim Financial Statements are accurate and complete in all material respects and present fairly the financial condition of Borrower and its consolidated Subsidiaries for their respective period in accordance with GAAP.  As of the date of the Financial Statements, there were no material contingent obligations, liabilities for taxes, unusual forward or long-term commitments, or unrealized or anticipated losses of the Borrower or any Subsidiary, except as disclosed therein and adequate reserves for such items have been made in accordance with GAAP.

 

(b)                                 Since the date of the Financial Statements, no event or circumstance that could cause a Material Adverse Change has occurred.

 

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(c)                                  As of the date hereof, the Borrower, the Guarantors and their respective Subsidiaries have no Debt other than the Debt listed on Schedule 4.05.

 

Section 4.06                True and Complete Disclosure.  All factual information (excluding estimates) heretofore or contemporaneously furnished by or on behalf of the Borrower or any of the Guarantors in writing to any Lender or the Administrative Agent for purposes of or in connection with this Agreement, any other Loan Document or any transaction contemplated hereby or thereby is, and all other such factual information hereafter furnished by or on behalf of the Borrower and the Guarantors in writing to the Administrative Agent or any of the Lenders was or shall be, true and accurate in all material respects on the date as of which such information was or is dated or certified and did not or does not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements contained therein not misleading at such time.  All projections, estimates, and pro forma financial information furnished by the Borrower were prepared on the basis of assumptions, data, information, tests, or conditions believed to be reasonable at the time such projections, estimates, and pro forma financial information were furnished.

 

Section 4.07                Litigation; Compliance with Laws.

 

(a)                                  There is no pending or, to the best knowledge of the Borrower, threatened action or proceeding affecting the Borrower or any of the Guarantors before any court, Governmental Authority or arbitrator which could reasonably be expected to cause a Material Adverse Change other than as set forth in Schedule 4.07 or which purports to affect the legality, validity, binding effect or enforceability of this Agreement, any Note, or any other Loan Document.  Additionally, there is no pending or, to the best of the knowledge of the Borrower, threatened action or proceeding instituted against the Borrower or any of the Guarantors which seeks to adjudicate the Borrower or any of the Guarantors as bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee or other similar official for it or for any substantial part of its Property.

 

(b)                                 The Borrower and its Subsidiaries have complied in all material respects with all material statutes, rules, regulations, orders and restrictions of any Governmental Authority having jurisdiction over the conduct of their respective businesses or the ownership of their respective Property

 

Section 4.08                Use of Proceeds.  The proceeds of the Advances will be used by the Borrower for the purposes described in Section 5.09.  The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U).  No proceeds of any Advance will be used to purchase or carry any margin stock in violation of Regulation T, U or X.

 

Section 4.09                Investment Company Act.  Neither the Borrower nor any of the Guarantors is an “investment company” or a company “controlled” by an “investment company” within the meaning of the Investment Company Act of 1940, as amended.

 

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Section 4.10                Federal Power Act.  Neither the Administrative Agent nor any of the Lenders, solely by virtue of the execution, delivery and performance of, and the consummation of the transactions contemplated by, the Loan Documents shall be or become subject to regulation (a) under the Federal Power Act, as amended, (b) as a “public utility” or “public service corporation” or the equivalent under the applicable law of any state, or (c) under the applicable laws of any state relating to public utilities or public service corporations.

 

Section 4.11                Taxes.

 

(a)                                  Reports and Payments.  All Returns (as defined below in clause (c) of this Section) required to be filed by or on behalf of the Borrower, the Guarantors, or any member of the Controlled Group (hereafter collectively called the “Tax Group”) have been duly filed on a timely basis or appropriate extensions have been obtained and such Returns are and will be true, complete and correct, except where the failure to so file would not be reasonably expected to cause a Material Adverse Change; and all Taxes shown to be payable on the Returns or on subsequent assessments with respect thereto will have been paid in full on a timely basis, and no other Taxes will be payable by the Tax Group with respect to items or periods covered by such Returns, except in each case to the extent of (i) reserves reflected in the Financial Statements and the Interim Financial Statements, or (ii) taxes that are being contested in good faith.  The reserves for accrued Taxes reflected in the financial statements delivered to the Lenders under this Agreement are adequate in the aggregate for the payment of all unpaid Taxes, whether or not disputed, for the period ended as of the date thereof and for any period prior thereto, and for which the Tax Group may be liable in its own right, as withholding agent or as a transferee of the assets of, or successor to, any Person.

 

(b)                                 Taxes Definition.  “Taxes” in this Section 4.11 shall mean all taxes, charges, fees, levies, or other assessments imposed by any federal, state, local, or foreign taxing authority, including without limitation, income, gross receipts, excise, real or personal property, sales, occupation, use, service, leasing, environmental, value added, transfer, payroll, and franchise taxes (and including any interest, penalties, or additions to tax attributable to or imposed on with respect to any such assessment).

 

(c)                                  Returns Definition.  “Returns” in this Section 4.11 shall mean any federal, state, local, or foreign report, estimate, declaration of estimated Tax, information statement or return relating to, or required to be filed in connection with, any Taxes, including any information return or report with respect to backup withholding or other payments of third parties.

 

Section 4.12                Pension Plans.  All Plans are in compliance in all material respects with all applicable provisions of ERISA.  No Termination Event has occurred with respect to any Plan, and each Plan has complied with and been administered in all material respects in accordance with applicable provisions of ERISA and the Code.  No “accumulated funding deficiency” (as defined in Section 302 of ERISA) has occurred and there has been no excise tax imposed under Section 4971 of the Code.  No Reportable Event under Section 4043 of ERISA and the regulations issued thereunder has occurred with respect to any Multiemployer Plan, and each Multiemployer Plan has complied with and been administered in all material respects with applicable provisions of ERISA and the Code.  The present value of all benefits vested under each Plan (based on the assumptions used to fund such Plan) did not, as of the last annual

 

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valuation date applicable thereto, exceed the value of the assets of such Plan allocable to such vested benefits.  Neither the Borrower nor any member of the Controlled Group has had a complete or partial withdrawal from any Multiemployer Plan for which there is any withdrawal liability.  As of the most recent valuation date applicable thereto, neither the Borrower nor any member of the Controlled Group would become subject to any liability under ERISA if the Borrower or any member of the Controlled Group has received notice that any Multiemployer Plan is insolvent or in reorganization.  Based upon GAAP existing as of the date of this Agreement and current factual circumstances, the Borrower has no reason to believe that the annual cost during the term of this Agreement to the Borrower or any member of the Controlled Group for post-retirement benefits to be provided to the current and former employees of the Borrower or any member of the Controlled Group under Plans that are welfare benefit plans (as defined in Section 3(1) of ERISA) could, in the aggregate, reasonably be expected to cause a Material Adverse Change.

 

Section 4.13                Condition of Property; Casualties.  Each of the Borrower and the Guarantors has good and marketable title to all of its Oil and Gas Properties as is customary in the oil and gas industry in all material respects, free and clear of all Liens except for Permitted Liens.  Each Borrower and the Guarantors has good and indefeasible title to all of its other Properties, free and clear of all Liens except for Permitted Liens.  The material Properties used or to be used in the continuing operations of the Borrower and each of the Guarantors are in good repair, working order and condition.  Since the date of the Financial Statements, neither the business nor the material Properties of the Borrower and each of the Guarantors, taken as a whole, has been materially and adversely affected as a result of any fire, explosion, earthquake, flood, drought, windstorm, accident, strike or other labor disturbance, embargo, requisition or taking of Property or cancellation of contracts, Permits, or concessions by a Governmental Authority, riot, activities of armed forces, or acts of God or of any public enemy.

 

Section 4.14                No Burdensome Restrictions; No Defaults.

 

(a)                                  Other than those identified on Schedule 4.14(a), neither the Borrower nor any Guarantor is a party to any indenture, loan, or credit agreement or any lease or other agreement or instrument or subject to any charter or corporate restriction or provision of applicable law or governmental regulation that could reasonably be expected to cause a Material Adverse Change.  Neither the Borrower nor any of its Subsidiaries is in default under or with respect to any contract, agreement, lease, or other instrument to which the Borrower or any Subsidiary is a party and which could reasonably be expected to cause a Material Adverse Change or under any agreement in connection with any Debt.  Neither the Borrower nor any of its Subsidiaries has received any notice of default under any material contract, agreement, lease, or other instrument to which the Borrower or such Subsidiary is a party a copy of which has not been delivered to the Administrative Agent.

 

(b)                                 No Default has occurred and is continuing.

 

Section 4.15                Environmental Condition.

 

(a)                                  Permits, Etc.  The Borrower and the Guarantors (i) have obtained all Environmental Permits necessary for the ownership and operation of their respective Properties

 

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and the conduct of their respective businesses; (ii) have at all times been and are in material compliance with all terms and conditions of such Permits and with all other material requirements of applicable Environmental Laws; (iii) have not received notice of any material violation or alleged violation of any Environmental Law or Permit; and (iv) are not subject to any actual or contingent Environmental Claim, which could reasonably be expected to cause a Material Adverse Change.

 

(b)                                 Certain Liabilities.  To the Borrower’s actual knowledge, none of the present or previously owned or operated Property of the Borrower or any Guarantor or of any of their former Subsidiaries, wherever located, (i) has been placed on or proposed to be placed on the National Priorities List, the Comprehensive Environmental Response Compensation Liability Information System list, or their state or local analogs, or have been otherwise investigated, designated, listed, or identified as a potential site for removal, remediation, cleanup, closure, restoration, reclamation, or other response activity under any Environmental Laws; (ii) is subject to a Lien, arising under or in connection with any Environmental Laws, that attaches to any revenues or to any Property owned or operated by the Borrower or any of the Guarantors, wherever located, which could reasonably be expected to cause a Material Adverse Change; or (iii) has been the site of any Release of Hazardous Substances or Hazardous Wastes from present or past operations which has caused at the site or at any third-party site any condition that has resulted in or could reasonably be expected to result in the need for Response that would cause a Material Adverse Change.

 

(c)                                  Certain Actions.  Without limiting the foregoing, (i) all necessary notices have been properly filed, and no further action is required under current Environmental Law as to each Response or other restoration or remedial project undertaken by the Borrower or the Guarantors or any of their former Subsidiaries on any of their presently or formerly owned or operated Property and (ii) the present and, to the Borrower’s best knowledge, future liability, if any, of the Borrower and the Guarantors which could reasonably be expected to arise in connection with requirements under Environmental Laws will not result in a Material Adverse Change.

 

Section 4.16                Permits, Licenses, Etc.  The Borrower and the Guarantors possess all authorizations, Permits, licenses, patents, patent rights or licenses, trademarks, trademark rights, trade names rights and copyrights which are material to the conduct of their business.  The Borrower and the Guarantors manage and operate their business in all material respects in accordance with all applicable Legal Requirements and good industry practices.

 

Section 4.17                Gas Contracts.  Neither the Borrower nor any of the Guarantors, as of the date hereof, (a) is obligated in any material respect by virtue of any prepayment made under any contract containing a “take-or-pay” or “prepayment” provision or under any similar agreement to deliver hydrocarbons produced from or allocated to any of the Borrower’s and its Subsidiaries’ Oil and Gas Properties at some future date without receiving full payment therefor at the time of delivery, or (b) except as has been disclosed to the Administrative Agent, has produced gas, in any material amount, subject to, and none of the Borrower’s and the Guarantors’ Oil and Gas Properties is subject to, balancing rights of third parties or subject to balancing duties under governmental requirements.

 

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Section 4.18     Liens; Titles, Leases, Etc.  None of the Property of the Borrower or any of the Guarantors is subject to any Lien other than Permitted Liens.  On the date of this Agreement, all governmental actions and all other filings, recordings, registrations, third party consents and other actions which are necessary to create and perfect the Liens provided for in the Security Instruments will have been made, obtained and taken in all relevant jurisdictions.  All leases and agreements for the conduct of business of the Borrower and the Guarantors are valid and subsisting, in full force and effect and there exists no default or event of default or circumstance which with the giving of notice or lapse of time or both would give rise to a default under any such leases or agreements which could reasonably be expected to cause a Material Adverse Change.  Neither the Borrower nor any of the Guarantors is a party to any agreement or arrangement (other than this Agreement and the Security Instruments), or subject to any order, judgment, writ or decree, which either restricts or purports to restrict its ability to grant Liens to secure the Obligations against their respective assets or Properties.

 

Section 4.19     Solvency and Insurance.  Before and after giving effect to the making of the initial Advances, each of the Borrower and its Subsidiaries is Solvent.  Additionally, each of the Borrower and its Subsidiaries carry insurance required under Section 5.02 of this Agreement.

 

Section 4.20     Hedging Agreements.  Schedule 4.20 sets forth, as of the date hereof, a true and complete list of all Interest Hedge Agreements, Hydrocarbon Hedge Agreements, and Hedge Contracts of the Borrower and its Subsidiaries, the material terms thereof (including the type, term, effective date, termination date and notional amounts or volumes), the net mark to market value thereof, all credit support agreements relating thereto (including any margin required or supplied), and the counterparty to each such agreement.

 

Section 4.21     Material Agreements.  Schedule 4.21 sets forth a complete and correct list of all material agreements, leases, indentures, purchase agreements, obligations in respect of letters of credit, guarantees, joint venture agreements, and other instruments in effect or to be in effect as of the date hereof (other than the agreements set forth in Schedule 4.20) providing for, evidencing, securing or otherwise relating to any Debt of the Borrower or any of the Guarantors, and all obligations of the Borrower or any of the Guarantors to issuers of surety or appeal bonds issued for account of the Borrower or any such Guarantor, and such list correctly sets forth the names of the debtor or lessee and creditor or lessor with respect to the Debt or lease obligations outstanding or to be outstanding and the Property subject to any Lien securing such Debt or lease obligation.  Also set forth on Schedule 4.21 hereto is a complete and correct list of all material agreements and other instruments of the Borrower and the Guarantors relating to the purchase, transportation by pipeline, gas processing, marketing, sale and supply of natural gas and other Hydrocarbons.  The Borrower has heretofore delivered to the Administrative Agent and the Lenders a complete and correct copy of all such material credit agreements, indentures, purchase agreements, contracts, letters of credit, guarantees, joint venture agreements, or other instruments, including any modifications or supplements thereto, as in effect on the date hereof.

 

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ARTICLE V

 

AFFIRMATIVE COVENANTS

 

So long as any Note or any amount under any Loan Document shall remain unpaid, or any Lender shall have any Commitment hereunder, the Borrower agrees, unless the Majority Lenders shall otherwise consent in writing, to comply with the following covenants.

 

Section 5.01     Compliance with Laws, Etc.  The Borrower shall comply, and cause each of its Subsidiaries to comply, in all material respects with all material Legal Requirements.  Without limiting the generality and coverage of the foregoing, the Borrower shall comply, and shall cause each of its Subsidiaries to comply, in all material respects, with all material Environmental Laws and all laws, regulations, or directives with respect to equal employment opportunity and employee safety in all jurisdictions in which the Borrower, or any of its Subsidiaries do business; provided, however, that this Section 5.01 shall not prevent the Borrower or any of its Subsidiaries from, in good faith and with reasonable diligence, contesting the validity or application of any such laws or regulations by appropriate legal proceedings.  Without limitation of the foregoing, the Borrower shall, and shall cause each of its Subsidiaries to, (a) maintain and possess all authorizations, Permits, licenses, trademarks, trade names, rights and copyrights which are necessary to the conduct of its business and (b) obtain, as soon as practicable, all consents or approvals required from any states of the United States (or other Governmental Authorities) necessary to grant the Administrative Agent an Acceptable Security Interest in the Borrower’s and its Subsidiaries’ Oil and Gas Properties.

 

Section 5.02     Maintenance of Insurance.

 

(a)           The Borrower shall, and shall cause each of its Subsidiaries to, procure and maintain or shall cause to be procured and maintained continuously in effect policies of insurance in form and amounts and issued by companies, associations or organizations reasonably satisfactory to the Administrative Agent covering such casualties, risks, perils, liabilities and other hazards reasonably required by the Administrative Agent.  In addition, the Borrower shall, and shall cause each of its Subsidiaries to, comply with all requirements regarding insurance contained in the Security Instruments.

 

(b)           All certified copies of policies or certificates thereof, and endorsements and renewals thereof shall be delivered to and retained by the Administrative Agent.  Unless the Senior Credit Agreement requires otherwise, all policies of insurance shall either have attached thereto a Lender’s loss payable endorsement for the benefit of the Administrative Agent, as loss payee in form reasonably satisfactory to the Administrative Agent or shall name the Administrative Agent as an additional insured, as applicable.  The Borrower shall furnish the Administrative Agent with a certificate of insurance or a certified copy of all policies of insurance required.  All policies or certificates of insurance shall set forth the coverage, the limits of liability, the name of the carrier, the policy number, and the period of coverage.  Unless the Senior Credit Agreement requires otherwise, all policies of insurance required under the terms hereof shall contain an endorsement or agreement by the insurer that any loss shall be payable in accordance with the terms of such policy notwithstanding any act of negligence of the Borrower, or a Subsidiary or any party holding under the Borrower or a Subsidiary which might otherwise result in a forfeiture of the insurance and the further agreement of the insurer waiving all rights of setoff, counterclaim or deductions against the Borrower and its Subsidiaries.  Unless the Senior Credit Agreement requires otherwise, all such policies shall contain a provision that notwithstanding any contrary agreements between the Borrower, its Subsidiaries, and the

 

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applicable insurance company, such policies will not be canceled, allowed to lapse without renewal, surrendered or amended (which provision shall include any reduction in the scope or limits of coverage) without at least 30 days’ prior written notice to the Administrative Agent.  In the event that, notwithstanding the “lender’s loss payable endorsement” requirement of this Section 5.02, the proceeds of any insurance policy described above are paid to the Borrower or a Subsidiary, any Obligations are outstanding and the Senior Debt has been indefeasibly paid in full, the Borrower shall deliver such proceeds to the Administrative Agent immediately upon receipt.  Notwithstanding the foregoing, the Borrower is not required to turn over to the Administrative Agent the casualty insurance proceeds received by the Borrower and its Subsidiaries in connection with the fires beginning on March 12, 2006 in the Texas Panhandle; provided that (i) the aggregate amount of insurance proceeds the Borrower is permitted to retain pursuant to the preceding provision shall not exceed $6,000,000, (ii) the Borrower shall deposit all such insurance proceeds into a deposit account with the Senior Administrative Agent in which the Senior Administrative Agent shall have a first priority security interest, and (iii) the Borrower shall use such proceeds to pay the attorneys’ fees, settlement amounts and other litigation expenses incurred by the Borrower and its Subsidiaries in defending or settling the Fire Litigation and for general corporate purposes.

 

Section 5.03     Preservation of Corporate Existence, Etc.  The Borrower shall preserve and maintain, and cause each of its Subsidiaries to preserve and maintain, its corporate or limited liability company, as applicable, existence, rights, franchises, and privileges in the jurisdiction of its incorporation or organization, as applicable, and qualify and remain qualified, and cause each such Subsidiary to qualify and remain qualified, as a foreign corporation in each jurisdiction in which qualification is necessary or desirable in view of its business and operations or the ownership of its Properties, and, in each case, where failure to qualify or preserve and maintain its rights and franchises could reasonably be expected to cause a Material Adverse Change.

 

Section 5.04     Payment of Taxes, Etc.  The Borrower shall pay and discharge, and cause each of its Subsidiaries to pay and discharge, before the same shall become delinquent, (a) all taxes, assessments, and governmental charges or levies imposed upon it or upon its income or profits or Property that are material in amount, prior to the date on which penalties attach thereto and (b) all lawful claims that are material in amount which, if unpaid, might by law become a Lien upon its Property; provided, however, that neither the Borrower nor any such Subsidiary shall be required to pay or discharge any such tax, assessment, charge, levy, or claim which is being contested in good faith and by appropriate proceedings, and with respect to which reserves in conformity with GAAP have been provided.

 

Section 5.05     Visitation Rights.  At any reasonable time and from time to time, upon reasonable notice, the Borrower shall, and shall cause its Subsidiaries to, permit the Administrative Agent and any Lender or any of their respective agents or representatives thereof, to (a) examine and make copies of and abstracts from the records and books of account of, and visit and inspect at their reasonable discretion the Properties of, the Borrower and any such Subsidiary, and (b) discuss the affairs, finances and accounts of the Borrower and any such Subsidiary with any of their respective officers or directors.

 

Section 5.06     Reporting Requirements.  The Borrower shall furnish to the Administrative Agent and each Lender:

 

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(a)           Annual Financials.  As soon as available and in any event not later than 90 days after the end of each fiscal year of the Borrower and its consolidated Subsidiaries, commencing with fiscal year ending June 30, 2008, (i) to the extent not otherwise provided in the Form 10-K filed by the Borrower with the SEC for such fiscal year end, a copy of the annual audit report for such year for the Borrower and its consolidated Subsidiaries, including therein the Borrower’s and its consolidated Subsidiaries’ balance sheets as of the end of such fiscal year and the Borrower’s and its consolidated Subsidiaries’ statements of income, cash flows, and retained earnings, in each case certified by an independent certified public accountants of national standing reasonably acceptable to the Administrative Agent and including any management letters delivered by such accountants to the Borrower or any Subsidiary in connection with such audit, (ii) any management letters delivered by such accountants to the Borrower, (iii) the Form 10-K filed with the SEC for such fiscal year end, (iv) a Compliance Certificate executed by a Responsible Officer of the Borrower and (v) a copy of the unaudited annual consolidating financial statements of each of its Subsidiaries, including therein such Subsidiary’s balance sheet and statements of income, cash flows, and retained earnings for such fiscal year;

 

(b)           Quarterly Financials.  As soon as available and in any event not later than 45 days after the end of each of the first three fiscal quarters of each fiscal year of the Borrower and its consolidated Subsidiaries, commencing with the fiscal quarter ending March 31, 2008, (i) to the extent not otherwise provided in the Form 10-Q for such fiscal quarter end, the unaudited balance sheet and the statements of income, cash flows, and retained earnings of each such Person for the period commencing at the end of the previous year and ending with the end of such fiscal quarter, all in reasonable detail and duly certified with respect to such consolidated statements (subject to year-end audit adjustments) by a Responsible Officer of the Borrower as having been prepared in accordance with GAAP, (ii) the Form 10-Q filed with the SEC for such fiscal quarter end, and (iii) a Compliance Certificate executed by the Responsible Officer of the Borrower;

 

(c)           Oil and Gas Reserve Reports.

 

(i)            As soon as available but in any event on or before each September 30 of each year, an Independent Engineering Report dated effective as of July 1 for such year;

 

(ii)           As soon as available but in any event on or before March 31 of each year an Internal Engineering Report dated effective as of the immediately preceding January 1;

 

(iii)          Such other information as may be reasonably requested by the Administrative Agent or any Lender with respect to the Oil and Gas Properties included or to be included in the Borrowing Base;

 

With the delivery of each Engineering Report, a certificate from a Responsible Officer of the Borrower certifying that, to the best of his knowledge and in all material respects: (A) the information contained in the Engineering Report and any other information delivered in connection therewith is true and correct, (B) the Borrower or its Subsidiary, as applicable, owns good and marketable title to the Oil and Gas Properties evaluated in such Engineering Report, as is customary in the oil and gas industry, and such Oil and Gas Properties are subject to an Acceptable Security Interest and free of all Liens except for Permitted Liens, (C) except as set

 

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forth on an exhibit to the certificate, on a net basis there are no gas imbalances, take or pay or other prepayments with respect to its Oil and Gas Properties evaluated in such Engineering Report which would require the Borrower or any of its Subsidiaries to deliver Hydrocarbons produced from such Oil and Gas Properties at some future time without then or thereafter receiving full payment therefor, (D) none of its Oil and Gas Properties have been sold since the date of the last Borrowing Base determination except as set forth on an exhibit to the certificate, which certificate shall list all of its Oil and Gas Properties sold and in such detail as reasonably required by the Majority Lenders, (E) attached to the certificate is a list of its Oil and Gas Properties added to and deleted from the immediately prior Engineering Report and a list showing any change in working interest or net revenue interest in its Oil and Gas Properties occurring and the reason for such change, (F) attached to the certificate is a list of all Persons disbursing proceeds to the Borrower or to its Subsidiary, as applicable, from its Oil and Gas Properties, (G) except as set forth on a schedule attached to the certificate, all of the Oil and Gas Properties evaluated by such Engineering Report are pledged as Collateral for the Obligations, and (H) attached to the certificate is a quarterly cash flow budget for the four quarters following the delivery of such certificate setting forth the Borrower’s projections for production volumes, revenues, expenses, taxes and budgeted capital expenditures during such period.

 

(d)           Production and Hedging Reports.  As soon as available and in any event within 45 days after the end of each quarter, commencing with the quarter ending March 31, 2008, a report certified by a Responsible Officer of the Borrower in form and substance satisfactory to the Administrative Agent prepared by the Borrower (i) covering each of the Oil and Gas Properties of the Borrower and its Subsidiaries (including the Barnett Shale Properties) and detailing on a quarterly basis (A) the production, revenue, and price information and associated operating expenses for each such quarter, (B) any changes to any producing reservoir, production equipment, or producing well during each such quarter, which changes could cause a Material Adverse Change, and (C) any sales of the Borrower’s or any Subsidiaries’ Oil and Gas Properties during each such quarter, (ii) setting forth a true and complete list of all Hedge Contracts of the Borrower and its Subsidiaries and detailing the material terms thereof (including the type, term, effective date, termination date and notional amounts or volumes), the net mark to market value thereof, all credit support agreements relating thereto (including any margin required or supplied), and the counterparty to each such agreement, and (iii) certifying the Borrower’s compliance with Section 5.12 hereof;

 

(e)           Defaults.  As soon as possible and in any event within five days after (i) the occurrence of any Default or (ii) the occurrence of any default under any instrument or document evidencing Debt of the Borrower or any Subsidiary, in each case known to any officer of the Borrower or any of its Subsidiaries which is continuing on the date of such statement, a statement of a Responsible Officer of the Borrower setting forth the details of such Default or default, as applicable, and the actions which the Borrower or such Subsidiary has taken and proposes to take with respect thereto;

 

(f)            Termination Events.  As soon as possible and in any event (i) within 30 days after the Borrower or any member of the Controlled Group knows or has reason to know that any Termination Event described in clause (a) of the definition of Termination Event with respect to any Plan has occurred, and (ii) within 10 days after the Borrower or any of its Affiliates knows or has reason to know that any other Termination Event with respect to any Plan has occurred, a

 

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statement of a Responsible Officer of the Borrower describing such Termination Event and the action, if any, which the Borrower or such Affiliate proposes to take with respect thereto;

 

(g)           Termination of Plans.  Promptly and in any event within two Business Days after receipt thereof by the Borrower or any member of the Controlled Group from the PBGC, copies of each notice received by the Borrower or any such member of the Controlled Group of the PBGC’s intention to terminate any Plan or to have a trustee appointed to administer any Plan;

 

(h)           Other ERISA Notices.  Promptly and in any event within five Business Days after receipt thereof by the Borrower or any member of the Controlled Group from a Multiemployer Plan sponsor, a copy of each notice received by the Borrower or any member of the Controlled Group concerning the imposition or amount of withdrawal liability pursuant to Section 4202 of ERISA;

 

(i)            Environmental Notices.  Promptly upon the receipt thereof by the Borrower or any of its Subsidiaries, a copy of any form of request, notice, summons or citation received from the Environmental Protection Agency, or any other Governmental Authority, concerning (i) violations or alleged violations of Environmental Laws, which seeks to impose liability therefor and could cause a Material Adverse Change, (ii) any action or omission on the part of the Borrower or any Subsidiary or any of their former Subsidiaries in connection with Hazardous Waste or Hazardous Substances which could reasonably result in the imposition of liability therefor that could cause a Material Adverse Change, including without limitation any information request related to, or notice of, potential responsibility under CERCLA, or (iii) concerning the filing of a Lien upon, against or in connection with the Borrower or any Subsidiary or their former Subsidiaries, or any of their leased or owned Property, wherever located;

 

(j)            Other Governmental Notices.  Promptly and in any event within five Business Days after receipt thereof by the Borrower or any Subsidiary, a copy of any notice, summons, citation, or proceeding seeking to modify in any material respect, revoke, or suspend any material contract, license, permit or agreement with any Governmental Authority;

 

(k)           Material Changes.  Prompt written notice of any condition or event of which the Borrower has knowledge, which condition or event has resulted or may reasonably be expected to result in (i) a Material Adverse Change or (ii) a breach of or noncompliance with any material term, condition, or covenant of any material contract to which the Borrower or any of its Subsidiaries is a party or by which they or their Properties may be bound;

 

(l)            Disputes, Etc.  Prompt written notice of (i) any claims, legal or arbitration proceedings, proceedings before any Governmental Authority, or disputes pending, or to the knowledge of the Borrower threatened, or affecting the Borrower, or any of its Subsidiaries which, if adversely determined, could reasonably be expected to cause a Material Adverse Change, or any material labor controversy of which the Borrower or any of its Subsidiaries has knowledge resulting in or reasonably considered to be likely to result in a strike against the Borrower or any of its Subsidiaries and (ii) any claim, judgment, Lien or other encumbrance (other than a Permitted Lien) affecting any Property of the Borrower or any Subsidiary if the

 

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value of the claim, judgment, Lien, or other encumbrance affecting such Property shall exceed $500,000.

 

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

 

(n)           Notices Under Other Loan Agreements.  Promptly after the furnishing thereof, copies of any statement, report or notice furnished to any Person pursuant to the terms of any indenture, loan or credit or other similar agreement, other than this Agreement and not otherwise required to be furnished to the Lenders pursuant to any other provision of this Section 5.06;

 

(o)           SEC Filings.  Promptly after the sending or filing thereof, copies of all proxy material, reports and other information which the Borrower or any of its Subsidiaries sends to or files with the SEC or sends to any shareholder of the Borrower or of any of its Subsidiaries;

 

(p)           USA Patriot Act.  Promptly, following a request by any Lender, all documentation and other information that such Lender reasonably requests in order to comply with its ongoing obligations under applicable “know your customer” and anti-money laundering rules and regulations, including the USA Patriot Act; and

 

(q)           Other Information.  Such other information respecting the business or Properties, or the condition or operations, financial or otherwise, of the Borrower or any of its Subsidiaries, as any Lender through the Administrative Agent may from time to time reasonably request.  The Administrative Agent agrees to provide the Lenders with copies of any material notices and information delivered solely to the Administrative Agent pursuant to the terms of this Agreement.

 

Section 5.07     Maintenance of Property.  The Borrower shall, and shall cause each of its Subsidiaries to, maintain their owned, leased, or operated Property in good condition and repair; and shall abstain, and cause each of its Subsidiaries to abstain from, knowingly or willfully permitting the commission of waste or other injury, destruction, or loss of natural resources, or the occurrence of pollution, contamination, or any other condition in, on or about the owned or operated Property involving the Environment that could reasonably be expected to result in Response activities and that could reasonably be expected to cause a Material Adverse Change.

 

Section 5.08     Agreement to Pledge.  The Borrower shall, and shall cause each Subsidiary to, grant to the Administrative Agent an Acceptable Security Interest in any Property of the Borrower or any Subsidiary now owned or hereafter acquired promptly after receipt of a written request from the Administrative Agent.

 

Section 5.09     Use of ProceedsThe Borrower shall use the proceeds of the Advances to pay to the Senior Lenders a portion of the Senior Debt outstanding under the Senior Credit Agreement.

 

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Section 5.10     Title Evidence and Opinions.  The Borrower shall from time to time upon the reasonable request of the Administrative Agent, take such actions and execute and deliver such documents and instruments as the Administrative Agent shall require to ensure that the Administrative Agent shall, at all times, have received satisfactory title evidence, which title evidence shall be in form and substance acceptable to the Administrative Agent in its sole discretion and shall include information regarding the before payout and after payout ownership interests held by the Borrower and the Borrower’s Subsidiaries, for all wells located on the Oil and Gas Properties, covering at least 80% of the present value of the Proven Reserves of the Borrower and its Subsidiaries and at least 80% of the present value of the proved developed producing reserves of the Borrower and its Subsidiaries as determined by the Administrative Agent.

 

Section 5.11     Further Assurances; Cure of Title Defects.  The Borrower shall, and shall cause each Subsidiary to, cure promptly any defects in the creation and issuance of the Notes and the execution and delivery of the Security Instruments and this Agreement.  The Borrower hereby authorizes the Administrative Agent to file any financing statements without the signature of the Borrower to the extent permitted by applicable law in order to perfect or maintain the perfection of any security interest granted under any of the Loan Documents.  The Borrower at its expense will, and will cause each Subsidiary to, promptly execute and deliver to the Administrative Agent upon request all such other documents, agreements and instruments to comply with or accomplish the covenants and agreements of the Borrower or any Subsidiary, as the case may be, in the Security Instruments and this Agreement, or to further evidence and more fully describe the collateral intended as security for the Notes, or to correct any omissions in the Security Instruments, or to state more fully the security obligations set out herein or in any of the Security Instruments, or to perfect, protect or preserve any Liens created pursuant to any of the Security Instruments, or to make any recordings, to file any notices or obtain any consents, all as may be necessary or appropriate in connection therewith or to enable the Administrative Agent to exercise and enforce its rights and remedies with respect to any Collateral.  Within 30 days after a request by the Administrative Agent or the Lenders to cure any title defects or exceptions which are not Permitted Liens raised by such information, the Borrower shall (i) cure such title defects or exceptions which are not Permitted Liens or substitute acceptable Oil and Gas Properties with no title defects or exceptions except for Permitted Liens covering Collateral of an equivalent value and (ii) deliver to the Administrative Agent satisfactory title evidence (including supplemental or new title opinions meeting the foregoing requirements) in form and substance acceptable to the Administrative Agent in its reasonable business judgment as to the Borrower’s and its Subsidiaries’ ownership of such Oil and Gas Properties and the Administrative Agent’s Liens and security interests therein as are required to maintain compliance with Section 5.10.

 

Section 5.12     Hedging ArrangementsThe Borrower shall maintain (a) each Hydrocarbon Hedge Agreement described in Schedule 5.12 until the stated maturity of such Hydrocarbon Hedge Agreement and (b)  Hydrocarbon Hedge Agreements covering no less than 50% and no more than 85% of the production volumes attributable to “proved, developed and producing” Proven Reserves of the Borrower’s and its Subsidiaries’ Oil and Gas Properties for a minimum period of at least three years as of the end of December 31, 2006 and as of the end of each six month period ending thereafter, and at a minimum price floor as required by the Majority Lenders from time to time.

 

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Section 5.13     Bank Accounts.  The Borrower shall, and shall cause each of its Subsidiaries to, (a) maintain their principal operating accounts and other deposit accounts with the Senior Administrative Agent or any Senior Lender or any other bank that has executed an account control agreement reasonably acceptable in form and substance to the Senior Administrative Agent, or (b) within 30 days from the date hereof, provide an account control agreement reasonably acceptable in form and substance to the Senior Administrative Agent and executed by each depository bank that holds any operating accounts or deposit accounts of the Borrower or any Guarantor and in existence on the date hereof.

 

ARTICLE VI

 

NEGATIVE COVENANTS

 

So long as any Note or any amount under any Loan Document shall remain unpaid or any Lender shall have any Commitment, the Borrower agrees, unless the Majority Lenders otherwise consent in writing, to comply with the following covenants.

 

Section 6.01     Liens, Etc.  The Borrower shall not create, assume, incur, or suffer to exist, or permit any of its Subsidiaries to create, assume, incur, or suffer to exist, any Lien on or in respect of any of its Property whether now owned or hereafter acquired, or assign any right to receive income, except that the Borrower and its Subsidiaries may create, incur, assume, or suffer to exist:

 

(a)           Liens created by the Security Instruments;

 

(b)           purchase money Liens or purchase money security interests upon or in any equipment acquired or held by the Borrower or any of its Subsidiaries in the ordinary course of business prior to or at the time of the Borrower’s or such Subsidiary’s acquisition of such equipment; provided that, the Debt secured by such Liens (i) was incurred solely for the purpose of financing the acquisition of such equipment, and does not exceed the aggregate purchase price of such equipment, (ii) is secured only by such equipment and not by any other assets of the Borrower and its Subsidiaries, and (iii) is not increased in amount;

 

(c)           Liens for taxes, assessments, or other governmental charges or levies not yet due or that (provided foreclosure, sale, or other similar proceedings shall not have been initiated) are being contested in good faith by appropriate proceedings, and such reserve as may be required by GAAP shall have been made therefor;

 

(d)           Liens in favor of vendors, carriers, warehousemen, repairmen, mechanics, workmen, materialmen, construction, or similar Liens arising by operation of law in the ordinary course of business in respect of obligations that are not yet due or that are being contested in good faith by appropriate proceedings, provided such reserve as may be required by GAAP shall have been made therefor;

 

(e)           Liens to operators and non-operators under joint operating agreements arising in the ordinary course of the business of the Borrower or the relevant Subsidiary to secure amounts owing, which amounts are not yet due or are being contested in good faith by appropriate proceedings, if such reserve as may be required by GAAP shall have been made therefor;

 

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(f)            royalties, overriding royalties, net profits interests, production payments, reversionary interests, calls on production, preferential purchase rights and other burdens on or deductions from the proceeds of production, that do not secure Debt for borrowed money and that are taken into account in computing the net revenue interests and working interests of the Borrower or any of its Subsidiaries warranted in the Security Instruments;

 

(g)           Liens arising in the ordinary course of business out of pledges or deposits under workers’ compensation laws, unemployment insurance, old age pensions or other social security or retirement benefits, or similar legislation or to secure public or statutory obligations of the Borrower;

 

(h)           operating agreements, unitization and pooling agreements and orders, farmout agreements, gas balancing agreements and other agreements, in each case that are customary in the oil, gas and mineral production business and that are entered into in the ordinary course of business that are taken into account in computing the net revenue interests and working interests of the Borrower or any of its Subsidiaries warranted in the Security Instruments, to the extent that any such Lien referred to in this clause does not materially impair the use of the Property covered by such Lien for the purposes for which such Property is held by the Borrower or any Subsidiary or materially impair the value of such Property subject thereto;

 

(i)            easements, rights-of-way, restrictions, and other similar encumbrances, and minor defects in the chain of title that are customarily accepted in the oil and gas financing industry, none of which interfere with the ordinary conduct of the business of Borrower or any Subsidiary or materially detract from the value or use of the Property to which they apply; and

 

(j)            Liens securing the Senior Debt.

 

Section 6.02     Debts, Guaranties, and Other Obligations.  The Borrower shall not, and shall not permit any of its Subsidiaries to, create, assume, suffer to exist, or in any manner become or be liable in respect of, any Debt except:

 

(a)           Debt of the Borrower and its Subsidiaries under the Loan Documents;

 

(b)           Senior Debt;

 

(c)           Debt in the form of obligations for the deferred purchase price of Property or services incurred in the ordinary course of business which are not yet due and payable or are being contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP have been established;

 

(d)           Debt secured by the Liens permitted under paragraph (b) of Section 6.01 in an aggregate amount not to exceed $3,000,000 at any time;

 

(e)           Debt under Hydrocarbon Hedge Agreements which are not prohibited by the terms of Section 6.14;

 

(f)            Debt consisting of sureties or bonds provided to any Governmental Authority or other Person and assuring payment of contingent liabilities of the Borrower in connection with

 

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the operation of the Oil and Gas Properties, including with respect to plugging, facility removal and abandonment of its Oil and Gas Properties;

 

(g)           Debt of the Borrower or any Subsidiary owing to the Borrower or to any other Subsidiary; provided that such Debt is subordinated to the Obligations on terms acceptable to the Administrative Agent in its sole discretion; and

 

(h)           Debt that constitutes a renewal, refinancing or extension of any Debt referred to clause (d) of this Section 6.02; provided that (i) no Lien existing at the time of such renewal, refinancing or extension shall be extended to cover any property not already subject to such Lien, and (ii) the principal amount of any Debt renewed, refinanced or extended shall not exceed the amount of such Debt outstanding immediately prior to such renewal, refinancing or extension;

 

(i)            Debt Issuance by the Borrower; provided that (i) such issuance, together with any Equity Issuance of convertible, preferred stock in accordance with Section 6.22, shall not exceed $60,000,000 in the aggregate; (ii) such Debt shall have (A) a maturity date that is no earlier than February 28, 2011 or such later “Maturity Date” in effect at the time such Debt is issued, (B) covenants and restrictions that are no more restrictive than those set forth in this Agreement and the other Loan Documents and which are, in any event, satisfactory to the Administrative Agent, (C) no restriction on the ability of the Borrower or any of its Subsidiaries to amend, modify or otherwise supplement this Agreement or the other Loan Documents, (D) no collateral or other security for such Debt, (E) no restriction on the ability of the Borrower or any of its Subsidiaries to guarantee the Obligations or pledge assets as collateral security for the Obligations, (F) a bullet repayment and not provide for amortization (other than amortization resulting from any mandatory prepayments required in respect of such Debt in connection with the occurrence of an event of default under such Debt), (G) conversion terms acceptable to the Administrative Agent, and (H) such other terms, conditions and provisions that are satisfactory to the Administrative Agent; (iii) such Debt shall be subordinated, in right of payment and otherwise, to the payment of the Obligations and the rights and remedies available to the Administrative Agent, the Lenders and the Swap Counterparties hereunder or under any other Loan Document, in a manner, and pursuant to documentation, satisfactory to the Administrative Agent in its sole discretion, including without limitation, payment blockage provisions and standstill periods of no less than 180 days; (iv) the Debt Issuance Proceeds shall be applied, first to satisfy the outstanding Subordinated Debt in full and second to prepay the Obligations as calculated under Section 2.05(f); and (v) such Debt Issuance shall not otherwise cause the occurrence of a Default or Event of Default after giving effect to the issuance of such Debt; and

 

(j)            Debt consisting of preferred Equity Interests of the Borrower; provided that such Equity Interests are issued in compliance with Section 6.22.

 

Section 6.03     Agreements Restricting Liens and Distributions.  The Borrower shall not, nor shall it permit any of its Subsidiaries to, create, incur, assume or permit to exist any contract, agreement or understanding (other than this Agreement, the Senior Loan Documents and the Security Instruments) which in any way prohibits or restricts the granting, conveying, creation or imposition of any Lien on any of its Property, whether now owned or hereafter acquired, to secure the Obligations or restricts any Subsidiary from paying dividends to the Borrower, or which requires the consent of or notice to other Persons in connection therewith.

 

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Section 6.04     Merger or Consolidation; Asset Sales.  The Borrower shall not, nor shall it permit any of its Subsidiaries to (a) merge or consolidate with or into any other Person without the prior consent of all of the Lenders; provided that the Borrower or any Subsidiary may merge or may be consolidated into the Borrower or any Guarantor if the Borrower or such Guarantor is the surviving entity; or (b) sell, lease, transfer, assign, farm-out, convey, or otherwise dispose of any of its Property (including, without limitation, any working interest, overriding royalty interest, production payments, net profits interest, royalty interest, or mineral fee interest) other than: (i) the sale of Hydrocarbons in the ordinary course of business, and (ii) the sale or transfer of equipment that is (A) obsolete, worn out, depleted or uneconomic and disposed of in the ordinary course of business, (B) no longer necessary for the business of such Person or (C) contemporaneously replaced by equipment of at least comparable value and use.

 

Section 6.05     Restricted PaymentsThe Borrower shall not, nor shall it permit any of its Subsidiaries to, make any Restricted Payments except that if no Default has occurred both before and after giving effect to the making of such Restricted Payment, (a) the Subsidiaries may make Restricted Payments to the Borrower, (b) the Borrower may make Restricted Payments to officers, directors, consultants and employees of the Borrower or any Guarantor in any form other than cash or other assets of the Borrower, (c) the Borrower may make Restricted Payments to officers, directors, consultants and employees of the Borrower or any Guarantor in the form of cash in an aggregate amount not to exceed $1,000,000 per fiscal year, (d) the Borrower may make Restricted Payments in respect of preferred Equity Interests which were issued in compliance with Section 6.22, and (e) the Borrower may make Restricted Payments in respect of Debt Issuances which were issued in compliance with Section 6.02(j) to the extent such payments would be permitted under the subordination terms in effect in favor of the Obligations and covering such Debt Issuances.

 

Section 6.06     Investments.  The Borrower shall not, nor shall it permit any of its Subsidiaries to, make or permit to exist any loans, advances, or capital contributions to, or make any investment in (including, without limitation, the making of any Acquisition), or purchase or commit to purchase any stock or other securities or evidences of indebtedness of or interests in any Person or any Oil and Gas Properties or activities related to Oil and Gas Properties, except:

 

(a)           Liquid Investments;

 

(b)           trade and customer accounts receivable which are for goods furnished or services rendered in the ordinary course of business and are payable in accordance with customary trade terms;

 

(c)           creation of any additional Subsidiaries or acquisition of Oil and Gas Properties in compliance with Section 6.15;

 

(d)           the loans, advances, capital contributions, investments, and commitments made prior to the date hereof and identified in the Interim Financial Statements; provided that, the respective amounts of such loans, advances, capital contributions, investments, and commitments shall not be increased (other than by appreciation);

 

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(e)           investments received in connection with the bankruptcy or reorganization of, or settlement of delinquent accounts and disputes with, customers and suppliers, in each case in the ordinary course of business; provided that, the aggregate amount of such investment shall not exceed $1,000,000 (other than by appreciation); and

 

(f)            investments consisting of any deferred portion of the sales price received by the Borrower or any Subsidiary in connection with any sale of assets permitted hereunder.

 

Section 6.07     Affiliate Transactions.  The Borrower shall not, nor shall it permit any of its Subsidiaries to, directly or indirectly, enter into or permit to exist any transaction or series of transactions (including, but not limited to, the purchase, sale, lease or exchange of Property, the making of any investment, the giving of any guaranty, the assumption of any obligation or the rendering of any service) with any of their Affiliates unless such transaction or series of transactions is on terms no less favorable to the Borrower or the Subsidiary, as applicable, than those that could be obtained in a comparable arm’s length transaction with a Person that is not such an Affiliate.

 

Section 6.08     Compliance with ERISA.  The Borrower shall not, nor shall it permit any of its Subsidiaries to, directly or indirectly, (a) engage in, or permit any Subsidiary or ERISA Affiliate to engage in, any transaction in connection with which the Borrower, any Subsidiary or any ERISA Affiliate could be subjected to either a civil penalty assessed pursuant to section 502(c), (i) or (l) of ERISA or a tax imposed by Chapter 43 of Subtitle D of the Code; (b) terminate, or permit any Subsidiary or ERISA Affiliate to terminate, any Plan in a manner, or take any other action with respect to any Plan, which could result in any liability to the Borrower, any Subsidiary or any ERISA Affiliate to the PBGC; (c) fail to make, or permit any Subsidiary or ERISA Affiliate to fail to make, full payment when due of all amounts which, under the provisions of any Plan, agreement relating thereto or applicable law, the Borrower, a Subsidiary or any ERISA Affiliate is required to pay as contributions thereto; (d) permit to exist, or allow any Subsidiary or ERISA Affiliate to permit to exist, any accumulated funding deficiency within the meaning of Section 302 of ERISA or section 412 of the Code, whether or not waived, with respect to any Plan; (e) permit, or allow any Subsidiary or ERISA Affiliate to permit, the actuarial present value of the benefit liabilities (as “actuarial present value of the benefit liabilities” shall have the meaning specified in section 4041 of ERISA) under any Plan maintained by the Borrower, any Subsidiary or any ERISA Affiliate which is regulated under Title IV of ERISA to exceed the current value of the assets (computed on a plan termination basis in accordance with Title IV of ERISA) of such Plan allocable to such benefit liabilities; (f) contribute to or assume an obligation to contribute to, or permit any Subsidiary or ERISA Affiliate to contribute to or assume an obligation to contribute to, any Multiemployer Plan; (g) acquire, or permit any Subsidiary or ERISA Affiliate to acquire, an interest in any Person that causes such Person to become an ERISA Affiliate with respect to the Borrower, any Subsidiary or any ERISA Affiliate if such Person sponsors, maintains or contributes to, or at any time in the six-year period preceding such acquisition has sponsored, maintained, or contributed to, (1) any Multiemployer Plan, or (2) any other Plan that is subject to Title IV of ERISA under which the actuarial present value of the benefit liabilities under such Plan exceeds the current value of the assets (computed on a plan termination basis in accordance with Title IV of ERISA) of such Plan allocable to such benefit liabilities; (h) incur, or permit any Subsidiary or ERISA Affiliate to incur, a liability to or on account of a Plan under sections 515, 4062, 4063, 4064, 4201 or 4204

 

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of ERISA; (i) contribute to or assume an obligation to contribute to, or permit any Subsidiary or ERISA Affiliate to contribute to or assume an obligation to contribute to, any employee welfare benefit plan, as defined in section 3(1) of ERISA, including, without limitation, any such plan maintained to provide benefits to former employees of such entities, that may not be terminated by such entities in their sole discretion at any time without any material liability; (j) amend or permit any Subsidiary or ERISA Affiliate to amend, a Plan resulting in an increase in current liability such that the Borrower, any Subsidiary or any ERISA Affiliate is required to provide security to such Plan under section 401(a)(29) of the Code; or (k) permit to exist any occurrence of any Reportable Event (as defined in Title IV of ERISA), or any other event or condition, which presents a material (in the opinion of the Majority Lenders) risk of such a termination by the PBGC of any Plan.

 

Section 6.09     Sale-and-Leaseback.  The Borrower shall not, nor shall it permit any of its Subsidiaries to, sell or transfer to a Person any Property, whether now owned or hereafter acquired, if at the time or thereafter the Borrower or a Subsidiary shall lease as lessee such Property or any part thereof or other Property which the Borrower or a Subsidiary intends to use for substantially the same purpose as the Property sold or transferred.

 

Section 6.10     Change of Business.  The Borrower shall not, nor shall it permit any of its Subsidiaries to, make any material change in the character of its business as an independent oil and gas exploration and production company, nor will the Borrower or any Subsidiary operate any business in any jurisdiction other than the United States, including the Gulf of Mexico.

 

Section 6.11     Organizational Documents, Name Change.  The Borrower shall not, nor shall it permit any of its Subsidiaries to, amend, supplement, modify or restate their articles or certificate of incorporation, bylaws, limited liability company agreements, or other equivalent organizational documents where such amendment, supplement, modification or restatement could have an adverse effect on the Lenders as determined by the Administrative Agent in its sole reasonable discretion, or amend its name or change its jurisdiction of incorporation, organization or formation without prior written notice to, and prior consent of, the Administrative Agent.

 

Section 6.12     Use of Proceeds.  The Borrower will not permit the proceeds of any Advance to be used for any purpose other than those permitted by Section 5.09.  The Borrower will not engage in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U).  Neither the Borrower nor any Person acting on behalf of the Borrower has taken or shall take, nor permit any of the Borrower’s Subsidiaries to take any action which might cause any of the Loan Documents to violate Regulation T, U or X or any other regulation of the Board of Governors of the Federal Reserve System or to violate Section 7 of the Securities Exchange Act of 1934 or any rule or regulation thereunder, in each case as now in effect or as the same may hereinafter be in effect, including without limitation, the use of the proceeds of any Advance to purchase or carry any margin stock in violation of Regulation T, U or X.

 

Section 6.13     Gas Imbalances, Take-or-Pay or Other Prepayments.  The Borrower shall not, nor shall it permit any of its Subsidiaries to, allow gas imbalances, take-or-pay or other prepayments with respect to the Oil and Gas Properties of the Borrower or any Subsidiary which

 

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would require the Borrower or any Subsidiary to deliver their respective Hydrocarbons produced on a monthly basis from such Oil and Gas Properties at some future time without then or thereafter receiving full payment therefor.

 

Section 6.14     Limitation on Speculative Hedging.  Other than the Hedge Contracts required to be entered into and maintained pursuant to Section 5.12 hereof, the Borrower shall not, nor shall it permit any of its Subsidiaries to, (a) purchase, assume, or hold a speculative position in any commodities market or futures market or enter into any Hydrocarbon Hedge Agreement, Interest Hedge Agreement or similar hedge arrangement for speculative purposes, or (b) be party to or otherwise enter into any Hedge Contract which (i) is entered into for reasons other than as a part of its normal business operations as a risk management strategy and/or hedge against changes resulting from market conditions related to the Borrower’s operations, (ii) covers notional volumes in excess of 85% of the anticipated production volumes attributable to Proven Reserves of the Borrower and its Subsidiaries during the period such hedge arrangement is in effect, or (iii) is longer than three years in duration.

 

Section 6.15     Additional Subsidiaries; Additional Oil and Gas Properties.  The Borrower shall not, nor shall it permit any of its Subsidiaries to, create or acquire any additional Subsidiaries or acquire any additional Oil and Gas Properties without (a) such new Subsidiary executing and delivering to the Administrative Agent, at its request, a Guaranty, a Pledge Agreement, a Security Agreement and a Mortgage, and such other Security Instruments as the Administrative Agent or the Majority Lenders may reasonably request, (b) the delivery by the Borrower of any certificates, opinions of counsel, title opinions or other documents as the Administrative Agent may reasonably request, and (c) the Borrower or such Subsidiary acquiring such Oil and Gas Properties executing and delivering to the Administrative Agent a new Mortgage or a supplement to an existing Mortgage encumbering such Oil and Gas Properties; provided that, in any event, no Subsidiary may be created or acquired and no Oil and Gas Properties may be acquired if a Default has occurred before or after giving effect to such creation or acquisition of the new Subsidiary or the acquisition of the additional Oil and Gas Properties.

 

Section 6.16     Account Payables.  The Borrower shall not, nor shall it permit any of its Subsidiaries to, allow (a) any of its trade payables or other accounts payable to be outstanding for more than 90 days (except in cases where any such trade payable is being disputed in good faith and adequate reserves under GAAP have been established) and (b) the weighted average maturity of all such trade payables to exceed 120 days.

 

Section 6.17     Current Ratio.  The Borrower shall not permit the ratio of, as of the end of each fiscal quarter of the Borrower, beginning with the fiscal quarter ending March 31, 2008, (a) its current assets to (b) its current liabilities, to be less 1.00 to 1.00.  For purposes of this calculation (i) “current assets” shall include, as of the date of calculation, the aggregate Unused Commitment Amounts (as defined under the Senior Credit Agreement) but shall exclude (A) any cash deposited with or at the request of a counterparty to any Hedge Contract or any other similar hedge arrangement and (B) any assets representing a valuation account arising from the application of SFAS 133 and 143, and (ii) “current liabilities” shall exclude, as of the date of calculation, the current portion of long-term Debt existing under this Agreement and the current portion of long-term Debt existing under the Senior Credit Agreement, and any liabilities representing a valuation account arising from the application of SFAS 133 and 143.

 

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Section 6.18                Leverage RatioThe Borrower (a) shall not permit the Leverage Ratio at the end of each fiscal quarter ending prior to June 30, 2008 to be greater than 5.50 to 1.00; and (b) shall not permit the Leverage Ratio at the end of each fiscal quarter ending on or after June 30, 2008 to be greater than 5.00 to 1.00; provided that, solely for purposes of calculating Leverage Ratio under this clause, “consolidated Debt” shall not include Debt outstanding under preferred Equity Interests issued in compliance with Section 6.22.

 

Section 6.19                Interest Coverage RatioThe Borrower shall not permit the ratio of, as of the end of each fiscal quarter ending on or after March 31, 2008, (a) the consolidated EBITDA of the Borrower calculated for the four fiscal quarters then ended, to (b) the consolidated Interest Expense of the Borrower for the four fiscal quarters then ended, to be less than 1.50 to 1.00.

 

Section 6.20                Senior Debt.  Except as otherwise permitted by the terms of the Subordination and Intercreditor Agreement none of the Borrower or any of its Subsidiaries shall amend, supplement or otherwise modify the terms of the Senior Debt unless otherwise consented to by the Majority Lender, including but not limited to, any increases in the Borrowing Base above $100,000,000.

 

Section 6.21                Non-Guarantor Subsidiary.  Notwithstanding anything to the contrary contained herein, including any provision of this Article VI, the Borrower shall not, nor shall it permit any of its Subsidiaries to, (a) create, assume, incur or suffer to exist any Lien on or in respect of any of its Property for the benefit of Tri-Flow, (b) sell, assign, pledge, or otherwise transfer any of its Properties to Tri-Flow, or (c) make or permit to exist any loans, advances, or capital contributions to, or make any investment in, or purchase or commit to purchase any stock or other securities or evidences of indebtedness of or interests in, Tri-Flow or in any Properties of Tri-Flow other than the loans, advances, capital contributions, investments, and commitments made prior to the date hereof in Tri-Flow; provided that, the respective amounts of such loans, advances, capital contributions, investments, and commitments shall not be increased (other than by appreciation).

 

Section 6.22                Equity IssuanceThe Borrower shall not, nor shall it permit any of its Subsidiaries to, issue any preferred, convertible equity securities or other Equity Interests unless (a) the maturity thereof shall not be earlier than February 28, 2011, (b) the other terms thereof, including any conversion terms, are satisfactory to the Administrative Agent, (c) the Equity Issuance Proceeds thereof are applied, first to satisfy the outstanding Subordinated Debt in full and second to prepay the Obligations as calculated under Section 2.05(g), and (d) such issuance of preferred or convertible Equity Interests, together with any Debt Issuance permitted under Section 6.02(j), does not exceed $60,000,000 in the aggregate.

 

Section 6.23                Minimum Asset Coverage Ratio.

 

(a)                                  The Borrower shall not permit at any time the ratio of (i) the Total Present Value as of such date to (ii) the consolidated Debt of the Borrower as of the applicable determination date to be less than 1.50 to 1.0.

 

(b)                                 Upon any change to Total Present Value pursuant to a Scheduled Redetermination or an Interim Redetermination (as such terms are defined below), the Borrower will promptly,

 

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but in any event within fifteen (15) days after any such redetermination, deliver to the Administrative Agent a certificate of a Responsible Officer of the Borrower setting forth the consolidated Debt of the Borrower and the Total Present Value and demonstrating compliance with Section 6.23(a).

 

(c)                                  The Total Present Value shall be calculated semi-annually in accordance with this Section 6.23 on or about April 15th and October 15th of each year, commencing April 15, 2008 (each such semi-annual calculation, a “Scheduled Redetermination”).  In addition, the Total Present Value shall be calculated between Scheduled Redeterminations at the time of any interim or additional redetermination of the Borrowing Base under the Senior Credit Agreement (each such interim or additional calculation, an “Interim Redetermination”) in accordance with this Section 6.23.  Promptly after receiving each Engineering Report or other applicable information relating to the Proven Reserves of the Borrower and its Subsidiaries delivered in connection with a Scheduled Redetermination or Interim Redetermination, and using the calculations of PDP NPV, PDNP NPV and PUD NPV contained therein (as well as any recalculations thereof made by Administrative Agent as provided for in the definitions of PDP NPV, PDNP NPV and PUD NPV) the Administrative Agent shall notify the Borrower and each Lender of the resulting Total Present Value.  Such Total Present Value shall thereupon be used for the purposes of Section 6.23(a) until a new Total Present Value is calculated or estimated pursuant to this Section 6.23.  Each determination of Total Present Value shall be made as of the date of the applicable Engineering Report or other applicable information delivered in connection with a Scheduled Redetermination or Interim Redetermination.

 

(d)                                 In the event that the Borrower does not furnish to the Administrative Agent and the Lenders the Independent Engineering Report, Internal Engineering Report or other information specified in Sections 5.06(c)(i), 5.06(c)(ii), or 5.06(c)(iii), as applicable, by the date specified in such clauses, the Administrative Agent may, based on the information available to it, estimate in good faith the Total Present Value from time to time thereafter until the Administrative Agent and the Lenders receive the relevant Independent Engineering Report, Internal Engineering Report, or other information, as applicable.  Such estimated Total Present Value shall thereupon be used for the purposes of Section 6.23(a) until a new Total Present Value is calculated or estimated pursuant to this Agreement.

 

ARTICLE VII

EVENTS OF DEFAULT; REMEDIES

 

Section 7.01                Events of Default.  The occurrence of any of the following events shall constitute an “Event of Default” under any Loan Document:

 

(a)                                  Payment.  The Borrower shall (i) fail to pay when due any principal or interest payable hereunder or under the Notes or (ii) fail to pay, within 3 Business Days of when due, any other amounts (including fees, reimbursements, and indemnifications) payable hereunder, under the Notes, or under any other Loan Document;

 

(b)                                 Representation and Warranties.  Any representation or warranty made or deemed to be made (i) by the Borrower, any Guarantor or any of their respective Subsidiaries (or any of

 

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their respective officers) in this Agreement or in any other Loan Document, or (ii) by the Borrower, any Guarantor or any of their respective Subsidiaries (or any of their respective officers) in connection with this Agreement or any other Loan Document, shall prove to have been incorrect in any material respect when made or deemed to be made;

 

(c)                                  Covenant Breaches.  The Borrower, any Guarantor or any of their respective Subsidiaries shall fail to (i) perform or observe any covenant contained in Section 5.02(a), Section 5.03, Section 5.06(e), Section 5.09, Section 5.12, or Article VI of this Agreement or (ii) fail to perform or observe any other term or covenant set forth in this Agreement or in any other Loan Document which is not covered by clause (i) above or any other provision of this Section 7.01 if such failure shall remain unremedied for 30 days after the occurrence of such breach or failure;

 

(d)                                 Cross-Defaults.  (i) The Borrower, any Guarantor or any of their respective Subsidiaries shall fail to pay any principal of or premium or interest on its Debt which is outstanding in a principal amount of at least $1,000,000 individually or when aggregated with all such Debt of the Borrower, any Guarantor or any of their respective Subsidiaries so in default (but excluding Debt evidenced by the Notes) when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Debt; (ii) any other event shall occur or condition shall exist under any agreement or instrument relating to Debt (including, without limitation, the Senior Credit Agreement) which is outstanding in a principal amount of at least $1,000,000 individually or when aggregated with all such Debt of the Borrower, such Subsidiary, or such Guarantor so in default, and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such event or condition is to accelerate, or to permit the acceleration of, the maturity of such Debt; or (iii) any such Debt shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; provided that, for purposes of this subsection 7.01(d), the “principal amount” of the obligations in respect of any Hedging Contracts at any time shall be the maximum aggregate amount (giving effect to any netting agreements) that would be required to be paid if such Hedging Contracts were terminated at such time

 

(e)                                  Insolvency.  The Borrower, any Guarantor or any of their respective Subsidiaries shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Borrower, any of its Subsidiaries, or any Guarantor seeking to adjudicate it as bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee or other similar official for it or for any substantial part of its Property and, in the case of any such proceeding instituted against the Borrower, any such Subsidiary or any such Guarantor either such proceeding shall remain undismissed for a period of 60 days or any of the actions sought in such proceeding shall occur; or the Borrower, any of its Subsidiaries, or any Guarantor shall take any corporate action to authorize any of the actions set forth above in this paragraph (e);

 

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(f)                                    Judgments.  Any judgment or order for the payment of money in excess of $1,000,000 shall be rendered against the Borrower, any Guarantor or any of their respective Subsidiaries and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order or (ii) there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect;

 

(g)                                 Termination Events.  Any Termination Event with respect to a Plan shall have occurred, and, 30 days after notice thereof shall have been given to the Borrower by the Administrative Agent, (i) such Termination Event shall not have been corrected and (ii) the then present value of such Plan’s vested benefits exceeds the then current value of assets accumulated in such Plan by more than the amount of $1,000,000 (or in the case of a Termination Event involving the withdrawal of a “substantial employer” (as defined in Section 4001(a)(2) of ERISA), the withdrawing employer’s proportionate share of such excess shall exceed such amount);

 

(h)                                 Plan Withdrawals.  The Borrower or any member of the Controlled Group as employer under a Multiemployer Plan shall have made a complete or partial withdrawal from such Multiemployer Plan and the plan sponsor of such Multiemployer Plan shall have notified such withdrawing employer that such employer has incurred a withdrawal liability in an annual amount exceeding $1,000,000.

 

(i)                                     Change in Control.  The Borrower shall have discontinued its usual business or a Change in Control shall have occurred;

 

(j)                                     Reserved.

 

(k)                                  Loan Documents.  Any material provision of any Loan Document shall for any reason cease to be valid and binding on the Borrower or a Guarantor or any of their respective Subsidiaries or any such Person shall so state in writing;

 

(l)                                     Security Instruments.  (i) The Administrative Agent shall fail to have an Acceptable Security Interest in any material portion of the Collateral as determined in the sole discretion of the Administrative Agent, (ii) the Administrative Agent shall fail to have an Acceptable Security Interest in any immaterial portion of the Collateral as determined in the sole discretion of the Administrative Agent and such failure continues for more than 30 days after the Administrative Agent shall have given notice thereof, and a request to cure such failure, to the Borrower, or (iii) any Security Instrument shall at any time and for any reason cease to create the Lien on the Property purported to be subject to such agreement in accordance with the terms of such agreement, or cease to be in full force and effect, or shall be contested by the Borrower, any Guarantor or any of their respective Subsidiaries;

 

(m)                               Potential Failure of Title.  The title of the Borrower, any Guarantor or any of their respective Subsidiaries to any of the Oil and Gas Properties subject to the Mortgages, or any material part thereof, shall become the subject matter of litigation before any Governmental Authority or arbitrator which could reasonably be expected to result in a Material Adverse

 

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Change with respect to the Borrower’s, such Guarantor’s or such Subsidiary’s title to such Oil and Gas Properties;

 

(n)                                 Material Adverse Change.  An event resulting in a Material Adverse Change shall have occurred;

 

(o)                                 Casualty.  Loss, theft, substantial damage or destruction of a material portion of the Collateral the subject of any Security Instrument and not fully covered by insurance (except for deductibles and allowing for the depreciated value of such Collateral) shall have occurred;

 

Section 7.02                Optional Acceleration of Maturity.  If any Event of Default (other than an Event of Default pursuant to paragraph (e) of Section 7.01) shall have occurred and be continuing, then, and in any such event,

 

(a)                                  the Administrative Agent (i) shall at the request, or may with the consent, of the Majority Lenders, by notice to the Borrower, declare the obligation, if any, of each Lender to make extensions of credit hereunder to be terminated, whereupon the same shall forthwith terminate, and (ii) shall at the request, or may with the consent, of the Majority Lenders, by notice to the Borrower, declare all principal, interest, fees, reimbursements, indemnifications, and all other amounts payable under this Agreement, the Notes, and the other Loan Documents to be forthwith due and payable, whereupon all such amounts shall become and be forthwith due and payable in full, without notice of intent to demand, demand, presentment for payment, notice of nonpayment, protest, notice of protest, grace, notice of dishonor, notice of intent to accelerate, notice of acceleration, and all other notices, all of which are hereby expressly waived by the Borrower; and

 

(b)                                 the Administrative Agent shall at the request of, or may with the consent of, the Majority Lenders (but subject to the Subordination and Intercreditor Agreement) proceed to enforce its rights and remedies under the Security Instruments, the Guaranties, and any other Loan Documents for the ratable benefit of the Secured Parties by appropriate proceedings.

 

Section 7.03                Automatic Acceleration of Maturity.  If any Event of Default pursuant to paragraph (e) of Section 7.01 shall occur,

 

(a)                                  (i) the obligation, if any, of each Lender to make extensions of credit hereunder shall terminate, and (ii) all principal, interest, fees, reimbursements, indemnifications, and all other amounts payable under this Agreement, the Notes, and the other Loan Documents shall become and be forthwith due and payable in full, without notice of intent to demand, demand, presentment for payment, notice of nonpayment, protest, notice of protest, grace, notice of dishonor, notice of intent to accelerate, notice of acceleration, and all other notices, all of which are hereby expressly waived by the Borrower; and

 

(b)                                 the Administrative Agent shall at the request of, or may with the consent of, the Majority Lenders (but subject to the Subordination and Intercreditor Agreement) proceed to enforce its rights and remedies under the Security Instruments, the Guaranties, and any other Loan Document for the ratable benefit of the Secured Parties by appropriate proceedings.

 

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Section 7.04                Right of Set-off.  Upon the occurrence and during the continuance of any Event of Default, the Administrative Agent and each Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by the Administrative Agent or such Lender to or for the credit or the account of the Borrower against any and all of the obligations of the Borrower now or hereafter existing under this Agreement, the Notes held by the Administrative Agent or such Lender, and the other Loan Documents, irrespective of whether or not the Administrative Agent or such Lender shall have made any demand under this Agreement, such Notes, or such other Loan Documents, and although such obligations may be unmatured.  The Administrative Agent and each Lender agrees to promptly notify the Borrower after any such set-off and application made by the Administrative Agent or such Lender, provided that the failure to give such notice shall not affect the validity of such set-off and application.  The rights of the Administrative Agent and each Lender under this Section 7.04 are in addition to any other rights and remedies (including, without limitation, other rights of set-off) that the Administrative Agent or such Lender may have.

 

Section 7.05                Non-exclusivity of Remedies.  No remedy conferred upon the Administrative Agent and the Lenders is intended to be exclusive of any other remedy, and each remedy shall be cumulative of all other remedies existing by contract, at law, in equity, by statute or otherwise.

 

Section 7.06                Application of Proceeds.

 

(a)                                  Prior to the Payment in Full of Senior Debt (as defined in the Subordination and Intercreditor Agreement) and other than as otherwise permitted by the Subordination and Intercreditor Agreement, any monies or Property actually received by the Administrative Agent pursuant to this Agreement or any other Loan Document as a result of the exercise of any rights or remedies under any Security Instrument or any other agreement with the Borrower, any Guarantor or any of their respective Subsidiaries which secures any of the Obligations, shall in any event be held in trust by the Administrative Agent for the benefit of Senior Agent and Senior Secured Parties (as defined in the Subordination and Intercreditor Agreement) and promptly paid or delivered to Senior Agent in the form received; and

 

(b)                                 after the Payment in Full of Senior Debt and the termination of the Subordination and Intercreditor Agreement, any monies or Property actually received by the Administrative Agent pursuant to this Agreement or any other Loan Document as a result of the exercise of any rights or remedies under any Security Instrument or any other agreement with the Borrower, any Guarantor or any of their respective Subsidiaries which secures any of the Obligations, shall be applied in the following order:

 

(i)                                     First, to the payment of all amounts, including costs and expenses incurred in connection with the collection of such proceeds and the payment of any part of the Obligations, due to the Administrative Agent under any of the expense reimbursement or indemnity provisions of this Agreement or any other Loan Document, any Security Instrument or other collateral documents, and any applicable law;

 

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(ii)                                  Second, ratably, according to the then unpaid amounts thereof, without preference or priority of any kind among them, to the payment of the Obligations then due and payable; and

 

(iii)                               Third, the remainder, if any, to the Borrower, its Subsidiaries, their respective successors or assigns, or such other Person as may be lawfully entitled to receive the same or as a court of competent jurisdiction may direct.

 

(c)                                  All rights of the Administrative Agent and the Lenders in this Article VII shall be subject to the terms and conditions of the Subordination and Intercreditor Agreement.  In the event of a conflict between the terms of this Article VII and the Subordination and Intercreditor Agreement, the Subordination and Intercreditor Agreement shall control.

 

ARTICLE VIII

THE ADMINISTRATIVE AGENT

 

Section 8.01                Authorization and Action.  Each Lender hereby appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent by the terms hereof and of the other Loan Documents, together with such powers as are reasonably incidental thereto.  As to any matters not expressly provided for by this Agreement or any other Loan Document (including, without limitation, enforcement or collection of the Notes), the Administrative 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 Lenders, and such instructions shall be binding upon all Lenders and all holders of Notes; provided, however, that the Administrative Agent shall not be required to take any action which exposes the Administrative Agent to personal liability or which is contrary to this Agreement, any other Loan Document, or applicable law.

 

Section 8.02                Administrative Agent’s Reliance, Etc.  Neither the Administrative Agent nor any of its directors, officers, agents, or employees shall be liable for any action taken or omitted to be taken (INCLUDING THE ADMINISTRATIVE AGENT’S OWN NEGLIGENCE) by it or them under or in connection with this Agreement or the other Loan Documents, except for its or their own gross negligence or willful misconduct.  Without limitation of the generality of the foregoing, the Administrative Agent:  (a) may treat the payee of any Note as the holder thereof until the Administrative Agent receives written notice of the assignment or transfer thereof signed by such payee and in form satisfactory to the Administrative Agent; (b) may consult with legal counsel (including counsel for the Borrower), independent public accountants, and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants, or experts; (c) makes no warranty or representation to any Lender and shall not be responsible to any Lender for any statements, warranties, or representations made in or in connection with this Agreement or the other Loan Documents; (d) shall not have any duty 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 Loan Document on the part of the Borrower or its Subsidiaries or to inspect the Property (including the books and records) of the Borrower or its

 

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Subsidiaries; (e) shall not be responsible to any Lender for the due execution, legality, validity, enforceability, genuineness, sufficiency, or value of this Agreement or any other Loan Document; and (f) shall incur no liability under or in respect of this Agreement or any other Loan Document by acting upon any notice, consent, certificate, or other instrument or writing (which may be by telecopier or telex) believed by it to be genuine and signed or sent by the proper party or parties.

 

Section 8.03                The Administrative Agent and Its Affiliates.  With respect to its Commitment, the Advances made by it and the Notes issued to it, the Administrative Agent shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though it were not the Administrative Agent.  The term “Lender” or “Lenders” shall, unless otherwise expressly indicated, include the Administrative Agent in its individual capacity.  The Administrative Agent and its 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 or any of its Subsidiaries, and any Person who may do business with or own securities of the Borrower or any such Subsidiary, all as if the Administrative Agent were not an agent hereunder and without any duty to account therefor to the Lenders.

 

Section 8.04                Lender Credit Decision.  Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender and based on the Financial Statements and the Interim Financial Statements and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement.  Each Lender also acknowledges that it shall, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement.

 

Section 8.05                IndemnificationTHE LENDERS SEVERALLY AGREE TO INDEMNIFY THE ADMINISTRATIVE AGENT AND EACH AFFILIATE THEREOF AND THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, AND AGENTS (TO THE EXTENT NOT REIMBURSED BY THE BORROWER), ACCORDING TO THEIR RESPECTIVE PRO RATA SHARES FROM AND AGAINST ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES, OR DISBURSEMENTS OF ANY KIND OR NATURE WHATSOEVER WHICH MAY BE IMPOSED ON, INCURRED BY, OR ASSERTED AGAINST THE ADMINISTRATIVE AGENT IN ANY WAY RELATING TO OR ARISING OUT OF THIS AGREEMENT OR ANY ACTION TAKEN OR OMITTED BY THE ADMINISTRATIVE AGENT UNDER THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT (INCLUDING THE ADMINISTRATIVE AGENT’S OWN NEGLIGENCE), AND INCLUDING, WITHOUT LIMITATION, ENVIRONMENTAL LIABILITIES, PROVIDED THAT NO LENDER SHALL BE LIABLE FOR ANY PORTION OF SUCH LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES, OR DISBURSEMENTS RESULTING FROM THE ADMINISTRATIVE AGENT’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.  WITHOUT LIMITATION OF THE FOREGOING, EACH LENDER AGREES TO REIMBURSE THE ADMINISTRATIVE AGENT PROMPTLY UPON DEMAND FOR ITS RATABLE SHARE OF ANY

 

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OUT-OF-POCKET EXPENSES (INCLUDING COUNSEL FEES) INCURRED BY THE ADMINISTRATIVE AGENT IN CONNECTION WITH THE PREPARATION, EXECUTION, DELIVERY, ADMINISTRATION, MODIFICATION, AMENDMENT, OR ENFORCEMENT (WHETHER THROUGH NEGOTIATIONS, LEGAL PROCEEDINGS, OR OTHERWISE) OF, OR LEGAL ADVICE IN RESPECT OF RIGHTS OR RESPONSIBILITIES UNDER, THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, TO THE EXTENT THAT THE ADMINISTRATIVE AGENT IS NOT REIMBURSED FOR SUCH BY THE BORROWER.

 

Section 8.06                Successor Administrative Agent.  The Administrative Agent may resign at any time by giving written notice thereof to the Lenders and the Borrower and may be removed at any time with or without cause by the Majority Lenders upon receipt of written notice from the Majority Lenders to such effect.  Upon receipt of notice of any such resignation or removal, the Majority Lenders shall have the right to appoint a successor Administrative Agent with, if any Event of Default has not occurred and is not continuing, the consent of the Borrower, which consent shall not be unreasonably withheld.  If no successor Administrative Agent shall have been so appointed by the Majority Lenders with the consent of the Borrower, and shall have accepted such appointment, within 30 days after the retiring Administrative Agent’s giving of notice of resignation or the Majority Lenders’ removal of the retiring Administrative Agent then the retiring Administrative Agent may, on behalf of the Lenders and the Borrower, appoint a successor Administrative Agent, which shall be, in the case of a successor agent, 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 $500,000,000.00.  Upon the acceptance of any appointment as Administrative Agent by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges, and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations under this Agreement and the other Loan Documents.  After any retiring Administrative Agent’s resignation or removal hereunder as Administrative Agent, the provisions of this Article VIII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement and the other Loan Documents.

 

ARTICLE IX

MISCELLANEOUS

 

Section 9.01                Amendments, Etc.  No amendment or waiver of any provision of this Agreement, the Notes, or any other Loan Document, nor consent to any departure by the Borrower or any Subsidiary therefrom, shall in any event be effective unless the same shall be in writing and signed by the Majority Lenders and the Borrower, 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 all the Lenders, do any of the following:  (a) waive any of the conditions specified in Section 3.01, (b) increase the Commitments of the Lenders other than as provide in Section 2.16, (c) reduce the principal of, or interest on, the Notes or any fees or other amounts payable hereunder or under any other Loan Document, (d) postpone any date fixed for any payment of principal of, or interest on, the Notes or any fees or other amounts payable hereunder or extend

 

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the Maturity Date (other than as provided in Section 2.15), (e) change the percentage of Lenders which shall be required for the Lenders or any of them to take any action hereunder or under any other Loan Document, (f) amend Section 2.11 or this Section 9.01, (g) amend the definition of “Majority Lenders,” (h) release any Guarantor from its obligations under any Guaranty, (i) permit the Borrower or any Subsidiary to enter into any merger or consolidation with or into any other Person or amend Section 6.04(a), (j) release any Collateral securing the Obligations, except for releases of Collateral sold as permitted by this Agreement or (k) amend or waive any provision of, nor consent to any departure by any party thereto from, the Collateral Trust and Intercreditor Agreement; and provided, further, that no amendment, waiver or consent shall, unless in writing and signed by the Administrative Agent in addition to the Lenders required above to take such action, affect the rights or duties of the Administrative Agent under this Agreement or any other Loan Document.

 

Section 9.02                Notices, Etc.  All notices and other communications shall be in writing (including, without limitation, telecopy or telex) and mailed by certified mail, return receipt requested, telecopied, telexed, hand delivered, or delivered by a nationally recognized overnight courier, at the address for the appropriate party specified in Schedule II or at such other address as shall be designated by such party in a written notice to the other parties.  All such notices and communications shall, when so mailed, telecopied, telexed, or hand delivered or delivered by a nationally recognized overnight courier, be effective when received if mailed, when telecopy transmission is completed, when confirmed by telex answer-back, or when delivered by such messenger or courier, respectively, except that notices and communications to the Administrative Agent pursuant to Article II or VIII shall not be effective until received by the Administrative Agent.

 

Section 9.03                No Waiver; Remedies.  No failure on the part of any Lender, or the Administrative Agent, to exercise, and no delay in exercising, any right hereunder or under any Note shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right.  The remedies herein provided are cumulative and not exclusive of any remedies provided by law.

 

Section 9.04                Costs and Expenses.  The Borrower agrees to pay on demand (a) all reasonable out-of-pocket costs and expenses of the Administrative Agent in connection with the preparation, execution, delivery, administration, modification, and amendment of this Agreement, the Notes, the Guaranties, and the other Loan Documents including the reasonable fees and out-of-pocket expenses of counsel for the Administrative Agent with respect to advising the Administrative Agent as to its rights and responsibilities under this Agreement and (b) all out-of-pocket costs and expenses, if any, of the Administrative Agent and each Lender (including, without limitation, reasonable counsel fees and expenses of the Administrative Agent and each Lender) in connection with the enforcement (whether through negotiations, legal proceedings, or otherwise) of this Agreement, the Notes, the Guaranties, and the other Loan Documents.

 

Section 9.05                Binding Effect.  This Agreement shall become effective when it shall have been executed by the Borrower and the Administrative Agent, and when the Administrative Agent shall have, as to each Lender, either received a counterpart hereof executed by such Lender or been notified by such Lender that such Lender has executed it and thereafter shall be

 

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binding upon and inure to the benefit of the Borrower, the Administrative Agent and each Lender and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights or delegate its duties under this Agreement or any interest in this Agreement without the prior written consent of each Lender.

 

Section 9.06                Lender Assignments and Participations.

 

(a)                                  Assignments.  Any Lender may assign to one or more Eligible Assignees all or any portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitments, if any, the Advances owing to it, and the Notes held by it); provided, however, that (i) each such assignment shall be of a constant, and not a varying, percentage of such Lender’s rights and obligations assigned under this Agreement and shall be an equal percentage with respect to both its obligations owing in respect of the Commitments, if any, and the related Advances, (ii) the amount of the Commitments and Advances of such Lender being assigned pursuant to each such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall be, if to an entity other than a Lender, not less than $5,000,000 and shall be an integral multiple of $1,000,000 in excess thereof, (iii) each such assignment shall be to an Eligible Assignee, (iv) the parties to each such assignment shall execute and deliver to the Administrative Agent, for its acceptance and recording in the Register, an Assignment and Acceptance, together with the Notes subject to such assignment, and (v) each Eligible Assignee (other than the Eligible Assignee of the Administrative Agent or an Affiliate of a Lender) shall pay to the Administrative Agent a $3,500 administrative fee.  Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least three Business Days after the execution thereof, (A) the assignee thereunder shall be a party hereto for all purposes 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 Lender hereunder and (B) such Lender thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of such Lender’s rights and obligations under this Agreement, such Lender shall cease to be a party hereto).

 

(b)                                 Term of Assignments.  By executing and delivering an Assignment and Acceptance, the Lender thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows:  (i) other than as provided in such Assignment and Acceptance, such Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency of value of this Agreement or any other instrument or document furnished pursuant hereto; (ii) such Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or its Subsidiaries or the performance or observance by the Borrower or its Subsidiaries of any of their obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of the Financial Statements and Interim Financial Statements referred to in Section 4.05 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such

 

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Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon the Administrative Agent, such Lender or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such assignee appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent by the terms hereof, together with such powers as are reasonably incidental thereto; and (vi) such assignee agrees that it will perform in accordance with their terms all of the obligations which by the terms of this Agreement are required to be performed by it as a Lender.

 

(c)                                  The Register.  The Administrative Agent shall maintain at its address referred to in Section 9.02 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 Lenders and the Commitments of, and principal amount of the Advances owing to, each Lender 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 Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement.  The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice.

 

(d)                                 Procedures.  Upon its receipt of an Assignment and Acceptance executed by a Lender and an Eligible Assignee, together with the Notes subject to such assignment, the Administrative Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of the attached Exhibit A, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register, and (iii) give prompt notice thereof to the Borrower.  Within five Business Days after its receipt of such notice, the Borrower shall execute and deliver to the Administrative Agent in exchange for the surrendered Notes (A) a new Note to the order of such Eligible Assignee in an amount equal to the Advances purchased by it pursuant to such Assignment and Acceptance and (B) if such Lender has retained any portion of the Advances owing to it, a new Note to the order of such Lender in an amount equal to the portion retained by it hereunder.  Such new Notes shall be dated the effective date of such Assignment and Acceptance and shall otherwise be in substantially the form of the attached Exhibit E.

 

(e)                                  Participations.  Each Lender may sell participations to one or more banks or other entities in or to all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of the Advances owing to it); provided, however, that (i) such Lender’s obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) such Lender shall remain the holder of any such Notes for all purposes of this Agreement, (iv) the Borrower, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under this Agreement, and (v) such Lender shall not require the participant’s consent to any matter under this Agreement, except for change in the principal amount of the Notes, reductions in fees or interest, releasing all or substantially all of any Collateral, permitting the Borrower or any Subsidiary to enter into any merger or consolidation with or into any other,  postponement of any date fixed for any payment of principal of, or interest on, the Notes or any fees or other amounts

 

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payable hereunder, or extensions of the Maturity Date (other than as provided in Section 2.15).  The Borrower hereby agrees that participants shall have the same rights under Sections 2.12, 2.13, 2.14(c), and 9.07 as a Lender to the extent of their respective participations.

 

Section 9.07                Indemnification; Waiver.

 

(a)                                  IndemnificationTHE BORROWER SHALL, AND DOES HEREBY INDEMNIFY, THE ADMINISTRATIVE AGENT (AND ANY SUB-AGENT THEREOF), EACH LENDER AND EACH OFFICER, DIRECTOR, EMPLOYEE, AGENT, ATTORNEY-IN-FACT AND AFFILIATE OF ANY OF THE FOREGOING PERSONS (EACH SUCH PERSON BEING CALLED AN “INDEMNITEE”) AGAINST, AND HOLD EACH INDEMNITEE HARMLESS FROM, ANY AND ALL LOSSES, CLAIMS, DAMAGES, LIABILITIES AND RELATED EXPENSES (INCLUDING THE FEES, CHARGES AND DISBURSEMENTS OF ANY COUNSEL FOR ANY INDEMNITEE), INCURRED BY ANY INDEMNITEE OR ASSERTED AGAINST ANY INDEMNITEE BY ANY THIRD PARTY OR BY THE BORROWER OR ANY SUBSIDIARY OF THE BORROWER ARISING OUT OF, IN CONNECTION WITH, OR AS A RESULT OF (I) THE EXECUTION OR DELIVERY OF THIS AGREEMENT, ANY OTHER LOAN DOCUMENT OR ANY AGREEMENT OR INSTRUMENT CONTEMPLATED HEREBY OR THEREBY, THE PERFORMANCE BY THE PARTIES HERETO OF THEIR RESPECTIVE OBLIGATIONS HEREUNDER OR THEREUNDER, THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, OR, IN THE CASE OF THE ADMINISTRATIVE AGENT (AND ANY SUB-AGENT, OFFICER, DIRECTOR, EMPLOYEE, AGENT, ATTORNEY-IN-FACT AND AFFILIATE THEREOF) THE ADMINISTRATION OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS, (II) ANY ADVANCE OR THE USE OR PROPOSED USE OF THE PROCEEDS THEREFROM, (III) ANY ACTUAL OR ALLEGED PRESENCE OR RELEASE OF HAZARDOUS MATERIALS ON OR FROM ANY PROPERTY OWNED OR OPERATED BY THE BORROWER OR ANY OF ITS SUBSIDIARIES, OR ANY ENVIRONMENTAL LIABILITY RELATED IN ANY WAY TO THE BORROWER OR ANY OF ITS SUBSIDIARIES, OR (IV) ANY ACTUAL OR PROSPECTIVE CLAIM, LITIGATION, INVESTIGATION OR PROCEEDING RELATING TO ANY OF THE FOREGOING, WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY, WHETHER BROUGHT BY A THIRD PARTY OR BY THE BORROWER OR ANY GUARANTOR, AND REGARDLESS OF WHETHER ANY INDEMNITEE IS A PARTY THERETO, IN ALL CASES, WHETHER OR NOT CAUSED BY OR ARISING, IN WHOLE OR IN PART, OUT OF THE COMPARATIVE, CONTRIBUTORY OR SOLE NEGLIGENCE OF THE INDEMNITEE; PROVIDED THAT SUCH INDEMNITY SHALL NOT, AS TO ANY INDEMNITEE, BE AVAILABLE TO THE EXTENT THAT SUCH LOSSES, CLAIMS, DAMAGES, LIABILITIES OR RELATED EXPENSES ARE DETERMINED BY A COURT OF COMPETENT JURISDICTION BY FINAL AND NONAPPEALABLE JUDGMENT TO HAVE RESULTED FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCH INDEMNITEE.

 

(b)                                 Waiver of Damages.  To the fullest extent permitted by applicable law, the Borrower shall not assert, and hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this

 

68



 

Agreement, any other Loan Document or any agreement or instrument contemplated hereby, the transactions contemplated hereby or thereby, any Advance or the use of the proceeds thereof.  No Indemnitee referred to in subsection (b) above shall be liable for any damages arising from the use by unintended recipients of any information or other materials distributed by it through telecommunications, electronic or other information transmission systems in connection with this Agreement or the other Loan Documents or the transactions contemplated hereby or thereby.

 

Section 9.08                Execution in Counterparts.  This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement.  Delivery of an executed counterpart signature page of this Agreement by facsimile is as effective as executing and delivering this Agreement in the presence of the other parties to this Agreement.

 

Section 9.09                Survival of Representations, Etc.  All representations and warranties contained in this Agreement or made in writing by or on behalf of the Borrower in connection herewith shall survive the execution and delivery of this Agreement and the Loan Documents, the making of the Advances and any investigation made by or on behalf of the Lenders, none of which investigations shall diminish any Lender’s right to rely on such representations and warranties.  All obligations of the Borrower provided for in Sections 2.12, 2.09(c), 2.13, 2.14(c), 9.04, and 9.07 and all of the obligations of the Lenders in Section 8.05 shall survive any termination of this Agreement and repayment in full of the Obligations.

 

Section 9.10                Severability.  In case one or more provisions of this Agreement or the other Loan Documents shall be invalid, illegal or unenforceable in any respect under any applicable law, the validity, legality, and enforceability of the remaining provisions contained herein or therein shall not be affected or impaired thereby.

 

Section 9.11                Business Loans.  The Borrower warrants and represents that the Loans evidenced by the Notes are and shall be for business, commercial, investment, or other similar purposes and not primarily for personal, family, household, or agricultural use, as such terms are used in Chapter One (“Chapter One”) of the Texas Credit Code.  At all such times, if any, as Chapter One shall establish a Maximum Rate, the Maximum Rate shall be the “indicated rate ceiling” (as such term is defined in Chapter One) from time to time in effect.

 

Section 9.12                Governing Law; Submission to Jurisdiction.  This Agreement, the Notes and the other Loan Documents shall be governed by, and construed and enforced in accordance with, the laws of the State of Texas.  Without limiting the intent of the parties set forth above, (a) Chapter 346 of the Texas Finance Code, as amended (relating to revolving loans and revolving tri-party accounts (formerly Tex.  Rev. Civ.  Stat.  Ann.  Art.  5069, Ch.  15)), shall not apply to this Agreement, the Notes, or the transactions contemplated hereby and (b) to the extent that any Lender may be subject to Texas law limiting the amount of interest payable for its account, such Lender shall utilize the indicated (weekly) rate ceiling from time to time in effect.  The Borrower hereby irrevocably submits to the jurisdiction of any Texas state or federal court sitting in Dallas, Texas in any action or proceeding arising out of or relating to this Agreement or the other Loan Documents, and the Borrower hereby irrevocably agrees that all claims in respect of such action

 

69



 

or proceeding may be heard and determined in such court.  The Borrower hereby unconditionally and irrevocably waives, to the fullest extent it may effectively do so, any right it may have to the defense of an inconvenient forum to the maintenance of such action or proceeding.  The Borrower hereby agrees that service of copies of the summons and complaint and any other process which may be served in any such action or proceeding may be made by mailing or delivering a copy of such process to such Borrower at its address set forth in this Agreement.  The Borrower agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law.  Nothing in this Section shall affect the rights of any Lender to serve legal process in any other manner permitted by the law or affect the right of any Lender to bring any action or proceeding against the Borrower or its Property in the courts of any other jurisdiction.

 

Section 9.13                Subordination and Intercreditor Agreement.  The Administrative Agent is hereby authorized on behalf of the Lenders for the Lenders to enter into the Subordination and Intercreditor Agreement.  A copy of such Subordination and Intercreditor Agreement will be made available to each Lender on the Effective Date and thereafter upon request.  Each Lender agrees to the terms of such Subordination and Intercreditor Agreement and agrees that the terms thereof shall be binding on such Lender and its successors and assigns, as if it were a party thereto.

 

Section 9.14                USA Patriot Act.  Each Lender that is subject to the Patriot Act and the Administrative Agent (for itself and not on behalf of any Lender) hereby notifies the Borrower that pursuant to the requirements of the Patriot Act it is required to obtain, verify and record information that identifies the Borrower, which information includes the name and address of the Borrower and other information that will allow such Lender or the Administrative Agent, as applicable, to identify the Borrower in accordance with the Patriot Act.

 

Section 9.15                WAIVER OF JURY TRIAL.  THE BORROWER, THE LENDERS AND THE ADMINISTRATIVE AGENT HEREBY ACKNOWLEDGE THAT THEY HAVE BEEN REPRESENTED BY AND HAVE CONSULTED WITH COUNSEL OF THEIR CHOICE, AND HEREBY KNOWINGLY, VOLUNTARILY, INTENTIONALLY, AND IRREVOCABLY WAIVE ANY AND ALL RIGHT TO TRIAL BY JURY IN RESPECT OF ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT, OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.

 

Section 9.16                ORAL AGREEMENTS.  THIS WRITTEN AGREEMENT AND THE LOAN DOCUMENTS, AS DEFINED IN THIS AGREEMENT, REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.

 

THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.

 

[Remainder of this page intentionally left blank.  Signature page follows.]

 

70



 

EXECUTED as of the date first above written.

 

 

BORROWER:

 

 

 

CANO PETROLEUM, INC. a Delaware corporation

 

 

 

 

 

By:

/s/ Morris B. Smith

 

 

Morris B. Smith,

 

 

Senior Vice President and

 

 

Chief Financial Officer

 

 

Signature page to Subordinated Credit Agreement
(Cano Petroleum)

 



 

 

ADMINISTRATIVE AGENT/LENDERS:

 

 

 

UNIONBANCAL EQUITIES, INC.,

 

as Administrative Agent and Lender

 

 

 

 

 

By:

/s/ Henry Park

 

 

Henry Park

 

 

Senior Vice President

 

 

 

 

 

By:

/s/ Tom Thompson

 

 

Tom Thompson

 

 

Senior Vice President

 

 

Signature page to Subordinated Credit Agreement
(Cano Petroleum)

 



 

SCHEDULE I

 

PRICING GRID

 

Applicable Margins

 

The Applicable Margin shall be determined in accordance with the following Table based on the Borrower’s Leverage Ratio as reflected in the Compliance Certificate delivered in connection with the Financial Statements most recently delivered pursuant to Section 5.06.  Adjustments, if any, to such Applicable Margin shall be effective on the date the Administrative Agent receives the applicable Financial Statements and corresponding Compliance Certificate as required by the terms of this Agreement.  If the Borrower fails to deliver the Financial Statements and corresponding Compliance Certificate to the Administrative Agent at the time required pursuant to Section 5.06, then effective as of the date such Financial Statements and Compliance Certificate were required to the delivered pursuant to Section 5.06, the Applicable Margin shall be determined at Level II and shall remain at such level until the date such Financial Statements and corresponding Compliance Certificate are so delivered by the Borrower.   Notwithstanding the foregoing, the Borrower shall be deemed to be at Level I described below until delivery of its unaudited Financial Statements and corresponding Compliance Certificate for the fiscal quarter ending March 31, 2008.  Notwithstanding anything to the contrary contained herein, the determination of the Applicable Margin for any period shall be subject to the provisions of Section 2.09(c).

 

Applicable
Margin

 

Leverage Ratio

 

Eurodollar
Advances

 

Reference Rate 
Advances

 

Level I

 

Is less than or equal to 4.00 to 1.00

 

5.75

%

4.75

%

Level II

 

Is greater than 4.00 to 1.00

 

6.00

%

5.00

%

 



 

SCHEDULE II

NOTICE INFORMATION AND COMMITMENTS

 

Each of the commitments to lend set forth herein is governed by the terms of the Credit Agreement which provides for, among other things, borrowing base limitations which may restrict the Borrower’s ability to request (and the Lenders’ obligation to provide) Credit Extensions to a maximum amount which is less than the commitments set forth in this Schedule II.

 

Administrative Agent:

 

UnionBanCal Equities, Inc.

445 South Figueroa Street, 13th Floor

Los Angeles, California 90071

Attention:  Maggie Elower

Phone:  213-236-7881

Fax:  213-236-7619

 

Borrower:

 

Cano Petroleum, Inc.

801 Cherry Street, Suite 3200

Forth Worth, Texas 76102

Attention: Morris B. Smith, CFO

Facsimile: (817) 334-0222

 

Lenders:

 

Commitments

 

UnionBanCal Equities, Inc.

 

$

15,000,000.00

 

Total:

 

$

15,000,000.00

 

 



 

SCHEDULE 4.01

 

SUBSIDIARIES OF BORROWER

 

Ladder Companies, Inc.

 

Sole Jurisdiction of Formation / Filing:             Delaware

Type of Organization:   Corporation

 

Square One Energy, Inc.

 

Sole Jurisdiction of Formation / Filing:             Texas

Type of Organization:   Corporation

 

W.O. Energy of Nevada, Inc.

 

Sole Jurisdiction of Formation / Filing:             Nevada

Type of Organization:   Corporation

 

WO Energy, Inc.

 

Sole Jurisdiction of Formation / Filing:             Texas

Type of Organization:   Corporation

 

W.O. Operating Company, Ltd.

 

Sole Jurisdiction of Formation / Filing:             Texas

Type of Organization:   Limited Partnership

 

W.O. Production Company, Ltd.

 

Sole Jurisdiction of Formation / Filing:             Texas

Type of Organization:   Limited Partnership

 

Tri-Flow, Inc.

 

Sole Jurisdiction of Formation / Filing:             Oklahoma

 

Type of Organization:   Corporation

 

Pantwist, LLC

 

Sole Jurisdiction of Formation / Filing:             Texas

 

Type of Organization:   Limited Liability Company

 

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Cano Petro of New Mexico

 

Sole Jurisdiction of Formation / Filing:             Texas

 

Type of Organization:   Corporation

 

2



 

SCHEDULE 4.05

 

Cano Petroleum, Inc.

 

Senior Debt as presented below, as of 3/12/08.

 

Value
Date

 

Maturity
Date

 

Eurodollar
Rate Loan 
Amount

 

Rate

 

Days

 

2/22/08

 

3/25/08

 

$

18,000,000

 

5.37

%

32

 

2/29/08

 

3/31/08

 

$

22,000,000

 

5.37

%

31

 

2/14/08

 

3/14/08

 

$

9,500,000

 *

5.38

%

31

 

 

 

 

 

$

49,500,000

 

 

 

 

 

 


* Provided notice to convert to a Reference Rate Loan on 3/14/08

 

The balances due for the Series D convertible preferred stock, as of 3/12/08, are as follows:

 

GLG North American Opportunity Fund

 

$

107,670

 

GLG North American Opportunity Fund

 

1,137,640

 

 

 

 

 

GLG North American Opportunity Fund

 

 

 

 

 

291,520

 

D.E. Shaw Laminar Portfolios, L.L.C.

 

11,202,161

 

Dynamis Energy Fund, LTD

 

182,835

 

Dynamis Energy Fund, LP

 

832,915

 

GLG North American Opportunity Fund

 

5,256,506

 

 

 

 

 

Investcorp Interlachen Multi-Strategy Master Fund Limited

 

 

 

 

 

1,404,049

 

Kellogg Capital Group LLC

 

2,044,705

 

William Herbert Hunt Trust Estate

 

3,219,012

 

Radcliffe SPC, Ltd. for and on behalf of the Class A

 

 

 

Convertible Crossover Segregated Portfolio

 

2,044,705

 

Touradji DeepRock Master Fund, Ltd.

 

1,015,750

 

Trapeze Capital Corp.

 

3,557,157

 

O’Connor PIPEs Corporate Strategies Master Limited

 

1,273,751

 

Spindrift Partners, L.P.

 

6,535,434

 

Spindrift Investors (Bermuda) L.P.

 

7,949,559

 

Total Convertible Preferred Stock

 

$

48,055,367

 

 

Ladder Companies, Inc. (d/b/a Ladder Energy Company)

 

Senior Debt – refer to detail under Cano Petroleum, Inc.

 

Square One Energy, Inc.

 

Senior Debt – refer to detail under Cano Petroleum, Inc.

 

1



 

W.O. Energy of Nevada, Inc.

 

Senior Debt – refer to detail under Cano Petroleum, Inc.

 

WO Energy, Inc.

 

Senior Debt – refer to detail under Cano Petroleum, Inc.

 

W.O. Operating Company, Ltd.

 

Senior Debt – refer to detail under Cano Petroleum, Inc.

 

W.O. Production Company, Ltd.

 

Senior Debt – refer to detail under Cano Petroleum, Inc.

 

2



 

Schedule 4.07

 

Litigation

 

Burnett:

 

On March 23, 2006, the following lawsuit was filed in the 100th Judicial District Court in Carson County, Texas; Cause No. 9840, The Tom L. and Anne Burnett Trust, by Anne Burnett Windfohr, Windi Phillips, Ben Fortson, Jr., George Beggs, III and Ed Hudson, Jr. as Co-Trustees; Anne Burnett Windfohr; and Burnett Ranches, Ltd. v. Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W. O. Operating Company, Ltd, and WO Energy, Inc.  The plaintiffs claim that the electrical wiring and equipment of Cano or certain of its subsidiaries relating to oil and gas operations started a wildfire that began on March 12, 2006 in Carson County.  The owner of the remainder of the mineral estate, Texas Christian University, has intervened in the suit joining the plaintiffs’ request to terminate certain oil and natural gas leases.

 

The plaintiffs in the above action (i) allege negligence and (ii) seek damages, including, but not limited to, damages for damage to their land and livestock, certain expenses related to fighting the fire and certain remedial expenses totaling approximately $1.7 million to $1.8 million.  In addition, the plaintiffs seek (i) termination of certain oil and natural gas leases, (ii) reimbursement for their attorney’s fees (in the amount of at least $549,000) and (iii) exemplary damages.  The plaintiffs also claim that Cano and its subsidiaries are jointly and severally liable as a single business enterprise and/or a general partnership or de facto partnership.

 

On June 21, 2007, the Judge of the 100th Judicial District Court issued a Final Judgment (a) granting motions for summary judgment in favor of Cano and certain of its subsidiaries on plaintiffs’ claims for (i) breach of contract/termination of an oil and gas lease; and (ii) negligence; and (b) granting the plaintiffs’ no-evidence motion for summary judgment on contributory negligence, assumption of risk, repudiation and estoppel affirmative defenses asserted by Cano and certain of its subsidiaries.  The Final Judgment has been appealed.

 

Adcock:

 

On April 28, 2006, the following lawsuit was filed in the 31st Judicial District Court of Roberts County, Texas, Cause No. 1922, Robert and Glenda Adcock, et al. v. Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W. O. Operating Company, Ltd, and WO Energy, Inc. (“Adcock”).  There are 47 plaintiffs and three groups of intervenors that claim that the electrical wiring and equipment of Cano or certain of its subsidiaries relating to oil and gas operations started a wildfire that began on March 12, 2006 in Carson County.

 

The plaintiffs and intervenors (i) allege negligence, res ipsa loquitor, trespass and nuisance and (ii) seek damages, including, but not limited to, damages to their land, buildings and livestock and certain remedial expenses totaling $11,297,684.  In addition, the plaintiffs and intervenors seek (i) reimbursement for their attorney’s fees and (ii) exemplary damages.  The plaintiffs also claim that Cano and its subsidiaries are jointly and severally liable as a single business enterprise and/or a general partnership or de facto partnership.  On August 28, 2007, one of the intervenors, Travelers Lloyds Insurance Company, filed a Notice of Nonsuit requesting the court to sign an

 

1



 

order dismissing its claims, which seek approximately $367,627 of total damages, without prejudice.   The Court granted the Nonsuit on September 12, 2007.

 

On September 25, 2007, the Texas Judicial Panel on Multidistrict Litigation granted Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W. O. Operating Company, Ltd, and WO Energy, Inc.’s motion to transfer and transferred the Adcock case to the Honorable Paul Davis, retired judge of the 200th District Court of Travis County, Texas.  No further action will be taken in the 31st District Court until the 200th District Court resolves all pretrial matters and remands this case to the 31st District Court for trial.

 

Hutchison:

 

On April 10, 2006, the following lawsuit was filed in the 31st Judicial District Court of Roberts County, Texas, Cause No. 1920, Joseph Craig Hutchison and Judy Hutchison v. Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W. O. Operating Company, Ltd, and WO Energy, Inc. (“Hutchison”).  The plaintiffs claim that the electrical wiring and equipment of Cano or certain of its subsidiaries relating to oil and gas operations started a wildfire that began on March 12, 2006 in Carson County.  The plaintiffs (i) allege negligence and trespass and (ii) seek damages including, but not limited to, damages to their land and certain remedial expenses.  In addition, the plaintiffs seek exemplary damages.

 

On September 25, 2007, the Texas Judicial Panel on Multidistrict Litigation granted the Company’s motion to transfer and transferred this case to the Honorable Paul Davis, retired judge of the 200th District Court of Travis County, Texas.  No further action will be taken in the 31st District Court until the 200th District Court resolves all pretrial matters and remands this case to the 31st District Court for trial.

 

On October 3, 2007, Firstbank Southwest, as Trustee for the John and Eddalee Haggard Trust, intervened in the consolidated case in the 200th District Court of Travis County, Texas as part of the Hutchinson case.  The intervenor claims that the electrical wiring and equipment of Cano or certain of its subsidiaries relating to oil and gas operations started a wildfire that began on March 12, 2006 in Carson County.  The intervenor (i) alleges negligence and (ii) seeks damages, including, but not limited to, damages to its land and certain remedial expenses.  In addition, the intervenor seeks exemplary damages.

 

Chisum:

 

On May 1, 2006, the following lawsuit was filed in the 31st Judicial District Court of Roberts County, Texas, Cause No. 1923, Chisum Family Partnership, Ltd. v. Cano, W.O. Energy of Nevada, Inc., W. O. Operating Company, Ltd, and WO Energy, Inc. (“Chisum”).  The plaintiff claims that the electrical wiring and equipment of Cano or certain of its subsidiaries relating to oil and gas operations started a wildfire that began on March 12, 2006 in Carson County.  The plaintiff (i) alleges negligence and trespass and (ii) seeks damages, including, but not limited to, damages to its land and certain remedial expenses.  In addition, the plaintiff seeks exemplary damages.

 

On September 25, 2007, the Texas Judicial Panel on Multidistrict Litigation granted the Company’s motion to transfer and transferred this case to the Honorable Paul Davis, retired judge of the 200th District Court of Travis County, Texas.  No further action will be taken in the

 

2



 

31st District Court until the 200th District Court resolves all pretrial matters and remands this case to the 31st District Court for trial.

 

Martinez:

 

On July 3, 2006, the following lawsuit was filed in the 31st Judicial District Court of Roberts County, Texas, Cause No. 1928, Rebecca Lee Martinez, et al v. Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W. O. Operating Company, Ltd., and WO Energy, Inc. (“Martinez”).  The plaintiffs claim that the electrical wiring and equipment of Cano or certain of its subsidiaries relating to oil and gas operations started a wildfire that began on March 12, 2006 in Carson County, Texas.  The plaintiffs (i) allege negligence and (ii) seek undisclosed damages for the wrongful death of two relatives, Gerardo Villarreal and Medardo Garcia, who they claim died as a result of the fire.  An additional heir of one of Medardo Garcia has intervened in this case alleging similar claims.

 

On September 25, 2007, the Texas Judicial Panel on Multidistrict Litigation granted Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W. O. Operating Company, Ltd, and WO Energy, Inc.’s motion to transfer and transferred the Martinez case to the Honorable Paul Davis, retired judge of the 200th District Court of Travis County, Texas.  No further action will be taken in the 31st District Court until the 200th District Court resolves all pretrial matters and remands this case to the 31st District Court for trial.

 

The plaintiffs and intervenor nonsuited this case on December 19, 2007 and refiled in the 348th Judicial District Court of Tarrant County, Texas as part of the Valenzuela case described below.

 

Villarreal:

 

On August 9, 2006, the following lawsuit was filed in the 233rd Judicial District Court of Gray County, Texas, Yolanda Villarreal, Individually and on behalf of the Estate of Gerardo Villarreal v. Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W. O. Operating Company, Ltd., and WO Energy, Inc. (“Villarreal”).  The plaintiffs claim that the electrical wiring and equipment of Cano or certain of its subsidiaries relating to oil and gas operations started a wildfire that began on March 12, 2006 in Carson County, Texas. The plaintiffs (i) allege negligence and (ii) seek undisclosed damages, including exemplary damages, for the wrongful death of Gerardo Villarreal who they claim died as a result of the fire.  The plaintiffs also claim that Cano and its subsidiaries are jointly and severally liable under vicarious liability theories.  Relatives of Roberto Chavira have intervened in the case alleging similar claims regarding the death of Roberto Chavira.

 

On September 25, 2007, the Texas Judicial Panel on Multidistrict Litigation granted Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W. O. Operating Company, Ltd, and WO Energy, Inc.’s motion to transfer and transferred the Martinez case to the Honorable Paul Davis, retired judge of the 200th District Court of Travis County, Texas.  No further action will be taken in the 233rd District Court until the 200th District Court resolves all pretrial matters and remands this case to the 233rd District Court for trial.

 

3



 

SPS:

 

On March 14, 2007, the following lawsuit was filed in 100th Judicial District Court in Carson County, Texas; Cause No. 9994, Southwestern Public Service Company d/b/a Xcel Energy v. Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W. O. Operating Company, Ltd, and WO Energy, Inc. (“SPS”). The plaintiff claims that the electrical wiring and equipment of Cano or certain of its subsidiaries relating to oil and gas operations started a wildfire that began on March 12, 2006 in Carson County.  The plaintiff (i) alleges negligence and breach of contract and (ii) seeks $1,876,000 in damages for loss and damage to transmission and distribution equipment, utility poles, lines and other equipment.  In addition, the plaintiff seeks reimbursement for its attorney’s fees.

 

On May 15, 2007, William L. Arrington, William M. Arrington and Mark and Le’Ann Mitchell intervened in the lawsuit.  The intervenors (i) allege negligence, res ipsa loquitor, nuisance, and trespass and (ii) seek damages, including, but not limited to, damages to their land, buildings and livestock and certain remedial expenses totaling approximately $201,280.  In addition, the intervenors seek (i) reimbursement for their attorney’s fees and (ii) exemplary damages.  The intervenors also claim that Cano and its subsidiaries are jointly and severally liable as a single business enterprise and/or as a partnership or de facto partnership.

 

On September 25, 2007, the Texas Judicial Panel on Multidistrict Litigation granted Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W. O. Operating Company, Ltd, and WO Energy, Inc.’s motion to transfer and transferred the SPS case to the Honorable Paul Davis, retired judge of the 200th District Court of Travis County, Texas.  No further action will be taken in the 100th District Court until the 200th District Court resolves all pretrial matters and remands this case to the 100th District Court for trial.

 

On January 10, 2008, Philip L. Fletcher intervened in the consolidated case in the 200th District Court of Travis County, Texas as part of the SPS case.  The intervenor (i) alleges negligence, trespass and nuisance and (ii) seeks damages, including, but not limited to, damages to his livestock.  In addition, the intervenor seeks (i) reimbursement for his attorney’s fees and (ii) exemplary damages.  The intervenor also claims that Cano and its subsidiaries are jointly and severally liable as a single business enterprise and/or as a partnership or de facto partnership.

 

On January 15, 2008, the Jones and McMordie Ranch Partnership intervened in the consolidated case in the 200th District Court of Travis County, Texas as part of the SPS case.  The intervenor (i) alleges negligence, trespass and nuisance and (ii) seeks damages, including, but not limited to, damages to its land.  In addition, the intervenor seeks exemplary damages.  The intervenor also claims that Cano and its subsidiaries are jointly and severally liable as a single business enterprise and/or as a partnership or de facto partnership.

 

Burgess:

 

On May 2, 2007, the following lawsuit was filed in the 84th Judicial District Court of Hutchinson County, Texas, Cause No. 37,619, Gary and Genia Burgess, et al. v. Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W.O. Operating, Ltd. and WO Energy, Inc. (“Burgess”).  Eleven plaintiffs claim that electrical wiring and equipment relating to oil and gas operations of the Company or certain of its subsidiaries started a wildfire that began on March 12, 2006 in Carson

 

4



 

County, Texas.  The plaintiffs (i) allege negligence, res ipsa loquitor, nuisance, and trespass and (ii) seek damages, including, but not limited to, damages to their land, buildings and livestock and certain remedial expenses totaling approximately $1,152,480.  In addition, the plaintiffs seek (i) reimbursement for their attorney’s fees and (ii) exemplary damages.  The plaintiffs also claim that Cano and its subsidiaries are jointly and severally liable as a single business enterprise and/or as a partnership or de facto partnership.

 

On September 25, 2007, the Texas Judicial Panel on Multidistrict Litigation granted Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W. O. Operating Company, Ltd, and WO Energy, Inc.’s motion to transfer and transferred the Burgess case to the Honorable Paul Davis, retired judge of the 200th District Court of Travis County, Texas.  No further action will be taken in the 84th District Court until the 200th District Court resolves all pretrial matters and remands this case to the 84th District Court for trial.

 

MDL Case:

 

On September 25, 2007, the Texas Judicial Panel on Multidistrict Litigation granted Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W. O. Operating Company, Ltd, and WO Energy, Inc.’s Motion to Transfer Related Cases to Pretrial Court pursuant to Texas Rule of Judicial Administration 13.  The Panel transferred to a single pretrial court for consideration of pretrial matters of all pending cases (Adcock, Chisum, Hutchison, Villarreal, Martinez, Southwestern Public Service Company d/b/a Xcel Energy, Burgess, identified above) that assert claims against the Company and its subsidiaries related to wildfires beginning on March 12, 2006.  The Panel transferred all pending cases to the Honorable Paul Davis, retired judge of the 200th District Court of Travis County, Texas.  On October 19, 2007, the Court entered a Case Management Order settling deadlines for completion of discovery in January and February of 2008 and a hearing date for summary judgment motions on April 14, 2008.

 

On December 19, 2007, the plaintiffs and intervenor in the Martinez case nonsuited their claims in the MDL Case.

 

Valenzuela:

 

On December 18, 2007, the following lawsuit was filed in the 348th Judicial District Court of Tarrant County, Texas, Cause No. 348-227907-07, Norma Valenzuela, et al. v. Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W.O. Operating, Ltd. and WO Energy, Inc. (“Valenzuela”).  Six plaintiffs, including the two plaintiffs and intervenor from the nonsuited Martinez case, claim that the electrical wiring and equipment of Cano or certain of its subsidiaries relating to oil and gas operations started a wildfire that began on March 12, 2006 in Carson County.  The plaintiffs (i) allege negligence and (ii) seek undisclosed damages for the wrongful death of four relatives, Manuel Dominguez, Roberto Chavira, Gerardo Villarreal and Medardo Garcia, who they claim died as a result of the fire.  In addition, plaintiffs seek (i) reimbursement for their attorney’s fees and (ii) exemplary damages.  The plaintiffs also claim that Cano and its subsidiaries are jointly and severally liable as a single business enterprise and/or as a partnership or de facto partnership.  Cano and its subsidiaries filed a Motion to Dismiss or, in the Alternative, to Transfer Venue and a Notice of Tag Along transferring the case to the MDL Case in the 200th Judicial District Court of Travis County, Texas.

 

5



 

Abraham Equine:

 

On February 11, 2008, the following lawsuit was filed in the 48th Judicial District Court of Tarrant County, Texas, Cause No. 048-228763-08, Abraham Equine, Inc. v. Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W.O. Operating, Ltd. and WO Energy, Inc. (“Abraham Equine”).  The plaintiff claims that the electrical wiring and equipment of Cano or certain of its subsidiaries relating to oil and gas operations started a wildfire that began on March 12, 2006 in Carson County.  The plaintiff (i) alleges negligence, trespass and nuisance and (ii) seeks damages, including, but not limited to, damages to its land, livestock and lost profits.  In addition, the plaintiff seeks (i) reimbursement for its attorney’s fees and (ii) exemplary damages.  The plaintiff also claims that Cano and its subsidiaries are jointly and severally liable as a single business enterprise and/or a general partnership or de facto partnership.  Cano and its subsidiaries filed a Motion to Dismiss or, in the Alternative, to Transfer Venue and a Notice of Tag Along transferring the case to the MDL Case in the 200th Judicial District Court of Travis County, Texas.

 

Pfeffer:

 

On March 10, 2008, the following lawsuit was filed in the 352nd Judicial District Court of Tarrant County, Texas, Cause No. 352-229256-08, Gary Pfeffer v. Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W.O. Operating, Ltd. and WO Energy, Inc. (“Pfeffer”).  Cano and its subsidiaries have not yet been served with the lawsuit.  The plaintiff claims that the electrical wiring and equipment of Cano or certain of its subsidiaries relating to oil and gas operations started a wildfire that began on March 12, 2006 in Carson County.  The plaintiff (i) alleges negligence, trespass and nuisance, (ii) seeks undisclosed damages for the wrongful death of his father, Bill W. Pfeffer, who he claims died as a result of the fire and (iii) seeks undisclosed damages, including, but not limited to, damages to his parents’ home and property.  In addition, the plaintiff seeks exemplary damages.  The plaintiff also claims that Cano and its subsidiaries are jointly and severally liable as a general partnership or de facto partnership.  Cano and its subsidiaries will file a Motion to Transfer Venue and a Notice of Tag Along transferring the case to the MDL Case in the 200th Judicial District Court of Travis County, Texas.

 

Ayers:

 

On March 11, 2008, the following lawsuit was filed in the 141st Judicial District Court of Tarrant County, Texas, Cause No. 141-229281-08, Pamela Ayers, et al. v. Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W.O. Operating, Ltd. and WO Energy, Inc.  Cano and its subsidiaries have not yet been served with the lawsuit.  The plaintiffs claim that the electrical wiring and equipment of Cano or certain of its subsidiaries relating to oil and gas operations started a wildfire that began on March 12, 2006 in Carson County.  The plaintiffs (i) allege negligence and (ii) seek undisclosed damages for the wrongful death of their mother, Kathy Ryan, who they claim died as a result of the fire.  In addition, the plaintiffs seek exemplary damages.  The plaintiffs also claim that Cano and its subsidiaries are jointly and severally liable as a single business enterprise and/or general partnership or de facto partnership.  Cano and its subsidiaries

 

6



 

will file a Motion to Transfer Venue and a Notice of Tag Along transferring the case to the MDL Case in the 200th Judicial District Court of Travis County, Texas.

 

Travelers:

 

On March 12, 2008, the following lawsuit was filed in the 17th Judicial District Court of Tarrant County, Texas, Cause No. 017-229316-08, The Travelers Lloyds Insurance Company and Travelers Lloyds of Texas Insurance Company v. Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W.O. Operating, Ltd. and WO Energy, Inc.  Cano and its subsidiaries have not yet been served with the lawsuit.  The plaintiffs claim that the electrical wiring and equipment of Cano or certain of its subsidiaries relating to oil and gas operations started a wildfire that began on March 12, 2006 in Carson County.  The plaintiffs (i) allege negligence, res ipsa loquitor, and trespass and (ii) claim they are subrogated to the rights of their insureds for damages to their buildings and building contents totaling $447,764.60.  The plaintiffs also claim that Cano and its subsidiaries are jointly and severally liable as a single business enterprise and/or general partnership or de facto partnership.  Cano and its subsidiaries will file a Motion to Transfer Venue and a Notice of Tag Along transferring the case to the MDL Case in the 200th Judicial District Court of Travis County, Texas.

 

Tolling Agreement:

 

On January 29, 2008, Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W.O. Operating, Ltd. and WO Energy, Inc. entered into a confidential tolling agreement with two claimants, which preserved their ability to bring claims against Cano and its subsidiaries arising out of, or related to, wildfires that allegedly began on March 12, 2006 in Carson County.

 

7



 

SCHEDULE 4.14(a)

 

AGREEMENTS WHICH COULD CREATE A MATERIAL ADVERSE CHANGE

 

Credit Agreement among Cano Petroleum, Inc. as Borrower, The Lenders Party hereto from time to time, as Lenders, and Union Bank of California, N.A., as Administrative Agent and as issuing Lender, dated November 29, 2005, including its Amendments (1-9) and all associated agreements.

 

Securities Purchase Agreement dated August 25, 2006 by and among Cano Petroleum, Inc. and the Buyers listed therein.

 

Certificate of Designations, Preferences and Rights of Series D Convertible Preferred Stock of Cano Petroleum, Inc. filed August 31, 2006 with the Delaware Secretary of State.

 



 

SCHEDULE 4.20

 

CANO PETROLEUM, INC.

SCHEDULE OF HEDGING AGREEMENTS

 

COSTLESS COLLARS

 

 

 

Floor

 

Ceiling

 

Barrels

 

Floor

 

Ceiling

 

MCF

 

 

 

Time Period

 

Oil Price

 

Oil Price

 

Quantity/ Mo.

 

Gas Price

 

Gas Price

 

Quantity/ Mo.

 

Counterparty

 

4/1/08 - 12/31/08

 

$

80.00

 

$

117.50

 

11,000

 

$

7.75

 

$

11.40

 

56,000

 

UBOC

 

1/1/09 - 12/31/09

 

$

80.00

 

$

110.90

 

11,000

 

$

7.75

 

$

10.60

 

50,000

 

UBOC

 

1/1/10 - 12/31/10

 

$

80.00

 

$

108.20

 

10,000

 

$

7.75

 

$

9.85

 

47,000

 

UBOC

 

1/1/11 - 3/31/11

 

$

80.00

 

$

107.30

 

10,000

 

$

7.75

 

$

11.60

 

44,000

 

UBOC

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4/1/08 - 12/31/08

 

$

85.00

 

$

110.60

 

8,000

 

$

8.00

 

$

10.90

 

37,000

 

UBOC

 

1/1/09 - 12/31/09

 

$

85.00

 

$

104.40

 

7,000

 

$

8.00

 

$

10.15

 

34,000

 

UBOC

 

1/1/10 - 12/31/10

 

$

85.00

 

$

101.50

 

7,000

 

$

8.00

 

$

9.40

 

31,000

 

UBOC

 

1/1/11 - 3/31/11

 

$

85.00

 

$

100.50

 

6,000

 

$

8.00

 

$

11.05

 

29,000

 

UBOC

 

 

PUTS PURCHASED BY CANO

 

Trade

 

Effective

 

Termination

 

Notional

 

Strike Price

 

 

 

Date

 

Date

 

Date

 

Quantity/ Mo.

 

(PUT)

 

Counterparty

 

Crude Oil

 

 

 

 

 

 

 

 

 

 

 

12/1/2007

 

1/1/2008

 

12/31/2008

 

14,500

 

$

55.00

 

UBOC

 

5/2/2006

 

1/1/2008

 

12/31/2008

 

2,000

 

$

60.00

 

UBOC

 

5/2/2006

 

1/1/2009

 

4/30/2009

 

1,800

 

$

60.00

 

UBOC

 

12/22/2006

 

1/1/2009

 

12/31/2009

 

12,000

 

$

55.00

 

UBOC

 

6/22/2007

 

1/1/2010

 

6/30/2010

 

11,000

 

$

55.00

 

UBOC

 

6/22/2007

 

7/1/2010

 

12/31/2010

 

12,000

 

$

55.00

 

F.C. Stone

 

 

 

 

 

 

 

 

 

 

 

 

 

Natural Gas

 

 

 

 

 

 

 

 

 

 

 

12/1/2007

 

1/1/2008

 

12/31/2008

 

46,500

 

$

7.50

 

UBOC

 

5/4/2006

 

1/1/2008

 

12/31/2008

 

18,000

 

$

7.60

 

UBOC

 

5/2/2006

 

1/1/2009

 

4/30/2009

 

17,000

 

$

7.60

 

UBOC

 

12/22/2006

 

1/1/2009

 

12/31/2009

 

50,000

 

$

7.60

 

UBOC

 

6/22/2007

 

1/1/2010

 

6/30/2010

 

50,000

 

$

7.00

 

UBOC

 

12/18/2007

 

7/1/2010

 

12/31/2010

 

63,000

 

$

7.50

 

F.C. Stone

 

 

CEILINGS PURCHASED BY CANO

Crude Oil

 

Trade

 

Effective

 

Termination

 

Notional

 

Strike Price

 

 

 

Date

 

Date

 

Date

 

Quantity/ Mo.

 

(Ceiling)

 

Counterparty

 

9/27/2007

 

1/1/2008

 

6/30/2008

 

14,000

 

$

86.00

 

UBOC

 

 



 

SCHEDULE 4.21

 

MATERIAL AGREEMENTS

 

Description

 

Certificate of Designations, Preferences and Rights of Series D Convertible Preferred Stock of Cano Petroleum, Inc. filed August 31, 2006 with the Delaware Secretary of State.

 

Crude Oil Purchase Contract between Cano Petro of New Mexico Inc and Plains Marketing L.P. dated January 21, 2008, Contract No. 7405-1001.

 

Crude Oil Purchase Agreement between Cano Petro of New Mexico, Inc and Blackrock Transportation dated June 25, 2007.

 

Crude Oil Purchase Agreement between Cano Petro of New Mexico, Inc and Blackrock Transportation dated February 28, 2008.

 

Gas Services and/or Purchase Agreement between Myriad Resources Corporation and Dynegy Midstream Services, L. P. dated July 20, 1999.

 

Gas Purchase Contract between Duke Energy (formerly Phillips 66) and Sohio Petroleum Company dated February 1, 1974.

 

Amendatory Agreement between Duke Energy (formerly Phillips 66) and Sohio Petroleum Company dated August 19, 1986.

 

Gas Purchase Contract between Myriad Resources Corporation and GPM Gas Corporation (successor to Phillips 66 Natural Gas Company) dated November 27, 1992.

 

Amendatory Agreement for Gas Purchase Contract between Myriad Resources Corporation and GPM Gas Corporation (successor to Phillips 66 Natural Gas Company) dated November June 18, 1993.

 

Amendatory Agreement for Gas Purchase Contract between Myriad Resources Corporation and GPM Gas Corporation (successor to Phillips 66 Natural Gas Company) dated January 4, 1994.

 

Gas Purchase Contract between Myriad Resources Corporation and GPM Gas Corporation dated June 23, 1994.

 

Gas Purchase Contract between Myriad Resources and GMPM Gas Corporation dated March 10, 1999.

 

Gas Purchase Agreement between ONEOK Texas Field Services, L. P and PAMTEX, Contract No,. 431625 dated October 1, 2004.

 

Gas Purchase Agreement between Scissortail Energy, Inc. and Ladder Energy Co. dated September 4, 2004.

 

Amendment to Gas Purchase Contract between GPM Gas Corporation and Rio Petroleum, Inc. dated June 1, 1999.

 

Crude Oil Purchase Agreement between Sunoco Partners Marketing & Terminals, LP and Ladder Energy Company dated February 1, 2000.

 

Amendment to Crude Oil Purchase Agreement between Sunoco Partners Marketing & Terminals, LP and Ladder Energy Company dated December 1, 2004.

 

Amendment to Crude Oil Purchase Agreement between Sunoco Partners Marketing & Terminals, LP and Ladder Energy Company dated June 2, 2005.

 

1



 

Amendment to Crude Oil Purchase Agreement between Sunoco Partners Marketing & Terminals, LP and Ladder Energy Company dated September 2, 2005.

 

Amendment to Crude Oil Purchase Agreement between Sunoco Partners Marketing & Terminals, LP and Ladder Energy Company dated September 26, 2006.

 

Gas Purchase and Sales Contract between Arrow Oil & Gas Inc and STP, Inc. dated August 15, 2002.

 

Gas Purchase Contract between Union Texas Products Corporation and Gemini Oil Company dated June 1, 1985.

 

Gas Sales & Purchase Agreement between Alliant Energy Desdemona and Square One Energy dated June 20, 2006.

 

Gas Sales & Purchase Agreement Amendment between Alliant Energy Desdemona and Square One Energy dated January 1, 2007.

 

Gas Sales & Purchase Agreement Amendment between Alliant Energy Desdemona and Square One Energy dated March 20, 2007.

 

Gas Sales & Purchase Agreement Amendment between Alliant Energy Desdemona and Square One Energy dated November 1, 2007.

 

Gas Purchase Contract between Enbridge G & P (North Texas) L. P. and Square One Energy, Inc. contract number 5409 dated March 1, 2007.

 

Crude Oil Purchase Contract between Plains Marketing, LP (PMLP) and Square One Energy contract number 7062-1001 dated March 1, 2007.

 

Crude Oil Purchase Agreement Amendment between Sunoco Partners Marketing & Terminals L.P. and Square One Energy Reference Number 521329 dated June 1, 2003.

 

Crude Oil Purchase Agreement Amendment between Sunoco Partners Marketing & Terminals L.P. and Square One Energy Reference Number 521329 dated March 1, 2004.

 

Crude Oil Purchase Agreement Amendment between Sunoco Partners Marketing & Terminals L.P. and Square One Energy Reference Number 521329 dated November 1, 2004.

 

Crude Oil Purchase Agreement Amendment between Sunoco Partners Marketing & Terminals L.P. and Square One Energy Reference Number 521329 dated September 1, 2006.

 

Crude Oil Purchase Agreement between Sunoco Partners Marketing & Terminals L.P. and Square One Energy Reference Number 521329 dated November 1, 2006.

 

Crude Oil Purchase Agreement Amendment between Sunoco Partners Marketing & Terminals L.P. and Square One Energy Reference Number 521329 dated November 1, 2006.

 

Crude Oil Purchase Agreement Amendment between Sunoco Partners Marketing & Terminals L.P. and Square One Energy Reference Number 521329 dated April 7, 2004.

 

Gas Purchase Contract between Duke Energy Field Services and W. O. Operating dated November 1, 2003.

 

Gas Purchase Contract Amendment between Duke Energy Field Services and W. O. Operating dated September 1, 2005.

 

Gas Purchase Contract between Duke Energy Field Services and W. O. Operating dated August 1, 2005.

 

Crude Oil Purchase Contract between Diamond Shamrock Refining Company, L. P. and W. O. Operating Company Contract number 01-0838 dated May 1, 2001

 

2



 

Crude Oil Purchase Contract between Diamond Shamrock Refining Company, L. P. and W. O. Operating Company Contract number 01-0838 dated August 1, 2007 and Exhibit A.

 

Gas Purchase Agreement between Eagle Rock Field Services, L.P. and W. O. Operating Company Ltd and Pantwist, LLC dated April 1, 2007.

 

Gas Purchase Contract between Hugoton Energy Corporation and GPM Gas Corporation dated August 3, 1995.

 

Gas Purchase Contract between W. O. Operating Company and GPM Corporation dated March 15, 1994.

 

Gas Purchase Agreement between ONEOK Texas Field Services, L. P. and W. O. Operating Company, LTD dated January 1, 2005.

 

Gas Purchase Contract between Phillips Petroleum Company and Skelly Oil Company dated September 1, 1975.

 

Crude Oil Purchase Agreement Amendment 14 between Valero Marketing and Supply Company and W. O. Operating Company dated December 1, 2007.

 

Crude Oil Purchase Agreement Amendment between Blackrock Transportation and Cano Petro Of New Mexico, Inc. dated February 1, 2008.

 

Gas Services and/or Purchase Agreement between Versado Gas Processors, L.L.C. acting through Dynegy Midstream Services, Limited Partnership, its operator and UHC New Mexico Corporation, Owner dated June 1, 2000.

 

Amendment to Gas Services and/or Purchase Agreement between Cano Petroleum, Inc, Owner and Versado Gas Processors, L.L.C. acting through Targa Midstream Services Limited Partnership, its operator

 

Pipeline Lease Agreement dated effective June 19, 2007, between Meyer Land and Cattle Co., Inc., Meyer Farms, Inc. and W.O. Operating Company, Ltd.

 

Unit Agreement – Cockrell Ranch Unit – Hutchinson County, Texas, dated January 8, 2007 executed by W.O. Operating Company, Ltd.

 

Unit Operating Agreement – Cano Unit dated May 1, 1989.

 

Unit Agreement for the Development and Operation for the Cato Unit – Chaves County, New Mexico dated May 1, 1989.

 

Credit Agreement among Cano Petroleum, Inc. as Borrower, The Lenders Party hereto from time to time, as Lenders, and Union Bank of California, N.A., as Administrative Agent and as issuing Lender, dated November 29, 2005, including its Amendments (1-9) and all associated agreements.

 

3



 

SCHEDULE 5.12

 

Required Hedging Contracts

 

COSTLESS COLLARS

 

 

 

Floor

 

Ceiling

 

Barrels

 

Floor

 

Ceiling

 

MCF

 

 

 

Time Period

 

Oil Price

 

Oil Price

 

Quantity/ Mo.

 

Gas Price

 

Gas Price

 

Quantity/ Mo.

 

Counterparty

 

4/1/08 - 12/31/08

 

$

80.00

 

$

117.50

 

11,000

 

$

7.75

 

$

11.40

 

56,000

 

UBOC

 

1/1/09 - 12/31/09

 

$

80.00

 

$

110.90

 

11,000

 

$

7.75

 

$

10.60

 

50,000

 

UBOC

 

1/1/10 - 12/31/10

 

$

80.00

 

$

108.20

 

10,000

 

$

7.75

 

$

9.85

 

47,000

 

UBOC

 

1/1/11 - 3/31/11

 

$

80.00

 

$

107.30

 

10,000

 

$

7.75

 

$

11.60

 

44,000

 

UBOC

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4/1/08 - 12/31/08

 

$

85.00

 

$

110.60

 

8,000

 

$

8.00

 

$

10.90

 

37,000

 

UBOC

 

1/1/09 - 12/31/09

 

$

85.00

 

$

104.40

 

7,000

 

$

8.00

 

$

10.15

 

34,000

 

UBOC

 

1/1/10 - 12/31/10

 

$

85.00

 

$

101.50

 

7,000

 

$

8.00

 

$

9.40

 

31,000

 

UBOC

 

1/1/11 - 3/31/11

 

$

85.00

 

$

100.50

 

6,000

 

$

8.00

 

$

11.05

 

29,000

 

UBOC

 

 



 

EXHIBIT A

 

FORM OF ASSIGNMENT AND ACCEPTANCE

 

This Assignment and Acceptance (the “Assignment and Acceptance”) is dated as of the Effective Date set forth below and is entered into by and between [the][each](1) Assignor identified in item 1 below ([the][each, an] “Assignor”) and [the][each](2) Assignee identified in item 2 below ([the][each, an] “Assignee”).  [It is understood and agreed that the rights and obligations of [the Assignors][the Assignees](3) hereunder are several and not joint.](4)  Capitalized terms used but not defined herein shall have the meanings given to them in the Credit Agreement identified below (as amended, the “Credit Agreement”), receipt of a copy of which is hereby acknowledged by [the][each] Assignee.  The Standard Terms and Conditions set forth in Annex 1 attached hereto are hereby agreed to and incorporated herein by reference and made a part of this Assignment and Acceptance as if set forth herein in full.

 

For an agreed consideration, [the][each] Assignor hereby irrevocably sells and assigns to [the Assignee][the respective Assignees], and [the][each] Assignee hereby irrevocably purchases and assumes from [the Assignor][the respective Assignors], subject to and in accordance with the Standard Terms and Conditions and the Credit Agreement, as of the Effective Date inserted by the Administrative Agent as contemplated below (i) all of [the Assignor’s][the respective Assignors’] rights and obligations in [its capacity as a Lender][their respective capacities as Lenders] under the Credit Agreement and any other documents or instruments delivered pursuant thereto to the extent related to the amount and percentage interest identified below of all of such outstanding rights and obligations of [the Assignor][the respective Assignors] under the respective facilities identified below (including without limitation any letters of credit, guarantees, and swingline loans included in such facilities) and (ii) to the extent permitted to be assigned under applicable law, all claims, suits, causes of action and any other right of [the Assignor (in its capacity as a Lender)][the respective Assignors (in their respective capacities as Lenders)] against any Person, whether known or unknown, arising under or in connection with the Credit Agreement, any other documents or instruments delivered pursuant thereto or the loan transactions governed thereby or in any way based on or related to any of the foregoing, including, but not limited to, contract claims, tort claims, malpractice claims, statutory claims and all other claims at law or in equity related to the rights and obligations sold and assigned pursuant to clause (i) above (the rights and obligations sold and assigned by [the][any] Assignor to [the][any] Assignee pursuant to clauses (i) and (ii) above being referred to herein collectively as [the][an] “Assigned Interest”).  Each such sale and assignment is without recourse to [the][any] Assignor and, except as expressly provided in this Assignment and Acceptance, without representation or warranty by [the][any] Assignor.

 


(1) For bracketed language here and elsewhere in this form relating to the Assignor(s), if the assignment is from a single Assignor, choose the first bracketed language.  If the assignment is from multiple Assignors, choose the second bracketed language.

 

(2) For bracketed language here and elsewhere in this form relating to the Assignee(s), if the assignment is to a single Assignee, choose the first bracketed language.  If the assignment is to multiple Assignees, choose the second bracketed language.

 

(3) Select as appropriate.

 

(4) Include bracketed language if there are either multiple Assignors or multiple Assignees.

 

1



 

1.

 

Assignor[s]:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2.

 

Assignee[s]:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[for each Assignee, indicate [Affiliate][Approved Fund] of [identify Lender]

 

 

 

 

 

 

 

 

 

 

3.

 

Borrower:

 

CANO PETROLEUM, INC., a Delaware corporation

 

 

 

 

 

4.

 

Administrative Agent:

 

UNIONBANCAL EQUITIES, INC., as the administrative agent under the Credit Agreement

 

 

 

 

 

5.

 

Credit Agreement:

 

The Subordinated Credit Agreement dated as of March     , 2008 among Borrower, the Lenders party thereto from time to time, and UnionBanCal Equities, Inc. as Administrative Agent.

 

 

 

 

 

6.

 

Assigned Interest[s]:

 

 

 

Assignor[s]

 

Assignee[s]

 

Facility
Assigned

 

Aggregate Amount
of Commitment
/Advance for all
Lenders

 

Amount of
Commitment / 
Advances
Assigned(5)

 

Percentage Assigned
of Commitment /
Advances(6)

 

CUSIP
Number

 

 

 

 

 

 

 

$

 

$

 

 

%

 

 

 

 

 

 

 

 

$

 

$

 

 

%

 

 

 

 

 

 

 

 

$

 

$

 

 

%

 

 

 

7.             Trade Date:                                          (7)

 

Effective Date:                                    , 20       [TO BE INSERTED BY ADMINISTRATIVE AGENT AND WHICH SHALL BE THE EFFECTIVE DATE OF RECORDATION OF TRANSFER IN THE REGISTER THEREFOR.]

 


(5) Amount to be adjusted by the counterparties to take into account any payments or prepayments made between the Trade Date and the Effective Date.

 

(6) Set forth, to at least 9 decimals, as a percentage of the Commitment / Advances of all Lenders thereunder.

 

 

(7) To be completed if the Assignor(s) and the Assignee(s) intend that the minimum assignment amount is to be determined as of the Trade Date.

 

2



 

The terms set forth in this Assignment and Acceptance are hereby agreed to:

 

 

ASSIGNOR[S](8)

 

[NAME OF ASSIGNOR]

 

 

 

By:

 

 

Name:

 

 

Title:

 

 

 

 

 

[NAME OF ASSIGNOR]

 

 

 

 

 

By:

 

 

Name:

 

 

Title:

 

 

 

 

ASSIGNEE[S]

 

[NAME OF ASSIGNEE]

 

 

 

 

 

By:

 

 

Name:

 

 

Title:

 

 

 

 

[NAME OF ASSIGNEE]

 

 

 

 

 

By:

 

 

Name:

 

 

Title:

 

 

[Consented to and] (9) Accepted:

 

UNIONBANCAL EQUITIES, INC., as

 

    Administrative Agent

 

 

 

By:

 

 

Name:

 

 

Title:

 

 

 

 


(8) Add additional signature blocks as needed.

 

(9) To be added only if the consent of the Administrative Agent is required by the terms of the Credit Agreement.

 

3



 

[Consented to:] (10)

 

CANO PETROLEUM, INC., a Delaware corporation

 

 

 

By:

 

 

Name:

 

 

Title: