-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WeoHcim/vbMbGYxN26s5521ffdZa6yMGKk37yeHx5ExYDlurwtu7W+gAWcMVWnPn GqhJu6ro7zdWt8FvTXynmQ== 0000050104-96-000026.txt : 19960816 0000050104-96-000026.hdr.sgml : 19960816 ACCESSION NUMBER: 0000050104-96-000026 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TESORO PETROLEUM CORP /NEW/ CENTRAL INDEX KEY: 0000050104 STANDARD INDUSTRIAL CLASSIFICATION: PETROLEUM REFINING [2911] IRS NUMBER: 950862768 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03473 FILM NUMBER: 96613747 BUSINESS ADDRESS: STREET 1: 8700 TESORO DR CITY: SAN ANTONIO STATE: TX ZIP: 78217 BUSINESS PHONE: 2108288484 10-Q 1 10Q FOR QUARTER ENDED 6/30/96 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from . . . . . . . . . . . to . . . . . . . . . . . Commission File Number 1-3473 TESORO PETROLEUM CORPORATION (Exact Name of Registrant as Specified in Its Charter) Delaware 95-0862768 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 8700 Tesoro Drive, San Antonio, Texas 78217 (Address of Principal Executive Offices) (Zip Code) 210-828-8484 (Registrant's Telephone Number, Including Area Code) ============================= Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ ============================== There were 26,329,156 shares of the Registrant's Common Stock outstanding at July 31, 1996. TESORO PETROLEUM CORPORATION AND SUBSIDIARIES INDEX TO FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996 PART I. FINANCIAL INFORMATION Page Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets - June 30, 1996 and December 31, 1995 . . . . . . . . . . . . . . . . . . . . . 3 Condensed Statements of Consolidated Operations - Three Months and Six Months Ended June 30, 1996 and 1995. . . . . 4 Condensed Statements of Consolidated Cash Flows - Six Months Ended June 30, 1996 and 1995. . . . . . . . . . . . . . . . 5 Notes to Condensed Consolidated Financial Statements. . . . . 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . . 10 PART II. OTHER INFORMATION Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . 22 Item 2. Changes in Securities . . . . . . . . . . . . . . . . 23 Item 4. Submission of Matters to a Vote of Security Holders . 24 Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . 24 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 2 PART I - FINANCIAL INFORMATION
Item 1. Financial Statements TESORO PETROLEUM CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in thousands except per share amounts) June 30, December 31, 1996 1995 ---- ---- ASSETS CURRENT ASSETS: Cash and cash equivalents. . . . . . . . . . $ 5,494 13,941 Receivables, less allowance for doubtful accounts of $2,156 ($1,842 at December 31, 1995). . . . . . . . . . . . . 94,525 77,534 Receivable from Tennessee Gas Pipeline Company (Note 5). . . . . . . . . . . . . . 66,871 - Inventories: Crude oil and wholesale refined products, at LIFO. . . . . . . . . . . . . . . . . . 72,734 70,406 Merchandise and retail refined products . . 5,393 5,153 Materials and supplies. . . . . . . . . . . 4,669 4,894 Prepayments and other. . . . . . . . . . . . 9,603 10,536 ---------- ---------- Total Current Assets. . . . . . . . . . . . 259,289 182,464 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT: Refining and marketing . . . . . . . . . . . 325,707 322,023 Exploration and production: Oil and gas (full cost method of accounting) 145,484 124,954 Gas transportation. . . . . . . . . . . . . 6,703 6,703 Marine services. . . . . . . . . . . . . . . 32,024 12,757 Corporate. . . . . . . . . . . . . . . . . . 12,347 12,443 ---------- ---------- 522,265 478,880 Less accumulated depreciation, depletion and amortization . . . . . . . . . . . . . 237,396 217,191 ---------- ---------- Net Property, Plant and Equipment . . . . 284,869 261,689 ---------- ---------- RECEIVABLE FROM TENNESSEE GAS PIPELINE COMPANY (Note 5). . . . . . . . . . . . . . . . . . . - 50,680 OTHER ASSETS . . . . . . . . . . . . . . . . . 28,652 24,320 ---------- ---------- TOTAL ASSETS. . . . . . . . . . . . . . . $ 572,810 519,153 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable . . . . . . . . . . . . . . $ 60,867 61,389 Accrued liabilities. . . . . . . . . . . . . 37,101 34,073 Current portion of long-term debt and other obligations. . . . . . . . . . . . . . . . 9,681 9,473 ---------- ---------- Total Current Liabilities . . . . . . . . . 107,649 104,935 ---------- ---------- DEFERRED INCOME TAXES. . . . . . . . . . . . . 11,682 5,389 ---------- ---------- OTHER LIABILITIES. . . . . . . . . . . . . . . 38,428 37,308 ---------- ---------- LONG-TERM DEBT AND OTHER OBLIGATIONS, LESS CURRENT PORTION. . . . . . . . . . . . . . . 168,599 155,007 ---------- ---------- COMMITMENTS AND CONTINGENCIES (Note 5) STOCKHOLDERS' EQUITY: Common Stock, par value $.16-2/3; authorized 50,000,000 shares; 26,292,778 shares issued and outstanding (24,780,134 in 1995). . . . 4,382 4,130 Additional paid-in capital . . . . . . . . . 188,305 176,599 Retained earnings. . . . . . . . . . . . . . 53,765 35,785 ---------- ---------- Total Stockholders' Equity. . . . . . . . . 246,452 216,514 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 572,810 519,153 ========== ========== The accompanying notes are an integral part of these condensed consolidated financial statements. The balance sheet at December 31, 1995 has been taken from the audited consolidated financial statements at that date and condensed.
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TESORO PETROLEUM CORPORATION AND SUBSIDIARIES CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (Unaudited) (In thousands except per share amounts) Three Months Ended Six Months Ended June 30, June 30, ------------------ ---------------- 1996 1995 1996 1995 ---- ---- ---- ---- REVENUES: Refining and marketing. . . . . . . $ 172,327 207,602 360,106 392,649 Exploration and production. . . . . 29,936 35,337 57,457 67,121 Marine services . . . . . . . . . . 31,525 21,216 54,807 38,381 Other income. . . . . . . . . . . . 98 6 5,103 22 --------- --------- --------- --------- Total Revenues . . . . . . . . . . 233,886 264,161 477,473 498,173 --------- --------- --------- --------- OPERATING COSTS AND EXPENSES: Refining and marketing. . . . . . . 163,890 207,224 351,147 393,955 Exploration and production. . . . . 2,945 4,951 6,351 9,797 Marine services . . . . . . . . . . 29,399 21,632 51,880 40,031 Depreciation, depletion and amortization . . . . . . . . . . . 10,004 11,177 19,771 22,841 --------- --------- --------- --------- Total Operating Costs and Expenses 206,238 244,984 429,149 466,624 --------- --------- --------- --------- OPERATING PROFIT . . . . . . . . . . 27,648 19,177 48,324 31,549 General and Administrative . . . . . (2,933) (4,185) (5,904) (7,999) Interest Expense . . . . . . . . . . (4,055) (5,368) (8,000) (10,661) Interest Income. . . . . . . . . . . 172 188 581 424 Other Expense, Net . . . . . . . . . (2,116) (933) (7,548) (1,964) --------- --------- --------- --------- Earnings Before Income Taxes . . . . 18,716 8,879 27,453 11,349 Income Tax Provision . . . . . . . . 6,706 1,423 9,473 2,133 --------- --------- --------- --------- NET EARNINGS . . . . . . . . . . . . $ 12,010 7,456 17,980 9,216 ========= ========= ========= ========= EARNINGS PER SHARE . . . . . . . . . $ .45 .30 .69 .37 ========= ========= ========= ========= WEIGHTED AVERAGE OUTSTANDING COMMON AND COMMON EQUIVALENT SHARES. . . . 26,615 25,206 26,144 25,163 ========= ========= ========= ========= The accompanying notes are an integral part of these condensed consolidated financial statements.
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TESORO PETROLEUM CORPORATION AND SUBSIDIARIES CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (Unaudited) (In thousands) Six Months Ended June 30, ---------------- 1996 1995 ---- ---- CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES: Net earnings . . . . . . . . . . . . . . . . . $ 17,980 9,216 Adjustments to reconcile net earnings to net cash from operating activities: Depreciation, depletion and amortization. . . 20,170 23,327 Amortization of deferred charges and other. . 703 788 Changes in operating assets and liabilities: Receivable from Tennessee Gas Pipeline Company. . . . . . . . . . . . . . . . . . (16,191) (17,647) Receivables, other trade. . . . . . . . . . (9,053) 8,917 Inventories . . . . . . . . . . . . . . . . (1,098) 6,146 Other assets. . . . . . . . . . . . . . . . 613 (7,304) Accounts payable and other current liabilities. . . . . . . . . . . . . . . . (2,272) 5,855 Obligation payments to State of Alaska. . . (1,981) (1,316) Other liabilities and obligations . . . . . 7,884 1,461 ---------- ---------- Net cash from operating activities. . . . 16,755 29,443 ---------- ---------- CASH FLOWS USED IN INVESTING ACTIVITIES: Capital expenditures . . . . . . . . . . . . . (29,285) (32,758) Acquisition of Coastwide Energy Services, Inc. (7,720) - Other. . . . . . . . . . . . . . . . . . . . . (2,428) (2,157) ---------- ---------- Net cash used in investing activities . . (39,433) (34,915) ---------- ---------- CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES: Borrowings, net of repayments of $45,400 in 1996 and $159,500 in 1995, under revolving credit facilities. . . . . . . . . . . . . . 15,000 - Payments of long-term debt . . . . . . . . . . (1,914) (1,200) Other. . . . . . . . . . . . . . . . . . . . . 1,145 10 ---------- ---------- Net cash from (used in) financing activities . . . . . . . . . . . . . . . 14,231 (1,190) ---------- ---------- DECREASE IN CASH AND CASH EQUIVALENTS . . . . . (8,447) (6,662) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD. 13,941 14,018 ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . $ 5,494 7,356 ========== ========== SUPPLEMENTAL CASH FLOW DISCLOSURES: Interest paid. . . . . . . . . . . . . . . . . $ 6,311 9,013 ========== ========== Income taxes paid . . . . . . . . . . . . . . $ 2,623 2,389 ========== ========== The accompanying notes are an integral part of these condensed consolidated financial statements.
-5- TESORO PETROLEUM CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 - BASIS OF PRESENTATION The interim condensed consolidated financial statements of Tesoro Petroleum Corporation and its subsidiaries (collectively, the "Company" or "Tesoro") are unaudited but, in the opinion of management, incorporate all adjustments necessary for a fair presentation of results for such periods. Such adjustments are of a normal recurring nature. The preparation of these condensed consolidated financial statements required the use of management's best estimates and judgment that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods. Actual results could differ from those estimates. The results of operations for any interim period are not necessarily indicative of results for the full year. Certain reclassifications have been made to amounts previously reported for the interim periods of 1995 to conform to the current presentation of financial information. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1995. NOTE 2 - ACQUISITION In February 1996, the Company purchased 100% of the capital stock of Coastwide Energy Services, Inc. ("Coastwide"). The consideration for the stock of Coastwide includes approximately 1.4 million shares of Tesoro's Common Stock and $7.7 million in cash. The market price of Tesoro's Common Stock was $9.00 per share at closing of this transaction. In addition, upon closing, Tesoro repaid approximately $4.5 million of Coastwide's outstanding debt. Coastwide is primarily a provider of services and a wholesale distributor of diesel fuel and lubricants to the offshore petroleum industry in the Gulf of Mexico. The Company has combined its existing marine petroleum distribution operations with Coastwide, forming a Marine Services segment. The acquisition of Coastwide was accounted for as a purchase whereby the purchase price was allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. NOTE 3 - CREDIT FACILITY In June 1996, the Company negotiated an amended and restated corporate revolving credit agreement ("Credit Facility") which provides total commitments of $150 million from a consortium of nine banks and expires June 30, 1999. The Company, at its option, has currently activated $100 million of these commitments, which includes cash borrowing availability of $50 million at June 30, 1996. The Credit Facility, which is subject to a borrowing base, provides for the issuance of letters of credit and cash borrowings. Under the Credit Facility, cash borrowings are limited to the lesser amount of (a) 50% of the active facility amount or (b) the borrowing base attributable to domestic oil and gas reserves (which has most recently been determined to be $45 million) plus $10 million. At June 30, 1996, the Company had outstanding cash borrowings of $15 million and letters of credit of $52 million. Outstanding obligations under the Credit Facility are secured by liens on substantially all of the Company's trade accounts receivable and product inventory and by mortgages on the Company's refinery and South Texas natural gas reserves. Cash borrowings under the Credit Facility bear interest at the prime rate plus .75% per annum or the London Interbank Offered Rate ("LIBOR") plus 1.75%. Fees on outstanding letters of credit under the Credit Facility are 1.75% per annum. Under the terms of the Credit Facility, the Company is required to maintain specified levels of consolidated working capital, tangible net worth, cash flow and interest coverage. Among other matters, the Credit Facility contains covenants which restrict the incurrence of additional indebtedness and a restricted payment covenant which limits the payment of dividends. The Credit Facility contains certain provisions that are contingent upon the issuance of a mandate favorable to the Company by the Texas Supreme Court with respect to the request for rehearing by Tennessee Gas ("Mandate Event") and collection of the related bonded receivable ("Collection Event") (see Note 5). In these regards, the Credit Facility provides, among other items, for an extension of the expiration date to April 30, 2000 upon occurrence of the Mandate Event and an increase in cash borrowing availability to $100 million upon occurrence 6 of both the Mandate Event and the Collection Event. In addition, the Credit Facility provides for reductions in fees on letters of credit and lower interest rates on cash borrowings, subject to occurrence of the Mandate Event. After the Mandate Event, the Credit Facility would allow dividends up to $5 million per year, subject to the restricted payment covenant. During the six months ended June 30,1996, the Company's gross borrowings under its revolving credit line totaled $60 million which were used on a short-term basis to finance working capital requirements and capital expenditures. Repayments of these borrowings totaled $45 million for the six months ended June 30, 1996. NOTE 4 - INCENTIVE COMPENSATION STRATEGY In June 1996, the Company's Board of Directors unanimously approved an incentive compensation strategy that provides eligible employees with added incentives to achieve a significant increase in the market price of the Company's Common Stock. Under the strategy, awards would be earned only if the market price of the Company's Common Stock reaches an average price per share of $20 or higher over any 20 consecutive trading days after June 30, 1997 and before December 31, 1998 (the "Performance Target"). In connection with this strategy, non-executive employees will be able to earn cash bonuses equal to 25% of their individual payroll amounts for the previous 12 complete months and certain executives have been granted, from the Company's Executive Long-Term Incentive Plan, a total of 340,000 stock options at an exercise price of $11.375 per share and 350,000 shares of restricted Common Stock, all of which vest only upon achieving the Performance Target. NOTE 5 - COMMITMENTS AND CONTINGENCIES Gas Purchase and Sales Contract The Company is selling a portion of the gas produced from its Bob West Field to Tennessee Gas Pipeline Company ("Tennessee Gas") under a Gas Purchase and Sales Agreement ("Tennessee Gas Contract") which provides that the price of gas shall be the maximum price as calculated in accordance with Section 102(b)(2) ("Contract Price") of the Natural Gas Policy Act of 1978 ("NGPA"). In August 1990, Tennessee Gas filed suit against the Company in the District Court of Bexar County, Texas, alleging that the Tennessee Gas Contract is not applicable to the Company's properties and that the gas sales price should be the price calculated under the provisions of Section 101 of the NGPA rather than the Contract Price. During the month of June 1996, the Contract Price was $8.56 per Mcf and the average spot market price was $2.14 per Mcf. For the six months ended June 30, 1996, approximately 16% of the Company's net U.S. natural gas production was sold under the Tennessee Gas Contract. Tennessee Gas also claimed that the contract should be considered an "output contract" under Section 2.306 of the Texas Uniform Commercial Code ("UCC") and that the increases in volumes tendered under the contract exceeded those allowable for an output contract. The District Court judge returned a verdict in favor of the Company on all issues. On appeal by Tennessee Gas, the Court of Appeals for the Fourth Supreme Judicial District of Texas affirmed the validity of the Tennessee Gas Contract as to the Company's properties and held that the price payable by Tennessee Gas for the gas was the Contract Price. The Court of Appeals remanded the case to the trial court based on its determination (i) that the Tennessee Gas Contract was an output contract and (ii) that a fact issue existed as to whether the increases in the volumes of gas tendered to Tennessee Gas under the contract were made in bad faith or were unreasonably disproportionate to prior tenders. The Company sought review of the appellate court ruling on the output contract issue in the Supreme Court of Texas. Tennessee Gas also sought review of the appellate court ruling denying the remaining Tennessee Gas claims in the Supreme Court of Texas. The appellate court decision was the first decision reported in Texas holding that a take-or-pay contract was an output contract. The Supreme Court of Texas heard arguments in December 1994 regarding the output contract issue and certain of the issues raised by Tennessee Gas. On August 1, 1995, the Supreme Court of Texas, in a divided opinion, affirmed the decision of the appellate court on all issues, including that the price under the Tennessee Gas Contract is the Contract Price, and determined that the Tennessee Gas Contract was an output contract and remanded the case to the trial court for determination of whether gas volumes tendered by the Company to Tennessee Gas were tendered in good faith 7 and were not unreasonably disproportionate to any normal or otherwise comparable prior output or stated estimates in accordance with the UCC. The Company filed a motion for rehearing before the Texas Supreme Court on the issue of whether the Tennessee Gas Contract is an output contract. On April 18, 1996, the Texas Supreme Court reversed its earlier ruling on the output contract issue and held that the Tennessee Gas Contract was not an output contract and affirmed its earlier decision in favor of the Company on all other issues. On June 3, 1996, Tennessee Gas filed a motion for rehearing and on June 10, 1996, the Company filed its response to Tennessee Gas' motion for rehearing. An order from the Texas Supreme Court on Tennessee Gas' motion for rehearing is pending. The Company believes that, if this issue is tried, the gas volumes tendered to Tennessee Gas will be found to have been in good faith and otherwise in accordance with the requirements of the UCC. However, there can be no assurance as to the ultimate outcome at trial. In conjunction with the District Court judgment and on behalf of all sellers under the Tennessee Gas Contract, Tennessee Gas is presently required to post a supersedeas bond in the amount of $206 million. Under the terms of this bond, for the period September 17, 1994 through April 30, 1996, Tennessee Gas was required to take at least its entire monthly take-or-pay obligation and pay for gas taken at $3.00 per Mmbtu, which approximates $3.00 per Mcf ("Bond Price"). The $206 million bond represents an amount which together with anticipated sales of natural gas at the Bond Price will equal the anticipated value of the Tennessee Gas Contract from September 17, 1994 through April 30, 1996. Except for the period September 17, 1994 through August 13, 1995, the difference between the spot market price and the Bond Price is refundable in the event Tennessee Gas ultimately prevails in the litigation. The Company retains the right to receive the Contract Price for all gas sold to Tennessee Gas. The bond shall remain in place until the Supreme Court issues its mandate on Tennessee Gas' motion for rehearing. Tennessee Gas continues to take its minimum monthly required amount of gas and has resumed paying the Contract Price to the Company for gas taken beginning with May 1996 volumes. Through June 30, 1996, under the Tennessee Gas Contract, the Company recognized cumulative net revenues in excess of spot market prices totaling approximately $133.3 million. Of the $133.3 million incremental net revenues, the Company has received $11.1 million that is nonrefundable and $62.6 million which the Company could be required to repay in the event of an adverse ruling. The remaining $59.6 million of incremental net revenues represents the unpaid difference between the Contract Price and the Bond Price as described above and is included in the $66.9 million classified in the Company's Consolidated Balance Sheet as a current receivable at June 30, 1996. An adverse outcome of this litigation could require the Company to reverse as much as $122.2 million of the incremental revenues and could require the Company to repay as much as $62.6 million for amounts received above spot prices, plus interest if awarded by the court. Environmental The Company is subject to extensive federal, state and local environmental laws and regulations. These laws, which change frequently, regulate the discharge of materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites or install additional controls or other modifications or changes in use for certain emission sources. The Company is currently involved with a waste disposal site near Abbeville, Louisiana, at which it has been named a potentially responsible party under the Federal Superfund law. Although this law might impose joint and several liability upon each party at each site, the extent of the Company's allocated financial contributions to the cleanup of the site is expected to be limited based upon the number of companies, volumes of waste involved and an estimated total cost of approximately $500,000 among all of the parties to close the site. The Company is currently involved in settlement discussions with the Environmental Protection Agency ("EPA") and other potentially responsible parties at the Abbeville, Louisiana site. The Company expects, based on these discussions, that its liability at the site will not exceed $25,000. The Company is also involved in remedial responses and has incurred cleanup expenditures associated with environmental matters at a number of sites, including certain of its own properties. At June 30, 1996, the Company's accruals for environmental matters amounted to $10 million, which included a noncurrent liability of approximately $4 million for remediation of Kenai Pipe Line Company's ("KPL") 8 properties that has been funded by the former owners of KPL through a restricted escrow deposit. Based on currently available information, including the participation of other parties or former owners in remediation actions, the Company believes these accruals are adequate. In addition, to comply with environmental laws and regulations, the Company anticipates that it will be required to make capital improvements in 1996 of approximately $3 million, primarily for the removal and upgrading of underground storage tanks. Environmental regulations would also have required the Company to make capital improvements starting in 1996 of approximately $9.5 million for the installation of dike liners. However, on April 18, 1996 the Alaska Department of Environmental Conservation ("ADEC") issued a memorandum stating that alternative compliance schedules allowing for delayed implementation of the requirements for dike liners in secondary containment systems for existing petroleum storage tanks would be approved. The April 18, 1996 ADEC Memorandum recognizes that secondary containment options other than synthetic dike liners are appropriate, but essential ADEC guidelines addressing other options will not be available before the end of 1996. The ADEC believes it will be three to five years before all affected facilities fully implement the provisions of the regulations. The Company has applied for an alternative compliance schedule with ADEC to maintain the Company's existing storage tank facilities in compliance with the state regulations. The Company cannot presently determine when an alternative schedule will be granted. Conditions that require additional expenditures may exist for various Company sites, including, but not limited to, the Company's refinery, retail gasoline outlets (current and closed locations) and petroleum product terminals, and for compliance with the Clean Air Act. The amount of such future expenditures cannot currently be determined by the Company. NOTE 6 - SEVERANCE TAX EXEMPTION In February 1996, the Texas Railroad Commission certified substantially all of the Company's proved producing reserves in the Bob West Field as high-cost gas from a designated tight formation. As a result of the Railroad Commission's certification, the Texas Comptroller's office has issued certificates for the majority of these wells, indicating that the wells have been classified as high-cost gas wells that are exempt from state severance taxes from the date of first production through August 2001. During the first quarter of 1996, based on approved severance tax exemption certificates received to date by the Company from the Texas Comptroller's office, the Company recorded $5 million of income for retroactive refunds. These exemptions also had the effect of increasing the pretax present value of the Company's 1995 year-end U.S. proved reserves by $7.7 million to $176.4 million. Current severance taxes will not be recorded for production from exempt wells during 1996. 9 Item 2. TESORO PETROLEUM CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - THREE AND SIX MONTHS ENDED JUNE 30, 1996 COMPARED WITH THREE AND SIX MONTHS ENDED JUNE 30, 1995 Net earnings of $12.0 million, or $.45 per share, for the three months ended June 30, 1996 ("1996 quarter") compare with net earnings of $7.4 million, or $.30 per share, for the three months ended June 30, 1995 ("1995 quarter"). Net earnings of $18.0 million, or $.69 per share, for the six months ended June 30, 1996 ("1996 period") compare with net earnings of $9.2 million, or $.37 per share, for the six months ended June 30, 1995 ("1995 period"). The increases in net earnings during the 1996 quarter and period were attributable to improved operating profit levels, together with reduced general and administrative expenses and interest expense. Partly offsetting these improvements in the 1996 quarter and period were increased other expenses and a higher effective tax rate. A discussion and analysis of the factors contributing to the Company's results of operations are presented below. 10
Refining and Marketing Three Months Ended Six Months Ended June 30, June 30, ------------------ ---------------- (Dollars in millions except per unit 1996 1995 1996 1995 amounts) ---- ---- ---- ---- Gross Operating Revenues: Refined products . . . . . . . . . . . $ 149.1 169.7 295.8 323.3 Other, primarily crude oil resales and merchandise. . . . . . . . . . . . . 23.3 37.8 64.3 69.3 -------- -------- -------- -------- Gross Operating Revenues. . . . . . . $ 172.4 207.5 360.1 392.6 ======== ======== ======== ======== Operating Profit (Loss): Gross margin - refined products. . . . $ 27.9 18.9 47.6 34.0 Gross margin - other . . . . . . . . . 3.5 3.1 6.2 5.6 -------- -------- -------- -------- Gross margin. . . . . . . . . . . . . 31.4 22.0 53.8 39.6 Operating and other expenses . . . . . 23.0 21.7 44.8 40.9 Depreciation and amortization. . . . . 3.0 3.0 6.0 6.0 -------- -------- -------- -------- Operating Profit (Loss) . . . . . . . $ 5.4 (2.7) 3.0 (7.3) ======== ======== ======== ======== Capital Expenditures . . . . . . . . . . $ 2.0 3.0 3.8 5.3 ======== ======== ======== ======== Refinery Operations - Throughput (average daily barrels). . . . . . . . . . . . . 51,117 47,971 48,082 46,778 ======== ======== ======== ======== Refinery Operations - Production (average daily barrels): Gasoline . . . . . . . . . . . . . . . 13,524 13,779 13,619 13,277 Middle distillates and other . . . . . 24,723 21,395 22,780 21,554 Heavy oils and residual product. . . . 14,633 14,347 13,477 13,391 -------- -------- -------- -------- Total Refinery Production . . . . . . 52,880 49,521 49,876 48,222 ======== ======== ======== ======== Refinery Operations - Product Spread ($/barrel) : Average yield value of products manufactured. . . . . . . . . . . . . $ 25.14 20.70 23.58 20.22 Cost of raw materials. . . . . . . . . 19.35 17.87 18.68 17.33 -------- -------- -------- -------- Refinery Product Spread . . . . . . . $ 5.79 2.83 4.90 2.89 ======== ======== ======== ======== Refining and Marketing - Total Product Sales (average daily barrels): Gasoline . . . . . . . . . . . . . . . 18,167 26,996 19,094 25,172 Middle distillates . . . . . . . . . . 28,978 37,725 29,167 37,970 Heavy oils and residual product. . . . 10,184 13,552 13,635 13,684 -------- -------- -------- -------- Total Product Sales . . . . . . . . . 57,329 78,273 61,896 76,826 ======== ======== ======== ======== Refining and Marketing - Total Product Sales Prices ($/barrel): Gasoline . . . . . . . . . . . . . . . $ 35.35 28.76 31.32 27.87 Middle distillates . . . . . . . . . . $ 28.99 24.51 27.39 24.09 Heavy oils and residual product. . . . $ 15.30 12.35 16.76 12.50 Refining and Marketing - Gross Margins on Total Product Sales ($/barrel) : Average sales price. . . . . . . . . . $ 28.57 23.87 26.26 23.27 Average costs of sales . . . . . . . . 23.21 21.20 22.03 20.82 -------- -------- -------- -------- Gross margin . . . . . . . . . . . . $ 5.36 2.67 4.23 2.45 ======== ======== ======== ======== The refinery product spread presented above represents the excess of yield value of the products manufactured at the refinery over the cost of raw materials used to manufacture such products. Sources of total product sales include products manufactured at the refinery, existing inventory balances and products purchased from third parties. Margins on sales of purchased products, together with the effect of changes in inventories, are included in the gross margin on total product sales presented above. The Company's purchases of refined products for resale approximated 11,900 and 28,700 average daily barrels for the three months ended June 30, 1996 and 1995, respectively, and 11,300 and 26,900 average daily barrels for the six months ended June 30, 1996 and 1995, respectively.
11 Three Months Ended June 30, 1996 Compared With Three Months Ended June 30, 1995. The Company's Refining and Marketing segment returned to profitability during the 1996 quarter with operating profit of $5.4 million, as compared to a loss of $2.7 million in the 1995 quarter. This improvement was due primarily to higher product margins, as experienced generally by the industry and in part to initiatives by the Company to reduce costs and improve marketing of its refined products. The Company's refined product yield values increased by 21%, from $20.70 per barrel in the 1995 quarter to $25.14 per barrel in the 1996 quarter, while the Company's feedstock costs increased by only 8%, from $17.87 per barrel in the 1995 quarter to $19.35 per barrel in the 1996 quarter. In the Company's Refining and Marketing segment, revenues from sales of refined products were lower in the 1996 quarter due to a 27% decrease in sales volumes. Total refined product sales volumes averaged 57,329 barrels per day in the 1996 quarter as compared to 78,273 barrels per day in the 1995 quarter. This decrease reflected the Company's withdrawal from certain West Coast markets, which also reduced the Company's purchases from other refiners and suppliers to 11,900 barrels per day in the 1996 quarter as compared to 28,700 barrels per day in the 1995 quarter. The Company plans to sell three Company-owned facilities and is in the process of discontinuing certain operations in California. In addition, resales of crude oil in the 1996 quarter declined to $15.2 million, as compared to $29.7 million in the 1995 quarter, due primarily to increased throughput levels at the Company's refinery during the current quarter. The decrease in revenues was partially offset by a 20% increase in the Company's average sales price of refined products. Costs of sales were lower in the 1996 quarter due to the lower volumes of refined products, partially offset by higher prices for refined products and crude oil. The $1.3 million increase in operating expenses was primarily related to environmental matters. Six Months Ended June 30, 1996 Compared With Six Months Ended June 30, 1995. For the 1996 period, the Company's Refining and Marketing segment returned to profitability with operating profit of $3.0 million, as compared to a loss of $7.3 million in the 1995 period. This improvement was due primarily to higher product margins, as experienced generally by the industry and in part to initiatives by the Company to reduce costs and improve marketing of its refined products. The Company's average yield value of refined products increased by 17%, from $20.22 per barrel in the 1995 period to $23.58 per barrel in the 1996 period, while the Company's average feedstock costs increased by only 8%, from $17.33 per barrel in the 1995 period to $18.68 per barrel in the 1996 period. In the Company's Refining and Marketing segment, revenues from sales of refined products decreased in the 1996 period due primarily to a 19% decline in sales volumes. Total refined product sales averaged 61,896 barrels per day in the 1996 period as compared to 76,826 barrels per day in the 1995 period. This decline, as discussed above, reflected the Company's withdrawal from the West Coast market, which also reduced refined product purchases from other refiners and suppliers to 11,300 barrels per day in the 1996 period from 26,900 in the 1995 period. In addition, the Company resales of crude oil also decreased from $54.8 million in the 1995 period to $49.7 million in the 1996 period. These decreases in sales volumes were partially offset by a 13% increase in the Company's average sales price of refined products. Costs of sales were lower in the 1996 period due to lower volumes of refined product, partially offset by higher prices for crude oil and refined products. Operating expenses increased by $3.9 million primarily due to employee termination costs in the 1996 period together with the impact of a reduction in an environmental accrual in the 1995 period. Although the Company's results from its Refining and Marketing segment improved during the 1996 quarter and period, future profitability of this segment will continue to be dependent on market conditions, particularly as these conditions influence costs of crude oil relative to prices received for sales of refined products, and other additional factors that are beyond the control of the Company. 12
Exploration and Production Three Months Ended Six Months Ended June 30, June 30, ------------------ ---------------- (Dollars in millions except per unit amounts) 1996 1995 1996 1995 ---- ---- ---- ---- U.S. Oil and Gas: Gross operating revenues . . . . . . . . . . $ 24.6 30.5 47.7 58.6 Other income - severance tax refunds . . . . - - 5.0 - Production costs . . . . . . . . . . . . . . 1.1 3.3 2.5 6.7 Administrative support and other operating expenses. . . . . . . . . . . . . .9 .7 1.9 1.2 Depreciation, depletion and amortization . . 6.3 8.0 12.6 16.6 -------- -------- -------- -------- Operating Profit - U.S. Oil and Gas. . . . 16.3 18.5 35.7 34.1 -------- -------- -------- -------- U.S. Gas Transportation: Gross operating revenues . . . . . . . . . . 1.3 1.7 2.7 2.7 Operating expenses . . . . . . . . . . . . . - .1 .1 .1 Depreciation and amortization. . . . . . . . - .1 .1 .1 -------- -------- -------- -------- Operating Profit - U.S. Gas Transportation. 1.3 1.5 2.5 2.5 -------- -------- -------- -------- Bolivia: Gross operating revenues . . . . . . . . . . 4.0 3.2 7.1 5.8 Production costs . . . . . . . . . . . . . . .2 .1 .4 .3 Administrative support and other operating expenses. . . . . . . . . . . . . .8 .8 1.5 1.5 Depreciation, depletion and amortization . . .3 - .6 - -------- -------- -------- -------- Operating Profit - Bolivia. . . . . . . . . 2.7 2.3 4.6 4.0 -------- -------- -------- -------- Total Operating Profit - Exploration and Production. . . . . . . . . . . . . . . . . . $ 20.3 22.3 42.8 40.6 ======== ======== ======== ======== U.S.: Capital expenditures . . . . . . . . . . . . $ 5.9 13.0 15.4 27.0 ======== ======== ======== ======== Net natural gas production (average daily Mcf) - Spot market and other . . . . . . . . . . . 76,898 121,811 78,269 101,157 Tennessee Gas Contract. . . . . . . . . 14,653 20,401 14,553 22,988 -------- -------- -------- -------- Total production. . . . . . . . . . . . . 91,551 142,212 92,822 124,145 ======== ======== ======== ======== Average natural gas sales ($/Mcf) - Spot market . . . . . . . . . . . . . . $ 1.90 1.35 1.80 1.31 Tennessee Gas Contract. . . . . . . . . $ 8.45 8.36 8.31 8.30 Average . . . . . . . . . . . . . . . . . . $ 2.95 2.36 2.82 2.61 Average operating expenses ($/Mcf) - Lease operating expenses. . . . . . . . . . $ .10 .09 .12 .12 Severance taxes . . . . . . . . . . . . . . .05 .16 .03 .18 -------- -------- -------- -------- Total production costs. . . . . . . . . . .15 .25 .15 .30 Administrative support. . . . . . . . . . . .09 .05 .11 .05 -------- -------- -------- -------- Total operating expenses. . . . . . . . . $ .24 .30 .26 .35 ======== ======== ======== ======== Depletion ($/Mcf). . . . . . . . . . . . . . $ .75 .62 .74 .74 ======== ======== ======== ======== Bolivia: Capital expenditures . . . . . . . . . . . . $ 2.8 - 4.9 - Net natural gas production (average daily Mcf) 24,067 19,715 21,563 18,321 Average natural gas sales price ($/Mcf). . . $ 1.36 1.30 1.34 1.28 Net condensate production (average daily barrels) . . . . . . . . . . 679 610 614 581 Average condensate price ($/barrel). . . . . $ 16.75 15.69 16.29 15.22 Average operating expenses ($/Mcfe) - Production costs. . . . . . . . . . . . . . $ .08 .09 .09 .09 Value-added taxes . . . . . . . . . . . . . .06 .05 .07 .04 Administrative support. . . . . . . . . . . .21 .30 .24 .32 -------- -------- -------- -------- Total operating expenses. . . . . . . . . $ .35 .44 .40 .45 ======== ======== ======== ======== Depletion ($/Mcfe) . . . . . . . . . . . . . $ .13 - .13 - ======== ======== ======== ======== The Company is involved in litigation with Tennessee Gas relating to a natural gas sales contract. See "Capital Resources and Liquidity--Tennessee Gas Contract," "Legal Proceedings--Tennessee Gas Contract" and Note 5 of Notes 13 to Condensed Consolidated Financial Statements. Includes effects of the Company's natural gas price swap agreements which amounted to a loss of $.18 per Mcf and a gain of $.01 per Mcf for the three months ended June 30, 1996 and 1995, respectively, and a loss of $.12 per Mcf and a gain of $.03 per Mcf for the six months ended June 30, 1996 and 1995, respectively. Mcf is defined as one thousand cubic feet; Mcfe is defined as net equivalent one thousand cubic feet.
United States Three Months Ended June 30, 1996 Compared With Three Months Ended June 30, 1995. Operating profit of $16.3 million from the Company's U.S. oil and gas producing operations in the 1996 quarter compares to $18.5 million in the 1995 quarter. The comparability between these two quarters was impacted by several items, including amounts recorded in the 1995 quarter related to certain interests that have since been sold, while the 1996 quarter excludes current severance taxes on production from exempt wells. Operating profit from the Company's sales of natural gas in the spot market rose 19% during the 1996 quarter, as higher prices more than offset a reduction in volumes. Prices for the Company's natural gas sales in the spot market increased 41%, from $1.35 per Mcf in the 1995 quarter to $1.90 per Mcf in the 1996 quarter. The Company's weighted average sales price, including the above-market pricing of the Tennessee Gas Contract, increased 25%, from $2.36 per Mcf in the 1995 quarter to $2.95 per Mcf in the 1996 quarter. Included in the 1995 quarter were spot market natural gas production averaging 43.7 Mmcf per day, revenues of $5.6 million and operating profit of $2.5 million related to certain interests in the Bob West Field that were sold during the third quarter of 1995. Excluding amounts related to the sold interests from the 1995 quarter, operating profit from spot market sales rose 124% on essentially unchanged volumes. Volumes sold under the above-market contract with Tennessee Gas declined 28% during the 1996 quarter due to an expected decline in contract deliverability. Revenues from the Company's U.S. oil and gas operations decreased by $5.9 million during the 1996 quarter due to the lower production volumes sold into the spot market and lower volumes sold to Tennessee Gas, partially offset by the increases in the Company's sales prices. Total production costs were lower in the 1996 quarter primarily due to the lower volumes and the exclusion of severance taxes on exempt wells. On a per Mcf basis, production costs were reduced to $.15 per Mcf compared to $.25 per Mcf due to the exemption of severance taxes. Total operating expenses on a per Mcf basis decreased due to the lower production costs, partially offset by higher expenses for administrative support. Depreciation, depletion and amortization was lower in the 1996 quarter, primarily due to lower production volumes partly offset by a higher depletion rate. The Company enters into commodity price swap agreements to reduce the risk caused by fluctuations in the prices of natural gas in the spot market. During the 1996 and 1995 quarters, the Company used such arrangements to set the price of 33% and 25%, respectively, of the natural gas production that it sold in the spot market. During the 1996 and 1995 quarters, the Company realized a loss of $1.2 million (or $.18 per Mcf) and a gain of $.1 million (or $.01 per Mcf), respectively, from these price swap arrangements. Six Months Ended June 30, 1996 Compared With Six Months Ended June 30, 1995. Operating profit of $35.7 million from the Company's U.S. oil and gas operations in the 1996 period benefited from retroactive state severance tax exemptions totaling approximately $5 million from its Bob West Field production. Substantially all of the Company's proved producing reserves in the Bob West Field were certified by the Texas Railroad Commission as high-cost gas from a designated tight formation, eligible for state severance tax exemptions from the date of first production through August 2001. These exemptions also had the effect of increasing the pretax present value of the Company's 1995 year-end U.S. proved reserves by $7.7 million to $176.4 million. Current severance taxes will not be recorded for production from exempt wells during 1996. Included in the 1995 period were spot market natural gas production averaging 35.8 Mmcf per day, revenues of $8.6 million and operating profit of $2.9 million related to certain interests in the Bob West Field that were sold during the third quarter of 1995. Excluding the income related to the severance tax refund from the 1996 period and the operating profit related to sold interests from the 1995 period, operating profit from the U.S. oil and gas operations would have decreased $.5 million, relatively unchanged from the 1995 period. Prices for sales of the Company's natural gas production into the spot market increased 37%, from $1.31 per Mcf 14 in the 1995 period compared to $1.80 per Mcf in the 1996 period. The Company's weighted average sales price, including the effect of the above-market pricing of the Tennessee Gas Contract, increased from $2.61 per Mcf in the 1995 period to $2.82 per Mcf in the 1996 period. The Company's U.S. natural gas production sold into the spot market in the 1996 period was lower than the 1995 period due to the sale of certain interests in the third quarter of 1995. Excluding the impact of the sold interests, natural gas production sold into the spot market would have increased by 20%, reflecting the effects of a voluntary curtailment by the Company during the early part of the 1995 period in response to poor market conditions during that time and reflecting initiatives by the Company during the 1996 period to add production through drilling and acquisition activities. Production sold under the Tennessee Gas Contract decreased by 37%, reflecting higher takes by Tennessee Gas during the 1995 period together with a decline in contract deliverability during the 1996 period. Revenues from the Company's U.S. oil and gas operations decreased by $10.9 million due to the lower volumes, partly offset by increases in the Company's sales prices. Total production costs were lower in the 1996 period primarily due to exemptions from severance taxes discussed above and lower production volumes. On a per Mcf basis, production costs were reduced to $.15 per Mcf compared to $.30 per Mcf due to the exemption of severance taxes. Total operating expenses on a per Mcf basis declined due to the lower production costs, partially offset by increased expenses for administrative support. Depreciation, depletion and amortization was lower in the 1996 period due to lower production volumes. The Company enters into commodity price swap agreements to reduce the risk caused by fluctuations in the prices of natural gas in the spot market. During the 1996 and 1995 periods, the Company used such arrangements to set the price of 37% and 23%, respectively, of the natural gas production that it sold in the spot market. During the 1996 and 1995 periods, the Company realized a loss of $1.8 million (or $.12 per Mcf) and a gain of $.5 million (or $.03 per Mcf), respectively, from these price swap arrangements. As of June 30, 1996, the Company has remaining price swaps totaling 3.1 billion cubic feet at an average Houston Ship Channel price of $1.73 per Mcf. In the 1996 period, the Company's average spot market wellhead price per Mcf was approximately $.21 less than the average Houston Ship Channel index, the difference representing transportation and marketing costs from the wellhead in South Texas. Bolivia Three Months Ended June 30, 1996 Compared With Three Months Ended June 30, 1995. Operating profit from the Company's Bolivian operations improved by $.4 million during the 1996 quarter primarily due to a 22% increase in natural gas production, together with increases in the prices received for both natural gas and condensate. The increase in the Company's natural gas production was primarily related to increased demand from the Bolivian state-owned oil and gas company for higher quality natural gas, in order to meet contract specifications for its exports to Argentina, together with the inability of another producer to meet supply requirements. Production costs and other operating expenses remained relatively unchanged in total, but declined by 20% on a per unit basis reflecting the Company's ability to increase volumes with minimal increases in expenses. Partially offsetting these improvements was depreciation, depletion and amortization of $.3 million recorded in the 1996 quarter. Six Months Ended June 30, 1996 Compared With Six Months Ended June 30, 1995. Operating results from the Company's Bolivian operations increased by $.6 million during the 1996 period, primarily due to an 18% increase in production of natural gas together with higher prices received for both natural gas and condensate. Production costs and other operating expenses remained relatively unchanged in total but declined by 11% on a per unit basis reflecting the increase in volumes with minimal increases in expenses. Partially offsetting these improvements was depreciation, depletion and amortization of $.6 million recorded in the 1996 period. Bolivian Hydrocarbons Law. On April 30, 1996, a new Hydrocarbons Law that significantly impacts the Company's operations in Bolivia was enacted by the Bolivian government. Among other matters, the new law granted the Company the option to convert its Contracts of Operation to new Shared Risk Contracts. On July 29, 1996, the Company signed new agreements converting its Contracts of Operation to Shared Risk Contracts subject to recision at the option of the Company if the Company is not satisfied with modifications to Bolivian fiscal law 15 to be enacted not later than January 31, 1997. The Shared Risk Contracts extend the term of operation, provide more favorable acreage relinquishment terms and a revised fiscal regime of taxes and tariffs. The new contracts will extend the Company's operations on Block 18 and Block 20 to 2017 and 2029 from their current expiration dates of 2007 and 2008, respectively, except for an Exploitation Area in Block 20 which will have an expiration date of 2018. The new contract provisions will result in an immediate increase, possibly as high as 35%, of the Company's proved Bolivian reserves that have been previously limited by the contract termination dates. In connection with the conversion to Shared Risk Contracts, the Company selected certain acreage to be relinquished in Block 20, retained its producing fields and discoveries, and continues to hold approximately two-thirds of the remaining unexplored Block 20 acreage. Block 20 is subject to a seven-year exploration period, certain future acreage relinquishments and exploration drilling obligations required by government regulations.
Marine Services Three Months Ended Six Months Ended June 30, June 30, ----------------- ---------------- (Dollars in millions) 1996 1995 1996 1995 ---- ---- ---- ---- Gross Operating Revenues . . . . . . . . . $ 31.5 21.2 54.8 38.4 Costs of Sales . . . . . . . . . . . . . . 23.6 18.3 42.2 33.4 -------- -------- -------- -------- Gross Margin . . . . . . . . . . . . . . 7.9 2.9 12.6 5.0 Operating and Other Expenses . . . . . . . 5.6 3.3 9.6 6.6 Depreciation and Amortization. . . . . . . .4 .1 .5 .2 -------- -------- -------- -------- Operating Profit (Loss). . . . . . . . . $ 1.9 (.5) 2.5 (1.8) ======== ======== ======== ======== Capital Expenditures . . . . . . . . . . . $ 4.3 .1 5.0 .1 ======== ======== ======== ======== Refined Product Sales, Primarily Diesel Fuel (thousands of gallons). . . . . . . 39,147 32,176 69,547 58,373 ======== ======== ======== ========
Three Months Ended June 30, 1996 Compared With Three Months Ended June 30, 1995. On February 20, 1996, the Company acquired Coastwide Energy Services, Inc. ("Coastwide") and combined Coastwide's operations with the Company's marine petroleum products distribution business, forming a Marine Services segment. As a combined operation, the Marine Services segment is a wholesale distributor of diesel fuel and lubricants and a provider of services to the offshore petroleum industry in the Gulf of Mexico. Operating results from Coastwide have been included in the Company's Marine Services segment since the date of acquisition. The improvement in operating results of the Marine Services segment in the 1996 quarter was largely attributable to a 22% increase in volumes, mainly related to the acquisition, and improved margins, partially offset by higher operating expenses associated with the increased activity. Six Months Ended June 30, 1996 Compared with Six Months Ended June 30, 1995. As discussed above, during the 1996 period, the Company acquired Coastwide and combined Coastwide's operations with the Company's marine petroleum products distribution business. Operating results of Coastwide have been included in the Company's Marine Services segment, since acquisition, or approximately four months of the 1996 period, which contributed to a 19% increase in volumes. This increase in volumes together with improved margins were partially offset by higher operating expenses associated with the increased activity. General and Administrative Expenses General and administrative expenses decreased by $1.3 million, or 31%, during the 1996 quarter and by $2.1 million, or 26%, during the 1996 period. These decreases were primarily due to reduced professional fees and lower employee and labor costs resulting from cost reduction measures implemented by the Company in late 1995. 16 Interest Expense Interest expense decreased by $1.3 million, or 24%, during the 1996 quarter and by $2.7 million, or 25%, during the 1996 period. In December 1995, the Company redeemed $34.6 million of its 12-3/4% Subordinated Debentures which, together with lower borrowings under the Company's revolving credit facility, resulted in interest expense savings of approximately $1.4 million and $2.7 million during the 1996 quarter and period, respectively. Other Expense The increase of $1.2 million in other expense during the 1996 quarter was primarily due to environmental and other expenses related to the Company's former operations. For the 1996 period, other expense increased by $5.6 million, primarily due to costs of $2.3 million related to a shareholder consent solicitation, which was resolved in April 1996, together with employee termination costs and write-off of deferred financing costs. Income Taxes Income taxes increased by $5.3 million and $7.4 million during the 1996 quarter and period, respectively. These increases were primarily due to a higher effective tax rate for the Company during the 1996 quarter and period as earnings subject to U.S. tax exceeded available net operating loss and tax credit carryforwards. IMPACT OF CHANGING PRICES The Company's operating results and cash flows are sensitive to the volatile changes in energy prices. Major shifts in the cost of crude oil used for refinery feedstocks and the price of refined products can result in a change in gross margin from the refining and marketing operations, as prices received for refined products may or may not keep pace with changes in crude oil costs. These energy prices, together with volume levels, also determine the carrying value of crude oil and refined product inventory. Likewise, changes in natural gas prices impact revenues and the present value of estimated future net revenues and cash flows from the Company's exploration and production operations. From time to time, the Company may increase or decrease its natural gas production in response to market conditions. The carrying value of natural gas assets may also be subject to noncash write-downs based on changes in natural gas prices and other determining factors. CAPITAL RESOURCES AND LIQUIDITY The Company operates in an environment where its liquidity and capital resources are impacted by changes in the supply of and demand for crude oil, natural gas and refined petroleum products, market uncertainty and a variety of additional factors that are beyond the control of the Company. These factors include, among others, the level of consumer product demand, weather conditions, the proximity of the Company's natural gas reserves to pipelines, the capacities of such pipelines, fluctuations in seasonal demand, governmental regulations, the price and availability of alternative fuels and overall market and economic conditions. The Company's future capital expenditures, borrowings under its credit facility and other sources of capital will be affected by these conditions. During the 1996 period, the Company achieved improvement in profitability from each of its business segments as well as cost savings at the corporate level. Furthermore, the Texas Supreme Court's decision in April 1996, which is subject to a motion for rehearing, may remove a major financial uncertainty from the Company's capital structure that could improve the predictability of the Company's cash flow and provide for additional financial flexibility. See "Capital Resources and Liquidity - Tennessee Gas Contract." The Company continues to assess its existing asset base in order to maximize returns and financial flexibility through diversification, acquisitions and divestitures in all of its operating segments. This ongoing assessment includes, in the Exploration and Production segment, evaluating ways in which the Company might diversify the mix of its oil and gas assets and reduce the asset concentration associated with the Bob West Field through 17 domestic development, exploration and acquisition activity outside of this area. In the Refining and Marketing segment, the Company has been engaged in an ongoing effort to evaluate these assets and operations and has considered possible joint ventures, strategic alliances or business combinations; however, such evaluations have not resulted in any transaction. The Company continues to assess its Marine Services segment, pursuing opportunities to consolidate operations and improve efficiencies. In these regards, during the 1996 period, the Company completed its acquisition of Coastwide for approximately 1.4 million shares of Tesoro's Common Stock and $7.7 million in cash (see Note 2 of Notes to Condensed Consolidated Financial Statements). Credit Arrangements In June 1996, the Company negotiated an amended and restated corporate revolving credit agreement ("Credit Facility") which provides total commitments of $150 million from a consortium of nine banks and expires June 30, 1999. The Credit Facility, which replaced a previous higher-cost $90 million facility, provides more financial flexibility for the Company, including lower interest rates, reduced fees on letters of credit, elimination of certain restrictive financial tests, an increased borrowing base, increased cash borrowing availability, and the right to restructure non-recourse or limited financings for certain subsidiaries. The Company, at its option, has currently activated $100 million of the available commitments under the Credit Facility, which includes cash borrowing availability of $50 million at June 30, 1996. The Credit Facility, which is subject to a borrowing base, provides for the issuance of letters of credit and cash borrowings. Under the Credit Facility, cash borrowings are limited to the lesser amount of (a) 50% of the active facility amount or (b) the borrowing base attributable to domestic oil and gas reserves (which has most recently been determined to be $45 million) plus $10 million. At June 30, 1996, the Company had outstanding cash borrowings of $15 million and letters of credit of $52 million. Outstanding obligations under the Credit Facility are secured by liens on substantially all of the Company's trade accounts receivable and product inventory and by mortgages on the Company's refinery and South Texas natural gas reserves. Under the terms of the Credit Facility, the Company is required to maintain specified levels of consolidated working capital, tangible net worth, cash flow and interest coverage. Among other matters, the Credit Facility contains covenants which restrict the incurrence of additional indebtedness and a restricted payment covenant which limits the payment of dividends. The Credit Facility contains certain provisions that are contingent upon the issuance of a mandate favorable to the Company by the Texas Supreme Court with respect to the request for rehearing by Tennessee Gas and collection of the related bonded receivable. In these regards, the Credit Facility provides, among other items, for an extension of the expiration date to April 30, 2000, an increase in cash borrowing availability to $100 million, reductions in fees on letters of credit, lower interest rates on cash borrowings and favorable changes in certain restrictions and limitations. For further information regarding the Tennessee Gas litigation and the Credit Facility, see Notes 3 and 5 of Notes to Condensed Consolidated Financial Statements. Debt and Other Obligations The Company's funded debt obligations at June 30, 1996 include $30 million principal amount of 12-3/4% Subordinated Debentures ("Subordinated Debentures"), which is due March 15, 2001 and bears interest at 12-3/4% per annum, and $44.1 million principal amount of 13% Exchange Notes ("Exchange Notes"), which bear interest at 13% per annum and become due December 1, 2000. The Subordinated Debentures and Exchange Notes are redeemable at the option of the Company at 100% of principal amount, plus accrued interest. The Company continuously reviews financing alternatives with respect to its Subordinated Debentures and Exchange Notes and currently intends, upon a final resolution of the Tennessee Gas litigation, to redeem the Subordinated Debentures and Exchange Notes. However, there can be no assurance whether or when the Company would propose other refinancings or would be able to retire such indebtedness. The indenture governing the Subordinated Debentures contains certain covenants, including a restriction that prevents the current payment of cash dividends on Common Stock and currently limits the Company's ability to purchase or redeem any shares of its capital stock. The limitation of dividend payments included in the indenture governing the Exchange Notes is less restrictive than the limitation imposed by the Subordinated Debentures. 18 Capital Expenditures For the year 1996, the Company's total capital budget is approximately $84 million (excluding amounts related to the purchase of Coastwide), based upon an outlook which includes a favorable resolution of the Tennessee Gas litigation. The exploration and production segment accounts for $64 million of the budgeted expenditures with $56 million planned for U.S. activities and $8 million for Bolivia. The planned U.S. expenditures include $39 million for exploration, development and acquisition outside of the Bob West Field and $17 million for development drilling and facilities in the Bob West Field. In Bolivia, the drilling program includes two exploratory wells and workovers of current producing wells to increase deliverability. Capital spending for the refining and marketing segment is projected to be $13 million, which includes amounts for installation of facilities to allow the Company to produce and market asphalt in Alaska, improvements and upgrades at the Company's refinery and convenience store operations, and environmental projects. Capital spending for 1996 is expected to be financed through a combination of cash flows from operations and borrowings under the Credit Facility. During the six months ended June 30, 1996, total capital expenditures of $29 million (excluding amounts related to Coastwide) were funded primarily by cash flows from operations, available cash reserves and borrowings under the Credit Facility. Capital expenditures for U.S. oil and gas activities totaled $15 million for the 1996 period, principally for participation in the drilling of eight development wells, seven of which were completed, and four exploratory wells, all of which were in progress at quarter-end, and the acquisition of other working interests. In Bolivia, the Company's capital expenditures of $5 million during the 1996 period, related primarily to one exploratory well which was completed and resulted in a discovery of oil and gas reserves, and another exploratory well currently being completed. Capital expenditures for the Company's refining and marketing segment totaled $4 million for the 1996 period, primarily for installation of facilities to produce and market asphalt and for expansion of its retail marketing facilities. The Marine Services segment's capital spending totaled $5 million for the 1996 period primarily reflecting efforts to improve operating efficiencies. Cash Flows From Operating, Investing and Financing At June 30, 1996, the Company's working capital totaled $151.6 million, which included a receivable from Tennessee Gas of $66.9 million and cash of $5.5 million. For information on litigation related to a natural gas sales contract and the related impact on the Company's cash flows from operations, see "Tennessee Gas Contract" below and Note 5 of Notes to Condensed Consolidated Financial Statements. Components of the Company's cash flows are set forth below (in millions): Six Months Ended June 30, ---------------- 1996 1995 ---- ---- Cash Flows From (Used In): Operating Activities . . . . . . . . . . . . . . $ 16.7 29.4 Investing Activities . . . . . . . . . . . . . . (39.4) (34.9) Financing Activities . . . . . . . . . . . . . . 14.2 (1.2) ------- ------- Decrease in Cash and Cash Equivalents. . . . . . . $ (8.5) (6.7) ======= ======= Net cash from operating activities of $17 million during the 1996 period, which compares to $29 million for the 1995 period, included higher net earnings partially offset by increased working capital balances. Net cash used in investing activities during the 1996 period of $39 million included capital expenditures of $29 million and cash consideration of $7.7 million for the acquisition of Coastwide. Capital expenditures for the 1996 period included $20 million for the Company's exploration and production activities in South Texas and Bolivia. Net cash from financing activities of $14 million during the 1996 period was primarily related to an outstanding borrowing of $15 million under the Company's Credit Facility, partially offset by payments of other long-term debt. During the 1996 period, the Company's gross borrowings under its revolving credit line amounted to $60 million, with repayments of $45 million. 19 Tennessee Gas Contract The Company is selling a portion of the gas produced from its Bob West Field to Tennessee Gas Pipeline Company ("Tennessee Gas") under a Gas Purchase and Sales Agreement ("Tennessee Gas Contract") which provides that the price of gas shall be the maximum price as calculated in accordance with Section 102(b)(2) ("Contract Price") of the Natural Gas Policy Act of 1978 ("NGPA"). In August 1990, Tennessee Gas filed suit against the Company in the District Court of Bexar County, Texas, alleging that the Tennessee Gas Contract is not applicable to the Company's properties and that the gas sales price should be the price calculated under the provisions of Section 101 of the NGPA rather than the Contract Price. During the month of June 1996, the Contract Price was $8.56 per Mcf and the average spot market price was $2.14 per Mcf. For the six months ended June 30, 1996, approximately 16% of the Company's net U.S. natural gas production was sold under the Tennessee Gas Contract. Tennessee Gas also claimed that the contract should be considered an "output contract" under Section 2.306 of the Texas Uniform Commercial Code ("UCC") and that the increases in volumes tendered under the contract exceeded those allowable for an output contract. The District Court judge returned a verdict in favor of the Company on all issues. On appeal by Tennessee Gas, the Court of Appeals for the Fourth Supreme Judicial District of Texas affirmed the validity of the Tennessee Gas Contract as to the Company's properties and held that the price payable by Tennessee Gas for the gas was the Contract Price. The Court of Appeals remanded the case to the trial court based on its determination (i) that the Tennessee Gas Contract was an output contract and (ii) that a fact issue existed as to whether the increases in the volumes of gas tendered to Tennessee Gas under the contract were made in bad faith or were unreasonably disproportionate to prior tenders. The Company sought review of the appellate court ruling on the output contract issue in the Supreme Court of Texas. Tennessee Gas also sought review of the appellate court ruling denying the remaining Tennessee Gas claims in the Supreme Court of Texas. The appellate court decision was the first decision reported in Texas holding that a take-or-pay contract was an output contract. The Supreme Court of Texas heard arguments in December 1994 regarding the output contract issue and certain of the issues raised by Tennessee Gas. On August 1, 1995, the Supreme Court of Texas, in a divided opinion, affirmed the decision of the appellate court on all issues, including that the price under the Tennessee Gas Contract is the Contract Price, and determined that the Tennessee Gas Contract was an output contract and remanded the case to the trial court for determination of whether gas volumes tendered by the Company to Tennessee Gas were tendered in good faith and were not unreasonably disproportionate to any normal or otherwise comparable prior output or stated estimates in accordance with the UCC. The Company filed a motion for rehearing before the Texas Supreme Court on the issue of whether the Tennessee Gas Contract is an output contract. On April 18, 1996, the Texas Supreme Court reversed its earlier ruling on the output contract issue and held that the Tennessee Gas Contract was not an output contract and affirmed its earlier decision in favor of the Company on all other issues. On June 3, 1996, Tennessee Gas filed a motion for rehearing and on June 10, 1996, the Company filed its response to Tennessee Gas' motion for rehearing. An order from the Texas Supreme Court on Tennessee Gas' motion for rehearing is pending. The Company believes that, if this issue is tried, the gas volumes tendered to Tennessee Gas will be found to have been in good faith and otherwise in accordance with the requirements of the UCC. However, there can be no assurance as to the ultimate outcome at trial. In conjunction with the District Court judgment and on behalf of all sellers under the Tennessee Gas Contract, Tennessee Gas is presently required to post a supersedeas bond in the amount of $206 million. Under the terms of this bond, for the period September 17, 1994 through April 30, 1996, Tennessee Gas was required to take at least its entire monthly take-or-pay obligation and pay for gas taken at $3.00 per Mmbtu, which approximates $3.00 per Mcf ("Bond Price"). The $206 million bond represents an amount which together with anticipated sales of natural gas at the Bond Price will equal the anticipated value of the Tennessee Gas Contract from September 17, 1994 through April 30, 1996. Except for the period September 17, 1994 through August 13, 1995, the difference between the spot market price and the Bond Price is refundable in the event Tennessee Gas ultimately prevails in the litigation. The Company retains the right to receive the Contract Price for all gas sold to Tennessee Gas. The bond shall remain in place until the Supreme Court issues its mandate on Tennessee Gas' motion for rehearing. Tennessee Gas continues to take its minimum monthly required amount of gas and has resumed paying the Contract Price to the Company for gas taken beginning with May 1996 volumes. 20 Through June 30, 1996, under the Tennessee Gas Contract, the Company recognized cumulative net revenues in excess of spot market prices totaling approximately $133.3 million. Of the $133.3 million incremental net revenues, the Company has received $11.1 million that is nonrefundable and $62.6 million which the Company could be required to repay in the event of an adverse ruling. The remaining $59.6 million of incremental net revenues represents the unpaid difference between the Contract Price and the Bond Price as described above and is included in the $66.9 million classified in the Company's Consolidated Balance Sheet as a current receivable at June 30, 1996. An adverse outcome of this litigation could require the Company to reverse as much as $122.2 million of the incremental revenues and could require the Company to repay as much as $62.6 million for amounts received above spot prices, plus interest if awarded by the court. Environmental and Other Matters The Company is subject to extensive federal, state and local environmental laws and regulations. These laws, which change frequently, regulate the discharge of materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites or install additional controls or other modifications or changes in use for certain emission sources. The Company is currently involved in remedial responses and has incurred cleanup expenditures associated with environmental matters at a number of sites, including certain of its own properties. At June 30, 1996, the Company's accruals for environmental matters amounted to $10 million, which included a noncurrent liability of approximately $4 million for remediation of Kenai Pipe Line Company's ("KPL") properties that has been funded by the former owners of KPL through a restricted escrow deposit. Based on currently available information, including the participation of other parties or former owners in remediation actions, the Company believes these accruals are adequate. In addition, to comply with environmental laws and regulations, the Company anticipates that it will be required to make capital improvements in 1996 of approximately $3 million, primarily for the removal and upgrading of underground storage tanks. Environmental regulations would also have required the Company to make capital improvements starting in 1996 of approximately $9.5 million for the installation of dike liners. However, on April 18, 1996, the Alaska Department of Environmental Conservation ("ADEC") issued a memorandum stating that alternative compliance schedules allowing for delayed implementation of the requirements for dike liners in secondary containment systems for existing petroleum storage tanks would be approved. The April 18, 1996 ADEC Memorandum recognizes that secondary containment options other than synthetic dike liners are appropriate, but essential ADEC guidelines addressing other options will not be available before the end of 1996. The ADEC believes it will be three to five years before all affected facilities fully implement the provisions of the regulations. The Company has applied for an alternative compliance schedule with ADEC to maintain the Company's existing storage tank facilities in compliance with the state regulations. The Company cannot presently determine when an alternative schedule will be granted. Conditions that require additional expenditures may exist for various Company sites, including, but not limited to, the Company's refinery, retail gasoline outlets (current and closed locations) and petroleum product terminals, and for compliance with the Clean Air Act. The amount of such future expenditures cannot currently be determined by the Company. For further information on environmental contingencies, see Note 5 of Notes to Condensed Consolidated Financial Statements. 21 PART II - OTHER INFORMATION Item 1. Legal Proceedings Tennessee Gas Contract. The Company is selling a portion of the gas produced from its Bob West Field to Tennessee Gas Pipeline Company ("Tennessee Gas") under a Gas Purchase and Sales Agreement ("Tennessee Gas Contract") which provides that the price of gas shall be the maximum price as calculated in accordance with Section 102(b)(2) ("Contract Price") of the Natural Gas Policy Act of 1978 ("NGPA"). In August 1990, Tennessee Gas filed suit against the Company in the District Court of Bexar County, Texas, alleging that the Tennessee Gas Contract is not applicable to the Company's properties and that the gas sales price should be the price calculated under the provisions of Section 101 of the NGPA rather than the Contract Price. During the month of June 1996, the Contract Price was $8.56 per Mcf and the average spot market price was $2.14 per Mcf. For the six months ended June 30, 1996, approximately 16% of the Company's net U.S. natural gas production was sold under the Tennessee Gas Contract. Tennessee Gas also claimed that the contract should be considered an "output contract" under Section 2.306 of the Texas Uniform Commercial Code ("UCC") and that the increases in volumes tendered under the contract exceeded those allowable for an output contract. The District Court judge returned a verdict in favor of the Company on all issues. On appeal by Tennessee Gas, the Court of Appeals for the Fourth Supreme Judicial District of Texas affirmed the validity of the Tennessee Gas Contract as to the Company's properties and held that the price payable by Tennessee Gas for the gas was the Contract Price. The Court of Appeals remanded the case to the trial court based on its determination (i) that the Tennessee Gas Contract was an output contract and (ii) that a fact issue existed as to whether the increases in the volumes of gas tendered to Tennessee Gas under the contract were made in bad faith or were unreasonably disproportionate to prior tenders. The Company sought review of the appellate court ruling on the output contract issue in the Supreme Court of Texas. Tennessee Gas also sought review of the appellate court ruling denying the remaining Tennessee Gas claims in the Supreme Court of Texas. The appellate court decision was the first decision reported in Texas holding that a take-or-pay contract was an output contract. The Supreme Court of Texas heard arguments in December 1994 regarding the output contract issue and certain of the issues raised by Tennessee Gas. On August 1, 1995, the Supreme Court of Texas, in a divided opinion, affirmed the decision of the appellate court on all issues, including that the price under the Tennessee Gas Contract is the Contract Price, and determined that the Tennessee Gas Contract was an output contract and remanded the case to the trial court for determination of whether gas volumes tendered by the Company to Tennessee Gas were tendered in good faith and were not unreasonably disproportionate to any normal or otherwise comparable prior output or stated estimates in accordance with the UCC. The Company filed a motion for rehearing before the Texas Supreme Court on the issue of whether the Tennessee Gas Contract is an output contract. On April 18, 1996, the Texas Supreme Court reversed its earlier ruling on the output contract issue and held that the Tennessee Gas Contract was not an output contract and affirmed its earlier decision in favor of the Company on all other issues. On June 3, 1996, Tennessee Gas filed a motion for rehearing and on June 10, 1996, the Company filed its response to Tennessee Gas' motion for rehearing. An order from the Texas Supreme Court on Tennessee Gas' motion for rehearing is pending. The Company believes that, if this issue is tried, the gas volumes tendered to Tennessee Gas will be found to have been in good faith and otherwise in accordance with the requirements of the UCC. However, there can be no assurance as to the ultimate outcome at trial. In conjunction with the District Court judgment and on behalf of all sellers under the Tennessee Gas Contract, Tennessee Gas is presently required to post a supersedeas bond in the amount of $206 million. Under the terms of this bond, for the period September 17, 1994 through April 30, 1996, Tennessee Gas was required to take at least its entire monthly take-or-pay obligation and pay for gas taken at $3.00 per Mmbtu, which approximates $3.00 per Mcf ("Bond Price"). The $206 million bond represents an amount which together with anticipated sales of natural gas at the Bond Price will equal the anticipated value of the Tennessee Gas Contract from September 17, 1994 through April 30, 1996. Except for the period September 17, 1994 through August 13, 1995, the difference between the spot market price and the Bond Price is refundable in the event Tennessee Gas ultimately prevails in the litigation. The Company retains the right to receive the Contract Price for all gas sold to Tennessee Gas. The bond shall remain in place until the Supreme Court issues its mandate on Tennessee Gas' motion for rehearing. Tennessee Gas continues to take its minimum monthly required amount of gas and has resumed paying the Contract Price to the Company for gas taken beginning with May 1996 volumes. Through June 30, 1996, under the Tennessee Gas Contract, the Company recognized cumulative net revenues in excess of spot market prices totaling approximately $133.3 million. Of the $133.3 million incremental net revenues, the Company has received $11.1 million that is nonrefundable and $62.6 million which the Company 22 could be required to repay in the event of an adverse ruling. The remaining $59.6 million of incremental net revenues represents the unpaid difference between the Contract Price and the Bond Price as described above and is included in the $66.9 million classified in the Company's Consolidated Balance Sheet as a current receivable at June 30, 1996. An adverse outcome of this litigation could require the Company to reverse as much as $122.2 million of the incremental revenues and could require the Company to repay as much as $62.6 million for amounts received above spot prices, plus interest if awarded by the court. Environmental Matters. As previously reported, in March 1992, the Company received a Compliance Order and Notice of Violation from the Environmental Protection Agency ("EPA") alleging violations by the Company of the New Source Performance Standards under the Clean Air Act at its Alaska refinery. The allegations included failure to install, maintain and operate monitoring equipment over a period of approximately six years, failure to perform accuracy testing on monitoring equipment, and failure to install certain pollution control equipment. The Company denied these allegations. From March 1992 to July 1993, the EPA and the Company exchanged information relevant to these allegations. In addition, the EPA conducted an environmental audit of the Company's refinery in May 1992. As a result of this audit, the EPA alleged violation of certain regulations related to asbestos materials. In October 1993, the EPA referred these matters to the Department of Justice ("DOJ"). On June 4, 1996, the U.S. District Court of Alaska approved a consent decree between the Company and the DOJ. The decree included a penalty assessment of $1.3 million, which was paid on July 3, 1996, and the agreement by the Company to incur $200,000 in costs to complete a supplemental environmental project. As previously reported, the Company, along with numerous other parties, has been identified by the EPA as a potentially responsible party ("PRP") pursuant to the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") for the Mud Superfund site in Abbeville, Louisiana (the "Site"). The Company arranged for the disposal of a minimal amount of materials at the Site, but CERCLA might impose joint and several liability on each PRP at the Site. The EPA is seeking reimbursement for its response costs incurred to date at the Site, as well as a commitment from the PRPs either to conduct future remedial activities or to finance such activities. The extent of the Company's allocated financial contributions to the cleanup of the Site is expected to be limited based upon the number of companies, volumes of waste involved and an estimated total cost of approximately $500,000 among all of the parties to close the Site. The Company is currently involved in settlement discussions with the EPA and other PRPs involved at the Site. The Company expects, based on these discussions, that its liability at the Site will not exceed $25,000. Refund Claim. As previously reported, in July 1994, a former customer of the Company ("Customer") filed suit against the Company in the United States District Court for the District of New Mexico for a refund in the amount of approximately $1.2 million, plus interest of approximately $4.4 million and attorney's fees, related to a gasoline purchase from the Company in 1979. The Customer also alleges entitlement to treble damages and punitive damages in the aggregate amount of $16.8 million. The refund claim is based on allegations that the Company renegotiated the acquisition price of gasoline sold to the Customer and failed to pass on the benefit of the renegotiated price to the Customer in violation of Department of Energy price and allocation controls then in effect. In May 1995, the court issued an order granting the Company's motion for summary judgment and dismissed with prejudice all the claims in the Customer's complaint. In June 1995, the Customer filed a notice of appeal with the U.S. Court of Appeals for the Federal Circuit. On June 13, 1996, the U.S. Court of Appeals for the Federal Circuit issued its decision affirming the lower court's ruling in favor of the Company. Item 2. Changes in Securities In June 1996, the Company entered into an Amended and Restated Credit Agreement ("Credit Facility") under which the Company is required to maintain specified levels of consolidated working capital, tangible net worth, cash flow and interest coverage. The Credit Facility has certain restrictions with respect to dividends on its capital stock. For further information on the Credit Facility, see Note 3 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1. 23 Item 4. Submission of Matters to a Vote of Security Holders (a) The 1996 annual meeting of stockholders of the Company was held on June 6, 1996. (b) The names of the directors elected at the meeting and a tabulation of the number of votes cast for or withheld with respect to each such director are set forth below: Votes Votes Name For Withheld ---- ------------ ------------- Robert J. Caverly 22,748,535 679,648 Steven H. Grapstein 22,793,629 634,554 Alan J. Kaufman 22,769,092 659,091 Raymond K. Mason, Sr. 22,748,925 679,258 Sanford B. Prater 22,771,425 656,758 Bruce A. Smith 22,691,524 736,659 Patrick J. Ward 22,800,367 627,816 Murray L. Weidenbaum 22,751,313 676,870 Effective June 6, 1996, the Company's Board of Directors elected Mr. William J. Johnson as a director. (c) A brief description of each matter, other than the election of directors, voted upon at the meeting and the number of votes cast for, against or withheld, as well as the number of abstentions and broker non-votes as to each matter, is set forth below: With respect to a proposal to increase the number of shares which can be granted under the Executive Long-Term Incentive Plan and limit the awards of restricted stock under such plan, there were 11,207,150 votes for; 6,174,725 votes against; 5,805,905 broker non-votes; and 240,403 abstentions. With respect to the ratification of the appointment of Deloitte & Touche LLP as independent auditors for the Company for fiscal year 1996, there were 23,252,961 votes for; 128,568 votes against; and 46,654 abstentions. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits See the Exhibit Index immediately preceding the exhibits filed herewith. (b) Reports on Form 8-K No reports on Form 8-K have been filed during the quarter for which this report is filed. 24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TESORO PETROLEUM CORPORATION Registrant Date: August 14, 1996 /s/ BRUCE A. SMITH Bruce A. Smith Chairman of the Board of Directors, President and Chief Executive Officer Date: August 14, 1996 /s/ WILLIAM T. VAN KLEEF William T. Van Kleef Senior Vice President and Chief Financial Officer 25 EXHIBIT INDEX Exhibit Number 4.1 Amended and Restated Credit Agreement ("Credit Facility") dated as of June 7, 1996 among the Company and Banque Paribas, individually, as an Issuing Bank and as Administrative Agent, and The Bank of Nova Scotia, individually and as Documentation Agent, and certain other financial institutions named therein. 4.2 Amended and Restated Guaranty Agreement dated as of June 7, 1996 among various subsidiaries of the Company and Banque Paribas, individually, as Administrative Agent and as an Issuing Bank, and certain other financial institutions named therein, entered into in connection with the Credit Facility. 4.3 Amended and Restated Security Agreement (Accounts and Inventory) dated as of June 7, 1996 between the Company and Banque Paribas, entered into in connection with the Credit Facility. 4.4 Amended and Restated Security Agreement (Accounts and Inventory) dated as of June 7, 1996 between Tesoro Alaska Petroleum Company and Banque Paribas, entered into in connection with the Credit Facility. 4.5 Amended and Restated Security Agreement (Accounts and Inventory) dated as of June 7, 1996 between Tesoro Refining, Marketing & Supply Company and Banque Paribas, entered into in connection with the Credit Facility. 4.6 Security Agreement (Accounts and Inventory) dated as of June 7, 1996 between Kenai Pipe Line Company and Banque Paribas, entered into in connection with the Credit Facility. 4.7 Security Agreement (Accounts and Inventory) dated as of June 7, 1996 between Tesoro Coastwide Services Company and Banque Paribas, entered into in connection with the Credit Facility. 4.8 Security Agreement (Accounts and Inventory) dated as of June 7, 1996 between Coastwide Marine Services, Inc. and Banque Paribas, entered into in connection with the Credit Facility. 4.9 Security Agreement (Accounts) dated as of June 7, 1996 between Tesoro Vostok Company and Banque Paribas, entered into in connection with the Credit Facility. 4.10 Amended and Restated Security Agreement (Pledge) dated as of June 7, 1996 by the Company in favor of Banque Paribas, entered into in connection with the Credit Facility. 4.11 First Amendment to Deed of Trust, Security Agreement and Financing Statement dated as of June 7, 1996 among Tesoro Alaska Petroleum Company, TransAlaska Title Insurance Agency, Inc., as Trustee, and Banque Paribas, as Administrative Agent, entered into in connection with the Credit Facility. 4.12 First Amendment to Mortgage, Deed of Trust, Assignment of Production, Security Agreement and Financing Statement dated as of June 7, 1996 from Tesoro E&P Company, L.P., entered into in connection with the Credit Facility. 4.13 Mortgage, Deed of Trust, Assignment of Production, Security Agreement and Financing Statement dated as of June 7, 1996 from Tesoro E&P Company, L.P., entered into in connection with the Credit Facility. 27 Financial Data Schedule. 26 EX-4.1 2 AMENDED AND RESTATED CREDIT AGREEMENT AMENDED AND RESTATED CREDIT AGREEMENT Among TESORO PETROLEUM CORPORATION as the Company and BANQUE PARIBAS Individually, as an Issuing Bank and as Administrative Agent, THE BANK OF NOVA SCOTIA Individually and as Documentation Agent and FINANCIAL INSTITUTIONS NOW OR HEREAFTER PARTIES HERETO $150,000,000 Revolving Credit Facility June 7, 1996 TABLE OF CONTENTS ARTICLE I DEFINITIONS Section 1.01 Definitions . . . . . . . . . . . . . . . . .1 Section 1.02 Accounting Terms and Determinations . . . . 21 Section 1.03 Other Definitional Terms. . . . . . . . . . 21 ARTICLE II AMOUNT AND TERMS OF LOANS Section 2.01 Commitments . . . . . . . . . . . . . . . . 21 Section 2.02 Borrowing Requests. . . . . . . . . . . . . 22 Section 2.03 Letters of Credit . . . . . . . . . . . . . 23 Section 2.04 Disbursement of Funds . . . . . . . . . . . 27 Section 2.05 Notes.. . . . . . . . . . . . . . . . . . . 27 Section 2.06 Interest. . . . . . . . . . . . . . . . . . 28 Section 2.07 Interest Periods. . . . . . . . . . . . . . 29 Section 2.08 Repayment of Loans. . . . . . . . . . . . . 29 Section 2.09 Termination or Reduction of Revolving Credit Commitments . . . . . . . . . . . 30 Section 2.10 Prepayments . . . . . . . . . . . . . . . . 30 Section 2.11 Continuation and Conversion Options . . . . 31 Section 2.12 Fees. . . . . . . . . . . . . . . . . . . . 32 Section 2.13 Payments, etc . . . . . . . . . . . . . . . 33 Section 2.14 Interest Rate Not Ascertainable, etc. . . . 33 Section 2.15 Illegality. . . . . . . . . . . . . . . . . 34 Section 2.16 Increased Costs . . . . . . . . . . . . . . 34 Section 2.17 Change of Lending Office. . . . . . . . . . 36 Section 2.18 Funding Losses. . . . . . . . . . . . . . . 36 Section 2.19 Sharing of Payments, etc. . . . . . . . . . 36 Section 2.20 E&P Borrowing Base. . . . . . . . . . . . . 37 Section 2.21 Taxes . . . . . . . . . . . . . . . . . . . 38 Section 2.22 Pro Rata Treatment. . . . . . . . . . . . . 40 Section 2.23 Disposition of Proceeds . . . . . . . . . . 41 Section 2.24 Senior Debt . . . . . . . . . . . . . . . . 41 ARTICLE III CONDITIONS TO BORROWINGS AND TOPURCHASE, RENEWAL AND RE Section 3.01 Closing . . . . . . . . . . . . . . . . . . 41 -i- Section 3.02 Conditions Precedent to Initial Loan. . . . 41 Section 3.03 Conditions Precedent to Each Loan . . . . . 44 Section 3.04 Recordings. . . . . . . . . . . . . . . . . 44 ARTICLE IV REPRESENTATIONS AND WARRANTIES Section 4.01 Corporate Existence . . . . . . . . . . . . 45 Section 4.02 Corporate Power and Authorization . . . . . 45 Section 4.03 Binding Obligations . . . . . . . . . . . . 45 Section 4.04 No Legal Bar or Resultant Lien. . . . . . . 45 Section 4.05 No Consent. . . . . . . . . . . . . . . . . 45 Section 4.06 Financial Information . . . . . . . . . . . 45 Section 4.07 Investments and Guaranties. . . . . . . . . 46 Section 4.08 Litigation. . . . . . . . . . . . . . . . . 46 Section 4.09 Use of Proceeds . . . . . . . . . . . . . . 46 Section 4.10 Compliance with ERISA . . . . . . . . . . . 46 Section 4.11 Taxes; Governmental Charges . . . . . . . . 46 Section 4.12 Titles, etc . . . . . . . . . . . . . . . . 47 Section 4.13 Defaults. . . . . . . . . . . . . . . . . . 47 Section 4.14 Casualties; Taking of Properties. . . . . . 47 Section 4.15 Compliance with the Law . . . . . . . . . . 47 Section 4.16 No Material Misstatements . . . . . . . . . 47 Section 4.17 Investment Company Act. . . . . . . . . . . 48 Section 4.18 Public Utility Holding Company Act. . . . . 48 Section 4.19 Subsidiaries. . . . . . . . . . . . . . . . 48 Section 4.20 Insurance . . . . . . . . . . . . . . . . . 48 Section 4.21 Mortgaged Property. . . . . . . . . . . . . 48 Section 4.22 Gas Imbalances. . . . . . . . . . . . . . . 48 Section 4.23 Environmental Matters . . . . . . . . . . . 48 ARTICLE V AFFIRMATIVE COVENANTS Section 5.01 Maintenance and Compliance, etc.. . . . . . 50 Section 5.02 Payment of Taxes and Claims, etc. . . . . . 50 Section 5.03 Further Assurances. . . . . . . . . . . . . 50 Section 5.04 Performance of Obligations. . . . . . . . . 51 Section 5.05 Insurance.. . . . . . . . . . . . . . . . . 51 Section 5.06 Accounts and Records. . . . . . . . . . . . 51 Section 5.07 Right of Inspection.. . . . . . . . . . . . 51 Section 5.08 Operation and Maintenance of Mortgaged Property and Compliance with Leases. . . 52 -ii- Section 5.09 Stock of Subsidiaries.. . . . . . . . . . . 52 Section 5.10 Certain Additional Assurances Regarding Maintenance and Operation of Properties. 52 Section 5.11 Designation of Subsidiaries as Additional Guarantors . . . . . . . . . . . . . . . 52 Section 5.12 Minimum Capital Expenditures. . . . . . . . 52 Section 5.13 Payment of Charters and Tariffs.. . . . . . 52 Section 5.14 Title Opinions. . . . . . . . . . . . . . . 52 Section 5.15 Reporting Covenants . . . . . . . . . . . . 52 ARTICLE V INEGATIVE COVENANTS Section 6.01 Consolidated Tangible Net Worth.. . . . . . 56 Section 6.02 Consolidated Current Ratio. . . . . . . . . 56 Section 6.03 Consolidated Cash Flow Coverage Ratio.. . . 56 Section 6.04 Consolidated Interest Coverage Ratio. . . . 57 Section 6.05 Indebtedness. . . . . . . . . . . . . . . . 57 Section 6.06 Liens.. . . . . . . . . . . . . . . . . . . 59 Section 6.07 Mergers, Sales, etc.. . . . . . . . . . . . 61 Section 6.08 Restricted Payments.. . . . . . . . . . . . 61 Section 6.09 Investments, Loans, etc.. . . . . . . . . . 62 Section 6.10 Lease Payments. . . . . . . . . . . . . . . 64 Section 6.11 Sales and Leasebacks. . . . . . . . . . . . 64 Section 6.12 Nature of Business. . . . . . . . . . . . . 64 Section 6.13 ERISA Compliance. . . . . . . . . . . . . . 64 Section 6.14 Sale or Discount of Receivables.. . . . . . 65 Section 6.15 Negative Pledge Agreements. . . . . . . . . 65 Section 6.16 Transactions with Affiliates. . . . . . . . 65 Section 6.17 Unconditional Purchase Obligations. . . . . 66 Section 6.18 Stock.. . . . . . . . . . . . . . . . . . . 66 Section 6.19 Non-Recourse Indebtedness . . . . . . . . . 66 ARTICLE VII EVENTS OF DEFAULT Section 7.01 Payments. . . . . . . . . . . . . . . . . . 66 Section 7.02 Covenants Without Notice. . . . . . . . . . 66 Section 7.03 Other Covenants . . . . . . . . . . . . . . 66 Section 7.04 Other Financing Document Obligations. . . . 67 Section 7.05 Representations . . . . . . . . . . . . . . 67 Section 7.06 Non-Payments of Other Indebtedness. . . . . 67 Section 7.07 Defaults Under Other Agreements . . . . . . 67 -iii- Section 7.08 Bankruptcy. . . . . . . . . . . . . . . . . 67 Section 7.09 ERISA . . . . . . . . . . . . . . . . . . . 68 Section 7.10 Money Judgment. . . . . . . . . . . . . . . 68 Section 7.11 Discontinuance of Business. . . . . . . . . 68 Section 7.12 Security Instruments. . . . . . . . . . . . 68 Section 7.13 Change of Control . . . . . . . . . . . . . 68 Section 7.14 Mandatory Prepayments . . . . . . . . . . . 68 Section 7.15 Material Adverse Event. . . . . . . . . . . 68 ARTICLE VIII THE ADMINISTRATIVE AGENT Section 8.01 Appointment of Administrative Agent . . . . 69 Section 8.02 Nature of Duties of Administrative Agent and Documentation Agent. . . . . . . . . 69 Section 8.03 Lack of Reliance on the Administrative Agent and the Documentation Agent. . . . 69 Section 8.04 Certain Rights of the Administrative Agent. 70 Section 8.05 Reliance by Administrative Agent. . . . . . 70 Section 8.06 Indemnification of Administrative Agent and the Documentation Agent. . . . . . . 70 Section 8.07 The Administrative Agent and Documentation Agent in their Individual Capacity . . . 70 Section 8.08 Lender as Owner . . . . . . . . . . . . . . 71 Section 8.09 Successor Administrative Agent. . . . . . . 71 ARTICLE IX MISCELLANEOUS Section 9.01 Notices . . . . . . . . . . . . . . . . . . 71 Section 9.02 Amendments, etc . . . . . . . . . . . . . . 72 Section 9.03 No Waiver; Remedies Cumulative. . . . . . . 72 Section 9.04 Payment of Expenses, Indemnities, etc . . . 72 Section 9.05 Right of Setoff . . . . . . . . . . . . . . 74 Section 9.06 Benefit of Agreement. . . . . . . . . . . . 75 Section 9.07 Assignments and Participations. . . . . . . 75 Section 9.08 Governing Law; Submission to Jurisdiction; Etc. . . . . . . . . . . . . . . . . . . 77 Section 9.09 Independent Nature of Lenders' Rights . . . 78 Section 9.10 Invalidity. . . . . . . . . . . . . . . . . 78 Section 9.11 Survival of Agreements. . . . . . . . . . . 78 Section 9.12 Renewal, Extension or Rearrangement . . . . 78 Section 9.13 Interest. . . . . . . . . . . . . . . . . . 78 Section 9.14 Taxes, etc. . . . . . . . . . . . . . . . . 79 Section 9.15 Confidential Information. . . . . . . . . . 79 -iv- Section 9.16 Entire Agreement. . . . . . . . . . . . . . 80 Section 9.17 Attachments . . . . . . . . . . . . . . . . 80 Section 9.18 Counterparts. . . . . . . . . . . . . . . . 80 Section 9.19 Survival of Indemnities . . . . . . . . . . 80 Section 9.20 Headings Descriptive. . . . . . . . . . . . 80 Section 9.21 Satisfaction Requirement. . . . . . . . . . 80 Section 9.22 Effectiveness . . . . . . . . . . . . . . . 81 Section 9.23 Conflict with E&P Mortgage. . . . . . . . . 81 Section 9.24 Exculpation Provisions. . . . . . . . . . . 81 ANNEXES Annex I - Commitments Annex II - Eligible Inventory Valuation SCHEDULES Schedule 1.01 - Outstanding Letters of Credit Schedule 4.05 - Consents Schedule 4.07 - Investment and Guaranties Schedule 4.08 - Litigation Schedule 4.10 - ERISA Schedule 4.12 - Titles Schedule 4.13 - Defaults Schedule 4.20 - Insurance Schedule 4.22 - Gas Imbalances Schedule 4.23 - Environmental Matters Schedule 6.05 - Existing Indebtedness Schedule 6.06 - Liens Schedule 6.15 - Negative Pledge Agreements EXHIBITS Exhibit A - Form of Revolving Note Exhibit B - Form of Borrowing Request Exhibit C - Subsidiaries/Guarantors Exhibit D - Form of Assignment and Acceptance Exhibit E - Form of Borrowing Base Report Exhibit F - Form of Letter to Hydrocarbon Purchasers -v- CREDIT AGREEMENT THIS AMENDED AND RESTATED CREDIT AGREEMENT is made and entered into as of the 7th day of June, 1996, among TESORO PETROLEUM CORPORATION, a Delaware corporation (the "Company"); BANQUE PARIBAS, individually, as an Issuing Bank and as Administrative Agent, THE BANK OF NOVA SCOTIA, individually and as Documentation Agent, and each of the lenders that is a signatory hereto or which becomes a party hereto as provided in Section 9.07 (individually, a "Lender" and, collectively, the "Lenders"). RECITALS A. The Company has requested that the Lenders amend, extend and rearrange all of the Existing Indebtedness (as defined in Section 1.01) and provide certain loans to and extensions of credit on behalf of the Company; and B. The Lenders have agreed to amend, extend and rearrange the Existing Indebtedness and to make such loans and extensions of credit subject to the terms and conditions of this Agreement. C. In consideration of the mutual covenants and agreements herein contained and of the loans, extensions of credit and commitments hereinafter referred to, the parties hereto agree to amend and restate the Existing Credit Agreement (as defined in Section 1.01) as follows: ARTICLE I DEFINITIONS Section 1.01 Definitions. As used herein, the following terms shall have the meanings herein specified (to be equally applicable to both the singular and plural forms of the terms defined): "Account Borrowing Base Parties" shall mean Tesoro Alaska, KPL, Tesoro Vostok, Tesoro Coastwide and Tesoro R&M, and "Account Borrowing Base Party" shall mean any one of them. "Active Facility Amount" shall mean $100,000,000 or such other amount in excess thereof not to exceed the Aggregate Revolving Credit Commitments as the Company may from time to time request in writing pursuant to Section 2.01(d). "Administrative Agent" shall mean Banque Paribas, acting in the manner and to the extent described in Article VIII. "Advance Notice" shall mean written or telecopy notice (or telephonic notice promptly confirmed in writing), which in each case shall be irrevocable, from the Company to be received by the Administrative Agent before 11:00 a.m. (Houston time), by the number of Business Days in advance of any borrowing, conversion, continuation or prepayment of any Loan pursuant to this Agreement as respectively indicated below: (i) Eurodollar Loans - 3 Business Days; and (ii) Base Rate Loans - same Business Day. For the purpose of determining the respectively applicable Loan in the case of the conversion from one type of Loan into another, the Loan into which there is to be a conversion shall control. The Administrative Agent, each Issuing Bank and each Lender are entitled to rely upon and act upon telecopy notice made or purportedly made by the Company, and the Company hereby waives the right to dispute the authenticity and validity of any such transaction once the Administrative Agent or any Lender has advanced funds or the Issuing Bank has issued Letters of Credit, absent manifest error. "Affiliate" of any Person shall mean any other Person directly or indirectly controlling, controlled by, or under common control with, such Person, whether through the ownership of voting securities, by contract or otherwise. "Aggregate Revolving Credit Commitments" shall mean the sum of each Lender's Revolving Credit Commitment. "Aggregate Revolving Credit Exposure" shall mean the sum of each Lender's Revolving Credit Exposure. "Agreement" shall mean this Credit Agreement, as amended, supplemented or modified from time to time. "Alaska Deed of Trust" shall mean the Deed of Trust and Security Agreement covering the Kenai Refinery executed by Tesoro Alaska in favor of TransAlaska Title Insurance Agency, Inc., as trustee, recorded in Book 0441, Pages 848 through 873 of the Kenai Recording District, Third Judicial District, State of Alaska, as security for the Lender Indebtedness, as the same may be amended, modified or supplemented from time to time. "Applicable Margin" shall mean (i) .75% per annum with respect to Base Rate Loans, and (ii) 1.75% per annum with respect to Eurodollar Loans; provided, however, at any time (a) while the Company's senior unsecured debt (or implied senior unsecured debt) is rated BB- or better by Standard and Poors Corporation or Ba3 or better by Moody's Investors Service, Inc. or (b) from and after the occurrence of the Mandate Event, then the "Applicable Margin" shall be (i) .50% per annum for Base Rate Loans and (ii) 1.5% per annum for Eurodollar Loans; and, further provided, however, that during any Deficiency Period, the "Applicable Margin" as would otherwise be in effect shall be increased by 2.0% per annum for both Base Rate Loans and Eurodollar Loans. Application" shall mean an "Application and Agreement for Letters of Credit," or similar instruments or agreements, entered into between the Company and the Issuing Bank in connection with any Letter of Credit. "Assignment and Acceptance" shall have the meaning assigned such term in Section 9.07(b). -2- "BB Properties" shall mean at any time the Oil and Gas Properties and other assets of the Company or a Subsidiary of the Company evaluated by the Lenders and to which the Lenders gave loan value in determining the most recent E&P Borrowing Base. "Bankruptcy Code" shall have the meaning provided in Section 7.08. "Base Rate" shall have the meaning provided in Section 2.06(a). "Base Rate Loan" shall mean a Revolving Credit Loan bearing interest at the rate provided in Section 2.06(a). "Borrowing" shall mean a borrowing pursuant to a Borrowing Request or a continuation or a conversion pursuant to Section 2.11 consisting, in each case, of the same Type of Loans having, in the case of Eurodollar Loans, the same Interest Period (except as otherwise provided in Sections 2.16 and 2.18) and made previously or being made concurrently by all of the Lenders. "Borrowing Base" shall mean at any time the amount equal to the sum of (i) eighty percent (80%) of Eligible Accounts plus (ii) sixty percent (60%) of the Loan Value of Eligible Inventory; plus (iii) one hundred percent (100%) of the E&P Borrowing Base. "Borrowing Base Report" shall mean the report of the Company concerning the amount of the Borrowing Base, to be delivered pursuant to Section 5.15(h), substantially in the form attached as Exhibit E. "Borrowing Request" shall mean a request for a Borrowing pursuant to Section 2.02, substantially in the form attached as Exhibit B. "BP" shall mean Banque Paribas, in its individual capacity or as an Issuing Bank, as the case may be and not as Administrative Agent. "Business Day" shall mean any day excluding Saturday, Sunday and any other day on which banks are required or authorized to close in New York, New York or Houston, Texas and, if the applicable Business Day relates to Eurodollar Loans, on which trading is carried on by and between banks in Dollar deposits in the applicable interbank Eurodollar market. "Capital Expenditures" shall mean capital expenditures for capital or fixed assets, whether by way of acquisition or otherwise. "Capital Lease Obligations" shall mean, as to any Person, the obligations of such person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) real and/or personal property which obligations are required to be classified and accounted for as a liability for a capital lease on a balance sheet of such Person in accordance with GAAP. "Cash Flow" shall mean, as to any Person, the sum of the net income of such Person after taxes for any period plus, to the extent deducted from net income, all non-cash items, including, but not limited to, depreciation, depletion and impairment, amortization of leasehold and intangibles, deferred taxes and write-offs of exploration costs and producing lease abandonments and write-offs -3- of original issue discount and deferred financing costs on existing Indebtedness that has been retired or replaced by Indebtedness permitted by Section 6.05(b), minus, to the extent included in the net income of Tesoro E&P, revenues (net of deferred taxes) attributable to the supersedeas bond posted pursuant to the Memorandum of Binding Agreement relating to Lenape Resources Corp. v. Tennessee Gas Pipeline Company, 39 Tex Sup. Ct. J. 496 (April 18, 1996), as the same may be amended, supplemented, modified or replaced from time to time, provided that such revenues may be included in the net income of Tesoro E&P at the time of the Collection Event; in each case for such period and determined as to such Person. "Change of Control" shall mean either (i) a change resulting when any Unrelated Person or any Unrelated Persons acting together which would constitute a Group together with any Affiliates thereof (in each case also constituting Unrelated Persons) shall at any time Beneficially Own more than 40% of the aggregate voting power of all classes of Voting Stock of the Company. As used herein (a) "Beneficially Own" means "beneficially own" as defined in Rule 13d-3 of the Securities Exchange Act of 1934, as amended, or any successor provision thereto; provided, however, that, for purposes of this definition, a Person shall not be deemed to Beneficially Own securities tendered pursuant to a tender or exchange offer made by or on behalf of such Person or any of such Person's Affiliates until such tendered securities are accepted for purchase or exchange; (b) "Group" means a "group" for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended; (c) "Unrelated Person" means at any time any Person other than the Company or any Subsidiary and other than any trust for any employee benefit plan of the Company or any Subsidiary of the Company; and (d) "Voting Stock" of any Person shall mean capital stock of such Person which ordinarily has voting power for the election of directors (or persons performing similar functions) of such Person, whether at all times or only so long as no senior class of securities has such voting power by reason of any contingency or (ii) during any consecutive 12 month period, Continuing Directors cease to constitute a majority of the Board of Directors then in office. "Closing Date" shall mean the as of date of this Agreement set forth in the first paragraph hereof. "Code" shall mean the Internal Revenue Code of 1986, as amended, and any successor statute. "Collection Event" shall mean the receipt by the Company or Tesoro E&P from or on behalf of Tennessee Gas Pipeline Company (or its successor) of at least $59,000,000 cash (whether in one or more payments) in payment for past tenders, which funds the Company or Tesoro E&P should previously have received under the terms of the gas purchase agreement with Tennessee Gas Pipeline Company. "Commitment" shall mean, with respect to each Lender, the obligation of such Lender to make loans to the Company under Section 2.01, up to the maximum amount set forth opposite such Lender's name on Annex I under the caption "Revolving Credit Commitment." "Company" shall mean Tesoro Petroleum Corporation, a Delaware corporation. "Continuing Directors" shall mean any member of the Board of Directors of the Company on the Closing Date, any director elected since the date thereof in an annual meeting of the -4- stockholders upon the recommendation of the Board of Directors of the Company and any other member of the Board of Directors of the Company who will be recommended or elected to succeed to a Continuing Director by a majority of Continuing Directors who are then members of the Board of Directors of the Company. "Consolidating Statement Entities" shall mean, for the purpose of identifying the Persons or groups of Persons for whom consolidating financial statements shall be prepared, all of the consolidated Subsidiaries of the Company reported as a single consolidated group. "Consolidated Tangible Net Worth" shall mean, at any time and from time to time, the sum of preferred or common stock not subject to a mandatory redemption obligation (other than a mandatory redemption obligation that can be satisfied by the tendering of common stock of the Company) as of the date of determination, par value of common stock, additional paid-in capital of common stock and retained earnings less treasury stock (if any), less goodwill, cost in excess of net assets acquired and all other assets as are properly classified as intangible assets, all as determined as to the Company and its Subsidiaries on a consolidated basis. "Cover" for Letter of Credit Liabilities shall be effected by paying to the Administrative Agent in immediately available funds, to be held by the Administrative Agent in a collateral account maintained by the Administrative Agent at its Payment Office and collaterally assigned as security pursuant to the Cash Collateral Account Agreement dated as of the Closing Date between the Company and the Administrative Agent, an amount equal to the maximum amount of each applicable Letter of Credit available for drawing at any time. Such amount shall be retained by the Administrative Agent in such collateral account until such time as the applicable Letter of Credit shall have expired and Reimburse- ment Obligations, if any, with respect thereto shall have been fully satisfied. "Cumulative Amount Available for Restricted Payments" shall mean: (i) prior to the occurrence of the Mandate Event the difference of (a) the sum, since December 31, 1995, of (A) $5,000,000, (B) ten percent of consolidated net income up to $25,000,000 and (C) twenty percent of consolidated net income in excess of $25,000,000 of the Company and its Subsidiaries in any calendar year (provided, however consolidated net income shall not include any revenues (net of deferred taxes) attributable to the supersedeas bond posted pursuant to the Memorandum of Binding Agreement relating to Lenape Resources Corp. v. Tennessee Gas Pipeline Company, 39 Tex Sup. Ct. J. 496 (April 18, 1996), as the same may be amended, supplemented, modified or replaced from time to time, provided that such revenues may be included in the net income of Tesoro E&P at the time of the Collection Event) and (b) any amount previously paid, prepaid, redeemed or repurchased as permitted by the terms of clause (ii) and subclause (D) of clause (iii) of Section 6.08 since the Closing Date; or (ii) after the occurrence of the Mandate Event, the difference of (a) the sum, since December 31, 1995, of (A) $5,000,000 and (B) fifty percent of consolidated net income of the Company and its Subsidiaries in any calendar year and (b) any amount previously paid, prepaid, redeemed or repurchased as permitted by the terms of clause (ii) and subclause (D) of clause (iii) of Section 6.08 since the Closing Date. -5- "Default" shall mean an Event of Default or any condition or event which, with notice or lapse of time or both, would constitute an Event of Default. "Deficiency Period" shall have the meaning assigned to such term in Section 2.10(d). "Developed" shall mean Proved Hydrocarbon reserves recoverable through existing wells. "Documentary Letter of Credit" shall mean a letter of credit denominated in Dollars issued pursuant to this Credit Agreement (i) the terms of which are in the reasonable judgment of the Issuing Bank for such letter of credit, standard in the petroleum industry, and (ii) which supports payment or performance for a single identified purchase or exchange of crude oil, condensate and/or other petroleum products. "Documentation Agent" shall mean The Bank of Nova Scotia. "Dollar" and the sign "$" shall mean lawful money of the United States of America. "E&P Borrowing Base" shall mean at any time an amount equal to the amount determined, pursuant to Section 2.20. "E&P Mortgage" shall mean the Mortgage, Deed of Trust, Assignment of Production, Security Agreement and Financing Statement dated as of April 20, 1994 granted by Tesoro Exploration and Production Company, to Stephen H. Field, as trustee, recorded in Volume 0692, Page 523 of the Real Property Records of Starr County, Texas and Volume 497, Page 340 of the Real Property Records of Zapata County, Texas granting a Lien on the Oil and Gas Properties of Tesoro LP, as security for the indebtedness defined therein as "Indebtedness", as the same has been or may from time to time be amended, supplemented or otherwise modified and the Mortgage Deed of Trust, Assignment of Production, Security Agreement and Financing Statement dated as of the Closing Date granted by Tesoro LP, to Brian Malone as trustee, granting a Lien on the Oil and Gas Properties of Tesoro LP situated in the Lopeno Field and Tea Jay Field, as security for the indebtedness defined therein as "Indebtedness", as the same may from time to time be amended, supplemented or otherwise modified. "EBITDA" shall mean, as to the Company and its Subsidiaries on a consolidated basis and, for each Rolling Period, the amount equal to net income of the Company and its Subsidiaries, less any non-cash income included in net income to the extent the applicable cash was not received at any time during such Rolling Period, plus, to the extent deducted from net income, interest expense, depreciation, depletion and impairment, amortization of leasehold and intangibles, other non-cash expenses (including, but not limited to, write-offs of original issue discount and deferred financing costs on existing Indebtedness that has been retired or replaced by Indebtedness permitted by Section 6.05(b), and taxes (excluding Bolivian taxes paid in kind), provided, that, gains or losses on the disposition of assets shall not be included in EBITDA. "Effective Date" shall mean the date on which (i) each of the conditions precedent set forth in Article III have been satisfied or waived by each of the Lenders, (ii) the conditions to effectiveness set forth in Section 9.22 have been satisfied and (iii) the initial Loans have been made, -6- the Outstanding Letters of Credit have been assumed, or the initial Letter of Credit has been issued. Subject to Section 3.01, the Effective Date and Closing Date may be the same date. "Eligible Account" shall mean at any time the net invoice or ledger amount owing on each account (which shall mean any "account" as such term is defined in Section 9-106 of the UCC and any "chattel paper" as such term is defined in Section 9-105(b) of the UCC) of any Account Borrowing Base Party (net of any credit balance, returns, trade discounts, or unbilled amounts or retention) for which each of the following statements is accurate and complete (and the Company by including such account in any computation of the Borrowing Base shall be deemed to represent and warrant to the Administrative Agent, the Issuing Banks and the Lenders the accuracy and completeness of such statements): (a) Said account is a binding and valid obligation of the obligor thereon in full force and effect; (b) Said account is genuine as appearing on its face or as represented in the books and records of the applicable Account Borrowing Base Party; (c) Said account is free from claims regarding rescission, cancellation or avoidance, whether by operation of law or otherwise; (d) Payment of said account is not more than 90 days past the invoice date thereof and is less than 60 days past due; (e) Said account is net of concessions, offset (excluding any accounts payable offset supported by a Letter of Credit) or understandings with the obligor thereon of any kind; (f) Said account is, and at all times will be, free and clear of all Liens, except in favor of the Administrative Agent, and the Administrative Agent has a first priority, perfected security interest in such account; (g) Said account is derived from goods sold or leased or services rendered to the obligor in the ordinary course of the applicable Account Borrowing Base Party's business (other than the sale of minerals or the like, including oil and gas, at the wellhead or minehead); (h) Said account is not (i) carried on the books of such Account Borrowing Base Party as an "exchange account receivable" or (ii) subject to an exchange agreement with another Person except for cash exchange account receivables net of any corresponding payables; (i) Said account is not payable by an obligor who is more than 60 days past due with regard to 20% or more of the total accounts owed by such obligor; (j) The account debtor has sent an invoice within 10 days after said account has been entered on the financial records of the appropriate Account Borrowing Base Party; -7- (k) All consents, licenses, approvals or authorizations of, or registrations or declarations with, any Governmental Authority required to be obtained, effected or given in connection with the execution, delivery and performance of said account by each party obligated thereunder have been duly obtained, effected or given and are in full force and effect; (l) The obligor on said account (i) is not the subject of any bankruptcy or insolvency proceeding, has not had a trustee or receiver appointed for all or a substantial part of its property, has not made an assignment for the benefit of creditors, admitted its inability to pay its debts as they mature or suspended its business; and (ii) is not affiliated, directly or indirectly, with the Company, as a Subsidiary or other Affiliate, employee or otherwise; (m) The obligor on said account may be the United States of America or any branch or agency thereof; provided that no Default has occurred and is continuing and the Administrative Agent, in its sole discretion, has determined that said account has been properly assigned to the Administrative Agent pursuant to the Federal Assignment of Claims Act; (n) The goods sold or leased or services rendered resulting in the right to payment in connection with said account were sold, leased or rendered in a state or territory of the United States of America (excluding however, such goods which are sold or leased for export outside of the United States of America), which is payable in the United States of America, and the obligor of which is subject to the jurisdiction of federal or state courts in the United States of America, unless said account is backed by a letter of credit in form and substance, and issued by an issuer, acceptable to the Administrative Agent; (o) If said account, when added to all other accounts that are obligations of the same obligor, results in a total sum that exceeds 10% of the total balance then due on all of the applicable Account Borrowing Base Party's accounts, the amount of said account in excess of 10% of such total balance then due shall be excluded from Eligible Accounts; provided, however, if the obligor of said account is Texaco Inc., Exxon Corporation, Chevron U.S.A. Inc. Shell, Amoco, Arco, Unocal, Federal Express and Mapco or any wholly owned Subsidiary of any one of them, or other obligors approved for such purpose by the Administrative Agent and Documentation Agent in writing (with such approval being reported to the Lenders), and so long as such obligor maintains a rating of Baa3 or better with Moody's Investor Services, Inc., or BBB- or better with Standard & Poors Corporation, then said account shall be included as an Eligible Account; provided, however, with respect to any such obligor whose rating drops below the limits stated above, then during such time, said account shall be included as an Eligible Account to the extent that the total sum due to any of such obligors is less than 15% of the total balance then due on all applicable Account Borrowing Base Party's accounts, and the amount of said account in excess of 15% of such total balance then due shall be excluded from Eligible Accounts; and (p) Said account has not been otherwise determined by the Administrative Agent or Documentation Agent, in its good faith discretion, to be unacceptable in accordance with its customary practices for facilities of this nature. -8- "Eligible Inventory" shall mean, at any time, all inventory (as such term is defined in Section 9-109(4) of the UCC) of the Inventory Borrowing Base Parties, including, without limitation, but without duplication, the In Transit Inventory, inventory in the Tesoro Terminals, and inventory at the KPL Facility (as defined in clause (x) below) for which each of the following statements is accurate and complete (and the Company by including such inventory in any computation of the Borrowing Base shall be deemed to represent and warrant to the Administrative Agent, each Issuing Bank and each Lender the accuracy and completeness of such statements): (a) Said inventory is, and at all times will be, free and clear of all Liens (except for perfected Liens in favor of the Administrative Agent and, in the case of In Transit Inventory described in the definition of In Transit Inventory below, Liens securing the payment of tariffs owed by Tesoro Alaska to a common carrier transporting feedstocks or blendstocks through the Trans-Alaska Pipeline System or the KPL Facility, as defined below), and the Administrative Agent has a first priority, perfected security interest in such inventory; (b) Said inventory does not include capitalized goods which are part of inventory of any Inventory Borrowing Base Party; (c) Said inventory is located in Alaska, California, Texas, Louisiana or Washington, or to the extent that it qualifies as In Transit Inventory, is located in the territorial waters of Alaska, California, Oregon, Texas, Louisiana, Washington or British Columbia, Canada (and not in international waters); and (d) Said inventory is not stored at any terminal other than a Tesoro Terminal. For purposes of this definition, "In Transit Inventory" shall mean, at any time, feedstocks, blendstocks or refined products, including asphalt, solely owned by an Inventory Borrowing Base Party that are in transit: (x) to the Kenai Refinery (i) from Pump Station No. 1 on the Trans-Alaska Pipeline System, including feedstocks or blendstocks in storage at the Valdez Terminal in Valdez, Alaska, (ii) in a tanker or barge located within Alaska, California, Washington or British Columbia, Canada or their respective territorial waters (and not in international waters) that has been time chartered by any Inventory Borrowing Base Party, (iii) in or on any pipeline, terminal, dock or storage tank of the KPL in the area of Cook Inlet, Alaska (the "KPL Facility"), or (iv) in the Cook Inlet Pipeline Company System in the area of Cook Inlet, Alaska, including feedstocks or blendstocks in storage at the Drift River Terminal in Drift River, Alaska; (y) from the Kenai Refinery (i) in a tanker or barge located within Alaska, California, Oregon, Washington or British Columbia, Canada or their respective territorial waters (and not in international waters) that has been time chartered by any Inventory Borrowing Base Party, (ii) in the Anchorage Pipeline owned by Tesoro Alaska Pipeline Company (formerly known as the Nikiski Alaska Pipeline), or (iii) in the KPL Facility (as defined in Clause (x) above); or -9- (z) between Alaska, California, Washington, Texas, Louisiana Oregon or British Columbia, Canada and in their respective territorial waters (and not in international waters) and is inventory in which the Administrative Agent has been granted a first priority perfected Lien which is in effect at such time. "Eligible Transferee" shall mean any financial institution which is a Lender as of the Effective Date or which is a commercial bank, a financial institution or an "accredited investor" (as defined in Regulation D) which makes loans in the ordinary course of its business and that makes or acquires Loans for its own account in the ordinary course of its business and which has capital, surplus and undivided profits aggregating at least $250,000,000 (as of the date of its most recent financial statements). "Environmental Laws" shall mean any and all laws, statutes, ordinances, rules, regulations, orders, or determinations of any Governmental Authority pertaining to health or the environment in effect in any and all jurisdictions in which the Company or its Subsidiaries are conducting or at any time have conducted business, or where any Property of the Company or its Subsidiaries is located, or where any hazardous substances generated by or disposed of by the Company or its Subsidiaries are located, including but not limited to the Oil Pollution Act of 1990 ("OPA"), the Clean Air Act, as amended, the Comprehensive Environmental, Response, Compensation, and Liability Act of 1980 ("CERCLA"), as amended, the Federal Water Pollution Control Act, as amended, the Occupational Safety and Health Act of 1970, as amended, the Resource Conservation and Recovery Act of 1976 ("RCRA"), as amended, the Safe Drinking Water Act, as amended, the Toxic Substances Control Act, as amended, the Superfund Amendments and Reauthorization Act of 1986, as amended, and other environmental conservation or protection laws. The term "oil" shall have the meaning specified in OPA; the terms "hazardous substance," "release" and "threatened release" have the meanings specified in CERCLA, and the terms "solid waste" and "disposal" (or "disposed") have the meanings specified in RCRA; provided, however, in the event either CERCLA or RCRA is amended so as to broaden the meaning of any term defined thereby, such broader meaning shall apply subsequent to the effective date of such amendment, and provided, further, that, to the extent the laws of the state in which any Property of the Company or its Subsidiaries is located establish a meaning for "oil," "hazardous substance," "release," "solid waste" or "disposal" which is broader than that specified in either OPA, CERCLA or RCRA, such broader meaning shall apply. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended, and any successor statute. "ERISA Affiliate" shall mean each trade or business (whether or not incorporated) which together with the Company or a Subsidiary of the Company would be deemed to be a "single employer" within the meaning of Section 4001(b)(1) of ERISA or Subsections 414(b), (c), (m) or (o) of the Code. "ERISA Termination Event" shall mean (i) 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 Subsections .14, .18, .19 or .20 of Part 2615 of the PBGC regulations), (ii) the withdrawal of the Company, a Subsidiary of the Company or any ERISA Affiliate from a Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA, (iii) the filing of a notice of intent to terminate a Plan or the treatment -10- of a Plan amendment as a termination under Section 4041 of ERISA, (iv) the institution of proceedings to terminate a Plan by the PBGC, or (v) any other event or condition which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan. "Eurodollar Loan" shall mean a Revolving Credit Loan bearing interest at the rate provided in Subsection 2.06(b). "Eurodollar Rate" shall mean the offered quotation, if any, to first-class banks in the Eurodollar market by the Administrative Agent for Dollar deposits of amounts in funds comparable to the principal amount of the Eurodollar Loan to which such Eurodollar Rate is to be applicable with maturities comparable to the Interest Period for which such Eurodollar Rate will apply as of approximately 10:00 a.m. (Houston time) two Business Days prior to the commencement of such Interest Period. "Event of Default" shall have the meaning provided in Article VII. "Exchange Notes" shall mean the 13% Exchange Notes due December 1, 2000, issued by the Company. "Existing Credit Agreement" shall mean the Credit Agreement dated as of April 20, 1994 among the Company, Texas Commerce Bank National Association, as agent, Banque Paribas, as co-agent, and the lenders party thereto, as amended. "Existing Indebtedness" shall mean the outstanding Indebtedness under the Existing Credit Agreement. "Federal Funds Rate" shall mean, 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 such day on such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. "Financial Statements" shall mean the consolidated financial statements of the Company and its Subsidiaries described or referred to in Section 4.06. "Financing Documents" shall mean this Agreement, the Notes, the Guaranty Agreement, the Security Instruments, the Applications, the Letters of Credit, Borrowing Requests, Borrowing Base Reports, and the other documents, instruments or agreements described in Subsection 3.02(d), together with any other document, instrument or agreement (other than participation, agency or similar agreements among the Lenders or between any Lender and any other bank or creditor with respect to any indebtedness or obligations of the Company hereunder) now or hereafter entered into in connection with the Loans, the Indebtedness or the Mortgaged Properties, as such documents, instruments or agreements may be amended, modified or supplemented from time to time. -11- "Form 1001 Certification" shall have the meaning provided in Section 2.21(f). "Form 4224 Certification" shall have the meaning provided in Section 2.21(f). "Funded Indebtedness" shall mean all Indebtedness for borrowed money, any Capital Lease Obligations and any guaranty with respect to Funded Indebtedness of another Person, excluding any intercompany Indebtedness between Consolidating Statement Entities. "GAAP" shall mean generally accepted accounting principles as applied in accordance with Section 1.02. "Governmental Authority" shall mean any (domestic or foreign) federal, state, province, county, city, municipal or other political subdivision or government, department, commission, board, bureau, court, agency or any other instrumentality of any of them, which exercises jurisdiction over the Company or any of its Property or any Subsidiary of the Company or any of such Subsidiary's Property. "Governmental Requirement" shall mean any law, statute, code, ordinance, order, rule, regulation, judgment, decree, injunction, franchise, permit, certificate, license, authorization or other direction or requirement (including but not limited to any of the foregoing which relate to Environmental Laws, energy regulations and occupational, safety and health standards or controls) of any Governmental Authority. "Guaranty Agreement" shall mean the Amended and Restated Guaranty Agreement dated as of even date herewith executed by the Guarantors. "Guarantors" shall mean those Subsidiaries designated as Guarantors on Exhibit C and any other Subsidiary of the Company, other than a Non-Guarantor Subsidiary, designated as a Guarantor by (i) the Company with the approval of the Administrative Agent or (ii) the Majority Lenders, in each case pursuant to Section 5.11. "Hedge Agreement" shall mean (i) any Hydrocarbon Swap Agreement or (ii) any Interest Rate Swap Agreement. "Highest Lawful Rate" shall mean, with respect to each Lender, the maximum nonusurious interest rate, if any, that at any time or from time to time may be contracted for, taken, reserved, charged or received on the Notes or on other Lender Indebtedness, as the case may be, owed to it under the law of any jurisdiction whose laws may be mandatorily applicable to such Lender notwithstanding other provisions of this Agreement, or law of the United States of America applicable to such Lender and the Transactions which would permit such Lender to contract for, charge, take, reserve or receive a greater amount of interest than under such jurisdiction's law. "Hydrocarbon Interests" shall mean all rights, titles, leasehold and other interests and estates in and to oil and gas leases, oil, gas and mineral leases, or other liquid or gaseous hydrocarbon leases, mineral fee interests, overriding royalty and royalty interests, net profit interests and production payment interests, including any reserve or residual interest of whatever nature. -12- "Hydrocarbon Swap Agreement" shall mean any contract for sale for future delivery of Hydrocarbons (whether or not the subject Hydrocarbons are to be delivered), hedging contract, forward contract, swap agreement, futures contract or other hydrocarbon pricing protection agreement or option with respect to any such transaction, designed to hedge against fluctuations in Hydrocarbon prices. "Hydrocarbons" shall mean oil, gas, casinghead gas, condensate, distillate, liquid hydrocarbons, gaseous hydrocarbons and all products refined therefrom. "Improvements" shall mean all improvements owned by Tesoro Alaska now or hereafter attached to or placed, erected, constructed or developed on the Refinery Premises (excluding the Property leased pursuant to the Solar Turbine Lease). "Indebtedness" of any Person shall mean: (i) all obligations of such Person which, in accordance with GAAP, are or should be shown on the balance sheet of such Person as a liability (including, but not limited to, obligations for borrowed money and for the deferred purchase price of property or services, and obligations evidenced by bonds, debentures, notes or other similar instruments); (ii) all Capital Lease Obligations; (iii) all guaranties (direct or indirect), all contingent reimbursement obligations under undrawn letters of credit and other contingent obligations of such Person in respect of, or obligations to purchase or otherwise acquire or to assure payment of, Indebtedness of others; (iv) Indebtedness of others secured by any Lien upon Property owned by such Person, whether or not assumed; and (v) obligations of such Person under agreements of the types described in the definitions of Hydrocarbon Swap Agreement and Interest Rate Swap Agreement. "Interest Period" shall mean, with respect to each Borrowing of Eurodollar Loans, an interest period complying with the terms and provisions of Section 2.07. "Interest Rate Swap Agreement" shall mean any rate swap, rate cap, rate floor, rate collar, forward rate agreement or other rate protection agreement or option with respect to any such transaction, designed to hedge against fluctuations in interest rates. "Interior Fuels" shall mean Interior Fuels Company, an Alaska corporation. "Inventory Borrowing Base Parties" shall mean Tesoro Alaska, KPL, Tesoro Coastwide and Tesoro R&M, and "Inventory Borrowing Base Party" shall mean any one of them. -13- "Issuing Bank" shall mean, for each Letter of Credit, BP or The First National Bank of Chicago as the issuing bank for such Letter of Credit at the option of the Company. "Kenai Refinery" shall mean the refinery of Tesoro Alaska located in the area of Kenai, Alaska, consisting of the Refinery Premises and the Kenai Refinery Related Property. "Kenai Refinery Related Property" shall mean (i) all Improvements; (ii) all Refinery Personal Property; (iii) all water and water rights pertaining to the Refinery Premises; (iv) all building materials and equipment now or hereafter delivered to and intended to be installed in or on the Refinery Premises or on the Improvements; (v) all plans and specifications for the Improvements; (vi) all rights of Tesoro Alaska (but not its obligations) under any contracts relating to the Refinery Premises, the Improvements or the Refinery Personal Property, including without limitation, the Solar Turbine Lease, but excluding contract rights under contracts containing prohibitions against assignment of or the granting of a security interest in the rights of a party thereunder; (vii) all rights of Tesoro Alaska (but not its obligations) under any accounts, construction contracts, architectural agreements and general intangibles, other than contract rights under contracts containing prohibitions against assignment of or the granting of a security interest in the rights of a party thereunder, (but excluding trademarks, trade names and symbols) arising from or by virtue of any transactions related to the Refinery Premises, Improvements or Refinery Personal Property; (viii) all permits, licenses, franchises, certificates, and other rights and privileges obtained in connection with the Refinery Premises, the Improvements and the Refinery Personal Property; (ix) all proceeds arising from or by virtue of the sale, lease or other disposition of the Refinery Premises, the Improvements or the Refinery Personal Property; (x) all proceeds of each policy of insurance relating to the Refinery Premises, the Improvements or the Refinery Personal Property; (xi) all proceeds from the taking of any of the Refinery Premises, the Improvements, the Refinery Personal Property or any rights appurtenant thereto by right of eminent domain or by private or other purchase in lieu thereof, including change of grade of streets, curb cuts or other rights of access, for any public or quasi-public use under any Governmental Requirement; (xii) all right, title and interest of Tesoro Alaska in and to all streets, roads, public places, easements and rights-of-way, existing or proposed, public or private, adjacent to or used in connection with, belonging or pertaining to the Refinery Premises; (xiii) all of the leases, rents, royalties, bonuses, issues, profits, revenues or other benefits of the Refinery Premises, the Improvements or the Refinery Personal Property, including without limitation, cash or securities deposited pursuant to leases to secure performance by the lessees of their obligations thereunder; (xiv) all consumer goods located in, on or about the Refinery Premises or the Improvements or used in connection with the use or operation thereof; (xv) all rights, hereditaments and appurtenances pertaining to the foregoing; and (xvi) all other interests of every kind and character that Tesoro Alaska now has or at any time hereafter acquires in and to the Refinery Premises, Improvements and Refinery Personal Property described herein and all Property that is used or useful in connection therewith, including, without limitation, rights of ingress and egress and all reversionary rights or interests of Tesoro Alaska with respect to such Refinery Premises, Improvements or Refinery Personal Property. "KPL" shall mean Kenai Pipe Line Company, a Delaware corporation. "Lender Indebtedness" shall mean any and all amounts owing or to be owing by the Company to the Administrative Agent, the Issuing Banks or the Lenders with respect to or in -14- connection with the Loans, any Letter of Credit Liabilities, the Notes, Hedge Agreements permitted hereby with any Lenders or their Affiliates, this Agreement, or any other Financing Document. "Lender" shall have the meaning assigned such term in the opening paragraph of this Agreement. "Lending Office" shall mean for each Lender the office specified opposite such Lender's name on the signature pages hereof, or in the Assignment and Acceptance pursuant to which it became a Lender, with respect to each Type of Loan, or such other office as such Lender may designate in writing from time to time to the Company and the Administrative Agent with respect to such Type of Loan. "Letters of Credit" shall have the meaning assigned such term in Section 2.03(a) and shall include the Outstanding Letters of Credit which are hereby deemed to be issued under this Agreement. "Letter of Credit Liabilities" shall mean, at any time and in respect of any Letter of Credit, the sum of (i) the amount available for drawings under such Letter of Credit as of the date of determination plus (ii) the aggregate unpaid amount of all Reimbursement Obligations due and payable as of the date of determination in respect of previous drawings made under such Letter of Credit. "Lien" shall mean any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on the common law, statute or contract, and including but not limited to the lien or security interest arising from a mortgage, encumbrance, pledge, security agreement, conditional sale or trust receipt or a lease, consignment or bailment for security purposes. The term "Lien" shall include reservations, exceptions, encroachments, easements, rights of way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting Property. For the purposes of this Agreement, the Company or any Subsidiary of the Company shall be deemed to be the owner of any Property which it has acquired or holds subject to a conditional sale agreement, financing lease or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person for security purposes. "Loan" shall mean a Revolving Credit Loan. "Loan Parties" shall mean the Company and the Guarantors and "Loan Party" shall mean any one of them. "Loan Value of Eligible Inventory" shall mean, at a particular date, an amount equal to the Eligible Inventory at such date, valued at current market as described on Annex II of the Credit Agreement or valued at current market as may otherwise be mutually agreed upon from time to time between the Company and the Administrative Agent. "Majority Lenders" shall mean at any time (a) prior to the Commitments expiring or being terminated in full, Lenders holding at least 66-2/3% of the Commitments in effect at such time, or (b) thereafter, Lenders holding at least 66-2/3% of the then Aggregate Revolving Credit Exposure. -15- "Mandate Event" shall mean the issuance of a mandate favorable to the Company by the Texas Supreme Court in the case of Lenape Resources Corp. v. Tennessee Gas Pipeline Company, 39 Tex Sup. Ct. J. 496 (April 18, 1996) after denying the request, if any, for rehearing requested by Tennessee Gas Pipeline Company. "Margin Stock" shall have the meaning provided in Regulation U and Regulation X. "Material Adverse Effect" shall mean any material and adverse effect on the business, financial condition, results of operations or prospects of the Company and its Subsidiaries taken as a whole. "Maximum Available Amount" shall mean, at any date, an amount equal to the lesser of (a) the Borrowing Base as of such date or (b) the Active Facility Amount as of such date. "Maximum Revolving Credit Loan Available Amount" shall mean: (i) prior to the occurrence of both the Mandate Event and the Collection Event, at any date, an amount equal to the lesser of (a) fifty percent (50%) of the Active Facility Amount as of such date and (b) the E&P Borrowing Base as of such date plus $10,000,000; or (ii) from and after the occurrence of both the Mandate Event and the Collection Event, $100,000,000. "Mortgaged Property" shall mean the Company's and the Guarantors' Properties described in and subject to the Liens, privileges, priorities and security interests existing and to exist under the terms of the Security Instruments, including but not limited to the Kenai Refinery and the Oil and Gas Properties owned by the Company or the Guarantors which have been or are hereafter mortgaged to the Administrative Agent for the benefit of the Lenders pursuant to the Security Instruments. "Non-Guarantor Subsidiary" shall mean a Subsidiary of the Company that is not indicated as a Guarantor on Exhibit C. "Non-Recourse Indebtedness" shall mean Indebtedness of a Subsidiary which is non-recourse to the Company and the other Subsidiaries on terms satisfactory to the Majority Lenders. "Notes" shall mean the Revolving Credit Notes. "Oil and Gas Properties" shall mean Hydrocarbon Interests; the properties now or hereafter pooled or unitized with Hydrocarbon Interests; all presently existing or future unitization, pooling agreements and declarations of pooled units and the units created thereby (including, but not limited to, units created under orders, regulations and rules of any Governmental Authority having jurisdiction) which may affect all or any portion of the Hydrocarbon Interests; all operating agreements, contracts and other agreements which relate to any of the Hydrocarbon Interests or the production, sale, purchase, exchange or processing of Hydrocarbons from or attributable to such Hydrocarbon Interests; all Hydrocarbons in and under and which may be produced and saved or -16- attributable to the Hydrocarbon Interests, the lands covered thereby and all oil in tanks and all rents, issues, profits, proceeds, products, revenues and other incomes from or attributable to the Hydrocarbon Interests; all tenements, hereditaments, appurtenances and Properties in anywise appertaining, belonging, affixed or incidental to the Hydrocarbon Interests, Properties, rights, titles, interests and estates described or referred to above, including any and all Property, real or personal, now owned or hereafter acquired and situated upon, used, held for use or useful in connection with the operating, working or development of any of such Hydrocarbon Interests or Property (excluding drilling rigs, automotive equipment or other personal property which may be on such premises for the purpose of drilling a well or for other similar temporary uses) and including any and all oil wells, gas wells, injection wells or other wells, buildings, structures, fuel separators, liquid extraction plants, plant compressors, pumps, pumping units, field gathering systems, tanks and tank batteries, fixtures, valves, fittings, machinery and parts, engines, boilers, meters, apparatus, equipment, appliances, tools, implements, cables, wires, towers, casing, tubing and rods, surface leases, rights-of-way, easements and servitudes together with all additions, substitutions, replacements, accessions and attachments to any and all of the foregoing. "Other Taxes" shall have the meaning provided in Subsection 2.21(b). "Outstanding Letters of Credit" shall mean the Letters of Credit set forth on Schedule 1.01. "Payment Office" shall mean the Administrative Agent's office located at 1200 Smith, Suite 3100, Houston, Texas, 77002; Attention: Ms. Leah Evans-Hughes. "PBGC" shall mean the Pension Benefit Guaranty Corporation, or any successor thereto. "Percentage Share" shall mean, as to any Lender, the fraction, expressed as a percentage, the numerator of which is the amount of such Lender's Revolving Credit Commitment and the denominator of which is the amount of the Aggregate Revolving Credit Commitments. "Permitted Dividends" shall mean those dividends that the Company is permitted to declare and pay pursuant to Section 6.08. "Person" shall mean any individual, partnership, firm, corporation (including, but not limited to the Company), association, joint venture, trust or other entity, or any government or political subdivision or agency, department or instrumentality thereof; provided, however, for the purpose of the definition of "Change of Control," "Person" shall mean a "person" or group of persons within the meaning of Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended. "Plan" shall mean any employee pension benefit plan, as defined in Section 3(2) of ERISA, which (i) is currently or hereafter sponsored, maintained or contributed to by the Company, a Subsidiary or an ERISA Affiliate, or (ii) was at any time during the six calendar years preceding the date of this Agreement sponsored, maintained or contributed to by the Company, a Subsidiary or an ERISA Affiliate. "Prime Rate" shall mean the rate which the Documentation Agent announces from time to time as its prime rate. Without notice to the Company or any other Person, the Prime Rate shall change automatically from time to time as and in the amount by which such prime rate shall -17- fluctuate. The Prime Rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer. The Documentation Agent may make commercial loans or other loans at rates of interest at, above or below the Prime Rate. "Property" shall mean any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "Proved" shall mean Hydrocarbon reserves which geological and engineering data demonstrate with reasonable certainty to be economically recoverable in future years with present operating methods and expenses. "Proved Undeveloped Hydrocarbon Reserves" shall mean Proved Hydrocarbon reserves which are not Developed. "Quarterly Dates" shall mean the last day of each March, June, September, and December, in each year, the first of which shall be June 30, 1996; provided, however, that if any such day is not a Business Day, such Quarterly Date shall be the next succeeding Business Day. "Refinery Personal Property" shall mean all equipment, fixtures, furnishings, inventory and articles of personal property of Tesoro Alaska (excluding from the foregoing the Property leased pursuant to the Solar Turbine Lease) now or hereafter attached to or used in or about the Improvements or that are necessary or useful for the complete and comfortable use and occupancy of the Improvements for the purposes for which they were or are to be attached, placed, erected, constructed or developed, or which are or may be used in or related to the planning, development, financing or operation of the Improvements, and all renewals of or replacements or substitutions for any of the foregoing, whether or not the same are or shall be attached to the Refinery Premises or the Improvements. "Refinery Premises" shall mean the real property owned by Tesoro Alaska described on Exhibit A attached to the Alaska Deed of Trust. "Register" shall mean the register maintained by the Administrative Agent at its Payment Office showing the name and address of each Lender, its Commitment, and the principal amount of the Loans owing to each Lender from time to time. "Regulation D", "Regulation U" and "Regulation X" shall mean Regulation D, Regulation U, and Regulation X, respectively, of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor thereto. "Reimbursement Obligations" shall mean, at any date, the obligations of the Company then outstanding in respect of the Letters of Credit, to reimburse the Administrative Agent for the account of the Issuing Bank for the amount paid by the Issuing Bank in respect of any drawings under the Letters of Credit. "Reserve Report" shall mean an engineering report meeting the requirements set forth in Subsection 5.15(e) (and as to scheduled redeterminations, provided on the dates set forth in such Subsection) and such other reports, data and supplemental information as may from time to time be -18- reasonably requested by the Administrative Agent in connection with any redetermination of the E&P Borrowing Base. "Responsible Officer" shall mean the Chief Executive Officer, the Chief Financial Officer, the Treasurer, the Controller, the Secretary or the Assistant Treasurer in each case of the Company. "Revolving Credit Commitment" shall mean for any Lender, the amount set forth opposite such Lender's name on Annex I under the caption "Revolving Credit Commitment", as such amount may be reduced pursuant to Section 2.09 or otherwise from time to time modified pursuant to Section 9.07(b). "Revolving Credit Exposure" shall mean, at any time and as to each Lender, the sum of (a) the aggregate principal amount of the Revolving Credit Loans made by such Lender as of such date plus (b) such Lender's Percentage Share of the aggregate amount of all Letter of Credit Liabilities as of such date. "Revolving Credit Loan" shall have the meaning provided in Subsection 2.01(a); the Revolving Credit Loans shall not include any Letter of Credit Liabilities. "Revolving Credit Maturity Date" shall mean June 30, 1999; provided, however, upon the occurrence of the Mandate Event, it shall mean April 30, 2000. "Revolving Credit Note" shall mean a promissory note of the Company described in Section 2.05(a) payable to any Lender and being substantially in the form of Exhibit A, evidencing the aggregate Indebtedness of the Company to such Lender resulting from Revolving Credit Loans made by such Lender. "Rolling Period" shall mean for each calendar quarter, such quarter and the three preceding calendar quarters. "Scheduled Redetermination Date" shall have the meaning assigned to such term in Section 2.20(d). "Scotiabank" shall mean The Bank of Nova Scotia, in its individual capacity and not as Documentation Agent. "Security Instruments" shall mean the agreements or instruments described or referred to in Subsections 3.02(d)(ii) through (vii) and any and all other agreements or instruments now or hereafter executed and delivered by the Company, any Subsidiary of the Company or any other Person as security for the payment or performance of the Lender Indebtedness or previously executed in connection with the Existing Indebtedness. "Simple Majority Lenders" shall mean at any time (a) prior to the Commitments expiring or being terminated in full, Lenders holding at least 51% of the Commitments in effect at such time, or (b) thereafter, Lenders holding at least 51% of the then Aggregate Revolving Credit Exposure. -19- "Solar Turbine Lease" shall mean that certain Lease Agreement dated as of October 1, 1987, from Solar Turbines Incorporated, as lessor, to the Company, as lessee. "Standby Letter of Credit" shall mean a letter of credit denominated in Dollars (i) the terms of which are in the reasonable judgment of the Issuing Bank for such Letter of Credit standard in the petroleum industry, (ii) which is used in lieu or in support of performance guarantees or performance, surety or other similar bonds (but expressly excluding stay and appeal bonds) arising in the ordinary course of business, (iii) which is used in lieu or in support of stay or appeal bonds; provided all such letters of credit used in lieu or in support of stay or appeal bonds shall not exceed $5,000,000 in aggregate amount at any time outstanding, (iv) which supports the payment of insurance premiums for reasonably necessary casualty insurance carried by the Company or any of its consolidated Subsidiaries, or (v) which supports payment or performance for identified purchases or exchanges of crude oil, condensate and/or petroleum products. "Subordinated Debentures" shall mean the 12 % Subordinated Debentures due March 15, 2001, issued by the Company. "Subsidiary" of any Person shall mean (a) a corporation of which a majority of the outstanding shares of stock of each class having ordinary voting power is owned by such Person, by one or more Subsidiaries of such Person, or by such Person and one or more of its Subsidiaries and (b) Tesoro LP. "TAPL" shall mean Tesoro Alaska Pipeline Company, a Delaware corporation. "Taxes" shall have the meaning provided in Subsection 2.21(a). "Tesoro Alaska" shall mean Tesoro Alaska Petroleum Company, a Delaware corporation. "Tesoro Bolivia" shall mean Tesoro Bolivia Petroleum Company, a Texas corporation. "Tesoro Coastwide" shall mean collectively, Tesoro Coastwide Services Company, a Delaware corporation and Coastwide Marine Services, Inc., a Texas corporation. "Tesoro E&P" shall mean Tesoro Exploration and Production Company, Tesoro LP and Tesoro Gas Resources Company, Inc., a Delaware corporation, as a single consolidated group. "Tesoro Environmental" shall mean Tesoro Environmental Resources Company, a Delaware corporation. "Tesoro LP" shall mean Tesoro E&P Company, L.P., a Delaware limited partnership. "Tesoro Northstore" shall mean Tesoro Northstore Company, an Alaska corporation. "Tesoro R&M" shall mean Tesoro Refining, Marketing & Supply Company, a Delaware corporation. -20- "Tesoro Terminals" shall mean the Vancouver Terminal located in the area of Vancouver, Washington, the Sacramento Terminal located in the area of Sacramento, California, the Stockton Terminal located in the area of Stockton, California, the Port Hueneme Terminal located in the area of Port Hueneme, California and such other terminals which Tesoro Alaska or any other Inventory Borrowing Base Party owns or has possession of pursuant to a long-term lease. "Tesoro Vostok" shall mean Tesoro Vostok Company, a Delaware corporation. "Transactions" shall mean the transactions provided for in and contemplated by this Agreement and the other Financing Documents. "Type" of Loan shall mean a Base Rate Loan or Eurodollar Loan. "UCC" shall mean the Uniform Commercial Code as from time to time in effect in the State of Texas or, where applicable as to specific Mortgaged Property, any other relevant state. Section 1.02 Accounting Terms and Determinations. Unless otherwise defined or specified herein, all accounting terms shall be construed herein, all accounting determinations hereunder shall be made, all financial statements required to be delivered hereunder shall be prepared and all financial records shall be maintained in accordance with GAAP applied on a basis consistent with the financial statements referred to in Subsection 4.06(a). Section 1.03 Other Definitional Terms. 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, and article, section, schedule, exhibit and like references are to this Agreement unless otherwise specified. ARTICLE II AMOUNT AND TERMS OF LOANS Section 2.01 Commitments. (a) Loans. Subject to and upon the terms and conditions herein set forth, each Lender severally agrees on any Business Day prior to the Revolving Credit Maturity Date, to make Revolving Credit Loans (each a "Revolving Credit Loan") to the Company. (b) Types of Loans. The Revolving Credit Loans made pursuant hereto by each Lender shall, at the option of the Company, be either Base Rate Loans or Eurodollar Loans and may be continued or converted pursuant to Section 2.11, provided that, except as otherwise specifically provided herein, all Loans made pursuant to the same Borrowing shall be of the same Type. (c) Revolving Credit Commitments. Each Lender's Revolving Credit Exposure shall not exceed at any one time its Revolving Credit Commitment; provided, however, that the Aggregate Revolving Credit Exposure at any one time outstanding shall not exceed the Maximum Available Amount in effect at such time; and, provided, further, the aggregate principal amount of all -21- Revolving Credit Loans at any one time outstanding shall not exceed the Maximum Revolving Credit Loan Available Amount in effect at such time. There may be more than one Borrowing with respect to Revolving Credit Loans on any day. Within the foregoing limits and subject to the conditions set out in Article III, the Company may obtain Borrowings of Revolving Credit Loans, repay or prepay such Revolving Credit Loans, and reborrow such Revolving Credit Loans. (d) Active Facility Amount. The Company may from time to time, by written notice to the Administrative Agent, the Issuing Bank and each Lender, designate the Active Facility Amount as any amount (in integral multiples of $1,000,000) not less than $100,000,000 and not in excess of the Aggregate Revolving Credit Commitments. As of the Closing Date, the Active Facility Amount shall be $100,000,000 until such time as a new Active Facility Amount is designated pursuant to the terms of this Section. (e) Amounts of Borrowings, etc. The aggregate principal amount of each Borrowing (i) of Eurodollar Loans shall be not less than $5,000,000 and shall be in an integral multiple of $1,000,000, and (ii) of Base Rate Loans hereunder shall be not less than $1,000,000 and shall be in an integral multiple of $100,000, except that any Borrowing of Revolving Credit Loans that are Base Rate Loans may be in the aggregate amount of the unused Maximum Revolving Credit Loan Amount in effect at such time. Borrowings of more than one Type may be outstanding at the same time; provided, however, that the Company shall not be entitled to request any Borrowing that, if made, would result in an aggregate of more than four separate Borrowings of Eurodollar Loans being outstanding at any one time. For purposes of the foregoing, Borrowings having different Interest Periods, regardless of whether they commence on the same date, shall be considered separate Borrowings. Section 2.02 Borrowing Requests. (a) Borrowing Requests. Whenever the Company desires to make a Borrowing hereunder, it shall give Advance Notice in the form of a Borrowing Request, specifying, subject to the provisions hereof, (i) the aggregate principal amount of the Loans to be made pursuant to such Borrowing, (ii) the date of Borrowing (which shall be a Business Day), (iii) whether the Loans being made pursuant to such Borrowing are to be Base Rate Loans or Eurodollar Loans, and (iv) in the case of Eurodollar Loans, the Interest Period to be applicable thereto. (b) Notice by Administrative Agent. The Administrative Agent shall promptly give each Lender telecopy or telephonic notice (and, in the case of telephonic notices, confirmed by telecopy or otherwise in writing) of the proposed Borrowing, of such Lender's proportionate share thereof and of the other matters covered by the Advance Notice. Without in any way limiting the Company's obligation to confirm in writing any telephonic notice, the Administrative Agent may act without liability upon the basis of telephonic notice believed by the Administrative Agent in good faith to be from the Company prior to receipt of written confirmation. In each such case, the Company hereby waives the right to dispute the Administrative Agent's record of the terms of such telephonic notice, absent manifest error. -22- Section 2.03 Letters of Credit. (a) Issuance of Letters of Credit. Subject to the terms and conditions hereof, the Company shall have the right, in addition to Revolving Credit Loans provided for in Section 2.01, to utilize the Revolving Credit Commitments from time to time prior to the Revolving Credit Maturity Date by obtaining the issuance of either Documentary Letters of Credit or Standby Letters of Credit for the account of any Loan Party by the Issuing Bank if the Company shall so request in the notice referred to in Subsection 2.03(b)(i) (such letters of credit being collectively referred to as the "Letters of Credit"); provided, however, that the Aggregate Revolving Credit Exposure at any one time outstanding shall not exceed the Maximum Available Amount in effect at such time. The Letters of Credit may be issued to support the obligations of the Company or any of its Subsidiaries. Upon the date of the issuance of a Letter of Credit, the applicable Issuing Bank shall be deemed, without further action by any party hereto, to have sold to each Lender, and each Lender shall be deemed, without further action by any party hereto, to have purchased from the Issuing Bank, a participation, to the extent of such Lender's Percentage Share, in such Letter of Credit and the related Letter of Credit Liabilities. No Letter of Credit issued pursuant to this Agreement shall have an expiry date later than one year from date of issuance (except for Letters of Credit issued to support performance bonds on behalf of Tesoro Bolivia), provided that any Letter of Credit having an expiry date after the Revolving Credit Maturity Date shall have been fully Covered or shall be backed by a letter of credit in form and substance, and issued by an issuer, acceptable to each of the Administrative Agent and the Issuing Bank in their sole discretion, provided, further, that, subject to the immediately preceding proviso, any Letter of Credit may give the beneficiary thereof the right to draw such Letter of Credit unless the expiry date thereof is extended for periods of up to one year per extension. The Company and the Lenders agree that, as of the Effective Date, the Outstanding Letters of Credit shall for all purposes of this Agreement be deemed to be Letters of Credit issued under and pursuant to the terms of this Agreement. (b) Additional Letter of Credit Provisions. The following additional provisions shall apply to each Letter of Credit: (i) The Company shall give the Administrative Agent and the Issuing Bank at least one Business Days' prior notice (effective upon receipt), or in each case, such shorter period as may be agreed to by the Issuing Bank, specifying the date such Letter of Credit is to be issued (which shall be a Business Day) and the Issuing Bank and describing: (A) the face amount of the Letter of Credit, (B) the expiration date of the Letter of Credit, (C) the name and address of the beneficiary, (D) information concerning the transaction proposed to be supported by such Letter of Credit as the Administrative Agent or the Issuing Bank may reasonably request, (E) such other information and documents relating to the Letter of Credit as the Administrative Agent or the Issuing Bank may reasonably request, and (F) a precise description of documents and the verbatim text of any certificate to be presented by the beneficiary, which, if presented prior to the expiry date of the Letter of Credit, would require the Issuing Bank to make payment under the Letter of Credit; provided that the Issuing Bank, in its reasonable judgment, may require changes in such documents and certificates; and provided further that the Issuing Bank shall not be required to issue any Letter of Credit that on its terms requires payment thereunder prior to the next Business Day following receipt by the Issuing Bank of such documents and certificates. Each such notice shall be accompanied by the Issuing Bank's Application and by a certificate executed by a Responsible Officer setting forth calculations evidencing availability for such Letter of Credit pursuant to -23- Subsection 2.03(b)(ii) and stating that all conditions precedent to such issuance have been satisfied. Each Letter of Credit shall, to the extent not inconsistent with the express terms hereof or the applicable Application, be subject to the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500 (together with any subsequent revisions thereof approved by a Congress of the International Chamber of Commerce and adhered to by the Issuing Lender, the "UCP"), and shall, as to matters not governed by the UCP, be governed by, and construed and interpreted in accordance with, the laws of the State of Texas. In determining whether to pay any Letter of Credit, the Issuing Bank shall be responsible only to use reasonable care to determine that the documents and certificates required to be delivered under that Letter of Credit have been delivered and that they comply on their face with the requirements of that Letter of Credit. (ii) No Letter of Credit may be issued if after giving effect thereto the Aggregate Revolving Credit Exposure would exceed the Maximum Available Amount. On each day during the period commencing with the issuance of any Letter of Credit and until such Letter of Credit shall have expired or have been terminated, the Revolving Credit Commitment of each Lender shall be deemed to be utilized for all purposes hereof in an amount equal to such Lender's Percentage Share of the amount of the Letter of Credit Liabilities related to such Letter of Credit. (iii) Upon receipt from the beneficiary of any Letter of Credit of any demand for payment thereunder, the Issuing Bank shall promptly notify the Company and the Administrative Agent of such demand (provided that the failure of an Issuing Bank to give such notice shall not affect the Reimbursement Obligations of the Company hereunder) and the Company shall immediately, and in any event no later than 11:00 a.m. (Houston, Texas time) on the date of such drawing, reimburse the Administrative Agent for the account of the Issuing Bank for any amount paid by the Issuing Bank upon any drawing under any Letter of Credit, without presentment, demand, protest or other formalities of any kind in an amount, in same day funds, equal to the amount of such drawing. Unless prior to 11:00 a.m. (Houston, Texas time) on the date of such drawing, the Company shall have either notified the Issuing Bank and the Administrative Agent that the Company intends to reimburse the Administrative Agent for the account of the Issuing Bank for the amount of such drawing with funds other than the proceeds of a Revolving Credit Loan or delivered to the Administrative Agent a Borrowing Request for Revolving Credit Loans in an amount equal to such drawing, the Company will be deemed to have given a Borrowing Request to the Administrative Agent requesting that the Lenders make Revolving Credit Loans which shall be Base Rate Loans on the date on which such drawing is honored in an amount equal to the amount of such drawing. Such Loans shall be subject to satisfaction of the conditions in Article III and to existence of Maximum Revolving Credit Loan Available Amount. Subject to the preceding sentence, if so requested by the Administrative Agent, the Lenders shall, on the date of such drawing, make such Revolving Credit Loans in an amount equal to such Lender's Percentage Share of such drawing, the proceeds of which shall be applied directly by the Administrative Agent to reimburse the Issuing Bank for the amount of such drawing. (iv) If the Company fails to reimburse the Issuing Bank as provided in clause (iii) above, the Issuing Bank shall promptly notify the Administrative Agent and the Administrative Agent shall notify each Lender of the unreimbursed amount of such drawing and of such Lender's respective participation therein based on such Lender's Percentage Share. Each Lender will pay to the Administrative Agent for the account of the applicable Issuing Bank on the date of such notice an -24- amount equal to such Lender's Percentage Share of such unreimbursed drawing (or, if such notice is made after 11:00 a.m. (Houston, Texas time) on such date, on the next succeeding Business Day). If any Lender fails to make available to the Issuing Bank the amount of such Lender's participation in such Letter of Credit as provided in this clause (iv), the Issuing Bank shall be entitled to recover such amount on demand from such Lender together with interest at the Federal Funds Rate for one Business Day and thereafter at the Base Rate. Nothing in this clause (iv) shall be deemed to prejudice the right of any Lender to recover from the Issuing Bank any amounts made available by such Lender to the Issuing Bank pursuant to this clause (iv) if it is determined by a court of competent jurisdiction that the payment with respect to a Letter of Credit by the Issuing Bank was wrongful and such wrongful payment was the result of gross negligence or willful misconduct on the part of the Issuing Bank. The Issuing Bank shall pay to the Administrative Agent and the Administrative Agent to each Lender such Lender's Percentage Share of all amounts received from the Company for payment, in whole or in part, of the Reimbursement Obligation in respect of any Letter of Credit, but only to the extent such Lender has made payment to the Issuing Bank in respect of such Letter of Credit pursuant to this clause (iv). (v) The issuance by the Issuing Bank of each Letter of Credit shall, in addition to the conditions precedent set forth in Article III, be subject to the conditions precedent that such Letter of Credit shall be in such form and contain such terms as shall be reasonably satisfactory to the Issuing Bank, and that the Company shall have executed and delivered such other instruments and agreements relating to such Letter of Credit as the Issuing Bank shall have reasonably requested and that are not inconsistent with the terms of this Agreement including the Issuing Bank's Application therefor. In the event of a conflict between the terms of this Agreement and the terms of any Application, the terms of this Agreement shall control. (vi) As between the Company and the Issuing Bank, the Company assumes all risks of the acts and omissions of or misuse of the Letters of Credit issued by the Issuing Bank by the respective beneficiaries of such Letters of Credit. In furtherance and not in limitation of the foregoing, the Issuing Bank shall not be responsible: (A) for the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any Person in connection with the application for or issuance of such Letters of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (B) for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any such Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; (C) for failure of the beneficiary of any such Letter of Credit to comply fully with conditions required in order to draw upon such Letter of Credit, which failure is not the result of gross negligence or willful misconduct of the Issuing Bank as determined by a court of competent jurisdiction; (D) for errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they are in cipher; (E) for errors in interpretation of technical terms; (F) for any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any such Letter of Credit or of the proceeds thereof; (G) for the misapplication by the beneficiary of any such Letter of Credit of the proceeds of any drawing under such Letter of Credit; and (H) for any consequences arising from -25- causes beyond the control of the Issuing Bank, including, without limitation, the actions of any governmental authority. None of the above shall affect, impair, or prevent the vesting of any of the Issuing Bank's rights or powers hereunder. Notwithstanding anything to the contrary contained in this clause (vi), the Company shall have no obligation to indemnify an Issuing Bank in respect of any liability incurred by the Issuing Bank arising solely out of the gross negligence or willful misconduct of the Issuing Bank, as determined by a court of competent jurisdiction. (vii) The Issuing Bank will send to the Company and the Administrative Agent immediately upon issuance of any Letter of Credit, or an amendment thereto, a true and complete copy of such Letter of Credit, or such amendment thereto. Upon issuance of any Letter of Credit or an amendment thereto, the Administrative Agent shall promptly notify each Lender of the terms of such Letter of Credit or amendment thereto, the Issuing Bank for such Letter of Credit or amendment thereto, and of such Lender's Percentage Share of the amount of such Letter of Credit or amendment thereto, and the Administrative Agent shall provide to each Lender a copy of such Letter of Credit or such amendment thereto. Upon cancellation or termination of any Letter of Credit, the Issuing Bank shall promptly notify the Administrative Agent and the Company, and the Administrative Agent will then promptly notify each Lender, of such cancellation or termination. (viii) The obligation of the Company to reimburse each Issuing Bank for Reimbursement Obligations with regard to the Letters of Credit issued by it and the obligations of Lenders under clause (iv) shall be unconditional and irrevocable and shall be paid strictly in accordance with the terms of this Agreement and under all circumstances including, without limitation, the following circumstances: (A) any lack of validity or enforceability of any Letter of Credit; (B) the existence of any claim, set-off, defense or other right that the Company may have at any time against a beneficiary or any transferee of any Letter of Credit (or any Persons for whom any such transferee may be acting), any Lender or any other Person, whether in connection with this Agreement, the transactions contemplated herein or any unrelated transaction (including any underlying transaction between the Company or one of its Subsidiaries and the beneficiary for which the Letter of Credit was procured) other than a defense based on the gross negligence or willful misconduct of the Issuing Bank, as determined by a court of competent jurisdiction; (C) any draft, demand, certificate or any other document presented under any Letter of Credit is proved to be forged, fraudulent, invalid or insufficient in any respect or any statement therein is untrue or inaccurate in any respect; (D) payment by the Issuing Bank under any Letter of Credit against presentation of a demand, draft or certificate or other document that does not comply with the terms of such Letter of Credit, provided that such payment does not occur as a result of the gross negligence or willful misconduct of the Issuing Bank, as determined by a court of competent jurisdiction; (E) any adverse change in the condition (financial or otherwise) of the Company; -26- (F) any breach of this Agreement or any other Financing Document by the Company, Administrative Agent or any Lender (other than the Issuing Bank); (G) any other circumstance or happening whatsoever which is similar to any of the foregoing; provided that such other occurrence or happening is not the result of the gross negligence or willful misconduct of the Issuing Bank, as determined by a court of competent jurisdiction; or (H) the fact that a Default shall have occurred and be continuing. Section 2.04 Disbursement of Funds. (a) Availability. No later than 2:00 p.m. (Houston time) on the date of each Borrowing, each Lender will make available its pro rata portion of the amount (if any) by which the principal amount of the Borrowing requested to be made on such date exceeds the principal amount of Loans (if any) maturing or Reimbursement Obligations (if any) due and owing on such date, in Dollars and in immediately available funds at the Payment Office. The Administrative Agent will make available to the Company at the Payment Office the aggregate of the amounts (if any) so made available by the Lenders by depositing the same, in immediately available funds, to an account of the Company at the Administrative Agent designated by the Company for such purpose. To the extent that Loans mature or Reimbursement Obligations are due and owing on the date of a requested Borrowing of Revolving Credit Loans, the Lenders shall apply the proceeds of the Revolving Credit Loans then being made, to the extent thereof, to the repayment of such maturing Loans or Reimbursement Obligations, such Revolving Credit Loans and repayments intended to be a contemporaneous exchange. (b) Funds to the Administrative Agent. Unless the Administrative Agent shall have been notified by any Lender prior to the date of a Borrowing that such Lender does not intend to make available to the Administrative Agent such Lender's portion of the Borrowing to be made on such date, the Administrative Agent may assume that such Lender has made such amount available to the Administrative Agent on such date, and the Administrative Agent may make available to the Company a corresponding amount. If such corresponding amount is not in fact made available to the Administrative Agent by such Lender on the date of a Borrowing, the Administrative Agent shall be entitled to recover such corresponding amount on demand from such Lender together with interest at the Federal Funds Rate. If such Lender does not pay such corresponding amount forthwith upon the Administrative Agent's demand therefor, the Administrative Agent shall promptly notify the Company, and the Company shall immediately pay such corresponding amount to the Administrative Agent together with interest at the rate specified for the Borrowing which includes such amount paid. Nothing in this Section shall be deemed to relieve any Lender from its obligation to fulfill its Commitment hereunder or to prejudice any rights which the Company may have against any Lender as a result of any default by such Lender hereunder. (c) Lenders' Responsibilities. No Lender shall be responsible for any default by any other Lender in its obligation to make Loans hereunder, and each Lender shall be obligated to make the Loans provided to be made by it hereunder, regardless of the failure of any other Lender to fulfill its Commit- ment hereunder. Section 2.05 Notes. -27- (a) Revolving Credit Notes. The Company's obligation to pay the principal of, and interest on, the Revolving Credit Loans made by each Lender shall be further evidenced by the Company's issuance, execution and delivery of a Revolving Credit Note payable to the order of each such Lender in the amount of the sum of such Lender's Revolving Credit Commitment and shall be dated as of the date of issuance of such Revolving Credit Note. The principal amount of each Revolving Credit Note shall be payable on or before the Revolving Credit Maturity Date. (b) Right to Collect on the Notes. The Company and the Guarantors are personally obligated and fully liable for the amounts due under the Notes. The Lenders have the right to sue on the Notes and obtain a personal judgment against the Company and the Guarantors for satisfaction of the amounts due under the Notes either before or after a judicial foreclosure of the Alaska Deed of Trust under Alaska Statute 09.45.170 - 09.45.220. Section 2.06 Interest. In all cases subject to Section 9.13: (a) Base Rate Loans. Subject to Section 2.06(c), the Company agrees to pay interest in respect of the unpaid principal amount of each Base Rate Loan from the date thereof until payment in full thereof at a rate per annum which shall be, for any day, equal to the sum of the Applicable Margin plus the Base Rate in effect on such day, but in no event to exceed the Highest Lawful Rate. The term "Base Rate" shall mean the higher of (i) the Prime Rate in effect on such day or (ii) one-half of one percent (1/2%) plus the Federal Funds Rate in effect for such day (rounded upwards, if necessary, to the nearest 1/16th of 1%), but in no event to exceed the Highest Lawful Rate. For purposes of this Agreement, any change in the Base Rate due to a change in the Federal Funds Rate or the Prime Rate shall be effective on the effective date of such change in the Federal Funds Rate or the Prime Rate, as the case may be. If for any reason the Administrative Agent shall have determined (which determination shall be conclusive and binding, absent manifest error) that it is unable to ascertain the Federal Funds Rate for any reason, including but not limited to the inability of the Administrative Agent to obtain sufficient bids or publications in accordance with the terms hereof, the Base Rate shall be the Prime Rate until the circumstances giving rise to such inability no longer exist. (b) Eurodollar Loans. Subject to Section 2.06(c), the Company agrees to pay interest in respect of the unpaid principal amount of each Eurodollar Loan from the date thereof until payment in full thereof at a rate per annum which shall be the sum of the Applicable Margin plus the relevant Eurodollar Rate, but in no event to exceed the Highest Lawful Rate. (c) Default Interest. Overdue principal and, to the extent permitted by law, overdue interest in respect of each Loan and all other amounts owing hereunder shall bear interest for each day that such amounts are overdue at a rate per annum equal to three percent (3%) in excess of the Base Rate in effect for each such day. (d) Miscellaneous. Interest on each Loan shall accrue from and including the date of such Loan to but excluding the date of payment in full thereof. Interest on each Eurodollar Loan shall be payable on the last day of each Interest Period applicable thereto and, in the case of an Interest Period in excess of three months, on each day which occurs every three months after the initial date of such Interest Period, and on any prepayment (on the amount prepaid), at maturity -28- (whether by acceleration or otherwise) and, after maturity, on demand. Interest on Base Rate Loans shall be payable on each Quarterly Date, commencing on the first of such days to occur after such Loan is made, at maturity (whether by acceleration or otherwise) and, after maturity, on demand. (e) Notice by the Administrative Agent. The Administrative Agent, upon determining the Eurodollar Rate for any Interest Period, shall promptly notify by telephone (confirmed in writing) or in writing the Company and the Lenders thereof. Section 2.07 Interest Periods. In connection with each Borrowing of Eurodollar Loans, the Company shall elect an Interest Period to be applicable to such Borrowing, which Interest Period shall begin on and include, as the case may be, the date selected by the Company pursuant to Section 2.02(a), the conversion date or the date of expiration of the then current Interest Period applicable thereto, and end on but exclude the date which is either one, two, three or six months thereafter, as selected by the Company; provided that: (a) Business Days. If any Interest Period would otherwise expire on a day which is not a Business Day, such Interest Period shall expire on the next succeeding Business Day, provided, further, that if any Interest Period (other than in respect of a Borrowing of Eurodollar Loans the Interest Period of which is expiring pursuant to Section 2.15(b) hereof) would otherwise expire on a day which is not a Business Day but is a day of the month after which no further Business Day occurs in such month, such Interest Period shall expire on the next preceding Business Day; (b) Month End. 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, subject to Subsection (c) below, end on the last Business Day of a calendar month; (c) Payment Limitations. No Interest Period shall extend beyond any date that any principal payment or prepayment is scheduled to be due unless the aggregate principal amount of Borrowings which are Borrowings of Base Rate Loans or which have Interest Periods which will expire on or before such date, less the aggregate amount of any other principal payments or prepayments due during such Interest Period, is equal to or in excess of the amount of such principal payment or prepayment; and (d) Maturity Dates. No Interest Period shall extend beyond the Revolving Credit Maturity Date. Section 2.08 Repayment of Loans. Subject to the provisions of Sections 2.09, 2.10 and 2.11, the Company shall pay to the Administrative Agent for the ratable benefit of the Lenders the unpaid principal amount of (i) each Eurodollar Loan made by such Lender hereunder on the last day of the Interest Period in respect of such Loan and (ii) each Base Rate Loan on or before the Revolving Credit Maturity Date. -29- Section 2.09 Termination or Reduction of Revolving Credit Commitments. The Company may, upon at least three Business Days' notice to the Administrative Agent, terminate entirely at any time, or proportionately reduce from time to time by an aggregate amount of $5,000,000 or any larger multiple of $1,000,000, the unused portions of the Revolving Credit Commitments, provided that any such reduction shall apply proportionately to the Revolving Credit Commitment of each Lender. If the Revolving Credit Commitments are terminated in their entirety, all accrued commitment fees with respect thereto shall be payable on the effective date of such termination. Section 2.10 Prepayments. (a) Mandatory Revolving Credit Loan Prepayments. If, after giving effect to any reduction of the Maximum Revolving Credit Loan Available Amount as a result of a redetermination of the E&P Borrowing Base as provided in Section 2.20 or decrease in the Active Facility Amount, the outstanding aggregate principal amount of the Revolving Credit Loans exceeds the amount of the Maximum Revolving Credit Loan Available Amount as so reduced, the Company shall pay or prepay the Revolving Credit Loans in the amount of such excess, together with interest on the principal amount paid accrued to the date of such prepayment, pursuant to Section 2.10(d). (b) Mandatory Borrowing Base Prepayments. If at any time the Aggregate Revolving Credit Exposure is in excess of the Maximum Available Amount, the Company shall make a prepayment of Revolving Credit Loans or provide Cover for Letter of Credit Liabilities, or a combination thereof, in an amount equal to such excess. Any such Cover shall be provided in full within five Business Days of the earlier of (i) the date of the Borrowing Base Report first reporting such excess or (ii) the date on which the Administrative Agent provides notice thereof to the Company and any such prepayment, together with interest on the principal amount paid accrued to the date of such prepayment, shall be made pursuant to Section 2.10(d). (c) Voluntary Prepayments. The Company may, at its option, at any time and from time to time, prepay Loans, in whole or in part, without premium or penalty (other than funding losses, if any, resulting from such prepayment being made other than on the last day of an Interest Period with respect to any Eurodollar Loan as provided in Section 2.18), upon giving, in the case of a Eurodollar Loan, three Business Days' prior written notice to the Administrative Agent, and, in the case of a Base Rate Loan, on the same Business Day's with prior written notice by 11:00 a.m. of such day to the Administrative Agent. Such notice shall specify the date and amount of prepayment and the Loan or Loans (including the Type thereof) to which such prepayment is to be applicable. Upon receipt of such notice, the Administrative Agent shall promptly notify each Lender of the contents thereof and of such Lender's ratable share of such prepayment. The payment amount specified in the such notice shall be due and payable on the date specified. Each prepayment of Base Rate Loans shall be in the minimum principal amount of $1,000,000 and in integral multiples of $100,000 and each prepayment of Eurodollar Loans shall be in the minimum principal amount of $5,000,000 and in integral multiples of $1,000,000 or, in the case of either Base Rate Loans or Eurodollar Loans, or the aggregate balance outstanding on the applicable Notes. Each prepayment of Term Loans made pursuant to this Section shall be accompanied by any funding losses resulting from such prepayment being made other than on the last day of an Interest Period with respect to any Eurodollar Loan as provided in Section 2.18. Each prepayment shall be applied ratably to prepay the Loans of the several Lenders. -30- (d) Payment Procedure. Any prepayment required pursuant to Sections 2.10(a) or (b) other than as a result of elections by the Company to decrease the Active Facility Amount or the Aggregate Revolving Credit Commitments, if not otherwise paid promptly upon determination of such required prepayment, shall be paid in full from cash flow available during the six month period from and after the date that the deficiency requiring such prepayment is determined (the "Deficiency Period"). All prepayments pursuant to this Section 2.10 shall be applied first to such Base Rate Loans which are Revolving Credit Loans as the Company may designate and second to such Eurodollar Loans which are Revolving Credit Loans as the Company may designate. (e) Notice by Administrative Agent. Upon receipt of a notice of prepayment pursuant to this Section, the Administrative Agent shall promptly notify each Lender of the contents thereof and of such Lender's ratable share of such prepayment. Section 2.11 Continuation and Conversion Options. (a) Continuation. The Company may elect to continue all or any part of any Borrowing of Eurodollar Loans beyond the expiration of the then current Interest Period relating thereto by giving Advance Notice to the Administrative Agent of such election, specifying the Eurodollar Loan or portion thereof to be continued and the Interest Period therefor. In the absence of such a timely and proper election with regard to Eurodollar Loans, the Company shall be deemed to have elected to convert such Eurodollar Loan to a Base Rate Loan pursuant to Subsection 2.11(d). (b) Amounts of Continuations. All or part of any Eurodollar Loan may be continued as provided herein, provided that any continuation of such Loan shall not be (as to each Loan as continued for an applicable Interest Period) less than $5,000,000 and shall be in an integral multiple of $1,000,000. (c) Continuation or Conversion Upon Default. If no Default shall have occurred and be continuing, each Eurodollar Loan may be continued or converted as provided in this Section. If a Default shall have occurred and be continuing, the Company shall not have the option to elect to continue any such Eurodollar Loan pursuant to Subsection 2.11(a) or to convert Base Rate Loans pursuant to Subsection 2.11(e). (d) Conversion to Base Rate. The Company may elect to convert any Eurodollar Loan on the last day of the then current Interest Period relating thereto to a Base Rate Loan by giving Advance Notice to the Administrative Agent of such election. (e) Conversion to Eurodollar Rate. The Company may elect to convert any Base Rate Loan at any time or from time to time to a Eurodollar Loan by giving Advance Notice to the Administrative Agent of such election, specifying each Interest Period therefor. (f) Amounts of Conversions. All or any part of the outstanding Loans may be converted as provided herein, provided that any conversion of such Loans shall not result in a Borrowing of Eurodollar Loans in an amount less than $5,000,000 and in integral multiples of $1,000,000. -31- Section 2.12 Fees. (a) Revolving Credit Commitments. The Company shall pay to the Administrative Agent for the account of and distribution to each Lender in accordance with its Percentage Share a commitment fee for the period commencing on the Closing Date to and including the Revolving Credit Maturity Date (or such earlier date as the Revolving Credit Commitments shall have been terminated entirely) computed at a rate equal to .375% per annum on the average daily unused amount of the Active Facility Amount, payable in arrears on the Quarterly Dates, commencing on the first Quarterly Date to occur after the Closing Date. (b) Commitments. The Company shall pay to the Administrative Agent for the account of and distribution to each Lender in accordance with its Percentage Share a commitment fee for the period commencing on the Closing Date to and including the Revolving Credit Maturity Date computed at a rate equal to .1875% per annum on the average daily amount by which the Aggregate Revolving Credit Commitments exceed the Active Facility Amount, payable in arrears on the Quarterly Dates, commencing on the first Quarterly Date to occur after the Closing Date. In the event that the Company elects, at any time, to increase the Active Facility Amount pursuant to Section 2.01(d), the Company shall pay to the Administrative Agent for the account of and distribution to each Lender in accordance with its Percentage Share an additional commitment fee for the period commencing on the date six months prior to the date such increase is designated (but in no event earlier than the later to have occurred of the Closing Date or the date of the last increase of the Active Facility Amount) to and including such date of designation computed at a rate equal to .375% per annum on the amount of the increase so designated. Payment of such additional commitment fee shall be due and payable upon delivery of the notice of designating the increase as provided to the Administrative Agent pursuant to Section 2.01(d). (c) Letters of Credit. (i) As consideration for the issuance of any Letter of Credit, the Company will pay to the Issuing Bank the greater of (A) $300 or (B) a fee on the daily average amount available for drawings under each Letter of Credit, in each case for the period from and including the date of issuance of such Letter of Credit (or in the case of the Outstanding Letters of Credit, from and including the Effective Date) to and excluding the date of expiration or termination thereof computed at a rate equal to one-fourth of one percent (1/4%) per annum, payable in arrears on each Quarterly Date. The Company shall pay to the Issuing Bank in arrears on each Quarterly Date, with respect to any amendment or transfer of any Letter of Credit and for each drawing made thereunder, documentary and processing charges in accordance with the Issuing Bank's standard schedule for such charges in effect at the time of such amendment, transfer or drawing, as the case may be. All fees payable pursuant to this clause (i) shall be retained by the applicable Issuing Bank. (ii) The Company will pay to the Administrative Agent for the account of and pro rata distribution to each Lender a fee on the daily average amount available for drawings under each Letter of Credit, in each case for the period from and including the date of issuance of such Letter of Credit (or in the case of the Outstanding Letters of Credit, from and including the Effective Date) to and excluding the date of expiration or termination thereof computed at a per annum rate for each day equal to the Applicable Margin for Eurodollar Loans in effect from time to time less one-fourth of one percent (1/4%) per annum, payable in arrears on each Quarterly Date. -32- (d) Administrative Agent and Documentation Agent Fees. The Company shall pay to the Administrative Agent such fees as are set forth in the letter agreement between the Administrative Agent and the Company dated as of March 15, 1996, as the same has been or may be hereafter amended or supplemented, on the dates specified therein. The Company shall pay to the Administrative Agent and Documentation Agent such fees as are set forth in the letter agreement, dated as of March 18, 1996, among the Administrative Agent, the Documentation Agent and the Company as the same has been or may be hereafter amended or supplemented, on the dates specified therein. Section 2.13 Payments, etc. (a) Without Setoff, etc. Except as otherwise specifically provided herein, all payments under this Agreement shall be made to the Administrative Agent on behalf of the Lenders without defense, set-off or counterclaim to the Administrative Agent not later than 11:00 a.m. Houston time on the date when due and shall be made in Dollars in immediately available funds at the Payment Office. The Administrative Agent will promptly thereafter distribute funds in the form received relating to the payment of principal or interest or commitment fees ratably to the Lenders for the account of their respective Lending Offices, and funds in the form received relating to the payment of any other amount payable to any Lender to such Lender for the account of its Lending Office. (b) Non-Business Days. Whenever any payment to be made hereunder or under any Note shall be stated to be due on a day which is not a Business Day, the due date thereof shall be extended to the next succeeding Business Day (except as otherwise provided in Section 2.07 hereof) and, with respect to payments of principal, interest thereon shall be payable at the applicable rate during such extension. (c) Computations. All computations of interest shall be made on the basis of a year of 360 days (unless such calculation would result in a usurious rate, in which case interest shall be calculated on the basis of a year of 365 or 366 days, as the case may be) in the case of Eurodollar Loans, and 365 or 366 days (as the case may be) in the case of Base Rate Loans, and all computations of fees shall be made on the basis of a year of 360 days (unless such calculation would result in a usurious rate, in which case interest shall be calculated on the basis of a year of 365 or 366 days, as the case may be), 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 hereunder shall, except for manifest error, be final, conclusive and binding for all purposes, provided that such determination shall be made in good faith in a manner generally consistent with the Administrative Agent's standard practice. If the Administrative Agent and the Company determine that manifest error exists, said parties shall correct such error by way of an adjustment to the payment due on the next Quarterly Date. Section 2.14 Interest Rate Not Ascertainable, etc. In the event that the Administrative Agent shall have determined (which determination shall be reasonably exercised and shall, absent manifest error, be final, conclusive and binding upon all parties) that on any date for determining the Eurodollar Rate for any Interest Period, by reason of any changes arising after the date of this Agreement affecting the interbank Eurodollar market, or any Lender's position in such market, adequate and fair means do not exist for ascertaining the applicable interest rate on the basis provided for in the definition of Eurodollar Rate, then, -33- and in any such event, the Administrative Agent shall forthwith give notice (by telephone confirmed in writing) to the Company and to the Lenders of such determination. Until the Administrative Agent notifies the Company that the circumstances giving rise to the suspension described herein no longer exist, the obligations of the Lenders to make Eurodollar Loans shall be immediately suspended; any Eurodollar Loan that is requested (by continuation, conversion or otherwise) shall instead be made as a Base Rate Loan, and any outstanding Eurodollar Loan shall be converted, on the last day of the then current Interest Period applicable thereto, to a Base Rate Loan. Section 2.15 Illegality. (a) Determinations of Illegality. In the event that any Lender shall have determined (which determination shall be reasonably exercised and shall, absent manifest error, be final, conclusive and binding upon all parties) at any time that the making or continuance of any Eurodollar Loan has become unlawful by compliance by such Lender in good faith with any applicable law, governmental rule, regulation, guideline or order (whether or not having the force of law and whether or not failure to comply therewith would be unlawful), then, in any such event, the Lender shall give prompt notice (by telephone confirmed in writing) to the Company and to the Administrative Agent of such determination (which notice the Administrative Agent shall promptly transmit to the other Lenders). (b) Eurodollar Loans Suspended. Upon the giving of the notice to the Company referred to in Subsection (a) above, (i) the Company's right to request (by continuation, conversion or otherwise) and such Lender's obligation to make Eurodollar Loans shall be immediately suspended, and any such requested Eurodollar Loan shall instead be made as a Base Rate Loan, and (ii) if the affected Eurodollar Loan or Loans are then outstanding, the Company shall immediately, or if permitted by applicable law, no later than the date permitted thereby, upon at least one Business Day's written notice to the Administrative Agent and the affected Lender, convert each such Eurodollar Loan into a Base Rate Loan, provided that if more than one Lender is affected at any time, then all affected Lenders must be treated the same pursuant to this Subsection. Section 2.16 Increased Costs. (a) Eurodollar Regulations, etc. If, by reason of (x) after the date hereof, the introduction of or any change (including, but not limited to, any change by way of imposition or increase of reserve requirements) in or in the interpretation of any law or regulation, or (y) the compliance with any guideline or request from any central bank or other governmental authority or quasi-governmental authority exercising control over banks or financial institutions generally (whether or not having the force of law): (i) any Lender (or its applicable Lending Office) shall be subject to any tax, duty or other charge with respect to its Eurodollar Loans or its obligation to make Eurodollar Loans, or shall change the basis of taxation of payments to any Lender of the principal of or interest on its Eurodollar Loans or its obligation to make Eurodollar Loans (except for changes in the rate of tax on the overall net income or gross receipts of such Lender or its applicable Lending Office imposed by the jurisdiction in which such Lender's principal executive office or applicable Lending Office is located); or -34- (ii) any reserve (including, but not limited to, any imposed by the Board of Governors of the Federal Reserve System), special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender's applicable Lending Office shall be imposed or deemed applicable or any other condition affecting its Eurodollar Loans or its obligations to make Eurodollar Loans shall be imposed on any Lender or its applicable Lending Office or the interbank Eurodollar market or the secondary certificate of deposit market; and as a result thereof there shall be any increase in the cost to such Lender of agreeing to make or making, funding or maintaining Eurodollar Loans (except to the extent already included in the determination of the applicable Eurodollar Rate) or there shall be a reduction in the amount received or receivable by such Lender or its applicable Lending Office, then the Company shall from time to time, upon written notice from and demand by such Lender (with a copy of such notice and demand to the Administrative Agent), pay to such Lender, within 30 days after the date specified in such notice and demand, additional amounts determined by such Lender in a reasonable manner to be sufficient to indemnify such Lender against such increased cost. A certificate as to the amount of such increased cost and the calculation thereof, submitted to the Company and the Administrative Agent by such Lender, shall, except for manifest error, be final, conclusive and binding for all purposes, provided that the determination of such amount shall be made in good faith in a manner generally consistent with such Lender's standard practice. (b) Costs. If any Lender shall advise the Administrative Agent that at any time, because of the circumstances described in clauses (x) or (y) in Subsection 2.16(a) or any other circumstances arising after the Effective Date affecting such Lender or the interbank Eurodollar market or such Lender's position in such market, the Eurodollar Rate, as determined in good faith by the Administrative Agent, will not adequately and fairly reflect the cost to such Lender of funding its Eurodollar Loans, then, and in any such event: (i) the Administrative Agent shall forthwith give notice (by telephone confirmed in writing) to the Company and to the Lenders of such advice; (ii) the Company's right to request and such Lender's obligation to make Eurodollar Loans shall be immediately suspended, any such Eurodollar Loan that is requested (by continuation, conversion or otherwise) shall instead be made as a Base Rate Loan, and any such outstanding Eurodollar Loan shall be converted, on the last day of the then current Interest Period applicable thereto, to a Base Rate Loan. (c) Capital Adequacy. If, by reason of (i) after the date hereof, the introduction of or any change (including, but not limited to, any change by way of imposition or increase of reserve requirements) 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 or quasi-governmental authority exercising control over banks or financial institutions generally (whether or not having the force of law) affects or would affect the amount of capital required to be maintained by any Lender or any corporation controlling such Lender, and the amount of such capital is increased by or based upon the existence of such Lender's Commitment to lend hereunder and other commitments of this Type or of the Letters of Credit (or similar contingent obligations), then, within 30 days after written request therefor by such Lender (with a copy of such request to the Administrative Agent), the -35- Company shall pay to such Lender, from time to time as specified by such Lender, additional amounts sufficient to compensate such Lender for the increased cost of such additional capital 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 hereunder or to the issuance or maintenance of the Letters of Credit. A certificate as to such amounts and the calculation thereof, submitted to the Company and the Administrative Agent by such Lender, shall be conclusive and binding for all purposes, absent manifest error, provided that the determination of such amount shall be made in good faith in a manner generally consistent with such Lender's standard practice. (d) Issuing Bank. The rights and benefits of the Lenders under this Section 2.16 shall also apply to the Issuing Bank in its capacity as such. (e) Notice. The Company shall not be obligated to compensate any Lender pursuant to this Section 2.16 for any amounts attributable to a period more than 90 days prior to the giving of notice by such Lender to the Company of its intention to seek compensation under this Section 2.16. Section 2.17 Change of Lending Office. Each Lender agrees that it will use reasonable efforts to designate an alternate Lending Office with respect to any of its Eurodollar Loans affected by the matters or circumstances described in Sections 2.14, 2.15 or 2.16 to reduce the liability of the Company or avoid the results provided thereunder, so long as such designation is not disadvantageous to such Lender as determined by such Lender in its sole discretion; provided that such Lender shall have no obligation to so designate an alternate Lending Office located in the United States. Section 2.18 Funding Losses. The Company shall compensate each Lender, upon its written request (which request shall set forth the basis for requesting such amounts and which request shall be reasonably exercised and shall, absent manifest error, be final, conclusive and binding upon all of the parties hereto), for all losses, expenses and liabilities (including, but not limited to, any interest paid by such Lender to lenders of funds borrowed by it to make or carry its Eurodollar Loans to the extent not recovered by the Lender in connection with the re-employment of such funds and including loss of anticipated profits), which the Lender may sustain: (i) if for any reason (other than a default by such Lender) a Borrowing of Eurodollar Loans does not occur on the date specified therefor in a Borrowing Request (whether or not withdrawn), (ii) if any repayment (or conversion pursuant to Section 2.16) of any of its Eurodollar Loans occurs on a date which is not the last day of an Interest Period applicable thereto, or (iii) if, for any reason, the Company defaults in its obligation to repay its Eurodollar Loans when required by the terms of this Agreement. Section 2.19 Sharing of Payments, etc. If any Lender shall obtain any payment or reduction (including, but not limited to, any amounts received as adequate protection of a deposit treated as cash collateral under the Bankruptcy Code) of any obligation of the Company hereunder (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) in excess of its ratable share of payments or reductions on account of such obligations obtained by all the Lenders, such Lender shall forthwith (i) notify each of the other Lenders and the Administrative Agent of such receipt, and (ii) purchase from the other Lenders such participations in the affected obligations as shall be necessary to cause such purchasing Lender to share the excess payment or reduction, net of costs incurred in connection therewith, ratably with each of them, provided that if all or any portion of such excess payment or reduction is thereafter recovered from such purchasing Lender or additional costs are incurred, the purchase shall be -36- rescinded and the purchase price restored to the extent of such recovery or such additional costs, but without interest. The Company agrees that any Lender so purchasing a participation from another Lender pursuant to this Section 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 Company in the amount of such participation. Section 2.20 E&P Borrowing Base. (a) Redetermination Date; Initial E&P Borrowing Base. The E&P Borrowing Base shall be determined in accordance with Section 2.20(b) by the Administrative Agent with the concurrence of the Majority Lenders and is subject to redetermination in accordance with Section 2.20(d). Upon any redetermination of the E&P Borrowing Base, such redetermination shall remain in effect until the next successive Redetermination Date. "Redetermination Date" shall mean the date that the redetermined E&P Borrowing Base becomes effective subject to the notice requirements specified in Section 2.20(e) both for scheduled redeterminations and unscheduled redeterminations. During the period from and after the Closing Date until the next Redetermination Date, unless redetermined pursuant to any unscheduled redeterminations, the amount of the E&P Borrowing Base shall be $45,000,000; provided, however, if both the Mandate Event and the Collection Event occur prior to the next Redetermination Date, the amount of the E&P Borrowing Base shall be increased to $70,000,000. (b) Redetermination. Upon receipt of the Reserve Reports by the Administrative Agent, the Administrative Agent will redetermine the E&P Borrowing Base. Such redetermination by the Administrative Agent, in its sole discretion, will be in accordance with its normal and customary procedures for evaluating oil and gas reserves and other related assets as such exist at that particular time. The Administrative Agent shall propose to the Lenders a new E&P Borrowing Base within 15 days following receipt by the Administrative Agent and the Lenders of the complete Reserve Reports. After having received notice of such proposal by the Administrative Agent, the Majority Lenders shall have 15 days to agree or disagree with such proposal. If at the end of the 15 days, the Majority Lenders have not communicated their approval or disapproval, such silence shall be deemed to be an approval and the Administrative Agent's proposal shall be the new E&P Borrowing Base. If however, the Majority Lenders notify Administrative Agent within 15 days of their disapproval, the Majority Lenders shall, within a reasonable period of time, agree on a new E&P Borrowing Base. (c) Exclusion of Certain Property. The Administrative Agent in its reasonable discretion, may exclude any Oil and Gas Property or portion of production therefrom or any income from any other Property from the E&P Borrowing Base, at any time and for any reason, including, but not limited to, the following: the title information for such Property is not satisfactory, such Property is not Mortgaged Property, such Property is located outside of the United States of America, or such Property is not assignable. (d) Time of Redetermination, etc. So long as any of the Commitments are in effect and so long as there remains any Revolving Credit Exposure as to any Lender, on or around the first Business Day of each October 1 and April 1, commencing October 1, 1996 (each being a "Scheduled Redetermi- nation Date"), the Administrative Agent, the Documentation Agent and the Lenders shall redetermine the amount of the E&P Borrowing Base in accordance with Section 2.20(b). In -37- addition, the Simple Majority Lenders may elect to initiate, at any other time as they so elect, one unscheduled redetermi- nation of the E&P Borrowing Base during any consecutive twelve (12) month period by specifying in writing to the Company the date on which the Company is to furnish a Reserve Report and the date on which such redetermination is to occur. The Company may initiate up to two additional redeterminations of the E&P Borrowing Base in any calendar year. Each such request shall be accompanied by a Reserve Report and a $10,000 redetermination fee for the account of the Administrative Agent. In the event of any such unscheduled redetermination, the Administrative Agent, the Documentation Agent and the Lenders shall redetermine the amount of the E&P Borrowing Base in accordance with Section 2.20(b). (e) Notice by Administrative Agent. The Administrative Agent shall promptly notify in writing the Company and the Lenders of the new E&P Borrowing Base. Any redetermination of the E&P Borrowing Base shall not be in effect until written notice is received by the Company. Section 2.21 Taxes. (a) Payments Free and Clear. Any and all payments by the Company under this Agreement or any other Financing Document shall be made, in accordance with Section 2.13, 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, the Administrative Agent and each Issuing Bank, taxes imposed on its income, and franchise or similar taxes imposed on it, by (i) any jurisdiction (or political subdivision thereof) of which the Administrative Agent, the Issuing Bank or such Lender, as the case may be, is a citizen or resident or in which such Lender has a permanent establishment (or is otherwise engaged in the active conduct of its banking business through an office or a branch) which is such Lender's applicable Lending Office, (ii) the jurisdiction (or any political subdivision thereof) in which the Administrative Agent, the Issuing Bank or such Lender is organized, or (iii) any jurisdiction (or political subdivision thereof) in which such Lender, the Issuing Bank or the Administrative Agent is presently doing business which taxes are imposed solely as a result of doing business in such jurisdiction (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities so arising out of payments by the Company being hereinafter referred to as "Taxes"). If the Company shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to the Lenders, the Issuing Banks or the Administrative Agent (i) the sum payable shall be increased by the amount necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 2.21) such Lender, the Issuing Bank or the Administrative Agent (as the case may be) shall receive an amount equal to the sum it would have received had no such deductions been made, (ii) the Company shall make such deductions and (iii) the Company shall pay the full amount deducted to the relevant taxing authority or other Governmental Authority in accordance with applicable law. (b) Other Taxes. In addition, the Company agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies that arise from any payment made hereunder or from the execution, delivery or registration of, or otherwise with respect to, this Agreement, any Assignment and Acceptance or any other Financing Document (hereinafter referred to as "Other Taxes"). -38- (c) Indemnification. The Company will indemnify each Lender, each Issuing Bank and the Administrative Agent for the full amount of Taxes and Other Taxes (including, but not limited to, any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 2.21) paid by such Lender or the Issuing Bank or the Administrative Agent (on their behalf or on behalf of any Lender), as the case may be, and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted. Any payment pursuant to such indemnification shall be made within 30 days after the date any Lender, the Issuing Bank or the Administrative Agent, as the case may be, makes written demand therefor. If any Lender, the Issuing Bank or the Administrative Agent receives a refund or credit in respect of any Taxes or Other Taxes for which such Lender, the Issuing Bank or the Administrative Agent has received payment from the Company hereunder it shall promptly notify the Company of such refund or credit and shall, within 30 days after receipt of a request by the Company (or promptly upon receipt, if the Company has requested application for such refund or credit pursuant hereto), pay an amount equal to such refund or credit to the Company without interest (but with any interest so refunded or credited), provided that the Company, upon the request of such Lender, the Issuing Bank or the Administrative Agent, agrees to return such refund or credit (plus penalties, interest or other charges) to such Lender, the Issuing Bank or the Administrative Agent in the event such Lender, the Issuing Bank or the Administrative Agent is required to repay such refund or credit. (d) Receipts. Within 30 days after the date of any payment of Taxes or Other Taxes withheld by the Company in respect of any payment to any Lender, the Issuing Bank or the Administrative Agent, the Company will furnish to the Administrative Agent the original or a certified copy of a receipt evidencing payment thereof. (e) Survival. Without prejudice to the survival of any other agreement contained herein, the agreements and obligations contained in this Section 2.21 shall survive the payment in full of principal and interest hereunder. (f) Lender Representations. Each Lender represents that it is either (i) a corporation organized under the laws of the United States of America or any state thereof or (ii) it is entitled to complete exemption from United States withholding tax imposed on or with respect to any payments, including fees, to be made to it pursuant to this Agreement (A) under an applicable provision of a tax convention to which the United States of America is a party or (B) because it is acting through a branch, agency or office in the United States of America and any payment to be received by it hereunder is effectively connected with a trade or business in the United States of America. Each Lender that is not a corporation organized under the laws of the United States of America or any state thereof agrees to provide to the Company and the Administrative Agent on the Effective Date, or on the date of its delivery of the Assignment and Acceptance pursuant to which it becomes a Lender, and at such other times as required by United States law or as the Company or the Administrative Agent shall reasonably request, two accurate and complete original signed copies of either (A) Internal Revenue Service Form 4224 (or successor form) certifying that all payments to be made to it hereunder will be effectively connected to a United States trade or -39- business (the "Form 4224 Certification") or (B) Internal Revenue Service Form 1001 (or successor form) certifying that it is entitled to the benefit of a provision of a tax convention to which the United States of America is a party which completely exempts from United States withholding tax all payments to be made to it hereunder (the "Form 1001 Certification"). In addition, each Lender agrees that if it previously filed a Form 4224 Certification it will deliver to the Company and the Administrative Agent a new Form 4224 Certification prior to the first payment date occurring in each of its subsequent taxable years; and if it previously filed a Form 1001 Certification, it will deliver to the Company and the Administrative Agent a new certification prior to the first payment date falling in the third year following the previous filing of such certification. Each Lender also agrees to deliver to the Company and the Administrative Agent such other or supplemental forms as may at any time be required as a result of changes in applicable law or regulation in order to confirm or maintain in effect its entitlement to exemption from United States withholding tax on any payments hereunder, provided that the circumstances of the Lender at the relevant time and applicable laws permit it to do so. If a Lender determines, as a result of any change in either (i) applicable law, regulation or treaty, or in any official application thereof or (ii) its circumstances, that it is unable to submit any form or certificate that it is obligated to submit pursuant to this Section, or that it is required to withdraw or cancel any such form or certificate previously submitted, it shall promptly notify the Company and the Administrative Agent of such fact. If a Lender is organized under the laws of a jurisdiction outside the United States of America, unless the Company and the Administrative Agent have received a Form 1001 Certification or Form 4224 Certification satisfactory to them indicating that all payments to be made to such Lender hereunder are not subject to United States withholding tax, the Company shall withhold taxes from such payments at the applicable statutory rate, provided that such withholding shall not increase the amount of payments for the account of such Lender to be made by the Company pursuant to Subsection 2.21(a). Each Lender agrees to indemnify and hold harmless from any United States taxes, penalties, interest and other expenses, costs and losses incurred or payable by (i) the Administrative Agent as a result of such Lender's failure to submit any form or certificate that it is required to provide pursuant to this Section or (ii) the Company or the Administrative Agent as a result of their reliance on any such form or certificate which it has provided to them pursuant to this Section. (g) Efforts to Avoid or Reduce. Any Lender claiming any additional amounts payable pursuant to this Section 2.21 shall use reasonable efforts (consistent with legal and regulatory restrictions) to file any certificate or document requested by the Company or the Administrative Agent or to change the jurisdiction of its applicable Lending Office or to contest any tax imposed if the making of such a filing or change or contesting such tax would avoid the need for or reduce the amount of any such additional amounts that may thereafter accrue and would not, in the sole determination of such Lender, be otherwise disadvantageous to such Lender. Section 2.22 Pro Rata Treatment. Except as required under Section 2.15 or 2.16, each Borrowing, each payment or prepayment of principal of any Borrowing, each payment of interest on the Loans, each payment of the fees, each reduction of the Commitments, and each refinancing of any Borrowing with, conversion of any Borrowing to or continuation of any Borrowing as a Borrowing of any Type shall be allocated ratably and pro rata among the Lenders in accordance with their respective Percentage Share. Each Lender agrees that in com- puting such Lender's portion of any Borrowing to be made hereunder, the Administrative Agent may, in its discretion, round each Lender's portion of such Borrowing to the next higher or lower whole dollar amount. -40- Section 2.23 Disposition of Proceeds. The E&P Mortgage contains an assignment by Tesoro E&P to the Administrative Agent of all production and all proceeds attributable thereto which may be produced from or allocated to the Oil and Gas Properties described therein, and the E&P Mortgage further provides in general for the application of such proceeds to the satisfaction of the indebtedness, liabilities and obligations described therein and secured thereby. Notwithstanding such assignment in such E&P Mortgage, the Administrative Agent, the Issuing Banks and the Lenders hereby grant to Tesoro E&P a license to receive, collect and use the proceeds attributable to such production and agree not to notify the purchaser or purchasers of such production and not to take any other action to cause such proceeds to be remitted to the Administrative Agent, the Issuing Banks or the Lenders, in each case unless and until an Event of Default has occurred and is continuing; provided that so long as no Default has occurred and is continuing, the Administrative Agent shall execute and deliver a letter in the form of Exhibit F to such Persons as the Company may direct; provided, further, if the Administrative Agent, the Issuing Bank or any Lender shall receive any such proceeds directly from any such purchaser prior to the occurrence and continuation of a Default, then such Person so receiving such proceeds shall notify the Company thereof and upon request of the Company and pursuant to its written instructions shall promptly remit such proceeds to the Company for the account of Tesoro E&P. Section 2.24 Senior Debt. The Lender Indebtedness is Senior Debt as such term is defined in that certain Subordination Agreement dated December 15, 1993, among the Company, Tesoro Alaska, and the State of Alaska, attached as Exhibit 7 to the Settlement Agreement dated December 15, 1992, among the Company, Tesoro Alaska, and the State of Alaska. ARTICLE III CONDITIONS TO BORROWINGS AND TO PURCHASE, RENEWAL AND REARRANGEMENT The obligation of each Lender to make a Loan or an Issuing Bank to issue a Letter of Credit hereunder is subject to the satisfaction of the following conditions: Section 3.01 Closing. The Company shall have delivered to the Administrative Agent on or before the Closing Date all instruments, certificates and opinions referred to in Section 3.02 not theretofore delivered. Section 3.02 Conditions Precedent to Initial Loan. At the time of the making by such Lender of its initial Loan hereunder or the issuance by the Issuing Bank of the initial Letter of Credit (including, but not limited to, the assumption by the Lenders of the Outstanding Letters of Credit), all obligations of the Company hereunder to the Administrative Agent or any Lender incurred prior to such initial Loan or Letter of Credit (including, but not limited to, the Company's obligation to reimburse the reasonable fees and disbursements of counsel to the Administrative Agent for which the Company has been provided an invoice and any fees payable to the Lenders or the Administrative Agent on or before the Effective Date), shall have been paid in full, and the Administrative Agent shall have received the following, each dated as of the Closing Date, in form and substance satisfactory to the Administrative Agent, with an original thereof for the Administrative Agent and with sufficient copies thereof for each Lender (except that in the case of the Notes, the originals thereof will be delivered to the respective Lenders): -41- (a) Notes - A duly completed and executed Revolving Credit Note for each Lender and in each case payable to the order of the Administrative Agent for the benefit of such Lender. (b) Resolutions and Incumbency Certificates - (i) certified copies of the resolutions of the Board of Directors of the Company and its Subsidiaries that are parties to any Financing Document approving, as appropriate, the Loans, the Notes, this Agreement and the other Financing Documents, and all other documents, if any, to which the Company or such Subsidiary is a party evidencing corporate authorization with respect to such documents; (ii) a certificate of the Secretary or an Assistant Secretary of the Company certifying (A) the name, title and true signature of each officer of such Person authorized to execute the Notes, this Agreement, Applications and the other Financing Documents to which it is a party, (B) the name, title and true signature of each officer of such Person authorized to provide the certifications required pursuant to this Agreement including, but not limited to, certifications required pursuant to Section 5.15, Borrowing Requests, and Borrowing Base Reports, and (C) that attached thereto is a true and complete copy of the articles of incorporation and bylaws of the Company, as amended to date, and a recent good standing certificate; and (iii) a certificate of the Secretary or an Assistant Secretary of each Subsidiary that is a party to any Financing Document certifying (x) the name, title and true signature of each officer of each Subsidiary authorized to execute each such Financing Document to which it is a party, and (y) that attached thereto is a true and complete copy of the articles of incorporation and bylaws of such Subsidiary, as amended to date, and a recent good standing certificate. (c) Opinions of Counsel - Favorable written opinions of Fulbright & Jaworski L.L.P., counsel to the Company and its Subsidiaries, James C. Reed, Jr., special counsel to the Company, and Groh, Eggers & Price, local Alaska counsel to the Company, in each case addressed to the Administrative Agent, the Issuing Bank and each of the Lenders, in form and substance satisfactory to the Administrative Agent, as to such matters incident to the Transactions as any Lender through the Administrative Agent, the Issuing Bank or the Administrative Agent may reasonably request. (d) The Security Instruments - (i) Guaranty Agreement; (ii) Security Agreements or Amended and Restated Security Agreements, as applicable, dated as of the Closing Date executed by each of the Company, Tesoro Alaska, Tesoro R&M, KPL, Tesoro Coastwide and Tesoro Vostok, granting to the Administrative Agent a first priority security interest in all personal Property described therein of each such Person, as security for the indebtedness respectively defined therein as the "Obligations;" (iii) Pledge Agreements dated as of the Closing Date executed by the Company granting to the Administrative Agent a first priority security interest in 100% of the capital -42- stock of Tesoro Alaska, Tesoro R&M, Tesoro Exploration and Production Company, Tesoro Gas Resources Company, Inc., Tesoro Natural Gas Company and TAPL, as security for the Lender Indebtedness; (iv) Amendment of the Alaska Deed of Trust; (v) the E&P Mortgage and any amendments thereto; (vi) Financing Statements, as appropriate, to perfect the security interests created by the instruments delivered under clauses (ii) through (v) above; (vii) Stock certificates and corresponding stock powers to perfect the Administrative Agent's security in the stock pledged by the instrument delivered under clause (iv) above; (viii) all Property in which the Administrative Agent shall, at such time, be entitled to have a Lien pursuant to this Agreement or any other Financing Document shall have been physically delivered to the possession of the Administrative Agent or any bailee accepted by the Administrative Agent to the extent that such possession is necessary for the purpose of perfecting the Administrative Agent's Lien in such collateral security; (ix) the Cash Collateral Account Agreement described in the definition of "Cover"; (x) Assignment and Acceptance Agreement from each of the lenders in the Existing Credit Agreement to the Lenders; (xi) Assignment of Liens; (xii) Confirmation letter acknowledged by State of Alaska regarding subordinate states; and (xiii) Notice to National Bank of Alaska in connection with intercreditor agreement. (e) Insurance. A certificate of insurance coverage of the Company and its Subsidiaries evidencing that the Company is carrying insurance in accordance with Section 5.05 hereof. In addition, the Administrative Agent shall have received evidence satisfactory to the Administrative Agent that the Kenai Refinery and Tesoro Terminals are not situated in an area that has been identified by the Director of the Federal Emergency Management Agency or any other Governmental Authority as an area having special flood hazards. Should it be determined, however, that the Kenai Refinery is situated in an area identified as having special flood hazards, the Administrative Agent shall have received a copy of the applicable flood insurance policy (or policy applications), in form and substance satisfactory to the Administrative Agent, indicating that the maximum limits of coverage have been obtained and that the full premium therefor has been paid in full. -43- (f) Title Opinions. Title opinions as the Administrative Agent may require from attorneys satisfactory to the Administrative Agent setting forth the status of title to the Oil and Gas Properties that constitute a part of the Mortgaged Property. (g) Title Insurance; Survey. An endorsement to the existing Mortgagee's Policy of Title Insurance, in form and substance satisfactory to the Administrative Agent, insuring the lien granted pursuant to the Alaska Deed of Trust and the most recent survey covering the Refinery Premises. (h) Miscellaneous. Such other documents or conditions precedent which the Administrative Agent may reasonably have requested or require in its sole discretion. Section 3.03 Conditions Precedent to Each Loan. At the time of the making by such Lender of each Loan, including the initial Loan but not including continuations or conversions pursuant to Section 2.11 (before as well as after giving effect to such Loan and to the proposed use of the proceeds thereof): (a) Notes. The Company shall have issued, executed and delivered the Notes; (b) No Default. There shall exist no Default or Event of Default; (c) Representations and Warranties. Except for facts timely disclosed to the Administrative Agent from time to time in writing, not materially more adverse to the Company and its Subsidiaries than those existing on the Effective Date, all representations and warranties contained herein and in the other Financing Documents executed and delivered on or after the date hereof shall be true and correct in all material respects with the same effect as though such representations and warranties had been made on and as of the date of such Loan; and (d) Documentation. The Administrative Agent shall have received such other documents as the Administrative Agent or any Lender or special counsel to the Administrative Agent may reasonably request, all in form and substance satisfactory to the Administrative Agent. Each Borrowing Request submitted by the Company, and the acceptance by the Company of the proceeds of such Borrowing (but not including continuations or conversions pursuant to Section 2.11), shall constitute a representation and warranty by the Company, as of the date of the Loans comprising such Borrowing, that the conditions specified in Subsections 3.03(b) and (c) have been satisfied. Section 3.04 Recordings. The Security Instruments and accompanying financing statements covering the Mortgaged Property, or other notices related thereto if necessary or appropriate, shall have been duly delivered by the Administrative Agent to the appropriate offices for filing or recording. ARTICLE IV REPRESENTATIONS AND WARRANTIES In order to induce the Lenders to enter into this Agreement, the Company represents and warrants to the Lenders (which representations and warranties will survive the delivery of the Notes) that: -44- Section 4.01 Corporate Existence. The Company and each of its Subsidiaries are corporations duly organized, legally existing and in good standing under the laws of the jurisdictions in which they are incorporated and are duly qualified as foreign corporations in all jurisdictions wherein the Property owned or the business transacted by them makes such qualification necessary, except where the failure to be so qualified would not have a Material Adverse Effect. Section 4.02 Corporate Power and Authorization. The Company is authorized and empowered to create and issue the Notes; the Company and each of its Subsidiaries are duly authorized and empowered to execute, deliver and perform the Financing Documents, including this Agreement, to which they respectively are parties; and all corporate action on the Company's part requisite for the due creation and issuance of the Notes on the Company's and each of its Subsidiaries' respective part requisite for the due execution, delivery and performance of the Financing Documents, including this Agreement, to which the Company and each of its Subsidiaries respectively are parties has been duly and effectively taken. Section 4.03 Binding Obligations. This Agreement does, and the Notes and other Financing Documents to which the Company and each of its Subsidiaries respectively are parties upon their creation, issuance, execution and delivery will, when issued and delivered under this Agreement, constitute valid and binding obligations of the Company and each such Subsidiary that is a party thereto, respectively, and will be enforceable in accordance with their respective terms (except that enforcement may be subject to any applicable bankruptcy, insolvency or similar laws generally affecting the enforcement of creditors' rights and subject to the availability of equitable remedies). Section 4.04 No Legal Bar or Resultant Lien. The Notes and the other Financing Documents, including this Agreement, to which the Company or any of its Subsidiaries is a party do not and will not violate or create a default under any provisions of the articles or certificate of incorporation or bylaws of the Company or any of its Subsidiaries, or any contract, agreement, instrument or Governmental Requirement to which the Company or any of its Subsidiaries is subject, or result in the creation or imposition of any Lien upon any Properties of the Company or any of its Subsidiaries, other than those violations and defaults that would not affect the Company's or such Subsidiaries' use of such Properties or those permitted by this Agreement. Section 4.05 No Consent. Except as set forth on Schedule 4.05, the Company's and each of its Subsidiaries' respective execution, delivery and performance of the Notes and the other Financing Documents, including this Agreement, to which the Company and each such Subsidiary respectively are parties do not require notice to or filing or registration with, or the authorization, consent or approval of or other action by any other Person, including, but not limited to, any Governmental Authority. Section 4.06 Financial Information. (a) Annual Financial Statements. The consolidated balance sheet of the Company and its Subsidiaries as of December 31, 1995, and the related consolidated statements of income, retained earnings and cash flows for the 12-month period then ended, including in each case the related schedules and notes, reported on by Deloitte & Touche, true copies of which have been previously delivered to each of the Lenders, fairly present the consolidated financial condition of the Company and its Subsidiaries as at the date thereof and the consolidated results of operations and the cash flows for such period, in accordance with generally accepted accounting principles applied on a consistent basis. The unaudited consolidating balance sheet of the Consolidating -45- Statement Entities as of December 31, 1995, and the related unaudited consolidating statements of income and cash flows, form the basis of the Company's consolidated financial statements and are fairly stated in all material respects when considered in relation thereto. (b) No Material Adverse Effect. Since December 31, 1995, there has been no event or occurrence that could reasonably be expected to have a Material Adverse Effect. Section 4.07 Investments and Guaranties. At the date of this Agreement, neither the Company nor any of its Subsidiaries has made investments in or advances to any Person or guaranties of the obligations of any Person that is not a Subsidiary of the Company, except those permitted by Subsections 6.09(b) through (f), those reflected in the Financial Statements or described in Schedule 4.07. Section 4.08 Litigation. Except as set forth in Schedule 4.08, there is no action, suit or proceeding, or any governmental investigation or any arbitration, in each case pending or, to the knowledge of the Company, threatened against the Company or any of its Subsidiaries or any material Property of any thereof before any court or arbitrator or any Governmental Authority which (i) challenges the validity of this Agreement, any Note, any Application, the Guaranty Agreement, or any of the other Financing Documents or (ii) if adversely determined would have a Material Adverse Effect. Section 4.09 Use of Proceeds. The proceeds of the Revolving Credit Loans will be used only to refinance the Existing Indebtedness, provide working capital and for general corporate purposes of the Loan Parties, and to the extent specifically permitted hereunder, Non-Guarantors and after the occurrence of both the Mandate Event and the Collection Event pay-off up to $15,000,000 of principal outstanding under the Subordinated Debentures and the Exchange Notes in the aggregate. The Letters of Credit shall be used only for the purposes provided in Section 2.03. Neither the Company nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose, whether immediate, incidental or ultimate, of buying or carrying Margin Stock (within the meaning of Regulation U or X) and no part of the proceeds of any Loan hereunder will be used to buy or carry any Margin Stock. Neither the Company nor any Person acting on behalf of the Company has taken or will take any action which might cause the Notes or any of the Financing Documents, including this Agreement, to violate Regulation 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 and Exchange Commission (or any successor thereto) or any rule or regulation thereunder, in each case as now in effect or as the same may hereinafter be in effect. Section 4.10 Compliance with ERISA. Neither the Company, any of its Subsidiaries nor any ERISA Affiliate sponsors, maintains or contributes to, or has at any time in the six-year period preceding the date of this Agreement sponsored, maintained or contributed to, any Plan, including, but not limited to, any Plan which is a "multi-employer plan" as such term is defined in Section 3(37) or 4001(a)(3) of ERISA. Except as set forth in Schedule 4.10, each Plan described in such schedule has been terminated with no resulting liability to the PBGC. No act, omission or transaction has occurred which could result in imposition on the Company, any of its Subsidiaries or any ERISA Affiliate (whether directly or directly) of (i) either a civil penalty assessed pursuant to Sections 502(c) or 502(i) of ERISA or a tax imposed pursuant to Section 4975 of the Code, or (ii) breach of fiduciary duty liability damages under Section 409 of ERISA, which in each case would have a Material Adverse Effect. Section 4.11 Taxes; Governmental Charges. The Company and its Subsidiaries have filed all tax returns and reports required to be filed and have paid all taxes, assessments, fees and other governmental -46- charges levied upon any of them or upon any of their respective Properties or income which are due and payable, including interest and penalties, or have provided adequate reserves for the payment thereof if required in accordance with generally accepted accounting principles for the payment thereof, except such interest and penalties as are being contested in good faith by appropriate actions or proceedings and for which adequate reserves for the payment thereof as required by general accepted accounting principles have been provided. Section 4.12 Titles, etc. The Company and its Subsidiaries have indefeasible title to their respective material (individually or in the aggregate) Properties, free and clear of all Liens except (i) Liens referred to in the Financial Statements, (ii) Liens disclosed to the Lenders in Schedule 4.12, (iii) Liens and minor irregularities in title which do not materially interfere with the occupation, use and enjoyment by the Company or any Subsidiary of the Company of any of their respective Properties in the normal course of business as presently conducted or materially impair the value thereof for such business, or (iv) Liens otherwise permitted or contemplated by this Agreement or the other Financing Documents. Section 4.13 Defaults. Neither the Company nor any of its Subsidiaries is in default nor has any event or circumstance occurred which, but for the passage of time or the giving of notice, or both, would constitute a default (in any respect that would have a Material Adverse Effect) under any loan or credit agreement, indenture, mortgage, deed of trust, security agreement or other instrument or agreement evidencing or pertaining to any Indebtedness of the Company or any of its Subsidiaries, or under any material agreement or instrument to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound, except as disclosed to the Lenders in Schedule 4.13. No Default hereunder has occurred and is continuing. Section 4.14 Casualties; Taking of Properties. Since the date of the Financial Statements, neither the business nor the Properties of the Company or any of its Subsidiaries have been affected in a manner that has had or would have a Material Adverse Effect 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 any domestic or foreign government or any agency thereof, riot, activities of armed forces or acts of God or of any public enemy. Section 4.15 Compliance with the Law. Neither the Company nor any of its Subsidiaries: (a) is in violation of any Governmental Requirement; or (b) has failed to obtain any license, permit, franchise or other governmental authorization necessary to the ownership of any of their respective Properties or the conduct of their respective business; which violation or failure would have (in the event that such a violation or failure were asserted by any Person through appropriate action) a Material Adverse Effect. Section 4.16 No Material Misstatements. No information, exhibit or report furnished to the Administrative Agent or the Lenders by or at the direction of the Company or any of its Subsidiaries in connection with the negotiation of this Agreement contained any material misstatement of fact or, when such statement is considered with all other written statements furnished to the Lenders in that connection, omitted to state a material fact or any fact necessary to make the statement contained therein not misleading. -47- Section 4.17 Investment Company Act. The Company is not an "investment company" or a company "controlled" by an "investment company" that is incorporated in or organized under the laws of the United States or any "State," as those terms are defined in the Investment Company Act of 1940, as amended. The execution and delivery by the Company and its Subsidiaries of this Agreement and the other Financing Documents to which they respectively are parties and their respective performance of the obligations provided for therein, will not result in a violation of the Investment Company Act of 1940, as amended. Section 4.18 Public Utility Holding Company Act. The Company is not a "holding company," or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company," or a "public utility" within the meaning of the Public Utility Holding Company Act of 1935, as amended. Section 4.19 Subsidiaries. The Company has no Subsidiaries except those shown in Exhibit C hereto, which exhibit is complete and accurate. The Company owns 100% of all stock of the Subsidiaries listed in such Exhibit, except as set forth therein. Section 4.20 Insurance. Schedule 4.20 attached hereto contains an accurate and complete description of all material policies of fire, liability, workmen's compensation, casualty, flood, business interruption and other forms of insurance owned or held by the Company and each of its Subsidiaries. All such policies are in full force and effect, all premiums with respect thereto have been paid in accordance with their respective terms, and no notice of cancellation or termination has been received with respect to any such policy. Such policies are sufficient for compliance with all requirements of law and of all agreements to which the Company or any of its Subsidiaries is a party; are valid, outstanding and enforceable policies; provide adequate insurance coverage in at least such amounts and against at least such risks (but including in any event public liability) as are usually insured against in the same general area by companies engaged in the same or a similar business for the assets and operations of the Company and each of its Subsidiaries; and will not in any way be affected by, or terminate or lapse by reason of, the transactions contemplated by this Agreement. Schedule 4.20 identifies all material risks, if any, which the Company and its Subsidiaries and their respective Board of Directors or officers have designated as being self insured. Neither the Company nor any of its Subsidiaries has been unable to obtain any insurance with respect to its assets or operations, nor has its coverage been limited below usual and customary policy limits during the last three years. Section 4.21 Mortgaged Property. Substantially all of the Mortgaged Property is described in and covered by the engineering or other written reports which have previously been delivered to and relied upon by the Lenders in connection with this Agreement. Section 4.22 Gas Imbalances. Except as disclosed to the Administrative Agent in Schedule 4.22, there are no gas imbalances, take or pay or other prepayments owed by the Company in excess of $5,000,000 in the aggregate with respect to the Mortgaged Property (or in the case of any of the Mortgaged Property operated by a Person other than the Company or its Subsidiaries, to the best of the Company's knowledge) which would require the Company or its Subsidiaries to deliver Hydrocarbons produced from any of the Mortgaged Property at some future time without then or thereafter receiving full payment therefor. Section 4.23 Environmental Matters. -48- (a) Environmental Laws, etc. Neither any Property of the Company or its Subsidiaries nor the operations conducted thereon violate any applicable order of any court or Governmental Authority or Environmental Laws, which violation could reasonably be expected to have a Material Adverse Effect or which could reasonably be expected to result in remedial obligations having a Material Adverse Effect assuming disclosure to the applicable Governmental Authority of all relevant facts, conditions and circumstances, if any, pertaining to the relevant Property. (b) No Litigation. Without limitation of Subsection (a) above, except as set forth on Schedule 4.23, no Property of the Company or its Subsidiaries nor the operations currently conducted thereon or by any prior owner or operator of such Property or operation, are in violation of or subject to any existing, pending or threatened action, suit, investigation, inquiry or proceeding by or before any court or Governmental Authority or to any remedial obligations under Environmental Laws, which violation, action, suit, investigation, inquiry or proceeding could reasonably be expected to have a Material Adverse Effect or which could reasonably be expected to result in remedial obligations having a Material Adverse Effect assuming disclosure to the applicable Governmental Authority of all relevant facts, conditions and circumstances, if any, pertaining to the relevant Property. (c) Notices, Permits, etc. All notices, permits, licenses or similar authorizations, if any, required to be obtained or filed by the Company or its Subsidiaries in connection with the operation or use of any and all Property of the Company or its Subsidiaries, including but not limited to past or present treatment, storage, disposal or release of a hazardous substance or solid waste into the environment, have been duly obtained or filed except to the extent the failure to obtain or file such notices, permits, licenses or similar authorizations could not reasonably be expected to have a Material Adverse Effect or which could reasonably be expected to result in remedial obligations having a Material Adverse Effect assuming disclosure to the applicable Governmental Authority of all relevant facts, conditions and circumstances, if any, pertaining to the relevant Property. (d) Hazardous Substances Carriers. All hazardous substances or solid waste generated at any and all Property of the Company or its Subsidiaries have in the past been transported, treated and disposed of only by carriers maintaining valid permits under RCRA and any other Environmental Law, except to the extent the failure to have such substances or waste transported, treated or disposed by such carriers could not reasonably be expected to have a Material Adverse Effect, and only at treatment, storage and disposal facilities maintaining valid permits under RCRA and any other Environmental Law, which carriers and facilities have been and are operating in compliance with such permits, except to the extent the failure to have such substances or waste treated, stored or disposed at such facilities, or the failure of such carriers or facilities to so operate, could not reasonably be expected to have a Material Adverse Effect or which could reasonably be expected to result in remedial obligations having a Material Adverse Effect assuming disclosure to the applicable Governmental Authority of all relevant facts, conditions and circumstances, if any, pertaining to the relevant Property. (e) Hazardous Substances Disposal. The Company and its Subsidiaries have taken all reasonable steps necessary to determine and have determined that no hazardous substances or solid waste have been disposed of or otherwise released and there has been no threatened release of any hazardous substances on or to any Property of the Company or its Subsidiaries except in compliance with Environmental Laws, except to the extent the failure to do so could not reasonably be expected -49- to have a Material Adverse Effect or which could reasonably be expected to result in remedial obligations having a Material Adverse Effect assuming disclosure to the applicable Governmental Authority of all relevant facts, conditions and circumstances, if any, pertaining to the relevant Property. (f) OPA Requirements. Except to the extent the failure to so comply would not have a Material Adverse Effect, to the extent applicable, the Company and its Subsidiaries have complied with all design, operation and equipment requirements imposed by OPA or scheduled to be imposed by OPA during the term of this Agreement, and the Company does not have reason to believe that either it or its Subsidiaries will not be able to maintain such compliance with OPA requirements during the term of this Agreement. (g) No Contingent Liability. The Company and its Subsidiaries have no material contingent liability in connection with any release or threatened release of any hazardous substance or solid waste into the environment other than such contingent liabilities at any one time and from time to time which could reasonably be expected to exceed $1,500,000 in excess of applicable insurance coverage and for which adequate reserves for the payment thereof as required by GAAP have not been provided, or which could reasonably be expected to result in remedial obligations having a Material Adverse Effect assuming disclosure to the applicable Governmental Authority of all relevant facts, conditions and circumstances, if any, pertaining to such release or threatened release. ARTICLE V AFFIRMATIVE COVENANTS So long as any Lender has any Commitment hereunder or any Loan remains unpaid or any Revolving Credit Exposure remains outstanding, the Company will at all times comply with the following covenants: Section 5.01 Maintenance and Compliance, etc. The Company will and will cause each of its Subsidiaries to observe and comply in all material respects with all Governmental Requirements, except where failure to do so could not reasonably be expected to have a Material Adverse Effect. The Company will and will cause each Guarantor to, except as permitted by Section 6.07(c), preserve and maintain its corporate existence, rights and franchises. Section 5.02 Payment of Taxes and Claims, etc. The Company will pay, and cause each of its Subsidiaries to pay, (i) all taxes, assessments and governmental charges imposed upon it or upon its Property, and (ii) all claims (including, but not limited to, claims for labor, materials, supplies or services) which might, if unpaid, become a Lien upon its Property, unless, in each case, the validity or amount thereof is being contested in good faith by appropriate action or proceedings and the Company has established adequate reserves in accordance with GAAP with respect thereto. Section 5.03 Further Assurances. The Company will and will cause each Guarantor to cure promptly any defects in the creation and issuance of the Notes, and the execution and delivery of the Financing Documents, including this Agreement, to which it is a party. The Company at its expense will, as promptly as practical, execute and deliver to the Administrative Agent or the applicable Issuing Bank -50- upon request all such other and further documents, agreements and instruments (or cause any of its Subsidiaries to take such action) in compliance with or performance of the covenants and agreements of the Company or any of its Subsidiaries in the Financing Documents, including this Agreement, or to further evidence and more fully describe the collateral intended as security for the Notes or other Lender Indebtedness, or to correct any omissions in the Financing Documents, or more fully to state the security obligations set out herein or in any of the Financing Documents, or to perfect, protect or preserve any Liens created pursuant to any of the Financing Documents, or to make any recordings, to file any notices, or obtain any consents, all as may be necessary or appropriate in connection therewith. Section 5.04 Performance of Obligations. The Company will pay the Notes according to the reading, tenor and effect thereof; and the Company will do and perform every act and discharge all of the obligations provided to be performed and discharged by the Company under the Financing Documents, including this Agreement, at the time or times and in the manner specified, and cause each of the Guarantors to take such action with respect to their obligations to be performed and discharged under the Financing Documents to which they respectively are parties. Section 5.05 Insurance. The Company and its Subsidiaries will maintain or cause to be maintained, with financially sound and reputable insurers, insurance with respect to their respective Properties and business against such liabilities, casualties, risks and contingencies and in such types (including business interruption insurance and flood insurance) and amounts as is customary in the case of Persons engaged in the same or similar businesses and similarly situated or in accordance with any Governmental Requirement. Upon request of the Administrative Agent, the Company will furnish or cause to be furnished to the Administrative Agent from time to time a summary of the insurance coverage of the Company and its Subsidiaries in form and substance reasonably satisfactory to the Administrative Agent and if requested will furnish the Administrative Agent copies of the applicable policies. In the case of any fire, accident or other casualty causing loss or damage to any Properties of the Company or its Subsidiaries (other than Tesoro Coastwide), the proceeds of such policies shall be used, in the Company's sole discretion, (i) to reasonably promptly repair or replace the damaged Property, or (ii) to prepay the Lender Indebtedness. The Company will obtain endorsements to the policies pertaining to all physical Properties in which the Administrative Agent or the Lenders shall have a Lien under the Financing Documents, naming the Administrative Agent as a loss payee and containing provisions that such policies will not be canceled without 30 days prior written notice having been given by the insurance company to the Administrative Agent. Section 5.06 Accounts and Records. The Company will keep and will cause each of its Subsidiaries to keep proper books of record and account in which full, true and correct entries will be made of all financial or business dealings or transactions in relation to their respective business and activities. Section 5.07 Right of Inspection. The Company will permit and will cause each of its Subsidiaries to permit any officer, employee or agent of the Administrative Agent or any of the Lenders to visit and inspect any of the Properties of the Company or any of its Subsidiaries, examine the Company's or any such Subsidiary's books of record and accounts, take copies and extracts therefrom, and discuss the affairs, finances and accounts of the Company or any of its Subsidiaries with the Company's or such Subsidiary's officers, accountants and auditors, as often and all at such reasonable times during normal business hours as may be reasonably requested by the Administrative Agent or any of the Lenders. -51- Section 5.08 Operation and Maintenance of Mortgaged Property and Compliance with Leases. Subject to Section 5.10, the Company will, and will cause each of its Subsidiaries to, operate its Properties or cause its Properties to be operated in accordance with prudent industry practice and in compliance with all material terms and provisions of all applicable leases, contracts and agreements and in compliance with all applicable proration and conservation laws of the jurisdiction in which such Properties may be situated, and all applicable laws, rules and regulations of every other agency and authority from time to time constituted to regulate the development and operation of such Properties, and as to any Oil and Gas Properties, the production and sale of Hydrocarbons and other minerals therefrom. Section 5.09 Stock of Subsidiaries. The Company will at all times own, directly or indirectly, 100% of all stock of all Guarantors, except as otherwise permitted pursuant to Section 6.07. Section 5.10 Certain Additional Assurances Regarding Maintenance and Operation of Properties. With respect to those Properties of the Company or a Subsidiary of the Company which are being operated by operators other than the Company or such Subsidiary, the Company or such Subsidiary shall not be obligated, itself, to perform any undertakings contemplated by the covenants and agreements contained in Sections 5.02, 5.05, and 5.08 which are performable only by such operators and are beyond the control of the Company or such Subsidiary; however, the Company agrees to promptly take and to cause such Subsidiary to promptly take all reasonable actions available under any operating agreements or otherwise to bring about the performance of any such undertakings required to be performed under such Subsections. Section 5.11 Designation of Subsidiaries as Additional Guarantors. If at any time the Majority Lenders, in their sole discretion, or the Company, with the approval of the Administrative Agent, designate any one or more Subsidiaries of the Company (other than a Non-Guarantor Subsidiary) to be additional Guarantors, the Company shall cause any such newly designated Guarantor to execute, within 30 days of such designation, a guaranty agreement in substantially the same form as the Guaranty Agreement executed by the Guarantors in connection with this Agreement. Section 5.12 Minimum Capital Expenditures. The Company and each of its Subsidiaries shall make capital expenditures in accordance with prudent industry practice for the development of their Proved Undeveloped Hydrocarbon Reserves. Section 5.13 Payment of Charters and Tariffs. The Company will pay, and will cause each of its Subsidiaries to pay before or when due (i) the amount owed for the time charter of any tanker or barge used to transport feedstocks, blendstocks or refined products and (ii) the tariff owed by any Inventory Borrowing Base party for the transport or storage of any inventory, including but not limited to, the tariff owed by Tesoro Alaska to the Trans-Alaska Pipeline System, unless in each case, the validity or amount thereof is being contested in good faith by appropriate action or proceedings and the Company has established appropriate reserves in accordance with GAAP. Section 5.14 Title Opinions. Within 90 days after the Closing Date, the attorneys who furnished the title opinions required pursuant to Section 3.02(f) will provide to the Administrative Agent a supplemental opinion stating that there has been no change in the status of title from that reflected in such opinions through the filing and recordation of the E&P Mortgage and that, subject only to the liens referenced in such earlier title opinions, the Liens granted by the E&P Mortgage are first priority. Section 5.15 Reporting Covenants. The Company will furnish to each Lender: -52- (a) Annual Financial Statements. As soon as available and in any event within 105 days after the end of each calendar year of the Company, a consolidated balance sheet of the Company and its Subsidiaries as at the end of such year and the related consolidated statements of income, retained earnings and cash flows of the Company and its Subsidiaries for such calendar year, setting forth in each case in comparative form the figures for the previous calendar year, all in reasonable detail and accompanied by a report thereon of Deloitte & Touche or other independent public accountants of comparable recognized national standing, which such report shall state that such consolidated financial statements present fairly the consolidated financial condition as at the end of such calendar year, and the consolidated results of operations and cash flow for such calendar year, of the Company and its Subsidiaries in accordance with GAAP, applied on a consistent basis. At the same time, a consolidating balance sheet of the Consolidating Statement Entities as at the end of such year and related consolidating statements of income and a schedule of consolidating EBITDA for such calendar year, accompanied by a certification thereon of a Responsible Officer, stating that such consolidating financial statements and EBITDA schedule form the basis of the Company's consolidated financial statements and EBITDA calculations, and are fairly stated in all material respects when considered in relation thereto. (b) Quarterly Financial Statements. As soon as available and in any event within 60 days after the end of each of the first three calendar quarters of the Company, a consolidated balance sheet of the Company and its Subsidiaries as at the end of such quarter and the related consolidated statements of income, retained earnings and cash flows of the Company and its Subsidiaries for such calendar quarter and for the portion of the Company's calendar year ended at the end of such quarter, setting forth in each case in comparative form the figures for the corresponding quarter and the corresponding portion of the Company's previous calendar year and, in the case of the balance sheet only, the last day of the immediately preceding fiscal year, all in reasonable detail and certified by a Responsible Officer that such financial statements are complete and correct and fairly present the consolidated financial condition as at the end of such calendar quarter, and the consolidated results of operations and cash flows for such calendar quarter and such portion of the Company's calendar year, of the Company and its Subsidiaries in accordance with GAAP (subject to normal, year-end adjustments). At the same time, a consolidating balance sheet of the Consolidating Statement Entities at the end of such calendar quarter and related consolidating statements of income and a schedule of consolidating EBITDA, for the portion of the Company's calendar year ended at such quarter accompanied by a certification from a Responsible Officer that such consolidating financial statements and EBITDA schedule form the basis of the Company's consolidated financial statements and EBITDA calculations, and are fairly stated in all material respects when considered in relation thereto. (c) No Default/Compliance Certificate. Together with the financial statements required pursuant to subsections (a) and (b) above, a certificate of a Responsible Officer (i) stating that a review of such financial statements during the period covered thereby and of the activities of the Company and its Subsidiaries has been made under such Responsible Officer's supervision with a view to determining whether the Company and its Subsidiaries have fulfilled all of their obligations under this Agreement, the other Financing Documents, and the Notes; (ii) stating that the Company and its Subsidiaries have fulfilled their obligations under such instruments and that all representations made in this Agreement continue to be true and correct (or specifying the nature of any change), or if there shall be a Default or Event of Default, specifying the nature and status thereof and the Company's proposed response thereto; (iii) demonstrating in reasonable detail -53- compliance (including, but not limited to, showing all material calculations) as at the end of such calendar year or such calendar quarter with Sections 6.01, 6.02, 6.03 and 6.04; and (iv) containing or accompanied by such financial or other details, information and material as the Administrative Agent may reasonably request to evidence such compliance. (d) Auditors' No Default Certificate; Management Letters. Together with the financial statements required pursuant to subsection (a) above, a certificate of the independent public accountants who audited the annual report referred to therein to the effect that their audit has not disclosed the existence of an Event of Default or a Default under this Agreement, or if there exists an Event of Default or a Default hereunder, specifying the nature thereof; and if there exists an Event of Default or Default hereunder, copies of each management letter issued to the Company by such accountants promptly following consideration or review by the Board of Directors of the Company, or any committee thereof (together with any response thereto prepared by the Company). (e) Engineering Reports. Promptly after December 31st and June 30th of each year, but in no event later than 60 days after such date, a report (the "Reserve Report") in form and substance satisfactory to the Majority Lenders and in the case of the December 31 Reserve Report prepared by Netherland, Sewell & Associates or other independent petroleum consultant(s) acceptable to the Majority Lenders (the previous acceptability of an independent petroleum consultant satisfactory to the Majority Lenders shall have no bearing on such consultant's present or future acceptability), which Reserve Report shall evaluate the Hydrocarbon reserves included in the Mortgaged Property as of each such date and which shall, together with any other information reasonably requested by any Lender, set forth the total Proved Hydrocarbon reserves by accepted and customary reserve category attributable to such Mortgaged Property, together with a projection of the rate of production and future net income with respect thereto as of each such date. The June 30 Reserve Report shall be prepared by the engineering staff of the Company and shall update the most recent Reserve Report. (f) Title Information. Within a reasonable time after a request by the Administrative Agent, additional title information in form and substance acceptable to the Majority Lenders as is reasonably necessary covering the Mortgaged Property so that the Lenders shall have received, together with the title information previously received by the Lenders, satisfactory title information covering all of the Mortgaged Property. (g) Events or Circumstances with respect to Mortgaged Property. Promptly after the occurrence of any event or circumstance (other than as known to affect oil and gas prices generally) concerning or changing any of the Mortgaged Property that would have a Material Adverse Effect, notice of such event or circumstance in reasonable detail. (h) Bi-Weekly Borrowing Base Reports. (i) As soon as available and in any event by the Thursday following the close of each two calendar week period, a Borrowing Base Report dated and reflecting amounts as of the close of business on Thursday of the preceding calendar week. (ii) As soon as available and in any event by the 105th day after the end of the fourth calendar quarter of each year and the 60th day after the end of each of the first three -54- calendar quarters of each year of the Company, a quarterly Borrowing Base Report dated and reflecting amounts as of the last day of such calendar year or quarter, as the case may be, which have been reconciled to the financial statements delivered pursuant to Subsection 5.15(a) or (b), as the case may be. (i) Notice of Certain Events. Promptly after the Company learns of the receipt or occurrence of any of the following, a certificate of a Responsible Officer specifying (i) any official notice of any violation, possible violation, non-compliance or possible non-compliance, or claim made by any Governmental Authority pertaining to all or any part of the Properties of the Company or any of its Subsidiaries which, if adversely determined, would have a Material Adverse Effect; (ii) any event which constitutes a Default or Event of Default, together with a detailed statement specifying the nature thereof and the steps being taken to cure such Default or Event of Default; (iii) the receipt of any notice from, or the taking of any other action by, the holder of any promissory note, debenture or other evidence of indebtedness in excess of $1,000,000 of the Company or any of its Subsidiaries with respect to a claimed default, together with a detailed statement specifying the notice given or other action taken by such holder and the nature of the claimed default and what action the Company or its Subsidiary is taking or proposes to take with respect thereto; (iv) any default or noncompliance of any party to any of the Financing Documents with any of the terms and conditions thereof or any notice of termination or other proceedings or actions which could reasonably be expected to adversely affect any of the Financing Documents; (v) the creation, dissolution, merger or acquisition of any Subsidiary of the Company with material operations; (vi) any event or condition which violates any Environmental Law and which could potentially have a Material Adverse Effect or which could potentially result in remedial obligations having a Material Adverse Effect, assuming disclosure to the applicable Governmental Authority of all relevant facts, conditions and circumstances, if any, pertaining to such event or condition; or (vii) any event or condition which may reasonably be expected to have a Material Adverse Effect. (j) Shareholder Communications, Filings, etc. Promptly upon the mailing or filing thereof, copies of all financial statements, reports and proxy statements mailed to the Company's shareholders, and copies of all registration statements, periodic reports and other documents (excluding the related exhibits except to the extent expressly requested by the Administrative Agent) filed with or received by the Company in connection therewith from the Securities and Exchange Commission (or any successor thereto) or any national securities exchange. (k) Litigation. Promptly after (i) the occurrence thereof, notice of the institution of or any material adverse development in any action, suit or proceeding or any governmental investigation or any arbitration, before any court or arbitrator or any governmental or administrative body, agency or official, against the Company, any Guarantor or any material Property of any thereof; or (ii) actual knowledge thereof, notice of the threat of any such action, suit, proceeding, investigation or arbitration, in either case in which the amount involved is material and is not covered by insurance or which, if adversely determined, would have a Material Adverse Effect. (l) ERISA. Promptly after (i) the Company's obtaining knowledge of the occurrence thereof, notice that an ERISA Termination Event or a "prohibited transaction," as such term is defined in Section 406 of ERISA or Section 4975 of the Code, with respect to any Plan has occurred, which such notice shall specify the nature thereof, the Company's proposed response thereto and, where known, any action taken or proposed by the Internal Revenue Service, the Department of -55- Labor or the PBGC with respect thereto, and (ii) the Company's obtaining knowledge thereof, copies of any notice of the PBGC's intention to terminate or to have a trustee appointed to administer any Plan. (m) Borrowing Base Audit. Each calendar year, as of a date to be designated by the Agent, at the cost of the Company, a report of an independent collateral field examiner approved by the Administrative Agent in writing and reasonably acceptable to the Company (which may be the Administrative Agent or an affiliate thereof) with respect to the Eligible Accounts and Eligible Inventory components included in the Borrowing Base, and the Administrative Agent shall have the option to receive such additional reports as the Administrative Agent or the Majority Lenders shall reasonably request; provided, however, that so long as no Default has occurred and is continuing, neither the Administrative Agent nor the Majority Lenders shall request more than one such additional report (for a total of two such reports) per calendar year. (n) Other Information. With reasonable promptness, such other information about the business and affairs and financial condition of the Company or its Subsidiaries as any Lender may reasonably request from time to time. ARTICLE VI NEGATIVE COVENANTS So long as any Lender has any Commitment hereunder or any Loan remains unpaid or any Revolving Credit Exposure remains outstanding, the Company will not: Section 6.01 Consolidated Tangible Net Worth. Permit Consolidated Tangible Net Worth as of the end of any calendar quarter to be less than $125,000,000 plus 75% of the Company's consolidated net income aggregated for each of the calendar quarters from and after April 1, 1996 in which consolidated net income is positive; provided if at any time the Company issues equity securities of any kind, such minimum amount of Consolidated Tangible Net Worth shall be permanently increased by an amount equal to 75% of the net cash proceeds from the issuance of such equity securities, except that to the extent such proceeds are used as permitted in clause (iii) of Section 6.08, such amount shall not so increase the minimum Consolidated Tangible Net Worth; and provided further, that such amount of minimum Consolidated Tangible Net Worth shall be adjusted so as to remove the effect of any accounting adjustments that would otherwise result from the retirement of the Subordinated Debentures and Exchange Notes due to write-offs of original issue discount or deferred financing costs. Section 6.02 Consolidated Current Ratio. Permit the ratio of (i) consolidated current assets to (ii) consolidated current liabilities (excluding current maturities of the Notes) to be less than 1.3 to 1.0 at any time. As used in this Section 6.02 "consolidated current assets" shall mean assets which would, in accordance with GAAP, be included as current assets on a consolidated balance sheet of the Company and its Subsidiaries and "consolidated current liabilities" shall mean liabilities which would, in accordance with GAAP, be included as current liabilities on a consolidated balance sheet of the Company and its Subsidiaries. Section 6.03 Consolidated Cash Flow Coverage Ratio. Permit a cash flow coverage ratio for itself and its Subsidiaries on a consolidated basis as of any Quarterly Date to be less than 1.10 to 1.00 for -56- the Rolling Period ending on the applicable Quarterly Date. As used in this Section 6.03, "cash flow coverage ratio" shall mean, as to the Company, and for the Rolling Period ending on such Quarterly Date, the ratio of (i) the sum of (A) Cash Flow of the Company and its Subsidiaries on a consolidated basis, plus (B) the difference between the Maximum Revolving Credit Loan Available Amount on the last day of the applicable Rolling Period and the outstanding principal amount of the Revolving Credit Loans on the first day of the last calendar quarter of such Rolling Period, plus (C) interest expense of the Company and its Subsidiaries on a consolidated basis to (ii) the sum of (A) regularly scheduled principal payments of Funded Indebtedness paid in cash, plus (B) cash interest expense of the Company and its Subsidiaries on a consolidated basis, plus (C) capital expenditures by the Company and its Subsidiaries on a consolidated basis, excluding capital expenditures made by way of exchanges of equity, plus (D) cash dividends actually paid by the Company and its Subsidiaries on a consolidated basis. Section 6.04 Consolidated Interest Coverage Ratio. Permit its consolidated interest coverage ratio as of the end of any Rolling Period to be less than 2.5 to 1.0. As used in this Section 6.04, "consolidated interest coverage ratio" shall mean the ratio of (i) EBITDA for the Rolling Period to (ii) cash payments made by the Company and its Subsidiaries for interest for such Rolling Period. Section 6.05 Indebtedness. Create, incur, assume or suffer to exist, or permit any of its Subsidiaries to create, incur, assume or suffer to exist, any Indebtedness, other than: (a) the Lender Indebtedness; (b) Indebtedness outstanding on the date hereof which is set out in the Company's financial statements referred to in Section 4.06(a) or on Schedule 6.05 and any renewal, extension, refinancing or refunding of such Indebtedness; provided that (A) the principal amount of such Indebtedness that renews, extends, refinances or refunds any such Indebtedness shall not exceed the principal amount of such renewed, extended, refunded or refinanced Indebtedness, plus up to 5% to cover the costs associated with such renewal, extension, refinancing or refunding of such Indebtedness and (B) the Indebtedness that renews, extends, refinances or refunds such Indebtedness is scheduled to mature no earlier and shall be upon substantially the same or no less favorable terms than the Indebtedness being renewed, extended, refinanced or refunded; provided further, that for purposes of this Section 6.05(b) only, if the Subordinated Debentures and/or the Exchange Notes are prepaid in full, the Borrower may issue subordinated notes upon substantially the same or no less favorable terms than the Subordinated Debentures or Exchange Notes and in an aggregate amount not to exceed $100,000,000 less the amount, if any, on either the Subordinated Debentures or Exchange Notes, if both are not prepaid; (c) accounts payable (for the deferred purchase price of Property or services) from time to time incurred in the ordinary course of business and which are not in excess of 90 days past the invoice or billing date, or if in excess of 90 days past the invoice or billing date are being currently contested in good faith by appropriate actions or proceedings diligently conducted; (d) guaranties issued by the Company or any Subsidiary in the ordinary course of its business of obligations of others (other than for borrowed money) incurred in oil and gas drilling, oil and gas production, oil and gas transportation, crude oil and refined products purchasing, oil and gas exploration or other similar programs or operations; -57- (e) obligations whether current or long term incurred in the normal course of business under or pursuant to customary oil, gas and mineral leases, royalties and oil and gas operating agreements, farm-out and farm-in agreements, development agreements and other agreements which are customary in the oil and gas industry; (f) Indebtedness created, incurred, assumed or guaranteed after the date hereof not otherwise permitted pursuant to this Section 6.05, provided that the aggregate outstanding principal amount of such Indebtedness shall not exceed $10,000,000 at any one time outstanding; (g) Indebtedness owing by (A) the Company to Non-Guarantor Subsidiaries not to exceed $5,000,000 in the aggregate, (B) any Subsidiary of the Company to the Company, (C) the Company to any Guarantor, and (D) any Guarantor to any other Guarantor; (h) obligations for current taxes, assessments and other governmental charges and taxes, assessments or other governmental charges which are not yet due or are being contested in good faith by appropriate action or proceeding promptly initiated and diligently conducted, if such reserve as shall be required by GAAP shall have been made therefor; (i) Capital Lease Obligations not to exceed $7,500,000 at any one time; (j) Indebtedness relating to personal injury or property claims against the Company or any of its Subsidiaries in an amount not to exceed $5,000,000 in the aggregate unless and to the extent such claims are covered by insurance; (k) Indebtedness, not to exceed (i) $15,000,000 in the aggregate outstanding at any one time, in respect of letters of credit (other than the Letters of Credit) or bank guaranties provided by the Company or any of its Subsidiaries in the ordinary course of business and used in lieu or in support of performance guarantees, performance, surety or other similar bonds, or bankers acceptances, and (ii) $5,000,000 in the aggregate outstanding at any one time, in respect of letters of credit (other than Letters of Credit) or bank guaranties provided by the Company or any of its Subsidiaries used in lieu or in support of stay or appeal bonds; provided, however, to the extent Letters of Credit are used in lieu or in support of stay or appeal bonds, such $5,000,000 maximum amount shall be reduced by an amount equal to the aggregate amount of any such Letters of Credit used in lieu or support of stay or appeal bonds; (l) Indebtedness existing in connection with Hedge Agreements, provided that such Hedge Agreements are entered into by the Company or its Subsidiaries in the ordinary course of business and for the purpose of hedging against fluctuations in price or interest rates. (m) Non-Recourse Indebtedness of Tesoro Bolivia; and (n) Indebtedness, not to exceed $15,000,000, incurred by Tesoro Northstore, to be used for the purchase (in fee or leasehold), construction, and/or upgrading of retail outlet stores, subject, however, to the execution of an intercreditor agreement satisfactory in form and substance to the Administrative Agent and Documentation Agent. -58- Section 6.06 Liens. Create, incur, assume or suffer to exist, or permit any of its Subsidiaries to create, incur, assume or suffer to exist, any Lien on any of its Property now owned or hereafter acquired to secure any Indebtedness of any Person, other than: (a) Liens existing on the date hereof and set out on Schedule 6.06; (b) Liens securing the Lender Indebtedness; (c) Liens for taxes, assessments or other governmental charges or levies not yet due or which are being contested in good faith by appropriate action or proceedings and with respect to which adequate reserves are being maintained; (d) statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, materialmen, repairmen, workmen, and other Liens imposed by law created in the ordinary course of business for amounts which are not past due for more than 30 days or which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves in accordance with GAAP are being maintained; (e) Liens (other than any inchoate Lien imposed by ERISA) incurred or deposits or pledges made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, old age or other similar obligations, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money); (f) easements, rights-of-way, restrictions, servitudes, permits, reservations, exceptions, conditions, covenants and other similar charges or encumbrances not interfering with the ordinary conduct of the business of the Company or any of its Subsidiaries; (g) any Lien securing Indebtedness, neither assumed nor guaranteed by the Company or any of its Subsidiaries nor on which it customarily pays interest, existing upon real estate or rights in or relating to real estate acquired by the Company for substation, metering station, pump station, storage, gathering line, transmission line, transportation line, distribution line or for right-of-way purposes, and any Liens reserved in leases for rent and for compliance with the terms of the leases in the case of leasehold estates, to the extent that any such Lien referred to in this clause (vii) does not materially impair the use of the Property covered by such Lien for the purposes of which such Property is held by the Company or any of its Subsidiaries; (h) inchoate Liens arising under ERISA; (i) any Lien on any Property securing Indebtedness incurred, assumed or guaranteed as permitted by Section 6.05(f); (j) Liens reserved in customary oil, gas and/or mineral leases for bonus or rental payments and for compliance with the terms of such leases and Liens reserved in customary operating agreements, farm-out and farm-in agreements, exploration agreements, development agreements and other similar agreements for compliance with the terms of such agreements; -59- (k) any obligations or duties affecting any of the Property of the Company or its Subsidiaries to any municipality or public authority with respect to any franchise, grant, license or permit which do not materially impair the use of such Property for the purposes for which it is held; (l) defects, irregularities and deficiencies in title of any rights of way or other Property of the Company or any Subsidiary which in the aggregate do not materially impair the use of such rights of way or other Property for the purposes for which such rights of way and other Property are held by the Company or any Subsidiary, and defects, irregularities and deficiencies in title to any Property of the Company or its Subsidiaries, which defects, irregularities or deficiencies have been cured by possession under applicable statutes of limitation; (m) royalties, overriding royalties, revenue interests, net revenue interests, production payments (other than production payments granted or created by the Company in connection with the borrowing of money), advance payment obligations (other than obligations in respect of advance payment received by the Company in connection with the borrowing of money) and other similar burdens now existing on Oil and Gas Properties now owned or, as to Properties hereafter acquired, at the time of acquisition by the Company or any of its Subsidiaries; (n) Liens arising out of all presently existing and future division and transfer orders, advance payment agreements, processing contracts, gas processing plant agreements, operating agreements, gas balancing or deferred production agreements, pooling, unitization or communitization agreements, pipeline, gathering or transportation agreements, platform agreements, drilling contracts, injection or repressuring agreements, cycling agreements, construction agreements, salt water or other disposal agreements, leases or rental agreements (but only as otherwise permitted by this Agreement), farm-out and farm-in agreements, exploration and development agreements, and any and all other contracts or agreements covering, arising out of, used or useful in connection with or pertaining to the exploration, development, operation, production, sale, use, purchase, exchange, storage, separation, dehydration, treatment, compression, gathering, transportation, processing, improvement, marketing, disposal or handling of any Property of the Company or its Subsidiaries, provided such agreements are entered into in the ordinary course of business and contain terms customary for such agreements in the industry; (o) Liens securing up to $15,000,000 of the Indebtedness permitted by Section 6.05(k) to the extent such Indebtedness is issued in support of the Company's (or its Subsidiaries') Bolivian operations; (p) Liens securing up to $15,000,000 of Indebtedness permitted by Section 6.05(n); (q) Liens securing the Indebtedness permitted by Section 6.05(i) and Liens of equipment lessors, but only covering the Property under lease; and (r) extensions, renewals or replacements of any Lien referred to in Subsections 6.06(a) through (q), provided that the principal amount of the Indebtedness or obligation secured thereby is not increased and that any such extension, renewal or replacement is limited to the Property originally encumbered thereby. -60- Section 6.07 Mergers, Sales, etc. Merge into or with or consolidate with, or permit any of its Subsidiaries to merge into or with or consolidate with, any other Person, or sell, lease or otherwise dispose of, or permit any of its Subsidiaries to sell, lease or otherwise dispose of (whether in one transaction or in a series of transactions) all or any part of its Property to any other Person, other than (i) (A) a merger of any Guarantor into the Company or into another Guarantor other than Tesoro Bolivia, Tesoro Environmental, or any Subsidiary thereof, (B) a merger of any Guarantor with any Person other than the Company or another Guarantor if immediately thereafter and giving effect thereto the Company or a Guarantor, other than Tesoro Bolivia, Tesoro Environmental, or any Subsidiary thereof, shall own 100% of the stock of the surviving corporation and (C) a merger of the Company with any other Person if the Company is the surviving corporation, provided, however, that in each such case, immediately thereafter and giving effect thereto, no event shall have occurred and be continuing which constitutes a Default, (ii) a sale, lease or other disposition of all or any part of its Property by any Guarantor to the Company or another Guarantor other than Tesoro Bolivia, Tesoro Environmental, or any Subsidiary thereof, (iii) sales, leases or other dispositions of all or any part of its Property by the Company or any of its Subsidiaries to any other Person not in excess of $2,000,000 in any 12-month period and not to exceed $5,000,000 cumulatively from the Closing Date and provided further, that the Company or any such Subsidiary of the Company receives fair market consideration for any such sale, lease or disposition of such Properties, or (iv) a sale, lease or other disposition of Tesoro R&M's interest in the Tesoro Terminals, the proceeds of which will not be included in the limitation amounts set forth in clause (iii) above. Notwithstanding the foregoing limitations, the Company and its Subsidiaries may (A) sell inventory, Hydrocarbon production and other similar assets in the ordinary course of business, (B) sell, transfer or otherwise dispose of personal property (including, but not limited to, pipe, equipment, machinery and vehicles) in the ordinary course of business or when, in the reasonable judgment of the Company, such property is no longer used or useful in the conduct of its business or the business of its Subsidiaries, (C) farm-out in the ordinary course of business any Oil and Gas Properties owned by the Company or its Subsidiaries which do not constitute a portion of the Mortgaged Property, (D) sell Properties of the Non-Guarantor Subsidiaries, and (E) sell the Property of or stock issued by Tesoro Bolivia, Tesoro Environmental, or any of their respective Subsidiaries, provided, that, in connection with any sale of property or stock pursuant to this clause (E), any Letter of Credit issued for the account of, or to support the assets or operations of the Guarantor whose Properties or stock is being sold, shall be terminated or backed by a letter of credit in form and substance, and issued by an issuer, acceptable to each of the Administrative Agent and the applicable Issuing Bank in their sole discretion. Section 6.08 Restricted Payments. Declare or pay any dividend on its capital stock, make any payment to purchase, redeem, retire or acquire any of its capital stock or any option, warrant, or other right to acquire such capital stock, return any capital to its stockholders, make any distribution of its assets to its stockholders as such, or permit any of its Subsidiaries to purchase or otherwise acquire for value any stock of the Company, or pay, prepay, repurchase or redeem the Subordinated Debentures or Exchange Notes, except that the Company may (i) declare and deliver stock dividends, (ii) declare and pay cash dividends on common stock or preferred stock issued by the Company or repurchase its common stock, in amounts not to exceed the Cumulative Amount Available for Restricted Payments; provided, however, after the occurrence of the Mandate Event, any payments made pursuant to this clause (ii) shall not, on an annual basis, exceed an amount equal to $5,000,000 less the amount used pursuant to clause (vi) to purchase outstanding stock of the Company, -61- (iii) redeem the Subordinated Debentures and/or Exchange Notes with the proceeds from (A) equity offerings, (B) Indebtedness permitted by Sections 6.05(b) and (f) and (C) cash proceeds received in connection with Lenape Resources Corp. v. Tennessee Gas Pipeline Company, 39 Tex Sup. Ct. J. 496 (April 18, 1996), (D) the Cumulative Amount Available for Restricted Payments, (E) after the occurrence of the Collection Event, cash on hand and (F) after the occurrence of [both the Mandate Event and] the Collection Event, Loans not to exceed $15,000,000 in the aggregate, (iv) purchase stock as permitted by Section 6.09(i), (v) after the occurrence of the Mandate Event and in an aggregate amount not to exceed $5,000,000, repurchase the common stock issued by the Company from (A) shareholders owning 100 shares or less pursuant to an oddlot buyback program and (B) the open market for employee benefit plans, and (vi) after the occurrence of the Mandate Event, repurchase common stock (other than as permitted in Section 6.08(v)) issued by the Company in an annual amount not to exceed $5,000,000 less the amount of any dividends paid pursuant to clause (ii); provided that both before and after giving effect to any such restricted payment permitted by clauses (i) through (vi) above, a Default shall not have occurred and be continuing and the Aggregate Revolving Credit Exposure shall not exceed the Maximum Available Amount. Section 6.09 Investments, Loans, etc. Make or permit any loans to or investments in any Person, or permit any of its Subsidiaries to make or permit any loans to or investments in any Person, other than: (a) investments, loans or advances, the material details of which have been set forth in the Financial Statements or are disclosed to the Administrative Agent in Schedule 4.07 hereto; (b) investments in direct obligations of the United States of America or any agency thereof; (c) investments in certificates of deposit of maturities less than one year, issued by commercial banks in the United States having capital and surplus in excess of $500,000,000; provided, however, the Company may, with the written approval of the Administrative Agent, invest in such certificates of deposit issued by commercial banks in the United States having capital and surplus in excess of $200,000,000 and a Thomson's Bank Watch rating of B or better; (d) investments in commercial paper of maturities less than one year rated A1 or P1 by Standard & Poors Corporation or Moody's Investors Services, Inc., respectively, or any equivalent rating from any other rating agency satisfactory to the Administrative Agent; (e) routine loans or advances to employees made in the ordinary course of business not to exceed (A) $250,000 at any one time outstanding to any one employee and (B) $1,500,000 in the aggregate; (f) investments in securities purchased by the Company or any Subsidiary of the Company under repurchase obligations pursuant to which arrangements are made with selling -62- financial institutions (being (A) a financial institution having unimpaired capital and surplus of not less than $500,000,000 and with a rating of A1 or P1 by Standard & Poors Corporation or Moody's Investors Services, Inc., respectively; or (B) with the written approval of the Administrative Agent, a financial institution having unimpaired capital and surplus of not less than $200,000,000 and a Thomson's Bank Watch rating of B or better) for such financial institutions to repurchase such securities within 30 days from the date of purchase by the Company or such Subsidiary, and other similar short-term investments made in connection with the Company's or any of its Subsidiary's cash management practices; (g) the purchase, redemption or acquisition of capital stock of the Company as permitted by Section 6.08; (h) entering into a joint venture or partnership in connection with the sale to such joint venture or partnership of the assets of Tesoro Bolivia or Tesoro Environmental; (i) the purchase of stock issued by the Company from participants in the incentive stock plans of the Company made for the purpose of satisfying federal withholding tax obligations of such participants as provided for under the terms of such incentive stock plans or stock incentive grants thereunder; (j) investments in eurodollar obligations with maturities not exceeding three (3) months, issued by (and supported by the full faith and credit and representing direct obligations of) any Lender or any office located in the United States of any other bank or trust company which is organized under the laws of the United States or any state thereof, has capital, surplus and undivided profits aggregating at least $500,000,000.00 (as of the date of such Lender's or bank or trust company's most recent financial reports) and has a short term deposit rating of no lower than A1 or P1, as such rating is set forth from time to time, by Standard & Poors Corporation or Moody's Investors Service, Inc., respectively; provided, however, the Company may, with the written approval of the Administrative Agent, invest in such eurodollar obligations issued by (and supported by the full faith and credit and representing direct obligations of) any bank or trust company with an office located in the United States having capital, surplus and undivided profits aggregating at least $200,000,000 and a Thomson's Bank Watch rating of B or better; (k) purchases, in the aggregate not to exceed $10,000,000, of all or substantially all of the stock of corporations principally in the business of exploration and production of oil and gas as a means of acquiring any such corporation, but in no event in contravention of Section 4.09; and (l) purchases, in the aggregate not to exceed $10,000,000, of all or substantially all of the stock of corporations principally in the business of marine services as a means of acquiring any such corporation, but in no event in contravention of Section 4.09. (m) investments, loans or advances to Guarantors and to Tesoro Environmental Resources Company; provided, however, the aggregate amount of all investments, loans or advances after the Closing Date directly or indirectly by the Company in Tesoro Environmental Resources Company shall not exceed $1,500,000; provided further, however, that the Company may settle claims against Non-Guarantor Subsidiaries in an amount not to exceed $3,000,000, in the aggregate. -63- Section 6.10 Lease Payments. Except for (i) oil and gas lease obligations permitted under Section 6.05, (ii) lease obligations (excluding Capital Lease Obligations) existing under leases for oil field equipment and tools rented in the ordinary course of business for a duration of less than one year and (iii) time charter payments with regard to barges or tankers used to transport feedstocks, blendstocks or refined products in the ordinary course of business; create, incur, assume or suffer to exist, nor permit any of its Subsidiaries to create, incur, assume or suffer to exist, any obligation for the payment of rent or hire of Property of any kind whatsoever (real or personal), whether directly or as a guarantor, if, after giving effect thereto, the aggregate amount of all payments required to be made by the Company and its Subsidiaries on a consolidated basis pursuant to such leases or lease agreements (excluding Capital Lease Obligations) would exceed $8,000,000 in any calendar year. Section 6.11 Sales and Leasebacks. Enter into, or permit any of its Subsidiaries to enter into, any arrangement, directly or indirectly, with any Person whereby the Company or any such Subsidiary shall sell or transfer any Property, whether now owned or hereafter acquired, and whereby the Company or any such Subsidiary shall then or thereafter rent or lease as lessee such Property or any part thereof or other Property which the Company or any such Subsidiary intends to use for substantially the same purpose or purposes as the Property sold or transferred. Section 6.12 Nature of Business. Permit any material change to be made in the character of its business or the business of any Guarantor as carried on at the date hereof, except as may be permitted pursuant to this Agreement. Section 6.13 ERISA Compliance. (a) Engage in, or permit any ERISA Affiliate to engage in, any transaction in connection with which the Company, a Subsidiary of the Company or any ERISA Affiliate could be subjected to either a civil penalty assessed pursuant to Sections 502(c) or 502(i) of ERISA or a tax imposed by Section 4975 of the Code, except where such assessment or imposition would not have Material Adverse Effect; (b) Terminate, or permit any ERISA Affiliate to terminate, any Plan in a manner, or take any other action with respect to any Plan, which could result in any liability of the Company, a Subsidiary of the Company or any ERISA Affiliate to the PBGC, except where such termination would not have a Material Adverse Effect; (c) Fail to make, or permit any ERISA Affiliate to fail to make, full payment when due of all amounts which, under the provisions of any Plan, agreement relating thereto or applicable law, the Company, a Subsidiary of the Company or any ERISA Affiliate is required to pay as contributions thereto, except where the failure to make such payments would not have Material Adverse Effect; (d) Permit to exist, or allow any ERISA Affiliate to permit to exist, any accumulated funding deficiency within the meaning of Section 302 of ERISA or Section 412 of the Code, whether or not waived, with respect to any Plan, except where the existence of such a deficiency would not have a Material Adverse Effect; -64- (e) Contribute to or assume an obligation to contribute to, or permit any ERISA Affiliate to contribute to or assume an obligation to contribute to, any "multiemployer plan" as such term is defined in Section 3(37) or 4001(a)(3) of ERISA; (f) Acquire, or permit any ERISA Affiliate to acquire, an interest in any Person that causes such Person to become an ERISA Affiliate with respect to the Company or a Subsidiary of the Company or with respect to any ERISA Affiliate of the Company or a Subsidiary of the Company 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" as such term is defined in Section 3(37) or 4001(a)(3) of ERISA, 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; (g) Fail to pay, or cause to be paid, to the PBGC in a timely manner, and without incurring any late payment or underpayment charge or penalty, all premiums required pursuant to Sections 4006 and 4007 of ERISA, except where such failure would not have a Material Adverse Effect; or (h) Amend, or permit any ERISA Affiliate to amend, a Plan resulting in an increase in current liability such that the Company, a Subsidiary of the Company or any ERISA Affiliate is required to provide security to such Plan under Section 401(a)(29) of the Code. Section 6.14 Sale or Discount of Receivables. Discount or sell (with or without recourse), or permit any of its Subsidiaries to discount or sell (with or without recourse), any of its or its Subsidiaries' notes receivable or accounts receivable; provided that the Company may discount or sell (with or without recourse) up to $3,000,000 in the aggregate of its accounts receivables that are more than 60 days past due. Section 6.15 Negative Pledge Agreements. Create, incur, assume or suffer to exist, or permit any of its Subsidiaries to create, incur, assume or suffer to exist, any contract, agreement or understanding (other than this Agreement, the other Financing Documents or as set forth on Schedule 6.15 hereof) which in any way prohibits or restricts the granting, conveying, creation or imposition of any Lien on any Property of the Company or its Subsidiaries, or which requires the consent of or notice to other Persons in connection therewith. Section 6.16 Transactions with Affiliates. Enter into any transaction or series of transactions, or permit any of its Subsidiaries to enter into any transaction or series of transactions, with Affiliates of the Company or its Subsidiaries which involve an outflow of money or other Property from the Company or its Subsidiaries to an Affiliate of the Company or its Subsidiaries, including but not limited to repayment of Indebtedness, management fees, compensation, salaries, asset purchase payments or any other type of fees or payments similar in nature, other than on terms and conditions substantially as favorable to the Company and its Subsidiaries as would be obtainable by the Company and its Subsidiaries in a reasonably comparable arm's-length transaction with a Person other than such an Affiliate of the Company or its Subsidiaries. Notwithstanding the foregoing, the restrictions set forth in this Section 6.16 shall not apply to: (i) the payment of reasonable and customary fees to directors of the Company who are not employees of the Company, (ii) routine loans or advances to employees made in the ordinary course of business not to exceed $250,000 at any one time outstanding to any one employee, or (iii) any other transaction with any employee, -65- officer or director of the Company or any of its Subsidiaries pursuant to employee benefit plans and compensation arrangements in amounts customary for corporations similarly situated to the Company or any such Subsidiary and entered into the ordinary course of business and approved by the Board of Directors of the Company or any committee thereof or the Board of Directors of such Subsidiary. Section 6.17 Unconditional Purchase Obligations. Enter into or be a party to, or permit any of its Subsidiaries to enter into or be a party to, any contract for the purchase of materials, supplies or other property or services, if such contract requires that payment be made by it regardless of whether or not delivery is ever made of such materials, supplies or other property or services. Section 6.18 Stock. Authorize or issue any preferred stock (except for the issuance of non-redeemable preferred stock to replace one or more of the Company's outstanding issues of preferred stock, provided, that the issuance of such preferred stock does not otherwise result in a Default under this Agreement) or permit any of its Subsidiaries to authorize or issue any preferred or common stock to be held by any Person other than the Company or any of its wholly-owned Subsidiaries. Section 6.19 Non-Recourse Indebtedness. The Company shall not permit any Subsidiary to incur any Non-Recourse Indebtedness otherwise permitted hereunder except upon terms and conditions and pursuant to documentation, in form and substance, reasonably satisfactory to the Administrative Agent and Documentation Agent. ARTICLE VII EVENTS OF DEFAULT Upon the occurrence and during the continuance of any of the following specified events (each an "Event of Default"): Section 7.01 Payments. (a) The Company shall fail to pay when due (including, but not limited to, by mandatory prepayment) any principal of any Loan or any Note, or any Reimbursement Obligation; or (b) the Company shall fail to pay when due any interest on any Loan or Note, any fee or any other amount payable hereunder, and such failure to pay shall continue unremedied for a period of three Business Days; Section 7.02 Covenants Without Notice. The Company shall fail to observe or perform any covenant or agreement contained in Sections 5.05, 5.09 and Article VI (excluding Subsections 6.05(c) and (h), and Section 6.16 hereof); Section 7.03 Other Covenants. The Company shall fail to observe or perform any covenant or agreement contained in (a) Section 5.11, Section 5.15(a), (b), (c), (d), (g), (h), (i), or (k), Subsections 6.05(c) or (h) or Section 6.16 and, if capable of being remedied, such failure shall remain unremedied for 10 days after the earlier of (i) the Company's obtaining knowledge thereof, or (ii) written notice thereof shall have been given to the Company by any Lender, the Issuing Bank or the Administrative Agent; and (b) this Agreement, other than those referred to in Sections 7.01, 7.02, or clause (a) of this Section 7.03, and, if capable of being remedied, such failure shall remain unremedied for 30 days after the earlier of (i) the Company's obtaining knowledge thereof, or (ii) written notice thereof shall have been given to the Company by any Lender, the Issuing Bank or the Administrative Agent; -66- Section 7.04 Other Financing Document Obligations. Default is made in the due observance or performance by the Company or any Subsidiary of the Company of any of the covenants or agreements contained in any Financing Document other than this Agreement, and such default continues unremedied beyond the expiration of any applicable grace period which may be expressly allowed under such Financing Document; Section 7.05 Representations. Any representation, warranty or statement made or deemed to be made by the Company or any Subsidiary of the Company or any of such Company's, or Subsidiary's officers herein or in any other Financing Document, or in any certificate, request or other document furnished pursuant to or under this Agreement or any other Financing Document, shall have been incorrect in any material respect as of the date when made or deemed to be made; Section 7.06 Non-Payments of Other Indebtedness. The Company or any of its Subsidiaries shall fail to make any payment or payments of principal of or interest on any Indebtedness of the Company or such Subsidiary in excess of $3,000,000 in the aggregate (other than (i) the Lender Indebtedness and (ii) any trade account subject to a bona fide dispute and the trade creditor has neither filed a lawsuit nor caused a Lien to be placed upon any Property of the Company or such Subsidiary) when due (whether at stated maturity, by acceleration, on demand or otherwise) after giving effect to any applicable grace period; Section 7.07 Defaults Under Other Agreements. The Company or any of its Subsidiaries shall fail to observe or perform any covenant or agreement contained in any agreement(s) or instrument(s) relating to Indebtedness of $3,000,000 or more in the aggregate within any applicable grace period, or any other event shall occur, if the effect of such failure or other event is to accelerate, or to permit the holder of such Indebtedness or any other Person to accelerate, the maturity of $3,000,000 or more in the aggregate of such Indebtedness; or $3,000,000 or more in the aggregate of any such Indebtedness shall be, or if as a result of such failure or other event may be, required to be prepaid (other than by a regularly scheduled required prepayment) in whole or in part prior to its stated maturity; Section 7.08 Bankruptcy. The Company or any of its Subsidiaries shall commence a voluntary case concerning itself under Title 11 of the United States Code entitled "Bankruptcy" as now or hereafter in effect, or any successor thereto (the "Bankruptcy Code"); or an involuntary case is commenced against the Company or any of its Subsidiaries and the petition is not controverted within 10 days, or is not stayed or dismissed within 60 days, after commencement of the case; or a custodian (as defined in the Bankruptcy Code) is appointed for, or takes charge of, all or any substantial part of the property of the Company or any of its Subsidiaries; or the Company or any of its Subsidiaries commences any other proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to the Company or such Subsidiary or there is commenced against the Company or any of its Subsidiaries any such proceeding which remains unstayed or undismissed for a period of 60 days; or the Company or any of its Subsidiaries is adjudicated insolvent or bankrupt; or any order of relief or other order approving any such case or proceeding is entered; or the Company or any of its Subsidiaries suffers any appointment of any custodian or the like for it or any substantial part of its Property to continue undischarged or unstayed for a period of 60 days; or the Company or any of its Subsidiaries makes a general assignment for the benefit of creditors; or the Company or any of its Subsidiaries shall fail to pay, or shall state that it is unable to pay, or shall be unable to pay, its debts generally as they become due; or the Company or any of its Subsidiaries shall by any act or failure to act indicate its consent to, approval of or acquiescence in any of the foregoing; or any corporate action is taken by the Company or any of its Subsidiaries for the purpose of effecting any of the foregoing; -67- Section 7.09 ERISA. A Plan shall fail to maintain the minimum funding standard required by Section 412 of the Code for any plan year or a waiver of such standard is sought or granted under Section 412(d), or a Plan is, shall have been or is likely to be, terminated or the subject of termination proceedings under ERISA, or the Company or an ERISA Affiliate has incurred or is likely to incur a liability to or on account of a Plan under Section 515, 4062, 4063, 4064, 4201 or 4204 of ERISA, and there shall result from any such event or events either a liability or a material risk of incurring a liability to the PBGC or a Plan, which will have a Material Adverse Effect; Section 7.10 Money Judgment. A judgment or order for the payment of money in excess of $3,000,000 or that would otherwise have a Material Adverse Effect shall be rendered against the Company or any of it Subsidiaries and such judgment or order shall continue unsatisfied in accordance with the terms of such judgment or order (in the case of a money judgment) and in effect for a period of 30 days during which execution shall not be effectively stayed or deferred (whether by action of a court, by agreement or otherwise); Section 7.11 Discontinuance of Business. The Company or any Guarantor shall cease to carry on its business as currently conducted or as contemplated to be conducted, except for the discontinuance of Tesoro R&M; Section 7.12 Security Instruments. The material terms of the Security Instruments after delivery thereof shall for any reason, except to the extent permitted by the terms thereof, cease to be in full force and effect and valid, binding and enforceable (except as enforceability may be limited as stated in Section 4.03) in accordance with their terms, or cease to create a valid and perfected Lien of the priority contemplated thereby on any of the collateral purported to be covered thereby, or the Company or any of its Subsidiaries (or any other Person who may have granted or purported to grant such Lien) shall so state in writing; Section 7.13 Change of Control. The occurrence of a Change of Control; Section 7.14 Mandatory Prepayments. The Company shall fail to make any mandatory prepayment required by Section 2.10; or Section 7.15 Material Adverse Event. The occurrence of any event or condition that the Majority Lenders believe in good faith to have resulted in a Material Adverse Effect; then, and in any such event, and at any time thereafter, if any Event of Default shall then be continuing, the Administrative Agent, upon the written or telex request of the Majority Lenders, shall, by written notice to the Company, take any or all of the following actions, without prejudice to the rights of the Administrative Agent, any Lender or the holder of any Note, to enforce its claims against the Company: (i) declare the Revolving Credit Commitment, and other lending obligations, if any, terminated, whereupon the Revolving Credit Commitment and other lending obligations, if any, of each Lender shall terminate immediately; or (ii) declare the entire principal amount of and all accrued interest on all Lender Indebtedness then outstanding to be, whereupon the same shall become, forthwith due and payable without presentment, demand, protest, notice of protest or dishonor, notice of acceleration, notice of intent to accelerate or other notice of any kind, all of which are hereby expressly waived by the Company, and thereupon take such action as it may deem desirable under and pursuant to the Financing Documents; provided, that, if an Event of Default specified in Section 7.08 shall occur, the result which would occur upon the giving of written notice -68- by the Administrative Agent to the Company, as specified in clauses (i) and (ii) above, shall occur automatically without the giving of any such notice. ARTICLE VIII THE ADMINISTRATIVE AGENT Section 8.01 Appointment of Administrative Agent. Each Lender and the Issuing Bank hereby designate Banque Paribas, as Administrative Agent to act as herein specified. Each Lender and the Issuing Bank hereby irrevocably authorizes the Administrative Agent to take such action on its behalf under the provisions of this Agreement, the Notes, and the other Financing Documents and to exercise such powers and to perform such duties hereunder and thereunder as are specifically delegated to or required of the Administrative Agent by the terms hereof and thereof and such other powers as are reasonably incidental thereto. The Administrative Agent may perform any of its duties hereunder by or through its Administrative Agents or employees. Section 8.02 Nature of Duties of Administrative Agent and Documentation Agent. The Administrative Agent and the Documentation Agent shall have no duties or responsibilities except those expressly set forth with respect to each of the Administrative Agent or the Documentation Agent in this Agreement. Neither the Administrative Agent, the Documentation Agent nor any of their respective officers, directors, employees or Administrative Agents shall be liable for any action taken or omitted by it as such hereunder or in connection herewith, unless caused by its or their gross negligence or willful misconduct. The duties of the Administrative Agent and the Documentation Agent shall be mechanical and administrative in nature; the Administrative Agent and the Documentation Agent shall not have by reason of this Agreement a fiduciary relationship in respect of any Lender; and nothing in this Agreement, expressed or implied, is intended to or shall be so construed as to impose upon the Administrative Agent or the Documentation Agent any obligations in respect of this Agreement except as expressly set forth herein. Section 8.03 Lack of Reliance on the Administrative Agent and the Documentation Agent. (a) Independent Investigation. Independently and without reliance upon the Administrative Agent or the Documentation Agent, each Lender, to the extent it deems appropriate, has made and shall continue to make (i) its own independent investigation of the financial condition and affairs of the Company in connection with the taking or not taking of any action in connection herewith, and (ii) its own appraisal of the creditworthiness of the Company, and, except as expressly provided in this Agreement, the Administrative Agent and the Documentation Agent shall have no duty or responsibility, either initially or on a continuing basis, to provide any Lender with any credit or other information with respect thereto, whether coming into its possession before the consummation of the transactions contemplated herein or at any time or times thereafter. (b) Agent Not Responsible. The Administrative Agent and the Documentation Agent shall not be responsible to any Lender or the Issuing Bank for any recitals, statements, information, representations or warranties herein or in any document, certificate or other writing delivered in connection herewith or for the execution, effectiveness, genuineness, validity, enforceability, collectibility, priority or sufficiency of this Agreement, the Notes, the Letters of Credit or the other Financing Documents or the financial condition of the Company or be required to make any inquiry -69- concerning either the performance or observance of any of the terms, provisions or conditions of this Agreement, the Notes or the other Financing Documents, or the financial condition of the Company, or the existence or possible existence of any Default or Event of Default. Section 8.04 Certain Rights of the Administrative Agent. If the Administrative Agent shall request instructions from the Majority Lenders with respect to any act or action (including the failure to act) in connection with this Agreement, the Notes and the other Financing Documents, the Administrative Agent shall be entitled to refrain from such act or taking such action unless and until the Administrative Agent shall have received instructions from the Majority Lenders; and the Administrative Agent shall not incur liability to any Person by reason of so refraining. Without limiting the foregoing, no Lender shall have any right of action whatsoever against the Administrative Agent as a result of the Administrative Agent acting or refraining from acting under this Agreement, the Notes and the other Financing Documents in accordance with the instructions of the Majority Lenders. Section 8.05 Reliance by Administrative Agent. The Administrative Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, statement, certificate, telex, teletype or telecopier message, cablegram, radiogram, order or other documentary, teletransmission or telephone message believed by it to be genuine and correct and to have been signed, sent or made by the proper Person. The Administrative Agent may consult with legal counsel (including counsel for the Company), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. Section 8.06 Indemnification of Administrative Agent and the Documentation Agent. To the extent the Administrative Agent or the Documentation Agent is not reimbursed and indemnified by the Company, each Lender will reimburse and indemnify the Administrative Agent or the Documentation Agent, as applicable, in proportion to its Percentage Share, for and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses (including counsel fees and disbursements) or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against the Administrative Agent or the Documentation Agent in performing its duties hereunder, in any way relating to or arising out of this Agreement; provided that no Lender shall be liable to the Administrative Agent or the Documentation Agent for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from, as to the Administrative Agent, the Administrative Agent's gross negligence or willful misconduct or, as to the Documentation Agent, the Documentation Agent's gross negligence or willful misconduct. Section 8.07 The Administrative Agent and Documentation Agent in their Individual Capacity. With respect to their obligations under this Agreement, the Loans made by it and the Note issued to it, the Administrative Agent and Documentation Agent shall have the same rights and powers hereunder as any other Lender or holder of a Note and may exercise the same as though it were not performing the duties, if any, specified herein; and the terms "Lenders," "Majority Lenders," "holders of Notes" or any similar terms shall, unless the context clearly otherwise indicates, include the Administrative Agent and Documentation Agent in their individual capacity. The Administrative Agent and Documentation Agent may accept deposits from, lend money to, and generally engage in any kind of banking, trust, financial advisory or other business -70- with the Company or any affiliate of the Company as if it were not performing the duties, if any, specified herein, and may accept fees and other consideration from the Company for services in connection with this Agreement and otherwise without having to account for the same to the Lenders. Section 8.08 Lender as Owner. The Administrative Agent and the Documentation Agent may deem and treat each Lender as the owner of such Lender's Note for all purposes hereof unless and until a written notice of the assignment or transfer thereof shall have been filed with the Administrative Agent. Any request, authority or consent of any Person who at the time of making such request or giving such authority or consent is the owner of a Note shall be conclusive and binding on any subsequent owner, transferee or assignee of such Note or any promissory note or notes issued in exchange therefor. Section 8.09 Successor Administrative Agent. (a) Agent Resignation. The Administrative Agent may resign at any time by giving written notice thereof to the Lenders, the Issuing Bank and the Company and may be removed at any time with or without cause by the Majority Lenders. Upon any such resignation or removal, the Majority Lenders shall have the right, upon five days' notice to the Company, to appoint a successor Administrative Agent. If no successor Administrative Agent shall have been so appointed by the Majority Lenders, 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, upon five days' notice to the Company, the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent, which shall be a bank which maintains an office in the United States, or a commercial bank organized under the laws of the United States of America or of any State thereof, or any Affiliate of such bank, having a combined capital and surplus of at least $250,000,000. (b) Rights, Powers, etc. Upon the acceptance of any appointment as Administrative Agent hereunder 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. 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. ARTICLE IX MISCELLANEOUS Section 9.01 Notices. All notices, requests and other communications to any party hereunder shall be in writing (including, telecopy or similar teletransmission or writing) and shall be given to such party at its address or telecopy number set forth on the signature pages hereof or such other address or telecopy number as such party may hereafter specify by notice to the Administrative Agent and the Company; provided that a copy of all notices to the Administrative Agent (a) which are Advance Notices shall also be sent to Banque Paribas, 1200 Smith Street, Suite 3100, Houston, Texas 77002, Telecopier No. (713) 659-5305, Attention: Leah Evans-Hughes, and (b) which are requests for the issuance of a Letter of Credit by -71- Banque Paribas shall also be sent to Banque Paribas, 1200 Smith Street, Suite 3100, Houston, Texas 77002, Telecopier No. (713) 659-3832, Attention: Cheryl Johnson. Each such notice, request or other communication shall be effective (i) if given by mail, 72 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid, or (ii) if given by any other means (including, but not limited to, by air courier), when delivered at the address specified in this Section; provided that notices to the Administrative Agent shall not be effective until received. Section 9.02 Amendments, etc. Any provision of this Agreement or any other Financing Document may be amended, modified or waived with the Company's and the Majority Lenders' prior written consent; provided that (a) no amendment, modification or waiver which extends the due date or maturity of the Loans, the Revolving Credit Maturity Date, releases all or substantially all of the Collateral, reduces the interest rate applicable to the Loans or the fees payable to the Lenders generally, releases the Company or any material Guarantor from its respective obligation to pay principal or interest on the Loans, affects this Section 9.02 or Section 9.04 or modifies the definition of "Majority Lenders", shall be effective without consent of all Lenders; (b) no amendment, modification or waiver which increases the Commitment of any Lender shall be effective without the consent of such Lender; (c) no amendment, modification or waiver which modifies the rights, duties or obligations of the Administrative Agent shall be effective without the consent of the Administrative Agent; (d) no amendment, modification or waiver which modifies the rights, duties or obligations of the Documentation Agent shall be effective without the consent of the Documentation Agent; and (e) no amendment, modification or waiver which modifies the rights, duties or obligations of either Issuing Bank shall be effective without the consent of the applicable Issuing Bank. Notwithstanding anything in this Section to the contrary, unless instructed to the contrary by the Majority Lenders, the applicable Issuing Bank shall extend each Letter of Credit prior to any expiration date thereof pursuant to the terms of such Letter of Credit or its related Application if a failure to so extend such Letter of Credit would result in entitling the beneficiary thereof to draw thereon. Section 9.03 No Waiver; Remedies Cumulative. No failure or delay on the part of the Company or the Administrative Agent or any Lender or any holder of any Note in exercising any right or remedy under this Agreement or any other Financing Document and no course of dealing between the Company and the Administrative Agent or any Lender or any holder of any Note shall operate as a waiver thereof, nor shall any single or partial exercise of any right or remedy under the Notes, this Agreement or any other Financing Document preclude any other or further exercise thereof or the exercise of any other right or remedy under the Notes, this Agreement or any other Financing Document. The rights and remedies herein expressly provided are cumulative and not exclusive of any rights or remedies which the Company, the Administrative Agent or any Lender would otherwise have. No notice to or demand on the Company not required under the Notes, this Agreement or any other Financing Document in any case shall entitle the Company to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of the Administrative Agent or the Lenders to any other or further action in any circumstances without notice or demand. Section 9.04 Payment of Expenses, Indemnities, etc. The Company agrees to (and shall be liable for): (a) Expenses. Whether or not the transactions hereby contemplated are consummated, pay all reasonable out-of-pocket costs and expenses of the Administrative Agent and each Issuing Bank in the administration (both before and after the execution hereof and including advice of counsel as to the rights and duties of the Administrative Agent and the Lenders with respect thereto) -72- of, and in connection with the preparation, execution and delivery of, recording or filing of, preservation of rights under, enforcement of, and, after a Default, refinancing, renegotiation or restructuring of, this Agreement, the Notes, and the other Financing Documents and any amendment, waiver or consent relating thereto (including, but not limited to, the reasonable fees and disbursements of counsel for the Administrative Agent and in the case of enforcement for any of the Lenders) and promptly reimburse the Administrative Agent for all amounts expended, advanced, or incurred by the Administrative Agent or the Lenders to satisfy any obligation of the Company or the Guarantors under this Agreement or any other Financing Document; (b) Indemnification. Indemnify the Administrative Agent, the Documentation Agent, the Issuing Banks and each Lender, each of their respective officers, directors, employees, representatives, agents and Affiliates from, hold each of them harmless against, and promptly upon demand pay or reimburse each of them for, any and all actions, suits, proceedings (including any investigations, litigation or inquiries), claims, costs, losses, liabilities, damages or expenses of any kind or nature whatsoever which may be incurred by or asserted against or involve any of them (whether or not any of them is designated a party thereto) as a result of, arising out of or in any way related to (i) any actual or proposed use by the Company or any Subsidiary of the Company of the proceeds of any of the Loans; or (ii) any other aspect of this Agreement, the Notes, and the Financing Documents, including but not limited to the reasonable fees and disbursements of counsel (including allocated costs of internal counsel) and all other expenses incurred in connection with investigating, defending or preparing to defend any such action, suit, proceeding (including any investigations, litigation or inquiries) or claim, and including all actions, suits, proceedings (including any investigations, litigation or inquiries), claims, costs, losses, liabilities, damages or expenses arising by reason of ordinary negligence of any of the Administrative Agent, the Documentation Agent, the Issuing Banks and each Lender, each of their respective officers, directors, employees, representatives, agents and Affiliates; provided, however, the provisions of this Section 9.04(b) shall not apply to any action, suits, proceedings, claims, costs, losses, liabilities, damages, or expenses to the extent, but only to the extent, caused by the gross negligence or willful misconduct of the party seeking indemnification; (c) Environmental Indemnification. Indemnify and hold harmless from time to time the Administrative Agent, the Documentation Agent, the Issuing Banks and the Lenders, each Person claiming by, through, under or on account of any of the foregoing and the respective directors, officers, counsel, employees, agents, successors and assigns of each of the foregoing from and against any and all losses, claims, cost recovery actions, administrative orders or proceedings, damages and liabilities (which relate to or arise as a result of the Loans, the Letters of Credit or any Financing Document) to which any such Person may become subject and including any and all losses, claims, cost recovery actions, administrative orders or proceedings, damages and liabilities (which relate to or arise as a result of the Loans, the Letters of Credit or any Financing Document) arising by reason of the ordinary negligence of the Administrative Agent, the Documentation Agent and the Lenders, each Person claiming by, through, under or on account of any of the -73- foregoing and the respective directors, officers, counsel, employees, agents, successors and assigns of each of the foregoing (1) under any Environmental Law applicable to the Company or any of its Subsidiaries or any of their respective Properties, including without limitation, the treatment or disposal of Hazardous Substances on any of their respective Properties, (2) as a result of the breach or non-compliance by the Company or any of its Subsidiaries with any Environmental Law applicable to the Company or any of its Subsidiaries, (3) due to past ownership by the Company or any of its Subsidiaries of any of their respective Properties or past activity on any of their respective Properties or past activity on any of their respective Properties which, though lawful and fully permissible at the time, could result in present liability, (4) the presence, use, release, storage, treatment or disposal of Hazardous Substances on or at any of the Properties owned or operated by the Company or any of its Subsidiaries, or (5) any other environmental, health or safety condition in connection with this Agreement, the Notes or any other Financing Document; provided, however, no indemnity shall be afforded under this Section 9.04(c) in respect of any Property for any occurrence arising solely and directly from the acts or omissions of the Administrative Agent or any Lender during the period after which such Person, its successors or assigns shall have obtained possession of such Property (whether by foreclosure or deed in lieu of foreclosure, as mortgagee-in-possession or otherwise); and (d) Environmental Waiver. Without limiting the foregoing provisions, and hereby does waive, release and covenant not to bring against any of the Persons identified in this Section 9.04 any demand, claim, cost recovery action or lawsuit they may now or hereafter have or accrue (which relate to or arise as a result of the Loans, the Letters of Credit or any Financing Document) arising from (1) any Environmental Law now or hereafter enacted (including those applicable to the Company or any of its Subsidiaries) unless the acts or omissions of any such person or their respective successors and assigns are the sole and direct cause of the circumstances giving rise to such demand, cost recovery action or lawsuit, (2) the presence, use, release, storage, treatment or disposal of Hazardous Substances on or at any of the Properties owned or operated by the Company or any of its Subsidiaries, or (3) the breach or non-compliance by the Company with any Environmental Law or environmental covenant applicable to the Company or any of its Subsidiaries, unless the acts or omissions of such Person, its successors and assigns are the sole and direct cause of the circumstances giving rise to such demand, claim, cost recovery action or lawsuit. If and to the extent that the obligations of the Company under this Section are unenforceable for any reason, the Company hereby agrees to make the maximum contribution to the payment and satisfaction of such obligations which is permissible under applicable law. The Company's obligations under this Section shall survive any termination of this Agreement and the payment of the Notes. Section 9.05 Right of Setoff. In addition to and not in limitation of all rights of offset that any Lender or either Issuing Bank may have under applicable law, each Lender or other holder of a Note, or any other Lender Indebtedness shall, upon the occurrence of any Event of Default and at any time during the continuance thereof and whether or not such Lender, the Issuing Bank or such holder has made any demand -74- or the Company's obligations are matured, have the right at any time and from time to time, without notice to the Company (any such notice being expressly waived by the Company) 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 any Lender or the Issuing Bank to or for the credit or the account of the Company against any and all of the Lender Indebtedness then outstanding. Section 9.06 Benefit of Agreement. (a) Benefit of Parties. The Notes, this Agreement and the other Financing Documents shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto, provided that the Company may not assign or transfer any of its interest hereunder or thereunder without the prior written consent of the Lenders. In the event that any Lender sells participations in the Notes or other Lender Indebtedness of the Company incurred or to be incurred pursuant to this Agreement, to other banks or entities, each of such other banks or entities shall have the rights of set-off against such Lender Indebtedness and similar rights or Liens to the same extent as may be available to the Administrative Agent or the Lenders. (b) Branch Offices, Affiliates. Any Lender may make, carry or transfer Loans at, to or for the account of, any of its branch offices or the office of an Affiliate of such Lender. Section 9.07 Assignments and Participations. (a) No Company Assignments. The Company may not assign its rights and obligations hereunder or under the Notes. (b) Assignment by Lenders. Each Lender may, upon the written consent of the Administrative Agent and, so long as no Default exists, the Company (which consent shall not be unreasonably withheld), assign to one or more Eligible Transferees all or a portion of its rights and obligations under this Agreement pursuant to an Assignment and Acceptance Agreement substantially in the form of Exhibit D (an "Assignment and Acceptance") provided, however, that (i) any such assignment shall be in the aggregate amount of at least $5,000,000 or such lesser amount to which the Company has consented (or if the aggregate amount of any Lender's Loans and Commitments is less than $5,000,000, then the entire amount of such Lender's Loans and Commitments), and (ii) the assignee shall pay to the Administrative Agent a processing and recordation fee of $2,500; and, further provided, however, any Lender may assign its rights and obligations hereunder to an Affiliate pursuant to the foregoing terms and conditions, except that (i) no consent from the Administrative Agent and the Company shall be required and (ii) no processing and recordation fee shall be required. Any such assignment will become effective upon the recording by the Administrative Agent of such assignment in the Register of the resultant effects thereof on the Commitment of the assignor and assignee, and the principal amount outstanding of the Loans owed to the assignor and assignee, the Administrative Agent hereby agreeing to effect such recordation no later than five Business Days after its receipt of an Assignment and Acceptance executed by all parties thereto. Promptly after receipt of an Assignment and Acceptance executed by all parties thereto, the Administrative Agent shall send to the Company a copy of such executed Assignment and Acceptance. Upon receipt of such executed Assignment and Acceptance, the Company, will, at its own expense, execute and deliver new Notes to the assignor and/or assignee, as appropriate, in accordance with their respective interests as they appear on the Register. Upon -75- the effectiveness of any assignment pursuant to this subsection, the assignee shall be deemed automatically to have become a party hereto, if not already a party hereto, and shall become a "Lender," if not already a "Lender," for all purposes of this Agreement and the other Financing Documents. The assignor shall be relieved of its obligations hereunder to the extent of such assignment (and if the assigning Lender no longer holds any rights or obligations under this Agreement, such assigning Lender shall cease to be a "Lender" hereunder). The Administrative Agent will prepare on the last Business Day of each month during which an assignment has become effective pursuant to this subsection a new schedule giving effect to all such assignments effected during such month, and will promptly provide the same to the Company, the Issuing Banks and each of the Lenders. (c) Participations. Each Lender may transfer, grant or assign participations in all or any part of such Lender's interests hereunder pursuant to this subsection to any Person, provided that: (i) such Lender shall remain a "Lender" for all purposes of this Agreement and the transferee of such participation shall not constitute a "Lender" hereunder; and (ii) no participant under any such participation shall have rights to approve any amendment to or waiver of this Agreement, the Notes or any Financing Document except to the extent such amendment or waiver would (x) extend the Revolving Credit Maturity Date of any of the Commitments or Loans in which such participant is participating, (y) reduce the interest rate (other than as a result of waiving the applicability of any post-default increases in interest rates) or fees applicable to any of the Commitments or Loans in which such participant is participating, or postpone the payment of any thereof, or (z) release all or substantially all of the collateral or guaranties (except as expressly provided in the Financing Documents) supporting any of the Commitments or Loans in which such participant is participating. In the case of any such participation, the participant shall not have any rights under this Agreement or any of the Financing Documents (the participant's rights against the granting Lender in respect of such participation to be those set forth in the agreement with such Lender creating such participation), and all amounts payable by the Company hereunder shall be determined as if such Lender had not sold such participation, provided that such participant shall be entitled to receive additional amounts under Sections 2.16 and 2.18 on the same basis as if it were a Lender. In addition, each agreement creating any participation must include an agreement by the participant to be bound by the provisions of Section 9.15. Notwithstanding anything in this Section 9.07(c) to the contrary, the purchase by each Lender of a participation in the Letters of Credit on the Effective Date and any subsequent assignment of all or any part of any such Lender's Percentage Share in any Letter of Credit and its related Letter of Credit Liabilities pursuant to Section 9.07(b) shall not be considered a participation pursuant to this Section 9.07(c). (d) Registration Statements; Blue Sky Laws. Notwithstanding any other provisions of this Section 9.07, no transfer or assignment of the interests or obligations of any Lender hereunder or any grant of participations therein shall be permitted if such transfer, assignment or grant would require the Company or any Guarantor to file a registration statement with the Securities and Exchange Commission or to qualify the Loans under the "Blue Sky" laws of any state. (e) Certain Representations. Each Lender initially party to this Agreement hereby represents, and each Person that becomes a Lender pursuant to an assignment permitted by subsection (b) above will, upon its becoming party to this Agreement, represent that it is an Eligible Transferee, and that it will make or acquire Loans only for its own account in the ordinary course of its business; provided, however, that subject to the preceding Subsections (b) through (d), the -76- disposition of any promissory notes or other evidences of or interests in Lender Indebtedness held by such Lender shall at all times be within its exclusive control. (f) Assignees Treated as Lenders. The entries in the Register shall be conclusive in the absence of manifest error and the Company, the Administrative Agent, the Issuing Bank and the Lenders may treat each person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement and the other Financing Documents. The Register shall be available for inspection by the Company and any Lender, at any reasonable time and from time to time upon reasonable prior notice. (d) The Lenders may furnish any information concerning the Company and the Subsidiaries in the possession of the Lenders from time to time to assignees and participants (including prospective assignees and participants); provided that, such Persons agree to be bound by the provisions of Section 9.15 hereof. (e) Notwithstanding anything in this Section 9.07 to the contrary, any Lender may assign and pledge its Note to any Federal Reserve Bank or the United States Treasury as collateral security pursuant to Regulation A of the Board of Governors of the Federal Reserve System and any operating circular issued by such Federal Reserve System and/or such Federal Reserve Bank. No such assignment and/or pledge shall release the assigning and/or pledging Lender from its obligations hereunder. Section 9.08 Governing Law; Submission to Jurisdiction; Etc. (a) Governing Law. This Agreement and the rights and obligations of the parties hereunder and under the Notes shall be construed in accordance with and be governed by the laws of the State of Texas and to the extent controlling, laws of the United States of America. Tex. Rev. Civ. Stat. Ann. Art. 5069, Ch. 15 (which regulates certain revolving credit loan accounts and revolving tri-party accounts) shall not apply to this Agreement or the other Financing Documents. (b) Submission to Jurisdiction. Any legal action or proceeding with respect to this Agreement, the Notes or the other Financing Documents may be brought in the courts of the State of Texas or of the United States of America for the Southern District of Texas, and, by execution and delivery of this Agreement, the Company hereby accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of the aforesaid courts. The company hereby irrevocably waives any objection, including, but not limited to, any objection to the laying of venue or based on the grounds of forum non conveniens, which it may now or hereafter have to the bringing of any such action or proceeding in such respective jurisdictions. (c) Waiver of Jury Trial, etc. The Company and each Lender hereby (i) irrevocably and unconditionally waive, to the fullest extent permitted by law, trial by jury in any legal action or proceeding relating to this Agreement or any Financing Document and for any counterclaim therein; (ii) certify that no party -77- hereto nor any representative or agent of counsel for any party hereto has represented, expressly or otherwise, or implied that such party would not, in the event of litigation, seek to enforce the foregoing waivers, and (iii) acknowledge that it has been induced to enter into this Agreement, the Financing Documents and the transactions contemplated hereby and thereby by, among other things, the mutual waivers and certifications contained in this section 9.08. (d) Designation of Administrative Agent. The Company hereby irrevocably designates its General Counsel, currently designated as James C. Reed, Jr., as the designee, appointee and agent of the Company to receive, for and on behalf of the Company, service of process in such respective jurisdictions in any legal action or proceeding with respect to this Agreement, the Notes, or the other Financing Documents. It is understood that a copy of such process served on such agent will be promptly forwarded by mail to the Company at its address set forth opposite its signature below, but the failure of the Company to receive such copy shall not affect in any way the service of such process. The Company further irrevocably consents to the service of process of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to the Company at its said address, such service to become effective 30 days after such mailing. (e) Service of Process. Nothing herein shall affect the right of the Administrative Agent or any Lender or any holder of a Note to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against the Company in any other jurisdiction. Section 9.09 Independent Nature of Lenders' Rights. The amounts payable at any time hereunder to each Lender shall be a separate and independent debt, and each Lender shall be entitled to protect and enforce its rights arising out of this Agreement, and it shall not be necessary for any other Lender to be joined as an additional party in any proceeding for such purpose. Section 9.10 Invalidity. In the event that any one or more of the provisions contained in the Notes, this Agreement or in any other Financing Document shall, for any reason, be held invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of the Notes, this Agreement or any other Financing Document. Section 9.11 Survival of Agreements. All representations and warranties of the Company or its Subsidiaries or any other Person herein or in the other Financing Documents, and all covenants and agreements herein not fully performed before the Effective Date, shall survive such date or dates. Section 9.12 Renewal, Extension or Rearrangement. All provisions of this Agreement and of any other Financing Documents relating to the Notes or other Lender Indebtedness shall apply with equal force and effect to each and all promissory notes hereafter executed which in whole or in part represent a renewal, extension for any period, increase or rearrangement of any part of the Lender Indebtedness originally represented by the Notes, or of any part of such other Lender Indebtedness. Section 9.13 Interest. It is the intention of the parties hereto to conform strictly to usury laws applicable to the Administrative Agent, the Documentation Agent, the Issuing Banks and the Lenders (collectively, the "Financing Parties") and the Transactions. Accordingly, if the Transactions would be usurious as to any Financing Party under laws applicable to it, then, notwithstanding anything to the contrary -78- in the Notes, this Agreement or in any other Financing Document or agreement entered into in connection with the Transactions or as security for the Notes, it is agreed as follows: (i) the aggregate of all consideration which constitutes interest under law applicable to any Financing Party that is contracted for, taken, reserved, charged or received by such Financing Party under the Notes, this Agreement or under any of such other Financing Documents or agreements or otherwise in connection with the Transactions shall under no circumstances exceed the maximum amount allowed by such applicable law, (ii) in the event that the maturity of the Notes is accelerated for any reason, or in the event of any required or permitted prepayment, then such consideration that constitutes interest under law applicable to any Financing Party may never include more than the maximum amount allowed by such applicable law, and (iii) excess interest, if any, provided for in this Agreement or otherwise in connection with the Transactions shall be canceled automatically by such Financing Party and, if theretofore paid, shall be credited by such Financing Party on the principal amount of such Financing Party's Indebtedness (or, to the extent that the principal amount of such Financing Party's Indebtedness shall have been or would thereby be paid in full, refunded by such Financing Party to the Company). The right to accelerate the maturity of the Notes does not include the right to accelerate any interest which has not otherwise accrued on the date of such acceleration, and the Financing Parties do not intend to collect any unearned interest in the event of acceleration. All sums paid or agreed to be paid to the Financing Parties for the use, forbearance or detention of sums included in the Lender Indebtedness shall, to the extent permitted by law applicable to such Financing Party, be amortized, prorated, allocated and spread throughout the full term of the Notes until payment in full so that the rate or amount of interest on account of the Lender Indebtedness does not exceed the applicable usury ceiling, if any. As used in this Section, the terms "applicable law" or "laws applicable to any Financing Party" shall mean the law of any jurisdiction whose laws may be mandatorily applicable notwithstanding other provisions of this Agreement, or law of the United States of America applicable to any Financing Party and the Transactions which would permit such Financing Party to contract for, charge, take, reserve or receive a greater amount of interest than under such jurisdiction's law. To the extent that Article 5069-1.04 of the Texas Revised Civil Statutes is relevant to any Financing Party for the purpose of determining the Highest Lawful Rate, such Financing Party hereby elects to determine the applicable rate ceiling under such Article by the indicated (weekly) rate ceiling from time to time in effect, subject to such Financing Party's right subsequently to change such method in accordance with applicable law. Section 9.14 Taxes, etc. Any taxes (excluding income taxes) payable or ruled payable by federal or state authority in respect of the Notes, this Agreement or the other Financing Documents shall be paid by the Company, together with interest and penalties, if any. Section 9.15 Confidential Information. The Administrative Agent and each Lender agree that all documentation and other information made available by the Company to the Administrative Agent or such Lender under the terms of this Agreement shall (except to the extent such documentation or other information is publicly available or hereafter becomes publicly available other than by action of the Administrative Agent or such Lender, or was theretofore known or hereinafter becomes known to the Administrative Agent or such Lender independent of any disclosure thereto by the Company) be held in the strictest confidence by the Administrative Agent or such Lender and used solely in the administration and enforcement of the Loans from time to time outstanding from such Lender to the Company and in the prosecution of defense of legal proceedings arising in connection herewith; provided that (i) the Administrative Agent or such Lender may disclose documentation and information to the Administrative Agent and/or to any other Lender which is a party to this Agreement or any Affiliates thereof and (ii) the Administrative Agent or such Lender may disclose such documentation or other information to any other bank or other Person to which such Lender sells or proposes to make an assignment or sell a participation -79- in its Loans hereunder if such other bank or Person, prior to such disclosure, agrees in writing to be bound by the terms of the confidentiality statement customarily employed by the Administrative Agent in connection with such potential transfers. Notwithstanding the foregoing, nothing contained herein shall be construed to prevent the Administrative Agent or a Lender from (a) making disclosure of any information (i) if required to do so by applicable law or regulation or accepted banking practice, (ii) to any governmental agency or regulatory body having or claiming to have authority to regulate or oversee any aspect of such Lender's business or that of such Lender's corporate parent or affiliates in connection with the exercise of such authority or claimed authority, (iii) pursuant to any subpoena or if otherwise compelled in connection with any litigation or administrative proceeding, (iv) to correct any false or misleading information which may become public concerning such Person's relationship to the Company, or (v) to the extent the Administrative Agent or such Lender or its counsel deems necessary or appropriate to effect or preserve its security for any Lender Indebtedness or to enforce any remedy provided in the Financing Documents, the Notes or this Agreement or otherwise available by law; or (b) making, on a confidential basis, such disclosures as such Lender reasonably deems necessary or appropriate to its legal counsel or accountants (including outside auditors). If the Administrative Agent or such Lender is compelled to disclose such confidential information in a proceeding requesting such disclosure, the Administrative Agent or such Lender shall seek to obtain assurance that such confidential treatment will be accorded such information; provided, however, that the Lender shall have no liability for the failure to obtain such treatment. Section 9.16 Entire Agreement. The Notes, this Agreement and the other Financing Documents embody the entire agreement and understanding between the Administrative Agent, the Documentation Agent, the Issuing Bank or the Lenders and the other respective parties hereto and thereto and supersede all prior agreements and understandings between such parties relating to the subject matter hereof and thereof and may not be contradicted by evidence of prior, contemporaneous or subsequent agreements of the parties. There are no unwritten oral agreements between the parties. Section 9.17 Attachments. The exhibits, schedules and annexes attached to this Agreement are incorporated herein and shall be considered a part of this Agreement for the purposes stated herein, except that in the event of any conflict between any of the provisions of such exhibits and the provisions of this Agreement, the provisions of this Agreement shall prevail. Section 9.18 Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original but all of which shall together constitute one and the same instrument. Section 9.19 Survival of Indemnities. The Company's obligations under Sections 2.16, 2.18, 2.21 and 9.04 shall survive the payment in full of the Loans and the Letter of Credit Liabilities. Section 9.20 Headings Descriptive. The headings of the several sections and subsections of this Agreement, and the Table of Contents, are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement. Section 9.21 Satisfaction Requirement. If any agreement, certificate, instrument or other writing, or any action taken or to be taken, is by the terms of this Agreement required to be satisfactory to any party, the determination of such satisfaction shall be made by such party in its sole and exclusive judgment exercised reasonably and in good faith. -80- Section 9.22 Effectiveness. This Agreement shall not be effective until executed by all signatories hereto and delivered to the Administrative Agent in the State of Texas and accepted by the Administrative Agent in such state. Section 9.23 Conflict with E&P Mortgage. In the event of a conflict between the terms of the E&P Mortgage and the terms of this Agreement, the terms of this Agreement shall control. Section 9.24 Exculpation Provisions. Each of the parties hereto specifically agrees that it has a duty to read this Agreement and the other Financing Documents and agrees that it is charged with notice and knowledge of the terms of this Agreement and the other Financing Documents; that it has in fact read this Agreement and is fully informed and has full notice and knowledge of the terms, conditions and effects of this Agreement; that it has been represented by legal counsel of its choice throughout the negotiations preceding its execution of this Agreement and the other Financing Documents; and has received the advice of its attorneys in entering into this Agreement and the other Financing Documents; and that it recognizes that certain of the terms of this Agreement and the other Financing Documents result in one party assuming the liability inherent in some aspects of the transaction and relieving the other party of its responsibility for such liability. Each party hereto agrees and covenants that it will not contest the validity or enforceability of any exculpatory provision of this Agreement and the other Financing Documents on the basis that the party had no notice or knowledge of such provision or that the provision is not "conspicuous." [SIGNATURES BEGIN ON NEXT PAGE] -81- IN WITNESS WHEREOF, the parties hereto have caused this instrument to be duly executed as of the date first above written. COMPANY: TESORO PETROLEUM CORPORATION By: /s/ G. A. Wright Name: G. A. Wright Address: Title: Vice President, Corporate Communications and Treasurer 8700 Tesoro Drive San Antonio, Texas 78217 Telecopier No. (210) 283-2003 ADMINISTRATIVE AGENT, DOCUMENTATION AGENT, ISSUING BANKS AND THE LENDERS: BANQUE PARIBAS Individually, as an Issuing Bank and as Administrative Agent By: /s/ Brian Malone Address: Name: Brian Malone Title: Vice President 1200 Smith Street, Suite 3100 Houston, Texas 77002 Attention: Mr. Brian Malone By: /s/ Barton D. Schouest Telecopier No. (713) 659-6915 Name: Barton D. Schouest Title: Group Vice President S-1 THE BANK OF NOVA SCOTIA Individually and as Documentation Agent By: /s/ A.S. Norsworthy Address: Name: F.C.H. Ashby Title: Senior Manager Loan Operations 600 Peachtree Street N.E. Suite 2700 Atlanta, Georgia 30308 A.S. Norsworthy Attention: Mr. Claude Ashby Sr. Team Leader-Loan Operations Telecopier No. (404) 888-8998 With Copy To: 1100 Louisiana Street, Suite 3000 Houston, Texas 77002 Attention: Mr. Michael W. Nepveux Telecopier No. (713) 752-2425 Address: BANK OF SCOTLAND 565 5th Avenue New York, New York 10017 Attention: Ms. Catherine Oniffrey By: /s/ Catherine Oniffrey Telecopier No. (212) 557-9460 Name: Title: With Copy To: 1200 Smith Street 1750 Two Allen Center Houston, Texas 77002 Attention: Ms. Janna Blanter Telecopier No. (713) 651-9714 S-2 CHRISTIANIA BANK OG KREDITKASSE By: /s/ Peter M. Dodge Address: Name: Peter M. Dodge Title: Vice President 11 West 42nd Street, 7th Floor New York, New York 10036 Attention: Mr. Steve Phillips By: /s/ Carl-Petter Svendsen Telecopier No. (212) 827-4888 Name: Carl-Petter Svendsen Title: First Vice President THE FIRST NATIONAL BANK OF CHICAGO, Individually and as an Issuing Bank By: /s/ George R. Schanz Address: Name: George R. Schanz Title: Vice President One First National Plaza Chicago, Illinois 60670 Attention: Mr. George R. Schanz Telecopier No. (312) 732-3055 FIRST UNION NATIONAL BANK OF NORTH CAROLINA By: /s/ Michael J. Kolosowsky Address: Name: Michael J. Kolosowsky Title: Vice President 1001 Fannin Street, Suite 2255 Houston, Texas 77002 Attention: Mr. Paul N. Riddle Telecopier No. (713) 650-6354 S-3 NATIONAL BANK OF CANADA By: /s/ Larry L. Sears Address: Name: Larry L. Sears Title: Group Vice President 125 West 55th Street New York, New York 10019-5366 Attention: Mr. Wayne Rosen By: /s/ Doug Clark Telecopier No. (212) 632-8736 Name: Doug Clark Title: Vice President With Copy To: 2121 San Jacinto, Suite 1850 Dallas, Texas 75201 Attention: Mr. Doug Clark Telecopier No. (214) 871-2015 S-4 THE FROST NATIONAL BANK By: /s/ James B. Crosby Address: Name: James B. Crosby Title: Senior Vice President 100 W. Houston Street P. O. Box 1600 San Antonio, Texas 78296 Attention: Ms. Jenny Crabtree Telecopier No. (210) 220-4626 DEN NORSKE BANK ASA By: /s/ Haakon Sandborg Address: Name: Haakon Sandborg Title: Senior Vice President Three Allen Center 333 Clay Street, Suite 4890 Houston, Texas 77002 By: /s/ Byron L. Cooley Attention: Mr. Byron Cooley Name: Byron L. Cooley Telecopier No. (713) 757-1167 Title: First Vice President S-5 ANNEX I Commitments Revolving Credit Banks Commitment ----- ---------- ($'s) Banque Paribas 24,000,000 The Bank of Nova Scotia 24,000,000 Bank of Scotland 20,000,000 Christiania Bank OG Kreditkasse 20,000,000 The First National Bank of Chicago 20,000,000 National Bank of Canada 12,000,000 First Union National Bank of North Carolina 10,000,000 The Frost National Bank 10,000,000 Den norske Bank ASA 10,000,000 ----------- Total 150,000,000 Annex I-1 EXHIBIT A FORM OF REVOLVING CREDIT NOTE $__________ June 7, 1996 TESORO PETROLEUM CORPORATION, a Delaware corporation (the "Company"), for value received, promises and agrees to pay to the order of (the "Lender") at the Payment Office of BANQUE PARIBAS (the "Administrative Agent"), at _________________________, the principal sum of ___________________________________ DOLLARS ($___________________), or such lesser amount as shall equal the aggregate unpaid principal amount of the Revolving Credit Loans made by Lender hereunder to the Company under the Credit Agreement, as hereafter defined, in lawful money of the United States of America and in immediately available funds, on the dates and in the principal amounts provided in the Credit Agreement referred to below, and to pay interest on the unpaid principal amount as provided in the Credit Agreement for such Revolving Credit Loans made by the Lender to the Company under the Credit Agreement, at such office, in like money and funds, for the period commencing on the date of each such Revolving Credit Loan until such Revolving Credit Loan shall be paid in full, at the rates per annum and on the dates provided in the Credit Agreement. In addition to and cumulative of any payments required to be made against this note pursuant to the Credit Agreement, this note, including all principal and accrued interest then unpaid, shall be due and payable on April ________, 1999, its final maturity. All payments shall be applied first to accrued interest and the balance to principal, except as otherwise expressly provided in the Credit Agreement. Prepayments on this note shall be applied in the manner set forth in the Credit Agreement. This note is one of the Revolving Credit Notes referred to in the Credit Agreement dated as of the 7th day of June, 1996, by and among the Company and Banque Paribas, individually, as Issuing Bank and as Administrative Agent, The Bank of Nova Scotia, individually and as Documentation Agent and financial institutions parties thereto (including the Lender) (such Credit Agreement, together with all amendments or supplements thereto, being the "Credit Agreement"). This note evidences the Revolving Credit Loans made by the Lender thereunder and shall be governed by the Credit Agreement. Capitalized terms used in this note and not defined in this note, but which are defined in the Credit Agreement, have the respective meanings herein as are assigned to them in the Credit Agreement. The Lender is hereby authorized by the Company to endorse on Schedule A (or a continuation thereof) attached to this note, the Type of each Revolving Credit Loan, the amount and date of each payment or prepayment of principal of each such Revolving Credit Loan received by the Lender and the Interest Periods and interest rates applicable to each Revolving Credit Loan, provided that any failure by the Lender to make any such endorsement shall not affect the obligations of the Company under the Credit Agreement or under this note in respect of such Revolving Credit Loans. Except only for any notices which are specifically required by the Credit Agreement or the other Financing Documents, the Company and any and all co-makers, endorsers, guarantors and sureties severally waive notice (including but not limited to notice of intent to accelerate and notice of acceleration, notice of protest and notice of dishonor), demand, presentment for payment, protest, diligence in collecting and the filing of suit for the purpose of fixing liability, and consent that the time of payment hereof may be extended and re-extended from time to time without notice to any of them. Each such person agrees that his, her or its liability on or with respect to this note shall not be affected by any release of or change in any guaranty A-1 or security at any time existing or by any failure to perfect or maintain perfection of any lien against or security interest in any such security or the partial or complete enforceability of any guaranty or other surety obligation, in each case in whole or in part, with or without notice and before or after maturity. The Credit Agreement provides for the acceleration of the maturity of this note upon the occurrence of certain events and for prepayment of Revolving Credit Loans upon the terms and conditions specified therein. Reference is made to the Credit Agreement for all other pertinent purposes. This note is issued pursuant to and is entitled to the benefits of the Credit Agreement and is secured by the Security Instruments. THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF TEXAS AND THE UNITED STATES OF AMERICA FROM TIME TO TIME IN EFFECT. TESORO PETROLEUM CORPORATION By:______________________________ Name: Title: A-2 EXHIBIT B FORM OF BORROWING REQUEST __________________, 199__ TESORO PETROLEUM CORPORATION, a Delaware corporation (the "Company"), hereby requests a Borrowing on the date and in the amount as follows: $___________________ under the Revolving Credit Notes Requested funding date: ________________, 199__ Type of Borrowing: ______ Base Rate Loans ______ Eurodollar Loans If Eurodollar Loans, length of Interest Period: ______ one month ______ two months ______ three months ______ six months pursuant to the Credit Agreement dated as of June 7, 1996 (as the same may be amended or supplemented, the "Credit Agreement") among the Company, Banque Paribas, individually, as Issuing Bank, and as Administrative Agent, The Bank of Nova Scotia, individually, and as Documentation Agent and the financial institutions now or hereafter parties thereto. Capitalized terms used herein and not defined herein shall have the meaning given such term in the Credit Agreement. The undersigned certifies that he is the __________________ of the Company, and that as such he is authorized to execute this certificate on behalf of the Company. The undersigned further certifies, represents and warrants on behalf of the Company that (i) the Company is entitled to receive the requested Revolving Credit Loan under the terms and conditions of the Credit Agreement and (ii) after giving effect to any requested Revolving Credit Loan, the aggregate principal amount of outstanding Revolving Credit Loans will not exceed the Maximum Revolving Credit Loan Available Amount. TESORO PETROLEUM CORPORATION By:___________________________________ Name: Title: B-1 EXHIBIT C SUBSIDIARIES GUARANTORS ------------ ---------- Tesoro Petroleum Companies, Inc. X Digicomp, Inc. X Tesoro Technology Partners Company X Tesoro Alaska Petroleum Company X Interior Fuels Company X Tesoro Alaska Pipeline Company X Tesoro Northstore Company X Tesoro Refining, Marketing & Supply Company X Tesoro Exploration and Production Company X Tesoro E&P Company, L.P. X Tesoro Gas Resources Company, Inc. X Tesoro Natural Gas Company X Tesoro Bolivia Petroleum Company X Kenai Pipe Line Company X Tesoro Vostok Company X Coastwide Marine Services, Inc. X Tesoro Coastwide Services Company X Tesoro Environmental Resources Company Tesoro Environmental Products Company Tesoro Indonesia Petroleum Company Tesoro Tarakan Petroleum Company Tesoro Equipment Company Tesoro Crude Oil Company Tesoro Gasoline Marketing Company Tesoro Pump & Valve Company Tesoro Petroleum (Singapore) Pte. Ltd. C-1 EXHIBIT D FORM OF ASSIGNMENT AND ACCEPTANCE Dated: __________, 199__ Reference is made to the Credit Agreement dated as of April ______, 1996 (as restated, amended, modified, supplemented and in effect from time to time, the "Credit Agreement"), among TESORO PETROLEUM CORPORATION, a Delaware corporation, BANQUE PARIBAS, individually, as Issuing Bank and as Administrative Agent, THE BANK OF NOVA SCOTIA, individually and as Documentation Agent, and the financial institutions parties thereto (the "Lenders"). Capitalized terms used herein and not otherwise defined shall have the meanings assigned to such terms in the Credit Agreement. This Assignment and Acceptance, between the Assignor (as defined and set forth on Schedule I hereto and made a part hereof) and the Assignee (as defined and set forth on Schedule I hereto and made a part hereof) is dated as of the Effective Date (as set forth on Schedule I hereto and made a part hereof). 1. The Assignor hereby irrevocably sells and assigns to the Assignee without recourse to the Assignor, and the Assignee hereby irrevocably purchases and assumes from the Assignor without recourse to the Assignor, as of the Effective Date, an undivided interest (the "Assigned Interest") in and to all the Assignor's rights and obligations under the Credit Agreement respecting the credit facilities contained in the Credit Agreement as set forth on Schedule I (herein referred to as the "Assigned Loans"), in a principal amount for each Assigned Loan as set forth on Schedule I. 2. The Assignor (i) represents and warrants that it owns the Assigned Interest free and clear from any lien or adverse claim; (ii) other than the representation and warranty set forth in clause (i) above, makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement or any other instrument, document or agreement delivered in connection therewith, or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement, or any other instrument or document furnished pursuant thereto, other than that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim; (iii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Company or its Subsidiaries or the performance or observance by the Company or its Subsidiaries of any of its respective obligations under the Credit Agreement, or any other instrument or document furnished pursuant thereto; and (iv) attaches the Notes held by it evidencing the Assigned Loans and requests that the Administrative Agent exchange such Note(s) for a new Note or Notes payable to the Assignor (if the Assignor has retained any interest in the Assigned Loans) and new Notes payable to the Assignee in the respective amounts which reflect the assignment being made hereby (and after giving effect to any other assignments which have become effective on the Effective Date). 3. The Assignee (i) represents and warrants that it is legally authorized to enter into this Assignment and Acceptance and that it is an Eligible Transferee under of the Credit Agreement; (ii) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements referred to in Section 4.06, or if later, the most recent financial statements delivered pursuant to Section 5.15 thereof, and such other documents and information as it has deemed appropriate to make its own credit analysis; (iii) agrees that it will, independently and without reliance upon the Administrative Agent, the Assignor or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; D-1 (iv) appoints and authorizes the Administrative Agent to take such action as Administrative Agent on its behalf and to exercise such powers under the Credit Agreement as are delegated to the Administrative Agent by the terms thereof, together with such powers as are reasonably incidental thereto; (v) agrees that it will be bound by the provisions of the Credit Agreement and will perform in accordance with its terms all the obligations which by the terms of the Credit Agreement are required to be performed by it as a Lender and hereby makes the Lender representations set forth in Section 2.21(f) of the Credit Agreement; and (vi) if the Assignee is organized under the laws of a jurisdiction outside the United States, attaches the forms prescribed by the Internal Revenue Service of the United States and required pursuant to Section 2.21 of the Credit Agreement certifying as to the Assignee's exemption from United States withholding taxes with respect to all payments to be made to the Assignee under the Credit Agreement or such other documents as are necessary to indicate that all such payments are subject to such tax at a rate reduced by an applicable tax treaty. 4. Following the execution of this Assignment and Acceptance, it will be delivered to the Administrative Agent and the Company for acceptance by each of them and recording by the Administrative Agent pursuant to Section 9.07(b) of the Credit Agreement, effective as of the Effective Date (which Effective Date shall, unless otherwise agreed to by the Administrative Agent, be at least five Business Days after the execution of this Assignment and Acceptance). 5. Upon acceptance and recording by the Administrative Agent, all payments under the Credit Agreement in respect of the Assigned Interest (including without limitation, all payments of principal, interest and fees with respect thereto) for the period up to, but not including, the Effective Date, shall be made to the Assignor, and for the period from and after the Effective Date shall be made to the Assignee. Assignor and Assignee hereby agree that if Assignor receives any of the payments referred to in the preceding sentence which should have been made to Assignee, or if Assignee receives any of the payments referred to in the previous sentence which should have been made to Assignor, such payments shall promptly be paid by Assignor to Assignee, or by Assignee to Assignor, as the case may be, in full. 6. From and after the Effective Date, (i) the Assignee shall be a party to the Credit Agreement and, to the extent provided in this Assignment and Acceptance and Section 9.07 of the Credit Agreement, have the rights and obligations of a Lender thereunder, and (ii) the Assignor shall, to the extent provided in this Assignment and Acceptance and Section 9.07 of the Credit Agreement, relinquish its rights and be released from its obligations under the Credit Agreement. 7. THIS ASSIGNMENT AND ACCEPTANCE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS. IN WITNESS WHEREOF, the parties hereto have caused this Assignment and Acceptance to be executed by their respective duly authorized officers on Schedule I hereto. as Assignor By: _____________________________________________ Name: Title: D-2 as Assignee By: _____________________________________________ Name: Title: ACCEPTED: TESORO PETROLEUM CORPORATION By: _____________________________________________ Name: Title: BANQUE PARIBAS, as Administrative Agent By: _____________________________________________ Name: Title: By: _____________________________________________ Name: Title: D-3 SCHEDULE I TO ASSIGNMENT AND ACCEPTANCE RESPECTING THE CREDIT AGREEMENT, DATED AS OF JUNE 7, 1996 AMONG TESORO PETROLEUM CORPORATION AND BANQUE PARIBAS, INDIVIDUALLY, AS Administrative Agent AND AS ISSUING BANK, AND THE BANK OF NOVA SCOTIA INDIVIDUALLY AND AS Documentation Agent AND THE LENDERS PARTIES THERETO Assignor: _________________________________________________ Assignee: _________________________________________________ Effective Date of Assignment: _________________, 199__ Percentage Assigned (to at Principal Amount (sum least 8 decimals) shown as a Assigned Loans of Commitment and percentage of aggregate and outstanding amounts) original principal amount Commitments Assigned of all Lenders - ----------- -------- -------------- Revolving Credit Loans and Commitments $____________________ _______% Assignee's Base Rate Address for Notice: Lending Office __________________________ ___________________________ __________________________ ___________________________ __________________________ ___________________________ Assignee's Eurodollar Telex No.:_______________________ Lending Office ___________________________ Telecopy No.:____________________ ___________________________ ___________________________ D-4 EXHIBIT E FORM OF BORROWING BASE REPORT Pursuant to subsection 5.15(h) of the Credit Agreement dated as of June 7, 1996, among Tesoro Petroleum Corporation, Banque Paribas, individually, as Issuing Bank and as Administrative Agent, The Bank of Nova Scotia, individually, and as Documentation Agent, and the other financial institutions parties thereto (as amended, restated, modified or supplemented and in effect from time to time the "Credit Agreement", defined terms from which being used herein with the meanings assigned to such terms in the Credit Agreement), the undersigned hereby certifies to the Administrative Agent and the Lenders that the inventory and accounts have been valued in accordance with the terms of the Credit Agreement. I. The Borrowing Base as of __________________________ was $___________________ computed as follows: A. Eligible Accounts 1. Eligible Accounts (see Schedule I) $______________ 2. 80% of Line I.A.1 $______________ B. Eligible Inventory 1. Loan Value of Eligible Inventory (see Schedule II) $______________ 2. 60% of Line I.B.1. $______________ C. E&P Borrowing Base $______________ BORROWING BASE (Sum of Lines 1.A.2, I.B.2 and I.C.1) $______________ Certified as of the ______ day of _________________________. TESORO PETROLEUM CORPORATION By:_____________________________________ Printed Name:___________________________ Title:___________________________________ E-1 SCHEDULE I SUMMARY OF ELIGIBLE ACCOUNTS [DATE] Loan Party Eligible Accounts ---------- ----------------- Tesoro Alaska Petroleum Company $______________ Tesoro Refining, Marketing & Supply Company _______________ Kenai Pipe Line Company _______________ Tesoro Vostok Company _______________ TOTAL OF ELIGIBLE ACCOUNTS $_______________ E-2 SCHEDULE II LOAN VALUE OF ELIGIBLE INVENTORY [DATE] A. TESORO ALASKA PETROLEUM COMPANY State Volume Market Market Product Location Bls. Price/Bbl. Value -------------------------------------------------- ________ _________ ______ $__________ $________ ________ _________ ______ ___________ _________ ________ _________ ______ ___________ _________ ________ _________ ______ ___________ _________ ________ _________ ______ ___________ _________ ________ _________ ______ ___________ _________ ________ _________ ______ ___________ _________ ________ _________ ______ ___________ _________ TOTAL LOAN VALUE OF TESORO ALASKA PETROLEUM COMPANY'S ELIGIBLE INVENTORY $________ (1) B. KENAI PIPE LINE COMPANY State Volume Market Market Product Location Bls. Price/Bbl. Value -------------------------------------------------- ________ _________ ______ $__________ $________ ________ _________ ______ ___________ _________ ________ _________ ______ ___________ _________ ________ _________ ______ ___________ _________ ________ _________ ______ ___________ _________ ________ _________ ______ ___________ _________ ________ _________ ______ ___________ _________ ________ _________ ______ ___________ _________ TOTAL LOAN VALUE OF KENAI PIPELINE COMPANY'S ELIGIBLE INVENTORY $________ (2) E-3 C. TESORO REFINING, MARKETING & SUPPLY COMPANY State Volume Market Market Product Location Bls. Price/Bbl. Value -------------------------------------------------- ________ _________ ______ $__________ $________ ________ _________ ______ ___________ _________ ________ _________ ______ ___________ _________ ________ _________ ______ ___________ _________ ________ _________ ______ ___________ _________ ________ _________ ______ ___________ _________ ________ _________ ______ ___________ _________ ________ _________ ______ ___________ _________ TOTAL LOAN VALUE OF TESORO REFINING, MARKETING & SUPPLY COMPANY'S ELIGIBLE INVENTORY $________ (3) D. TOTAL LOAN VALUE OF ELIGIBLE INVENTORY (Sum of Lines (1), (2) and (3)) $________ (4) E-4 EXHIBIT F FORM OF LETTER TO HYDROCARBON PURCHASERS [Letterhead of Mortgagor] ________________, 19___ [Purchaser of Hydrocarbons] Re: [Descriptions of Field and Division Order Identification Number] Gentlemen: You are currently paying for purchases of hydrocarbons from ________________________ ("_______________") with respect to the above property. By instrument entitled ______________________ (the "Mortgage"), ______________ has mortgaged its interest in this property to ____________________________ (the "Bank "). The Mortgage provides for an assignment to the Bank of the proceeds arising from the purchases of hydrocarbons from the properties mortgaged thereby, which properties include the above property. Notwithstanding the foregoing, you are directed to continue to make checks, wire transfers and other remittances and payments (collectively, the "Payments") payable and to mail, wire transfer or otherwise direct all Payments to Tesoro E&P Company, L.P., or its designee, unless and until you should receive from the Bank contrary written instructions. ____________________________________ By: ________________________________ Name: Title: ____________________________________ [Name of Bank] By: ________________________________ Name: Title: F-1 EX-4.2 3 AMENDED AND RESTATED GUARANTY AGREEMENT AMENDED AND RESTATED GUARANTY AGREEMENT (Subsidiaries) AMENDED AND RESTATED GUARANTY AGREEMENT, dated as of June 7, 1996 (this "Guaranty Agreement"), among TESORO ALASKA PETROLEUM COMPANY, a Delaware corporation, TESORO EXPLORATION AND PRODUCTION COMPANY, a Delaware corporation, and TESORO PETROLEUM COMPANIES, INC., a Delaware corporation, DIGICOMP, INC., a Delaware corporation, TESORO TECHNOLOGY PARTNERS COMPANY, a Delaware corporation, INTERIOR FUELS COMPANY, an Alaskan corporation, TESORO ALASKA PIPELINE COMPANY, a Delaware corporation, TESORO NORTHSTORE COMPANY, an Alaskan corporation, TESORO REFINING, MARKETING & SUPPLY COMPANY, a Delaware corporation, TESORO NATURAL GAS COMPANY, a Delaware corporation, TESORO BOLIVIA PETROLEUM COMPANY, a Texas corporation, TESORO GAS RESOURCES COMPANY, INC., a Delaware corporation, TESORO E&P COMPANY, L.P., a Delaware limited partnership, TESORO VOSTOK COMPANY, a Delaware corporation, TESORO COASTWIDE SERVICES COMPANY, a Delaware corporation, COASTWIDE MARINE SERVICES, INC., a Texas corporation, and KENAI PIPE LINE COMPANY, a Delaware corporation (the "Guarantors"), in favor of BANQUE PARIBAS, individually, as Administrative Agent and as an Issuing Bank, and the other financial institutions now or hereafter parties to the Credit Agreement (as such term is hereinafter defined). RECITALS A. On April 20, 1994, Tesoro Petroleum Corporation, a Delaware corporation (the "Company"), Texas Commerce Bank National Association, individually and as agent and the other financial institutions now or hereafter parties thereto entered into a Credit Agreement (as amended from time to time, the "Prior Credit Agreement"). B. The conditions precedent to the effectiveness of the Credit Agreement included the execution and delivery of that certain Guaranty Agreement dated of even date therewith by each Subsidiary of the Company (the "Prior Guaranty Agreement"). C. Of even date herewith, the Company, Banque Paribas, as Administrative Agent, The Bank of Nova Scotia, as Documentation Agent and various lenders (the "Lenders") are entering into an Amended and Restated Credit Agreement (the "Credit Agreement") amending and restating the Prior Credit Agreement. D. Therefore, in consideration of the premises contained herein, the Guarantors and the Administrative Agent agree to amend and restate the Prior Guaranty Agreement as follows: AGREEMENT 1. Defined Terms. As used in this Guaranty Agreement, capitalized terms defined in the Credit Agreement are used herein as defined therein unless otherwise noted herein, and the following additional capitalized terms shall have the following meanings: "Collateral" shall mean any Property in which the Agent is granted a Lien from time to time as security for the Lender Indebtedness. "Contribution Obligation" shall mean an amount equal, at any time and from time to time and for each respective Guarantor, to the product of (i) its Contribution Percentage times (ii) the sum of all payments made previous to or at the time of calculation by all Guarantors in respect of the Obligations, as a Guarantor or debtor under any Loan Document (less the amount of any such payments previously returned to any Guarantor by operation of law or otherwise, but not including payments received by any Guarantor by way of its rights of subrogation and contribution under this Guaranty Agreement), provided, however, such Contribution Obligation for any Guarantor shall in no event exceed such Guarantor's Maximum Guaranteed Amount. "Contribution Percentage" shall mean for any Guarantor for any applicable date as of which such percentage is being determined, an amount equal to the quotient of (i) the Net Worth of such Guarantor as of such date, divided by (ii) the sum of the Net Worth of all the Guarantors as of such date. "Maximum Guaranteed Amount" shall mean, for each Guarantor, the greater of (i) the "reasonably equivalent value" or "fair consideration" (or equivalent concept) received by such Guarantor in exchange for the obligation incurred hereunder by such Guarantor, within the meaning of any state or federal fraudulent conveyance or transfer laws applicable to such Guarantor; or (ii) the lesser of (A) the maximum amount that will not render such Guarantor insolvent, or (B) the maximum amount that will not leave such Guarantor (after giving effect to this Guaranty Agreement) with Property deemed an unreasonably small capital. Clauses (A) and (B) are and shall be determined pursuant to and as of the appropriate date mandated by such applicable state or federal fraudulent conveyance or transfer laws and to the extent allowed by law take into account the rights to contribution and subrogation under this Guaranty Agreement so as to provide for the largest MaximumGuaranteed Amount possible. "Net Payments" shall mean an amount equal, at any time and from time to time and for each respective Guarantor, to the difference of (i) the sum of all payments made -2- previous to or at the time of calculation by such Guarantor in respect to the Obligations, as a Guarantor, and in respect of its obligations contained in this Guaranty Agreement or any other Financing Document, less (ii) the sum of all such payments previously returned to such Guarantor by operation of law or otherwise and including payments received by such Guarantor by way of its rights of subrogation and contribution under this Guaranty Agreements. "Net Worth" shall mean for any Guarantor, calculated on and as of any applicable date on which such amount is being determined, the greater of (i) zero or (ii) the difference between (A) the sum of all such Guarantor's property, at a fair valuation and as of such date, minus (B) the sum of all such Guarantor's debts, at a fair valuation and as of such date, excluding the Obligations. "Obligations" shall mean (i) all Lender Indebtedness now or hereafter owing, including, but not limited to, (A) the unpaid principal of and accrued interest on (including interest accruing on or after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Company, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) the Notes, and (B) the obligation of the Company to otherwise reimburse the Lender, whether on account of fees, indemnities, costs, taxes, expenses (including all fees and disbursements set forth in Sections 2.21 or 9.04 of the Credit Agreement) or otherwise, (ii) payment of and performance of any and all present or future obligations of the Company according to the terms of any present or future interest or currency rate swap, rate cap, rate floor, rate collar, exchange transaction, forward rate agreement or other exchange or rate protection agreements or any option with respect to any such transaction now existing or hereafter entered into between the Company and the Administrative Agent or any of the Lenders (or any of their Affiliates) and authorized pursuant to the terms of the Credit Agreement; (iii) payment of and performance of any and all present or future obligations of the Company according to the terms of any present or future swap agreements, cap, floor, collar, exchange transaction, forward agreement or other exchange or protection agreements relating to crude oil, natural gas or other hydrocarbons or any option with respect to any such transaction now existing or hereafter entered into between the Company and the Administrative Agent or any of the Lenders (or any of their Affiliates) and authorized pursuant to the terms of the Credit Agreement; and (iv) any and all other sums payable by the Company or any of its Subsidiaries under or in respect of any Financing Document. -3- "Subrogation and Contribution Agreement" shall mean that certain Subrogation and Contribution Agreement dated as of April 20, 1994 among certain of the Guarantors and the Company which is hereby declared terminated. 2. Guarantee. (a) Each of the Guarantors hereby unconditionally and irrevocably and jointly and severally guarantees to the Agent, the Issuing Banks and each Lender the prompt and complete payment when due (whether at the stated maturity, by acceleration or otherwise) of the Obligations, and each of the Guarantors further agrees, jointly and severally, to pay any and all expenses which may be paid or incurred by the Agent, either Issuing Bank or any Lender in enforcing any rights with respect to, or collecting, any or all of the Obligations and/or enforcing any rights with respect to, or collecting against, any Guarantor under this Guaranty Agreement; provided, however, that, notwithstanding anything herein or in any other Financing Document to the contrary, the maximum liability of each Guarantor hereunder and under the other Financing Documents shall in no event exceed the Maximum Guaranteed Amount for such Guarantor. (b) Each Guarantor agrees that the Obligations may at any time and from time to time exceed the Maximum Guaranteed Amount for such Guarantor without impairing this Guaranty Agreement or affecting the rights and remedies of the Agent, either Issuing Bank or any Lender. (c) No payment or payments made by the Company, any Guarantor, any other guarantor or any other Person or received or collected by the Agent, either Issuing Bank or any Lender from the Company, any Guarantor, any other guarantor or any other Person by virtue of any action or proceeding or any set-off or appropriation or application at any time or from time to time in reduction of or in payment of the Obligations shall be deemed to modify, reduce, release or otherwise affect the liability of each Guarantor hereunder, which shall, notwithstanding any such payment or payments, other than payments made by such Guarantor in respect of the Obligations or payments received or collected from such Guarantor in respect of the Obligations, remain liable for the Obligations up to the Maximum Guaranteed Amount for such Guarantor until the Obligations are paid in full. (d) It is the intention of the parties hereto that all intercompany indebtedness either owed to or by any Guarantor not be included as either an asset or a liability, respectively, in determining the solvency or capital of any Guarantor. Accordingly, each Guarantor agrees that in connection with any determination of the Maximum Guaranteed Amount, such intercompany indebtedness may be treated in the manner that would achieve the result intended by the first sentence of this subsection (d). -4- (e) Right to Collect on the Notes. The Company and the Guarantors are personally obligated and fully liable for the amounts due under the Notes. The Lenders have the right to sue on the Notes and obtain a personal judgment against the Company and the Guarantors for satisfaction of the amounts due under the Notes either before or after a judicial foreclosure of the Alaska Deed of Trust under Alaska Statute 09.45.170 - 09.45.220. (f) Senior Debt. Tesoro Alaska's guarantee of the payment of the Obligations constitutes Senior Debt as such term is defined in that certain Subordination Agreement dated December 15, 1993, among the Company, Tesoro Alaska, and the State of Alaska, attached as Exhibit 7 to the Settlement Agreement dated December 15, 1992, among the Company, Tesoro Alaska, and the State of Alaska. 3. Right of Contribution. Each Guarantor agrees that after all the Obligations have been paid in full that if its then current Net Payments are less than the amount of its then current Contribution Obligation, such Guarantor shall pay to the other Guarantors an amount (together with any payments required of the other Guarantors by this Section 3) such that the Net Payments made by all Guarantors in respect of the Obligations shall be shared among all of the Guarantors in proportion to their respective Contribution Percentage. The provisions of this Paragraph 3 shall in no respect limit the obligations and liabilities of any Guarantor to the Agent, the Issuing Banks or any Lender, and each Guarantor shall remain liable to the Agent, the Issuing Banks and each Lender for the full amount guaranteed by such Guarantor hereunder. 4. Right of Set-off. The Agent, the Issuing Bank and each Lender is hereby irrevocably authorized upon the occurrence of an Event of Default without notice to the Guarantors, any such notice being expressly waived by each Guarantor, to set-off and credit against any credits, indebtedness or claims, in any currency, in each case whether direct or indirect or contingent or matured or unmatured, at any time held or owing by the Agent, either Issuing Bank or any Lender to or for the credit or the account of any Guarantor, or any part thereof in such amounts as the Agent, such Issuing Bank or such Lender may elect, against and on account of the obligations and liabilities of the applicable Guarantor to the Agent, the Issuing Banks and the Lenders hereunder and claims of every nature and description of the Agent, the Issuing Banks and the Lenders against such Guarantor, in any currency, whether arising hereunder, under the Credit Agreement, any other Financing Document or otherwise, as the Agent, either Issuing Bank or any Lender may elect, whether or not the Agent, such Issuing Bank or such Lender has made any demand for payment and although such obligations, liabilities and claims may be contingent or unmatured. The Agent agrees to notify (promptly after receipt of notice by the Agent) the Company and the applicable Guarantor of any such set-off and the application made by the Agent, such Issuing Bank or any 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 Agent, either -5- Issuing Bank and each Lender under this paragraph are in addition to other rights and remedies (including, without limitation, other rights of set-off) which any such Person may have. If foreign currency is exchanged for U.S. Dollars by the Agent, either Issuing Bank or any Lender, such Person shall use the rate of exchange prevailing at the time for customers exchanging a similar amount of currency. 5. No Subrogation. Notwithstanding any payment or payments made by any Guarantor hereunder or any set-off or application of funds of any Guarantors by the Agent, either Issuing Bank or any Lender, any such Guarantor shall not be entitled to be subrogated to any of the rights of the Agent, either Issuing Bank or any Lender against the Company or any collateral security or guaranty or right of offset held by any such Person for the payment of the Obligations, nor shall any Guarantor seek or be entitled to seek any contribution or reimbursement from the Company in respect of payments made by any such Guarantor hereunder, until all Obligations are paid in full. If any amount shall be paid to any Guarantor on account of such subrogation rights at any time when all of the Obligations shall not have been paid in full, such amount shall be held by such Guarantor in trust for the Agent, the Issuing Banks and the Lenders, segregated from other funds of such Guarantor, and shall, forthwith upon receipt by such Guarantor, be turned over to the Agent in the exact form received by such Guarantor (duly indorsed by such Guarantor to the Agent, if required), to be applied against the Obligations, whether matured or unmatured in such order as the Agent may determine. 6. Amendments, etc. with respect to the Obligations; Waiver of Rights. Each Guarantor shall remain obligated hereunder notwithstanding that, without any reservation of rights against the Guarantors and without notice to or further assent by the Guarantors, any demand for payment of any of the Obligations made by the Agent, either Issuing Bank or any Lender may be rescinded and any of the Obligations continued, and the Obligations, or the liability of any other party upon or for any part thereof, or any collateral security or guaranty therefor or right of offset with respect thereto, may, from time to time, in whole or in part, be renewed, extended, amended, modified, accelerated, compromised, waived, surrendered or released by the Agent, the Issuing Banks or the Lenders and the Credit Agreement, the Notes and any collateral security document or other guaranty or document in connection therewith (including, without limitation, the other Financing Documents) may be amended, modified, supplemented or terminated, in whole or in part, as the Agent, the Issuing Banks or the Lenders may deem advisable from time to time, and any collateral security or guaranty or right of offset at any time held by the Agent, the Issuing Banks or the Lenders for the payment of the Obligations may be sold, exchanged, waived, surrendered or released, all without the necessity of any reservation of rights against the Guarantors and without notice to or further assent by the Guarantors which will remain bound hereunder, notwithstanding any such renewal, extension, modification, acceleration, compromise, amendment, supplement, termination, sale, exchange, waiver, -6- surrender or release. Neither the Agent, either Issuing Bank nor any Lender shall have an obligation to protect, secure, perfect or insure any Lien at any time held as security for the Obligations or this Guaranty Agreement or any Property subject thereto. When making any demand hereunder against any Guarantor, the Agent may, but shall be under no obligation to, make a similar demand on the Company or any other guarantor, and any failure by the Agent to make any such demand or to collect any payments from the Company or any such other guarantor, or any release of the Company or other guarantor, shall not relieve any such Guarantor of its obligations or liabilities hereunder, and shall not impair or affect the rights and remedies, express or implied, or as a matter of law, of the Agent, the Issuing Banks of the Lenders against each Guarantor. For the purposes hereof "demand" shall include the commencement and continuance of any legal proceedings. 7. Guaranty Absolute and Unconditional. Each Guarantor waives any and all notice of the creation, renewal, extension or accrual of any of the Obligations and notice of or proof of reliance by the Agent, either Issuing Bank or any Lender upon this Guaranty Agreement or acceptance of this Guaranty Agreement, and the Obligations (and any of them) shall conclusively be deemed to have been created, contracted or incurred and extended, amended and waived in reliance upon this Guaranty Agreement, and all dealings between the Company or the Guarantors and the Agent, either Issuing Bank or any Lender shall likewise be conclusively presumed to have been had or consummated in reliance upon this Guaranty Agreement. Each Guarantor waives diligence, presentment, protest, demand for payment and notice of default or nonpayment, notice of intention to accelerate maturity and notice of acceleration of maturity to or upon the Company or the Guarantors with respect to the Obligations. Each Guarantor understands and agrees that this Guaranty Agreement shall be construed as a continuing, absolute, completed, unconditional (except as expressly conditioned pursuant to the terms hereof) and irrevocable guarantee of payment and not of collection without regard to (a) the validity, regularity or enforceability of the Credit Agreement, the other Financing Documents, any of the Obligations or any collateral security or guaranty therefor or right of offset with respect thereto at any time or from time to time held by the Agent, either Issuing Bank or any Lender, (b) any defense, set-off or counterclaim which may at any time be available to or be asserted by the Company or any other Person liable for the Obligations against the Agent, either Issuing Bank or any Lender, or (c) any other circumstance whatsoever (with or without notice to or knowledge of the Company or any Guarantor) which constitutes, or might be construed to constitute, an equitable or legal discharge of the Company or any other Person liable for the Obligations, or of any Guarantor under this Guaranty Agreement, in bankruptcy or in any other instance. When pursuing its rights and remedies hereunder against any Guarantor, the Agent, the Issuing Banks and the Lenders may, but shall be under no obligation to, pursue such rights and remedies as they may have against the Company or any other Person or against any collateral security or guaranty for the Obligations or any right of offset with respect thereto, and -7- any failure by the Agent, the Issuing Banks or the Lenders to pursue such other rights or remedies or to collect any payments from the Company or any such other Person or to realize upon any such collateral security or guaranty or to exercise any such right of offset, or any release of the Company or any such other Person or any such collateral security, guaranty or right of offset, shall not relieve any Guarantor of any liability hereunder, and shall not impair or affect the rights and remedies, whether express, implied or available as a matter of law, of the Agent, either Issuing Bank or any Lender against any Guarantor. This Guaranty Agreement shall remain in full force and effect and be binding in accordance with and to the extent of its terms upon each Guarantor and the respective successors and assigns thereof, and shall inure to the benefit of the Agent, Issuing Banks and the Lenders, and the respective successors, indorsees, transferees and assigns thereof, until all the Obligations and the obligations of the Guarantors under this Guaranty Agreement shall have been satisfied by payment in full. 8. Reinstatement. This Guaranty Agreement shall continue to be effective, or be reinstated, as the case may be, if at any time payment, or any part thereof, of any of the Obligations is rescinded or must otherwise be restored or returned by the Agent, either Issuing Bank or any Lender upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of the Company or any Guarantor, or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee or similar officer for, the Company or any Guarantor or any substantial part of such Person's property, or otherwise, all as though such payments had not been made. 9. Payments. Each Guarantor hereby guarantees that payments hereunder will be paid, without set-off or counterclaim and in immediately available funds and in lawful currency of the United States of America, to Agent in Houston, Texas, at the Agent's Payment Office, not later than 11:00 A.M., Houston time. 10. Representations and Warranties. Each Guarantor hereby represents and warrants that: (a) Corporate Existence. Each Guarantor (other than Tesoro E&P Company, L.P.) is a corporation duly organized, validly existing, and in good standing under the laws of the jurisdiction of its incorporation and has the corporate power and authority and the legal right to own and lease its property and to conduct its business. (b) Corporate Power; Authorization. Each Guarantor (other than Tesoro E&P Company, L.P.) has the corporate power and authority and the legal right to make, deliver and perform this Guaranty Agreement. Each Guarantor has taken all necessary -8- corporate action to authorize the execution, delivery and performance of this Guaranty Agreement. (c) Partnership Existence and Authorization. Tesoro E&P Company, L.P. is a limited partnership duly formed, validly existing and in good standing under the laws of the State of Delaware and has the partnership power and authority and the legal right to own and lease its property and to conduct its business. Tesoro E&P Company, L.P. has the partnership power and authority and the legal right to make, deliver and perform this Guaranty Agreement and has taken all necessary partnership action to authorize the execution, delivery and performance of this Guaranty Agreement. (d) Enforceable Obligations. This Guaranty Agreement has been duly executed and delivered by each Guarantor and constitutes a legal, valid and binding obligation of such Guarantor enforceable against such Guarantor in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles. 11. No Waiver: Cumulative Remedies. Neither the Agent, either Issuing Bank nor any of the Lenders shall by any act, delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Default or Event of Default or in any breach of any of the terms and conditions hereof. No failure to exercise and no delay in exercising, on the part of the Agent, either Issuing Bank or any Lender, any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege preclude any other or further exercise thereof, or the exercise of any other power, privilege or right. A waiver by the Agent, either Issuing Bank or any Lender of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which any such Person would have on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently, and are not exclusive of any rights or remedies provided by law. 12. Notices. All notices, requests and other communications to any party hereunder shall be in writing (including bank wire, telecopy or similar teletransmission or writing) and, in the case of any Guarantor, shall be given to such Guarantor at the address or telecopy number of the Company now or hereafter provided for in the Credit Agreement and in the case of the Agent, either Issuing Bank or any Lender, at the address or telecopy number for such Person now or hereafter provided for in the Credit Agreement. Each such notice, request or other communication shall be effective (i) if given by telecopier during regular business hours, once such telecopy is transmitted to the telecopy number specified in the Credit Agreement, (ii) if -9- given by mail, 72 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (iii) if given by any other means (including, without limitation, by air courier), when delivered at the address specified in the Credit Agreement; provided that notices to the Agent shall not be effective until received. 13. Entire Agreement. This Guaranty Agreement, the Credit Agreement, the Notes, the Security Instruments, the other Financing Documents referred to in sections 3.02 the Credit Agreement, and the Fee Letter embody the entire agreement and understanding between the Agent, the Issuing Banks, the Lenders and the other respective parties hereto and thereto and supersede all prior agreements and understandings between such parties relating to the subject matter hereof and thereof. There are no unwritten oral agreements between the parties. Any conflict or ambiguity between the terms and provisions of this agreement and the terms and provisions in any other financing document shall be controlled by the terms and provisions hereof. 14. Governing Law; Submission to Jurisdiction, Etc. (a) This Guaranty Agreement and the rights and obligations of the parties hereunder shall be construed in accordance with and be governed by the law (without giving effect to the conflict of law principles thereof) of the State of Texas. (b) Any legal action or proceeding with respect to this Agreement, may be brought in the courts of the State of Texas or of the United States of America for the Southern District of Texas, Houston Division, and, by execution and delivery of this Agreement, each Guarantor hereby accepts for itself and in respect of its Property, generally and unconditionally, the jurisdiction of the aforesaid courts. Each Guarantor hereby irrevocably waives any objection, including but not limited to any objection to the laying of venue or based on the grounds of Forum Non Conveniens, which it may now or hereafter have to the bringing of any such action or proceeding in such respective jurisdictions. (c) The Company and the Agent, each Issuing Bank and each Lender hereby (i) irrevocably and unconditionally waive, to the fullest extent permitted by law, trial by jury in any legal action or proceeding relating to this Guaranty Agreement or any Financing Document and for any counterclaim therein; (ii) certify that no party hereto nor any representative or agent of counsel for any party hereto has represented, expressly or otherwise, or -10- implied that such party would not, in the event of litigation, seek to enforce the foregoing waivers, and (iii) acknowledge that it has been induced to enter into this Agreement, the Financing Documents and the transactions contemplated hereby and thereby by, among other things, the mutual waivers and certifications contained in this section. (d) Each Guarantor that is not a Texas corporation hereby irrevocably designates the General Counsel of the Company (as of the Closing Date, James C. Reed, Jr.) located at 8700 Tesoro Drive, San Antonio, Texas 78217, as the designee, appointee and agent of such Guarantor to receive, for and on behalf of such Guarantor, service of process in such respective jurisdictions in any legal action or proceeding with respect to this Agreement, the Notes, the Security Instruments or the other Financing Documents. It is understood that a copy of such process served on such agent will be promptly forwarded by mail to such Guarantor at its address set forth opposite its signature below, but the failure of such Guarantor to receive such copy shall not affect in any way the service of such process. Each Guarantor further irrevocably consents to the service of process of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such Guarantor at its said address, such service to become effective 30 days after such mailing. (e) Nothing herein shall affect the right of the Agent or any Lender or any holder of a Note to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against any Guarantor in Texas or any other jurisdiction in which assets of any Guarantor are located. 15. Severability. Any provision of this Guaranty Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 16. Paragraph Headings. The Paragraph headings used in this Guaranty Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 17. Interest. It is the intention of the parties hereto to conform strictly to usury laws applicable to each Lender and the Transactions. Accordingly, if the Transactions would be usurious as to any Lender under applicable law, then, notwithstanding anything to the contrary in the Notes, this Agreement or in any Financing Document or agreement entered into in connection with the Transactions or as security for the Obligations, it is agreed as follows: -11- (i) the aggregate of all consideration which constitutes interest as to any Lender under applicable law that is contracted for, taken, reserved, charged or received by such Lender under the Notes, this Agreement or under any of the Financing Documents or agreements or otherwise in connection with the Transactions shall under no circumstances exceed the maximum amount allowed by such applicable law, (ii) in the event that the maturity of the Notes is accelerated for any reason, or in the event of any required or permitted prepayment, then such consideration that constitutes interest as to any Lender under applicable law may never include more than the maximum amount allowed by such applicable law, and (iii) excess interest, if any, provided for in this Agreement or otherwise in connection with the Transactions shall be cancelled automatically and, if theretofore paid, shall be credited by such Lender on the principal amount of the Obligations (or, to the extent that the principal amount of the Obligations shall have been or would thereby be paid in full, refunded by such Lender to the Company). The right to accelerate the maturity of the Notes does not include the right to accelerate any interest which has not otherwise accrued on the date of such acceleration, and the Lenders do not intend to collect any unearned interest in the event of acceleration. All sums paid or agreed to be paid to each Lender for the use, forbearance or detention of sums included in the Obligations shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full term of the Notes until payment in full so that the rate or amount of interest on account of the Obligations does not exceed the applicable usury ceiling, if any. As used in this Section, the term "applicable law" shall mean the laws of the State of Texas (or of any other jurisdiction whose laws may be mandatorily applicable notwithstanding other provisions of this Agreement) or laws of the United States of America applicable to any Lender and the Transactions, which would permit such Lender to contract for, charge, take, reserve or receive a greater amount of interest than under Texas (or such other jurisdiction's) law. To the extent that Article 5069-1.04 of the Texas Revised Civil Statutes is relevant to the Lenders for the purpose of determining the Highest Lawful Rate, the Lenders hereby elect to determine the applicable rate ceiling under such Article by the indicated (weekly) rate ceiling from time to time in effect, subject to the Lenders' right subsequently to change such method in accordance with applicable law. In no event shall the provisions of Tex. Rev. Civ. Stat. art. 5069-2.01 through 5069-8.06 or 5069-15.01 through 5069-15.11 be applicable to the Loans evidenced hereby. 18. Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original but all of which shall together constitute one and the same instrument. [SIGNATURES BEGIN NEXT PAGE] -12- IN WITNESS WHEREOF, the undersigned has caused this Guaranty Agreement to be duly executed and delivered by its duly authorized officer on the day and year first above written. TESORO ALASKA PETROLEUM COMPANY TESORO EXPLORATION AND PRODUCTION COMPANY TESORO PETROLEUM COMPANIES, INC. DIGICOMP, INC. TESORO TECHNOLOGY PARTNERS COMPANY INTERIOR FUELS COMPANY TESORO ALASKA PIPELINE COMPANY TESORO NORTHSTORE COMPANY TESORO REFINING, MARKETING & SUPPLY COMPANY TESORO NATURAL GAS COMPANY TESORO BOLIVIA PETROLEUM COMPANY TESORO VOSTOK COMPANY KENAI PIPE LINE COMPANY By: /s/ G. A. Wright G. A. Wright Vice President and Treasurer TESORO COASTWIDE SERVICES COMPANY COASTWIDE MARINE SERVICES, INC. By: /s/ Sharon L. Layman Sharon L. Layman Assistant Treasurer -13- TESORO E&P COMPANY, L.P. By: TESORO EXPLORATION AND PRODUCTION COMPANY, as its general partner By: /s/ G. A. Wright Name: G. A. Wright Title: Vice President and Treasurer TESORO GAS RESOURCES COMPANY, INC By: /s/ George Dodgen Name: George Dodgen Title: President BANQUE PARIBAS, AS ADMINISTRATIVE AGENT By: /s/ Brian Malone Name: Brian Malone Title: Vice President By: /s/ Barton D. Schouest Name: Barton D. Schouest Title: Group Vice President -14- EX-4.3 4 AMENDED AND RESTATED SECURITY AGREEMENT AMENDED AND RESTATED SECURITY AGREEMENT (Accounts and Inventory) Between TESORO PETROLEUM CORPORATION and BANQUE PARIBAS, AS ADMINISTRATIVE AGENT June 7, 1996 AMENDED AND RESTATED SECURITY AGREEMENT Accounts and Inventory THIS AMENDED AND RESTATED SECURITY AGREEMENT is made as of June 7, 1996, between TESORO PETROLEUM CORPORATION, a Delaware corporation ("Debtor"), and BANQUE PARIBAS, as Administrative Agent ("Secured Party"), for the Issuing Bank and the Lenders. RECITALS A. On April 20, 1994, the Debtor, Texas Commerce Bank National Association, individually and as agent, Banque Paribas, individually and as co-agent and the other financial institutions parties thereto entered into a Credit Agreement (as amended from time to time, the "Prior Credit Agreement"). B. The conditions precedent to the effectiveness of the Credit Agreement included the execution and delivery by Debtor of that certain Security Agreement dated of even date therewith (the "Prior Security Agreement"). C. Of even date herewith, Debtor, Banque Paribas, as Administrative Agent, The Bank of Nova Scotia, as Documentation Agent and various lenders (the "Lenders") are entering into an Amended and Restated Credit Agreement (the "Credit Agreement") amending and restating the Prior Credit Agreement. D. In view of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Debtor hereby agrees with Secured Party to amend and restate the Prior Security Agreement. ARTICLE I Definitions Section 1.01 Terms Defined Above. As used in this Security Agreement, the terms "Credit Agreement," "Debtor" and "Secured Party" shall have the meanings respectively assigned to them. Section 1.02 Certain Definitions. As used in this Security Agreement, the following terms shall have the following meanings, unless the context otherwise requires: "Accounts" shall mean all accounts (as such term is defined in the Code). "Account Debtor" shall mean any Person liable (whether directly or indirectly, primarily or secondarily) for the payment or performance of any obligations included in the Collateral, whether as an account debtor (as defined in the Code), obligor on an instrument, issuer of documents or securities, guarantor or otherwise. "Code" shall mean the Uniform Commercial Code as presently in effect in the State of Texas, Texas Business and Commerce Code, Chapters 1 through 9. "Collateral" shall mean the following types or items of Property (including Property hereafter acquired by Debtor as well as Property which Debtor now owns or in which Debtor has rights): (a) all of Debtor's Accounts and Inventory; (b) (i) any Property from time to time delivered to or deposited with Secured Party by or for the account of Debtor which is related to any Property referred to in clause (a) of this definition; and (ii) all certificates of title or other documents evidencing ownership or possession of or otherwise relating to any Property referred to in clause (a) of this definition; (c) (i) all goods which were at any time included in the Collateral described in clause (a) of this definition and which are returned to or for the account of Debtor following their sale, lease or other disposition; (ii) all policies of insurance (whether or not required by Secured Party) covering any Property referred to in this definition; and (iii) all proceeds, products, replacements, additions to, substitutions for, accessions of, and Property necessary for the operation of any of the Property referred to in this definition, including, without limitation, insurance payable as a result of loss or damage to any of the Property referred to in this definition, refunds of unearned premiums of any such insurance policy and claims against third parties; (d) all books and records related to any of the Property referred to in this definition, including, without limitation, any and all books of account, customer lists and other records relating in any way to the Collateral described in this definition; (e) all of Debtor's general intangibles (as defined in the Code) which are related (but only those related) to any Property referred to in this definition, including, without limitation, all (i) letters of credit, bonds, guaranties, purchase or sales agreements and other contractual rights, rights to performance, and claims for damages, refunds (including tax refunds) or other monies due or to become due; (ii) orders, franchises, permits, certificates, licenses, consents, exemptions, variances, authorizations or other approvals by any Governmental Authority; (iii) business records, computer tapes and computer software; and (iv) other intangible personal property, whether similar or dissimilar to the Property referred to in clause (a) of this definition; and -2- (f) all of Debtor's chattel paper, documents and instruments (as such terms are defined in the Code) related to or arising out of any Property referred to in clause (a) of this definition. It is expressly contemplated that additional Property may from time to time be pledged, assigned or granted to Secured Party as additional security for the Obligations, and, if so, then the term "Collateral" as used herein shall be deemed for all purposes hereof to include all such additional Property, together with all other Property of the types described above related thereto. It is expressly agreed that Collateral shall not include and shall be exclusive of any equipment. "Event of Default" shall have the meaning assigned such term in Section 6.01 of this Security Agreement. "Inventory" shall mean all inventory (as defined in the Code). "Obligations" shall mean: (i) the Lender Indebtedness described in the Credit Agreement, including without limitation, the Letter of Credit Liabilities and the Notes, and any and all renewals, extensions for any period, rearrangements or enlargements thereof and any interest accrued thereon, whether pre-petition or post-petition; (ii) payment of and performance of any and all present or future obligations of Debtor according to the terms of any present or future interest or currency rate swap, rate cap, rate floor, rate collar, exchange transaction, forward rate agreement or other exchange or rate protection agreements or any option with respect to any such transaction now existing or hereafter entered into between Debtor and Secured Party or any of the Lenders (or any of their Affiliates) and authorized pursuant to the terms of the Credit Agreement; (iii) payment of and performance of any and all present or future obligations of Debtor according to the terms of any present or future swap agreements, cap, floor, collar, exchange transaction, forward agreement or other exchange or protection agreements relating to crude oil, natural gas or other hydrocarbons or any option with respect to any such transaction now existing or hereafter entered into between Debtor and Secured Party or any of the Lenders (or any of their Affiliates) and authorized pursuant to the terms of the Credit Agreement; (iv) the performance of all obligations and agreements under the Financing Documents, including this Security Agreement; and (v) all accrued and earned interest, charges, expenses, attorneys' or other fees and any other sums payable to or incurred by Secured Party, any Issuing Bank or any Lender in connection with the execution, administration or enforcement of their rights and remedies hereunder or any other Financing Document. The Obligations are Senior Debt as such term is defined in that certain Subordination Agreement dated December 15, 1992 among the Debtor, Tesoro Alaska Petroleum Company and the State of Alaska attached to the Settlement Agreement among the Debtor, Tesoro Alaska Petroleum Company and the State of Alaska. -3- "Obligor" shall mean any Person, other than Debtor, liable (whether directly or indirectly, primarily or secondarily) for the payment or performance of any of the Obligations whether as maker, co-maker, endorser, guarantor, accommodation party, general partner or otherwise; and the term "Obligor" shall specifically include each Guarantor named in the Credit Agreement. "Property" shall mean any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "Security Agreement" shall mean this Amended and Restated Security Agreement, as the same may be amended, modified or supplemented from time to time. Section 1.03 Other Defined Terms. Unless otherwise defined herein, all terms beginning with a capital letter which are defined in the Credit Agreement shall have the meanings assigned therein, unless the context hereof requires otherwise. All uncapitalized terms which are defined in the Code shall have their respective meanings as used in the Code, unless the context hereof requires otherwise. ARTICLE II Security Interest Section 2.01 Grant of Security Interest. Debtor hereby assigns and grants to Secured Party, for its benefit and the benefit of the Lenders and the Issuing Banks, a security interest in, lien upon and right of set-off against the Collateral to secure the prompt payment and performance of the Obligations. ARTICLE III Representations and Warranties Debtor represents and warrants to Secured Party, the Issuing Banks and the Lenders (which representations and warranties will survive the creation and payment of the Obligations) that: Section 3.01 First Priority Security Interest. The grant of the security interest in the Collateral pursuant to this Security Agreement creates a valid and perfected first priority security interest in the Collateral, enforceable against Debtor and all third parties and securing payment of the Obligations. Section 3.02 No Filings By Third Parties. No financing statement or other public notice or recording covering the Collateral is on file in any public office (other than any financing -4- statement or other public notice or recording naming Secured Party as the secured party therein), and Debtor will not execute any such financing statement or other public notice or recording so long as any of the Obligations are outstanding. Section 3.03 No Name Changes. Debtor has not, during the preceding five years, entered into any contract, agreement, security instrument or other document using a name other than, or been known by or otherwise used any name other than, the name used by Debtor herein. Section 3.04 Location of Debtor and Collateral. Debtor's chief executive office and Debtor's records concerning the Collateral are located at the address or location set forth on the signature page hereof. The Collateral is located at such address or at the location(s), if any, specified in Exhibit A hereto. Any Collateral not at such location(s) nevertheless remains subject to Secured Party's security interest. Section 3.05 Collateral. All statements or other information provided by Debtor to Secured Party, any Issuing Bank or any Lender with respect to the Collateral is or (in the case of subsequently furnished information) will be when provided correct and complete in all material respects. The delivery at any time by Debtor to Secured Party of additional Collateral or of additional descriptions of Collateral shall constitute a representation and warranty by Debtor to Secured Party hereunder that the representations and warranties of this Article III are correct insofar as they would pertain to such Collateral or the descriptions thereof. Section 3.06 Accounts. (a) Each Account represents the genuine, valid and legally enforceable indebtedness of an Account Debtor arising from the sale, lease or rendition by Debtor of goods or services and is not and will not be subject to contra accounts, set-offs, defenses, counterclaims, allowances or adjustments (other than discounts for prompt payment shown on the invoice), or objections or complaints by the Account Debtor concerning its liability on the Account; and any goods, the sale of which gave rise to an Account, have not been returned or rejected by the Account Debtor or lost or damaged prior to receipt by the Account Debtor. (b) The amount shown as to each Account on Debtor's books is or will be the true and undisputed amount owing and unpaid thereon. Except as disclosed in writing to Secured Party, each Account arose or shall have arisen in the ordinary course of Debtor's business; provided, however, that any Accounts which arose or hereafter arise outside the ordinary course of Debtor's business shall nevertheless be included as part of the Collateral. Debtor has no knowledge of any bankruptcy, insolvency or other action affecting creditors' rights with respect to any Account Debtor. (c) Except as disclosed in writing to Secured Party, each invoice or agreement evidencing the Accounts is or will be due and payable not more than 90 days from the date thereof; provided, however, that any Accounts not so due and payable shall nevertheless be included as part of the Collateral. -5- Section 3.07 Delivery of Documents or Letters of Credit. With respect to any Inventory or other Collateral covered by one or more certificates of title or other documents evidencing ownership or possession thereof, and with respect to any Accounts or other Collateral supported by letters of credit, each of such certificates, documents or letters of credit has been delivered to Secured Party (provided, however, that all certificates, documents and letters of credit referred to in Section 1.02 shall be subject to the security interest created by this Security Agreement irrespective of whether or not such delivery shall have been made). ARTICLE IV Covenants and Agreements Debtor covenants and agrees that so long as any part of the Obligations are outstanding: Section 4.01 Change in Location of Collateral or Debtor. Debtor will give Secured Party 30 days' prior written notice of (i) any change in location of the Collateral to a jurisdiction other than Texas, Alaska, California, Oregon or Washington and which would cause the Secured Party to be unperfected in the Collateral, (ii) the opening or closing of any place of Debtor's business or (iii) any change in the location of Debtor's chief executive office or address. Section 4.02 Documents; Collateral in Possession of Third Parties. If certificates of title or other documents evidencing ownership or possession of the Collateral are issued or outstanding, Debtor will cause the security interest of Secured Party to be properly noted thereon and will, forthwith upon receipt, deliver same to Secured Party. If any Collateral is at any time in the possession or control of any warehouseman, bailee, agent or independent contractor, Debtor shall notify such Person of Secured Party's security interest in such Collateral. Upon Secured Party's request, Debtor shall instruct any such Person to hold all such Collateral for Secured Party's account subject to Debtor's instructions, or, if an Event of Default shall have occurred, subject to Secured Party's instructions. Section 4.03 Delivery of Letters of Credit and Instruments; Proceeds. Debtor will deliver each letter of credit, if any, included in the Collateral to Secured Party, in each case forthwith upon receipt by or for the account of Debtor. If any Account becomes evidenced by a promissory note, trade acceptance or any other instrument for the payment of money (other than checks or drafts in payment of Accounts collected by Debtor in the ordinary course of business prior to notification by Secured Party under Section 5.04), Debtor will immediately deliver such instrument to Secured Party appropriately endorsed to Secured Party, as collateral assignee and, regardless of the form of presentment, demand, notice of dishonor, protest and notice of protest with respect thereto, Debtor will remain liable thereon until such instrument is paid in full. Except as permitted by Sections 4.03, 4.08 and 4.09 Debtor will deliver to Secured Party all proceeds from the sale or other disposition of the Collateral promptly upon receipt. If chattel paper, documents or instruments are received as proceeds, which are required to be -6- delivered to Secured Party, they will be, immediately upon receipt, properly endorsed or assigned and delivered to Secured Party as Collateral. Section 4.04 Sale, Disposition or Encumbrance of Collateral. Except (i) as permitted by Section 4.08, or (ii) with the prior written consent of the Majority Lenders, Debtor will not in any way encumber any of the Collateral (or permit or suffer any of the Collateral to be encumbered) or sell, assign, lend, rent, lease or otherwise dispose of or transfer any of the Collateral to or in favor of any Person other than Secured Party. Section 4.05 Intentionally left blank. Section 4.06 Records and Information. (a) Debtor shall keep accurate and complete records of the Collateral (including proceeds). These records shall reflect complete and accurate stock records of the Inventory and all facts concerning each Account. Debtor shall conduct a physical count of the Inventory at such intervals as Secured Party requests and promptly supply Secured Party with a copy of such count accompanied by a report of the value (valued at the lower of cost or market value) of the Inventory. Secured Party may at any time have access to, examine, audit, make extracts from and inspect without hindrance or delay Debtor's records, files and the Collateral. (b) Debtor ognizes that financing statements pertaining to the Collateral will be filed with the offices of the Secretary of State of Texas, the Alaska Department of Natural Resources, the Secretary of State of California, the Secretary of State of Oregon and the Department of Licensing of the State of Washington. Debtor will immediately notify Secured Party of any condition or event that may change the proper location for the filing of any financing statements or other public notice or recordings for the purpose of perfecting a security interest in the Collateral. Without limiting the generality of the foregoing, Debtor will (i) immediately notify Secured Party of any change to a jurisdiction other than as represented in Section 3.04 (A) in the location of Debtor's chief executive office or chief place of business, (B) in the location of the office where Debtor keeps its records concerning the Accounts, or (C) in the "location" of Debtor within the meaning of Section 9-103(c) of the Code; (ii) immediately notify Secured Party of any change in the location of the Collateral to any jurisdiction other than the States of Texas, Alaska, California, Oregon and Washington; and (iii) notify Secured Party 30 days prior to any change in Debtor's name, identity or corporate structure or Tax Identification Number. In any notice furnished pursuant to this paragraph, Debtor will expressly state that the notice is required by this Security Agreement and contains facts that will or may require additional filings of financing statements or other notices for the purpose of continuing perfection of Secured Party's security interest in the Collateral. Debtor will promptly provide written notice to Secured Party of all information which in any way relates to or affects the Collateral generally, Secured Party's rights or remedies with respect thereto, the filing of any financing statement or other public notices or recordings, or the delivery and possession of items of Collateral for the purpose of perfecting a security interest in the Collateral. -7- Section 4.07 Further Assurances. Upon the request of Secured Party, Debtor shall (at Debtor's expense) execute and deliver all such assignments, certificates, financing statements or other documents and give further assurances and do all other acts and things as Secured Party may reasonably request to perfect Secured Party's interest in the Collateral or to protect, enforce or otherwise effect Secured Party's rights and remedies hereunder. Section 4.08 Inventory. Unless an Event of Default has occurred and is continuing and after any applicable notice and cure periods provided for in the Credit Agreement, Debtor may use the Inventory in any lawful manner not inconsistent with this Security Agreement and with the terms of insurance thereon and may sell, lease or otherwise dispose of its Inventory for cash or terms in the ordinary course of business, and Debtor may retain the proceeds of such sales, leases or other dispositions (subject to Section 4.03 and Section 4.09); provided, however, the Inventory shall remain in Debtor's possession and control at all times prior to sale, lease or other disposition at Debtor's address set forth in Section 3.04. Debtor shall bear any risk of loss of the Inventory. Debtor shall not use any item of Inventory in a manner inconsistent with the holding thereof for sale, lease or other disposition in the ordinary course of business or in contravention of the terms of any agreement. Upon the occurrence and continuance of an Event of Default and after any applicable cure period, Debtor shall immediately deliver to Secured Party any checks, cash or other forms of payment which Debtor receives in connection with any Inventory, appropriately endorsed. Section 4.09 Accounts. (a) Prior to notification by Secured Party under Section 6.02(i), Debtor will collect the Accounts in the ordinary course of its business and may retain the proceeds of such collections (subject to Section 4.03). (b) Debtor shall immediately notify Secured Party in writing in the event that any representation given in Article III with respect to any Account ceases to be true and correct in all material respects; such notice specifying other representation(s) that cease to be true and correct and the action, if any, that Debtor proposes to take with respect thereto. (c) Debtor will not modify, extend or substitute any contract, the terms of which shall at any time have given rise to an Account, except in the ordinary course of business or with the prior written consent of Secured Party. Debtor will not re-date any invoice or sale or make sales with an extended payment date beyond that customary in the industry, and in no event longer than 90 days. Debtor shall not adjust, settle, discount or compromise any of the Accounts, except in the ordinary course of business, as permitted in the Credit Agreement, or with the prior written consent of Secured Party. (d) Debtor will duly perform or cause to be performed all of Debtor's obligations with respect to the Accounts and the underlying sales of goods or other transactions giving rise to the Accounts. -8- Section 4.10 Condition of Collateral. Debtor will maintain all Collateral in good condition and in accordance with industry standards and practices. Debtor will not misuse, abuse, waste, destroy or endanger the Collateral nor allow it to be used in any manner other than its intended use. Debtor will not use any Collateral in violation of any Governmental Requirements, or suffer it to be so used. Section 4.11 Collateral Separate and Distinct. Debtor shall at all times keep the Collateral, including proceeds, or cause it to be kept (when in the possession of warehousemen, bailees, agents, independent contractors or other third parties), separate and distinct from other Property; provided, however, proceeds of the Collateral may be kept in various concentration accounts of the Parent or the Guarantors. Section 4.12 Change in Debtor's Name or Corporate Structure. Debtor will not change its name, identity or corporate structure (including, without limitation, any merger, consolidation or sale of substantially all of its assets) without notifying Secured Party of such change in writing at least 30 days prior to the effective date of such change. Without the express written consent of Secured Party, however, Debtor will not engage in any other business or transaction under any name other than Debtor's name hereunder. ARTICLE V Rights, Duties, and Powers of Secured Party The following rights, duties and powers of Secured Party are applicable irrespective of whether an Event of Default has occurred and is continuing, but only after having given Debtor at least three (3) days prior notice: Section 5.01 Attorney-in-Fact. Secured Party is hereby fully authorized and empowered (without the necessity of any further consent or authorization from Debtor) and the right is expressly granted to Secured Party, and Debtor hereby irrevocably appoints and makes Secured Party as Debtor's attorney-in-fact, with full authority in the place and stead of Debtor and in the name of Debtor or otherwise, from time to time in Secured Party's discretion, but at Debtor's cost and expense to: (a) obtain, adjust, sell and cancel any insurance with respect to the Collateral and endorse any draft drawn by insurers of the Collateral, and Secured Party may apply any proceeds or unearned premiums of such insurance to the Obligations (whether or not due); and (b) take any action and to execute any assignment, certificate, financing statement, notification, document or instrument which Secured Party may deem necessary or advisable to accomplish the purposes of this Security Agreement, including, without limitation, to receive, endorse and collect all instruments made payable to Debtor -9- representing any payment or other distribution in respect of the Collateral or any part thereof and to give full discharge for the same. Section 5.02 Transfer of Collateral. Secured Party may transfer any or all of the Obligations, and upon any such transfer, Secured Party may transfer its interest in any or all of the Collateral and shall be fully discharged thereafter from all liability therefor. Any transferee of the Collateral shall be vested with all rights, powers and remedies of Secured Party hereunder. Section 5.03 Purchase Money Financing. To the extent that the Lenders have advanced or will advance funds to or for the account of Debtor to enable Debtor to purchase or otherwise acquire specific types or items of Collateral, the Lenders may at their option pay such funds (i) directly to the Person from whom Debtor will make such purchase or acquire such rights or (ii) to Debtor, in which case Debtor covenants promptly to pay the same to such Person and forthwith furnish to Secured Party, on request, evidence satisfactory to Secured Party that such payment has been made from the funds so provided by Secured Party for such payment. Section 5.04 Proceeds. If so requested by Debtor, any payments received by Secured Party on the Accounts or as proceeds of other Collateral shall upon final collection by Secured Party be credited towards payment of the Obligations. In the absence of such request from Debtor, and until so requested, Secured Party may hold such collected payments as cash Collateral (and Secured Party may at any time place a hold or freeze on all or a part of any deposit account of Debtor containing deposits of such payments up to the amount of such deposits). Section 5.05 Discharge Encumbrances. Secured Party may, at its option, discharge any taxes, Liens, security interests or other encumbrances at any time levied or placed on the Collateral, may pay for insurance on the Collateral and may pay for the maintenance and preservation of the Collateral. Debtor agrees to reimburse Secured Party upon demand for any payment so made, plus interest on the portion thereof from time to time remaining unpaid from the date of Secured Party's demand at the rate for overdue principal and interest set forth in Section 2.06(c) of the Credit Agreement. Section 5.06 Disclaimer of Certain Duties. (a) The powers conferred upon Secured Party by this Security Agreement are to protect the interest of Secured Party, the Issuing Banks and the Lenders in the Collateral and shall not impose any duty upon Secured Party, the Issuing Banks or any Lender to exercise any such powers. Debtor hereby agrees that Secured Party, the Issuing Banks and the Lenders shall not be liable for, nor shall the indebtedness evidenced by the Obligations be diminished by, Secured Party's delay or failure to collect upon, foreclose, sell, take possession of or otherwise obtain value for the Collateral. (b) Except as provided in the Credit Agreement, Secured Party shall be under no duty whatsoever to make or give any presentment, notice of dishonor, protest, demand for -10- performance, notice of non-performance, notice of intent to accelerate, notice of acceleration, or other notice or demand in connection with any Collateral or the Obligations, or to take any steps necessary to preserve any rights against any Obligor, Account Debtor or other Person. Section 5.07 Modification of Obligations; Other Security. Debtor waives (i) any and all notice of acceptance, creation, modification, rearrangement, renewal or extension for any period of any instrument executed by any Obligor in connection with the Obligations and (ii) any defense of any Obligor by reason of disability, lack of authorization, cessation of the liability of any Obligor or for any other reason. Debtor authorizes Secured Party, without notice or demand and without any reservation of rights against Debtor and without affecting Debtor's liability hereunder or on the Obligations, from time to time to (x) take and hold other Property, other than the Collateral, as security for the Obligations, and exchange, enforce, waive and release any or all of the Collateral, (y) apply the Collateral in the manner permitted by this Security Agreement and (z) renew, extend for any period, accelerate, amend or modify, supplement, enforce, compromise, settle, waive or release the obligations of any Obligor or any instrument or agreement of such other Person with respect to any or all of the Obligations or Collateral. Section 5.08 Waiver of Notice; Demand and Presentment; etc. Except for any notice required under the Credit Agreement, Debtor hereby waives any demand, notice of default, notice of acceleration of the maturity of the Obligations, notice of intent to accelerate the maturity of the Obligations, presentment, protest and notice of dishonor as to any action taken by Secured Party in connection with this Security Agreement, or any instrument or document. Debtor waives any right of marshaling in respect of any and all Collateral, and waives any right to require Secured Party, any Issuing Bank or any Lender to proceed against any Obligor, Account Debtor or other Person, exhaust any Collateral or enforce any other remedy which Secured Party, any Issuing Bank or any Lender now has or may hereafter have against any Obligor or other Person. Section 5.09 Non-judicial Enforcement. To the fullest extent allowed by applicable law, Secured Party may enforce its rights hereunder without prior judicial process or judicial hearing, and to the fullest extent permitted by law Debtor expressly waives any and all legal rights which might otherwise require Secured Party to enforce its rights by judicial process. ARTICLE VI Events of Default Section 6.01 Events of Default. An Event of Default under the Credit Agreement shall constitute an "Event of Default" under this Security Agreement. Section 6.02 Remedies. Upon the occurrence and during the continuance of any Event of Default, Secured Party may take any or all of the following actions without notice (except where expressly required under the Credit Agreement or below) or demand to Debtor: -11- (a) Declare all or part of the indebtedness pursuant to the Obligations immediately due and payable and enforce payment of the same by Debtor or any Obligor. (b) Take possession of the Collateral, or at Secured Party's request Debtor shall, at Debtor's cost, assemble the Collateral and make it available at a location to be specified by Secured Party which is reasonably convenient to Debtor and Secured Party. In any event, Debtor shall bear the risk of accidental loss or damage to or diminution in value of the Collateral, and Secured Party shall have no liability whatsoever for failure to obtain or maintain insurance, nor to determine whether any insurance ever in force is adequate as to amount or as to risk insured. (c) Sell or lease, in one or more sales or leases and in one or more parcels, or otherwise dispose of any or all of the Collateral in its then condition or in any other commercially reasonable manner as Secured Party may elect, in a public or private transaction, at any location as deemed reasonable by Secured Party (including, without limitation, Debtor's premises), either for cash or credit or for future delivery at such price as Secured Party may deem fair, and (unless prohibited by the Code, as adopted in any applicable jurisdiction) Secured Party, any Issuing Bank or any Lender may be the purchaser of any or all Collateral so sold and may apply upon the purchase price therefor any Obligations secured hereby. Any such sale or transfer by Secured Party either to itself or to any other Person shall be absolutely free from any claim of right by Debtor, including any equity or right of redemption, stay or appraisal which Debtor has or may have under any rule of law, regulation or statute now existing or hereafter adopted. Upon any such sale or transfer, Secured Party shall have the right to deliver, assign and transfer to the purchaser or transferee thereof the Collateral so sold or transferred. It shall not be necessary that the Collateral or any part thereof be present at the location of any such sale or transfer. Secured Party may, at its discretion, provide for a public sale, and any such public sale shall be held at such time or times within ordinary business hours and at such place or places as Secured Party may fix in the notice of such sale. Secured Party shall not be obligated to make any sale pursuant to any such notice. Secured Party may, without notice or publication, adjourn any public or private sale by announcement at any time and place fixed for such sale, and such sale may be made at any time or place to which the same may be so adjourned. In the event any sale or transfer hereunder is not completed or is defective in the opinion of Secured Party, such sale or transfer shall not exhaust the rights of Secured Party hereunder, and Secured Party shall have the right to cause one or more subsequent sales or transfers to be made hereunder. In the event that any of the Collateral is sold or transferred on credit, or to be held by Secured Party for future delivery to a purchaser or transferee, the Collateral so sold or transferred may be retained by Secured Party until the purchase price or other consideration is paid by the purchaser or transferee thereof, but in the event that such purchaser or transferee fails to pay for the Collateral so sold or transferred or to take delivery thereof, neither Secured Party, any Issuing Bank nor any Lender shall incur any liability in connection therewith. If only part of the Collateral is sold or transferred such that the Obligations remain outstanding (in whole or in part), Secured Party's rights and remedies hereunder shall not -12- be exhausted, waived or modified, and Secured Party is specifically empowered to make one or more successive sales or transfers until all the Collateral shall be sold or transferred and all the Obligations are paid. In the event that Secured Party elects not to sell the Collateral, Secured Party retains its rights to lease or otherwise dispose of or utilize the Collateral or any part or parts thereof in any manner authorized or permitted by law or in equity, and to apply the proceeds of the same towards payment of the Obligations. Each and every method of disposition of the Collateral described in this Section 6.02(c) or in Section 6.02(f) shall constitute disposition in a commercially reasonable manner. (d) Take possession of all books and records of Debtor pertaining to the Collateral. Secured Party shall have the authority to enter upon any real or immoveable property or improvements thereon in order to obtain any such books or records, or any Collateral located thereon, and remove the same therefrom without liability. (e) Apply proceeds of the disposition of the Collateral to the Obligations in any manner elected by Secured Party and permitted by the Code or otherwise permitted by law or in equity. Such application may include, without limitation, the reasonable expenses of retaking, holding, preparing for sale or other disposition, and the reasonable attorneys' fees and legal expenses incurred by Secured Party, the Issuing Banks and the Lenders. (f) Appoint any Person as agent to perform any act or acts necessary or incident to any sale or transfer by Secured Party of the Collateral. Additionally, any sale or transfer hereunder may be conducted by an auctioneer or any officer or agent of Secured Party. (g) Apply and set-off (i) any deposits of Debtor now or hereafter held by Secured Party, the Issuing Banks and the Lenders; (ii) all claims of Debtor against Secured Party, now or hereafter existing; (iii) any other Property, rights or interests of Debtor which come into the possession or custody or under the control of Secured Party; and (iv) the proceeds of any of the foregoing as if the same were included in the Collateral. Secured Party agrees to notify Debtor promptly after any such set-off or application; provided, however, the failure of Secured Party to give any notice shall not affect the validity of such set-off or application. (h) With respect to the Collateral, receive, change the address for delivery, open and dispose of mail addressed to Debtor, and to execute, assign and endorse negotiable and other instruments for the payment of money, documents of title or other evidences of payment, shipment or storage for any form of Collateral on behalf of and in the name of Debtor. (i) Notify or require Debtor to notify Account Debtors that the Accounts have been assigned to Secured Party and direct such Account Debtors to make payments on -13- the Accounts directly to Secured Party. To the extent Secured Party does not so elect, Debtor shall continue to collect and retain the Accounts. Secured Party or its designee shall also have the right, in its own name or in the name of Debtor, to do any of the following: (i) to demand, collect, receipt for, settle, compromise any amounts due, give acquittances for, prosecute or defend any action which may be in relation to any monies due or to become due by virtue of, the Accounts; (ii) to sell, transfer or assign or otherwise deal in the Accounts or the proceeds thereof or the related goods, as fully and effectively as if Secured Party were the absolute owner thereof; (iii) to extend the time of payment of any of the Accounts, to grant waivers and make any allowance or other adjustment with reference thereto; (iv) to endorse the name of Debtor on notes, checks or other evidences of payments on Collateral that may come into possession of Secured Party; (v) to take control of cash and other proceeds of any Collateral; (vi) to sign the name of Debtor on any invoice or bill of lading relating to any Collateral, or any drafts against Account Debtors or other persons making payment with respect to Collateral; (vii) to send a request for verification of Accounts to any Account Debtor; and (viii) to do all other acts and things necessary to carry out the intent of this Agreement. (j) Exercise all other rights and remedies permitted by law or in equity. Section 6.03 Liability for Deficiency. If any sale or other disposition of Collateral by Secured Party or any Issuing Bank or any other action of Secured Party, any Issuing Bank or any Lender hereunder results in reduction of the Obligations, such action will not release Debtor from its liability to Secured Party, the Issuing Banks and the Lenders for any unpaid Obligations, including costs, charges and expenses incurred in the liquidation of Collateral, together with interest thereon, and the same shall be immediately due and payable to Secured Party at Secured Party's address set forth on the signature page of this Security Agreement. Section 6.04 Reasonable Notice. If any applicable provision of any law requires Secured Party, any Issuing Bank or any Lender to give reasonable notice of any sale or disposition or other action, Debtor hereby agrees that fifteen (15) days' prior written notice shall constitute reasonable notice thereof. Such notice, in the case of public sale, shall state the time and place fixed for such sale and, in the case of private sale, the time after which such sale is to be made. Section 6.05 Account Debtors. Any payment or settlement of an Account made by an Account Debtor will be, to the extent of such payment or to the extent provided under such settlement, a release, discharge and acquittance of the Account Debtor with respect to such Account, and Debtor shall take any action as may be required by Secured Party in connection therewith. No Account Debtor on any Account will ever be bound to make inquiry as to the termination of this Agreement or the rights of Secured Party to act hereunder, but shall be fully protected by Debtor in making payment directly to Secured Party. -14- ARTICLE VIII Miscellaneous Section 7.01 Notices. Any notice required or permitted to be given under or in connection with this Security Agreement shall be given as specified in Section 9.01 of the Credit Agreement to the address specified on the signature page of this Security Agreement. Section 7.02 Amendments and Waivers. Secured Party's, any Issuing Bank's or any Lender's acceptance of partial or delinquent payments or any forbearance, failure or delay by the Secured Party in exercising any right, power or remedy hereunder shall not be deemed a waiver of any obligation of Debtor or any Obligor, or of any right, power or remedy of Secured Party; and no partial exercise of any right, power or remedy shall preclude any other or further exercise thereof. Secured Party may remedy any Event of Default hereunder or in connection with the Obligations without waiving the Event of Default so remedied. Debtor hereby agrees that if Secured Party agrees to a waiver of any provision hereunder, or an exchange of or release of the Collateral, or the addition or release of any Obligor, any such action shall not constitute a waiver of any of Secured Party's other rights or of Debtor's obligations hereunder. This Security Agreement may be amended only by the manner set forth in Section 9.02 of the Credit Agreement by an instrument in writing executed jointly by Debtor and Secured Party and may be supplemented only by documents delivered or to be delivered in accordance with the express terms hereof. Section 7.03 Copy as Financing Statement. A photocopy or other reproduction of this Security Agreement or any financing statement covering the Collateral is sufficient as a financing statement, and the same may be filed with any appropriate filing authority for the purpose of perfecting Secured Party's security interest in the Collateral. Section 7.04 Possession of Collateral. Secured Party shall be deemed to have possession of any Collateral in transit to it or set apart for it (or, in either case, any of its agents, affiliates or correspondents). Section 7.05 Redelivery of Collateral. If any sale or transfer of Collateral by Secured Party results in full satisfaction of the Obligations, and after such sale or transfer and discharge there remains a surplus of proceeds, Secured Party will deliver to Debtor such excess proceeds in a commercially reasonable time; provided, however, that neither Secured Party, any Issuing Bank nor any Lender shall be liable for any interest, cost or expense in connection with any delay in delivering such proceeds to Debtor. Section 7.06 Governing Law; Jurisdiction. This Security Agreement and the security interest granted hereby shall be construed in accordance with and governed by the laws of the State of Texas (except to the extent that the laws of any other jurisdiction govern the perfection and priority of the security interests granted hereby). Debtor consents to and submits to in personam jurisdiction and venue in the state district and county courts of the county wherein -15- Secured Party's offices are located at the address specified on the signature page hereof, and in the Federal District Courts of the district wherein such offices of Secured Party are located. This submission to jurisdiction is nonexclusive and does not preclude Secured Party, any Issuing Bank or any Lender from obtaining jurisdiction over Debtor or the Collateral in any court otherwise having jurisdiction. Section 7.07 Cumulative and Other Rights. The rights, powers and remedies of Secured Party, the Issuing Banks and the Lenders hereunder are in addition to all rights, powers and remedies given by law or in equity. The exercise by Secured Party, any Issuing Bank or any Lender of any one or more of the rights, powers and remedies herein shall not be construed as a waiver of any other rights, powers and remedies, including, without limitation, any other rights of set-off. If any of the Obligations are given in renewal, extension for any period or rearrangement, or applied toward the payment of debt secured by any lien, Secured Party shall be, and is hereby, subrogated to all the rights, titles, interests and liens securing the debt so renewed, extended, rearranged or paid. Section 7.08 Continuing Security Agreement. (a) This Security Agreement shall constitute a continuing security agreement, and all representations and warranties, covenants and agreements shall, as applicable, apply to all future as well as existing transactions. Provisions of this Security Agreement, unless they are by their terms exclusive, shall be in addition to other agreements between the parties. (b) Except as may be expressly applicable pursuant to Section 9.505 of the Code, no action taken or omission to act by Secured Party, the Issuing Banks or the Lenders hereunder, including, without limitation, any action taken or inaction pursuant to Section 6.02, shall be deemed to constitute a retention of the Collateral in satisfaction of the Obligations or otherwise to be in full satisfaction of the Obligations, and the Obligations shall remain in full force and effect, until Secured Party, the Issuing Banks and the Lenders shall have applied payments (including, without limitation, collections from Collateral) towards the Obligations in the full amount then outstanding or until such subsequent time as is hereinafter provided in subsection (c) below. (c) To the extent that any payments on the Obligations or proceeds of the Collateral are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, debtor in possession, receiver or other Person under any bankruptcy law, common law or equitable cause, then to such extent the Obligations so satisfied shall be revived and continue as if such payment or proceeds had not been received by Secured Party, the Issuing Banks or the Lenders, and Secured Party's, the Issuing Banks' and the Lenders' security interests, rights, powers and remedies hereunder shall continue in full force and effect. In such event, this Security Agreement shall be automatically reinstated if it shall theretofore have been terminated pursuant to Section 7.09. -16- (d) In the event that the Obligations are structured such that there are times when no Indebtedness is owing thereunder, this Security Agreement shall remain valid and in full force and effect as to all subsequent indebtedness included in the Obligations, provided Secured Party has not in the interim period executed a written release or termination statement or returned possession of or reassigned the Collateral to Debtor. Section 7.09 Termination. The grant of a security interest hereunder and all of Secured Party's, the Issuing Banks' and the Lenders' rights, powers and remedies in connection therewith shall remain in full force and effect until Secured Party has retransferred and delivered all Collateral in its possession to Debtor, and executed a written release or termination statement and reassigned to Debtor without recourse or warranty any remaining Collateral and all rights conveyed hereby. Upon the complete payment of the Obligations and the compliance by Debtor with all covenants and agreements hereof, Secured Party, at the written request and expense of Debtor, will release, reassign and transfer the Collateral to Debtor and declare this Security Agreement to be of no further force or effect. Notwithstanding the foregoing, the provisions of Section 7.08(c) shall survive the termination of this Security Agreement. Section 7.10 Counterparts, Effectiveness. This Security Agreement may be executed in two or more counterparts. Each counterpart is deemed an original, but all such counterparts taken together constitute one and the same instrument. This Security Agreement becomes effective upon the execution hereof by Debtor and delivery of the same to Secured Party, and it is not necessary for Secured Party, the Issuing Banks or any Lender to execute any acceptance hereof or otherwise signify or express its acceptance hereof. Section 7.11 Headings Descriptive. All titles or headings to articles, sections, subsections or other divisions of this Security Agreement or the exhibits hereto are only for the convenience of the parties and shall not be construed to have any effect or meaning with respect to the other content of such articles, sections, subsections or other divisions, such other content being controlling as to the agreement between the parties hereto. Section 7.12 Delivery of Copy/Waiver. The Debtor hereby acknowledges receiving a copy of this Security Agreement. The Debtor waives all rights to receive from the Secured Party a copy of any financing statement or financing change statement filed or registered or verification statement issued at any time in respect of this Security Agreement. Section 7.13 Amendment and Restatement. This Security Agreement amends and restates in its entirety the Prior Security Agreement and all its terms, provisions and conditions. Debtor acknowledges that the liens, claims, rights, titles, interests and benefits created and granted by the Prior Security Agreement continue to exist, remain valid and subsisting, shall not be impaired or released hereby, shall remain in full force and effect and are hereby renewed, extended, carried forward and conveyed as security for the Obligations. -17- DEBTOR: TESORO PETROLEUM CORPORATION By: /s/ G. A. Wright Name: G. A. Wright Title: Vice President, Corporate Communications and Treasurer Address of Chief Executive Office and Location of the Collateral: 8700 Tesoro Drive San Antonio, Texas 78217 SECURED PARTY: BANQUE PARIBAS, AS ADMINISTRATIVE AGENT By: /s/ Brian Malone Name: Brian Malone Title: Vice President By: /s/ Barton D. Schouest Name: Barton D. Schouest Title: Group Vice President Address: 1200 Smith Street, Suite 3100 Houston, Texas 77002 -18- EX-4.4 5 AMENDED AND RESTATED SECURITY AGREEMENT AMENDED AND RESTATED SECURITY AGREEMENT (Accounts and Inventory) Between TESORO ALASKA PETROLEUM COMPANY and BANQUE PARIBAS, AS ADMINISTRATIVE AGENT June 7, 1996 AMENDED AND RESTATED SECURITY AGREEMENT Accounts and Inventory THIS AMENDED AND RESTATED SECURITY AGREEMENT is made as of June 7, 1996, between TESORO ALASKA PETROLEUM COMPANY, a Delaware corporation ("Debtor"), and BANQUE PARIBAS, as Administrative Agent ("Secured Party") for the Issuing Banks and the Lenders parties to the Credit Agreement referred to below. RECITALS A. On April 20, 1994, Tesoro Petroleum Corporation (the "Company"), Texas Commerce Bank National Association, individually and as agent, Banque Paribas, individually and as co-agent and the other financial institutions parties thereto entered into a Credit Agreement (as amended from time to time, the "Prior Credit Agreement"). B. The conditions precedent to the effectiveness of the Credit Agreement included the execution and delivery by Debtor of that certain Security Agreement dated of even date therewith (the "Prior Security Agreement"). C. On even date herewith, the Company, Secured Party, The Bank of Nova Scotia, as Documentation Agent and the other financial institutions parties thereto (the "Lenders") are entering into an Amended and Restated Credit Agreement (as amended from time to time, the "Credit Agreement"). D. Therefore, in view of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Debtor and Secured Party agree to amend and restate the Prior Security Agreement as follows: ARTICLE I Definitions Section 1.01 Terms Defined Above. As used in this Security Agreement, the terms "Company," "Credit Agreement," "Debtor" and "Secured Party" shall have the meanings respectively assigned to them. Section 1.02 Certain Definitions. As used in this Security Agreement, the following terms shall have the following meanings, unless the context otherwise requires: "Accounts" shall mean all accounts (as such term is defined in the Code). "Account Debtor" shall mean any Person liable (whether directly or indirectly, primarily or secondarily) for the payment or performance of any obligations included in the Collateral, whether as an account debtor (as defined in the Code), obligor on an instrument, issuer of documents or securities, guarantor or otherwise. "Code" shall mean the Uniform Commercial Code as presently in effect in the State of Texas, Texas Business and Commerce Code, Chapters 1 through 9. "Collateral" shall mean the following types or items of Property (including Property hereafter acquired by Debtor as well as Property which Debtor now owns or in which Debtor has rights): (a) all of Debtor's Accounts and Inventory; (b) (i) any Property from time to time delivered to or deposited with Secured Party by or for the account of Debtor which is related to any Property referred to in clause (a) of this definition; and (ii) all certificates of title or other documents evidencing ownership or possession of or otherwise relating to any Property referred to in clause (a) of this definition; (c) (i) all goods which were at any time included in the Collateral described in clause (a) of this definition and which are returned to or for the account of Debtor following their sale, lease or other disposition; (ii) all policies of insurance (whether or not required by Secured Party) covering any Property referred to in this definition; and (iii) all proceeds, products, replacements, additions to, substitutions for, accessions of, and Property necessary for the operation of any of the Property referred to in this definition, including, without limitation, insurance payable as a result of loss or damage to any of the Property referred to in this definition, refunds of unearned premiums of any such insurance policy and claims against third parties; (d) all books and records related to any of the Property referred to in this definition, including, without limitation, any and all books of account, customer lists and other records relating in any way to the Collateral described in this definition; (e) all of Debtor's general intangibles (as defined in the Code) which are related (but only those related) to any Property referred to in this definition, including, without limitation, all (i) letters of credit, bonds, guaranties, purchase or sales agreements and other contractual rights, rights to performance, and claims for damages, refunds (including tax refunds) or other monies due or to become due; (ii) orders, franchises, permits, certificates, licenses, consents, exemptions, variances, authorizations or other approvals by any Governmental Authority; (iii) business records, computer tapes and computer software; and (iv) other intangible personal property, whether similar or dissimilar to the Property referred to in clause (a) of this definition; and -2- (f) all of Debtor's chattel paper, documents and instruments (as such terms are defined in the Code) related to or arising out of any Property referred to in clause (a) of this definition. It is expressly contemplated that additional Property may from time to time be pledged, assigned or granted to Secured Party as additional security for the Obligations, and, if so, then the term "Collateral" as used herein shall be deemed for all purposes hereof to include all such additional Property, together with all other Property of the types described above related thereto. It is expressly agreed that Collateral shall not include and shall be exclusive of any equipment. "Event of Default" shall have the meaning assigned such term in Section 6.01 of this Security Agreement. "Inventory" shall mean all inventory (as defined in the Code). "Obligations" shall mean with respect to the Debtor, the Obligations (as defined in the Guaranty Agreement) to the extent the Debtor is liable therefor as provided in the Guaranty Agreement. The Obligations are Senior Debt as such term is defined in that certain Subordination Agreement dated December 15, 1992 among the Company, Tesoro Alaska Petroleum Company and the State of Alaska attached to the Settlement Agreement among the Company, Tesoro Alaska Petroleum Company and the State of Alaska. "Obligor" shall mean the Company and any other Person, other than Debtor, liable (whether directly or indirectly, primarily or secondarily) for the payment or performance of any of the Obligations whether as maker, co-maker, endorser, guarantor, accommodation party, general partner or otherwise; and the term "Obligor" shall specifically include each Guarantor, other than Debtor, named in the Credit Agreement. "Property" shall mean any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "Security Agreement" shall mean this Amended and Restated Security Agreement, as the same may be amended, modified or supplemented from time to time. Section 1.03 Other Defined Terms. Unless otherwise defined herein, all terms beginning with a capital letter which are defined in the Credit Agreement shall have the meanings assigned therein, unless the context hereof requires otherwise. All uncapitalized terms which are defined in the Code shall have their respective meanings as used in the Code, unless the context hereof requires otherwise. -3- ARTICLE II Security Interest Section 2.01 Grant of Security Interest. Debtor hereby assigns and grants to Secured Party, for its benefit and the benefit of the Lenders and the Issuing Banks, a security interest in, lien upon and right of set-off against the Collateral to secure the prompt payment and performance of the Obligations. ARTICLE III Representations and Warranties Debtor represents and warrants to Secured Party, the Issuing Banks and the Lenders (which representations and warranties will survive the creation and payment of the Obligations) that: Section 3.01 First Priority Security Interest. The grant of the security interest in the Collateral pursuant to this Security Agreement creates a valid and perfected first priority security interest in the Collateral, enforceable against Debtor and all third parties and securing payment of the Obligations. Section 3.02 No Filings By Third Parties. No financing statement or other public notice or recording covering the Collateral is on file in any public office (other than any financing statement or other public notice or recording naming Secured Party as the secured party therein), and Debtor will not execute any such financing statement or other public notice or recording so long as any of the Obligations are outstanding. Section 3.03 No Name Changes. Debtor has not, during the preceding five years, entered into any contract, agreement, security instrument or other document using a name other than, or been known by or otherwise used any name other than, the name used by Debtor herein. Section 3.04 Location of Debtor and Collateral. Debtor's chief executive office and Debtor's records concerning the Collateral are located at the address or location set forth on the signature page hereof. The Collateral is located at such address or at the location(s), if any, specified in Exhibit A hereto. Any Collateral not at such location(s) nevertheless remains subject to Secured Party's security interest. Section 3.05 Collateral. All statements or other information provided by Debtor to Secured Party, any Issuing Bank or any Lender with respect to the Collateral is or (in the case of subsequently furnished information) will be when provided correct and complete in all material respects. The delivery at any time by Debtor to Secured Party of additional Collateral or of additional descriptions of Collateral shall constitute a representation and warranty by -4- Debtor to Secured Party hereunder that the representations and warranties of this Article III are correct insofar as they would pertain to such Collateral or the descriptions thereof. Section 3.06 Accounts. (a) Each Account represents the genuine, valid and legally enforceable indebtedness of an Account Debtor arising from the sale, lease or rendition by Debtor of goods or services and is not and will not be subject to contra accounts, set-offs, defenses, counterclaims, allowances or adjustments (other than discounts for prompt payment shown on the invoice), or objections or complaints by the Account Debtor concerning its liability on the Account; and any goods, the sale of which gave rise to an Account, have not been returned or rejected by the Account Debtor or lost or damaged prior to receipt by the Account Debtor. (b) The amount shown as to each Account on Debtor's books is or will be the true and undisputed amount owing and unpaid thereon. Except as disclosed in writing to Secured Party, each Account arose or shall have arisen in the ordinary course of Debtor's business; provided, however, that any Accounts which arose or hereafter arise outside the ordinary course of Debtor's business shall nevertheless be included as part of the Collateral. Debtor has no knowledge of any bankruptcy, insolvency or other action affecting creditors' rights with respect to any Account Debtor. (c) Except as disclosed in writing to Secured Party, each invoice or agreement evidencing the Accounts is or will be due and payable not more than 90 days from the date thereof; provided, however, that any Accounts not so due and payable shall nevertheless be included as part of the Collateral. Section 3.07 Delivery of Documents or Letters of Credit. With respect to any Inventory or other Collateral covered by one or more certificates of title or other documents evidencing ownership or possession thereof, and with respect to any Accounts or other Collateral supported by letters of credit, each of such certificates, documents or letters of credit has been delivered to Secured Party (provided, however, that all certificates, documents and letters of credit referred to in Section 1.02 shall be subject to the security interest created by this Security Agreement irrespective of whether or not such delivery shall have been made). Section 3.08 Ownership of Collateral; Encumbrances; Valid and Binding Agreement. Debtor is the legal and beneficial owner of the Collateral free and clear of any adverse claim, lien, security interest, option or other charge or encumbrance except for the security interest created by this Agreement or as permitted by the Credit Agreement, and Debtor has full right, power and authority to assign and grant a security interest in the Collateral to Secured Party. This Agreement constitutes a legal, valid and binding obligation of Debtor enforceable against Debtor in accordance with its terms. The execution, delivery and performance of this Agreement will not violate the terms of any contract, agreement, law, regulation, order, injunction, judgment, decree or writ to which Debtor is subject and does not require the consent or approval of any other Person. -5- Section 3.09 No Required Consent. No authorization, consent, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body (other than the filing of financing statements) is required for (i) the due execution, delivery and performance by Debtor of this Agreement, (ii) the grant by Debtor of the security interest granted by this Agreement, (iii) the perfection of such security interest or (iv) the exercise by Secured Party of its rights and remedies under this Agreement. ARTICLE IV Covenants and Agreements Debtor covenants and agrees that so long as any part of the Obligations are outstanding: Section 4.01 Change in Location of Collateral or Debtor. Debtor will give Secured Party 30 days' prior written notice of (i) any change in location of the Collateral to a jurisdiction other than Texas, Alaska, California, Oregon or Washington and which would cause the Secured Party to be unperfected in the Collateral, (ii) the opening or closing of any place of Debtor's business or (iii) any change in the location of Debtor's chief executive office or address. Section 4.02 Documents; Collateral in Possession of Third Parties. If certificates of title or other documents evidencing ownership or possession of the Collateral are issued or outstanding, Debtor will cause the security interest of Secured Party to be properly noted thereon and will, forthwith upon receipt, deliver same to Secured Party. If any Collateral is at any time in the possession or control of any warehouseman, bailee, agent or independent contractor, Debtor shall notify such Person of Secured Party's security interest in such Collateral. Upon Secured Party's request, Debtor shall instruct any such Person to hold all such Collateral for Secured Party's account subject to Debtor's instructions, or, if an Event of Default shall have occurred, subject to Secured Party's instructions. Section 4.03 Delivery of Letters of Credit and Instruments; Proceeds. Debtor will deliver each letter of credit, if any, included in the Collateral to Secured Party, in each case forthwith upon receipt by or for the account of Debtor. If any Account becomes evidenced by a promissory note, trade acceptance or any other instrument for the payment of money (other than checks or drafts in payment of Accounts collected by Debtor in the ordinary course of business prior to notification by Secured Party under Section 5.04), Debtor will immediately deliver such instrument to Secured Party appropriately endorsed to Secured Party, as collateral assignee and, regardless of the form of presentment, demand, notice of dishonor, protest and notice of protest with respect thereto, Debtor will remain liable thereon until such instrument is paid in full. Except as permitted by Sections 4.03, 4.08 and 4.09, Debtor will deliver to Secured Party all proceeds from the sale or other disposition of the Collateral promptly upon receipt. If chattel paper, documents or instruments are received as proceeds, which are required to be delivered to Secured Party, they will be, immediately upon receipt, properly endorsed or assigned and delivered to Secured Party as Collateral. -6- Section 4.04 Sale, Disposition or Encumbrance of Collateral. Except (i) as permitted by Section 4.08, or (ii) with the prior written consent of the Majority Lenders, Debtor will not in any way encumber any of the Collateral (or permit or suffer any of the Collateral to be encumbered) or sell, assign, lend, rent, lease or otherwise dispose of or transfer any of the Collateral to or in favor of any Person other than Secured Party. Section 4.05 Intentionally left blank. Section 4.06 Records and Information. (a) Debtor shall keep accurate and complete records of the Collateral (including proceeds). These records shall reflect complete and accurate stock records of the Inventory and all facts concerning each Account. Debtor shall conduct a physical count of the Inventory at such intervals as Secured Party requests and promptly supply Secured Party with a copy of such count accompanied by a report of the value (valued at the lower of cost or market value) of the Inventory. Secured Party may at any time have access to, examine, audit, make extracts from and inspect without hindrance or delay Debtor's records, files and the Collateral. (b) Debtor will promptly furnish such information as Secured Party may from time to time reasonably request regarding (i) the business, affairs or financial condition of Debtor or (ii) the Collateral or Secured Party's rights or remedies with respect thereto. Any balance sheets or financial statements requested by Secured Party pursuant to this Section 4.06(b) shall conform to generally accepted accounting principles. (c) Debtor recognizes that financing statements pertaining to the Collateral will be filed with the offices of the Secretary of State of Texas, the Alaska Department of Natural Resources, the Secretary of State of California, the Secretary of State of Oregon and the Department of Licensing of the State of Washington. Debtor will immediately notify Secured Party of any condition or event that may change the proper location for the filing of any financing statements or other public notice or recordings for the purpose of perfecting a security interest in the Collateral. Without limiting the generality of the foregoing, Debtor will (i) immediately notify Secured Party of any change to a jurisdiction other than as represented in Section 3.04 (A) in the location of Debtor's chief executive office or chief place of business, (B) in the location of the office where Debtor keeps its records concerning the Accounts, or (C) in the "location" of Debtor within the meaning of Section 9-103(c) of the Code; (ii) immediately notify Secured Party of any change in the location of the Collateral to any jurisdiction other than the States of Texas, Alaska, California, Oregon and Washington; and (ii) notify Secured Party 30 days prior to any change in Debtor's name, identity or corporate structure or Tax Identification Number. In any notice furnished pursuant to this paragraph, Debtor will expressly state that the notice is required by this Security Agreement and contains facts that will or may require additional filings of financing statements or other notices for the purpose of continuing perfection of Secured Party's security interest in the Collateral. Debtor will promptly provide written notice to Secured Party of all information which in any way relates to or affects the Collateral generally, Secured Party's rights or remedies with respect thereto, the filing of any -7- financing statement or other public notices or recordings, or the delivery and possession of items of Collateral for the purpose of perfecting a security interest in the Collateral. Section 4.07 Further Assurances. Upon the request of Secured Party, Debtor shall (at Debtor's expense) execute and deliver all such assignments, certificates, financing statements or other documents and give further assurances and do all other acts and things as Secured Party may reasonably request to perfect Secured Party's interest in the Collateral or to protect, enforce or otherwise effect Secured Party's rights and remedies hereunder. Section 4.08 Inventory. Unless an Event of Default has occurred and is continuing and after any applicable notice and cure periods provided for in the Credit Agreement, Debtor may use the Inventory in any lawful manner not inconsistent with this Security Agreement and with the terms of insurance thereon and may sell, lease or otherwise dispose of its Inventory for cash or terms in the ordinary course of business, and Debtor may retain the proceeds of such sales, leases or other dispositions (subject to Section 4.03 and Section 4.09); provided, however, the Inventory shall remain in Debtor's possession and control at all times prior to sale, lease or other disposition at Debtor's address set forth in Section 3.04. Debtor shall bear any risk of loss of the Inventory. Debtor shall not use any item of Inventory in a manner inconsistent with the holding thereof for sale, lease or other disposition in the ordinary course of business or in contravention of the terms of any agreement. Upon the occurrence and continuance of an Event of Default and after any applicable cure period, Debtor shall immediately deliver to Secured Party any checks, cash or other forms of payment which Debtor receives in connection with any Inventory, appropriately endorsed. Section 4.09 Accounts. (a) Prior to notification by Secured Party under Section 6.02(i), Debtor will collect the Accounts in the ordinary course of its business and may retain the proceeds of such collections (subject to Section 4.03). (b) Debtor shall immediately notify Secured Party in writing in the event that any representation given in Article III with respect to any Account ceases to be true and correct in all material respects; such notice specifying other representation(s) that cease to be true and correct and the action, if any, that Debtor proposes to take with respect thereto. (c) Debtor will not modify, extend or substitute any contract, the terms of which shall at any time have given rise to an Account, except in the ordinary course of business or with the prior written consent of Secured Party. Debtor will not re-date any invoice or sale or make sales with an extended payment date beyond that customary in the industry, and in no event longer than 90 days. Debtor shall not adjust, settle, discount or compromise any of the Accounts, except in the ordinary course of business, as permitted by the Credit Agreement or with the prior written consent of Secured Party. -8- (d) Debtor will duly perform or cause to be performed all of Debtor's obligations with respect to the Accounts and the underlying sales of goods or other transactions giving rise to the Accounts. Section 4.10 Condition of Collateral. Debtor will maintain all Collateral in good condition and in accordance with industry standards and practices. Debtor will not misuse, abuse, waste, destroy or endanger the Collateral nor allow it to be used in any manner other than its intended use. Debtor will not use any Collateral in violation of any Governmental Requirement, or suffer it to be so used. Section 4.11 Collateral Separate and Distinct. Debtor shall at all times keep the Collateral, including proceeds, or cause it to be kept (when in the possession of warehousemen, bailees, agents, independent contractors or other third parties), separate and distinct from other Property; provided, however, proceeds of the Collateral may be kept in various concentration accounts of the Parent or the Guarantors. Section 4.12 Change in Debtor's Name or Corporate Structure. Debtor will not change its name, identity or corporate structure (including, without limitation, any merger, consolidation or sale of substantially all of its assets) without notifying Secured Party of such change in writing at least 30 days prior to the effective date of such change. Without the express written consent of Secured Party, however, Debtor will not engage in any other business or transaction under any name other than Debtor's name hereunder. ARTICLE V Rights, Duties, and Powers of Secured Party The following rights, duties and powers of Secured Party are applicable irrespective of whether an Event of Default has occurred and is continuing, but only after having given Debtor at least three (3) days prior notice: Section 5.01 Attorney-in-Fact. Secured Party is hereby fully authorized and empowered (without the necessity of any further consent or authorization from Debtor) and the right is expressly granted to Secured Party, and Debtor hereby irrevocably appoints and makes Secured Party as Debtor's attorney-in-fact, with full authority in the place and stead of Debtor and in the name of Debtor or otherwise, from time to time in Secured Party's discretion, but at Debtor's cost and expense to: (a) obtain, adjust, sell and cancel any insurance with respect to the Collateral and endorse any draft drawn by insurers of the Collateral, and Secured Party may apply any proceeds or unearned premiums of such insurance to the Obligations (whether or not due); and -9- (b) take any action and to execute any assignment, certificate, financing statement, notification, document or instrument which Secured Party may deem necessary or advisable to accomplish the purposes of this Security Agreement, including, without limitation, to receive, endorse and collect all instruments made payable to Debtor representing any payment or other distribution in respect of the Collateral or any part thereof and to give full discharge for the same. Section 5.02 Transfer of Collateral. Secured Party may transfer any or all of the Obligations, and upon any such transfer, Secured Party may transfer its interest in any or all of the Collateral and shall be fully discharged thereafter from all liability therefor. Any transferee of the Collateral shall be vested with all rights, powers and remedies of Secured Party hereunder. Section 5.03 Purchase Money Financing. To the extent that the Lenders have advanced or will advance funds to or for the account of Debtor to enable Debtor to purchase or otherwise acquire specific types or items of Collateral, the Lenders may at their option pay such funds (i) directly to the Person from whom Debtor will make such purchase or acquire such rights or (ii) to Debtor, in which case Debtor covenants promptly to pay the same to such Person and forthwith furnish to Secured Party, on request, evidence satisfactory to Secured Party that such payment has been made from the funds so provided by Secured Party for such payment. Section 5.04 Proceeds. If so requested by Debtor, any payments received by Secured Party on the Accounts or as proceeds of other Collateral shall upon final collection by Secured Party be credited towards payment of the Obligations. In the absence of such request from Debtor, and until so requested, Secured Party may hold such collected payments as cash Collateral (and Secured Party may at any time place a hold or freeze on all or a part of any deposit account of Debtor containing deposits of such payments up to the amount of such deposits). Section 5.05 Discharge Encumbrances. Secured Party may, at its option, discharge any taxes, Liens, security interests or other encumbrances at any time levied or placed on the Collateral, may pay for insurance on the Collateral and may pay for the maintenance and preservation of the Collateral. Debtor agrees to reimburse Secured Party upon demand for any payment so made, plus interest on the portion thereof from time to time remaining unpaid from the date of Secured Party's demand at the rate for overdue principal and interest set forth in Section 2.06(c) of the Credit Agreement. Section 5.06 Disclaimer of Certain Duties. (a) The powers conferred upon Secured Party by this Security Agreement are to protect the interest of Secured Party, the Issuing Banks and the Lenders in the Collateral and shall not impose any duty upon Secured Party, the Issuing Banks or any Lender to exercise any such powers. Debtor hereby agrees that Secured Party, the Issuing Banks and the Lenders shall not be liable for, nor shall the indebtedness evidenced by the Obligations be diminished by, -10- Secured Party's delay or failure to collect upon, foreclose, sell, take possession of or otherwise obtain value for the Collateral. (b) Except as provided in the Credit Agreement, Secured Party shall be under no duty whatsoever to make or give any presentment, notice of dishonor, protest, demand for performance, notice of non-performance, notice of intent to accelerate, notice of acceleration, or other notice or demand in connection with any Collateral or the Obligations, or to take any steps necessary to preserve any rights against any Obligor, Account Debtor or other Person. Section 5.07 Modification of Obligations; Other Security. Debtor waives (i) any and all notice of acceptance, creation, modification, rearrangement, renewal or extension for any period of any instrument executed by any Obligor in connection with the Obligations and (ii) any defense of any Obligor by reason of disability, lack of authorization, cessation of the liability of any Obligor or for any other reason. Debtor authorizes Secured Party, without notice or demand and without any reservation of rights against Debtor and without affecting Debtor's liability hereunder or on the Obligations, from time to time to (x) take and hold other Property, other than the Collateral, as security for the Obligations, and exchange, enforce, waive and release any or all of the Collateral, (y) apply the Collateral in the manner permitted by this Security Agreement and (z) renew, extend for any period, accelerate, amend or modify, supplement, enforce, compromise, settle, waive or release the obligations of any Obligor or any instrument or agreement of such other Person with respect to any or all of the Obligations or Collateral. Section 5.08 Waiver of Notice; Demand and Presentment; etc. Except for any notice required under the Credit Agreement, Debtor hereby waives any demand, notice of default, notice of acceleration of the maturity of the Obligations, notice of intent to accelerate the maturity of the Obligations, presentment, protest and notice of dishonor as to any action taken by Secured Party in connection with this Security Agreement, or any instrument or document. Debtor waives any right of marshaling in respect of any and all Collateral, and waives any right to require Secured Party, any Issuing Bank or any Lender to proceed against any Obligor, Account Debtor or other Person, exhaust any Collateral or enforce any other remedy which Secured Party, any Issuing Bank or any Lender now has or may hereafter have against any Obligor or other Person. Section 5.09 Non-judicial Enforcement. To the fullest extent allowed by applicable law, Secured Party may enforce its rights hereunder without prior judicial process or judicial hearing, and to the fullest extent permitted by law Debtor expressly waives any and all legal rights which might otherwise require Secured Party to enforce its rights by judicial process. -11- ARTICLE VI Events of Default Section 6.01 Events of Default. An Event of Default under the Credit Agreement shall constitute an "Event of Default" under this Security Agreement. Section 6.02 Remedies. Upon the occurrence and during the continuance of any Event of Default, Secured Party may take any or all of the following actions without notice (except where expressly required under the Credit Agreement or below) or demand to Debtor: (a) Declare all or part of the indebtedness pursuant to the Obligations immediately due and payable and enforce payment of the same by Debtor or any Obligor. (b) Take possession of the Collateral, or at Secured Party's request Debtor shall, at Debtor's cost, assemble the Collateral and make it available at a location to be specified by Secured Party which is reasonably convenient to Debtor and Secured Party. In any event, Debtor shall bear the risk of accidental loss or damage to or diminution in value of the Collateral, and Secured Party shall have no liability whatsoever for failure to obtain or maintain insurance, nor to determine whether any insurance ever in force is adequate as to amount or as to risk insured. (c) Sell or lease, in one or more sales or leases and in one or more parcels, or otherwise dispose of any or all of the Collateral in its then condition or in any other commercially reasonable manner as Secured Party may elect, in a public or private transaction, at any location as deemed reasonable by Secured Party (including, without limitation, Debtor's premises), either for cash or credit or for future delivery at such price as Secured Party may deem fair, and (unless prohibited by the Code, as adopted in any applicable jurisdiction) Secured Party, any Issuing Bank or any Lender may be the purchaser of any or all Collateral so sold and may apply upon the purchase price therefor any Obligations secured hereby. Any such sale or transfer by Secured Party either to itself or to any other Person shall be absolutely free from any claim of right by Debtor, including any equity or right of redemption, stay or appraisal which Debtor has or may have under any rule of law, regulation or statute now existing or hereafter adopted. Upon any such sale or transfer, Secured Party shall have the right to deliver, assign and transfer to the purchaser or transferee thereof the Collateral so sold or transferred. It shall not be necessary that the Collateral or any part thereof be present at the location of any such sale or transfer. Secured Party may, at its discretion, provide for a public sale, and any such public sale shall be held at such time or times within ordinary business hours and at such place or places as Secured Party may fix in the notice of such sale. Secured Party shall not be obligated to make any sale pursuant to any such notice. Secured Party may, without notice or publication, adjourn any public or private sale by announcement at any time and place fixed for such sale, and such sale may be made at any time or place to which the same may be so adjourned. In the event any sale or transfer hereunder is not -12- completed or is defective in the opinion of Secured Party, such sale or transfer shall not exhaust the rights of Secured Party hereunder, and Secured Party shall have the right to cause one or more subsequent sales or transfers to be made hereunder. In the event that any of the Collateral is sold or transferred on credit, or to be held by Secured Party for future delivery to a purchaser or transferee, the Collateral so sold or transferred may be retained by Secured Party until the purchase price or other consideration is paid by the purchaser or transferee thereof, but in the event that such purchaser or transferee fails to pay for the Collateral so sold or transferred or to take delivery thereof, neither Secured Party, any Issuing Bank nor any Lender shall incur any liability in connection therewith. If only part of the Collateral is sold or transferred such that the Obligations remain outstanding (in whole or in part), Secured Party's rights and remedies hereunder shall not be exhausted, waived or modified, and Secured Party is specifically empowered to make one or more successive sales or transfers until all the Collateral shall be sold or transferred and all the Obligations are paid. In the event that Secured Party elects not to sell the Collateral, Secured Party retains its rights to lease or otherwise dispose of or utilize the Collateral or any part or parts thereof in any manner authorized or permitted by law or in equity, and to apply the proceeds of the same towards payment of the Obligations. Each and every method of disposition of the Collateral described in this Section 6.02(c) or in Section 6.02(f) shall constitute disposition in a commercially reasonable manner. (d) Take possession of all books and records of Debtor pertaining to the Collateral. Secured Party shall have the authority to enter upon any real or immoveable property or improvements thereon in order to obtain any such books or records, or any Collateral located thereon, and remove the same therefrom without liability. (e) Apply proceeds of the disposition of the Collateral to the Obligations in any manner elected by Secured Party and permitted by the Code or otherwise permitted by law or in equity. Such application may include, without limitation, the reasonable expenses of retaking, holding, preparing for sale or other disposition, and the reasonable attorneys' fees and legal expenses incurred by Secured Party, the Issuing Banks and the Lenders. (f) Appoint any Person as agent to perform any act or acts necessary or incident to any sale or transfer by Secured Party of the Collateral. Additionally, any sale or transfer hereunder may be conducted by an auctioneer or any officer or agent of Secured Party. (g) Apply and set-off (i) any deposits of Debtor now or hereafter held by Secured Party, the Issuing Banks and the Lenders; (ii) all claims of Debtor against Secured Party, now or hereafter existing; (iii) any other Property, rights or interests of Debtor which come into the possession or custody or under the control of Secured Party; and (iv) the proceeds of any of the foregoing as if the same were included in the Collateral. Secured Party agrees to notify Debtor promptly after any such set-off or -13- application; provided, however, the failure of Secured Party to give any notice shall not affect the validity of such set-off or application. (h) With respect to the Collateral, receive, change the address for delivery, open and dispose of mail addressed to Debtor, and to execute, assign and endorse negotiable and other instruments for the payment of money, documents of title or other evidences of payment, shipment or storage for any form of Collateral on behalf of and in the name of Debtor. (i) Notify or require Debtor to notify Account Debtors that the Accounts have been assigned to Secured Party and direct such Account Debtors to make payments on the Accounts directly to Secured Party. To the extent Secured Party does not so elect, Debtor shall continue to collect and retain the Accounts. Secured Party or its designee shall also have the right, in its own name or in the name of Debtor, to do any of the following: (i) to demand, collect, receipt for, settle, compromise any amounts due, give acquittances for, prosecute or defend any action which may be in relation to any monies due or to become due by virtue of, the Accounts; (ii) to sell, transfer or assign or otherwise deal in the Accounts or the proceeds thereof or the related goods, as fully and effectively as if Secured Party were the absolute owner thereof; (iii) to extend the time of payment of any of the Accounts, to grant waivers and make any allowance or other adjustment with reference thereto; (iv) to endorse the name of Debtor on notes, checks or other evidences of payments on Collateral that may come into possession of Secured Party; (v) to take control of cash and other proceeds of any Collateral; (vi) to sign the name of Debtor on any invoice or bill of lading relating to any Collateral, or any drafts against Account Debtors or other persons making payment with respect to Collateral; (vii) to send a request for verification of Accounts to any Account Debtor; and (viii) to do all other acts and things necessary to carry out the intent of this Agreement. (j) Exercise all other rights and remedies permitted by law or in equity. Section 6.03 Liability for Deficiency. If any sale or other disposition of Collateral by Secured Party or any Issuing Bank or any other action of Secured Party, any Issuing Bank or any Lender hereunder results in reduction of the Obligations, such action will not release Debtor from its liability to Secured Party, the Issuing Banks and the Lenders for any unpaid Obligations, including costs, charges and expenses incurred in the liquidation of Collateral, together with interest thereon, and the same shall be immediately due and payable to Secured Party at Secured Party's address set forth on the signature page of this Security Agreement. Section 6.04 Reasonable Notice. If any applicable provision of any law requires Secured Party any Issuing Bank or any Lender to give reasonable notice of any sale or disposition or other action, Debtor hereby agrees that fifteen (15) days' prior written notice shall constitute reasonable notice thereof. Such notice, in the case of public sale, shall state the time and place fixed for such sale and, in the case of private sale, the time after which such sale is to be made. -14- Section 6.05 Account Debtors. Any payment or settlement of an Account made by an Account Debtor will be, to the extent of such payment or to the extent provided under such settlement, a release, discharge and acquittance of the Account Debtor with respect to such Account, and Debtor shall take any action as may be required by Secured Party in connection therewith. No Account Debtor on any Account will ever be bound to make inquiry as to the termination of this Agreement or the rights of Secured Party to act hereunder, but shall be fully protected by Debtor in making payment directly to Secured Party. ARTICLE VIII Miscellaneous Section 7.01 Notices. Any notice required or permitted to be given under or in connection with this Security Agreement shall be given in accordance with the notice provisions of the Guaranty Agreement. Section 7.02 Amendments and Waivers. Secured Party's, any Issuing Bank's or any Lender's acceptance of partial or delinquent payments or any forbearance, failure or delay by the Secured Party in exercising any right, power or remedy hereunder shall not be deemed a waiver of any obligation of Debtor or any Obligor, or of any right, power or remedy of Secured Party; and no partial exercise of any right, power or remedy shall preclude any other or further exercise thereof. Secured Party may remedy any Event of Default hereunder or in connection with the Obligations without waiving the Event of Default so remedied. Debtor hereby agrees that if Secured Party agrees to a waiver of any provision hereunder, or an exchange of or release of the Collateral, or the addition or release of any Obligor, any such action shall not constitute a waiver of any of Secured Party's other rights or of Debtor's obligations hereunder. This Security Agreement may be amended only by the manner set forth in Section 9.02 of the Credit Agreement by an instrument in writing executed jointly by Debtor and Secured Party and may be supplemented only by documents delivered or to be delivered in accordance with the express terms hereof. Section 7.03 Copy as Financing Statement. A photocopy or other reproduction of this Security Agreement or any financing statement covering the Collateral is sufficient as a financing statement, and the same may be filed with any appropriate filing authority for the purpose of perfecting Secured Party's security interest in the Collateral. Section 7.04 Possession of Collateral. Secured Party shall be deemed to have possession of any Collateral in transit to it or set apart for it (or, in either case, any of its agents, affiliates or correspondents). Section 7.05 Redelivery of Collateral. If any sale or transfer of Collateral by Secured Party results in full satisfaction of the Obligations, and after such sale or transfer and discharge there remains a surplus of proceeds, Secured Party will deliver to Debtor such excess proceeds -15- in a commercially reasonable time; provided, however, that neither Secured Party, any Issuing Bank nor any Lender shall be liable for any interest, cost or expense in connection with any delay in delivering such proceeds to Debtor. Section 7.06 Governing Law; Jurisdiction. This Security Agreement and the security interest granted hereby shall be construed in accordance with and governed by the laws of the State of Texas (except to the extent that the laws of any other jurisdiction govern the perfection and priority of the security interests granted hereby). Debtor consents to and submits to in personam jurisdiction and venue in the state district and county courts of the county wherein Secured Party's offices are located at the address specified on the signature page hereof, and in the Federal District Courts of the district wherein such offices of Secured Party are located. This submission to jurisdiction is nonexclusive and does not preclude Secured Party, any Issuing Bank or any Lender from obtaining jurisdiction over Debtor or the Collateral in any court otherwise having jurisdiction. Section 7.07 Cumulative and Other Rights. The rights, powers and remedies of Secured Party hereunder are in addition to all rights, powers and remedies given by law or in equity. The exercise by Secured Party, any Issuing Bank or any Lender of any one or more of the rights, powers and remedies herein shall not be construed as a waiver of any other rights, powers and remedies, including, without limitation, any other rights of set-off. If any of the Obligations are given in renewal, extension for any period or rearrangement, or applied toward the payment of debt secured by any lien, Secured Party shall be, and is hereby, subrogated to all the rights, titles, interests and liens securing the debt so renewed, extended, rearranged or paid. Section 7.08 Subrogation. Until the Obligations have been paid in full, Debtor hereby waives any claim, right or remedy which Debtor may now have or hereafter acquire against the Company which arises out of this Security Agreement or from the performance by Debtor hereunder, including without limitation, any claim, remedy or right of subrogation, reimbursement, exoneration, indemnification, or participation in any such claim, right or remedy of any other Person against the Company; provided, however, notwithstanding the foregoing, Debtor reserves its rights of contribution and reimbursement, if any, from any Obligor. Until the Obligations have been paid in full, Debtor further waives any benefit of any right to participate in any security now or hereafter held by Secured Party, the Issuing Banks and/or the Lenders. Section 7.09 Continuing Security Agreement. (a) This Security Agreement shall constitute a continuing security agreement, and all representations and warranties, covenants and agreements shall, as applicable, apply to all future as well as existing transactions. Provisions of this Security Agreement, unless they are by their terms exclusive, shall be in addition to other agreements between the parties. (b) Except as may be expressly applicable pursuant to Section 9.505 of the Code, no action taken or omission to act by Secured Party, the Issuing Banks or the Lenders hereunder, -16- including, without limitation, any action taken or inaction pursuant to Section 6.02, shall be deemed to constitute a retention of the Collateral in satisfaction of the Obligations or otherwise to be in full satisfaction of the Obligations, and the Obligations shall remain in full force and effect, until Secured Party, the Issuing Banks and the Lenders shall have applied payments (including, without limitation, collections from Collateral) towards the Obligations in the full amount then outstanding or until such subsequent time as is hereinafter provided in subsection (c) below. (c) To the extent that any payments on the Obligations or proceeds of the Collateral are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, debtor in possession, receiver or other Person under any bankruptcy law, common law or equitable cause, then to such extent the Obligations so satisfied shall be revived and continue as if such payment or proceeds had not been received by Secured Party, the Issuing Banks or the Lenders, and Secured Party's, the Issuing Banks' and the Lenders' security interests, rights, powers and remedies hereunder shall continue in full force and effect. In such event, this Security Agreement shall be automatically reinstated if it shall theretofore have been terminated pursuant to Section 7.10. (d) In the event that the Obligations are structured such that there are times when no Indebtedness is owing thereunder, this Security Agreement shall remain valid and in full force and effect as to all subsequent indebtedness included in the Obligations, provided Secured Party has not in the interim period executed a written release or termination statement or returned possession of or reassigned the Collateral to Debtor. Section 7.10 Termination. The grant of a security interest hereunder and all of Secured Party's, the Issuing Banks' and the Lenders' rights, powers and remedies in connection therewith shall remain in full force and effect until Secured Party has retransferred and delivered all Collateral in its possession to Debtor, and executed a written release or termination statement and reassigned to Debtor without recourse or warranty any remaining Collateral and all rights conveyed hereby. Upon the complete payment of the Obligations and the compliance by Debtor with all covenants and agreements hereof, Secured Party, at the written request and expense of Debtor, will release, reassign and transfer the Collateral to Debtor and declare this Security Agreement to be of no further force or effect. Notwithstanding the foregoing, the provisions of Section 7.09(c) shall survive the termination of this Security Agreement. Section 7.11 Counterparts, Effectiveness. This Security Agreement may be executed in two or more counterparts. Each counterpart is deemed an original, but all such counterparts taken together constitute one and the same instrument. This Security Agreement becomes effective upon the execution hereof by Debtor and delivery of the same to Secured Party, and it is not necessary for Secured Party, the Issuing Banks or any Lender to execute any acceptance hereof or otherwise signify or express its acceptance hereof. Section 7.12 Headings Descriptive. All titles or headings to articles, sections, subsections or other divisions of this Security Agreement or the exhibits hereto are only for the -17- convenience of the parties and shall not be construed to have any effect or meaning with respect to the other content of such articles, sections, subsections or other divisions, such other content being controlling as to the agreement between the parties hereto. Section 7.13 Delivery of Copy/Waiver. The Debtor hereby acknowledges receiving a copy of this Security Agreement. The Debtor waives all rights to receive from the Secured Party a copy of any financing statement or financing change statement filed or registered or verification statement issued at any time in respect of this Security Agreement. Section 7.14 Amendment and Restatement. This Security Agreement amends and restates in its entirety the Prior Security Agreement and all its terms, provisions and conditions. Debtor acknowledges that the liens, claims, rights, titles, interests and benefits created and granted by the Prior Security Agreement continue to exist, remain valid and subsisting, shall not be impaired or released hereby, shall remain in full force and effect and are hereby renewed, extended, carried forward and conveyed as security for the Obligations. -18- DEBTOR: TESORO ALASKA PETROLEUM COMPANY By: /s/ G. A. Wright Name: G. A. Wright Title: Vice President and Treasurer Address of Chief Executive Office and Location of the Collateral: 8700 Tesoro Drive San Antonio, Texas 78217 SECURED PARTY: BANQUE PARIBAS, AS ADMINISTRATIVE AGENT By: /s/ Brian Malone Name: Brian Malone Title: Vice President By: /s/ Barton D. Schouest Name: Barton D. Schouest Title: Group Vice President Address: 1200 Smith Street, Suite 3100 Houston, Texas 77002 EX-4.5 6 AMENDED AND RESTATED SECURITY AGREEMENT AMENDED AND RESTATED SECURITY AGREEMENT (Accounts and Inventory) Between TESORO REFINING, MARKETING & SUPPLY COMPANY and BANQUE PARIBAS, AS ADMINISTRATIVE AGENT June 7, 1996 AMENDED AND RESTATED SECURITY AGREEMENT Accounts and Inventory THIS AMENDED AND RESTATED SECURITY AGREEMENT is made as of June 7, 1996, between TESORO REFINING, MARKETING & SUPPLY COMPANY, a Delaware corporation ("Debtor"), and BANQUE PARIBAS, as Administrative Agent ("Secured Party") for the Issuing Banks and the Lenders parties to the Credit Agreement referred to below. RECITALS A. On April 20, 1994, Tesoro Petroleum Corporation (the "Company"), Texas Commerce Bank National Association, individually and as agent, Banque Paribas, individually and as co-agent and the other financial institutions parties thereto entered into a Credit Agreement (as amended from time to time, the "Prior Credit Agreement"). B. The conditions precedent to the effectiveness of the Credit Agreement included the execution and delivery by Debtor of that certain Security Agreement dated of even date therewith (the "Prior Security Agreement"). C. On even date herewith, the Company, Secured Party, The Bank of Nova Scotia, as Documentation Agent and the other financial institutions parties thereto (the "Lenders") are entering into an Amended and Restated Credit Agreement (as amended from time to time, the "Credit Agreement"). D. Therefore, in view of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Debtor and Secured Party agree to amend and restate the Prior Security Agreement as follows: ARTICLE I Definitions Section 1.01 Terms Defined Above. As used in this Security Agreement, the terms "Company," "Credit Agreement," "Debtor" and "Secured Party" shall have the meanings respectively assigned to them. Section 1.02 Certain Definitions. As used in this Security Agreement, the following terms shall have the following meanings, unless the context otherwise requires: "Accounts" shall mean all accounts (as such term is defined in the Code). "Account Debtor" shall mean any Person liable (whether directly or indirectly, primarily or secondarily) for the payment or performance of any obligations included in the Collateral, whether as an account debtor (as defined in the Code), obligor on an instrument, issuer of documents or securities, guarantor or otherwise. "Code" shall mean the Uniform Commercial Code as presently in effect in the State of Texas, Texas Business and Commerce Code, Chapters 1 through 9. "Collateral" shall mean the following types or items of Property (including Property hereafter acquired by Debtor as well as Property which Debtor now owns or in which Debtor has rights): (a) all of Debtor's Accounts and Inventory; (b) (i) any Property from time to time delivered to or deposited with Secured Party by or for the account of Debtor which is related to any Property referred to in clause (a) of this definition; and (ii) all certificates of title or other documents evidencing ownership or possession of or otherwise relating to any Property referred to in clause (a) of this definition; (c) (i) all goods which were at any time included in the Collateral described in clause (a) of this definition and which are returned to or for the account of Debtor following their sale, lease or other disposition; (ii) all policies of insurance (whether or not required by Secured Party) covering any Property referred to in this definition; and (iii) all proceeds, products, replacements, additions to, substitutions for, accessions of, and Property necessary for the operation of any of the Property referred to in this definition, including, without limitation, insurance payable as a result of loss or damage to any of the Property referred to in this definition, refunds of unearned premiums of any such insurance policy and claims against third parties; (d) all books and records related to any of the Property referred to in this definition, including, without limitation, any and all books of account, customer lists and other records relating in any way to the Collateral described in this definition; (e) all of Debtor's general intangibles (as defined in the Code) which are related (but only those related) to any Property referred to in this definition, including, without limitation, all (i) letters of credit, bonds, guaranties, purchase or sales agreements and other contractual rights, rights to performance, and claims for damages, refunds (including tax refunds) or other monies due or to become due; (ii) orders, franchises, permits, certificates, licenses, consents, exemptions, variances, authorizations or other approvals by any Governmental Authority; (iii) business records, computer tapes and computer software; and (iv) other intangible personal property, whether similar or dissimilar to the Property referred to in clause (a) of this definition; and -2- (f) all of Debtor's chattel paper, documents and instruments (as such terms are defined in the Code) related to or arising out of any Property referred to in clause (a) of this definition. It is expressly contemplated that additional Property may from time to time be pledged, assigned or granted to Secured Party as additional security for the Obligations, and, if so, then the term "Collateral" as used herein shall be deemed for all purposes hereof to include all such additional Property, together with all other Property of the types described above related thereto. It is expressly agreed that Collateral shall not include and shall be exclusive of any equipment. "Event of Default" shall have the meaning assigned such term in Section 6.01 of this Security Agreement. "Inventory" shall mean all inventory (as defined in the Code). "Obligations" shall mean with respect to the Debtor, the Obligations (as defined in the Guaranty Agreement) to the extent the Debtor is liable therefor as provided in the Guaranty Agreement. The Obligations are Senior Debt as such term is defined in that certain Subordination Agreement dated December 15, 1992 among the Company, Tesoro Alaska Petroleum Company and the State of Alaska attached to the Settlement Agreement among the Company, Tesoro Alaska Petroleum Company and the State of Alaska. "Obligor" shall mean the Company and any other Person, other than Debtor, liable (whether directly or indirectly, primarily or secondarily) for the payment or performance of any of the Obligations whether as maker, co-maker, endorser, guarantor, accommodation party, general partner or otherwise; and the term "Obligor" shall specifically include each Guarantor, other than Debtor, named in the Credit Agreement. "Property" shall mean any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "Security Agreement" shall mean this Amended and Restated Security Agreement, as the same may be amended, modified or supplemented from time to time. Section 1.03 Other Defined Terms. Unless otherwise defined herein, all terms beginning with a capital letter which are defined in the Credit Agreement shall have the meanings assigned therein, unless the context hereof requires otherwise. All uncapitalized terms which are defined in the Code shall have their respective meanings as used in the Code, unless the context hereof requires otherwise. -3- ARTICLE II Security Interest Section 2.01 Grant of Security Interest. Debtor hereby assigns and grants to Secured Party, for its benefit and the benefit of the Lenders and the Issuing Banks, a security interest in, lien upon and right of set-off against the Collateral to secure the prompt payment and performance of the Obligations. ARTICLE III Representations and Warranties Debtor represents and warrants to Secured Party, the Issuing Banks and the Lenders (which representations and warranties will survive the creation and payment of the Obligations) that: Section 3.01 First Priority Security Interest. The grant of the security interest in the Collateral pursuant to this Security Agreement creates a valid and perfected first priority security interest in the Collateral, enforceable against Debtor and all third parties and securing payment of the Obligations. Section 3.02 No Filings By Third Parties. No financing statement or other public notice or recording covering the Collateral is on file in any public office (other than any financing statement or other public notice or recording naming Secured Party as the secured party therein), and Debtor will not execute any such financing statement or other public notice or recording so long as any of the Obligations are outstanding. Section 3.03 No Name Changes. Debtor has not, during the preceding five years, entered into any contract, agreement, security instrument or other document using a name other than, or been known by or otherwise used any name other than, the name used by Debtor herein. Section 3.04 Location of Debtor and Collateral. Debtor's chief executive office and Debtor's records concerning the Collateral are located at the address or location set forth on the signature page hereof. The Collateral is located at such address or at the location(s), if any, specified in Exhibit A hereto. Any Collateral not at such location(s) nevertheless remains subject to Secured Party's security interest. Section 3.05 Collateral. All statements or other information provided by Debtor to Secured Party, any Issuing Bank or any Lender with respect to the Collateral is or (in the case of subsequently furnished information) will be when provided correct and complete in all material respects. The delivery at any time by Debtor to Secured Party of additional Collateral or of additional descriptions of Collateral shall constitute a representation and warranty by -4- Debtor to Secured Party hereunder that the representations and warranties of this Article III are correct insofar as they would pertain to such Collateral or the descriptions thereof. Section 3.06 Accounts. (a) Each Account represents the genuine, valid and legally enforceable indebtedness of an Account Debtor arising from the sale, lease or rendition by Debtor of goods or services and is not and will not be subject to contra accounts, set-offs, defenses, counterclaims, allowances or adjustments (other than discounts for prompt payment shown on the invoice), or objections or complaints by the Account Debtor concerning its liability on the Account; and any goods, the sale of which gave rise to an Account, have not been returned or rejected by the Account Debtor or lost or damaged prior to receipt by the Account Debtor. (b) The amount shown as to each Account on Debtor's books is or will be the true and undisputed amount owing and unpaid thereon. Except as disclosed in writing to Secured Party, each Account arose or shall have arisen in the ordinary course of Debtor's business; provided, however, that any Accounts which arose or hereafter arise outside the ordinary course of Debtor's business shall nevertheless be included as part of the Collateral. Debtor has no knowledge of any bankruptcy, insolvency or other action affecting creditors' rights with respect to any Account Debtor. (c) Except as disclosed in writing to Secured Party, each invoice or agreement evidencing the Accounts is or will be due and payable not more than 90 days from the date thereof; provided, however, that any Accounts not so due and payable shall nevertheless be included as part of the Collateral. Section 3.07 Delivery of Documents or Letters of Credit. With respect to any Inventory or other Collateral covered by one or more certificates of title or other documents evidencing ownership or possession thereof, and with respect to any Accounts or other Collateral supported by letters of credit, each of such certificates, documents or letters of credit has been delivered to Secured Party (provided, however, that all certificates, documents and letters of credit referred to in Section 1.02 shall be subject to the security interest created by this Security Agreement irrespective of whether or not such delivery shall have been made). Section 3.08 Ownership of Collateral; Encumbrances; Valid and Binding Agreement. Debtor is the legal and beneficial owner of the Collateral free and clear of any adverse claim, lien, security interest, option or other charge or encumbrance except for the security interest created by this Agreement or as permitted by the Credit Agreement, and Debtor has full right, power and authority to assign and grant a security interest in the Collateral to Secured Party. This Agreement constitutes a legal, valid and binding obligation of Debtor enforceable against Debtor in accordance with its terms. The execution, delivery and performance of this Agreement will not violate the terms of any contract, agreement, law, regulation, order, injunction, judgment, decree or writ to which Debtor is subject and does not require the consent or approval of any other Person. -5- Section 3.09 No Required Consent. No authorization, consent, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body (other than the filing of financing statements) is required for (i) the due execution, delivery and performance by Debtor of this Agreement, (ii) the grant by Debtor of the security interest granted by this Agreement, (iii) the perfection of such security interest or (iv) the exercise by Secured Party of its rights and remedies under this Agreement. ARTICLE IV Covenants and Agreements Debtor covenants and agrees that so long as any part of the Obligations are outstanding: Section 4.01 Change in Location of Collateral or Debtor. Debtor will give Secured Party 30 days' prior written notice of (i) any change in location of the Collateral to a jurisdiction other than Texas, Alaska, California, Oregon or Washington and which would cause the Secured Party to be unperfected in the Collateral, (ii) the opening or closing of any place of Debtor's business or (iii) any change in the location of Debtor's chief executive office or address. Section 4.02 Documents; Collateral in Possession of Third Parties. If certificates of title or other documents evidencing ownership or possession of the Collateral are issued or outstanding, Debtor will cause the security interest of Secured Party to be properly noted thereon and will, forthwith upon receipt, deliver same to Secured Party. If any Collateral is at any time in the possession or control of any warehouseman, bailee, agent or independent contractor, Debtor shall notify such Person of Secured Party's security interest in such Collateral. Upon Secured Party's request, Debtor shall instruct any such Person to hold all such Collateral for Secured Party's account subject to Debtor's instructions, or, if an Event of Default shall have occurred, subject to Secured Party's instructions. Section 4.03 Delivery of Letters of Credit and Instruments; Proceeds. Debtor will deliver each letter of credit, if any, included in the Collateral to Secured Party, in each case forthwith upon receipt by or for the account of Debtor. If any Account becomes evidenced by a promissory note, trade acceptance or any other instrument for the payment of money (other than checks or drafts in payment of Accounts collected by Debtor in the ordinary course of business prior to notification by Secured Party under Section 5.04), Debtor will immediately deliver such instrument to Secured Party appropriately endorsed to Secured Party, as collateral assignee and, regardless of the form of presentment, demand, notice of dishonor, protest and notice of protest with respect thereto, Debtor will remain liable thereon until such instrument is paid in full. Except as permitted by Sections 4.03, 4.08 and 4.09, Debtor will deliver to Secured Party all proceeds from the sale or other disposition of the Collateral promptly upon receipt. If chattel paper, documents or instruments are received as proceeds, which are required to be delivered to Secured Party, they will be, immediately upon receipt, properly endorsed or assigned and delivered to Secured Party as Collateral. -6- Section 4.04 Sale, Disposition or Encumbrance of Collateral. Except (i) as permitted by Section 4.08, or (ii) with the prior written consent of the Majority Lenders, Debtor will not in any way encumber any of the Collateral (or permit or suffer any of the Collateral to be encumbered) or sell, assign, lend, rent, lease or otherwise dispose of or transfer any of the Collateral to or in favor of any Person other than Secured Party. Section 4.05 Intentionally left blank. Section 4.06 Records and Information. (a) Debtor shall keep accurate and complete records of the Collateral (including proceeds). These records shall reflect complete and accurate stock records of the Inventory and all facts concerning each Account. Debtor shall conduct a physical count of the Inventory at such intervals as Secured Party requests and promptly supply Secured Party with a copy of such count accompanied by a report of the value (valued at the lower of cost or market value) of the Inventory. Secured Party may at any time have access to, examine, audit, make extracts from and inspect without hindrance or delay Debtor's records, files and the Collateral. (b) Debtor will promptly furnish such information as Secured Party may from time to time reasonably request regarding (i) the business, affairs or financial condition of Debtor or (ii) the Collateral or Secured Party's rights or remedies with respect thereto. Any balance sheets or financial statements requested by Secured Party pursuant to this Section 4.06(b) shall conform to generally accepted accounting principles. (c) Debtor recognizes that financing statements pertaining to the Collateral will be filed with the offices of the Secretary of State of Texas, the Alaska Department of Natural Resources, the Secretary of State of California, the Secretary of State of Oregon and the Department of Licensing of the State of Washington. Debtor will immediately notify Secured Party of any condition or event that may change the proper location for the filing of any financing statements or other public notice or recordings for the purpose of perfecting a security interest in the Collateral. Without limiting the generality of the foregoing, Debtor will (i) immediately notify Secured Party of any change to a jurisdiction other than as represented in Section 3.04 (A) in the location of Debtor's chief executive office or chief place of business, (B) in the location of the office where Debtor keeps its records concerning the Accounts, or (C) in the "location" of Debtor within the meaning of Section 9-103(c) of the Code; (ii) immediately notify Secured Party of any change in the location of the Collateral to any jurisdiction other than the States of Texas, Alaska, California, Oregon and Washington; and (ii) notify Secured Party 30 days prior to any change in Debtor's name, identity or corporate structure or Tax Identification Number. In any notice furnished pursuant to this paragraph, Debtor will expressly state that the notice is required by this Security Agreement and contains facts that will or may require additional filings of financing statements or other notices for the purpose of continuing perfection of Secured Party's security interest in the Collateral. Debtor will promptly provide written notice to Secured Party of all information which in any way relates to or affects the Collateral generally, Secured Party's rights or remedies with respect thereto, the filing of any -7- financing statement or other public notices or recordings, or the delivery and possession of items of Collateral for the purpose of perfecting a security interest in the Collateral. Section 4.07 Further Assurances. Upon the request of Secured Party, Debtor shall (at Debtor's expense) execute and deliver all such assignments, certificates, financing statements or other documents and give further assurances and do all other acts and things as Secured Party may reasonably request to perfect Secured Party's interest in the Collateral or to protect, enforce or otherwise effect Secured Party's rights and remedies hereunder. Section 4.08 Inventory. Unless an Event of Default has occurred and is continuing and after any applicable notice and cure periods provided for in the Credit Agreement, Debtor may use the Inventory in any lawful manner not inconsistent with this Security Agreement and with the terms of insurance thereon and may sell, lease or otherwise dispose of its Inventory for cash or terms in the ordinary course of business, and Debtor may retain the proceeds of such sales, leases or other dispositions (subject to Section 4.03 and Section 4.09); provided, however, the Inventory shall remain in Debtor's possession and control at all times prior to sale, lease or other disposition at Debtor's address set forth in Section 3.04. Debtor shall bear any risk of loss of the Inventory. Debtor shall not use any item of Inventory in a manner inconsistent with the holding thereof for sale, lease or other disposition in the ordinary course of business or in contravention of the terms of any agreement. Upon the occurrence and continuance of an Event of Default and after any applicable cure period, Debtor shall immediately deliver to Secured Party any checks, cash or other forms of payment which Debtor receives in connection with any Inventory, appropriately endorsed. Section 4.09 Accounts. (a) Prior to notification by Secured Party under Section 6.02(i), Debtor will collect the Accounts in the ordinary course of its business and may retain the proceeds of such collections (subject to Section 4.03). (b) Debtor shall immediately notify Secured Party in writing in the event that any representation given in Article III with respect to any Account ceases to be true and correct in all material respects; such notice specifying other representation(s) that cease to be true and correct and the action, if any, that Debtor proposes to take with respect thereto. (c) Debtor will not modify, extend or substitute any contract, the terms of which shall at any time have given rise to an Account, except in the ordinary course of business or with the prior written consent of Secured Party. Debtor will not re-date any invoice or sale or make sales with an extended payment date beyond that customary in the industry, and in no event longer than 90 days. Debtor shall not adjust, settle, discount or compromise any of the Accounts, except in the ordinary course of business, as permitted by the Credit Agreement or with the prior written consent of Secured Party. -8- (d) Debtor will duly perform or cause to be performed all of Debtor's obligations with respect to the Accounts and the underlying sales of goods or other transactions giving rise to the Accounts. Section 4.10 Condition of Collateral. Debtor will maintain all Collateral in good condition and in accordance with industry standards and practices. Debtor will not misuse, abuse, waste, destroy or endanger the Collateral nor allow it to be used in any manner other than its intended use. Debtor will not use any Collateral in violation of any Governmental Requirement, or suffer it to be so used. Section 4.11 Collateral Separate and Distinct. Debtor shall at all times keep the Collateral, including proceeds, or cause it to be kept (when in the possession of warehousemen, bailees, agents, independent contractors or other third parties), separate and distinct from other Property; provided, however, proceeds of the Collateral may be kept in various concentration accounts of the Parent or the Guarantors. Section 4.12 Change in Debtor's Name or Corporate Structure. Debtor will not change its name, identity or corporate structure (including, without limitation, any merger, consolidation or sale of substantially all of its assets) without notifying Secured Party of such change in writing at least 30 days prior to the effective date of such change. Without the express written consent of Secured Party, however, Debtor will not engage in any other business or transaction under any name other than Debtor's name hereunder. ARTICLE V Rights, Duties, and Powers of Secured Party The following rights, duties and powers of Secured Party are applicable irrespective of whether an Event of Default has occurred and is continuing, but only after having given Debtor at least three (3) days prior notice: Section 5.01 Attorney-in-Fact. Secured Party is hereby fully authorized and empowered (without the necessity of any further consent or authorization from Debtor) and the right is expressly granted to Secured Party, and Debtor hereby irrevocably appoints and makes Secured Party as Debtor's attorney-in-fact, with full authority in the place and stead of Debtor and in the name of Debtor or otherwise, from time to time in Secured Party's discretion, but at Debtor's cost and expense to: (a) obtain, adjust, sell and cancel any insurance with respect to the Collateral and endorse any draft drawn by insurers of the Collateral, and Secured Party may apply any proceeds or unearned premiums of such insurance to the Obligations (whether or not due); and -9- (b) take any action and to execute any assignment, certificate, financing statement, notification, document or instrument which Secured Party may deem necessary or advisable to accomplish the purposes of this Security Agreement, including, without limitation, to receive, endorse and collect all instruments made payable to Debtor representing any payment or other distribution in respect of the Collateral or any part thereof and to give full discharge for the same. Section 5.02 Transfer of Collateral. Secured Party may transfer any or all of the Obligations, and upon any such transfer, Secured Party may transfer its interest in any or all of the Collateral and shall be fully discharged thereafter from all liability therefor. Any transferee of the Collateral shall be vested with all rights, powers and remedies of Secured Party hereunder. Section 5.03 Purchase Money Financing. To the extent that the Lenders have advanced or will advance funds to or for the account of Debtor to enable Debtor to purchase or otherwise acquire specific types or items of Collateral, the Lenders may at their option pay such funds (i) directly to the Person from whom Debtor will make such purchase or acquire such rights or (ii) to Debtor, in which case Debtor covenants promptly to pay the same to such Person and forthwith furnish to Secured Party, on request, evidence satisfactory to Secured Party that such payment has been made from the funds so provided by Secured Party for such payment. Section 5.04 Proceeds. If so requested by Debtor, any payments received by Secured Party on the Accounts or as proceeds of other Collateral shall upon final collection by Secured Party be credited towards payment of the Obligations. In the absence of such request from Debtor, and until so requested, Secured Party may hold such collected payments as cash Collateral (and Secured Party may at any time place a hold or freeze on all or a part of any deposit account of Debtor containing deposits of such payments up to the amount of such deposits). Section 5.05 Discharge Encumbrances. Secured Party may, at its option, discharge any taxes, Liens, security interests or other encumbrances at any time levied or placed on the Collateral, may pay for insurance on the Collateral and may pay for the maintenance and preservation of the Collateral. Debtor agrees to reimburse Secured Party upon demand for any payment so made, plus interest on the portion thereof from time to time remaining unpaid from the date of Secured Party's demand at the rate for overdue principal and interest set forth in Section 2.06(c) of the Credit Agreement. Section 5.06 Disclaimer of Certain Duties. (a) The powers conferred upon Secured Party by this Security Agreement are to protect the interest of Secured Party, the Issuing Banks and the Lenders in the Collateral and shall not impose any duty upon Secured Party, the Issuing Banks or any Lender to exercise any such powers. Debtor hereby agrees that Secured Party, the Issuing Banks and the Lenders shall not be liable for, nor shall the indebtedness evidenced by the Obligations be diminished by, -10- Secured Party's delay or failure to collect upon, foreclose, sell, take possession of or otherwise obtain value for the Collateral. (b) Except as provided in the Credit Agreement, Secured Party shall be under no duty whatsoever to make or give any presentment, notice of dishonor, protest, demand for performance, notice of non-performance, notice of intent to accelerate, notice of acceleration, or other notice or demand in connection with any Collateral or the Obligations, or to take any steps necessary to preserve any rights against any Obligor, Account Debtor or other Person. Section 5.07 Modification of Obligations; Other Security. Debtor waives (i) any and all notice of acceptance, creation, modification, rearrangement, renewal or extension for any period of any instrument executed by any Obligor in connection with the Obligations and (ii) any defense of any Obligor by reason of disability, lack of authorization, cessation of the liability of any Obligor or for any other reason. Debtor authorizes Secured Party, without notice or demand and without any reservation of rights against Debtor and without affecting Debtor's liability hereunder or on the Obligations, from time to time to (x) take and hold other Property, other than the Collateral, as security for the Obligations, and exchange, enforce, waive and release any or all of the Collateral, (y) apply the Collateral in the manner permitted by this Security Agreement and (z) renew, extend for any period, accelerate, amend or modify, supplement, enforce, compromise, settle, waive or release the obligations of any Obligor or any instrument or agreement of such other Person with respect to any or all of the Obligations or Collateral. Section 5.08 Waiver of Notice; Demand and Presentment; etc. Except for any notice required under the Credit Agreement, Debtor hereby waives any demand, notice of default, notice of acceleration of the maturity of the Obligations, notice of intent to accelerate the maturity of the Obligations, presentment, protest and notice of dishonor as to any action taken by Secured Party in connection with this Security Agreement, or any instrument or document. Debtor waives any right of marshaling in respect of any and all Collateral, and waives any right to require Secured Party, any Issuing Bank or any Lender to proceed against any Obligor, Account Debtor or other Person, exhaust any Collateral or enforce any other remedy which Secured Party, any Issuing Bank or any Lender now has or may hereafter have against any Obligor or other Person. Section 5.09 Non-judicial Enforcement. To the fullest extent allowed by applicable law, Secured Party may enforce its rights hereunder without prior judicial process or judicial hearing, and to the fullest extent permitted by law Debtor expressly waives any and all legal rights which might otherwise require Secured Party to enforce its rights by judicial process. -11- ARTICLE VI Events of Default Section 6.01 Events of Default. An Event of Default under the Credit Agreement shall constitute an "Event of Default" under this Security Agreement. Section 6.02 Remedies. Upon the occurrence and during the continuance of any Event of Default, Secured Party may take any or all of the following actions without notice (except where expressly required under the Credit Agreement or below) or demand to Debtor: (a) Declare all or part of the indebtedness pursuant to the Obligations immediately due and payable and enforce payment of the same by Debtor or any Obligor. (b) Take possession of the Collateral, or at Secured Party's request Debtor shall, at Debtor's cost, assemble the Collateral and make it available at a location to be specified by Secured Party which is reasonably convenient to Debtor and Secured Party. In any event, Debtor shall bear the risk of accidental loss or damage to or diminution in value of the Collateral, and Secured Party shall have no liability whatsoever for failure to obtain or maintain insurance, nor to determine whether any insurance ever in force is adequate as to amount or as to risk insured. (c) Sell or lease, in one or more sales or leases and in one or more parcels, or otherwise dispose of any or all of the Collateral in its then condition or in any other commercially reasonable manner as Secured Party may elect, in a public or private transaction, at any location as deemed reasonable by Secured Party (including, without limitation, Debtor's premises), either for cash or credit or for future delivery at such price as Secured Party may deem fair, and (unless prohibited by the Code, as adopted in any applicable jurisdiction) Secured Party, any Issuing Bank or any Lender may be the purchaser of any or all Collateral so sold and may apply upon the purchase price therefor any Obligations secured hereby. Any such sale or transfer by Secured Party either to itself or to any other Person shall be absolutely free from any claim of right by Debtor, including any equity or right of redemption, stay or appraisal which Debtor has or may have under any rule of law, regulation or statute now existing or hereafter adopted. Upon any such sale or transfer, Secured Party shall have the right to deliver, assign and transfer to the purchaser or transferee thereof the Collateral so sold or transferred. It shall not be necessary that the Collateral or any part thereof be present at the location of any such sale or transfer. Secured Party may, at its discretion, provide for a public sale, and any such public sale shall be held at such time or times within ordinary business hours and at such place or places as Secured Party may fix in the notice of such sale. Secured Party shall not be obligated to make any sale pursuant to any such notice. Secured Party may, without notice or publication, adjourn any public or private sale by announcement at any time and place fixed for such sale, and such sale may be made at any time or place to which the same may be so adjourned. In the event any sale or transfer hereunder is not -12- completed or is defective in the opinion of Secured Party, such sale or transfer shall not exhaust the rights of Secured Party hereunder, and Secured Party shall have the right to cause one or more subsequent sales or transfers to be made hereunder. In the event that any of the Collateral is sold or transferred on credit, or to be held by Secured Party for future delivery to a purchaser or transferee, the Collateral so sold or transferred may be retained by Secured Party until the purchase price or other consideration is paid by the purchaser or transferee thereof, but in the event that such purchaser or transferee fails to pay for the Collateral so sold or transferred or to take delivery thereof, neither Secured Party, any Issuing Bank nor any Lender shall incur any liability in connection therewith. If only part of the Collateral is sold or transferred such that the Obligations remain outstanding (in whole or in part), Secured Party's rights and remedies hereunder shall not be exhausted, waived or modified, and Secured Party is specifically empowered to make one or more successive sales or transfers until all the Collateral shall be sold or transferred and all the Obligations are paid. In the event that Secured Party elects not to sell the Collateral, Secured Party retains its rights to lease or otherwise dispose of or utilize the Collateral or any part or parts thereof in any manner authorized or permitted by law or in equity, and to apply the proceeds of the same towards payment of the Obligations. Each and every method of disposition of the Collateral described in this Section 6.02(c) or in Section 6.02(f) shall constitute disposition in a commercially reasonable manner. (d) Take possession of all books and records of Debtor pertaining to the Collateral. Secured Party shall have the authority to enter upon any real or immoveable property or improvements thereon in order to obtain any such books or records, or any Collateral located thereon, and remove the same therefrom without liability. (e) Apply proceeds of the disposition of the Collateral to the Obligations in any manner elected by Secured Party and permitted by the Code or otherwise permitted by law or in equity. Such application may include, without limitation, the reasonable expenses of retaking, holding, preparing for sale or other disposition, and the reasonable attorneys' fees and legal expenses incurred by Secured Party, the Issuing Banks and the Lenders. (f) Appoint any Person as agent to perform any act or acts necessary or incident to any sale or transfer by Secured Party of the Collateral. Additionally, any sale or transfer hereunder may be conducted by an auctioneer or any officer or agent of Secured Party. (g) Apply and set-off (i) any deposits of Debtor now or hereafter held by Secured Party, the Issuing Banks and the Lenders; (ii) all claims of Debtor against Secured Party, now or hereafter existing; (iii) any other Property, rights or interests of Debtor which come into the possession or custody or under the control of Secured Party; and (iv) the proceeds of any of the foregoing as if the same were included in the Collateral. Secured Party agrees to notify Debtor promptly after any such set-off or -13- application; provided, however, the failure of Secured Party to give any notice shall not affect the validity of such set-off or application. (h) With respect to the Collateral, receive, change the address for delivery, open and dispose of mail addressed to Debtor, and to execute, assign and endorse negotiable and other instruments for the payment of money, documents of title or other evidences of payment, shipment or storage for any form of Collateral on behalf of and in the name of Debtor. (i) Notify or require Debtor to notify Account Debtors that the Accounts have been assigned to Secured Party and direct such Account Debtors to make payments on the Accounts directly to Secured Party. To the extent Secured Party does not so elect, Debtor shall continue to collect and retain the Accounts. Secured Party or its designee shall also have the right, in its own name or in the name of Debtor, to do any of the following: (i) to demand, collect, receipt for, settle, compromise any amounts due, give acquittances for, prosecute or defend any action which may be in relation to any monies due or to become due by virtue of, the Accounts; (ii) to sell, transfer or assign or otherwise deal in the Accounts or the proceeds thereof or the related goods, as fully and effectively as if Secured Party were the absolute owner thereof; (iii) to extend the time of payment of any of the Accounts, to grant waivers and make any allowance or other adjustment with reference thereto; (iv) to endorse the name of Debtor on notes, checks or other evidences of payments on Collateral that may come into possession of Secured Party; (v) to take control of cash and other proceeds of any Collateral; (vi) to sign the name of Debtor on any invoice or bill of lading relating to any Collateral, or any drafts against Account Debtors or other persons making payment with respect to Collateral; (vii) to send a request for verification of Accounts to any Account Debtor; and (viii) to do all other acts and things necessary to carry out the intent of this Agreement. (j) Exercise all other rights and remedies permitted by law or in equity. Section 6.03 Liability for Deficiency. If any sale or other disposition of Collateral by Secured Party or any Issuing Bank or any other action of Secured Party, any Issuing Bank or any Lender hereunder results in reduction of the Obligations, such action will not release Debtor from its liability to Secured Party, the Issuing Banks and the Lenders for any unpaid Obligations, including costs, charges and expenses incurred in the liquidation of Collateral, together with interest thereon, and the same shall be immediately due and payable to Secured Party at Secured Party's address set forth on the signature page of this Security Agreement. Section 6.04 Reasonable Notice. If any applicable provision of any law requires Secured Party any Issuing Bank or any Lender to give reasonable notice of any sale or disposition or other action, Debtor hereby agrees that fifteen (15) days' prior written notice shall constitute reasonable notice thereof. Such notice, in the case of public sale, shall state the time and place fixed for such sale and, in the case of private sale, the time after which such sale is to be made. -14- Section 6.05 Account Debtors. Any payment or settlement of an Account made by an Account Debtor will be, to the extent of such payment or to the extent provided under such settlement, a release, discharge and acquittance of the Account Debtor with respect to such Account, and Debtor shall take any action as may be required by Secured Party in connection therewith. No Account Debtor on any Account will ever be bound to make inquiry as to the termination of this Agreement or the rights of Secured Party to act hereunder, but shall be fully protected by Debtor in making payment directly to Secured Party. ARTICLE VIII Miscellaneous Section 7.01 Notices. Any notice required or permitted to be given under or in connection with this Security Agreement shall be given in accordance with the notice provisions of the Guaranty Agreement. Section 7.02 Amendments and Waivers. Secured Party's, any Issuing Bank's or any Lender's acceptance of partial or delinquent payments or any forbearance, failure or delay by the Secured Party in exercising any right, power or remedy hereunder shall not be deemed a waiver of any obligation of Debtor or any Obligor, or of any right, power or remedy of Secured Party; and no partial exercise of any right, power or remedy shall preclude any other or further exercise thereof. Secured Party may remedy any Event of Default hereunder or in connection with the Obligations without waiving the Event of Default so remedied. Debtor hereby agrees that if Secured Party agrees to a waiver of any provision hereunder, or an exchange of or release of the Collateral, or the addition or release of any Obligor, any such action shall not constitute a waiver of any of Secured Party's other rights or of Debtor's obligations hereunder. This Security Agreement may be amended only by the manner set forth in Section 9.02 of the Credit Agreement by an instrument in writing executed jointly by Debtor and Secured Party and may be supplemented only by documents delivered or to be delivered in accordance with the express terms hereof. Section 7.03 Copy as Financing Statement. A photocopy or other reproduction of this Security Agreement or any financing statement covering the Collateral is sufficient as a financing statement, and the same may be filed with any appropriate filing authority for the purpose of perfecting Secured Party's security interest in the Collateral. Section 7.04 Possession of Collateral. Secured Party shall be deemed to have possession of any Collateral in transit to it or set apart for it (or, in either case, any of its agents, affiliates or correspondents). Section 7.05 Redelivery of Collateral. If any sale or transfer of Collateral by Secured Party results in full satisfaction of the Obligations, and after such sale or transfer and discharge there remains a surplus of proceeds, Secured Party will deliver to Debtor such excess proceeds -15- in a commercially reasonable time; provided, however, that neither Secured Party, any Issuing Bank nor any Lender shall be liable for any interest, cost or expense in connection with any delay in delivering such proceeds to Debtor. Section 7.06 Governing Law; Jurisdiction. This Security Agreement and the security interest granted hereby shall be construed in accordance with and governed by the laws of the State of Texas (except to the extent that the laws of any other jurisdiction govern the perfection and priority of the security interests granted hereby). Debtor consents to and submits to in personam jurisdiction and venue in the state district and county courts of the county wherein Secured Party's offices are located at the address specified on the signature page hereof, and in the Federal District Courts of the district wherein such offices of Secured Party are located. This submission to jurisdiction is nonexclusive and does not preclude Secured Party, any Issuing Bank or any Lender from obtaining jurisdiction over Debtor or the Collateral in any court otherwise having jurisdiction. Section 7.07 Cumulative and Other Rights. The rights, powers and remedies of Secured Party hereunder are in addition to all rights, powers and remedies given by law or in equity. The exercise by Secured Party, any Issuing Bank or any Lender of any one or more of the rights, powers and remedies herein shall not be construed as a waiver of any other rights, powers and remedies, including, without limitation, any other rights of set-off. If any of the Obligations are given in renewal, extension for any period or rearrangement, or applied toward the payment of debt secured by any lien, Secured Party shall be, and is hereby, subrogated to all the rights, titles, interests and liens securing the debt so renewed, extended, rearranged or paid. Section 7.08 Subrogation. Until the Obligations have been paid in full, Debtor hereby waives any claim, right or remedy which Debtor may now have or hereafter acquire against the Company which arises out of this Security Agreement or from the performance by Debtor hereunder, including without limitation, any claim, remedy or right of subrogation, reimbursement, exoneration, indemnification, or participation in any such claim, right or remedy of any other Person against the Company; provided, however, notwithstanding the foregoing, Debtor reserves its rights of contribution and reimbursement, if any, from any Obligor. Until the Obligations have been paid in full, Debtor further waives any benefit of any right to participate in any security now or hereafter held by Secured Party, the Issuing Banks and/or the Lenders. Section 7.09 Continuing Security Agreement. (a) This Security Agreement shall constitute a continuing security agreement, and all representations and warranties, covenants and agreements shall, as applicable, apply to all future as well as existing transactions. Provisions of this Security Agreement, unless they are by their terms exclusive, shall be in addition to other agreements between the parties. (b) Except as may be expressly applicable pursuant to Section 9.505 of the Code, no action taken or omission to act by Secured Party, the Issuing Banks or the Lenders hereunder, -16- including, without limitation, any action taken or inaction pursuant to Section 6.02, shall be deemed to constitute a retention of the Collateral in satisfaction of the Obligations or otherwise to be in full satisfaction of the Obligations, and the Obligations shall remain in full force and effect, until Secured Party, the Issuing Banks and the Lenders shall have applied payments (including, without limitation, collections from Collateral) towards the Obligations in the full amount then outstanding or until such subsequent time as is hereinafter provided in subsection (c) below. (c) To the extent that any payments on the Obligations or proceeds of the Collateral are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, debtor in possession, receiver or other Person under any bankruptcy law, common law or equitable cause, then to such extent the Obligations so satisfied shall be revived and continue as if such payment or proceeds had not been received by Secured Party, the Issuing Banks or the Lenders, and Secured Party's, the Issuing Banks' and the Lenders' security interests, rights, powers and remedies hereunder shall continue in full force and effect. In such event, this Security Agreement shall be automatically reinstated if it shall theretofore have been terminated pursuant to Section 7.10. (d) In the event that the Obligations are structured such that there are times when no Indebtedness is owing thereunder, this Security Agreement shall remain valid and in full force and effect as to all subsequent indebtedness included in the Obligations, provided Secured Party has not in the interim period executed a written release or termination statement or returned possession of or reassigned the Collateral to Debtor. Section 7.10 Termination. The grant of a security interest hereunder and all of Secured Party's, the Issuing Banks' and the Lenders' rights, powers and remedies in connection therewith shall remain in full force and effect until Secured Party has retransferred and delivered all Collateral in its possession to Debtor, and executed a written release or termination statement and reassigned to Debtor without recourse or warranty any remaining Collateral and all rights conveyed hereby. Upon the complete payment of the Obligations and the compliance by Debtor with all covenants and agreements hereof, Secured Party, at the written request and expense of Debtor, will release, reassign and transfer the Collateral to Debtor and declare this Security Agreement to be of no further force or effect. Notwithstanding the foregoing, the provisions of Section 7.09(c) shall survive the termination of this Security Agreement. Section 7.11 Counterparts, Effectiveness. This Security Agreement may be executed in two or more counterparts. Each counterpart is deemed an original, but all such counterparts taken together constitute one and the same instrument. This Security Agreement becomes effective upon the execution hereof by Debtor and delivery of the same to Secured Party, and it is not necessary for Secured Party, the Issuing Banks or any Lender to execute any acceptance hereof or otherwise signify or express its acceptance hereof. Section 7.12 Headings Descriptive. All titles or headings to articles, sections, subsections or other divisions of this Security Agreement or the exhibits hereto are only for the -17- convenience of the parties and shall not be construed to have any effect or meaning with respect to the other content of such articles, sections, subsections or other divisions, such other content being controlling as to the agreement between the parties hereto. Section 7.13 Delivery of Copy/Waiver. The Debtor hereby acknowledges receiving a copy of this Security Agreement. The Debtor waives all rights to receive from the Secured Party a copy of any financing statement or financing change statement filed or registered or verification statement issued at any time in respect of this Security Agreement. Section 7.14 Amendment and Restatement. This Security Agreement amends and restates in its entirety the Prior Security Agreement and all its terms, provisions and conditions. Debtor acknowledges that the liens, claims, rights, titles, interests and benefits created and granted by the Prior Security Agreement continue to exist, remain valid and subsisting, shall not be impaired or released hereby, shall remain in full force and effect and are hereby renewed, extended, carried forward and conveyed as security for the Obligations. -18- DEBTOR: TESORO REFINING, MARKETING & SUPPLY COMPANY By: /s/ G. A. Wright Name: G. A. Wright Title: Vice President and Treasurer Address of Chief Executive Office and Location of the Collateral: 8700 Tesoro Drive San Antonio, Texas 78217 SECURED PARTY: BANQUE PARIBAS, AS ADMINISTRATIVE AGENT By: /s/ Brian Malone Name: Brian Malone Title: Vice President By: /s/ Barton D. Schouest Name: Barton D. Schouest Title: Group Vice President Address: 1200 Smith Street, Suite 3100 Houston, Texas 77002 -19- EX-4.6 7 SECURITY AGREEMENT SECURITY AGREEMENT (Accounts and Inventory) Between KENAI PIPE LINE COMPANY and BANQUE PARIBAS, AS ADMINISTRATIVE AGENT June 7, 1996 SECURITY AGREEMENT Accounts and Inventory THIS SECURITY AGREEMENT is made as of June 7, 1996, between KENAI PIPE LINE COMPANY, a Delaware corporation ("Debtor"), and BANQUE PARIBAS, as Administrative Agent ("Secured Party") for the Issuing Banks and the Lenders parties to the Credit Agreement referred to below. RECITALS A. On even date herewith, Tesoro Petroleum Corporation (the "Company"), Secured Party, The Bank of Nova Scotia, as Documentation Agent and the other financial institutions parties thereto (the "Lenders") are entering into an Amended and Restated Credit Agreement (as amended from time to time, the "Credit Agreement"). B. The conditions precedent to the effectiveness of the Credit Agreement include the execution and delivery by Debtor of this Security Agreement, and Debtor has agreed to enter into this Security Agreement. C. Therefore, (i) in order to comply with the terms and conditions of the Credit Agreement, (ii) to induce the Lenders at any time from time to time to loan monies and the Issuing Banks to issue Letters of Credit, with or without security to or for the account of the Company in accordance with the terms of the Credit Agreement, (iii) at the special insistence and request of the Agent, the Issuing Banks and the Lenders, and (iv) for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Debtor agrees with Secured Party as follows: ARTICLE I Definitions Section 1.01 Terms Defined Above. As used in this Security Agreement, the terms "Company," "Credit Agreement," "Debtor" and "Secured Party" shall have the meanings respectively assigned to them. Section 1.02 Certain Definitions. As used in this Security Agreement, the following terms shall have the following meanings, unless the context otherwise requires: "Accounts" shall mean all accounts (as such term is defined in the Code). "Account Debtor" shall mean any Person liable (whether directly or indirectly, primarily or secondarily) for the payment or performance of any obligations included in -1- the Collateral, whether as an account debtor (as defined in the Code), obligor on an instrument, issuer of documents or securities, guarantor or otherwise. "Code" shall mean the Uniform Commercial Code as presently in effect in the State of Texas, Texas Business and Commerce Code, Chapters 1 through 9. "Collateral" shall mean the following types or items of Property (including Property hereafter acquired by Debtor as well as Property which Debtor now owns or in which Debtor has rights): (a) all of Debtor's Accounts and Inventory; (b) (i) any Property from time to time delivered to or deposited with Secured Party by or for the account of Debtor which is related to any Property referred to in clause (a) of this definition; and (ii) all certificates of title or other documents evidencing ownership or possession of or otherwise relating to any Property referred to in clause (a) of this definition; (c) (i) all goods which were at any time included in the Collateral described in clause (a) of this definition and which are returned to or for the account of Debtor following their sale, lease or other disposition; (ii) all policies of insurance (whether or not required by Secured Party) covering any Property referred to in this definition; and (iii) all proceeds, products, replacements, additions to, substitutions for, accessions of, and Property necessary for the operation of any of the Property referred to in this definition, including, without limitation, insurance payable as a result of loss or damage to any of the Property referred to in this definition, refunds of unearned premiums of any such insurance policy and claims against third parties; (d) all books and records related to any of the Property referred to in this definition, including, without limitation, any and all books of account, customer lists and other records relating in any way to the Collateral described in this definition; (e) all of Debtor's general intangibles (as defined in the Code) which are related (but only those related) to any Property referred to in this definition, including, without limitation, all (i) letters of credit, bonds, guaranties, purchase or sales agreements and other contractual rights, rights to performance, and claims for damages, refunds (including tax refunds) or other monies due or to become due; (ii) orders, franchises, permits, certificates, licenses, consents, exemptions, variances, authorizations or other approvals by any Governmental Authority; (iii) business records, computer tapes and computer software; and (iv) other intangible personal property, whether similar or dissimilar to the Property referred to in clause (a) of this definition; and -2- (f) all of Debtor's chattel paper, documents and instruments (as such terms are defined in the Code) related to or arising out of any Property referred to in clause (a) of this definition. It is expressly contemplated that additional Property may from time to time be pledged, assigned or granted to Secured Party as additional security for the Obligations, and, if so, then the term "Collateral" as used herein shall be deemed for all purposes hereof to include all such additional Property, together with all other Property of the types described above related thereto. It is expressly agreed that Collateral shall not include and shall be exclusive of any equipment. "Event of Default" shall have the meaning assigned such term in Section 6.01 of this Security Agreement. "Inventory" shall mean all inventory (as defined in the Code). "Obligations" shall mean with respect to the Debtor, the Obligations (as defined in the Guaranty Agreement) to the extent the Debtor is liable therefor as provided in the Guaranty Agreement. The Obligations are Senior Debt as such term is defined in that certain Subordination Agreement dated December 15, 1992 among the Company, Tesoro Alaska Petroleum Company and the State of Alaska attached to the Settlement Agreement among the Company, Tesoro Alaska Petroleum Company and the State of Alaska. "Obligor" shall mean the Company and any other Person, other than Debtor, liable (whether directly or indirectly, primarily or secondarily) for the payment or performance of any of the Obligations whether as maker, co-maker, endorser, guarantor, accommodation party, general partner or otherwise; and the term "Obligor" shall specifically include each Guarantor, other than Debtor, named in the Credit Agreement. "Property" shall mean any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "Security Agreement" shall mean this Security Agreement, as the same may be amended, modified or supplemented from time to time. Section 1.03 Other Defined Terms. Unless otherwise defined herein, all terms beginning with a capital letter which are defined in the Credit Agreement shall have the meanings assigned therein, unless the context hereof requires otherwise. All uncapitalized terms which are defined in the Code shall have their respective meanings as used in the Code, unless the context hereof requires otherwise. -3- ARTICLE II Security Interest Section 2.01 Grant of Security Interest. Debtor hereby assigns and grants to Secured Party, for its benefit and the benefit of the Lenders and the Issuing Banks, a security interest in, lien upon and right of set-off against the Collateral to secure the prompt payment and performance of the Obligations. ARTICLE III Representations and Warranties Debtor represents and warrants to Secured Party, the Issuing Banks and the Lenders (which representations and warranties will survive the creation and payment of the Obligations) that: Section 3.01 First Priority Security Interest. The grant of the security interest in the Collateral pursuant to this Security Agreement creates a valid and perfected first priority security interest in the Collateral, enforceable against Debtor and all third parties and securing payment of the Obligations. Section 3.02 No Filings By Third Parties. No financing statement or other public notice or recording covering the Collateral is on file in any public office (other than any financing statement or other public notice or recording naming Secured Party as the secured party therein), and Debtor will not execute any such financing statement or other public notice or recording so long as any of the Obligations are outstanding. Section 3.03 No Name Changes. Debtor has not, during the preceding five years, entered into any contract, agreement, security instrument or other document using a name other than, or been known by or otherwise used any name other than, the name used by Debtor herein. Section 3.04 Location of Debtor and Collateral. Debtor's chief executive office and Debtor's records concerning the Collateral are located at the address or location set forth on the signature page hereof. The Collateral is located at such address or at the location(s), if any, specified in Exhibit A hereto. Any Collateral not at such location(s) nevertheless remains subject to Secured Party's security interest. Section 3.05 Collateral. All statements or other information provided by Debtor to Secured Party, any Issuing Bank or any Lender with respect to the Collateral is or (in the case of subsequently furnished information) will be when provided correct and complete in all material respects. The delivery at any time by Debtor to Secured Party of additional Collateral or of additional descriptions of Collateral shall constitute a representation and warranty by -4- Debtor to Secured Party hereunder that the representations and warranties of this Article III are correct insofar as they would pertain to such Collateral or the descriptions thereof. Section 3.06 Accounts. (a) Each Account represents the genuine, valid and legally enforceable indebtedness of an Account Debtor arising from the sale, lease or rendition by Debtor of goods or services and is not and will not be subject to contra accounts, set-offs, defenses, counterclaims, allowances or adjustments (other than discounts for prompt payment shown on the invoice), or objections or complaints by the Account Debtor concerning its liability on the Account; and any goods, the sale of which gave rise to an Account, have not been returned or rejected by the Account Debtor or lost or damaged prior to receipt by the Account Debtor. (b) The amount shown as to each Account on Debtor's books is or will be the true and undisputed amount owing and unpaid thereon. Except as disclosed in writing to Secured Party, each Account arose or shall have arisen in the ordinary course of Debtor's business; provided, however, that any Accounts which arose or hereafter arise outside the ordinary course of Debtor's business shall nevertheless be included as part of the Collateral. Debtor has no knowledge of any bankruptcy, insolvency or other action affecting creditors' rights with respect to any Account Debtor. (c) Except as disclosed in writing to Secured Party, each invoice or agreement evidencing the Accounts is or will be due and payable not more than 90 days from the date thereof; provided, however, that any Accounts not so due and payable shall nevertheless be included as part of the Collateral. Section 3.07 Delivery of Documents or Letters of Credit. With respect to any Inventory or other Collateral covered by one or more certificates of title or other documents evidencing ownership or possession thereof, and with respect to any Accounts or other Collateral supported by letters of credit, each of such certificates, documents or letters of credit has been delivered to Secured Party (provided, however, that all certificates, documents and letters of credit referred to in Section 1.02 shall be subject to the security interest created by this Security Agreement irrespective of whether or not such delivery shall have been made). Section 3.08 Ownership of Collateral; Encumbrances; Valid and Binding Agreement. Debtor is the legal and beneficial owner of the Collateral free and clear of any adverse claim, lien, security interest, option or other charge or encumbrance except for the security interest created by this Agreement or as permitted by the Credit Agreement, and Debtor has full right, power and authority to assign and grant a security interest in the Collateral to Secured Party. This Agreement constitutes a legal, valid and binding obligation of Debtor enforceable against Debtor in accordance with its terms. The execution, delivery and performance of this Agreement will not violate the terms of any contract, agreement, law, regulation, order, injunction, judgment, decree or writ to which Debtor is subject and does not require the consent or approval of any other Person. -5- Section 3.09 No Required Consent. No authorization, consent, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body (other than the filing of financing statements) is required for (i) the due execution, delivery and performance by Debtor of this Agreement, (ii) the grant by Debtor of the security interest granted by this Agreement, (iii) the perfection of such security interest or (iv) the exercise by Secured Party of its rights and remedies under this Agreement. ARTICLE IV Covenants and Agreements Debtor covenants and agrees that so long as any part of the Obligations are outstanding: Section 4.01 Change in Location of Collateral or Debtor. Debtor will give Secured Party 30 days' prior written notice of (i) any change in location of the Collateral to a jurisdiction other than Texas, Alaska, California, Oregon or Washington and which would cause the Secured Party to be unperfected in the Collateral, (ii) the opening or closing of any place of Debtor's business or (iii) any change in the location of Debtor's chief executive office or address. Section 4.02 Documents; Collateral in Possession of Third Parties. If certificates of title or other documents evidencing ownership or possession of the Collateral are issued or outstanding, Debtor will cause the security interest of Secured Party to be properly noted thereon and will, forthwith upon receipt, deliver same to Secured Party. If any Collateral is at any time in the possession or control of any warehouseman, bailee, agent or independent contractor, Debtor shall notify such Person of Secured Party's security interest in such Collateral. Upon Secured Party's request, Debtor shall instruct any such Person to hold all such Collateral for Secured Party's account subject to Debtor's instructions, or, if an Event of Default shall have occurred, subject to Secured Party's instructions. Section 4.03 Delivery of Letters of Credit and Instruments; Proceeds. Debtor will deliver each letter of credit, if any, included in the Collateral to Secured Party, in each case forthwith upon receipt by or for the account of Debtor. If any Account becomes evidenced by a promissory note, trade acceptance or any other instrument for the payment of money (other than checks or drafts in payment of Accounts collected by Debtor in the ordinary course of business prior to notification by Secured Party under Section 5.04), Debtor will immediately deliver such instrument to Secured Party appropriately endorsed to Secured Party, as collateral assignee and, regardless of the form of presentment, demand, notice of dishonor, protest and notice of protest with respect thereto, Debtor will remain liable thereon until such instrument is paid in full. Except as permitted by Sections 4.03, 4.08 and 4.09, Debtor will deliver to Secured Party all proceeds from the sale or other disposition of the Collateral promptly upon receipt. If chattel paper, documents or instruments are received as proceeds, which are required to be delivered to Secured Party, they will be, immediately upon receipt, properly endorsed or assigned and delivered to Secured Party as Collateral. -6- Section 4.04 Sale, Disposition or Encumbrance of Collateral. Except (i) as permitted by Section 4.08, or (ii) with the prior written consent of the Majority Lenders, Debtor will not in any way encumber any of the Collateral (or permit or suffer any of the Collateral to be encumbered) or sell, assign, lend, rent, lease or otherwise dispose of or transfer any of the Collateral to or in favor of any Person other than Secured Party. Section 4.05 Intentionally left blank. Section 4.06 Records and Information. (a) Debtor shall keep accurate and complete records of the Collateral (including proceeds). These records shall reflect complete and accurate stock records of the Inventory and all facts concerning each Account. Debtor shall conduct a physical count of the Inventory at such intervals as Secured Party requests and promptly supply Secured Party with a copy of such count accompanied by a report of the value (valued at the lower of cost or market value) of the Inventory. Secured Party may at any time have access to, examine, audit, make extracts from and inspect without hindrance or delay Debtor's records, files and the Collateral. (b) Debtor will promptly furnish such information as Secured Party may from time to time reasonably request regarding (i) the business, affairs or financial condition of Debtor or (ii) the Collateral or Secured Party's rights or remedies with respect thereto. Any balance sheets or financial statements requested by Secured Party pursuant to this Section 4.06(b) shall conform to generally accepted accounting principles. (c) Debtor recognizes that financing statements pertaining to the Collateral will be filed with the offices of the Secretary of State of Texas, the Alaska Department of Natural Resources, the Secretary of State of California, the Secretary of State of Oregon and the Department of Licensing of the State of Washington. Debtor will immediately notify Secured Party of any condition or event that may change the proper location for the filing of any financing statements or other public notice or recordings for the purpose of perfecting a security interest in the Collateral. Without limiting the generality of the foregoing, Debtor will (i) immediately notify Secured Party of any change to a jurisdiction other than as represented in Section 3.04 (A) in the location of Debtor's chief executive office or chief place of business, (B) in the location of the office where Debtor keeps its records concerning the Accounts, or (C) in the "location" of Debtor within the meaning of Section 9-103(c) of the Code; (ii) immediately notify Secured Party of any change in the location of the Collateral to any jurisdiction other than the States of Texas, Alaska, California, Oregon and Washington; and (ii) notify Secured Party 30 days prior to any change in Debtor's name, identity or corporate structure or Tax Identification Number. In any notice furnished pursuant to this paragraph, Debtor will expressly state that the notice is required by this Security Agreement and contains facts that will or may require additional filings of financing statements or other notices for the purpose of continuing perfection of Secured Party's security interest in the Collateral. Debtor will promptly provide written notice to Secured Party of all information which in any way relates to or affects the Collateral generally, Secured Party's rights or remedies with respect thereto, the filing of any -7- financing statement or other public notices or recordings, or the delivery and possession of items of Collateral for the purpose of perfecting a security interest in the Collateral. Section 4.07 Further Assurances. Upon the request of Secured Party, Debtor shall (at Debtor's expense) execute and deliver all such assignments, certificates, financing statements or other documents and give further assurances and do all other acts and things as Secured Party may reasonably request to perfect Secured Party's interest in the Collateral or to protect, enforce or otherwise effect Secured Party's rights and remedies hereunder. Section 4.08 Inventory. Unless an Event of Default has occurred and is continuing and after any applicable notice and cure periods provided for in the Credit Agreement, Debtor may use the Inventory in any lawful manner not inconsistent with this Security Agreement and with the terms of insurance thereon and may sell, lease or otherwise dispose of its Inventory for cash or terms in the ordinary course of business, and Debtor may retain the proceeds of such sales, leases or other dispositions (subject to Section 4.03 and Section 4.09); provided, however, the Inventory shall remain in Debtor's possession and control at all times prior to sale, lease or other disposition at Debtor's address set forth in Section 3.04. Debtor shall bear any risk of loss of the Inventory. Debtor shall not use any item of Inventory in a manner inconsistent with the holding thereof for sale, lease or other disposition in the ordinary course of business or in contravention of the terms of any agreement. Upon the occurrence and continuance of an Event of Default and after any applicable cure period, Debtor shall immediately deliver to Secured Party any checks, cash or other forms of payment which Debtor receives in connection with any Inventory, appropriately endorsed. Section 4.09 Accounts. (a) Prior to notification by Secured Party under Section 6.02(i), Debtor will collect the Accounts in the ordinary course of its business and may retain the proceeds of such collections (subject to Section 4.03). (b) Debtor shall immediately notify Secured Party in writing in the event that any representation given in Article III with respect to any Account ceases to be true and correct in all material respects; such notice specifying other representation(s) that cease to be true and correct and the action, if any, that Debtor proposes to take with respect thereto. (c) Debtor will not modify, extend or substitute any contract, the terms of which shall at any time have given rise to an Account, except in the ordinary course of business or with the prior written consent of Secured Party. Debtor will not re-date any invoice or sale or make sales with an extended payment date beyond that customary in the industry, and in no event longer than 90 days. Debtor shall not adjust, settle, discount or compromise any of the Accounts, except in the ordinary course of business, as permitted by the Credit Agreement or with the prior written consent of Secured Party. -8- (d) Debtor will duly perform or cause to be performed all of Debtor's obligations with respect to the Accounts and the underlying sales of goods or other transactions giving rise to the Accounts. Section 4.10 Condition of Collateral. Debtor will maintain all Collateral in good condition and in accordance with industry standards and practices. Debtor will not misuse, abuse, waste, destroy or endanger the Collateral nor allow it to be used in any manner other than its intended use. Debtor will not use any Collateral in violation of any Governmental Requirement, or suffer it to be so used. Section 4.11 Collateral Separate and Distinct. Debtor shall at all times keep the Collateral, including proceeds, or cause it to be kept (when in the possession of warehousemen, bailees, agents, independent contractors or other third parties), separate and distinct from other Property; provided, however, proceeds of the Collateral may be kept in various concentration accounts of the Parent or the Guarantors. Section 4.12 Change in Debtor's Name or Corporate Structure. Debtor will not change its name, identity or corporate structure (including, without limitation, any merger, consolidation or sale of substantially all of its assets) without notifying Secured Party of such change in writing at least 30 days prior to the effective date of such change. Without the express written consent of Secured Party, however, Debtor will not engage in any other business or transaction under any name other than Debtor's name hereunder. ARTICLE V Rights, Duties, and Powers of Secured Party The following rights, duties and powers of Secured Party are applicable irrespective of whether an Event of Default has occurred and is continuing, but only after having given Debtor at least three (3) days prior notice: Section 5.01 Attorney-in-Fact. Secured Party is hereby fully authorized and empowered (without the necessity of any further consent or authorization from Debtor) and the right is expressly granted to Secured Party, and Debtor hereby irrevocably appoints and makes Secured Party as Debtor's attorney-in-fact, with full authority in the place and stead of Debtor and in the name of Debtor or otherwise, from time to time in Secured Party's discretion, but at Debtor's cost and expense to: (a) obtain, adjust, sell and cancel any insurance with respect to the Collateral and endorse any draft drawn by insurers of the Collateral, and Secured Party may apply any proceeds or unearned premiums of such insurance to the Obligations (whether or not due); and -9- (b) take any action and to execute any assignment, certificate, financing statement, notification, document or instrument which Secured Party may deem necessary or advisable to accomplish the purposes of this Security Agreement, including, without limitation, to receive, endorse and collect all instruments made payable to Debtor representing any payment or other distribution in respect of the Collateral or any part thereof and to give full discharge for the same. Section 5.02 Transfer of Collateral. Secured Party may transfer any or all of the Obligations, and upon any such transfer, Secured Party may transfer its interest in any or all of the Collateral and shall be fully discharged thereafter from all liability therefor. Any transferee of the Collateral shall be vested with all rights, powers and remedies of Secured Party hereunder. Section 5.03 Purchase Money Financing. To the extent that the Lenders have advanced or will advance funds to or for the account of Debtor to enable Debtor to purchase or otherwise acquire specific types or items of Collateral, the Lenders may at their option pay such funds (i) directly to the Person from whom Debtor will make such purchase or acquire such rights or (ii) to Debtor, in which case Debtor covenants promptly to pay the same to such Person and forthwith furnish to Secured Party, on request, evidence satisfactory to Secured Party that such payment has been made from the funds so provided by Secured Party for such payment. Section 5.04 Proceeds. If so requested by Debtor, any payments received by Secured Party on the Accounts or as proceeds of other Collateral shall upon final collection by Secured Party be credited towards payment of the Obligations. In the absence of such request from Debtor, and until so requested, Secured Party may hold such collected payments as cash Collateral (and Secured Party may at any time place a hold or freeze on all or a part of any deposit account of Debtor containing deposits of such payments up to the amount of such deposits). Section 5.05 Discharge Encumbrances. Secured Party may, at its option, discharge any taxes, Liens, security interests or other encumbrances at any time levied or placed on the Collateral, may pay for insurance on the Collateral and may pay for the maintenance and preservation of the Collateral. Debtor agrees to reimburse Secured Party upon demand for any payment so made, plus interest on the portion thereof from time to time remaining unpaid from the date of Secured Party's demand at the rate for overdue principal and interest set forth in Section 2.06(c) of the Credit Agreement. Section 5.06 Disclaimer of Certain Duties. (a) The powers conferred upon Secured Party by this Security Agreement are to protect the interest of Secured Party, the Issuing Banks and the Lenders in the Collateral and shall not impose any duty upon Secured Party, the Issuing Banks or any Lender to exercise any such powers. Debtor hereby agrees that Secured Party, the Issuing Banks and the Lenders shall not be liable for, nor shall the indebtedness evidenced by the Obligations be diminished by, -10- Secured Party's delay or failure to collect upon, foreclose, sell, take possession of or otherwise obtain value for the Collateral. (b) Except as provided in the Credit Agreement, Secured Party shall be under no duty whatsoever to make or give any presentment, notice of dishonor, protest, demand for performance, notice of non-performance, notice of intent to accelerate, notice of acceleration, or other notice or demand in connection with any Collateral or the Obligations, or to take any steps necessary to preserve any rights against any Obligor, Account Debtor or other Person. Section 5.07 Modification of Obligations; Other Security. Debtor waives (i) any and all notice of acceptance, creation, modification, rearrangement, renewal or extension for any period of any instrument executed by any Obligor in connection with the Obligations and (ii) any defense of any Obligor by reason of disability, lack of authorization, cessation of the liability of any Obligor or for any other reason. Debtor authorizes Secured Party, without notice or demand and without any reservation of rights against Debtor and without affecting Debtor's liability hereunder or on the Obligations, from time to time to (x) take and hold other Property, other than the Collateral, as security for the Obligations, and exchange, enforce, waive and release any or all of the Collateral, (y) apply the Collateral in the manner permitted by this Security Agreement and (z) renew, extend for any period, accelerate, amend or modify, supplement, enforce, compromise, settle, waive or release the obligations of any Obligor or any instrument or agreement of such other Person with respect to any or all of the Obligations or Collateral. Section 5.08 Waiver of Notice; Demand and Presentment; etc. Except for any notice required under the Credit Agreement, Debtor hereby waives any demand, notice of default, notice of acceleration of the maturity of the Obligations, notice of intent to accelerate the maturity of the Obligations, presentment, protest and notice of dishonor as to any action taken by Secured Party in connection with this Security Agreement, or any instrument or document. Debtor waives any right of marshaling in respect of any and all Collateral, and waives any right to require Secured Party, any Issuing Bank or any Lender to proceed against any Obligor, Account Debtor or other Person, exhaust any Collateral or enforce any other remedy which Secured Party, any Issuing Bank or any Lender now has or may hereafter have against any Obligor or other Person. Section 5.09 Non-judicial Enforcement. To the fullest extent allowed by applicable law, Secured Party may enforce its rights hereunder without prior judicial process or judicial hearing, and to the fullest extent permitted by law Debtor expressly waives any and all legal rights which might otherwise require Secured Party to enforce its rights by judicial process. -11- ARTICLE VI Events of Default Section 6.01 Events of Default. An Event of Default under the Credit Agreement shall constitute an "Event of Default" under this Security Agreement. Section 6.02 Remedies. Upon the occurrence and during the continuance of any Event of Default, Secured Party may take any or all of the following actions without notice (except where expressly required under the Credit Agreement or below) or demand to Debtor: (a) Declare all or part of the indebtedness pursuant to the Obligations immediately due and payable and enforce payment of the same by Debtor or any Obligor. (b) Take possession of the Collateral, or at Secured Party's request Debtor shall, at Debtor's cost, assemble the Collateral and make it available at a location to be specified by Secured Party which is reasonably convenient to Debtor and Secured Party. In any event, Debtor shall bear the risk of accidental loss or damage to or diminution in value of the Collateral, and Secured Party shall have no liability whatsoever for failure to obtain or maintain insurance, nor to determine whether any insurance ever in force is adequate as to amount or as to risk insured. (c) Sell or lease, in one or more sales or leases and in one or more parcels, or otherwise dispose of any or all of the Collateral in its then condition or in any other commercially reasonable manner as Secured Party may elect, in a public or private transaction, at any location as deemed reasonable by Secured Party (including, without limitation, Debtor's premises), either for cash or credit or for future delivery at such price as Secured Party may deem fair, and (unless prohibited by the Code, as adopted in any applicable jurisdiction) Secured Party, any Issuing Bank or any Lender may be the purchaser of any or all Collateral so sold and may apply upon the purchase price therefor any Obligations secured hereby. Any such sale or transfer by Secured Party either to itself or to any other Person shall be absolutely free from any claim of right by Debtor, including any equity or right of redemption, stay or appraisal which Debtor has or may have under any rule of law, regulation or statute now existing or hereafter adopted. Upon any such sale or transfer, Secured Party shall have the right to deliver, assign and transfer to the purchaser or transferee thereof the Collateral so sold or transferred. It shall not be necessary that the Collateral or any part thereof be present at the location of any such sale or transfer. Secured Party may, at its discretion, provide for a public sale, and any such public sale shall be held at such time or times within ordinary business hours and at such place or places as Secured Party may fix in the notice of such sale. Secured Party shall not be obligated to make any sale pursuant to any such notice. Secured Party may, without notice or publication, adjourn any public or private sale by announcement at any time and place fixed for such sale, and such sale may be made at any time or place to which the same may be so adjourned. In the event any sale or transfer hereunder is not -12- completed or is defective in the opinion of Secured Party, such sale or transfer shall not exhaust the rights of Secured Party hereunder, and Secured Party shall have the right to cause one or more subsequent sales or transfers to be made hereunder. In the event that any of the Collateral is sold or transferred on credit, or to be held by Secured Party for future delivery to a purchaser or transferee, the Collateral so sold or transferred may be retained by Secured Party until the purchase price or other consideration is paid by the purchaser or transferee thereof, but in the event that such purchaser or transferee fails to pay for the Collateral so sold or transferred or to take delivery thereof, neither Secured Party, any Issuing Bank nor any Lender shall incur any liability in connection therewith. If only part of the Collateral is sold or transferred such that the Obligations remain outstanding (in whole or in part), Secured Party's rights and remedies hereunder shall not be exhausted, waived or modified, and Secured Party is specifically empowered to make one or more successive sales or transfers until all the Collateral shall be sold or transferred and all the Obligations are paid. In the event that Secured Party elects not to sell the Collateral, Secured Party retains its rights to lease or otherwise dispose of or utilize the Collateral or any part or parts thereof in any manner authorized or permitted by law or in equity, and to apply the proceeds of the same towards payment of the Obligations. Each and every method of disposition of the Collateral described in this Section 6.02(c) or in Section 6.02(f) shall constitute disposition in a commercially reasonable manner. (d) Take possession of all books and records of Debtor pertaining to the Collateral. Secured Party shall have the authority to enter upon any real or immoveable property or improvements thereon in order to obtain any such books or records, or any Collateral located thereon, and remove the same therefrom without liability. (e) Apply proceeds of the disposition of the Collateral to the Obligations in any manner elected by Secured Party and permitted by the Code or otherwise permitted by law or in equity. Such application may include, without limitation, the reasonable expenses of retaking, holding, preparing for sale or other disposition, and the reasonable attorneys' fees and legal expenses incurred by Secured Party, the Issuing Banks and the Lenders. (f) Appoint any Person as agent to perform any act or acts necessary or incident to any sale or transfer by Secured Party of the Collateral. Additionally, any sale or transfer hereunder may be conducted by an auctioneer or any officer or agent of Secured Party. (g) Apply and set-off (i) any deposits of Debtor now or hereafter held by Secured Party, the Issuing Banks and the Lenders; (ii) all claims of Debtor against Secured Party, now or hereafter existing; (iii) any other Property, rights or interests of Debtor which come into the possession or custody or under the control of Secured Party; and (iv) the proceeds of any of the foregoing as if the same were included in the Collateral. Secured Party agrees to notify Debtor promptly after any such set-off or -13- application; provided, however, the failure of Secured Party to give any notice shall not affect the validity of such set-off or application. (h) With respect to the Collateral, receive, change the address for delivery, open and dispose of mail addressed to Debtor, and to execute, assign and endorse negotiable and other instruments for the payment of money, documents of title or other evidences of payment, shipment or storage for any form of Collateral on behalf of and in the name of Debtor. (i) Notify or require Debtor to notify Account Debtors that the Accounts have been assigned to Secured Party and direct such Account Debtors to make payments on the Accounts directly to Secured Party. To the extent Secured Party does not so elect, Debtor shall continue to collect and retain the Accounts. Secured Party or its designee shall also have the right, in its own name or in the name of Debtor, to do any of the following: (i) to demand, collect, receipt for, settle, compromise any amounts due, give acquittances for, prosecute or defend any action which may be in relation to any monies due or to become due by virtue of, the Accounts; (ii) to sell, transfer or assign or otherwise deal in the Accounts or the proceeds thereof or the related goods, as fully and effectively as if Secured Party were the absolute owner thereof; (iii) to extend the time of payment of any of the Accounts, to grant waivers and make any allowance or other adjustment with reference thereto; (iv) to endorse the name of Debtor on notes, checks or other evidences of payments on Collateral that may come into possession of Secured Party; (v) to take control of cash and other proceeds of any Collateral; (vi) to sign the name of Debtor on any invoice or bill of lading relating to any Collateral, or any drafts against Account Debtors or other persons making payment with respect to Collateral; (vii) to send a request for verification of Accounts to any Account Debtor; and (viii) to do all other acts and things necessary to carry out the intent of this Agreement. (j) Exercise all other rights and remedies permitted by law or in equity. Section 6.03 Liability for Deficiency. If any sale or other disposition of Collateral by Secured Party or any Issuing Bank or any other action of Secured Party, any Issuing Bank or any Lender hereunder results in reduction of the Obligations, such action will not release Debtor from its liability to Secured Party, the Issuing Banks and the Lenders for any unpaid Obligations, including costs, charges and expenses incurred in the liquidation of Collateral, together with interest thereon, and the same shall be immediately due and payable to Secured Party at Secured Party's address set forth on the signature page of this Security Agreement. Section 6.04 Reasonable Notice. If any applicable provision of any law requires Secured Party any Issuing Bank or any Lender to give reasonable notice of any sale or disposition or other action, Debtor hereby agrees that fifteen (15) days' prior written notice shall constitute reasonable notice thereof. Such notice, in the case of public sale, shall state the time and place fixed for such sale and, in the case of private sale, the time after which such sale is to be made. -14- Section 6.05 Account Debtors. Any payment or settlement of an Account made by an Account Debtor will be, to the extent of such payment or to the extent provided under such settlement, a release, discharge and acquittance of the Account Debtor with respect to such Account, and Debtor shall take any action as may be required by Secured Party in connection therewith. No Account Debtor on any Account will ever be bound to make inquiry as to the termination of this Agreement or the rights of Secured Party to act hereunder, but shall be fully protected by Debtor in making payment directly to Secured Party. ARTICLE VIII Miscellaneous Section 7.01 Notices. Any notice required or permitted to be given under or in connection with this Security Agreement shall be given in accordance with the notice provisions of the Guaranty Agreement. Section 7.02 Amendments and Waivers. Secured Party's, any Issuing Bank's or any Lender's acceptance of partial or delinquent payments or any forbearance, failure or delay by the Secured Party in exercising any right, power or remedy hereunder shall not be deemed a waiver of any obligation of Debtor or any Obligor, or of any right, power or remedy of Secured Party; and no partial exercise of any right, power or remedy shall preclude any other or further exercise thereof. Secured Party may remedy any Event of Default hereunder or in connection with the Obligations without waiving the Event of Default so remedied. Debtor hereby agrees that if Secured Party agrees to a waiver of any provision hereunder, or an exchange of or release of the Collateral, or the addition or release of any Obligor, any such action shall not constitute a waiver of any of Secured Party's other rights or of Debtor's obligations hereunder. This Security Agreement may be amended only by the manner set forth in Section 9.02 of the Credit Agreement by an instrument in writing executed jointly by Debtor and Secured Party and may be supplemented only by documents delivered or to be delivered in accordance with the express terms hereof. Section 7.03 Copy as Financing Statement. A photocopy or other reproduction of this Security Agreement or any financing statement covering the Collateral is sufficient as a financing statement, and the same may be filed with any appropriate filing authority for the purpose of perfecting Secured Party's security interest in the Collateral. Section 7.04 Possession of Collateral. Secured Party shall be deemed to have possession of any Collateral in transit to it or set apart for it (or, in either case, any of its agents, affiliates or correspondents). Section 7.05 Redelivery of Collateral. If any sale or transfer of Collateral by Secured Party results in full satisfaction of the Obligations, and after such sale or transfer and discharge there remains a surplus of proceeds, Secured Party will deliver to Debtor such excess proceeds -15- in a commercially reasonable time; provided, however, that neither Secured Party, any Issuing Bank nor any Lender shall be liable for any interest, cost or expense in connection with any delay in delivering such proceeds to Debtor. Section 7.06 Governing Law; Jurisdiction. This Security Agreement and the security interest granted hereby shall be construed in accordance with and governed by the laws of the State of Texas (except to the extent that the laws of any other jurisdiction govern the perfection and priority of the security interests granted hereby). Debtor consents to and submits to in personam jurisdiction and venue in the state district and county courts of the county wherein Secured Party's offices are located at the address specified on the signature page hereof, and in the Federal District Courts of the district wherein such offices of Secured Party are located. This submission to jurisdiction is nonexclusive and does not preclude Secured Party, any Issuing Bank or any Lender from obtaining jurisdiction over Debtor or the Collateral in any court otherwise having jurisdiction. Section 7.07 Cumulative and Other Rights. The rights, powers and remedies of Secured Party hereunder are in addition to all rights, powers and remedies given by law or in equity. The exercise by Secured Party, any Issuing Bank or any Lender of any one or more of the rights, powers and remedies herein shall not be construed as a waiver of any other rights, powers and remedies, including, without limitation, any other rights of set-off. If any of the Obligations are given in renewal, extension for any period or rearrangement, or applied toward the payment of debt secured by any lien, Secured Party shall be, and is hereby, subrogated to all the rights, titles, interests and liens securing the debt so renewed, extended, rearranged or paid. Section 7.08 Subrogation. Until the Obligations have been paid in full, Debtor hereby waives any claim, right or remedy which Debtor may now have or hereafter acquire against the Company which arises out of this Security Agreement or from the performance by Debtor hereunder, including without limitation, any claim, remedy or right of subrogation, reimbursement, exoneration, indemnification, or participation in any such claim, right or remedy of any other Person against the Company; provided, however, notwithstanding the foregoing, Debtor reserves its rights of contribution and reimbursement, if any, from any Obligor. Until the Obligations have been paid in full, Debtor further waives any benefit of any right to participate in any security now or hereafter held by Secured Party, the Issuing Banks and/or the Lenders. Section 7.09 Continuing Security Agreement. (a) This Security Agreement shall constitute a continuing security agreement, and all representations and warranties, covenants and agreements shall, as applicable, apply to all future as well as existing transactions. Provisions of this Security Agreement, unless they are by their terms exclusive, shall be in addition to other agreements between the parties. (b) Except as may be expressly applicable pursuant to Section 9.505 of the Code, no action taken or omission to act by Secured Party, the Issuing Banks or the Lenders hereunder, -16- including, without limitation, any action taken or inaction pursuant to Section 6.02, shall be deemed to constitute a retention of the Collateral in satisfaction of the Obligations or otherwise to be in full satisfaction of the Obligations, and the Obligations shall remain in full force and effect, until Secured Party, the Issuing Banks and the Lenders shall have applied payments (including, without limitation, collections from Collateral) towards the Obligations in the full amount then outstanding or until such subsequent time as is hereinafter provided in subsection (c) below. (c) To the extent that any payments on the Obligations or proceeds of the Collateral are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, debtor in possession, receiver or other Person under any bankruptcy law, common law or equitable cause, then to such extent the Obligations so satisfied shall be revived and continue as if such payment or proceeds had not been received by Secured Party, the Issuing Banks or the Lenders, and Secured Party's, the Issuing Banks' and the Lenders' security interests, rights, powers and remedies hereunder shall continue in full force and effect. In such event, this Security Agreement shall be automatically reinstated if it shall theretofore have been terminated pursuant to Section 7.10. (d) In the event that the Obligations are structured such that there are times when no Indebtedness is owing thereunder, this Security Agreement shall remain valid and in full force and effect as to all subsequent indebtedness included in the Obligations, provided Secured Party has not in the interim period executed a written release or termination statement or returned possession of or reassigned the Collateral to Debtor. Section 7.10 Termination. The grant of a security interest hereunder and all of Secured Party's, the Issuing Banks' and the Lenders' rights, powers and remedies in connection therewith shall remain in full force and effect until Secured Party has retransferred and delivered all Collateral in its possession to Debtor, and executed a written release or termination statement and reassigned to Debtor without recourse or warranty any remaining Collateral and all rights conveyed hereby. Upon the complete payment of the Obligations and the compliance by Debtor with all covenants and agreements hereof, Secured Party, at the written request and expense of Debtor, will release, reassign and transfer the Collateral to Debtor and declare this Security Agreement to be of no further force or effect. Notwithstanding the foregoing, the provisions of Section 7.09(c) shall survive the termination of this Security Agreement. Section 7.11 Counterparts, Effectiveness. This Security Agreement may be executed in two or more counterparts. Each counterpart is deemed an original, but all such counterparts taken together constitute one and the same instrument. This Security Agreement becomes effective upon the execution hereof by Debtor and delivery of the same to Secured Party, and it is not necessary for Secured Party, the Issuing Banks or any Lender to execute any acceptance hereof or otherwise signify or express its acceptance hereof. Section 7.12 Headings Descriptive. All titles or headings to articles, sections, subsections or other divisions of this Security Agreement or the exhibits hereto are only for the -17- convenience of the parties and shall not be construed to have any effect or meaning with respect to the other content of such articles, sections, subsections or other divisions, such other content being controlling as to the agreement between the parties hereto. Section 7.13 Delivery of Copy/Waiver. The Debtor hereby acknowledges receiving a copy of this Security Agreement. The Debtor waives all rights to receive from the Secured Party a copy of any financing statement or financing change statement filed or registered or verification statement issued at any time in respect of this Security Agreement. -18- DEBTOR: KENAI PIPE LINE COMPANY By: /s/ G. A. Wright G. A. Wright Vice President and Treasurer Address of Chief Executive Office and Location of the Collateral: 8700 Tesoro Drive San Antonio, Texas 78217 -19- EX-4.7 8 SECURITY AGREEMENT SECURITY AGREEMENT (Accounts and Inventory) Between TESORO COASTWIDE SERVICES COMPANY and BANQUE PARIBAS, AS ADMINISTRATIVE AGENT June 7, 1996 SECURITY AGREEMENT Accounts and Inventory THIS SECURITY AGREEMENT is made as of June 7, 1996, between TESORO COASTWIDE SERVICES COMPANY, a Delaware corporation ("Debtor"), and BANQUE PARIBAS, as Administrative Agent ("Secured Party") for the Issuing Banks and the Lenders parties to the Credit Agreement referred to below. RECITALS A. On even date herewith, Tesoro Petroleum Corporation (the "Company"), Secured Party, The Bank of Nova Scotia, as Documentation Agent and the other financial institutions parties thereto (the "Lenders") are entering into an Amended and Restated Credit Agreement (as amended from time to time, the "Credit Agreement"). B. The conditions precedent to the effectiveness of the Credit Agreement include the execution and delivery by Debtor of this Security Agreement, and Debtor has agreed to enter into this Security Agreement. C. Therefore, (i) in order to comply with the terms and conditions of the Credit Agreement, (ii) to induce the Lenders at any time from time to time to loan monies and the Issuing Banks to issue Letters of Credit, with or without security to or for the account of the Company in accordance with the terms of the Credit Agreement, (iii) at the special insistence and request of the Agent, the Issuing Banks and the Lenders, and (iv) for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Debtor agrees with Secured Party as follows: ARTICLE I Definitions Section 1.01 Terms Defined Above. As used in this Security Agreement, the terms "Company," "Credit Agreement," "Debtor" and "Secured Party" shall have the meanings respectively assigned to them. Section 1.02 Certain Definitions. As used in this Security Agreement, the following terms shall have the following meanings, unless the context otherwise requires: "Accounts" shall mean all accounts (as such term is defined in the Code). "Account Debtor" shall mean any Person liable (whether directly or indirectly, primarily or secondarily) for the payment or performance of any obligations included in the Collateral, whether as an account debtor (as defined in the Code), obligor on an instrument, issuer of documents or securities, guarantor or otherwise. "Code" shall mean the Uniform Commercial Code as presently in effect in the State of Texas, Texas Business and Commerce Code, Chapters 1 through 9. "Collateral" shall mean the following types or items of Property (including Property hereafter acquired by Debtor as well as Property which Debtor now owns or in which Debtor has rights): (a) all of Debtor's Accounts and Inventory; (b) (i) any Property from time to time delivered to or deposited with Secured Party by or for the account of Debtor which is related to any Property referred to in clause (a) of this definition; and (ii) all certificates of title or other documents evidencing ownership or possession of or otherwise relating to any Property referred to in clause (a) of this definition; (c) (i) all goods which were at any time included in the Collateral described in clause (a) of this definition and which are returned to or for the account of Debtor following their sale, lease or other disposition; (ii) all policies of insurance (whether or not required by Secured Party) covering any Property referred to in this definition; and (iii) all proceeds, products, replacements, additions to, substitutions for, accessions of, and Property necessary for the operation of any of the Property referred to in this definition, including, without limitation, insurance payable as a result of loss or damage to any of the Property referred to in this definition, refunds of unearned premiums of any such insurance policy and claims against third parties; (d) all books and records related to any of the Property referred to in this definition, including, without limitation, any and all books of account, customer lists and other records relating in any way to the Collateral described in this definition; (e) all of Debtor's general intangibles (as defined in the Code) which are related (but only those related) to any Property referred to in this definition, including, without limitation, all (i) letters of credit, bonds, guaranties, purchase or sales agreements and other contractual rights, rights to performance, and claims for damages, refunds (including tax refunds) or other monies due or to become due; (ii) orders, franchises, permits, certificates, licenses, consents, exemptions, variances, authorizations or other approvals by any Governmental Authority; (iii) business records, computer tapes and computer software; and (iv) other intangible personal property, whether similar or dissimilar to the Property referred to in clause (a) of this definition; and -2- (f) all of Debtor's chattel paper, documents and instruments (as such terms are defined in the Code) related to or arising out of any Property referred to in clause (a) of this definition. It is expressly contemplated that additional Property may from time to time be pledged, assigned or granted to Secured Party as additional security for the Obligations, and, if so, then the term "Collateral" as used herein shall be deemed for all purposes hereof to include all such additional Property, together with all other Property of the types described above related thereto. It is expressly agreed that Collateral shall not include and shall be exclusive of any equipment. "Event of Default" shall have the meaning assigned such term in Section 6.01 of this Security Agreement. "Inventory" shall mean all inventory (as defined in the Code). "Obligations" shall mean with respect to the Debtor, the Obligations (as defined in the Guaranty Agreement) to the extent the Debtor is liable therefor as provided in the Guaranty Agreement. The Obligations are Senior Debt as such term is defined in that certain Subordination Agreement dated December 15, 1992 among the Company, Tesoro Alaska Petroleum Company and the State of Alaska attached to the Settlement Agreement among the Company, Tesoro Alaska Petroleum Company and the State of Alaska. "Obligor" shall mean the Company and any other Person, other than Debtor, liable (whether directly or indirectly, primarily or secondarily) for the payment or performance of any of the Obligations whether as maker, co-maker, endorser, guarantor, accommodation party, general partner or otherwise; and the term "Obligor" shall specifically include each Guarantor, other than Debtor, named in the Credit Agreement. "Property" shall mean any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "Security Agreement" shall mean this Security Agreement, as the same may be amended, modified or supplemented from time to time. Se tion 03 Other Defined Terms. Unless otherwise defined herein, all terms beginning with a capital letter which are defined in the Credit Agreement shall have the meanings assigned therein, unless the context hereof requires otherwise. All uncapitalized terms which are defined in the Code shall have their respective meanings as used in the Code, unless the context hereof requires otherwise. -3- ARTICLE II Security Interest Section 2.01 Grant of Security Interest. Debtor hereby assigns and grants to Secured Party, for its benefit and the benefit of the Lenders and the Issuing Banks, a security interest in, lien upon and right of set-off against the Collateral to secure the prompt payment and performance of the Obligations. ARTICLE III Representations and Warranties Debtor represents and warrants to Secured Party, the Issuing Banks and the Lenders (which representations and warranties will survive the creation and payment of the Obligations) that: Section 3.01 First Priority Security Interest. The grant of the security interest in the Collateral pursuant to this Security Agreement creates a valid and perfected first priority security interest in the Collateral, enforceable against Debtor and all third parties and securing payment of the Obligations. Section 3.02 No Filings By Third Parties. No financing statement or other public notice or recording covering the Collateral is on file in any public office (other than any financing statement or other public notice or recording naming Secured Party as the secured party therein), and Debtor will not execute any such financing statement or other public notice or recording so long as any of the Obligations are outstanding. Section 3.03 No Name Changes. Debtor has not, during the preceding five years, entered into any contract, agreement, security instrument or other document using a name other than, or been known by or otherwise used any name other than, the name used by Debtor herein. Section 3.04 Location of Debtor and Collateral. Debtor's chief executive office and Debtor's records concerning the Collateral are located at the address or location set forth on the signature page hereof. The Collateral is located at such address or at the location(s), if any, specified in Exhibit A hereto. Any Collateral not at such location(s) nevertheless remains subject to Secured Party's security interest. Section 3.05 Collateral. All statements or other information provided by Debtor to Secured Party, any Issuing Bank or any Lender with respect to the Collateral is or (in the case of subsequently furnished information) will be when provided correct and complete in all material respects. The delivery at any time by Debtor to Secured Party of additional Collateral or of additional descriptions of Collateral shall constitute a representation and warranty by -4- Debtor to Secured Party hereunder that the representations and warranties of this Article III are correct insofar as they would pertain to such Collateral or the descriptions thereof. Section 3.06 Accounts. (a) Each Account represents the genuine, valid and legally enforceable indebtedness of an Account Debtor arising from the sale, lease or rendition by Debtor of goods or services and is not and will not be subject to contra accounts, set-offs, defenses, counterclaims, allowances or adjustments (other than discounts for prompt payment shown on the invoice), or objections or complaints by the Account Debtor concerning its liability on the Account; and any goods, the sale of which gave rise to an Account, have not been returned or rejected by the Account Debtor or lost or damaged prior to receipt by the Account Debtor. (b) The amount shown as to each Account on Debtor's books is or will be the true and undisputed amount owing and unpaid thereon. Except as disclosed in writing to Secured Party, each Account arose or shall have arisen in the ordinary course of Debtor's business; provided, however, that any Accounts which arose or hereafter arise outside the ordinary course of Debtor's business shall nevertheless be included as part of the Collateral. Debtor has no knowledge of any bankruptcy, insolvency or other action affecting creditors' rights with respect to any Account Debtor. (c) Except as disclosed in writing to Secured Party, each invoice or agreement evidencing the Accounts is or will be due and payable not more than 90 days from the date thereof; provided, however, that any Accounts not so due and payable shall nevertheless be included as part of the Collateral. Section 3.07 Delivery of Documents or Letters of Credit. With respect to any Inventory or other Collateral covered by one or more certificates of title or other documents evidencing ownership or possession thereof, and with respect to any Accounts or other Collateral supported by letters of credit, each of such certificates, documents or letters of credit has been delivered to Secured Party (provided, however, that all certificates, documents and letters of credit referred to in Section 1.02 shall be subject to the security interest created by this Security Agreement irrespective of whether or not such delivery shall have been made). Section 3.08 Ownership of Collateral; Encumbrances; Valid and Binding Agreement. Debtor is the legal and beneficial owner of the Collateral free and clear of any adverse claim, lien, security interest, option or other charge or encumbrance except for the security interest created by this Agreement or as permitted by the Credit Agreement, and Debtor has full right, power and authority to assign and grant a security interest in the Collateral to Secured Party. This Agreement constitutes a legal, valid and binding obligation of Debtor enforceable against Debtor in accordance with its terms. The execution, delivery and performance of this Agreement will not violate the terms of any contract, agreement, law, regulation, order, injunction, judgment, decree or writ to which Debtor is subject and does not require the consent or approval of any other Person. -5- Section 3.09 No Required Consent. No authorization, consent, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body (other than the filing of financing statements) is required for (i) the due execution, delivery and performance by Debtor of this Agreement, (ii) the grant by Debtor of the security interest granted by this Agreement, (iii) the perfection of such security interest or (iv) the exercise by Secured Party of its rights and remedies under this Agreement. ARTICLE IV Covenants and Agreements Debtor covenants and agrees that so long as any part of the Obligations are outstanding: Section 4.01 Change in Location of Collateral or Debtor. Debtor will give Secured Party 30 days' prior written notice of (i) any change in location of the Collateral to a jurisdiction other than Louisiana and Texas and which would cause the Secured Party to be unperfected in the Collateral, (ii) the opening or closing of any place of Debtor's business or (iii) any change in the location of Debtor's chief executive office or address. Section 4.02 Documents; Collateral in Possession of Third Parties. If certificates of title or other documents evidencing ownership or possession of the Collateral are issued or outstanding, Debtor will cause the security interest of Secured Party to be properly noted thereon and will, forthwith upon receipt, deliver same to Secured Party. If any Collateral is at any time in the possession or control of any warehouseman, bailee, agent or independent contractor, Debtor shall notify such Person of Secured Party's security interest in such Collateral. Upon Secured Party's request, Debtor shall instruct any such Person to hold all such Collateral for Secured Party's account subject to Debtor's instructions, or, if an Event of Default shall have occurred, subject to Secured Party's instructions. Section 4.03 Delivery of Letters of Credit and Instruments; Proceeds. Debtor will deliver each letter of credit, if any, included in the Collateral to Secured Party, in each case forthwith upon receipt by or for the account of Debtor. If any Account becomes evidenced by a promissory note, trade acceptance or any other instrument for the payment of money (other than checks or drafts in payment of Accounts collected by Debtor in the ordinary course of business prior to notification by Secured Party under Section 5.04), Debtor will immediately deliver such instrument to Secured Party appropriately endorsed to Secured Party, as collateral assignee and, regardless of the form of presentment, demand, notice of dishonor, protest and notice of protest with respect thereto, Debtor will remain liable thereon until such instrument is paid in full. Except as permitted by Sections 4.03, 4.08 and 4.09, Debtor will deliver to Secured Party all proceeds from the sale or other disposition of the Collateral promptly upon receipt. If chattel paper, documents or instruments are received as proceeds, which are required to be delivered to Secured Party, they will be, immediately upon receipt, properly endorsed or assigned and delivered to Secured Party as Collateral. -6- Section 4.04 Sale, Disposition or Encumbrance of Collateral. Except (i) as permitted by Section 4.08, or (ii) with the prior written consent of the Majority Lenders, Debtor will not in any way encumber any of the Collateral (or permit or suffer any of the Collateral to be encumbered) or sell, assign, lend, rent, lease or otherwise dispose of or transfer any of the Collateral to or in favor of any Person other than Secured Party. Section 4.05 Intentionally left blank. Section 4.06 Records and Information. (a) Debtor shall keep accurate and complete records of the Collateral (including proceeds). These records shall reflect complete and accurate stock records of the Inventory and all facts concerning each Account. Debtor shall conduct a physical count of the Inventory at such intervals as Secured Party requests and promptly supply Secured Party with a copy of such count accompanied by a report of the value (valued at the lower of cost or market value) of the Inventory. Secured Party may at any time have access to, examine, audit, make extracts from and inspect without hindrance or delay Debtor's records, files and the Collateral. (b) Debtor will promptly furnish such information as Secured Party may from time to time reasonably request regarding (i) the business, affairs or financial condition of Debtor or (ii) the Collateral or Secured Party's rights or remedies with respect thereto. Any balance sheets or financial statements requested by Secured Party pursuant to this Section 4.06(b) shall conform to generally accepted accounting principles. (c) Debtor recognizes that financing statements pertaining to the Collateral will be filed with the offices of the Parish Clerk of Bienville Parish, Louisiana and of the Secretary of State of Texas. Debtor will immediately notify Secured Party of any condition or event that may change the proper location for the filing of any financing statements or other public notice or recordings for the purpose of perfecting a security interest in the Collateral. Without limiting the generality of the foregoing, Debtor will (i) immediately notify Secured Party of any change to a jurisdiction other than as represented in Section 3.04 (A) in the location of Debtor's chief executive office or chief place of business, (B) in the location of the office where Debtor keeps its records concerning the Accounts, or (C) in the "location" of Debtor within the meaning of Section 9-103(c) of the Code; (ii) immediately notify Secured Party of any change in the location of the Collateral to any jurisdiction other than the States of Texas, Alaska, California, Oregon and Washington; and (ii) notify Secured Party 30 days prior to any change in Debtor's name, identity or corporate structure or Tax Identification Number. In any notice furnished pursuant to this paragraph, Debtor will expressly state that the notice is required by this Security Agreement and contains facts that will or may require additional filings of financing statements or other notices for the purpose of continuing perfection of Secured Party's security interest in the Collateral. Debtor will promptly provide written notice to Secured Party of all information which in any way relates to or affects the Collateral generally, Secured Party's rights or remedies with respect thereto, the filing of any financing statement or other public notices or recordings, -7- or the delivery and possession of items of Collateral for the purpose of perfecting a security interest in the Collateral. Section 4.07 Further Assurances. Upon the request of Secured Party, Debtor shall (at Debtor's expense) execute and deliver all such assignments, certificates, financing statements or other documents and give further assurances and do all other acts and things as Secured Party may reasonably request to perfect Secured Party's interest in the Collateral or to protect, enforce or otherwise effect Secured Party's rights and remedies hereunder. Section 4.08 Inventory. Unless an Event of Default has occurred and is continuing and after any applicable notice and cure periods provided for in the Credit Agreement, Debtor may use the Inventory in any lawful manner not inconsistent with this Security Agreement and with the terms of insurance thereon and may sell, lease or otherwise dispose of its Inventory for cash or terms in the ordinary course of business, and Debtor may retain the proceeds of such sales, leases or other dispositions (subject to Section 4.03 and Section 4.09); provided, however, the Inventory shall remain in Debtor's possession and control at all times prior to sale, lease or other disposition at Debtor's address set forth in Section 3.04. Debtor shall bear any risk of loss of the Inventory. Debtor shall not use any item of Inventory in a manner inconsistent with the holding thereof for sale, lease or other disposition in the ordinary course of business or in contravention of the terms of any agreement. Upon the occurrence and continuance of an Event of Default and after any applicable cure period, Debtor shall immediately deliver to Secured Party any checks, cash or other forms of payment which Debtor receives in connection with any Inventory, appropriately endorsed. Section 4.09 Accounts. (a) Prior to notification by Secured Party under Section 6.02(a)(ix), Debtor will collect the Accounts in the ordinary course of its business and may retain the proceeds of such collections (subject to Section 4.03). (b) Debtor shall immediately notify Secured Party in writing in the event that any representation given in Article III with respect to any Account ceases to be true and correct in all material respects; such notice specifying other representation(s) that cease to be true and correct and the action, if any, that Debtor proposes to take with respect thereto. (c) Debtor will not modify, extend or substitute any contract, the terms of which shall at any time have given rise to an Account, except in the ordinary course of business or with the prior written consent of Secured Party. Debtor will not re-date any invoice or sale or make sales with an extended payment date beyond that customary in the industry, and in no event longer than 90 days. Debtor shall not adjust, settle, discount or compromise any of the Accounts, except in the ordinary course of business, as permitted by the Credit Agreement or with the prior written consent of Secured Party. -8- (d) Debtor will duly perform or cause to be performed all of Debtor's obligations with respect to the Accounts and the underlying sales of goods or other transactions giving rise to the Accounts. Section 4.10 Condition of Collateral. Debtor will maintain all Collateral in good condition and in accordance with industry standards and practices. Debtor will not misuse, abuse, waste, destroy or endanger the Collateral nor allow it to be used in any manner other than its intended use. Debtor will not use any Collateral in violation of any Governmental Requirement, or suffer it to be so used. Section 4.11 Collateral Separate and Distinct. Debtor shall at all times keep the Collateral, including proceeds, or cause it to be kept (when in the possession of warehousemen, bailees, agents, independent contractors or other third parties), separate and distinct from other Property; provided, however, proceeds of the Collateral may be kept in various concentration accounts of the Parent or the Guarantors. Section 4.12 Change in Debtor's Name or Corporate Structure. Debtor will not change its name, identity or corporate structure (including, without limitation, any merger, consolidation or sale of substantially all of its assets) without notifying Secured Party of such change in writing at least 30 days prior to the effective date of such change. Without the express written consent of Secured Party, however, Debtor will not engage in any other business or transaction under any name other than Debtor's name hereunder. ARTICLE V Rights, Duties, and Powers of Secured Party The following rights, duties and powers of Secured Party are applicable irrespective of whether an Event of Default has occurred and is continuing, but only after having given Debtor at least three (3) days prior notice: Section 5.01 Attorney-in-Fact. Secured Party is hereby fully authorized and empowered (without the necessity of any further consent or authorization from Debtor) and the right is expressly granted to Secured Party, and Debtor hereby irrevocably appoints and makes Secured Party as Debtor's attorney-in-fact, with full authority in the place and stead of Debtor and in the name of Debtor or otherwise, from time to time in Secured Party's discretion, but at Debtor's cost and expense to: (a) obtain, adjust, sell and cancel any insurance with respect to the Collateral and endorse any draft drawn by insurers of the Collateral, and Secured Party may apply any proceeds or unearned premiums of such insurance to the Obligations (whether or not due); and -9- (b) take any action and to execute any assignment, certificate, financing statement, notification, document or instrument which Secured Party may deem necessary or advisable to accomplish the purposes of this Security Agreement, including, without limitation, to receive, endorse and collect all instruments made payable to Debtor representing any payment or other distribution in respect of the Collateral or any part thereof and to give full discharge for the same. Section 5.02 Transfer of Collateral. Secured Party may transfer any or all of the Obligations, and upon any such transfer, Secured Party may transfer its interest in any or all of the Collateral and shall be fully discharged thereafter from all liability therefor. Any transferee of the Collateral shall be vested with all rights, powers and remedies of Secured Party hereunder. Section 5.03 Purchase Money Financing. To the extent that the Lenders have advanced or will advance funds to or for the account of Debtor to enable Debtor to purchase or otherwise acquire specific types or items of Collateral, the Lenders may at their option pay such funds (i) directly to the Person from whom Debtor will make such purchase or acquire such rights or (ii) to Debtor, in which case Debtor covenants promptly to pay the same to such Person and forthwith furnish to Secured Party, on request, evidence satisfactory to Secured Party that such payment has been made from the funds so provided by Secured Party for such payment. Section 5.04 Proceeds. If so requested by Debtor, any payments received by Secured Party on the Accounts or as proceeds of other Collateral shall upon final collection by Secured Party be credited towards payment of the Obligations. In the absence of such request from Debtor, and until so requested, Secured Party may hold such collected payments as cash Collateral (and Secured Party may at any time place a hold or freeze on all or a part of any deposit account of Debtor containing deposits of such payments up to the amount of such deposits). Section 5.05 Discharge Encumbrances. Secured Party may, at its option, discharge any taxes, Liens, security interests or other encumbrances at any time levied or placed on the Collateral, may pay for insurance on the Collateral and may pay for the maintenance and preservation of the Collateral. Debtor agrees to reimburse Secured Party upon demand for any payment so made, plus interest on the portion thereof from time to time remaining unpaid from the date of Secured Party's demand at the rate for overdue principal and interest set forth in Section 2.06(c) of the Credit Agreement. Section 5.06 Disclaimer of Certain Duties. (a) The powers conferred upon Secured Party by this Security Agreement are to protect the interest of Secured Party, the Issuing Banks and the Lenders in the Collateral and shall not impose any duty upon Secured Party, the Issuing Banks or any Lender to exercise any such powers. Debtor hereby agrees that Secured Party, the Issuing Banks and the Lenders shall not be liable for, nor shall the indebtedness evidenced by the Obligations be diminished by, -10- Secured Party's delay or failure to collect upon, foreclose, sell, take possession of or otherwise obtain value for the Collateral. (b) Except as provided in the Credit Agreement, Secured Party shall be under no duty whatsoever to make or give any presentment, notice of dishonor, protest, demand for performance, notice of non-performance, notice of intent to accelerate, notice of acceleration, or other notice or demand in connection with any Collateral or the Obligations, or to take any steps necessary to preserve any rights against any Obligor, Account Debtor or other Person. Section 5.07 Modification of Obligations; Other Security. Debtor waives (i) any and all notice of acceptance, creation, modification, rearrangement, renewal or extension for any period of any instrument executed by any Obligor in connection with the Obligations and (ii) any defense of any Obligor by reason of disability, lack of authorization, cessation of the liability of any Obligor or for any other reason. Debtor authorizes Secured Party, without notice or demand and without any reservation of rights against Debtor and without affecting Debtor's liability hereunder or on the Obligations, from time to time to (x) take and hold other Property, other than the Collateral, as security for the Obligations, and exchange, enforce, waive and release any or all of the Collateral, (y) apply the Collateral in the manner permitted by this Security Agreement and (z) renew, extend for any period, accelerate, amend or modify, supplement, enforce, compromise, settle, waive or release the obligations of any Obligor or any instrument or agreement of such other Person with respect to any or all of the Obligations or Collateral. Section 5.08 Waiver of Notice; Demand and Presentment; etc. Except for any notice required under the Credit Agreement, Debtor hereby waives any demand, notice of default, notice of acceleration of the maturity of the Obligations, notice of intent to accelerate the maturity of the Obligations, presentment, protest and notice of dishonor as to any action taken by Secured Party in connection with this Security Agreement, or any instrument or document. Debtor waives any right of marshaling in respect of any and all Collateral, and waives any right to require Secured Party, any Issuing Bank or any Lender to proceed against any Obligor, Account Debtor or other Person, exhaust any Collateral or enforce any other remedy which Secured Party, any Issuing Bank or any Lender now has or may hereafter have against any Obligor or other Person. Section 5.09 Non-judicial Enforcement. To the fullest extent allowed by applicable law, Secured Party may enforce its rights hereunder without prior judicial process or judicial hearing, and to the fullest extent permitted by law Debtor expressly waives any and all legal rights which might otherwise require Secured Party to enforce its rights by judicial process. -11- ARTICLE VI Events of Default Section 6.01 Events of Default. An Event of Default under the Credit Agreement shall constitute an "Event of Default" under this Security Agreement. Section 6.02 Remedies. Upon the occurrence and during the continuance of any Event of Default, Secured Party may take any or all of the following actions without notice (except where expressly required under the Credit Agreement or below) or demand to Debtor: (a) With respect to Collateral located in any jurisdiction: (i) Declare all or part of the indebtedness pursuant to the Obligations immediately due and payable and enforce payment of the same by Debtor or any Obligor. (ii) Take possession of the Collateral, or at Secured Party's request Debtor shall, at Debtor's cost, assemble the Collateral and make it available at a location to be specified by Secured Party which is reasonably convenient to Debtor and Secured Party. In any event, Debtor shall bear the risk of accidental loss or damage to or diminution in value of the Collateral, and Secured Party shall have no liability whatsoever for failure to obtain or maintain insurance, nor to determine whether any insurance ever in force is adequate as to amount or as to risk insured. (iii) Sell or lease, in one or more sales or leases and in one or more parcels, or otherwise dispose of any or all of the Collateral in its then condition or in any other commercially reasonable manner as Secured Party may elect, in a public or private transaction, at any location as deemed reasonable by Secured Party (including, without limitation, Debtor's premises), either for cash or credit or for future delivery at such price as Secured Party may deem fair, and (unless prohibited by the Code, as adopted in any applicable jurisdiction) Secured Party, any Issuing Bank or any Lender may be the purchaser of any or all Collateral so sold and may apply upon the purchase price therefor any Obligations secured hereby. Any such sale or transfer by Secured Party either to itself or to any other Person shall be absolutely free from any claim of right by Debtor, including any equity or right of redemption, stay or appraisal which Debtor has or may have under any rule of law, regulation or statute now existing or hereafter adopted. Upon any such sale or transfer, Secured Party shall have the right to deliver, assign and transfer to the purchaser or transferee thereof the Collateral so sold or transferred. It shall not be necessary that the Collateral or any part thereof be present at the location of any such sale or transfer. Secured Party may, at its discretion, provide for a public sale, and any such public sale shall be held at such time or times within ordinary business hours and at such place or places as Secured Party may fix in the notice of such sale. Secured Party shall not be obligated to make any sale pursuant to any such notice. Secured Party may, without notice or publication, adjourn any public or private sale by announcement at any -12- time and place fixed for such sale, and such sale may be made at any time or place to which the same may be so adjourned. In the event any sale or transfer hereunder is not completed or is defective in the opinion of Secured Party, such sale or transfer shall not exhaust the rights of Secured Party hereunder, and Secured Party shall have the right to cause one or more subsequent sales or transfers to be made hereunder. In the event that any of the Collateral is sold or transferred on credit, or to be held by Secured Party for future delivery to a purchaser or transferee, the Collateral so sold or transferred may be retained by Secured Party until the purchase price or other consideration is paid by the purchaser or transferee thereof, but in the event that such purchaser or transferee fails to pay for the Collateral so sold or transferred or to take delivery thereof, neither Secured Party, any Issuing Bank nor any Lender shall incur any liability in connection therewith. If only part of the Collateral is sold or transferred such that the Obligations remain outstanding (in whole or in part), Secured Party's rights and remedies hereunder shall not be exhausted, waived or modified, and Secured Party is specifically empowered to make one or more successive sales or transfers until all the Collateral shall be sold or transferred and all the Obligations are paid. In the event that Secured Party elects not to sell the Collateral, Secured Party retains its rights to lease or otherwise dispose of or utilize the Collateral or any part or parts thereof in any manner authorized or permitted by law or in equity, and to apply the proceeds of the same towards payment of the Obligations. Each and every method of disposition of the Collateral described in this Section 6.02(c) or in Section 6.02(f) shall constitute disposition in a commercially reasonable manner. (iv) Take possession of all books and records of Debtor pertaining to the Collateral. Secured Party shall have the authority to enter upon any real or immoveable property or improvements thereon in order to obtain any such books or records, or any Collateral located thereon, and remove the same therefrom without liability. (v) Apply proceeds of the disposition of the Collateral to the Obligations in any manner elected by Secured Party and permitted by the Code or otherwise permitted by law or in equity. Such application may include, without limitation, the reasonable expenses of retaking, holding, preparing for sale or other disposition, and the reasonable attorneys' fees and legal expenses incurred by Secured Party, the Issuing Banks and the Lenders. (vi) Appoint any Person as agent to perform any act or acts necessary or incident to any sale or transfer by Secured Party of the Collateral. Additionally, any sale or transfer hereunder may be conducted by an auctioneer or any officer or agent of Secured Party. (vii) Apply and set-off (i) any deposits of Debtor now or hereafter held by Secured Party, the Issuing Banks and the Lenders; (ii) all claims of Debtor against Secured Party, now or hereafter existing; (iii) any other Property, rights or interests of Debtor which come into the possession or custody or under the control of Secured Party; -13- and (iv) the proceeds of any of the foregoing as if the same were included in the Collateral. Secured Party agrees to notify Debtor promptly after any such set-off or application; provided, however, the failure of Secured Party to give any notice shall not affect the validity of such set-off or application. (viii) With respect to the Collateral, receive, change the address for delivery, open and dispose of mail addressed to Debtor, and to execute, assign and endorse negotiable and other instruments for the payment of money, documents of title or other evidences of payment, shipment or storage for any form of Collateral on behalf of and in the name of Debtor. (ix) Notify or require Debtor to notify Account Debtors that the Accounts have been assigned to Secured Party and direct such Account Debtors to make payments on the Accounts directly to Secured Party. To the extent Secured Party does not so elect, Debtor shall continue to collect and retain the Accounts. Secured Party or its designee shall also have the right, in its own name or in the name of Debtor, to do any of the following: (i) to demand, collect, receipt for, settle, compromise any amounts due, give acquittances for, prosecute or defend any action which may be in relation to any monies due or to become due by virtue of, the Accounts; (ii) to sell, transfer or assign or otherwise deal in the Accounts or the proceeds thereof or the related goods, as fully and effectively as if Secured Party were the absolute owner thereof; (iii) to extend the time of payment of any of the Accounts, to grant waivers and make any allowance or other adjustment with reference thereto; (iv) to endorse the name of Debtor on notes, checks or other evidences of payments on Collateral that may come into possession of Secured Party; (v) to take control of cash and other proceeds of any Collateral; (vi) to sign the name of Debtor on any invoice or bill of lading relating to any Collateral, or any drafts against Account Debtors or other persons making payment with respect to Collateral; (vii) to send a request for verification of Accounts to any Account Debtor; and (viii) to do all other acts and things necessary to carry out the intent of this Agreement. (x) Exercise all other rights and remedies permitted by law or in equity. (b) With respect to any Collateral located in Louisiana, Secured Party's rights shall also include the following: (i) Secured Party, at its option, may declare all Obligations immediately due and payable or performable and Secured Party shall thereupon, in addition to the rights and remedies provided in this Security Agreement or in any other instrument or document executed by Debtor, have all the rights and remedies of a "secured party" under Louisiana Commercial Laws (La. R.S. 10:9-101 et seq.) and under all other applicable laws of Louisiana or any other state having jurisdiction. Secured Party shall have the right to sell, transfer or otherwise dispose of any and all of the Collateral and to apply the proceeds thereof toward payment of all costs, expenses, attorney's fees and legal expenses thereby incurred by Secured Party and toward payment and performance of the -14- Obligations in such order or manner as Secured Party may elect. Unless the Collateral threatens to decline speedily in value, Secured Party shall send Debtor reasonable notice of the time and place of any public sale or of the time after which any private sale or the disposition thereof is to be made. The requirement of sending a reasonable notice shall be met if such notice is mailed, postage prepaid, to Debtor at the address set forth on the signature page hereof at least fifteen (15) days before the time of such sale or disposition. All expenses of retaking, holding, maintaining, preparing for sale, selling and the like, including Secured Party's reasonable attorney's fees and legal expenses, shall constitute additional Obligations of Debtor and shall be immediately due and payable, and payment of the same shall be secured by and entitled to the benefits of this Security Agreement. If the proceeds of any sale or other lawful disposition of the Collateral by Secured Party are insufficient to fully pay the Obligations, then Debtor shall pay or cause to be paid any deficiency. (ii) Debtor agrees that, in the event any proceedings are taken under this Security Agreement by way of executory process or otherwise, any and all declarations of fact made by authentic act before a notary public and in the presence of two witnesses by person declaring that such facts lie within his knowledge shall constitute authentic evidence of such facts for purposes of executory process, and in connection with any such action to foreclose or otherwise realize upon the Collateral. (iii) Debtor expressly waives: (A) The benefit of appraisement provided for in Articles 2332, 2336, 2723, 2724, Louisiana Code of Civil Procedure and all other laws conferring such benefits. (B) The demand and three days' delay accorded by Articles 2639 and 2721, Louisiana Code of Civil Procedure. (C) The three days' delay provided by Articles 2331 and 2722, Louisiana Code of Civil Procedure. (D) The benefit of the other provisions of Articles 2331, 2722 and 2723, Louisiana Code of Civil Procedure; Debtor expressly agrees to the immediate seizure of the Collateral in the event of suit hereon. (iv) Debtor does further confess judgment for the full amount of the Obligations in principal, interest, attorneys' fees and all other costs and charges and does consent and agree that upon the occurrence of any Event of Default, Secured Party may cause all of the Collateral to be seized and sold under executory or any other legal process, at the option of Secured Party. -15- (v) Notwithstanding anything to the contrary contained in this Article VI or elsewhere in this Security Agreement, the Obligations shall immediately become fully due, payable, performable, satisfiable and dischargeable without the necessity of further action on the part of Secured Party, and Debtor hereby expressly waives any required notice of intent to accelerate the Obligations and notice of acceleration of the Obligations. Section 6.03 Liability for Deficiency. If any sale or other disposition of Collateral by Secured Party or any Issuing Bank or any other action of Secured Party, any Issuing Bank or any Lender hereunder results in reduction of the Obligations, such action will not release Debtor from its liability to Secured Party, the Issuing Banks and the Lenders for any unpaid Obligations, including costs, charges and expenses incurred in the liquidation of Collateral, together with interest thereon, and the same shall be immediately due and payable to Secured Party at Secured Party's address set forth on the signature page of this Security Agreement. Section 6.04 Reasonable Notice. If any applicable provision of any law requires Secured Party any Issuing Bank or any Lender to give reasonable notice of any sale or disposition or other action, Debtor hereby agrees that fifteen (15) days' prior written notice shall constitute reasonable notice thereof. Such notice, in the case of public sale, shall state the time and place fixed for such sale and, in the case of private sale, the time after which such sale is to be made. Section 6.05 Account Debtors. Any payment or settlement of an Account made by an Account Debtor will be, to the extent of such payment or to the extent provided under such settlement, a release, discharge and acquittance of the Account Debtor with respect to such Account, and Debtor shall take any action as may be required by Secured Party in connection therewith. No Account Debtor on any Account will ever be bound to make inquiry as to the termination of this Agreement or the rights of Secured Party to act hereunder, but shall be fully protected by Debtor in making payment directly to Secured Party. ARTICLE VIII Miscellaneous Section 7.01 Notices. Any notice required or permitted to be given under or in connection with this Security Agreement shall be given in accordance with the notice provisions of the Guaranty Agreement. Section 7.02 Amendments and Waivers. Secured Party's, any Issuing Bank's or any Lender's acceptance of partial or delinquent payments or any forbearance, failure or delay by the Secured Party in exercising any right, power or remedy hereunder shall not be deemed a waiver of any obligation of Debtor or any Obligor, or of any right, power or remedy of Secured Party; and no partial exercise of any right, power or remedy shall preclude any other or further exercise -16- thereof. Secured Party may remedy any Event of Default hereunder or in connection with the Obligations without waiving the Event of Default so remedied. Debtor hereby agrees that if Secured Party agrees to a waiver of any provision hereunder, or an exchange of or release of the Collateral, or the addition or release of any Obligor, any such action shall not constitute a waiver of any of Secured Party's other rights or of Debtor's obligations hereunder. This Security Agreement may be amended only by the manner set forth in Section 9.02 of the Credit Agreement by an instrument in writing executed jointly by Debtor and Secured Party and may be supplemented only by documents delivered or to be delivered in accordance with the express terms hereof. Section 7.03 Copy as Financing Statement. A photocopy or other reproduction of this Security Agreement or any financing statement covering the Collateral is sufficient as a financing statement, and the same may be filed with any appropriate filing authority for the purpose of perfecting Secured Party's security interest in the Collateral. Section 7.04 Possession of Collateral. Secured Party shall be deemed to have possession of any Collateral in transit to it or set apart for it (or, in either case, any of its agents, affiliates or correspondents). Section 7.05 Redelivery of Collateral. If any sale or transfer of Collateral by Secured Party results in full satisfaction of the Obligations, and after such sale or transfer and discharge there remains a surplus of proceeds, Secured Party will deliver to Debtor such excess proceeds in a commercially reasonable time; provided, however, that neither Secured Party, any Issuing Bank nor any Lender shall be liable for any interest, cost or expense in connection with any delay in delivering such proceeds to Debtor. Section 7.06 Governing Law; Jurisdiction. This Security Agreement and the security interest granted hereby shall be construed in accordance with and governed by the laws of the State of Texas (except to the extent that the laws of any other jurisdiction govern the perfection and priority of the security interests granted hereby). Debtor consents to and submits to in personam jurisdiction and venue in the state district and county courts of the county wherein Secured Party's offices are located at the address specified on the signature page hereof, and in the Federal District Courts of the district wherein such offices of Secured Party are located. This submission to jurisdiction is nonexclusive and does not preclude Secured Party, any Issuing Bank or any Lender from obtaining jurisdiction over Debtor or the Collateral in any court otherwise having jurisdiction. Section 7.07 Cumulative and Other Rights. The rights, powers and remedies of Secured Party hereunder are in addition to all rights, powers and remedies given by law or in equity. The exercise by Secured Party, any Issuing Bank or any Lender of any one or more of the rights, powers and remedies herein shall not be construed as a waiver of any other rights, powers and remedies, including, without limitation, any other rights of set-off. If any of the Obligations are given in renewal, extension for any period or rearrangement, or applied toward the payment of -17- debt secured by any lien, Secured Party shall be, and is hereby, subrogated to all the rights, titles, interests and liens securing the debt so renewed, extended, rearranged or paid. Section 7.08 Subrogation. Until the Obligations have been paid in full, Debtor hereby waives any claim, right or remedy which Debtor may now have or hereafter acquire against the Company which arises out of this Security Agreement or from the performance by Debtor hereunder, including without limitation, any claim, remedy or right of subrogation, reimbursement, exoneration, indemnification, or participation in any such claim, right or remedy of any other Person against the Company; provided, however, notwithstanding the foregoing, Debtor reserves its rights of contribution and reimbursement, if any, from any Obligor. Until the Obligations have been paid in full, Debtor further waives any benefit of any right to participate in any security now or hereafter held by Secured Party, the Issuing Banks and/or the Lenders. Section 7.09 Continuing Security Agreement. (a) This Security Agreement shall constitute a continuing security agreement, and all representations and warranties, covenants and agreements shall, as applicable, apply to all future as well as existing transactions. Provisions of this Security Agreement, unless they are by their terms exclusive, shall be in addition to other agreements between the parties. (b) Except as may be expressly applicable pursuant to Section 9.505 of the Code, no action taken or omission to act by Secured Party, the Issuing Banks or the Lenders hereunder, including, without limitation, any action taken or inaction pursuant to Section 6.02, shall be deemed to constitute a retention of the Collateral in satisfaction of the Obligations or otherwise to be in full satisfaction of the Obligations, and the Obligations shall remain in full force and effect, until Secured Party, the Issuing Banks and the Lenders shall have applied payments (including, without limitation, collections from Collateral) towards the Obligations in the full amount then outstanding or until such subsequent time as is hereinafter provided in subsection (c) below. (c) To the extent that any payments on the Obligations or proceeds of the Collateral are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, debtor in possession, receiver or other Person under any bankruptcy law, common law or equitable cause, then to such extent the Obligations so satisfied shall be revived and continue as if such payment or proceeds had not been received by Secured Party, the Issuing Banks or the Lenders, and Secured Party's, the Issuing Banks' and the Lenders' security interests, rights, powers and remedies hereunder shall continue in full force and effect. In such event, this Security Agreement shall be automatically reinstated if it shall theretofore have been terminated pursuant to Section 7.10. (d) In the event that the Obligations are structured such that there are times when no Indebtedness is owing thereunder, this Security Agreement shall remain valid and in full force and effect as to all subsequent indebtedness included in the Obligations, provided Secured Party -18- has not in the interim period executed a written release or termination statement or returned possession of or reassigned the Collateral to Debtor. Section 7.10 Termination. The grant of a security interest hereunder and all of Secured Party's, the Issuing Banks' and the Lenders' rights, powers and remedies in connection therewith shall remain in full force and effect until Secured Party has retransferred and delivered all Collateral in its possession to Debtor, and executed a written release or termination statement and reassigned to Debtor without recourse or warranty any remaining Collateral and all rights conveyed hereby. Upon the complete payment of the Obligations and the compliance by Debtor with all covenants and agreements hereof, Secured Party, at the written request and expense of Debtor, will release, reassign and transfer the Collateral to Debtor and declare this Security Agreement to be of no further force or effect. Notwithstanding the foregoing, the provisions of Section 7.09(c) shall survive the termination of this Security Agreement. Section 7.11 Counterparts, Effectiveness. This Security Agreement may be executed in two or more counterparts. Each counterpart is deemed an original, but all such counterparts taken together constitute one and the same instrument. This Security Agreement becomes effective upon the execution hereof by Debtor and delivery of the same to Secured Party, and it is not necessary for Secured Party, the Issuing Banks or any Lender to execute any acceptance hereof or otherwise signify or express its acceptance hereof. Section 7.12 Headings Descriptive. All titles or headings to articles, sections, subsections or other divisions of this Security Agreement or the exhibits hereto are only for the convenience of the parties and shall not be construed to have any effect or meaning with respect to the other content of such articles, sections, subsections or other divisions, such other content being controlling as to the agreement between the parties hereto. Section 7.13 Delivery of Copy/Waiver. The Debtor hereby acknowledges receiving a copy of this Security Agreement. The Debtor waives all rights to receive from the Secured Party a copy of any financing statement or financing change statement filed or registered or verification statement issued at any time in respect of this Security Agreement. -19- DEBTOR: TESORO COASTWIDE SERVICES COMPANY By: /s/ Sharon L. Layman Sharon L. Layman Assistant Treasurer Address of Chief Executive Office and Location of the Collateral: 8700 Tesoro Drive San Antonio, Texas 78217 -20- EX-4.8 9 SECURITY AGREEMENT SECURITY AGREEMENT (Accounts and Inventory) Between COASTWIDE MARINE SERVICES, INC. and BANQUE PARIBAS, AS ADMINISTRATIVE AGENT June 7, 1996 SECURITY AGREEMENT Accounts and Inventory THIS SECURITY AGREEMENT is made as of June 7, 1996, between COASTWIDE MARINE SERVICES, INC., a Texas corporation ("Debtor"), and BANQUE PARIBAS, as Administrative Agent ("Secured Party") for the Issuing Banks and the Lenders parties to the Credit Agreement referred to below. RECITALS A. On even date herewith, Tesoro Petroleum Corporation (the "Company"), Secured Party, The Bank of Nova Scotia, as Documentation Agent and the other financial institutions parties thereto (the "Lenders") are entering into an Amended and Restated Credit Agreement (as amended from time to time, the "Credit Agreement"). B. The conditions precedent to the effectiveness of the Credit Agreement include the execution and delivery by Debtor of this Security Agreement, and Debtor has agreed to enter into this Security Agreement. C. Therefore, (i) in order to comply with the terms and conditions of the Credit Agreement, (ii) to induce the Lenders at any time from time to time to loan monies and the Issuing Banks to issue Letters of Credit, with or without security to or for the account of the Company in accordance with the terms of the Credit Agreement, (iii) at the special insistence and request of the Agent, the Issuing Banks and the Lenders, and (iv) for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Debtor agrees with Secured Party as follows: ARTICLE I Definitions Section 1.01 Terms Defined Above. As used in this Security Agreement, the terms "Company," "Credit Agreement," "Debtor" and "Secured Party" shall have the meanings respectively assigned to them. Section 1.02 Certain Definitions. As used in this Security Agreement, the following terms shall have the following meanings, unless the context otherwise requires: "Accounts" shall mean all accounts (as such term is defined in the Code). "Account Debtor" shall mean any Person liable (whether directly or indirectly, primarily or secondarily) for the payment or performance of any obligations included in the Collateral, whether as an account debtor (as defined in the Code), obligor on an instrument, issuer of documents or securities, guarantor or otherwise. "Code" shall mean the Uniform Commercial Code as presently in effect in the State of Texas, Texas Business and Commerce Code, Chapters 1 through 9. "Collateral" shall mean the following types or items of Property (including Property hereafter acquired by Debtor as well as Property which Debtor now owns or in which Debtor has rights): (a) all of Debtor's Accounts and Inventory; (b) (i) any Property from time to time delivered to or deposited with Secured Party by or for the account of Debtor which is related to any Property referred to in clause (a) of this definition; and (ii) all certificates of title or other documents evidencing ownership or possession of or otherwise relating to any Property referred to in clause (a) of this definition; (c) (i) all goods which were at any time included in the Collateral described in clause (a) of this definition and which are returned to or for the account of Debtor following their sale, lease or other disposition; (ii) all policies of insurance (whether or not required by Secured Party) covering any Property referred to in this definition; and (iii) all proceeds, products, replacements, additions to, substitutions for, accessions of, and Property necessary for the operation of any of the Property referred to in this definition, including, without limitation, insurance payable as a result of loss or damage to any of the Property referred to in this definition, refunds of unearned premiums of any such insurance policy and claims against third parties; (d) all books and records related to any of the Property referred to in this definition, including, without limitation, any and all books of account, customer lists and other records relating in any way to the Collateral described in this definition; (e) all of Debtor's general intangibles (as defined in the Code) which are related (but only those related) to any Property referred to in this definition, including, without limitation, all (i) letters of credit, bonds, guaranties, purchase or sales agreements and other contractual rights, rights to performance, and claims for damages, refunds (including tax refunds) or other monies due or to become due; (ii) orders, franchises, permits, certificates, licenses, consents, exemptions, variances, authorizations or other approvals by any Governmental Authority; (iii) business records, computer tapes and computer software; and (iv) other intangible personal property, whether similar or dissimilar to the Property referred to in clause (a) of this definition; and -2- (f) all of Debtor's chattel paper, documents and instruments (as such terms are defined in the Code) related to or arising out of any Property referred to in clause (a) of this definition. It is expressly contemplated that additional Property may from time to time be pledged, assigned or granted to Secured Party as additional security for the Obligations, and, if so, then the term "Collateral" as used herein shall be deemed for all purposes hereof to include all such additional Property, together with all other Property of the types described above related thereto. It is expressly agreed that Collateral shall not include and shall be exclusive of any equipment. "Event of Default" shall have the meaning assigned such term in Section 6.01 of this Security Agreement. "Inventory" shall mean all inventory (as defined in the Code). "Obligations" shall mean with respect to the Debtor, the Obligations (as defined in the Guaranty Agreement) to the extent the Debtor is liable therefor as provided in the Guaranty Agreement. The Obligations are Senior Debt as such term is defined in that certain Subordination Agreement dated December 15, 1992 among the Company, Tesoro Alaska Petroleum Company and the State of Alaska attached to the Settlement Agreement among the Company, Tesoro Alaska Petroleum Company and the State of Alaska. "Obligor" shall mean the Company and any other Person, other than Debtor, liable (whether directly or indirectly, primarily or secondarily) for the payment or performance of any of the Obligations whether as maker, co-maker, endorser, guarantor, accommodation party, general partner or otherwise; and the term "Obligor" shall specifically include each Guarantor, other than Debtor, named in the Credit Agreement. "Property" shall mean any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "Security Agreement" shall mean this Security Agreement, as the same may be amended, modified or supplemented from time to time. Section 1.03 Other Defined Terms. Unless otherwise defined herein, all terms beginning with a capital letter which are defined in the Credit Agreement shall have the meanings assigned therein, unless the context hereof requires otherwise. All uncapitalized terms which are defined in the Code shall have their respective meanings as used in the Code, unless the context hereof requires otherwise. -3- ARTICLE II Security Interest Section 2.01 Grant of Security Interest. Debtor hereby assigns and grants to Secured Party, for its benefit and the benefit of the Lenders and the Issuing Banks, a security interest in, lien upon and right of set-off against the Collateral to secure the prompt payment and performance of the Obligations. ARTICLE III Representations and Warranties Debtor represents and warrants to Secured Party, the Issuing Banks and the Lenders (which representations and warranties will survive the creation and payment of the Obligations) that: Section 3.01 First Priority Security Interest. The grant of the security interest in the Collateral pursuant to this Security Agreement creates a valid and perfected first priority security interest in the Collateral, enforceable against Debtor and all third parties and securing payment of the Obligations. Section 3.02 No Filings By Third Parties. No financing statement or other public notice or recording covering the Collateral is on file in any public office (other than any financing statement or other public notice or recording naming Secured Party as the secured party therein), and Debtor will not execute any such financing statement or other public notice or recording so long as any of the Obligations are outstanding. Section 3.03 No Name Changes. Debtor has not, during the preceding five years, entered into any contract, agreement, security instrument or other document using a name other than, or been known by or otherwise used any name other than, the name used by Debtor herein. Section 3.04 Location of Debtor and Collateral. Debtor's chief executive office and Debtor's records concerning the Collateral are located at the address or location set forth on the signature page hereof. The Collateral is located at such address or at the location(s), if any, specified in Exhibit A hereto. Any Collateral not at such location(s) nevertheless remains subject to Secured Party's security interest. Section 3.05 Collateral. All statements or other information provided by Debtor to Secured Party, any Issuing Bank or any Lender with respect to the Collateral is or (in the case of subsequently furnished information) will be when provided correct and complete in all material respects. The delivery at any time by Debtor to Secured Party of additional Collateral or of additional descriptions of Collateral shall constitute a representation and warranty by -4- Debtor to Secured Party hereunder that the representations and warranties of this Article III are correct insofar as they would pertain to such Collateral or the descriptions thereof. Section 3.06 Accounts. (a) Each Account represents the genuine, valid and legally enforceable indebtedness of an Account Debtor arising from the sale, lease or rendition by Debtor of goods or services and is not and will not be subject to contra accounts, set-offs, defenses, counterclaims, allowances or adjustments (other than discounts for prompt payment shown on the invoice), or objections or complaints by the Account Debtor concerning its liability on the Account; and any goods, the sale of which gave rise to an Account, have not been returned or rejected by the Account Debtor or lost or damaged prior to receipt by the Account Debtor. (b) The amount shown as to each Account on Debtor's books is or will be the true and undisputed amount owing and unpaid thereon. Except as disclosed in writing to Secured Party, each Account arose or shall have arisen in the ordinary course of Debtor's business; provided, however, that any Accounts which arose or hereafter arise outside the ordinary course of Debtor's business shall nevertheless be included as part of the Collateral. Debtor has no knowledge of any bankruptcy, insolvency or other action affecting creditors' rights with respect to any Account Debtor. (c) Except as disclosed in writing to Secured Party, each invoice or agreement evidencing the Accounts is or will be due and payable not more than 90 days from the date thereof; provided, however, that any Accounts not so due and payable shall nevertheless be included as part of the Collateral. Section 3.07 Delivery of Documents or Letters of Credit. With respect to any Inventory or other Collateral covered by one or more certificates of title or other documents evidencing ownership or possession thereof, and with respect to any Accounts or other Collateral supported by letters of credit, each of such certificates, documents or letters of credit has been delivered to Secured Party (provided, however, that all certificates, documents and letters of credit referred to in Section 1.02 shall be subject to the security interest created by this Security Agreement irrespective of whether or not such delivery shall have been made). Section 3.08 Ownership of Collateral; Encumbrances; Valid and Binding Agreement. Debtor is the legal and beneficial owner of the Collateral free and clear of any adverse claim, lien, security interest, option or other charge or encumbrance except for the security interest created by this Agreement or as permitted by the Credit Agreement, and Debtor has full right, power and authority to assign and grant a security interest in the Collateral to Secured Party. This Agreement constitutes a legal, valid and binding obligation of Debtor enforceable against Debtor in accordance with its terms. The execution, delivery and performance of this Agreement will not violate the terms of any contract, agreement, law, regulation, order, injunction, judgment, decree or writ to which Debtor is subject and does not require the consent or approval of any other Person. -5- Section 3.09 No Required Consent. No authorization, consent, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body (other than the filing of financing statements) is required for (i) the due execution, delivery and performance by Debtor of this Agreement, (ii) the grant by Debtor of the security interest granted by this Agreement, (iii) the perfection of such security interest or (iv) the exercise by Secured Party of its rights and remedies under this Agreement. ARTICLE IV Covenants and Agreements Debtor covenants and agrees that so long as any part of the Obligations are outstanding: Section 4.01 Change in Location of Collateral or Debtor. Debtor will give Secured Party 30 days' prior written notice of (i) any change in location of the Collateral to a jurisdiction other than Louisiana and Texas and which would cause the Secured Party to be unperfected in the Collateral, (ii) the opening or closing of any place of Debtor's business or (iii) any change in the location of Debtor's chief executive office or address. Section 4.02 Documents; Collateral in Possession of Third Parties. If certificates of title or other documents evidencing ownership or possession of the Collateral are issued or outstanding, Debtor will cause the security interest of Secured Party to be properly noted thereon and will, forthwith upon receipt, deliver same to Secured Party. If any Collateral is at any time in the possession or control of any warehouseman, bailee, agent or independent contractor, Debtor shall notify such Person of Secured Party's security interest in such Collateral. Upon Secured Party's request, Debtor shall instruct any such Person to hold all such Collateral for Secured Party's account subject to Debtor's instructions, or, if an Event of Default shall have occurred, subject to Secured Party's instructions. Section 4.03 Delivery of Letters of Credit and Instruments; Proceeds. Debtor will deliver each letter of credit, if any, included in the Collateral to Secured Party, in each case forthwith upon receipt by or for the account of Debtor. If any Account becomes evidenced by a promissory note, trade acceptance or any other instrument for the payment of money (other than checks or drafts in payment of Accounts collected by Debtor in the ordinary course of business prior to notification by Secured Party under Section 5.04), Debtor will immediately deliver such instrument to Secured Party appropriately endorsed to Secured Party, as collateral assignee and, regardless of the form of presentment, demand, notice of dishonor, protest and notice of protest with respect thereto, Debtor will remain liable thereon until such instrument is paid in full. Except as permitted by Sections 4.03, 4.08 and 4.09, Debtor will deliver to Secured Party all proceeds from the sale or other disposition of the Collateral promptly upon receipt. If chattel paper, documents or instruments are received as proceeds, which are required to be delivered to Secured Party, they will be, immediately upon receipt, properly endorsed or assigned and delivered to Secured Party as Collateral. -6- Section 4.04 Sale, Disposition or Encumbrance of Collateral. Except (i) as permitted by Section 4.08, or (ii) with the prior written consent of the Majority Lenders, Debtor will not in any way encumber any of the Collateral (or permit or suffer any of the Collateral to be encumbered) or sell, assign, lend, rent, lease or otherwise dispose of or transfer any of the Collateral to or in favor of any Person other than Secured Party. Section 4.05 Intentionally left blank. Section 4.06 Records and Information. (a) Debtor shall keep accurate and complete records of the Collateral (including proceeds). These records shall reflect complete and accurate stock records of the Inventory and all facts concerning each Account. Debtor shall conduct a physical count of the Inventory at such intervals as Secured Party requests and promptly supply Secured Party with a copy of such count accompanied by a report of the value (valued at the lower of cost or market value) of the Inventory. Secured Party may at any time have access to, examine, audit, make extracts from and inspect without hindrance or delay Debtor's records, files and the Collateral. (b) Debtor will promptly furnish such information as Secured Party may from time to time reasonably request regarding (i) the business, affairs or financial condition of Debtor or (ii) the Collateral or Secured Party's rights or remedies with respect thereto. Any balance sheets or financial statements requested by Secured Party pursuant to this Section 4.06(b) shall conform to generally accepted accounting principles. (c) Debtor recognizes that financing statements pertaining to the Collateral will be filed with the offices of the Parish Clerk of Bienville Parish, Louisiana and of the Secretary of State of Texas. Debtor will immediately notify Secured Party of any condition or event that may change the proper location for the filing of any financing statements or other public notice or recordings for the purpose of perfecting a security interest in the Collateral. Without limiting the generality of the foregoing, Debtor will (i) immediately notify Secured Party of any change to a jurisdiction other than as represented in Section 3.04 (A) in the location of Debtor's chief executive office or chief place of business, (B) in the location of the office where Debtor keeps its records concerning the Accounts, or (C) in the "location" of Debtor within the meaning of Section 9-103(c) of the Code; (ii) immediately notify Secured Party of any change in the location of the Collateral to any jurisdiction other than the States of Texas, Alaska, California, Oregon and Washington; and (ii) notify Secured Party 30 days prior to any change in Debtor's name, identity or corporate structure or Tax Identification Number. In any notice furnished pursuant to this paragraph, Debtor will expressly state that the notice is required by this Security Agreement and contains facts that will or may require additional filings of financing statements or other notices for the purpose of continuing perfection of Secured Party's security interest in the Collateral. Debtor will promptly provide written notice to Secured Party of all information which in any way relates to or affects the Collateral generally, Secured Party's rights or remedies with respect thereto, the filing of any financing statement or other public notices or recordings, -7- or the delivery and possession of items of Collateral for the purpose of perfecting a security interest in the Collateral. Section 4.07 Further Assurances. Upon the request of Secured Party, Debtor shall (at Debtor's expense) execute and deliver all such assignments, certificates, financing statements or other documents and give further assurances and do all other acts and things as Secured Party may reasonably request to perfect Secured Party's interest in the Collateral or to protect, enforce or otherwise effect Secured Party's rights and remedies hereunder. Section 4.08 Inventory. Unless an Event of Default has occurred and is continuing and after any applicable notice and cure periods provided for in the Credit Agreement, Debtor may use the Inventory in any lawful manner not inconsistent with this Security Agreement and with the terms of insurance thereon and may sell, lease or otherwise dispose of its Inventory for cash or terms in the ordinary course of business, and Debtor may retain the proceeds of such sales, leases or other dispositions (subject to Section 4.03 and Section 4.09); provided, however, the Inventory shall remain in Debtor's possession and control at all times prior to sale, lease or other disposition at Debtor's address set forth in Section 3.04. Debtor shall bear any risk of loss of the Inventory. Debtor shall not use any item of Inventory in a manner inconsistent with the holding thereof for sale, lease or other disposition in the ordinary course of business or in contravention of the terms of any agreement. Upon the occurrence and continuance of an Event of Default and after any applicable cure period, Debtor shall immediately deliver to Secured Party any checks, cash or other forms of payment which Debtor receives in connection with any Inventory, appropriately endorsed. Section 4.09 Accounts. (a) Prior to notification by Secured Party under Section 6.02(a)(ix), Debtor will collect the Accounts in the ordinary course of its business and may retain the proceeds of such collections (subject to Section 4.03). (b) Debtor shall immediately notify Secured Party in writing in the event that any representation given in Article III with respect to any Account ceases to be true and correct in all material respects; such notice specifying other representation(s) that cease to be true and correct and the action, if any, that Debtor proposes to take with respect thereto. (c) Debtor will not modify, extend or substitute any contract, the terms of which shall at any time have given rise to an Account, except in the ordinary course of business or with the prior written consent of Secured Party. Debtor will not re-date any invoice or sale or make sales with an extended payment date beyond that customary in the industry, and in no event longer than 90 days. Debtor shall not adjust, settle, discount or compromise any of the Accounts, except in the ordinary course of business, as permitted by the Credit Agreement or with the prior written consent of Secured Party. -8- (d) Debtor will duly perform or cause to be performed all of Debtor's obligations with respect to the Accounts and the underlying sales of goods or other transactions giving rise to the Accounts. Section 4.10 Condition of Collateral. Debtor will maintain all Collateral in good condition and in accordance with industry standards and practices. Debtor will not misuse, abuse, waste, destroy or endanger the Collateral nor allow it to be used in any manner other than its intended use. Debtor will not use any Collateral in violation of any Governmental Requirement, or suffer it to be so used. Section 4.11 Collateral Separate and Distinct. Debtor shall at all times keep the Collateral, including proceeds, or cause it to be kept (when in the possession of warehousemen, bailees, agents, independent contractors or other third parties), separate and distinct from other Property; provided, however, proceeds of the Collateral may be kept in various concentration accounts of the Parent or the Guarantors. Section 4.12 Change in Debtor's Name or Corporate Structure. Debtor will not change its name, identity or corporate structure (including, without limitation, any merger, consolidation or sale of substantially all of its assets) without notifying Secured Party of such change in writing at least 30 days prior to the effective date of such change. Without the express written consent of Secured Party, however, Debtor will not engage in any other business or transaction under any name other than Debtor's name hereunder. ARTICLE V Rights, Duties, and Powers of Secured Party The following rights, duties and powers of Secured Party are applicable irrespective of whether an Event of Default has occurred and is continuing, but only after having given Debtor at least three (3) days prior notice: Section 5.01 Attorney-in-Fact. Secured Party is hereby fully authorized and empowered (without the necessity of any further consent or authorization from Debtor) and the right is expressly granted to Secured Party, and Debtor hereby irrevocably appoints and makes Secured Party as Debtor's attorney-in-fact, with full authority in the place and stead of Debtor and in the name of Debtor or otherwise, from time to time in Secured Party's discretion, but at Debtor's cost and expense to: (a) obtain, adjust, sell and cancel any insurance with respect to the Collateral and endorse any draft drawn by insurers of the Collateral, and Secured Party may apply any proceeds or unearned premiums of such insurance to the Obligations (whether or not due); and -9- (b) take any action and to execute any assignment, certificate, financing statement, notification, document or instrument which Secured Party may deem necessary or advisable to accomplish the purposes of this Security Agreement, including, without limitation, to receive, endorse and collect all instruments made payable to Debtor representing any payment or other distribution in respect of the Collateral or any part thereof and to give full discharge for the same. Section 5.02 Transfer of Collateral. Secured Party may transfer any or all of the Obligations, and upon any such transfer, Secured Party may transfer its interest in any or all of the Collateral and shall be fully discharged thereafter from all liability therefor. Any transferee of the Collateral shall be vested with all rights, powers and remedies of Secured Party hereunder. Section 5.03 Purchase Money Financing. To the extent that the Lenders have advanced or will advance funds to or for the account of Debtor to enable Debtor to purchase or otherwise acquire specific types or items of Collateral, the Lenders may at their option pay such funds (i) directly to the Person from whom Debtor will make such purchase or acquire such rights or (ii) to Debtor, in which case Debtor covenants promptly to pay the same to such Person and forthwith furnish to Secured Party, on request, evidence satisfactory to Secured Party that such payment has been made from the funds so provided by Secured Party for such payment. Section 5.04 Proceeds. If so requested by Debtor, any payments received by Secured Party on the Accounts or as proceeds of other Collateral shall upon final collection by Secured Party be credited towards payment of the Obligations. In the absence of such request from Debtor, and until so requested, Secured Party may hold such collected payments as cash Collateral (and Secured Party may at any time place a hold or freeze on all or a part of any deposit account of Debtor containing deposits of such payments up to the amount of such deposits). Section 5.05 Discharge Encumbrances. Secured Party may, at its option, discharge any taxes, Liens, security interests or other encumbrances at any time levied or placed on the Collateral, may pay for insurance on the Collateral and may pay for the maintenance and preservation of the Collateral. Debtor agrees to reimburse Secured Party upon demand for any payment so made, plus interest on the portion thereof from time to time remaining unpaid from the date of Secured Party's demand at the rate for overdue principal and interest set forth in Section 2.06(c) of the Credit Agreement. Section 5.06 Disclaimer of Certain Duties. (a) The powers conferred upon Secured Party by this Security Agreement are to protect the interest of Secured Party, the Issuing Banks and the Lenders in the Collateral and shall not impose any duty upon Secured Party, the Issuing Banks or any Lender to exercise any such powers. Debtor hereby agrees that Secured Party, the Issuing Banks and the Lenders shall not be liable for, nor shall the indebtedness evidenced by the Obligations be diminished by, -10- Secured Party's delay or failure to collect upon, foreclose, sell, take possession of or otherwise obtain value for the Collateral. (b) Except as provided in the Credit Agreement, Secured Party shall be under no duty whatsoever to make or give any presentment, notice of dishonor, protest, demand for performance, notice of non-performance, notice of intent to accelerate, notice of acceleration, or other notice or demand in connection with any Collateral or the Obligations, or to take any steps necessary to preserve any rights against any Obligor, Account Debtor or other Person. Section 5.07 Modification of Obligations; Other Security. Debtor waives (i) any and all notice of acceptance, creation, modification, rearrangement, renewal or extension for any period of any instrument executed by any Obligor in connection with the Obligations and (ii) any defense of any Obligor by reason of disability, lack of authorization, cessation of the liability of any Obligor or for any other reason. Debtor authorizes Secured Party, without notice or demand and without any reservation of rights against Debtor and without affecting Debtor's liability hereunder or on the Obligations, from time to time to (x) take and hold other Property, other than the Collateral, as security for the Obligations, and exchange, enforce, waive and release any or all of the Collateral, (y) apply the Collateral in the manner permitted by this Security Agreement and (z) renew, extend for any period, accelerate, amend or modify, supplement, enforce, compromise, settle, waive or release the obligations of any Obligor or any instrument or agreement of such other Person with respect to any or all of the Obligations or Collateral. Section 5.08 Waiver of Notice; Demand and Presentment; etc. Except for any notice required under the Credit Agreement, Debtor hereby waives any demand, notice of default, notice of acceleration of the maturity of the Obligations, notice of intent to accelerate the maturity of the Obligations, presentment, protest and notice of dishonor as to any action taken by Secured Party in connection with this Security Agreement, or any instrument or document. Debtor waives any right of marshaling in respect of any and all Collateral, and waives any right to require Secured Party, any Issuing Bank or any Lender to proceed against any Obligor, Account Debtor or other Person, exhaust any Collateral or enforce any other remedy which Secured Party, any Issuing Bank or any Lender now has or may hereafter have against any Obligor or other Person. Section 5.09 Non-judicial Enforcement. To the fullest extent allowed by applicable law, Secured Party may enforce its rights hereunder without prior judicial process or judicial hearing, and to the fullest extent permitted by law Debtor expressly waives any and all legal rights which might otherwise require Secured Party to enforce its rights by judicial process. -11- ARTICLE VI Events of Default Section 6.01 Events of Default. An Event of Default under the Credit Agreement shall constitute an "Event of Default" under this Security Agreement. Section 6.02 Remedies. Upon the occurrence and during the continuance of any Event of Default, Secured Party may take any or all of the following actions without notice (except where expressly required under the Credit Agreement or below) or demand to Debtor: (a) With respect to Collateral located in any jurisdiction: (i) Declare all or part of the indebtedness pursuant to the Obligations immediately due and payable and enforce payment of the same by Debtor or any Obligor. (ii) Take possession of the Collateral, or at Secured Party's request Debtor shall, at Debtor's cost, assemble the Collateral and make it available at a location to be specified by Secured Party which is reasonably convenient to Debtor and Secured Party. In any event, Debtor shall bear the risk of accidental loss or damage to or diminution in value of the Collateral, and Secured Party shall have no liability whatsoever for failure to obtain or maintain insurance, nor to determine whether any insurance ever in force is adequate as to amount or as to risk insured. (iii) Sell or lease, in one or more sales or leases and in one or more parcels, or otherwise dispose of any or all of the Collateral in its then condition or in any other commercially reasonable manner as Secured Party may elect, in a public or private transaction, at any location as deemed reasonable by Secured Party (including, without limitation, Debtor's premises), either for cash or credit or for future delivery at such price as Secured Party may deem fair, and (unless prohibited by the Code, as adopted in any applicable jurisdiction) Secured Party, any Issuing Bank or any Lender may be the purchaser of any or all Collateral so sold and may apply upon the purchase price therefor any Obligations secured hereby. Any such sale or transfer by Secured Party either to itself or to any other Person shall be absolutely free from any claim of right by Debtor, including any equity or right of redemption, stay or appraisal which Debtor has or may have under any rule of law, regulation or statute now existing or hereafter adopted. Upon any such sale or transfer, Secured Party shall have the right to deliver, assign and transfer to the purchaser or transferee thereof the Collateral so sold or transferred. It shall not be necessary that the Collateral or any part thereof be present at the location of any such sale or transfer. Secured Party may, at its discretion, provide for a public sale, and any such public sale shall be held at such time or times within ordinary business hours and at such place or places as Secured Party may fix in the notice of such sale. Secured Party shall not be obligated to make any sale pursuant to any such notice. Secured Party may, without notice or publication, adjourn any public or private sale by announcement at any -12- time and place fixed for such sale, and such sale may be made at any time or place to which the same may be so adjourned. In the event any sale or transfer hereunder is not completed or is defective in the opinion of Secured Party, such sale or transfer shall not exhaust the rights of Secured Party hereunder, and Secured Party shall have the right to cause one or more subsequent sales or transfers to be made hereunder. In the event that any of the Collateral is sold or transferred on credit, or to be held by Secured Party for future delivery to a purchaser or transferee, the Collateral so sold or transferred may be retained by Secured Party until the purchase price or other consideration is paid by the purchaser or transferee thereof, but in the event that such purchaser or transferee fails to pay for the Collateral so sold or transferred or to take delivery thereof, neither Secured Party, any Issuing Bank nor any Lender shall incur any liability in connection therewith. If only part of the Collateral is sold or transferred such that the Obligations remain outstanding (in whole or in part), Secured Party's rights and remedies hereunder shall not be exhausted, waived or modified, and Secured Party is specifically empowered to make one or more successive sales or transfers until all the Collateral shall be sold or transferred and all the Obligations are paid. In the event that Secured Party elects not to sell the Collateral, Secured Party retains its rights to lease or otherwise dispose of or utilize the Collateral or any part or parts thereof in any manner authorized or permitted by law or in equity, and to apply the proceeds of the same towards payment of the Obligations. Each and every method of disposition of the Collateral described in this Section 6.02(c) or in Section 6.02(f) shall constitute disposition in a commercially reasonable manner. (iv) Take possession of all books and records of Debtor pertaining to the Collateral. Secured Party shall have the authority to enter upon any real or immoveable property or improvements thereon in order to obtain any such books or records, or any Collateral located thereon, and remove the same therefrom without liability. (v) Apply proceeds of the disposition of the Collateral to the Obligations in any manner elected by Secured Party and permitted by the Code or otherwise permitted by law or in equity. Such application may include, without limitation, the reasonable expenses of retaking, holding, preparing for sale or other disposition, and the reasonable attorneys' fees and legal expenses incurred by Secured Party, the Issuing Banks and the Lenders. (vi) Appoint any Person as agent to perform any act or acts necessary or incident to any sale or transfer by Secured Party of the Collateral. Additionally, any sale or transfer hereunder may be conducted by an auctioneer or any officer or agent of Secured Party. (vii) Apply and set-off (i) any deposits of Debtor now or hereafter held by Secured Party, the Issuing Banks and the Lenders; (ii) all claims of Debtor against Secured Party, now or hereafter existing; (iii) any other Property, rights or interests of Debtor which come into the possession or custody or under the control of Secured Party; -13- and (iv) the proceeds of any of the foregoing as if the same were included in the Collateral. Secured Party agrees to notify Debtor promptly after any such set-off or application; provided, however, the failure of Secured Party to give any notice shall not affect the validity of such set-off or application. (viii) With respect to the Collateral, receive, change the address for delivery, open and dispose of mail addressed to Debtor, and to execute, assign and endorse negotiable and other instruments for the payment of money, documents of title or other evidences of payment, shipment or storage for any form of Collateral on behalf of and in the name of Debtor. (ix) Notify or require Debtor to notify Account Debtors that the Accounts have been assigned to Secured Party and direct such Account Debtors to make payments on the Accounts directly to Secured Party. To the extent Secured Party does not so elect, Debtor shall continue to collect and retain the Accounts. Secured Party or its designee shall also have the right, in its own name or in the name of Debtor, to do any of the following: (i) to demand, collect, receipt for, settle, compromise any amounts due, give acquittances for, prosecute or defend any action which may be in relation to any monies due or to become due by virtue of, the Accounts; (ii) to sell, transfer or assign or otherwise deal in the Accounts or the proceeds thereof or the related goods, as fully and effectively as if Secured Party were the absolute owner thereof; (iii) to extend the time of payment of any of the Accounts, to grant waivers and make any allowance or other adjustment with reference thereto; (iv) to endorse the name of Debtor on notes, checks or other evidences of payments on Collateral that may come into possession of Secured Party; (v) to take control of cash and other proceeds of any Collateral; (vi) to sign the name of Debtor on any invoice or bill of lading relating to any Collateral, or any drafts against Account Debtors or other persons making payment with respect to Collateral; (vii) to send a request for verification of Accounts to any Account Debtor; and (viii) to do all other acts and things necessary to carry out the intent of this Agreement. (x) Exercise all other rights and remedies permitted by law or in equity. (b) With respect to any Collateral located in Louisiana, Secured Party's rights shall also include the following: (i) Secured Party, at its option, may declare all Obligations immediately due and payable or performable and Secured Party shall thereupon, in addition to the rights and remedies provided in this Security Agreement or in any other instrument or document executed by Debtor, have all the rights and remedies of a "secured party" under Louisiana Commercial Laws (La. R.S. 10:9-101 et seq.) and under all other applicable laws of Louisiana or any other state having jurisdiction. Secured Party shall have the right to sell, transfer or otherwise dispose of any and all of the Collateral and to apply the proceeds thereof toward payment of all costs, expenses, attorney's fees and legal expenses thereby incurred by Secured Party and toward payment and performance of the -14- Obligations in such order or manner as Secured Party may elect. Unless the Collateral threatens to decline speedily in value, Secured Party shall send Debtor reasonable notice of the time and place of any public sale or of the time after which any private sale or the disposition thereof is to be made. The requirement of sending a reasonable notice shall be met if such notice is mailed, postage prepaid, to Debtor at the address set forth on the signature page hereof at least fifteen (15) days before the time of such sale or disposition. All expenses of retaking, holding, maintaining, preparing for sale, selling and the like, including Secured Party's reasonable attorney's fees and legal expenses, shall constitute additional Obligations of Debtor and shall be immediately due and payable, and payment of the same shall be secured by and entitled to the benefits of this Security Agreement. If the proceeds of any sale or other lawful disposition of the Collateral by Secured Party are insufficient to fully pay the Obligations, then Debtor shall pay or cause to be paid any deficiency. (ii) Debtor agrees that, in the event any proceedings are taken under this Security Agreement by way of executory process or otherwise, any and all declarations of fact made by authentic act before a notary public and in the presence of two witnesses by person declaring that such facts lie within his knowledge shall constitute authentic evidence of such facts for purposes of executory process, and in connection with any such action to foreclose or otherwise realize upon the Collateral. (iii) Debtor expressly waives: (A) The benefit of appraisement provided for in Articles 2332, 2336, 2723, 2724, Louisiana Code of Civil Procedure and all other laws conferring such benefits. (B) The demand and three days' delay accorded by Articles 2639 and 2721, Louisiana Code of Civil Procedure. (C) The three days' delay provided by Articles 2331 and 2722, Louisiana Code of Civil Procedure. (D) The benefit of the other provisions of Articles 2331, 2722 and 2723, Louisiana Code of Civil Procedure; Debtor expressly agrees to the immediate seizure of the Collateral in the event of suit hereon. (iv) Debtor does further confess judgment for the full amount of the Obligations in principal, interest, attorneys' fees and all other costs and charges and does consent and agree that upon the occurrence of any Event of Default, Secured Party may cause all of the Collateral to be seized and sold under executory or any other legal process, at the option of Secured Party. -15- (v) Notwithstanding anything to the contrary contained in this Article VI or elsewhere in this Security Agreement, the Obligations shall immediately become fully due, payable, performable, satisfiable and dischargeable without the necessity of further action on the part of Secured Party, and Debtor hereby expressly waives any required notice of intent to accelerate the Obligations and notice of acceleration of the Obligations. Section 6.03 Liability for Deficiency. If any sale or other disposition of Collateral by Secured Party or any Issuing Bank or any other action of Secured Party, any Issuing Bank or any Lender hereunder results in reduction of the Obligations, such action will not release Debtor from its liability to Secured Party, the Issuing Banks and the Lenders for any unpaid Obligations, including costs, charges and expenses incurred in the liquidation of Collateral, together with interest thereon, and the same shall be immediately due and payable to Secured Party at Secured Party's address set forth on the signature page of this Security Agreement. Section 6.04 Reasonable Notice. If any applicable provision of any law requires Secured Party any Issuing Bank or any Lender to give reasonable notice of any sale or disposition or other action, Debtor hereby agrees that fifteen (15) days' prior written notice shall constitute reasonable notice thereof. Such notice, in the case of public sale, shall state the time and place fixed for such sale and, in the case of private sale, the time after which such sale is to be made. Section 6.05 Account Debtors. Any payment or settlement of an Account made by an Account Debtor will be, to the extent of such payment or to the extent provided under such settlement, a release, discharge and acquittance of the Account Debtor with respect to such Account, and Debtor shall take any action as may be required by Secured Party in connection therewith. No Account Debtor on any Account will ever be bound to make inquiry as to the termination of this Agreement or the rights of Secured Party to act hereunder, but shall be fully protected by Debtor in making payment directly to Secured Party. ARTICLE VIII Miscellaneous Section 7.01 Notices. Any notice required or permitted to be given under or in connection with this Security Agreement shall be given in accordance with the notice provisions of the Guaranty Agreement. Section 7.02 Amendments and Waivers. Secured Party's, any Issuing Bank's or any Lender's acceptance of partial or delinquent payments or any forbearance, failure or delay by the Secured Party in exercising any right, power or remedy hereunder shall not be deemed a waiver of any obligation of Debtor or any Obligor, or of any right, power or remedy of Secured Party; and no partial exercise of any right, power or remedy shall preclude any other or further exercise -16- thereof. Secured Party may remedy any Event of Default hereunder or in connection with the Obligations without waiving the Event of Default so remedied. Debtor hereby agrees that if Secured Party agrees to a waiver of any provision hereunder, or an exchange of or release of the Collateral, or the addition or release of any Obligor, any such action shall not constitute a waiver of any of Secured Party's other rights or of Debtor's obligations hereunder. This Security Agreement may be amended only by the manner set forth in Section 9.02 of the Credit Agreement by an instrument in writing executed jointly by Debtor and Secured Party and may be supplemented only by documents delivered or to be delivered in accordance with the express terms hereof. Section 7.03 Copy as Financing Statement. A photocopy or other reproduction of this Security Agreement or any financing statement covering the Collateral is sufficient as a financing statement, and the same may be filed with any appropriate filing authority for the purpose of perfecting Secured Party's security interest in the Collateral. Section 7.04 Possession of Collateral. Secured Party shall be deemed to have possession of any Collateral in transit to it or set apart for it (or, in either case, any of its agents, affiliates or correspondents). Section 7.05 Redelivery of Collateral. If any sale or transfer of Collateral by Secured Party results in full satisfaction of the Obligations, and after such sale or transfer and discharge there remains a surplus of proceeds, Secured Party will deliver to Debtor such excess proceeds in a commercially reasonable time; provided, however, that neither Secured Party, any Issuing Bank nor any Lender shall be liable for any interest, cost or expense in connection with any delay in delivering such proceeds to Debtor. Section 7.06 Governing Law; Jurisdiction. This Security Agreement and the security interest granted hereby shall be construed in accordance with and governed by the laws of the State of Texas (except to the extent that the laws of any other jurisdiction govern the perfection and priority of the security interests granted hereby). Debtor consents to and submits to in personam jurisdiction and venue in the state district and county courts of the county wherein Secured Party's offices are located at the address specified on the signature page hereof, and in the Federal District Courts of the district wherein such offices of Secured Party are located. This submission to jurisdiction is nonexclusive and does not preclude Secured Party, any Issuing Bank or any Lender from obtaining jurisdiction over Debtor or the Collateral in any court otherwise having jurisdiction. Section 7.07 Cumulative and Other Rights. The rights, powers and remedies of Secured Party hereunder are in addition to all rights, powers and remedies given by law or in equity. The exercise by Secured Party, any Issuing Bank or any Lender of any one or more of the rights, powers and remedies herein shall not be construed as a waiver of any other rights, powers and remedies, including, without limitation, any other rights of set-off. If any of the Obligations are given in renewal, extension for any period or rearrangement, or applied toward the payment of -17- debt secured by any lien, Secured Party shall be, and is hereby, subrogated to all the rights, titles, interests and liens securing the debt so renewed, extended, rearranged or paid. Section 7.08 Subrogation. Until the Obligations have been paid in full, Debtor hereby waives any claim, right or remedy which Debtor may now have or hereafter acquire against the Company which arises out of this Security Agreement or from the performance by Debtor hereunder, including without limitation, any claim, remedy or right of subrogation, reimbursement, exoneration, indemnification, or participation in any such claim, right or remedy of any other Person against the Company; provided, however, notwithstanding the foregoing, Debtor reserves its rights of contribution and reimbursement, if any, from any Obligor. Until the Obligations have been paid in full, Debtor further waives any benefit of any right to participate in any security now or hereafter held by Secured Party, the Issuing Banks and/or the Lenders. Section 7.09 Continuing Security Agreement. (a) This Security Agreement shall constitute a continuing security agreement, and all representations and warranties, covenants and agreements shall, as applicable, apply to all future as well as existing transactions. Provisions of this Security Agreement, unless they are by their terms exclusive, shall be in addition to other agreements between the parties. (b) Except as may be expressly applicable pursuant to Section 9.505 of the Code, no action taken or omission to act by Secured Party, the Issuing Banks or the Lenders hereunder, including, without limitation, any action taken or inaction pursuant to Section 6.02, shall be deemed to constitute a retention of the Collateral in satisfaction of the Obligations or otherwise to be in full satisfaction of the Obligations, and the Obligations shall remain in full force and effect, until Secured Party, the Issuing Banks and the Lenders shall have applied payments (including, without limitation, collections from Collateral) towards the Obligations in the full amount then outstanding or until such subsequent time as is hereinafter provided in subsection (c) below. (c) To the extent that any payments on the Obligations or proceeds of the Collateral are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, debtor in possession, receiver or other Person under any bankruptcy law, common law or equitable cause, then to such extent the Obligations so satisfied shall be revived and continue as if such payment or proceeds had not been received by Secured Party, the Issuing Banks or the Lenders, and Secured Party's, the Issuing Banks' and the Lenders' security interests, rights, powers and remedies hereunder shall continue in full force and effect. In such event, this Security Agreement shall be automatically reinstated if it shall theretofore have been terminated pursuant to Section 7.10. (d) In the event that the Obligations are structured such that there are times when no Indebtedness is owing thereunder, this Security Agreement shall remain valid and in full force and effect as to all subsequent indebtedness included in the Obligations, provided Secured Party -18- has not in the interim period executed a written release or termination statement or returned possession of or reassigned the Collateral to Debtor. Section 7.10 Termination. The grant of a security interest hereunder and all of Secured Party's, the Issuing Banks' and the Lenders' rights, powers and remedies in connection therewith shall remain in full force and effect until Secured Party has retransferred and delivered all Collateral in its possession to Debtor, and executed a written release or termination statement and reassigned to Debtor without recourse or warranty any remaining Collateral and all rights conveyed hereby. Upon the complete payment of the Obligations and the compliance by Debtor with all covenants and agreements hereof, Secured Party, at the written request and expense of Debtor, will release, reassign and transfer the Collateral to Debtor and declare this Security Agreement to be of no further force or effect. Notwithstanding the foregoing, the provisions of Section 7.09(c) shall survive the termination of this Security Agreement. Section 7.11 Counterparts, Effectiveness. This Security Agreement may be executed in two or more counterparts. Each counterpart is deemed an original, but all such counterparts taken together constitute one and the same instrument. This Security Agreement becomes effective upon the execution hereof by Debtor and delivery of the same to Secured Party, and it is not necessary for Secured Party, the Issuing Banks or any Lender to execute any acceptance hereof or otherwise signify or express its acceptance hereof. Section 7.12 Headings Descriptive. All titles or headings to articles, sections, subsections or other divisions of this Security Agreement or the exhibits hereto are only for the convenience of the parties and shall not be construed to have any effect or meaning with respect to the other content of such articles, sections, subsections or other divisions, such other content being controlling as to the agreement between the parties hereto. Section 7.13 Delivery of Copy/Waiver. The Debtor hereby acknowledges receiving a copy of this Security Agreement. The Debtor waives all rights to receive from the Secured Party a copy of any financing statement or financing change statement filed or registered or verification statement issued at any time in respect of this Security Agreement. -19- DEBTOR: COASTWIDE MARINE SERVICES, INC. By: /s/ Sharon L. Layman Sharon L. Layman Assistant Treasurer Address of Chief Executive Office and Location of the Collateral: 8700 Tesoro Drive San Antonio, Texas 78217 -20- EX-4.9 10 SECURITY AGREEMENT SECURITY AGREEMENT (Accounts) Between TESORO VOSTOK COMPANY and BANQUE PARIBAS, AS ADMINISTRATIVE AGENT June 7, 1996 SECURITY AGREEMENT Accounts THIS SECURITY AGREEMENT is made as of June 7, 1996, between TESORO VOSTOK COMPANY, a Delaware corporation ("Debtor"), and BANQUE PARIBAS, as Administrative Agent ("Secured Party"), for the Issuing Banks and the Lenders. RECITALS A. On even date herewith, Tesoro Petroleum Corporation (the "Company"), Secured Party, The Bank of Nova Scotia, as Documentation Agent and the other financial institutions parties thereto (the "Lenders") are entering into an Amended and Restated Credit Agreement (as amended from time to time, the "Credit Agreement"). B. The conditions precedent to the effectiveness of the Credit Agreement include the execution and delivery by Debtor of this Security Agreement, and Debtor has agreed to enter into this Security Agreement. C. Therefore, (i) in order to comply with the terms and conditions of the Credit Agreement, (ii) to induce the Lenders at any time from time to time to loan monies and the Issuing Banks to issue Letters of Credit, with or without security to or for the account of the Company in accordance with the terms of the Credit Agreement, (iii) at the special insistence and request of the Agent, the Issuing Banks and the Lenders, and (iv) for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Debtor agrees with Secured Party as follows: ARTICLE I Definitions Section 1.01 Terms Defined Above. As used in this Security Agreement, the terms "Company," "Credit Agreement," "Debtor" and "Secured Party" shall have the meanings respectively assigned to them. Section 1.02 Certain Definitions. As used in this Security Agreement, the following terms shall have the following meanings, unless the context otherwise requires: "Accounts" shall mean all accounts (as such term is defined in the Code). "Account Debtor" shall mean any Person liable (whether directly or indirectly, primarily or secondarily) for the payment or performance of any obligations included in the Collateral, whether as an account debtor (as defined in the Code), obligor on an instrument, issuer of documents or securities, guarantor or otherwise. "Code" shall mean the Uniform Commercial Code as presently in effect in the State of Texas, Texas Business and Commerce Code, Chapters 1 through 9. "Collateral" shall mean the following types or items of Property (including Property hereafter acquired by Debtor as well as Property which Debtor now owns or in which Debtor has rights): (a) all of Debtor's Accounts; (b) any Property from time to time delivered to or deposited with Secured Party by or for the account of Debtor which is related to any Property referred to in this definition; (c) all proceeds, replacements, additions to and substitutions for any of the Property referred to in this definition and claims against third parties; (d) all books and records related to any of the Property referred to in this definition, including, without limitation, any and all books of account, customer lists and other records relating in any way to the Collateral described in this definition; (e) all of Debtor's general intangibles (as defined in the Code) which are related (but only those related) to any Property referred to in this definition, including, without limitation, all (i) letters of credit, bonds, guaranties, purchase or sales agreements and other contractual rights, rights to performance, and claims for damages, refunds (including tax refunds) or other monies due or to become due; (ii) orders, franchises, permits, certificates, licenses, consents, exemptions, variances, authorizations or other approvals by any Governmental Authority; (iii) business records, computer tapes and computer software; and (iv) other intangible personal property, whether similar or dissimilar to the Property referred to in clause (a) of this definition; and (f) all of Debtor's chattel paper, documents and instruments (as such terms are defined in the Code) related to or arising out of any Property referred to in this definition. It is expressly contemplated that additional Property may from time to time be pledged, assigned or granted to Secured Party as additional security for the Obligations, and, if so, then the term "Collateral" as used herein shall be deemed for all purposes hereof to include all such additional Property, together with all other Property of the types described above related thereto. It is expressly agreed that Collateral shall not include and shall be exclusive of any equipment. "Event of Default" shall have the meaning assigned such term in Section 6.01 of this Security Agreement. -2- "Obligations" shall mean with respect to the Debtor, the Obligations (as defined in the Guaranty Agreement) to the extent the Debtor is liable therefor as provided in the Guaranty Agreement. The Obligations are Senior Debt as such term is defined in that certain Subordination Agreement dated December 15, 1992 among the Company, Tesoro Alaska Petroleum Company and the State of Alaska attached to the Settlement Agreement among the Company, Tesoro Alaska Petroleum Company and the State of Alaska. "Obligor" shall mean the Company and any other Person, other than Debtor, liable (whether directly or indirectly, primarily or secondarily) for the payment or performance of any of the Obligations whether as maker, co-maker, endorser, guarantor, accommodation party, general partner or otherwise; and the term "Obligor" shall specifically include each Guarantor, other than Debtor, named in the Credit Agreement. "Property" shall mean any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "Security Agreement" shall mean this Security Agreement, as the same may be amended, modified or supplemented from time to time. Section 1.03 Other Defined Terms. Unless otherwise defined herein, all terms beginning with a capital letter which are defined in the Credit Agreement shall have the meanings assigned therein, unless the context hereof requires otherwise. All uncapitalized terms which are defined in the Code shall have their respective meanings as used in the Code, unless the context hereof requires otherwise. ARTICLE II Security Interest Section 2.01 Grant of Security Interest. Debtor hereby assigns and grants to Secured Party, for its benefit and the benefit of the Lenders and the Issuing Banks, a security interest in, lien upon and right of set-off against the Collateral to secure the prompt payment and performance of the Obligations. ARTICLE III Representations and Warranties Debtor represents and warrants to Secured Party, the Issuing Banks and the Lenders (which representations and warranties will survive the creation and payment of the Obligations) that: -3- Section 3.01 First Priority Security Interest. The grant of the security interest in the Collateral pursuant to this Security Agreement creates a valid and perfected first priority security interest in the Collateral, enforceable against Debtor and all third parties and securing payment of the Obligations. Section 3.02 No Filings By Third Parties. No financing statement or other public notice or recording covering the Collateral is on file in any public office (other than any financing statement or other public notice or recording naming Secured Party as the secured party therein), and Debtor will not execute any such financing statement or other public notice or recording so long as any of the Obligations are outstanding. Section 3.03 No Name Changes; Federal Tax Identification Number. Debtor has not, during the preceding five years, entered into any contract, agreement, security instrument or other document using a name other than, or been known by or otherwise used any name other than, the name used by Debtor herein. Section 3.04 Location of Debtor. Debtor's chief executive office and Debtor's records concerning the Collateral are located at the address or location set forth on the signature page hereof. Section 3.05 Collateral. All statements or other information provided by Debtor to Secured Party, any Issuing Bank or any Lender with respect to the Collateral is or (in the case of subsequently furnished information) will be when provided correct and complete in all material respects. The delivery at any time by Debtor to Secured Party of additional Collateral or of additional descriptions of Collateral shall constitute a representation and warranty by Debtor to Secured Party hereunder that the representations and warranties of this Article III are correct insofar as they would pertain to such Collateral or the descriptions thereof. Section 3.06 Accounts. (a) Each Account represents the genuine, valid and legally enforceable indebtedness of an Account Debtor arising from the sale, lease or rendition by Debtor of goods or services and is not and will not be subject to contra accounts, set-offs, defenses, counterclaims, allowances or adjustments (other than discounts for prompt payment shown on the invoice), or objections or complaints by the Account Debtor concerning its liability on the Account; and any goods, the sale of which gave rise to an Account, have not been returned or rejected by the Account Debtor or lost or damaged prior to receipt by the Account Debtor. (b) The amount shown as to each Account on Debtor's books is or will be the true and undisputed amount owing and unpaid thereon. Except as disclosed in writing to Secured Party, each Account arose or shall have arisen in the ordinary course of Debtor's business; provided, however, that any Accounts which arose or hereafter arise outside the ordinary course of Debtor's business shall nevertheless be included as part of the Collateral. Debtor has no -4- knowledge of any bankruptcy, insolvency or other action affecting creditors' rights with respect to any Account Debtor. (c) Except as disclosed in writing to Secured Party, each invoice or agreement evidencing the Accounts is or will be due and payable not more than 90 days from the date thereof; provided, however, that any Accounts not so due and payable shall nevertheless be included as part of the Collateral. Section 3.07 Delivery of Documents or Letters of Credit. With respect to any Accounts or other Collateral supported by letters of credit, each of such letters of credit has been delivered to Secured Party (provided, however, that all letters of credit referred to in Section 1.02 shall be subject to the security interest created by this Security Agreement irrespective of whether or not such delivery shall have been made). Section 3.08 Ownership of Collateral; Encumbrances; Valid and Binding Agreement. Debtor is the legal and beneficial owner of the Collateral free and clear of any adverse claim, lien, security interest, option or other charge or encumbrance except for the security interest created by this Agreement or as permitted by the Credit Agreement, and Debtor has full right, power and authority to assign and grant a security interest in the Collateral to Secured Party. This Agreement constitutes a legal, valid and binding obligation of Debtor enforceable against Debtor in accordance with its terms. The execution, delivery and performance of this Agreement will not violate the terms of any contract, agreement, law, regulation, order, injunction, judgment, decree or writ to which Debtor is subject and does not require the consent or approval of any other Person. Section 3.09 No Required Consent. No authorization, consent, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body (other than the filing of financing statements) is required for (i) the due execution, delivery and performance by Debtor of this Agreement, (ii) the grant by Debtor of the security interest granted by this Agreement, (iii) the perfection of such security interest or (iv) the exercise by Secured Party of its rights and remedies under this Agreement. ARTICLE IV Covenants and Agreements Debtor covenants and agrees that so long as any part of the Obligations are outstanding: Section 4.01 Change in Location of Collateral or Debtor. Debtor will give Secured Party 30 days' prior written notice of (i) the opening or closing of any place of Debtor's business or (ii) any change in the location of Debtor's chief executive office or address. Section 4.02 Intentionally left blank. -5- Section 4.03 Delivery of Letters of Credit and Instruments; Proceeds. Debtor will deliver each letter of credit, if any, included in the Collateral to Secured Party, in each case forthwith upon receipt by or for the account of Debtor. If any Account becomes evidenced by a promissory note, trade acceptance or any other instrument for the payment of money (other than checks or drafts in payment of Accounts collected by Debtor in the ordinary course of business prior to notification by Secured Party under Section 5.04), Debtor will immediately deliver such instrument to Secured Party appropriately endorsed to Secured Party, as collateral assignee and, regardless of the form of presentment, demand, notice of dishonor, protest and notice of protest with respect thereto, Debtor will remain liable thereon until such instrument is paid in full. Except as permitted by Sections 4.03 and 4.09, Debtor will deliver to Secured Party all proceeds from the sale or other disposition of the Collateral promptly upon receipt. If chattel paper, documents or instruments are received as proceeds, which are required to be delivered to Secured Party, they will be, immediately upon receipt, properly endorsed or assigned and delivered to Secured Party as Collateral. Section 4.04 Sale, Disposition or Encumbrance of Collateral. Except with the prior written consent of the Majority Lenders, Debtor will not in any way encumber any of the Collateral (or permit or suffer any of the Collateral to be encumbered) or sell, assign, lend, rent, lease or otherwise dispose of or transfer any of the Collateral to or in favor of any Person other than Secured Party. Section 4.05 Intentionally left blank. Section 4.06 Records and Information. (a) Debtor shall keep accurate and complete records of the Collateral (including proceeds). These records shall reflect all facts concerning each Account. Secured Party may at any time have access to, examine, audit, make extracts from and inspect without hindrance or delay Debtor's records, files and the Collateral. (b) Debtor will promptly furnish such information as Secured Party may from time to time reasonably request regarding (i) the business, affairs or financial condition of Debtor or (ii) the Collateral or Secured Party's rights or remedies with respect thereto. Any balance sheets or financial statements requested by Secured Party pursuant to this Section 4.06(b) shall conform to generally accepted accounting principles. (c) Debtor recognizes that financing statements pertaining to the Collateral will be filed with the offices of the Secretary of State of Texas, the Alaska Department of Natural Resources, the Secretary of State of California, the Secretary of State of Oregon and the Department of Licensing of the State of Washington. Debtor will immediately notify Secured Party of any condition or event that may change the proper location for the filing of any financing statements or other public notice or recordings for the purpose of perfecting a security interest in the Collateral. Without limiting the generality of the foregoing, Debtor will (i) immediately notify Secured Party of any change to a jurisdiction other than as represented in -6- Section 3.04 (A) in the location of Debtor's chief executive office or chief place of business, (B) in the location of the office where Debtor keeps its records concerning the Accounts, or (C) in the "location" of Debtor within the meaning of Section 9-103(c) of the Code; and (ii) notify Secured Party 30 days prior to any change in Debtor's name, identity or corporate structure or Tax Identification Number. In any notice furnished pursuant to this paragraph, Debtor will expressly state that the notice is required by this Security Agreement and contains facts that will or may require additional filings of financing statements or other notices for the purpose of continuing perfection of Secured Party's security interest in the Collateral. Debtor will promptly provide written notice to Secured Party of all information which in any way relates to or affects the Collateral generally, Secured Party's rights or remedies with respect thereto, the filing of any financing statement or other public notices or recordings, or the delivery and possession of items of Collateral for the purpose of perfecting a security interest in the Collateral. Section 4.07 Further Assurances. Upon the request of Secured Party, Debtor shall (at Debtor's expense) execute and deliver all such assignments, certificates, financing statements or other documents and give further assurances and do all other acts and things as Secured Party may reasonably request to perfect Secured Party's interest in the Collateral or to protect, enforce or otherwise effect Secured Party's rights and remedies hereunder. Section 4.08 Intentionally left blank. Section 4.09 Accounts. (a) Prior to notification by Secured Party under Section 6.02(i), Debtor will collect the Accounts in the ordinary course of its business and may retain the proceeds of such collections (subject to Section 4.03). (b) Debtor shall immediately notify Secured Party in writing in the event that any representation given in Article III with respect to any Account ceases to be true and correct in all material respects; such notice specifying other representation(s) that cease to be true and correct and the action, if any, that Debtor proposes to take with respect thereto. (c) Debtor will not modify, extend or substitute any contract, the terms of which shall at any time have given rise to an Account, except in the ordinary course of business or with the prior written consent of Secured Party. Debtor will not re-date any invoice or sale or make sales with an extended payment date beyond that customary in the industry, and in no event longer than 90 days. Debtor shall not adjust, settle, discount or compromise any of the Accounts, except in the ordinary course of business, as permitted in the Credit Agreement or with the prior written consent of Secured Party. (d) Debtor will duly perform or cause to be performed all of Debtor's obligations with respect to the Accounts and the underlying sales of goods or other transactions giving rise to the Accounts. -7- Section 4.10 Condition of Collateral. Debtor will maintain all Collateral in good condition and in accordance with industry standards and practices. Debtor will not misuse, abuse, waste, destroy or endanger the Collateral nor allow it to be used in any manner other than its intended use. Debtor will not use any Collateral in violation of any Governmental Requirement, or suffer it to be so used. Section 4.11 Collateral Separate and Distinct. Debtor shall at all times keep the Collateral, including proceeds, or cause it to be kept (when in the possession of warehousemen, bailees, agents, independent contractors or other third parties), separate and distinct from other Property; provided, however, proceeds of the Collateral may be kept in various concentration accounts of the Parent or the Guarantors. Section 4.12 Change in Debtor's Name or Corporate Structure. Debtor will not change its name, identity or corporate structure (including, without limitation, any merger, consolidation or sale of substantially all of its assets) without notifying Secured Party of such change in writing at least 30 days prior to the effective date of such change. Without the express written consent of Secured Party, however, Debtor will not engage in any other business or transaction under any name other than Debtor's name hereunder. ARTICLE V Rights, Duties, and Powers of Secured Party The following rights, duties and powers of Secured Party are applicable irrespective of whether an Event of Default has occurred and is continuing, but only after having given Debtor at least three (3) days prior notice: Section 5.01 Attorney-in-Fact. Secured Party is hereby fully authorized and empowered (without the necessity of any further consent or authorization from Debtor) and the right is expressly granted to Secured Party, and Debtor hereby irrevocably appoints and makes Secured Party as Debtor's attorney-in-fact, with full authority in the place and stead of Debtor and in the name of Debtor or otherwise, from time to time in Secured Party's discretion, but at Debtor's cost and expense, to take any action and to execute any assignment, certificate, financing statement, notification, document or instrument which Secured Party may deem necessary or advisable to accomplish the purposes of this Security Agreement, including, without limitation, to receive, endorse and collect all instruments made payable to Debtor representing any payment or other distribution in respect of the Collateral or any part thereof and to give full discharge for the same. Section 5.02 Transfer of Collateral. Secured Party may transfer any or all of the Obligations, and upon any such transfer, Secured Party may transfer its interest in any or all of the Collateral and shall be fully discharged thereafter from all liability therefor. Any transferee of the Collateral shall be vested with all rights, powers and remedies of Secured Party hereunder. -8- Section 5.03 Purchase Money Financing. To the extent that the Lenders have advanced or will advance funds to or for the account of Debtor to enable Debtor to purchase or otherwise acquire specific types or items of Collateral, the Lenders may at their option pay such funds (i) directly to the Person from whom Debtor will make such purchase or acquire such rights or (ii) to Debtor, in which case Debtor covenants promptly to pay the same to such Person and forthwith furnish to Secured Party, on request, evidence satisfactory to Secured Party that such payment has been made from the funds so provided by Secured Party for such payment. Section 5.04 Proceeds. If so requested by Debtor, any payments received by Secured Party on the Accounts or as proceeds of other Collateral shall upon final collection by Secured Party be credited towards payment of the Obligations. In the absence of such request from Debtor, and until so requested, Secured Party may hold such collected payments as cash Collateral (and Secured Party may at any time place a hold or freeze on all or a part of any deposit account of Debtor containing deposits of such payments up to the amount of such deposits). Section 5.05 Discharge Encumbrances. Secured Party may, at its option, discharge any taxes, Liens, security interests or other encumbrances at any time levied or placed on the Collateral, may pay for insurance on the Collateral and may pay for the maintenance and preservation of the Collateral. Debtor agrees to reimburse Secured Party upon demand for any payment so made, plus interest on the portion thereof from time to time remaining unpaid from the date of Secured Party's demand at the rate for overdue principal and interest set forth in Section 2.06(c) of the Credit Agreement. Section 5.06 Disclaimer of Certain Duties. (a) The powers conferred upon Secured Party by this Security Agreement are to protect the interest of Secured Party, the Issuing Banks and the Lenders in the Collateral and shall not impose any duty upon Secured Party, the Issuing Banks or any Lender to exercise any such powers. Debtor hereby agrees that Secured Party, the Issuing Banks and the Lenders shall not be liable for, nor shall the indebtedness evidenced by the Obligations be diminished by, Secured Party's delay or failure to collect upon, foreclose, sell, take possession of or otherwise obtain value for the Collateral. (b) Except as provided in the Credit Agreement, Secured Party shall be under no duty whatsoever to make or give any presentment, notice of dishonor, protest, demand for performance, notice of non-performance, notice of intent to accelerate, notice of acceleration, or other notice or demand in connection with any Collateral or the Obligations, or to take any steps necessary to preserve any rights against any Obligor, Account Debtor or other Person. Section 5.07 Modification of Obligations; Other Security. Debtor waives (i) any and all notice of acceptance, creation, modification, rearrangement, renewal or extension for any period of any instrument executed by any Obligor in connection with the Obligations and (ii) any defense of any Obligor by reason of disability, lack of authorization, cessation of the liability of -9- any Obligor or for any other reason. Debtor authorizes Secured Party, without notice or demand and without any reservation of rights against Debtor and without affecting Debtor's liability hereunder or on the Obligations, from time to time to (x) take and hold other Property, other than the Collateral, as security for the Obligations, and exchange, enforce, waive and release any or all of the Collateral, (y) apply the Collateral in the manner permitted by this Security Agreement and (z) renew, extend for any period, accelerate, amend or modify, supplement, enforce, compromise, settle, waive or release the obligations of any Obligor or any instrument or agreement of such other Person with respect to any or all of the Obligations or Collateral. Section 5.08 Waiver of Notice; Demand and Presentment; etc. Except for any notice required under the Credit Agreement, Debtor hereby waives any demand, notice of default, notice of acceleration of the maturity of the Obligations, notice of intent to accelerate the maturity of the Obligations, presentment, protest and notice of dishonor as to any action taken by Secured Party in connection with this Security Agreement, or any instrument or document. Debtor waives any right of marshaling in respect of any and all Collateral, and waives any right to require Secured Party, any Issuing Bank or any Lender to proceed against any Obligor, Account Debtor or other Person, exhaust any Collateral or enforce any other remedy which Secured Party, any Issuing Bank or any Lender now has or may hereafter have against any Obligor or other Person. Section 5.09 Non-judicial Enforcement. To the fullest extent allowed by applicable law, Secured Party may enforce its rights hereunder without prior judicial process or judicial hearing, and to the fullest extent permitted by law Debtor expressly waives any and all legal rights which might otherwise require Secured Party to enforce its rights by judicial process. ARTICLE VI Events of Default Section 6.01 Events of Default. An Event of Default under the Credit Agreement shall constitute an "Event of Default" under this Security Agreement. Section 6.02 Remedies. Upon the occurrence and during the continuance of any Event of Default, Secured Party may take any or all of the following actions without notice (except where expressly required under the Credit Agreement or below) or demand to Debtor: (a) Declare all or part of the indebtedness pursuant to the Obligations immediately due and payable and enforce payment of the same by Debtor or any Obligor. (b) Take possession of the Collateral, or at Secured Party's request Debtor shall, at Debtor's cost, assemble the Collateral and make it available at a location to be specified by Secured Party which is reasonably convenient to Debtor and Secured Party. In any event, Debtor shall bear the risk of accidental loss or damage to or diminution in value of the Collateral, and -10- Secured Party shall have no liability whatsoever for failure to obtain or maintain insurance, nor to determine whether any insurance ever in force is adequate as to amount or as to risk insured. (c) Sell or lease, in one or more sales or leases and in one or more parcels, or otherwise dispose of any or all of the Collateral in its then condition or in any other commercially reasonable manner as Secured Party may elect, in a public or private transaction, at any location as deemed reasonable by Secured Party (including, without limitation, Debtor's premises), either for cash or credit or for future delivery at such price as Secured Party may deem fair, and (unless prohibited by the Code, as adopted in any applicable jurisdiction) Secured Party, any Issuing Bank or any Lender may be the purchaser of any or all Collateral so sold and may apply upon the purchase price therefor any Obligations secured hereby. Any such sale or transfer by Secured Party either to itself or to any other Person shall be absolutely free from any claim of right by Debtor, including any equity or right of redemption, stay or appraisal which Debtor has or may have under any rule of law, regulation or statute now existing or hereafter adopted. Upon any such sale or transfer, Secured Party shall have the right to deliver, assign and transfer to the purchaser or transferee thereof the Collateral so sold or transferred. It shall not be necessary that the Collateral or any part thereof be present at the location of any such sale or transfer. Secured Party may, at its discretion, provide for a public sale, and any such public sale shall be held at such time or times within ordinary business hours and at such place or places as Secured Party may fix in the notice of such sale. Secured Party shall not be obligated to make any sale pursuant to any such notice. Secured Party may, without notice or publication, adjourn any public or private sale by announcement at any time and place fixed for such sale, and such sale may be made at any time or place to which the same may be so adjourned. In the event any sale or transfer hereunder is not completed or is defective in the opinion of Secured Party, such sale or transfer shall not exhaust the rights of Secured Party hereunder, and Secured Party shall have the right to cause one or more subsequent sales or transfers to be made hereunder. In the event that any of the Collateral is sold or transferred on credit, or to be held by Secured Party for future delivery to a purchaser or transferee, the Collateral so sold or transferred may be retained by Secured Party until the purchase price or other consideration is paid by the purchaser or transferee thereof, but in the event that such purchaser or transferee fails to pay for the Collateral so sold or transferred or to take delivery thereof, neither Secured Party, any Issuing Bank nor any Lender shall incur any liability in connection therewith. If only part of the Collateral is sold or transferred such that the Obligations remain outstanding (in whole or in part), Secured Party's rights and remedies hereunder shall not be exhausted, waived or modified, and Secured Party is specifically empowered to make one or more successive sales or transfers until all the Collateral shall be sold or transferred and all the Obligations are paid. In the event that Secured Party elects not to sell the Collateral, Secured Party retains its rights to lease or otherwise dispose of or utilize the Collateral or any part or parts thereof in any manner authorized or permitted by law or in equity, and to apply the proceeds of the same towards payment of the Obligations. Each and every method of disposition of the Collateral described in this Section 6.02(c) or in Section 6.02(f) shall constitute disposition in a commercially reasonable manner. (d) Take possession of all books and records of Debtor pertaining to the Collateral. Secured Party shall have the authority to enter upon any real or immoveable property or -11- improvements thereon in order to obtain any such books or records, or any Collateral located thereon, and remove the same therefrom without liability. (e) Apply proceeds of the disposition of the Collateral to the Obligations in any manner elected by Secured Party and permitted by the Code or otherwise permitted by law or in equity. Such application may include, without limitation, the reasonable expenses of retaking, holding, preparing for sale or other disposition, and the reasonable attorneys' fees and legal expenses incurred by Secured Party, the Issuing Banks and the Lenders. (f) Appoint any Person as agent to perform any act or acts necessary or incident to any sale or transfer by Secured Party of the Collateral. Additionally, any sale or transfer hereunder may be conducted by an auctioneer or any officer or agent of Secured Party. (g) Apply and set-off (A) any deposits of Debtor now or hereafter held by Secured Party, the Issuing Banks and the Lenders; (B) all claims of Debtor against Secured Party, now or hereafter existing; (C) any other Property, rights or interests of Debtor which come into the possession or custody or under the control of Secured Party; and (D) the proceeds of any of the foregoing as if the same were included in the Collateral. Secured Party agrees to notify Debtor promptly after any such set-off or application; provided, however, the failure of Secured Party to give any notice shall not affect the validity of such set-off or application. (h) With respect to the Collateral, receive, change the address for delivery, open and dispose of mail addressed to Debtor, and to execute, assign and endorse negotiable and other instruments for the payment of money, documents of title or other evidences of payment, shipment or storage for any form of Collateral on behalf of and in the name of Debtor. (i) Notify or require Debtor to notify Account Debtors that the Accounts have been assigned to Secured Party and direct such Account Debtors to make payments on the Accounts directly to Secured Party. To the extent Secured Party does not so elect, Debtor shall continue to collect and retain the Accounts. Secured Party or its designee shall also have the right, in its own name or in the name of Debtor, to do any of the following: (A) to demand, collect, receipt for, settle, compromise any amounts due, give acquittances for, prosecute or defend any action which may be in relation to any monies due or to become due by virtue of, the Accounts; (B) to sell, transfer or assign or otherwise deal in the Accounts or the proceeds thereof or the related goods, as fully and effectively as if Secured Party were the absolute owner thereof; (C) to extend the time of payment of any of the Accounts, to grant waivers and make any allowance or other adjustment with reference thereto; (D) to endorse the name of Debtor on notes, checks or other evidences of payments on Collateral that may come into possession of Secured Party; (E) to take control of cash and other proceeds of any Collateral; (F) to sign the name of Debtor on any invoice or bill of lading relating to any Collateral, or any drafts against Account Debtors or other persons making payment with respect to Collateral; (G) to send a request for verification of Accounts to any Account Debtor; and (H) to do all other acts and things necessary to carry out the intent of this Agreement. -12- (j) Exercise all other rights and remedies permitted by law or in equity. Section 6.03 Liability for Deficiency. If any sale or other disposition of Collateral by Secured Party or any Issuing Bank or any other action of Secured Party, any Issuing Bank or any Lender hereunder results in reduction of the Obligations, such action will not release Debtor from its liability to Secured Party, the Issuing Banks and the Lenders for any unpaid Obligations, including costs, charges and expenses incurred in the liquidation of Collateral, together with interest thereon, and the same shall be immediately due and payable to Secured Party at Secured Party's address set forth on the signature page of this Security Agreement. Section 6.04 Reasonable Notice. If any applicable provision of any law requires Secured Party any Issuing Bank or any Lender to give reasonable notice of any sale or disposition or other action, Debtor hereby agrees that fifteen (15) days' prior written notice shall constitute reasonable notice thereof. Such notice, in the case of public sale, shall state the time and place fixed for such sale and, in the case of private sale, the time after which such sale is to be made. Section 6.05 Account Debtors. Any payment or settlement of an Account made by an Account Debtor will be, to the extent of such payment or to the extent provided under such settlement, a release, discharge and acquittance of the Account Debtor with respect to such Account, and Debtor shall take any action as may be required by Secured Party in connection therewith. No Account Debtor on any Account will ever be bound to make inquiry as to the termination of this Agreement or the rights of Secured Party to act hereunder, but shall be fully protected by Debtor in making payment directly to Secured Party. ARTICLE VIII Miscellaneous Section 7.01 Notices. Any notice required or permitted to be given under or in connection with this Security Agreement shall be given in accordance with the notice provisions of the Guaranty Agreement. Section 7.02 Amendments and Waivers. Secured Party's, any Issuing Bank's or any Lender's acceptance of partial or delinquent payments or any forbearance, failure or delay by the Secured Party in exercising any right, power or remedy hereunder shall not be deemed a waiver of any obligation of Debtor or any Obligor, or of any right, power or remedy of Secured Party; and no partial exercise of any right, power or remedy shall preclude any other or further exercise thereof. Secured Party may remedy any Event of Default hereunder or in connection with the Obligations without waiving the Event of Default so remedied. Debtor hereby agrees that if Secured Party agrees to a waiver of any provision hereunder, or an exchange of or release of the Collateral, or the addition or release of any Obligor, any such action shall not constitute a waiver of any of Secured Party's other rights or of Debtor's obligations hereunder. This Security -13- Agreement may be amended only by the manner set forth in Section 9.02 of the Credit Agreement by an instrument in writing executed jointly by Debtor and Secured Party and may be supplemented only by documents delivered or to be delivered in accordance with the express terms hereof. Section 7.03 Copy as Financing Statement. A photocopy or other reproduction of this Security Agreement or any financing statement covering the Collateral is sufficient as a financing statement, and the same may be filed with any appropriate filing authority for the purpose of perfecting Secured Party's security interest in the Collateral. Section 7.04 Possession of Collateral. Secured Party shall be deemed to have possession of any Collateral in transit to it or set apart for it (or, in either case, any of its agents, affiliates or correspondents). Section 7.05 Redelivery of Collateral. If any sale or transfer of Collateral by Secured Party results in full satisfaction of the Obligations, and after such sale or transfer and discharge there remains a surplus of proceeds, Secured Party will deliver to Debtor such excess proceeds in a commercially reasonable time; provided, however, that neither Secured Party, any Issuing Bank nor any Lender shall be liable for any interest, cost or expense in connection with any delay in delivering such proceeds to Debtor. Section 7.06 Governing Law; Jurisdiction. This Security Agreement and the security interest granted hereby shall be construed in accordance with and governed by the laws of the State of Texas (except to the extent that the laws of any other jurisdiction govern the perfection and priority of the security interests granted hereby). Debtor consents to and submits to in personam jurisdiction and venue in the state district and county courts of the county wherein Secured Party's offices are located at the address specified on the signature page hereof, and in the Federal District Courts of the district wherein such offices of Secured Party are located. This submission to jurisdiction is nonexclusive and does not preclude Secured Party, any Issuing Bank or any Lender from obtaining jurisdiction over Debtor or the Collateral in any court otherwise having jurisdiction. Section 7.07 Cumulative and Other Rights. The rights, powers and remedies of Secured Party hereunder are in addition to all rights, powers and remedies given by law or in equity. The exercise by Secured Party, any Issuing Bank or any Lender of any one or more of the rights, powers and remedies herein shall not be construed as a waiver of any other rights, powers and remedies, including, without limitation, any other rights of set-off. If any of the Obligations are given in renewal, extension for any period or rearrangement, or applied toward the payment of debt secured by any lien, Secured Party shall be, and is hereby, subrogated to all the rights, titles, interests and liens securing the debt so renewed, extended, rearranged or paid. Section 7.08 Subrogation. Until the Obligations have been paid in full, Debtor hereby waives any claim, right or remedy which Debtor may now have or hereafter acquire against the Company which arises out of this Security Agreement or from the performance by Debtor -14- hereunder, including without limitation, any claim, remedy or right of subrogation, reimbursement, exoneration, indemnification, or participation in any such claim, right or remedy of any other Person against the Company; provided, however, notwithstanding the foregoing, Debtor reserves its rights of contribution and reimbursement, if any, from any Obligor. Until the Obligations have been paid in full, Debtor further waives any benefit of any right to participate in any security now or hereafter held by Secured Party, the Issuing Banks and/or the Lenders. Section 7.09 Continuing Security Agreement. (a) This Security Agreement shall constitute a continuing security agreement, and all representations and warranties, covenants and agreements shall, as applicable, apply to all future as well as existing transactions. Provisions of this Security Agreement, unless they are by their terms exclusive, shall be in addition to other agreements between the parties. (b) Except as may be expressly applicable pursuant to Section 9.505 of the Code, no action taken or omission to act by Secured Party, the Issuing Banks or the Lenders hereunder, including, without limitation, any action taken or inaction pursuant to Section 6.02, shall be deemed to constitute a retention of the Collateral in satisfaction of the Obligations or otherwise to be in full satisfaction of the Obligations, and the Obligations shall remain in full force and effect, until Secured Party, the Issuing Banks and the Lenders shall have applied payments (including, without limitation, collections from Collateral) towards the Obligations in the full amount then outstanding or until such subsequent time as is hereinafter provided in subsection (c) below. (c) To the extent that any payments on the Obligations or proceeds of the Collateral are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, debtor in possession, receiver or other Person under any bankruptcy law, common law or equitable cause, then to such extent the Obligations so satisfied shall be revived and continue as if such payment or proceeds had not been received by Secured Party, the Issuing Banks or the Lenders, and Secured Party's, the Issuing Banks' and the Lenders' security interests, rights, powers and remedies hereunder shall continue in full force and effect. In such event, this Security Agreement shall be automatically reinstated if it shall theretofore have been terminated pursuant to Section 7.10. (d) In the event that the Obligations are structured such that there are times when no Indebtedness is owing thereunder, this Security Agreement shall remain valid and in full force and effect as to all subsequent indebtedness included in the Obligations, provided Secured Party has not in the interim period executed a written release or termination statement or returned possession of or reassigned the Collateral to Debtor. -15- Section 7.10 Termination. The grant of a security interest hereunder and all of Secured Party's, the Issuing Banks' and the Lenders' rights, powers and remedies in connection therewith shall remain in full force and effect until Secured Party has retransferred and delivered all Collateral in its possession to Debtor, and executed a written release or termination statement and reassigned to Debtor without recourse or warranty any remaining Collateral and all rights conveyed hereby. Upon the complete payment of the Obligations and the compliance by Debtor with all covenants and agreements hereof, Secured Party, at the written request and expense of Debtor, will release, reassign and transfer the Collateral to Debtor and declare this Security Agreement to be of no further force or effect. Notwithstanding the foregoing, the provisions of Section 7.09(c) shall survive the termination of this Security Agreement. Section 7.11 Counterparts, Effectiveness. This Security Agreement may be executed in two or more counterparts. Each counterpart is deemed an original, but all such counterparts taken together constitute one and the same instrument. This Security Agreement becomes effective upon the execution hereof by Debtor and delivery of the same to Secured Party, and it is not necessary for Secured Party, the Issuing Banks or any Lender to execute any acceptance hereof or otherwise signify or express its acceptance hereof. Section 7.12 Headings Descriptive. All titles or headings to articles, sections, subsections or other divisions of this Security Agreement or the exhibits hereto are only for the convenience of the parties and shall not be construed to have any effect or meaning with respect to the other content of such articles, sections, subsections or other divisions, such other content being controlling as to the agreement between the parties hereto. Section 7.13 Delivery of Copy/Waiver. The Debtor hereby acknowledges receiving a copy of this Security Agreement. The Debtor waives all rights to receive from the Secured Party a copy of any financing statement or financing change statement filed or registered or verification statement issued at any time in respect of this Security Agreement. [SIGNATURE BEGINS NEXT PAGE] -16- DEBTOR: TESORO VOSTOK COMPANY By: /s/ G. A. Wright G. A. Wright Vice President and Treasurer Address of Chief Executive Office and Location of the Collateral: 8700 Tesoro Drive Houston, Texas 78217 -17- EX-4.10 11 AMENDED AND RESTATED SECURITY AGREEMENT AMENDED AND RESTATED SECURITY AGREEMENT (Pledge) By TESORO PETROLEUM CORPORATION in favor of BANQUE PARIBAS, as Administrative Agent, June 7, 1996 AMENDED AND RESTATED SECURITY AGREEMENT (Pledge) THIS AMENDED AND RESTATED SECURITY AGREEMENT (Pledge) is made as of June 7, 1996, by TESORO PETROLEUM CORPORATION, a Delaware corporation, with principal offices at 8700 Tesoro Drive, San Antonio, Texas 78217 ("Pledgor"); in favor of BANQUE PARIBAS, with offices at 1200 Smith Street, Houston, Texas 77002, as Administrative Agent ("Secured Party") for the Issuing Banks and the Lenders parties to the Credit Agreement referred to below. RECITALS A. On April 20, 1994, the Pledgor, Texas Commerce Bank National Association, individually and as agent, Banque Paribas, individually and as co-agent and the other financial institutions parties thereto entered into a Credit Agreement (as amended from time to time, the "Prior Credit Agreement"). B. The conditions precedent to the effectiveness of the Credit Agreement included the execution and delivery by Pledgor of that certain Pledge Agreement dated of even date therewith (the "Prior Security Agreement"). C. On even date herewith, Pledgor, Secured Party, The Bank of Nova Scotia, as Documentation Agent and the other financial institutions parties thereto (the "Lenders") are entering into an Amended and Restated Credit Agreement (as amended from time to time, the "Credit Agreement"). D. Therefore, in view of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Pledgor and Secured Party agree to amend and restate the Prior Security Agreement as follows: ARTICLE I Definitions Section 1.01 Terms Defined Above or in the Credit Agreement. As used in this Security Agreement, the terms defined above shall have the meanings respectively assigned to them. Other capitalized terms which are defined in the Credit Agreement, but which are not defined herein shall have the same meanings as defined in the Credit Agreement. Section 1.02 Certain Definitions. As used in this Security Agreement, the following terms shall have the following meanings, unless the context otherwise requires: "Code" shall mean the Uniform Commercial Code as presently in effect in the State of Texas. Unless otherwise indicated by the context herein, all uncapitalized terms which are defined in the Code shall have their respective meanings as used in Articles 8 and 9 of the Code. "Collateral" shall mean the following types or items of property: (a) The securities described or referred to in Exhibit A attached hereto and made a part hereof; and (b) (i) all shares of, all securities convertible or exchangeable into, and all warrants, options or other rights to purchase shares of, stock of any of the Issuers; (ii) all certificates or instruments representing such additional shares, convertible or exchangeable securities, warrants, and other rights and all proceeds, income and profits thereon, and all interest, dividends and other payments, property and distributions with respect thereto; (iii) all proceeds received or receivable by the Pledgor in cash, stock or otherwise, from any sale of substantially all the assets of any Issuer; (iv) all proceeds received or receivable by the Pledgor, in cash, stock or otherwise, from any recapitalization, reclassification, merger, dissolution, liquidation or other termination of the existence of any Issuer; (v) all other proceeds or assets received or receivable by the Pledgor in respect of its status as a shareholder of any Issuer; and (vi) any proceeds of any of the foregoing. The inclusion of proceeds in this Agreement does not authorize the Pledgor to sell, dispose of or otherwise use the Collateral in any manner not specifically authorized hereby. Contemporaneously with the execution and delivery hereof, the Pledgor is delivering to Secured Party in pledge hereunder the certificates and other instruments evidencing all Pledged Securities owned by the Pledgor as of the date hereof. (c) It is expressly contemplated that additional securities or other property may from time to time be pledged, assigned or granted to Secured Party as additional security for the Obligations, and the term "Collateral" as used herein shall be deemed for all purposes hereof to include all such additional securities and property, together with all other property of the types described above related thereto. "Event of Default" shall mean any event specified in Section 6.01. "Issuer" shall mean those entities listed on Schedule 1.02 hereto and any other direct Subsidiary of Pledgor whether now owned or hereafter acquired by Pledgor which is an issuer of Pledged Securities pursuant to this Security Agreement. "Obligations" shall mean: (i) the Lender Indebtedness described in the Credit Agreement, including without limitation, the Letter of Credit Liabilities and the Notes, and any and all renewals, extensions for any period, rearrangements or enlargements thereof and any interest accrued thereon, whether pre-petition or post-petition; (ii) payment of and performance of any and all present or future obligations of Pledgor according to the terms of any present or future interest or currency rate swap, rate cap, rate floor, rate collar, exchange transaction, forward rate agreement or other exchange -2- or rate protection agreements or any option with respect to any such transaction now existing or hereafter entered into between Pledgor and Secured Party or any of the Lenders (or any of their Affiliates) and authorized pursuant to the terms of the Credit Agreement; (iii) payment of and performance of any and all present or future obligations of Pledgor according to the terms of any present or future swap agreements, cap, floor, collar, exchange transaction, forward agreement or other exchange or protection agreements relating to crude oil, natural gas or other hydrocarbons or any option with respect to any such transaction now existing or hereafter entered into between Pledgor and Secured Party or any of the Lenders (or any of their Affiliates) and authorized pursuant to the terms of the Credit Agreement; (iv) the performance of all obligations and agreements under the Financing Documents, including this Security Agreement; and (v) all interest accrued and earned, charges, expenses, attorneys' or other fees and any other sums payable to or incurred by Secured Party, any Issuing Bank or any Lender in connection with the execution, administration or enforcement of their rights and remedies hereunder or any other Financing Document. "Obligor" shall mean any Person, other than Pledgor, liable (whether directly or indirectly, primarily or secondarily) for the payment or performance of any of the Obligations whether as maker, co-maker, endorser, guarantor, accommodation party, general partner or otherwise. "Pledged Securities" shall mean all of the securities and other property (whether or not the same constitutes a "security" under the Code) referred to in Section 1.02 and all additional securities (as that term is defined in the Code), if any, constituting Collateral under this Security Agreement. "Security Agreement" shall mean this Amended and Restated Security Agreement (Pledge), as the same may from time to time be amended or supplemented. ARTICLE II Security Interest Section 2.01 Pledge. Pledgor hereby pledges, assigns and grants to Secured Party, for its benefit and the benefit of the Lenders and the Issuing Banks, a security interest in the Collateral to secure the prompt payment and performance of the Obligations. This security interest is granted as security only and shall not subject Secured Party, any Issuing Bank or any Lender to, or transfer or in any way affect or modify, any obligation or liability of the Pledgor or any Obligor with respect to any of the Collateral, the Obligations or any transaction in connection therewith. Section 2.02 Transfer of Collateral. All certificates or instruments representing or evidencing the Pledged Securities shall be delivered to and held pursuant hereto by Secured -3- Party or a Person designated by Secured Party and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, and accompanied by any required transfer tax stamps, or (in the case of either certificated or uncertificated securities) Secured Party shall have been provided with evidence that the Pledged Securities have been otherwise transferred to Secured Party in accordance with Section 8.301 of the Code, all in form and substance satisfactory to Secured Party. Notwithstanding the preceding sentence, at Secured Party's discretion, all Pledged Securities must be delivered or transferred in such manner as to permit Secured Party to be a "protected purchaser" to the extent of its security interest as provided in Section 8.303 of the Code (if Secured Party otherwise qualifies as a bona fide purchaser). Upon the occurrence and continuance of an Event of Default and after any notice and cure periods provided for in the Credit Agreement, Secured Party shall have the right, at any time in its discretion and without notice to Pledgor, to transfer to or to register in the name of Secured Party or any of its nominees any or all of the Pledged Securities, subject only to the revocable rights specified in Section 6.06. In addition, upon the occurrence and continuance of an Event of Default and after any notice and cure periods provided for in the Credit Agreement, Secured Party shall have the right at any time to exchange certificates or instruments representing or evidencing Pledged Securities for certificates or instruments of smaller or larger denominations. ARTICLE III Representations and Warranties In order to induce Secured Party, the Issuing Banks and the Lenders to accept this Security Agreement, Pledgor represents and warrants to Secured Party, the Issuing Banks and the Lenders (which representations and warranties will survive the creation and payment of the Obligations) that: Section 3.01 Ownership of Collateral; Encumbrances. Pledgor is the legal and beneficial owner of the Collateral free and clear of any adverse claim, lien, security interest, option or other charge or encumbrance except for the security interest created by this Security Agreement, and Pledgor has full right, power and authority to pledge, assign and grant a security interest in the Collateral to Secured Party. Section 3.02 No Required Consent. No authorization, consent, approval or other action by, and no notice to or registration, recordation or filing with, any governmental authority or regulatory body is required for (i) the due execution, delivery and performance by Pledgor of this Security Agreement, (ii) the grant by Pledgor of the security interest granted by this Security Agreement, (iii) the perfection of such security interest or (iv) the exercise by Secured Party of its rights and remedies under this Security Agreement. Neither the Pledgor nor any of its Subsidiaries has performed or will perform any acts which might prevent Secured Party from enforcing any of the terms and conditions of this Security Agreement or which would limit Secured Party in any such enforcement. -4- Section 3.03 Pledged Securities. The Pledged Securities have been duly authorized and validly issued, are fully paid and non-assessable and constitute 100% of the issued and outstanding shares of capital stock of the Issuer thereof. Section 3.04 First Priority Security Interest. The pledge of Pledged Securities pursuant to this Security Agreement creates a valid and perfected first priority security interest in the Collateral, enforceable against Pledgor and all third parties and securing payment of the Obligations. ARTICLE IV Covenants and Agreements Pledgor will at all times comply with the covenants and agreements contained in this Article IV, from the date hereof and for so long as any part of the Obligations are outstanding. Section 4.01 Sale, Disposition or Encumbrance of Collateral. Pledgor will not in any way encumber any of the Collateral (or permit or suffer any of the Collateral to be encumbered) or sell, pledge, assign, lend or otherwise dispose of or transfer any of the Collateral to or in favor of any Person other than Secured Party. The Pledgor is not and will not become a party to or otherwise be bound by any agreement, other than this Agreement, which restricts in any manner the rights of any present or future holder of any of the Pledged Securities with respect thereto. Section 4.02 Dividends or Distributions. So long as no Event of Default shall have occurred and be continuing, Pledgor shall be entitled to receive and retain any and all dividends and interest paid in respect of the Collateral, provided, however, that any and all: (a) dividends and interest paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in exchange for (including, without limitation, any certificate or share purchased or exchanged in connection with a tender offer or merger agreement), any Collateral, (b) dividends and other distributions paid or payable in cash in respect of any Collateral in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in surplus, or reclassification, and (c) cash paid, payable or otherwise distributed in respect of principal of, or in redemption of, or in exchange for, any Collateral, shall be, and shall be forthwith delivered to Secured Party to hold as, Collateral and shall, if received by Pledgor, be received in trust for the benefit of Secured Party, be segregated from the other property or funds of Pledgor, and be forthwith delivered to Secured Party as Collateral in the same form as so received (with any necessary indorsement). -5- Section 4.03 Records and Information. Pledgor shall keep accurate and complete records of the Collateral (including proceeds, payments, distributions, income and profits). Upon reasonable notice and without undue interference with the Pledgor's business, Secured Party may at any time during normal business hours have access to, examine, audit, make extracts from and inspect without hindrance or delay Pledgor's records, files and the Collateral. Section 4.04 Further Assurances. Upon the request of Secured Party, Pledgor shall (at Pledgor's expense) execute and deliver all such assignments, certificates, instruments, securities, financing statements, notifications to financial intermediaries, clearing corporations, Issuers of securities or other third parties or other documents and give further assurances and do all other acts and things as Secured Party may reasonably request to perfect Secured Party's interest in the Collateral or which is necessary to protect, enforce or otherwise effect Secured Party's rights and remedies hereunder. Section 4.05 Stock Powers. Pledgor shall furnish to Secured Party such stock powers and other instruments as may be required by Secured Party to assure the transferability of the Collateral when and as often as may be requested by Secured Party. Section 4.06 Rights to Sell. (a) If Secured Party shall determine to exercise its rights to sell all or any of the Collateral pursuant to its rights hereunder, Pledgor agrees that, upon request of Secured Party, Pledgor will, at its own expense: (i) use its best efforts to qualify the Collateral under the state securities or "Blue Sky" laws and to obtain all necessary governmental approvals for the sale of the Collateral, as requested by Secured Party; and (ii) use its best efforts to do or cause to be done all such others acts and things as may be necessary to make such sale of the Collateral or any part thereof valid and binding and in compliance with applicable law. (b) Pledgor further acknowledges the impossibility of ascertaining the amount of damages which would be suffered by Secured Party, the Issuing Banks and the Lenders by reason of the failure by Pledgor to perform any of the covenants contained in this Section 4.06 and consequently agrees that if Pledgor shall fail to perform any of such covenants, it shall pay, as liquidated damages, and not as penalty, an amount equal to the value of the Collateral on the date the Secured Party shall demand compliance with this Section 4.06. Section 4.07 Voting and Other Consensual Rights. Except to the extent otherwise provided in Section 6.06(d), Pledgor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Collateral or any part thereof for any purpose not inconsistent with the terms of this Security Agreement; provided however, that Pledgor shall not exercise or -6- refrain from exercising any such right if such action would have a material adverse effect on the value of the Collateral or any part thereof, and, provided, further, that upon request of Secured Party at any time or from time to time, Pledgor shall give Secured Party prompt written notice of the manner in which Pledgor has exercised, or the reasons for refraining from exercising, any such right. Section 4.08 Pledged Securities Percentage. The Pledged Securities will at all times constitute at least 100% of the issued and outstanding shares of capital stock of the Issuer thereof. Pledgor will not, to the extent it may legally do so, (a) permit any Issuer to issue any additional or substitute shares of stock of any class, or (b) amend any Issuer's charter or by-laws or other constitutional documents in any way which would reasonably be expected to materially and adversely affect the rights of Secured Party, the Issuing Banks or the Lenders, without the prior written consent of the Majority Lenders. ARTICLE V Rights, Duties, and Powers of Secured Party The following rights, duties and powers of Secured Party are applicable irrespective of whether an Event of Default occurs and is continuing: Section 5.01 Discharge Encumbrances. Secured Party may, at its option, after giving Pledgor three (3) days prior notice, discharge any taxes, liens, security interests or other encumbrances at any time levied or placed on the Collateral. Pledgor agrees to reimburse Secured Party within 30 days of demand for any payment so made, plus interest on the portion thereof from time to time remaining unpaid from the date of Secured Party's demand at the rate for overdue principal and interest set forth in Section 2.06(c) of the Credit Agreement. Section 5.02 Transfer of Collateral. Secured Party may, at its option, after giving Pledgor three (3) days prior notice, transfer any or all of the Obligations, and upon any such transfer Secured Party may transfer its interest in any or all of the Collateral and shall be fully discharged thereafter from all liability therefor. Any transferee of the Collateral shall be vested with all rights, powers and remedies of Secured Party hereunder. Section 5.03 Cumulative and Other Rights. The rights, powers and remedies of Secured Party hereunder are in addition to all rights, powers and remedies given by law or in equity. The exercise by Secured Party of any one or more of the rights, powers and remedies herein shall not be construed as a waiver of any other rights, powers and remedies, including, without limitation, any other rights of set-off. If any of the Obligations are given in renewal, extension for any period or rearrangement, or applied toward the payment of debt secured by any lien, Secured Party shall be, and is hereby, subrogated to all the rights, titles, interests and liens securing the debt so renewed, extended, rearranged or paid. -7- Section 5.04 Disclaimer of Certain Duties. (a) The powers conferred upon Secured Party by this Agreement are to protect its interest in the Collateral and shall not impose any duty upon Secured Party, any Issuing Bank or any Lender to exercise any such powers. Pledgor hereby agrees that Secured Party shall not be liable for, nor shall the indebtedness evidenced by the Obligations be diminished by, Secured Party's delay or failure to collect upon, foreclose, sell, take possession of or otherwise obtain value for the Collateral. (b) To the fullest extent permitted by applicable law, Secured Party shall be under no duty whatsoever (except as may be required under the Credit Agreement) to make or give any presentment, notice of dishonor, protest, demand for performance, notice of non-performance, notice of intent to accelerate, notice of acceleration, or other notice or demand in connection with any Collateral or the Obligations, or to take any steps necessary to preserve any rights against any Obligor or other Person. Pledgor waives any right of marshaling in respect of any and all Collateral, and waives any right to require Secured Party, any Issuing Bank or any Lender to proceed against any Obligor or other Person, exhaust any Collateral or enforce any other remedy which Secured Party, any Issuing Bank or any Lender now has or may hereafter have against any Obligor or other Person. Section 5.05 Modification of Obligations; Other Security. Pledgor waives (i) any and all notice of acceptance, creation, modification, rearrangement, renewal or extension for any period of any instrument executed by any Obligor in connection with the Obligations and (ii) to the fullest extent permitted by applicable law, any defense of any Obligor by reason of disability, lack of authorization, cessation of the liability of any Obligor or for any other reason. Pledgor authorizes Secured Party, without notice or demand and without any reservation of rights against Pledgor and without affecting Pledgor's liability hereunder or on the Obligations, from time to time to (x) take and hold other property, other than the Collateral, as security for the Obligations, and exchange, enforce, waive and release any or all of the Collateral, (y) apply the Collateral in the manner permitted by this Security Agreement and (z) renew, extend for any period, accelerate, amend or modify, supplement, enforce, compromise, settle, waive or release the obligations of any Obligor or any instrument or agreement of such other Person with respect to any or all of the Obligations or Collateral. Section 5.06 Custody and Preservation of the Collateral. Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which comparable secured parties accord comparable collateral, it being understood and agreed, however, that neither Secured Party, any Issuing Bank nor any Lender shall have responsibility for (i) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Collateral, whether or not Secured Party has or is deemed to have knowledge of such matters, or (ii) taking any necessary steps to preserve rights against Persons or entities with respect to any Collateral. -8- ARTICLE VI Events of Default Section 6.01 Events. It shall constitute an Event of Default under this Security Agreement if an Event of Default occurs and is continuing under the Credit Agreement. Section 6.02 Remedies. Upon the occurrence and during the continuance of any Event of Default, Secured Party may take any or all of the following actions without notice (except where expressly required below or in the Credit Agreement) or demand to Pledgor: (a) Declare all or part of the indebtedness pursuant to the Obligations immediately due and payable and enforce payment of the same by Pledgor or any Obligor. (b) Sell, in one or more sales and in one or more parcels, or otherwise dispose of any or all of the Collateral in any commercially reasonable manner as Secured Party may elect, in a public or private transaction, at any location as deemed reasonable by Secured Party either for cash or credit or for future delivery at such price as Secured Party may deem fair, and (unless prohibited by the Code, as adopted in any applicable jurisdiction) Secured Party, any Issuing Bank or any Lender may be the purchaser of any or all Collateral so sold and may apply upon the purchase price therefor any Obligations secured hereby. Any such sale or transfer by Secured Party either to itself or to any other Person shall be absolutely free from any claim of right by Pledgor, including any equity or right of redemption, stay or appraisal which Pledgor has or may have under any rule of law, regulation or statute now existing or hereafter adopted. Upon any such sale or transfer, Secured Party shall have the right to deliver, assign and transfer to the purchaser or transferee thereof the Collateral so sold or transferred. If Secured Party deems it advisable to do so, it may restrict the bidders or purchasers of any such sale or transfer to Persons or entities who will represent and agree that they are purchasing the Collateral for their own account and not with the view to the distribution or resale of any of the Collateral. Secured Party may, at its discretion, provide for a public sale, and any such public sale shall be held at such time or times within ordinary business hours and at such place or places as Secured Party may fix in the notice of such sale. Secured Party shall not be obligated to make any sale pursuant to any such notice. Secured Party may, without notice or publication, adjourn any public or private sale by announcement at any time and place fixed for such sale, and such sale may be made at any time or place to which the same may be so adjourned. In the event any sale or transfer hereunder is not completed or is defective in the opinion of Secured Party, such sale or transfer shall not exhaust the rights of Secured Party hereunder, and Secured Party shall have the right to cause one or more subsequent sales or transfers to be made hereunder. If only part of the Collateral is sold or transferred such that the Obligations remain outstanding (in whole or in part), Secured Party's rights and remedies hereunder shall not be exhausted, waived -9- or modified, and Secured Party is specifically empowered to make one or more successive sales or transfers until all the Collateral shall be sold or transferred and all the Obligations are paid. In the event that Secured Party elects not to sell the Collateral, Secured Party retains its rights to dispose of or utilize the Collateral or any part or parts thereof in any manner authorized or permitted by law or in equity, and to apply the proceeds of the same towards payment of the Obligations. Each and every method of disposition of the Collateral described in this subsection or in subsection (d) shall constitute disposition in a commercially reasonable manner. (c) Apply proceeds of the disposition of the Collateral to the Obligations in any manner elected by Secured Party and permitted by the Code or otherwise permitted by law or in equity. Such application may include, without limitation, the reasonable attorneys' fees and legal expenses incurred by Secured Party, the Issuing Banks and the Lenders. (d) Appoint any Person as agent to perform any act or acts necessary or incident to any sale or transfer by Secured Party of the Collateral. (e) Execute, assign and endorse negotiable and other instruments for the payment of money, documents of title or other evidences of payment, shipment or storage for any form of Collateral on behalf of and in the name of Pledgor. Section 6.03 Attorney-in-Fact. Pledgor hereby irrevocably appoints Secured Party as Pledgor's attorney-in-fact, with full authority in the place and stead of Pledgor and in the name of Pledgor or otherwise, from time to time in Secured Party's reasonable discretion upon the occurrence and during the continuance of an Event of Default and after any applicable notice and cure period provided for in the Credit Agreement, but at Pledgor's cost and expense, to take any action and to execute any assignment, certificate, financing statement, stock power, notification, document or instrument which Secured Party may deem necessary or advisable to accomplish the purposes of this Security Agreement, including, without limitation, to receive, endorse and collect all instruments made payable to Pledgor representing any dividend, interest payment or other distribution in respect of the Collateral or any part thereof and to give full discharge for the same. Section 6.04 Liability for Deficiency. If any sale or other disposition of Collateral by Secured Party or any other action of Secured Party, any Issuing Bank or any Lender hereunder results in reduction of the Obligations, such action will not release Pledgor from its liability to Secured Party, the Issuing Banks and the Lenders for any unpaid Obligations, including reasonable costs, charges and expenses incurred in the liquidation of Collateral, together with interest thereon, and the same shall be immediately due and payable to Secured Party at Secured Party's address set forth in the opening paragraph hereof. Section 6.05 Reasonable Notice. If any applicable provision of any law requires Secured Party, any Issuing Bank or any Lender to give reasonable notice of any sale or -10- disposition or other action, Pledgor hereby agrees that fifteen (15) days' prior written notice shall constitute reasonable notice thereof. Such notice, in the case of public sale, shall state the time and place fixed for such sale and, in the case of private sale, the time after which such sale is to be made. Section 6.06 Pledged Securities. Upon the occurrence and during the continuance of an Event of Default and after any applicable notice and cure period provided for in the Credit Agreement: (a) All rights of Pledgor to receive the dividends and interest payments which it would otherwise be authorized to receive and retain pursuant to Section 4.02 shall cease, and all such rights shall thereupon become vested in Secured Party who shall thereupon have the sole right to receive and hold as Collateral such dividends and interest payments, but Secured Party shall have no duty to receive and hold such dividends and interest payments and shall not be responsible for any failure to do so or delay in so doing. (b) All dividends and interest payments which are received by Pledgor contrary to the provisions of this Section 6.06 shall be received in trust for the benefit of Secured Party, shall be segregated from other funds of Pledgor and shall be forthwith paid over to Secured Party as Collateral in the same form as so received (with any necessary indorsement). (c) Secured Party may exercise any and all rights of conversion, exchange, subscription or any other rights, privileges or options pertaining to any of the Pledged Securities as if it were the absolute owner thereof, including without limitation, the right to exchange at its discretion, any and all of the Pledged Securities upon the merger, consolidation, reorganization, recapitalization or other readjustment of any Issuer of such Pledged Securities or upon the exercise by any such Issuer or Secured Party of any right, privilege or option pertaining to any of the Pledged Securities, and in connection therewith, to deposit and deliver any and all of the Pledged Securities with any committee, depository, transfer agent, registrar or other designated agency upon such terms and conditions as it may determine, all without liability except to account for property actually received by it, but Secured Party shall have no duty to exercise any of the aforesaid rights, privileges or options and shall not be responsible for any failure to do so or delay in so doing. (d) All rights of Pledgor to exercise the voting and other consensual rights which Pledgor would otherwise be entitled to exercise pursuant to Section 4.07 with respect to the Pledged Securities issued by such Issuer shall cease, and all such rights shall thereupon become vested in Secured Party who shall thereupon have the sole right to exercise such voting and other consensual rights, but Secured Party shall have no duty to exercise any such voting or other consensual rights and shall not be responsible for any failure to do so or delay in so doing. -11- Section 6.07 Non-judicial Enforcement. Secured Party may enforce its rights hereunder without prior judicial process or judicial hearing, and to the extent permitted by law Pledgor expressly waives any and all legal rights which might otherwise require Secured Party to enforce its rights by judicial process. Section 6.08 Private Sale of Pledged Securities. Pledgor recognizes that Secured Party may deem it impracticable to effect a public sale of all or any part of the Pledged Securities and that Secured Party may, therefore, determine to make one or more private sales of any such Pledged Securities to a restricted group of purchasers who will be obligated to agree, among other things, to acquire such Pledged Securities for their own account, for investment and not with a view to the distribution or resale thereof. Pledgor acknowledges that any such private sale may be at prices and on terms less favorable to the seller than the prices and other terms which might have been obtained at a public sale and, notwithstanding the foregoing, agrees that such private sale shall be deemed to have been made in a commercially reasonably manner and that Secured Party shall have no obligation to delay sale of any such Pledged Securities for the period of time necessary to permit Pledgor to register such Pledged Securities for public sale under the Securities Act of 1933, as amended (the "Securities Act"). Pledgor further acknowledges and agrees that any offer to sell such Pledged Securities which has been (i) publicly advertised on a bona fide basis in a newspaper or other publication of general circulation in the financial community of Houston, Texas (to the extent that such an offer may be so advertised without prior registration under the Securities Act), or (ii) made privately in the manner described above to not less than fifteen (15) bona fide offerees shall be deemed to involve a "public sale" for the purposes of Section 9-504(c) of the Code (or any successor or similar, applicable statutory provision) as then in effect in the State of Texas, notwithstanding that such sale may not constitute a "public offering" under the Securities Act and that Secured Party or any Lender may, in such event, bid for the purchase of such Pledged Securities. ARTICLE VII Miscellaneous Section 7.01 Notices. Any notice required or permitted to be given under or in connection with this Security Agreement shall be given in accordance with the notice provisions of the Credit Agreement. Section 7.02 Amendments and Waivers. Secured Party's, any Issuing Bank's or any Lender's acceptance of partial or delinquent payments or any forbearance, failure or delay by Secured Party in exercising any right, power or remedy hereunder shall not be deemed a waiver of any obligation of Pledgor or any Obligor, or of any right, power or remedy of Secured Party; and no partial exercise of any right, power or remedy shall preclude any other or further exercise thereof. Secured Party may remedy any Event of Default hereunder or in connection with the Obligations without waiving the Event of Default so remedied. Pledgor hereby agrees that if -12- Secured Party agrees to a waiver of any provision hereunder, or an exchange of or release of the Collateral, or the addition or release of any Obligor or other Person, any such action shall not constitute a waiver of any of Secured Party's other rights or of Pledgor's obligations hereunder. This Security Agreement may be amended only by an instrument in writing in the manner set forth in the Credit Agreement and may be supplemented only by documents delivered or to be delivered in accordance with the express terms hereof. Section 7.03 Copy as Financing Statement. A photocopy or other reproduction of this Security Agreement may be delivered by Pledgor or Secured Party to any financial intermediary or other third party for the purpose of transferring or perfecting any or all of the Pledged Securities to Secured Party or its designee or assignee. Section 7.04 Possession of Collateral. Secured Party shall be deemed to have possession of any Collateral in transit to it or set apart for it (or, in either case, any of its agents, affiliates or correspondents). Section 7.05 Redelivery of Collateral. If any sale or transfer of Collateral by Secured Party results in full satisfaction of the Obligations, and after such sale or transfer and discharge there remains a surplus of proceeds, Secured Party will deliver to Pledgor or such other Person as may be required by a court of competent jurisdiction such excess proceeds in a commercially reasonable time; provided, however, that neither Secured Party, any Issuing Bank nor any Lender shall have any liability for any interest, cost or expense in connection with any reasonable delay in delivering such proceeds to Pledgor. Section 7.06 Governing Law; Jurisdiction. This Security Agreement and the security interest granted hereby shall be construed in accordance with and governed by the laws of the State of Texas (except to the extent that the laws of any other jurisdiction govern the perfection and priority of the security interests granted hereby). Section 7.07 Continuing Security Agreement. (a) Except as may be expressly applicable pursuant to Section 9-505 of the Code, no action taken or omission to act by Secured Party, the Issuing Banks or the Lenders hereunder, including, without limitation, any exercise of voting or consensual rights pursuant to Section 4.07 or any other action taken or inaction pursuant to Section 6.02, shall be deemed to constitute a retention of the Collateral in satisfaction of the Obligations or otherwise to be in full satisfaction of the Obligations, and the Obligations shall remain in full force and effect, until Secured Party, the Issuing Banks and the Lenders shall have applied payments (including, without limitation, collections from Collateral) towards the Obligations in the full amount then outstanding or until such subsequent time as is hereinafter provided in subsection (b) below. (b) To the extent that any payments on the Obligations or proceeds of the Collateral are subsequently invalidated, declared to be fraudulent or preferential, set aside -13- or required to be repaid to a trustee, debtor in possession, receiver or other Person under any bankruptcy law, common law or equitable cause, then to such extent the Obligations so satisfied shall be revived and continue as if such payment or proceeds had not been received by Secured Party, the Issuing Banks or the Lenders, and Secured Party's, the Issuing Banks' and the Lenders' security interests, rights, powers and remedies hereunder shall continue in full force and effect. In such event, this Security Agreement shall be automatically reinstated if it shall theretofore have been terminated pursuant to Section 7.08. Section 7.08 Termination. The grant of a security interest hereunder and all of Secured Party's, the Issuing Banks' and the Lenders' rights, powers and remedies in connection therewith shall remain in full force and effect until the complete payment of the Obligations and the compliance by Pledgor with all covenants and agreements hereof and the termination of the Credit Agreement, at which time Secured Party, at the written request and expense of Pledgor, will release, reassign and transfer the Collateral to Pledgor and declare this Security Agreement to be of no further force or effect. Notwithstanding the foregoing, the provisions of Section 7.07(b) shall survive the termination of this Security Agreement. Section 7.09 Counterparts, Effectiveness. This Security Agreement may be executed in two or more counterparts. Each counterpart is deemed an original, but all such counterparts taken together constitute one and the same instrument. This Security Agreement becomes effective upon the execution hereof by Pledgor and delivery of the same to Secured Party, and it is not necessary for Secured Party, any Issuing Bank or any Lender to execute any acceptance hereof or otherwise signify or express its acceptance hereof. Section 7.10 Amendment and Restatement. This Security Agreement amends and restates in its entirety the Prior Security Agreement and all its terms, provisions and conditions. Pledgor acknowledges that the liens, claims, rights, titles, interests and benefits created and granted by the Prior Security Agreement continue to exist, remain valid and subsisting, shall not be impaired or released hereby, shall remain in full force and effect and are hereby renewed, extended, carried forward and conveyed as security for the Obligations. [SIGNATURES BEGIN NEXT PAGE] -14- PLEDGOR: TESORO PETROLEUM CORPORATION By: /s/ G. A. Wright Name: G. A. Wright Title: Vice President, Corporate Communications and Treasurer SECURED PARTY: BANQUE PARIBAS, AS ADMINISTRATIVE AGENT By: /s/ Brian Malone Name: Brian Malone Title: Vice President By: /s/ Barton D. Schouest Name: Barton D. Schouest Title: Group Vice President -15- SCHEDULE 1.02 ISSUERS Tesoro Alaska Petroleum Company, a Delaware corporation Tesoro Refining, Marketing & Supply Company, a Delaware corporation Tesoro Alaska Pipeline Company, a Delaware corporation Tesoro Exploration and Production Company, a Delaware corporation Tesoro Gas Resources Company, Inc., a Delaware corporation Tesoro Natural Gas Company, a Delaware corporation EXHIBIT A PLEDGED SECURITIES 1. 10 shares of the common stock of Tesoro - Alaskan Petroleum Corporation (now known as Tesoro Alaska Petroleum Company), a Delaware corporation ("TAPC"), registered in the name of Tesoro Petroleum Corporation ("Pledgor") on the books of TAPC, as represented by Certificate No. 1. 2. 1,000 shares of the common stock Nikiski Alaska Pipeline Company (now known as Tesoro Alaska Pipeline Corporation), a Delaware corporation ("Alaska Pipeline"), registered in the name of Pledgor on the books of Alaska Pipeline as represented by Certificate No. 2. 3. 1,000 shares of the common stock of Tesoro Refining, Marketing & Supply Company, a Delaware corporation ("TRMSC"), registered in the name of Pledgor on the books of TRMSC, as represented by Certificate No. 1. 4. 1,000 shares of the common stock of Tesoro Exploration and Production Company, a Delaware corporation ("TEP"), registered in the name of Pledgor on the books of TEP, as represented by Certificate No. 1. 5. 1,000 shares of the common stock of Tesoro Gas Resources Company, Inc., a Delaware corporation ("TGR"), registered in the name of Pledgor on the books of TGR, as represented by Certificate No. 1. 6. 900 shares of the common stock of Tesoro Natural Gas Company, a Delaware corporation ("TNG"), registered in the name of Pledgor on the books of TNG, as represented by Certificate No. 2. 7. 100 shares of the common stock of Tesoro Natural Gas Company, a Delaware corporation ("TNG"), registered in the name of Pledgor on the books of TNG, as represented by Certificate No. 1. EX-4.11 12 FIRST AMENDMENT FIRST AMENDMENT TO DEED OF TRUST, SECURITY AGREEMENT AND FINANCING STATEMENT THIS FIRST AMENDMENT TO DEED OF TRUST, SECURITY AGREEMENT AND FINANCING STATEMENT (this "Amendment") is entered into as of the effective time and date hereinafter stated (the "Effective Date") by and among TESORO ALASKA PETROLEUM COMPANY, a Delaware corporation with an address for notice hereunder of 8700 Tesoro Drive, San Antonio, Texas 78217 ("Trustor"), TRANSALASKA TITLE INSURANCE AGENCY, INC., an Alaska corporation, whose address is 400 W. Tudor Road, Anchorage, Alaska 99503 (including any successor trustee at the time acting as such hereunder, "Trustee") and BANQUE PARIBAS, as Administrative Agent for the benefit of the Issuing Banks and the Lenders, with offices and banking quarters at 1200 Smith, Suite 3100, Houston, Texas 77002 ("Beneficiary"). Any capitalized term used but not defined in this Amendment shall have the meaning assigned to such term in the hereinafter described Credit Agreement. R E C I T A L S A. Tesoro Petroleum Corporation (the "Company"), Texas Commerce Bank National Association, as agent and various lenders (the "Prior Lenders") entered into a Credit Agreement dated as of April 20, 1994 (as amended from time to time, the "Prior Credit Agreement"), and Trustor and others entered into a Guaranty Agreement dated of even date therewith guaranteeing the prompt and complete payment of the indebtedness and obligations of the Company under the Prior Credit Agreement (the "Prior Guaranty Agreement"). B. The Prior Credit Agreement and the Prior Guaranty Agreement was secured by, among other things, that certain Deed of Trust, Security Agreement and Financing Statement dated as of even date therewith from Trustor to Texas Commerce Bank National Association, as agent, as beneficiary ("Prior Beneficiary") for the benefit of the Prior Lenders (the "Deed of Trust"). C. The Deed of Trust was duly recorded in Book 441, page 848, File No. 94-3633 of the real estate records of the Kenai Recording District, Third Judicial District, State of Alaska on April 27, 1994. D. Of even date herewith, the Company, Banque Paribas, as Administrative Agent, The Bank of Nova Scotia, as Documentation Agent and various lenders (the "Lenders") are entering into an Amended and Restated Credit Agreement (the "Credit Agreement") amending and restating the Prior Credit Agreement, and Trustor and others are entering into an Amended and Restated Guaranty Agreement amending and restating the Prior Guaranty Agreement. E. Also of even date herewith, Prior Beneficiary is entering into an Assignment of Liens assigning all of its right, title and interest under the Deed of Trust to Banque Paribas, as Administrative Agent for the benefit of the Issuing Banks and the Lenders ("Beneficiary"). F. Trustor and Beneficiary now desire to amend the Deed of Trust. NOW, THEREFORE, in view of the foregoing, Trustor and Beneficiary do hereby agree as follows: 1. All capitalized terms used but not defined herein shall have the meanings assigned to such terms in the Deed of Trust. 2. All references in the Deed of Trust to "this Deed of Trust", as defined in Section 1.02 of the Deed of Trust shall mean the Deed of Trust as amended hereby and as the same may from time to time be further amended or supplemented. 3. All references in the Deed of Trust to "Beneficiary" shall mean Banque Paribas, as Administrative Agent for the benefit of the Issuing Banks and the Lenders, and all references in the Deed of Trust to "Credit Agreement" shall mean the above-described Credit Agreement as the same may be amended, supplemented or restated from time to time. 4. Section 2.03 of the Deed of Trust is amended in its entirety to hereafter read as follows: "Section 2.03 Indebtedness Secured. This Deed of Trust is executed and delivered by Trustor to secure and enforce the following (the "Indebtedness"): (a) Payment of and performance of any and all indebtedness, obligations and liabilities of Trustor pursuant to that certain Amended and Restated Guaranty Agreement dated June 7, 1996 executed by the Trustor, among others, in favor of BANQUE PARIBAS, as Administrative Agent for the Issuing Banks and the Lenders (as the same may from time to time be amended, supplemented or otherwise modified, the "Guaranty Agreement"), guaranteeing the prompt and complete payment when due (whether at the stated maturity, by acceleration or otherwise) of the Obligations (as defined in the Guaranty Agreement) including, without limitation, the Letters of Credit and the Notes evidencing Loans the proceeds of which may be disbursed over time, then satisfied in whole or in part, and then disbursed again over time, which indebtedness, obligations and liabilities will have a total principal balance from time to time of not more than $150,000,000 and any obligations arising under the Hedging Agreements with any Lender or its Affiliates. -2- (b) Any sums which may be advanced or paid by Beneficiary or any Lender under the terms hereof on account of the failure of Trustor to comply with the covenants of the Trustor contained herein or in the Credit Agreement; and all other indebtedness of Trustor arising pursuant to the provisions of this Deed of Trust. The Indebtedness which is secured by this Deed of Trust, if not sooner paid, is all due and payable on the 30th day of April, 2000. For the purpose of AS 34.20.150, the period of this Deed of Trust and the date when this Deed of Trust matures is six (6) years after said date. The Indebtedness is Senior Debt as such term is defined in that certain Subordination Agreement dated December 15, 1992 among Trustor, the Company and the State of Alaska attached as Exhibit 7 to the Settlement Agreement dated December 15, 1992 among Trustor, the Company and the State of Alaska." 5. Trustor hereby confirms that it has heretofore granted, bargained, sold, assigned, mortgaged, warranted, transferred and conveyed to Trustee for the benefit of Beneficiary, and granted a security interest to Beneficiary in, the Mortgaged Property, and Trustor further grants, bargains, sells, assigns, mortgages, warrants, transfers and conveys to Trustee for the benefit of Beneficiary, and grants a security interest to Beneficiary in, the Mortgaged Property, to Beneficiary on behalf of the Lenders to secure the payment and performance of the Indebtedness as defined herein. 6. The parties hereto hereby acknowledge and agree that except as specifically amended, changed or modified hereby, the Deed of Trust shall remain in full force and effect in accordance with its terms. None of the rights, titles and interests existing and to exist under the Deed of Trust are hereby released, diminished or impaired, and Trustor hereby reaffirms all covenants, representations and warranties made in the Deed of Trust. 7. This Amendment may be executed in two or more counterparts, and it shall not be necessary that the signatures of all parties hereto be contained on any one counterpart hereof. -3- EXECUTED this ___ day of June, 1996, to be effective as of the 7th day of June, 1996 (the "Effective Date"). TRUSTOR: TESORO ALASKA PETROLEUM COMPANY By: /s/ G. A. Wright Name: G. A. Wright Title: Vice President and Treasurer BENEFICIARY: BANQUE PARIBAS, AS ADMINISTRATIVE AGENT By: /s/ Brian Malone Name: Brian Malone Title: Vice President By: /s/ Barton D. Schouest Name: Barton D. Schouest Title: Group Vice President -4- STATE OF TEXAS COUNTY OF HARRIS The foregoing instrument was acknowledged before me the 7th day of June, 1996 by G. A. Wright, Vice President and Treasurer of TESORO ALASKA PETROLEUM COMPANY, a Delaware corporation, on behalf of such corporation. Seal: /s/ Linda Daugherty Notary Public in and for the State of Texas STATE OF TEXAS COUNTY OF HARRIS The foregoing instrument was acknowledged before me the 7th day of June, 1996 by Brian Malone, Vice President of BANQUE PARIBAS, a bank organized under the laws of France acting through its Houston, Texas agency, on behalf of such bank. Seal: /s/ Linda Daugherty Notary Public in and for the State of Texas STATE OF TEXAS COUNTY OF HARRIS The foregoing instrument was acknowledged before me the 7th day of June, 1996 by Barton D. Schouest, Group Vice President of BANQUE PARIBAS, a bank organized under the laws of France acting through its Houston, Texas agency, on behalf of such bank. /s/ Linda Daugherty Notary Public in and for the State of Texas Seal: -5- EX-4.12 13 FIRST AMENDMENT FIRST AMENDMENT TO MORTGAGE, DEED OF TRUST, ASSIGNMENT OF PRODUCTION, SECURITY AGREEMENT AND FINANCING STATEMENT THIS FIRST AMENDMENT TO MORTGAGE, DEED OF TRUST, ASSIGNMENT OF PRODUCTION, SECURITY AGREEMENT AND FINANCING STATEMENT (this "Amendment") is entered into as of the effective time and date hereinafter stated (the "Effective Date") by and between TESORO E&P COMPANY, L.P., a Delaware limited partnership with an address for notice hereunder of 8700 Tesoro Drive, San Antonio, Texas 78217 ("Mortgagor") and BANQUE PARIBAS, as Administrative Agent for the benefit of the Issuing Banks and the Lenders, with offices and banking quarters at 1200 Smith, Suite 3100, Houston, Texas 77002 ("Mortgagee"). Any capitalized term used but not defined in this Amendment shall have the meaning assigned to such term in the hereinafter described Credit Agreement. R E C I T A L S A. Tesoro Petroleum Corporation (the "Company"), Texas Commerce Bank National Association, as agent and various lenders (the "Prior Lenders") entered into a Credit Agreement dated as of April 20, 1994 (as amended from time to time, the "Prior Credit Agreement"), and Mortgagor and others entered into a Guaranty Agreement dated of even date therewith guaranteeing the prompt and complete payment of the indebtedness and obligations of the Company under the Prior Credit Agreement (the "Prior Guaranty Agreement"). B. The Prior Credit Agreement and the Prior Guaranty Agreement was secured by, among other things, that certain Mortgage, Deed of Trust, Assignment of Production, Security Agreement and Financing Statement dated as of even date therewith from Tesoro Exploration and Production Company ("TEP") to Stephen H. Field, as Trustee for Texas Commerce Bank National Association, as agent, as Mortgagee ("Prior Mortgagee") for the benefit of the Prior Lenders (the "Mortgage"). C. The Mortgage was duly recorded in Starr County, Texas on April 25, 1994 in Volume 692, Page 523 of the Official Public Records and in Zapata County, Texas on April 15, 1994 in Volume 497, Page 340 of the Official Records. D. TEP subsequently assigned all of its right, title and interest in the Mortgaged Property, as defined in the Mortgage, to Mortgagor. E. Of even date herewith, the Company, Banque Paribas, as Administrative Agent, The Bank of Nova Scotia, as Documentation Agent and various lenders (the "Lenders") are entering into an Amended and Restated Credit Agreement (the "Credit Agreement") amending and restating the Prior Credit Agreement and carrying forward the indebtedness thereunder, and Mortgagor and others are entering into an Amended and Restated Guaranty Agreement amending and restating the Prior Guaranty Agreement. F. Also of even date herewith, Prior Mortgagee is entering into an Assignment of Liens assigning all of its right, title and interest under the Mortgage to Banque Paribas, as Administrative Agent for the benefit of the Issuing Banks and the Lenders ("Mortgagee"). G. Mortgagor and Mortgagee now desire to amend the Mortgage. NOW, THEREFORE, in view of the foregoing, Mortgagor and Mortgagee do hereby agree as follows: 1. All capitalized terms used but not defined herein shall have the meanings assigned to such terms in the Mortgage. 2. All references in the Mortgage to "this Mortgage", as defined in Section 1.02 of the Mortgage shall mean the Mortgage as amended hereby and as the same may from time to time be further amended or supplemented. 3. All references in the Mortgage to "Mortgagor" shall mean Tesoro E&P Company, L.P.; all references in the Mortgage to "Mortgagee" shall mean Banque Paribas, as Administrative Agent for the benefit of the Issuing Banks and the Lenders; and all references in the Mortgage to "Credit Agreement" shall mean the above-described Credit Agreement as the same may be amended, supplemented or restated from time to time. 4. Section 1.03 of the Mortgage is amended in its entirety to hereafter read as follows: "Section 1.03 Indebtedness Secured. This Mortgage is executed and delivered by Mortgagor to secure and enforce the following (the "Indebtedness"): (a) Payment of and performance of any and all indebtedness, obligations and liabilities of Mortgagor pursuant to that certain Amended and Restated Guaranty Agreement dated June 7, 1996 executed by the Mortgagor, among others, in favor of BANQUE PARIBAS, as Administrative Agent for the Issuing Banks and the Lenders (as the same may from time to time be amended, supplemented or otherwise modified, the "Guaranty Agreement"), guaranteeing the prompt and complete payment when due (whether at the stated maturity, by acceleration or otherwise) of the Obligations (as defined in the Guaranty Agreement) including, without limitation, the Letters of Credit and the Notes with final maturity on or before April 30, 2000 and any obligations arising under the Hedging Agreements with any Lender or its Affiliates. -2- (b) Any sums which may be advanced or paid by Mortgagee or any Lender under the terms hereof on account of the failure of Mortgagor to comply with the covenants of the Mortgagor contained herein or in the Credit Agreement; and all other indebtedness of Mortgagor arising pursuant to the provisions of this Mortgage." 5. Mortgagor hereby confirms that it has heretofore granted, bargained, sold, assigned, mortgaged, warranted, transferred and conveyed to Trustee for the benefit of Mortgagee, and granted a security interest to Mortgagee in, the Mortgaged Property, and Mortgagor further grants, bargains, sells, assigns, mortgages, warrants, transfers and conveys to Trustee for the benefit of Mortgagee, and grants a security interest to Mortgagee in, the Mortgaged Property, to Mortgagee on behalf of the Lenders to secure the payment and performance of the Indebtedness as defined herein. 6. Mortgagor hereby confirms that it has heretofore absolutely and unconditionally assigned, transferred and conveyed and does hereby absolutely and unconditionally assign, transfer and convey to Mortgagee, its successors and assigns, all of the Hydrocarbons and all products obtained or processed therefrom, and the revenues and proceeds now and hereafter attributable to the Hydrocarbons and said products and all payments in lieu of the Hydrocarbons such as "take or pay" payments or settlements. 7. The parties hereto hereby acknowledge and agree that except as specifically amended, changed or modified hereby, the Mortgage shall remain in full force and effect in accordance with its terms. None of the rights, titles and interests existing and to exist under the Mortgage are hereby released, diminished or impaired, and Mortgagor hereby reaffirms all covenants, representations and warranties made in the Mortgage. 8. This Amendment may be executed in two or more counterparts, and it shall not be necessary that the signatures of all parties hereto be contained on any one counterpart hereof. -3- EXECUTED the ___ day of June, 1996, to be effective as of the 7th day of June, 1996 (the "Effective Date"). MORTGAGOR: TESORO E&P COMPANY, L.P. By: Tesoro Exploration and Production Company, its general partner By: /s/ G. A. Wright Name: G. A. Wright Title: Vice President and Treasurer MORTGAGEE: BANQUE PARIBAS, AS ADMINISTRATIVE AGENT By: /s/ Brian Malone Name: Brian Malone Title: Vice President By: /s/ Barton D. Schouest Name: Barton D. Schouest Title: Group Vice President -4- STATE OF TEXAS COUNTY OF HARRIS The foregoing instrument was acknowledged before me the 7th day of June, 1996 by G. A. Wright, Vice President and Treasurer of TESORO EXPLORATION AND PRODUCTION COMPANY, a Delaware corporation, on behalf of such corporation. Seal: /s/ Linda Daugherty Notary Public in and for the State of Texas STATE OF TEXAS COUNTY OF HARRIS The foregoing instrument was acknowledged before me the 7th day of June, 1996 by Brian Malone, Vice President of BANQUE PARIBAS, a bank organized under the laws of France, acting through its Houston, Texas agency, on behalf of such bank. /s/ Linda Daugherty Seal: Notary Public in and for the State of Texas STATE OF TEXAS COUNTY OF HARRIS The foregoing instrument was acknowledged before me the 7th day of June, 1996 by Barton D. Schouest, Group Vice President of BANQUE PARIBAS, a bank organized under the laws of France, acting through its Houston, Texas agency, on behalf of such bank. Seal: /s/ Linda Daugherty Notary Public in and for the State of Texas -5- EX-4.13 14 MORTGAGE STATEMENT WHEN RECORDED RETURN TO: VINSON & ELKINS L.L.P. First City Tower, Suite 3562 1001 Fannin Street Houston, TX 77002-6760 Attn: Linda Daugherty (Texas Oil & Gas Properties) MORTGAGE, DEED OF TRUST, ASSIGNMENT OF PRODUCTION, SECURITY AGREEMENT AND FINANCING STATEMENT FROM TESORO E&P COMPANY, L.P. as Mortgagor TO BRIAN MALONE, AS TRUSTEE FOR THE BENEFIT OF BANQUE PARIBAS, AS ADMINISTRATIVE AGENT, as Mortgagee TABLE OF CONTENTS ARTICLE I Grant of Lien and Indebtedness Secured Section 1.01 Grant of Liens. . . . . . . . . . . . . . . .1 Section 1.02 Grant of Security Interest. . . . . . . . . .4 Section 1.03 Indebtedness Secured. . . . . . . . . . . . .4 Section 1.04 Fixture Filing, Etc.. . . . . . . . . . . . .5 Section 1.05 Defined Terms . . . . . . . . . . . . . . . .5 ARTICLE II Assignment of Production Section 2.01 Assignment. . . . . . . . . . . . . . . . . .5 Section 2.02 Rights Under Texas Act. . . . . . . . . . . .6 Section 2.03 No Modification of Payment Obligations. . . .6 ARTICLE III Representations, Warranties and Covenants Section 3.01 Title . . . . . . . . . . . . . . . . . . . .7 Section 3.02 Defend Title. . . . . . . . . . . . . . . . .7 Section 3.03 Not a Foreign Person. . . . . . . . . . . . .7 Section 3.04 Power to Create Lien and Security . . . . . .7 Section 3.05 Revenue and Cost Bearing Interest . . . . . .8 Section 3.06 Rentals Paid; Leases in Effect. . . . . . . .8 Section 3.07 Operation of Mortgaged Property, Etc. . . . .8 Section 3.08 Operation By Third Parties. . . . . . . . . .9 Section 3.09 Abandon, Sales. . . . . . . . . . . . . . . .9 Section 3.10 Failure to Perform. . . . . . . . . . . . . .9 ARTICLE IV Rights and Remedies Section 4.01 Event of Default. . . . . . . . . . . . . . 10 Section 4.02 Foreclosure and Sale. . . . . . . . . . . . 10 Section 4.03 Substitute Trustees and Agents. . . . . . . 11 Section 4.04 Judicial Foreclosure; Receivership. . . . . 11 Section 4.05 Foreclosure for Installments. . . . . . . . 11 Section 4.06 Separate Sales. . . . . . . . . . . . . . . 12 Section 4.07 Possession of Mortgaged Property. . . . . . 12 Section 4.08 Occupancy After Foreclosure . . . . . . . . 12 Section 4.09 Remedies Cumulative, Concurrent and Nonexclusive . . . . . . . . . . . . . . . 13 Section 4.10 No Release of Obligations . . . . . . . . . 13 Section 4.11 Release of and Resort to Collateral . . . . 13 Section 4.12 Waiver of Redemption, Notice and Marshalling of Assets, Etc . . . . . . . . 13 Section 4.13 Discontinuance of Proceedings . . . . . . . 14 Section 4.14 Application of Proceeds . . . . . . . . . . 14 Section 4.15 Resignation of Operator . . . . . . . . . . 14 Section 4.16 Indemnity . . . . . . . . . . . . . . . . . 15 ARTICLE V The Trustee Section 5.01 Duties, Rights, and Powers of Trustee . . . 15 Section 5.02 Successor Trustee . . . . . . . . . . . . . 16 Section 5.03 Retention of Moneys . . . . . . . . . . . . 16 ARTICLE VI Miscellaneous Section 6.01 Instrument Construed as Mortgage, Etc.. . . 16 Section 6.02 Release of Mortgage . . . . . . . . . . . . 17 Section 6.03 Severability. . . . . . . . . . . . . . . . 17 Section 6.04 Successors and Assigns of Parties . . . . . 17 Section 6.05 Satisfaction of Prior Encumbrance . . . . . 17 Section 6.06 Subrogation of Trustee. . . . . . . . . . . 17 Section 6.07 Nature of Covenants . . . . . . . . . . . . 18 Section 6.08 Notices . . . . . . . . . . . . . . . . . . 18 Section 6.09 Counterparts. . . . . . . . . . . . . . . . 18 Section 6.10 Exculpation Provisions. . . . . . . . . . . 18 Exhibit A - Mortgaged Property -ii- MORTGAGE, DEED OF TRUST, ASSIGNMENT OF PRODUCTION, SECURITY AGREEMENT AND FINANCING STATEMENT This MORTGAGE, DEED OF TRUST, ASSIGNMENT OF PRODUCTION, SECURITY AGREEMENT AND FINANCING STATEMENT (this "Mortgage") is entered into as of the effective time and date hereinafter stated (the "Effective Date") by TESORO E&P COMPANY, L.P., a Delaware limited liability company, whose address for notice hereunder is 8700 Tesoro Drive, San Antonio, Texas 78217 ("Mortgagor"), for the benefit of BANQUE PARIBAS, as Administrative Agent for the benefit of the Issuing Banks and the Lenders, with offices and banking quarters at 1200 Smith Street, Suite 3100, Houston, Texas 77002 ("Mortgagee"). Any capitalized term used but not defined in this Mortgage shall have the meaning assigned to such term in the hereinafter defined Credit Agreement. R E C I T A L S: A. On even date herewith, Tesoro Petroleum Corporation (the "Company"), Mortgagee, The Bank of Nova Scotia, individually and as Documentation Agent, and the other financial institutions parties thereto are executing a Credit Agreement (as amended from time to time, the "Credit Agreement"). B. The Lenders and Issuing Banks have conditioned their obligations under the Credit Agreement upon the execution and delivery by Mortgagor of this Mortgage, and Mortgagor has agreed to enter into this Mortgage. C. Therefore, in order to comply with the terms and conditions of the Credit Agreement and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Mortgagor hereby agrees with Mortgagee as follows: ARTICLE I Grant of Lien and Indebtedness Secured Section 1.01 Grant of Liens. To secure payment of the Indebtedness (as hereinafter defined) and the performance of the covenants and obligations herein contained, Mortgagor does by these presents hereby GRANT, BARGAIN, SELL, ASSIGN, MORTGAGE, TRANSFER and CONVEY unto Brian Malone of Houston, Texas, as Trustee, whose address for notice hereunder is 1200 Smith Street, Suite 3100, Houston, Texas 77002 ("Trustee") and Trustee's successors and substitutes in trust hereunder, for the use and benefit of Mortgagee, the real and personal property, rights, titles, interests and estates described in the following paragraphs (a) through (g) (collectively called the "Mortgaged Property"): (a) All rights, titles, interests and estates now owned or hereafter acquired by Mortgagor in and to the oil and gas leases and/or oil, gas and other mineral leases and other interests and estates and the lands and premises covered or affected thereby which are described on Exhibit A hereto (collectively called the "Hydrocarbon Property") or which Hydrocarbon Property is otherwise referred to herein, and specifically, but without limitation, the undivided interests of Mortgagor which are more particularly described on attached Exhibit A. (b) All rights, titles, interests and estates now owned or hereafter acquired by Mortgagor in and to (i) the properties now or hereafter pooled or unitized with the Hydrocarbon Property; (ii) all presently existing or future unitization, communitization, pooling agreements and declarations of pooled units and the units created thereby (including, without limitation, all units created under orders, regulations, rules or other official acts of any Federal, State or other governmental body or agency having jurisdiction and any units created solely among working interest owners pursuant to operating agreements or otherwise) which may affect all or any portion of the Hydrocarbon Property including, without limitation, those units which may be described or referred to on attached Exhibit A; (iii) all operating agreements, production sales or other contracts, farmout agreements, farm-in agreements, area of mutual interest agreements, equipment leases and other agreements described or referred to in this Mortgage or which relate to any of the Hydrocarbon Property or interests in the Hydrocarbon Property described or referred to herein or on attached Exhibit A or to the production, sale, purchase, exchange, processing, handling, storage, transporting or marketing of the Hydrocarbons (hereinafter defined) from or attributable to such Hydrocarbon Property or interests; (iv) all geological, geophysical, engineering, accounting, title, legal, and other technical or business data concerning the Mortgaged Property, the Hydrocarbons, and all books, files, records, magnetic media, computer records, and other forms of recording or obtaining access to such data; and (v) the Hydrocarbon Property described on attached Exhibit A and covered by this Mortgage even though Mortgagor's interests therein be incorrectly described or a description of a part or all of such Hydrocarbon Property or Mortgagor's interests therein be omitted; it being intended by Mortgagor and Mortgagee herein to cover and affect hereby all interests which Mortgagor may now own or may hereafter acquire in and to the Hydrocarbon Property notwithstanding that the interests as specified on Exhibit A may be limited to particular lands, specified depths or particular types of property interests, but specifically excluding other Property outside of those described on Exhibit A hereto and not intended to be part of the Hydrocarbon Property. (c) All rights, titles, interests and estates now owned or hereafter acquired by Mortgagor in and to all oil, gas, casinghead gas, condensate, distillate, liquid hydrocarbons, gaseous hydrocarbons and all products refined therefrom and all other minerals (collectively called the "Hydrocarbons") in and under and which may be produced and saved from or attributable to the Hydrocarbon Property, the lands pooled or unitized therewith and Mortgagor's interests therein, including all oil in tanks and all rents, issues, profits, proceeds, products, revenues and other income from or attributable to the Hydrocarbon Property, the lands pooled or unitized therewith and Mortgagor's interests therein which are subjected or required to be subjected to the liens and security interests of this Mortgage and including specifically but without limitation all liens and security interests in such Hydrocarbons securing payment of proceeds resulting from the sale of Hydrocarbons. -2- (d) All tenements, hereditaments, appurtenances and properties in anywise appertaining, belonging, affixed or incidental to the Hydrocarbon Property, rights, titles, interests and estates described or referred to in paragraphs (a) and (b) above, which are now owned or which may hereafter be acquired by Mortgagor, including, without limitation, any and all property, real or personal, now owned or hereafter acquired and situated upon, used, held for use, or useful in connection with the operating, working or development of any of such Hydrocarbon Property or the lands pooled or unitized therewith (excluding drilling rigs, trucks, automotive equipment or other personal property which may be taken to the premises for the purpose of drilling a well or for other similar temporary uses) and including any and all oil wells, gas wells, injection wells or other wells, buildings, structures, field separators, liquid extraction plants, plant compressors, pumps, pumping units, pipelines, sales and flow lines, gathering systems, field gathering systems, salt water disposal facilities, tanks and tank batteries, fixtures, valves, fittings, machinery and parts, engines, boilers, meters, apparatus, equipment, appliances, tools, implements, cables, wires, towers, casing, tubing and rods, surface leases, rights-of-way, easements, servitudes, licenses and other surface and subsurface rights together with all additions, substitutions, replacements, accessions and attachments to any and all of the foregoing properties. (e) Any property that may from time to time hereafter, by delivery or by writing of any kind, be subjected to the lien and security interest hereof by Mortgagor; and the Trustee is hereby authorized to receive the same at any time as additional security hereunder. (f) All of the rights, titles and interests of every nature whatsoever now owned or hereafter acquired by Mortgagor in and to the Hydrocarbon Property rights, titles, interests and estates and every part and parcel thereof, including, without limitation, the Hydrocarbon Property rights, titles, interests and estates as the same may be enlarged by the discharge of any payments out of production or by the removal of any charges or Permitted Encumbrances (as hereinafter defined in Section 3.01) to which any of the Hydrocarbon Property rights, titles, interests or estates are subject, or otherwise; all rights of Mortgagor to liens and security interests securing payment of proceeds from the sale of production from the Mortgaged Property, including, but not limited to, those liens and security interests provided in Tex. Bus. & Com. Code Ann. 9.319 (Tex. UCC) (Vernon Supp. 1989) ("9.319 Tex. UCC"), as amended from time to time; together with any and all renewals and extensions of any of the Hydrocarbon Property rights, titles, interests or estates; all contracts and agreements supplemental to or amendatory of or in substitution for the contracts and agreements described or mentioned above; and any and all additional interests of any kind hereafter acquired by Mortgagor in and to the Hydrocarbon Property rights, titles, interests or estates. (g) All accounts, contract rights, inventory, general intangibles, insurance contracts and insurance proceeds constituting a part of, relating to or arising out of those portions of the Mortgaged Property which are described in paragraphs (a) through (f) above and all proceeds and products of all such portions of the Mortgaged Property and payments in lieu of production (such as "take or pay" payments), whether such proceeds or payments are goods, money, -3- documents, instruments, chattel paper, securities, accounts, general intangibles, fixtures, real property, or other assets. Any fractions or percentages specified on attached Exhibit A in referring to Mortgagor's interests are solely for purposes of the warranties made by Mortgagor pursuant to Section 3.01 hereof and shall in no manner limit the quantum of interest affected by this Section 1.01 with respect to any Hydrocarbon Property or with respect to any unit or well identified on said Exhibit A. TO HAVE AND TO HOLD the Mortgaged Property unto the Trustee and to his successors and assigns forever to secure the payment of the Indebtedness (hereinafter defined) and to secure the performance of the covenants, agreements, and obligations of the Mortgagor herein contained. Section 1.02 Grant of Security Interest. To further secure the Indebtedness, Mortgagor hereby grants to Mortgagee a security interest in and to the Mortgaged Property (whether now or hereafter acquired by operation of law or otherwise) insofar as the Mortgaged Property consists of equipment, accounts, contract rights, general intangibles, insurance contracts, insurance proceeds, inventory, Hydrocarbons, fixtures and any and all other personal property of any kind or character defined in and subject to the provisions of the Texas Business and Commerce Code, Chapters 1 through 9, as presently in effect (the "Texas UCC"), including the proceeds and products from any and all of such personal property. Upon the happening of any of the Events of Default, Mortgagee is and shall be entitled to all of the rights, powers and remedies afforded a secured party by the Texas UCC with reference to the personal property and fixtures in which Mortgagee has been granted a security interest herein, or the Trustee or Mortgagee may proceed as to both the real and personal property covered hereby in accordance with the rights and remedies granted under this Mortgage in respect of the real property covered hereby. Such rights, powers and remedies shall be cumulative and in addition to those granted to the Trustee or Mortgagee under any other provision of this Mortgage or under any other Security Instrument. Written notice mailed to Mortgagor as provided herein at least fifteen (15) days prior to the date of public sale of any part of the Mortgaged Property which is personal property subject to the provisions of the Texas UCC, or prior to the date after which private sale of any such part of the Mortgaged Property will be made, shall constitute reasonable notice. Section 1.03 Indebtedness Secured. This Mortgage is executed and delivered by Mortgagor to secure and enforce the following (the "Indebtedness"): (a) The payment of and performance of any and all indebtedness, obligations and liabilities of Mortgagor pursuant to that certain Amended and Restated Guaranty Agreement of even date herewith executed by the Mortgagor, among others, in favor of the Mortgagee (as the same may from time to time be amended, supplemented or otherwise modified, the "Guaranty Agreement"), guaranteeing the prompt and complete payment when due (whether at the stated maturity, by acceleration or otherwise) of the Obligations (as defined in the Guaranty Agreement) including, without limitation, the Letter of Credit and the Notes with final maturity -4- on or before April 30, 2000 and any obligations arising under the Hedging Agreements with any Lender or its Affiliates. (b) Any sums which may be advanced or paid by Mortgagee or any Lender under the terms hereof on account of the failure of Mortgagor to comply with the covenants of the Mortgagor contained herein or in the Credit Agreement; and all other indebtedness of Mortgagor arising pursuant to the provisions of this Mortgage. Section 1.04 Fixture Filing, Etc. Without in any manner limiting the generality of any of the other provisions of this Mortgage: (i) some portions of the goods described or to which reference is made herein are or are to become fixtures on the land described or to which reference is made herein or on attached Exhibit A; (ii) the security interests created hereby under applicable provisions of the Texas UCC will attach to Hydrocarbons (minerals including oil and gas) or the accounts resulting from the sale thereof at the wellhead or minehead located on the land described or to which reference is made herein; (iii) this Mortgage is to be filed of record in the real estate records as a financing statement, and (iv) Mortgagor is the record owner of the real estate or interests in the real estate comprised of the Mortgaged Property. Section 1.05 Defined Terms. Any capitalized term used in this Mortgage and not defined in this Mortgage shall have the meaning assigned to such term in the Credit Agreement. ARTICLE II Assignment of Production Section 2.01 Assignment. Mortgagor has absolutely and unconditionally assigned, transferred, and conveyed, and does hereby absolutely and unconditionally assign, transfer and convey unto Mortgagee, its successors and assigns, all of the Hydrocarbons and all products obtained or processed therefrom, and the revenues and proceeds now and hereafter attributable to the Hydrocarbons and said products and all payments in lieu of the Hydrocarbons such as "take or pay" payments or settlements. The Hydrocarbons and products are to be delivered into pipe lines connected with the Mortgaged Property, or to the purchaser thereof, to the credit of Mortgagee, free and clear of all taxes, charges, costs, and expenses; and all such revenues and proceeds shall be paid directly to Mortgagee, at its banking quarters in Houston, Harris County, Texas with no duty or obligation of any party paying the same to inquire into the rights of Mortgagee to receive the same, what application is made thereof, or as to any other matter. Mortgagor agrees to perform all such acts, and to execute all such further assignments, transfers and division orders, and other instruments as may be required or desired by Mortgagee or any party in order to have said proceeds and revenues so paid to Mortgagee. Mortgagee is fully authorized to receive and receipt for said revenues and proceeds; to endorse and cash any and all checks and drafts payable to the order of Mortgagor or Mortgagee for the account of Mortgagor received from or in connection with said revenues or proceeds and to hold the proceeds thereof in a bank account as additional collateral securing the Indebtedness; and to execute transfer and division orders in the name of Mortgagor, or otherwise, with warranties -5- binding Mortgagor. All proceeds received by the Mortgagee pursuant to this assignment shall be applied as provided in the Credit Agreement, or after the occurrence and during the continuance of an Event of Default, the Mortgagee may in its sole discretion apply the proceeds as provided in Section 4.13 hereof. Mortgagee shall not be liable for any delay, neglect, or failure to effect collection of any proceeds or to take any other action in connection therewith or hereunder; but Mortgagee shall have the right, at its election, in the name of Mortgagor or otherwise, to prosecute and defend any and all actions or legal proceedings deemed advisable by Mortgagee in order to collect such funds and to protect the interests of Mortgagee, and/or Mortgagor, with all costs, expenses and attorneys' fees incurred in connection therewith being paid by Mortgagor. Mortgagor hereby appoints Mortgagee as its attorney-in-fact to pursue any and all rights of Mortgagor to liens on and security interests in the Hydrocarbons securing payment of proceeds of runs attributable to the Hydrocarbons. In addition to the rights granted to Trustee and/or Mortgagee in Section 1.01 (c) of this Mortgage, Mortgagor hereby further transfers and assigns to Mortgagee any and all such liens, security interests, financing statements or similar interests of Mortgagor attributable to its interest in the Hydrocarbons and proceeds of runs therefrom arising under or created by said statutory provision, judicial decision or otherwise. The power of attorney granted to Mortgagee in this paragraph, being coupled with an interest, shall be irrevocable so long as the Indebtedness or any part thereof remains unpaid. Section 2.02 Rights Under Texas Act. Mortgagor hereby grants, sells, assigns, sets over and mortgages unto Mortgagee during the term hereof, all of Mortgagor's rights and interests pursuant to the provisions of 9.319 Tex. UCC, hereby vesting in Mortgagee all of Mortgagor's rights as an interest owner to the continuing security interest in and lien upon the Mortgaged Property. Section 2.03 No Modification of Payment Obligations. Nothing herein contained shall modify or otherwise alter the obligation of Mortgagor to make prompt payment of all principal and interest owing on the Indebtedness when and as the same become due regardless of whether the proceeds of the Hydrocarbons are sufficient to pay the same and the rights provided in accordance with the foregoing assignment provision shall be cumulative of all other security of any and every character now or hereafter existing to secure payment of the Indebtedness. ARTICLE III Representations, Warranties and Covenants Mortgagor hereby represents, warrants and covenants as follows: Section 3.01 Title. To the extent of the undivided interests specified on attached Exhibit A, Mortgagor has good and indefeasible title to and is possessed of the Mortgaged Property. The Mortgaged Property is free of any and all Liens (as defined in the Credit Agreement) except Liens allowed by Section 5.04(b) of the Credit Agreement and Liens described on Exhibit A hereto (collectively, the "Permitted Encumbrances"). -6- Section 3.02 Defend Title. This Mortgage is, and always will be kept, a direct first lien and security interest upon the Mortgaged Property subject only to the Permitted Encumbrances and Mortgagor will not create or suffer to be created or permit to exist any lien, security interest or charge prior or junior to or on a parity with the lien and security interest of this Mortgage upon the Mortgaged Property or any part thereof or upon the rents, issues, revenues, profits and other income therefrom. Mortgagor will warrant and defend the title to the Mortgaged Property against the claims and demands of all other persons whomsoever and will maintain and preserve the lien created hereby so long as any of the Indebtedness secured hereby remains unpaid. Should an adverse claim be made against or a cloud develop upon the title to any part of the Mortgaged Property, Mortgagor agrees it will immediately defend against such adverse claim or take appropriate action to remove such cloud at Mortgagor's cost and expense, and Mortgagor further agrees that the Trustee and/or Mortgagee may take such other action as they deem advisable to protect and preserve their interests in the Mortgaged Property, and in such event Mortgagor will indemnify the Trustee and Mortgagee against any and all cost, attorney's fees and other expenses which they may incur in defending against any such adverse claim or taking action to remove any such cloud. Section 3.03 Not a Foreign Person. Mortgagor is not a "foreign person" within the meaning of the Internal Revenue Code of 1986, as amended (hereinafter called the "Code"), Sections 1445 and 7701 (i.e. Mortgagor is not a non-resident alien, foreign corporation, foreign partnership, foreign trust or foreign estate as those terms are defined in the Code and any regulations promulgated thereunder). Section 3.04 Power to Create Lien and Security. The Mortgagor has full power and lawful authority to grant, bargain, sell, assign, transfer, mortgage, and convey a security interest in all of the Mortgaged Property in the manner and form herein provided and without obtaining the authorization, approval, consent or waiver of any lessor, sublessor, Governmental Authority or other party or parties whomsoever. Section 3.05 Revenue and Cost Bearing Interest. Mortgagor's ownership of the Hydrocarbon Property and the undivided interests therein as specified on attached Exhibit A will, after giving full effect to all Permitted Encumbrances, afford Mortgagor not less than those net interests in the production from or which is allocated to such Hydrocarbon Property specified as "Net Revenue Interest" on attached Exhibit A (expressed as a fraction, percentage or decimal) and will cause Mortgagor to bear not more than that portion, specified as "Working Interest" on attached Exhibit A (expressed as a fraction, percentage or decimal), of the costs of drilling, developing and operating the wells identified on Exhibit A. Section 3.06 Rentals Paid; Leases in Effect. All rentals and royalties due and payable in accordance with the terms of any leases or subleases comprising a part of the Hydrocarbon Property have been duly paid or provided for and all leases or subleases comprising a part of the Hydrocarbon Property are in full force and effect. -7- Section 3.07 Operation of Mortgaged Property, Etc. Except as provided in Section 3.08 Mortgagor will promptly pay and discharge all rentals, delay rentals, royalties and indebtedness accruing under, and perform or cause to be performed each and every act, matter or thing required by, each and all of the assignments, deeds, leases, sub-leases, contracts and agreements described or referred to herein or affecting Mortgagor's interests in the Mortgaged Property, and will do all other things necessary to keep unimpaired Mortgagor's rights with respect thereto and prevent any forfeiture thereof or default thereunder. The Mortgaged Property (and properties unitized therewith) has been maintained, operated and developed in a good and workmanlike manner and in conformity with all applicable laws and all rules, regulations and orders of all duly constituted authorities having jurisdiction and in conformity with the provisions of all leases, subleases or other contracts comprising a part of the Hydrocarbon Property and other contracts and agreements forming a part of the Mortgaged Property; specifically in this connection, (i) after the Effective Date no Mortgaged Property is subject to having allowable production reduced below the full and regular allowable (including the maximum permissible tolerance) because of any overproduction (whether or not the same was permissible at the time) prior to the Effective Date and (ii) none of the wells comprising a part of the Mortgaged Property (or properties unitized therewith) are deviated from the vertical more than the maximum permitted by applicable laws, regulations, rules and orders, and such wells are, in fact, bottomed under and are producing from, and the well bores are wholly within, the Mortgaged Property (or, in the case of wells located on properties unitized therewith, such unitized properties). Mortgagor will operate the Mortgaged Property in a careful and efficient manner in accordance with the practices of the industry and in compliance with all applicable contracts and agreements and in compliance with all applicable proration and conservation laws of the jurisdiction in which the Mortgaged Property is situated, and all applicable laws, rules and regulations of every other agency and authority from time to time constituted to regulate the development and operation of the Mortgaged Property and the production and sale of Hydrocarbons and other minerals therefrom. Mortgagor will do or cause to be done such development work as may be reasonably necessary to the prudent and economical operation of the Mortgaged Property in accordance with the most approved practices of operators in the industry, including all to be done that may be appropriate to protect from diminution the productive capacity of the Mortgaged Property and each producing well thereon including, without limitation, cleaning out and reconditioning each well from time to time, plugging and completing at a different level each such well, drilling a substitute well to conform to changed spacing regulations and to protect the Mortgaged Property against drainage whenever and as often as is necessary. Section 3.08 Operation By Third Parties. All or portions of the Mortgaged Property may be comprised of interests in the Hydrocarbon Property which are other than working interests or which may be operated by a party or parties other than Mortgagor and with respect to all or any such interests and properties as may be comprised of interests other than working interests or which may be operated by parties other than Mortgagor, Mortgagor's covenants as expressed in this Article III are modified to require that Mortgagor use its best efforts to obtain compliance with such covenants by the working interest owners or the operator or operators of such leases or properties. -8- Section 3.09 Abandon, Sales. The Mortgagor will not sell, lease, assign, transfer or otherwise dispose or abandon any of the Mortgaged Property except as permitted by the Credit Agreement. Section 3.10 Failure to Perform. The Mortgagor agrees that if the Mortgagor fails to perform any act or to take any action which the Mortgagor is required to perform or take hereunder or pay any money which the Mortgagor is required to pay hereunder, each of the Mortgagee and the Trustee in the Mortgagor's name or its or their own name may, but shall not be obligated to, perform or cause to perform such act or take such action or pay such money, and any expenses so incurred by either of them and any money so paid by either of them shall be a demand obligation owing by the Mortgagor to the Mortgagee or the Trustee, as the case may be, and each of the Mortgagee and the Trustee, upon making such payment, shall be subrogated to all of the rights of the Person receiving such payment. Each amount due and owing by Mortgagor to each of the Mortgagee and the Trustee pursuant to this Mortgage shall bear interest from the date of such expenditure or payment or other occurrence which gives rise to such amount being owed to such Person until paid at the rate for overdue principal and interest set forth in Section 2.06(c) of the Credit Agreement (the "Post-Default Rate"), and all such amounts together with such interest thereon shall be a part of the Indebtedness described in Section 1.03 hereof. ARTICLE IV Rights and Remedies Section 4.01 Event of Default. An "Event of Default" under the Credit Agreement shall be an Event of Default under this Mortgage. Section 4.02 Foreclosure and Sale. If an Event of Default shall occur and be continuing after any applicable notice and cure period provided for in the Credit Agreement, Mortgagee shall have the right and option to proceed with foreclosure by directing the Trustee, or his successors or substitutes in trust, to proceed with foreclosure and to sell, to the extent permitted by law, all or any portion of the Mortgaged Property at one or more sales, as an entirety or in parcels, at such place or places in otherwise such manner and upon such notice as may be required by law, or, in the absence of any such requirement, as the Mortgagee may deem appropriate, and to make conveyance to the purchaser or purchasers. Where the Mortgaged Property is situated in more than one county, notice as above provided shall be posted and filed in all such counties (if such notices are required by law), and all such Mortgaged Property may be sold in any such county and any such notice shall designate the county where such Mortgaged Property is to be sold. Nothing contained in this Section 4.02 shall be construed so as to limit in any way the Trustee's rights to sell the Mortgaged Property, or any portion thereof, by private sale if, and to the extent that, such private sale is permitted under the laws of the applicable jurisdiction or by public or private sale after entry of a judgment by any court of competent jurisdiction so ordering. Mortgagor hereby irrevocably appoints the Trustee to be the attorney -9- of Mortgagor and in the name and on behalf of Mortgagor to execute and deliver any deeds, transfers, conveyances, assignments, assurances and notices which Mortgagor ought to execute and deliver and do and perform any and all such acts and things which Mortgagor ought to do and perform under the covenants herein contained and generally, to use the name of Mortgagor in the exercise of all or any of the powers hereby conferred on the Trustee. At any such sale: (i) whether made under the power herein contained or any other legal enactment, or by virtue of any judicial proceedings or any other legal right, remedy or recourse, it shall not be necessary for Trustee to have physically present, or to have constructive possession of, the Mortgaged Property (Mortgagor hereby covenanting and agreeing to deliver to Trustee any portion of the Mortgaged Property not actually or constructively possessed by Trustee immediately upon demand by Trustee) and the title to and right of possession of any such property shall pass to the purchaser thereof as completely as if the same had been actually present and delivered to purchaser at such sale, (ii) each instrument of conveyance executed by Trustee shall contain a general warranty of title, binding upon Mortgagor and its successors and assigns, (iii) each and every recital contained in any instrument of convey- ance made by Trustee shall conclusively establish the truth and accuracy of the matters recited therein, including, without limitation, nonpayment of the Indebtedness, advertisement and conduct of such sale in the manner provided herein and otherwise by law and appointment of any successor Trustee hereunder, (iv) any and all prerequisites to the validity thereof shall be con- clusively presumed to have been performed, (v) the receipt of Trustee or of such other party or officer making the sale shall be a sufficient discharge to the purchaser or purchasers for its purchase money and no such purchaser or purchasers, or its assigns or personal representatives, shall thereafter be obligated to see to the application of such purchase money, or be in any way answerable for any loss, misapplication or nonapplication thereof, (vi) to the fullest extent permitted by law, Mortgagor shall be completely and irrevocably divested of all of its right, title, interest, claim and demand whatsoever, either at law or in equity, in and to the property sold and such sale shall be a perpetual bar both at law and in equity against Mortgagor, and against any and all other persons claiming or to claim the property sold or any part thereof, by, through or under Mortgagor, and (vii) to the extent and under such circumstances as are permitted by law, Mortgagee may be a purchaser at any such sale, and shall have the right, after paying or accounting for all costs of said sale or sales, to credit the amount of the bid upon the amount of the Indebtedness (in the order of priority set forth in Section 4.13 hereof) in lieu of cash payment. Section 4.03 Substitute Trustees and Agents. The Trustee or his successor or substitute may appoint or delegate any one or more persons as agent to perform any act or acts necessary or incident to any sale held by Trustee, including the posting of notices and the conduct of sale, but in the name and on behalf of Trustee, his successor or substitute. If Trustee or his successor or substitute shall have given notice of sale hereunder, any successor or substitute trustee thereafter appointed may complete the sale and the conveyance of the property pursuant thereto as if such notice had been given by the successor or substitute trustee conducting the sale. Section 4.04 Judicial Foreclosure; Receivership. If any of the Indebtedness shall become due and payable and shall not be promptly paid, the Trustee or Mortgagee shall have the right and power to proceed by a suit or suits in equity or at law, whether for the specific -10- performance of any covenant or agreement herein contained or in aid of the execution of any power herein granted, or for any foreclosure hereunder or for the sale of the Mortgaged Property under the judgment or decree of any court or courts of competent jurisdiction, or for the appointment of a receiver pending any foreclosure hereunder or the sale of the Mortgaged Property under the order of a court or courts of competent jurisdiction or under executory or other legal process, or for the enforcement of any other appropriate legal or equitable remedy. Any money advanced by the Trustee and/or Mortgagee in connection with any such receivership shall be a demand obligation (which obligation Mortgagor hereby expressly promises to pay) owing by Mortgagor to the Trustee and/or Mortgagee and shall bear interest from the date of making such advance by the Trustee and/or Mortgagee until paid at the Post Default Rate. Section 4.05 Foreclosure for Installments. Mortgagee shall also have the option to proceed with foreclosure in satisfaction of any installments of the Indebtedness which have not been paid when due either through the courts or by directing the Trustee or his successors in trust to proceed with foreclosure in satisfaction of the matured but unpaid portion of the Indebtedness as if under a full foreclosure, conducting the sale as herein provided and without declaring the entire principal balance and accrued interest due; such sale may be made subject to the unmatured portion of the Indebtedness, and any such sale shall not in any manner affect the unmatured portion of the Indebtedness, but as to such unmatured portion of the Indebtedness this Mortgage shall remain in full force and effect just as though no sale had been made hereunder. It is further agreed that several sales may be made hereunder without exhausting the right of sale for any unmatured part of the Indebtedness, it being the purpose hereof to provide for a foreclosure and sale of the security for any matured portion of the Indebtedness without exhausting the power to foreclose and sell the Mortgaged Property for any subsequently maturing portion of the Indebtedness. Section 4.06 Separate Sales The Mortgaged Property may be sold in one or more parcels and in such manner and order as Mortgagee, in its sole discretion, may elect, it being expressly understood and agreed that the right of sale arising out of any Event of Default shall not be exhausted by any one or more sales. Section 4.07 Possession of Mortgaged Property. Mortgagor agrees to the full extent that it lawfully may, that, in case one or more of the Events of Default shall have occurred and shall not have been remedied, then, and in every such case, the Trustee or Mortgagee shall have the right and power to enter into and upon and take possession of all or any part of the Mortgaged Property in the possession of Mortgagor, its successors or assigns, or its or their agents or servants, and may exclude Mortgagor, its successors or assigns, and all persons claiming under Mortgagor, and its or their agents or servants wholly or partly therefrom; and, holding the same, the Trustee may use, administer, manage, operate and control the Mortgaged Property and conduct the business thereof to the same extent as Mortgagor, its successors or assigns, might at the time do and may exercise all rights and powers of Mortgagor, in the name, place and stead of Mortgagor, or otherwise as the Trustee shall deem best. All costs, expenses and liabilities of every character incurred by the Trustee and/or Mortgagee in administering, managing, operating, and controlling the Mortgaged Property shall constitute a demand obligation (which obligation -11- Mortgagor hereby expressly promises to pay) owing by Mortgagor to the Trustee and/or Mortgagee and shall bear interest from date of expenditure until paid at the Post Default Rate, all of which shall constitute a portion of the Indebtedness and shall be secured by this Mortgage and all other Security Instruments. Section 4.08 Occupancy After Foreclosure. In the event there is a foreclosure sale hereunder and at the time of such sale Mortgagor or Mortgagor's heirs, devisees, representatives, successors or assigns or any other person claiming any interest in the Mortgaged Property by, through or under Mortgagor, are occupying or using the Mortgaged Property or any part thereof, each and all shall immediately become the tenant of the purchaser at such sale, which tenancy shall be a tenancy from day to day, terminable at the will of either the landlord or tenant, or at a reasonable rental per day based upon the value of the property occupied, such rental to be due daily to the purchaser; to the extent permitted by applicable law, the purchaser at such sale shall, notwithstanding any language herein apparently to the contrary, have the sole option to demand immediate possession following the sale or to permit the occupants to remain as tenants at will. In the event the tenant fails to surrender possession of said property upon demand, the purchaser shall be entitled to institute and maintain a summary action for possession of the Mortgaged Property (such as an action for forcible entry and detainer) in any court having jurisdiction. Section 4.09 Remedies Cumulative, Concurrent and Nonexclusive. Every right, power and remedy herein given to the Trustee or Mortgagee shall be cumulative and in addition to every other right, power and remedy herein specifically given or now or hereafter existing in equity, at law or by statute (including specifically those granted by the Texas UCC and applicable to the Mortgage Property or any portion thereof) each and every right, power and remedy whether specifically herein given or otherwise existing may be exercised from time to time and so often and in such order as may be deemed expedient by the Trustee or Mortgagee, and the exercise, or the beginning of the exercise, of any such right, power or remedy shall not be deemed a waiver of the right to exercise, at the same time or thereafter any other right, power or remedy. No delay or omission by the Trustee or Mortgagee in the exercise of any right, power or remedy shall impair any such right, power or remedy or operate as a waiver thereof or of any other right, power or remedy then or thereafter existing. Section 4.10 No Release of Obligations. Neither Mortgagor, any guarantor nor any other person hereafter obligated for payment of all or any part of the Indebtedness shall be relieved of such obligation by reason of (a) the failure of Trustee to comply with any request of Mortgagor, or any guarantor or any other person so obligated to foreclose the lien of this Mortgage or to enforce any provision hereunder or under the Credit Agreement; (b) the release, regardless of consideration, of the Mortgaged Property or any portion thereof or interest therein or the addition of any other property to the Mortgaged Property; (c) any agreement or stipulation between any subsequent owner of the Mortgaged Property and Mortgagee extending, renewing, rearranging or in any other way modifying the terms of this Mortgage without first having obtained the consent of, given notice to or paid any consideration to Mortgagor, any guarantor or such other person, and in such event Mortgagor, guarantor and all such other persons shall continue to be liable to make payment according to the terms of any such extension or -12- modification agreement unless expressly released and discharged in writing by Mortgagee; or (d) by any other act or occurrence save and except the complete payment of the Indebtedness and the complete fulfillment of all obligations hereunder or under the Credit Agreement. Section 4.11 Release of and Resort to Collateral. Mortgagee may release, regardless of consideration, any part of the Mortgaged Property without, as to the remainder, in any way impairing, affecting, subordinating or releasing the lien or security interest created in or evidenced by this Mortgage or its stature as a first and prior lien and security interest in and to the Mortgaged Property, and without in any way releasing or diminishing the liability of any person or entity liable for the repayment of the Indebtedness. For payment of the Indebtedness, Mortgagee may resort to any other security therefor held by Mortgagee or Trustee in such order and manner as Mortgagee may elect. Section 4.12 Waiver of Redemption, Notice and Marshalling of Assets, Etc. To the fullest extent permitted by law, Mortgagor hereby irrevocably and unconditionally waives and releases (a) all benefits that might accrue to Mortgagor by virtue of any present or future moratorium law or other law exempting the Mortgaged Property from attachment, levy or sale on execution or providing for any appraisement, valuation, stay of execution, exemption from civil process, redemption or extension of time for payment; (b) except as provided in the Credit Agreement, all notices of any Event of Default or of Mortgagee's intention to accelerate maturity of the Indebtedness or of Trustee's election to exercise or his actual exercise of any right, remedy or recourse provided for hereunder or under the Credit Agreement; and (c) any right to a marshalling of assets or a sale in inverse order of alienation. If any law referred to in this Mortgage and now in force, of which Mortgagor or its successor or successors might take advantage despite the provisions hereof, shall hereafter be repealed or cease to be in force, such law shall thereafter be deemed not to constitute any part of the contract herein contained or to preclude the operation or application of the provisions hereof. Section 4.13 Discontinuance of Proceedings In case Mortgagee shall have proceeded to invoke any right, remedy or recourse permitted hereunder or under the Credit Agreement and shall thereafter elect to discontinue or abandon same for any reason, Mortgagee shall have the unqualified right so to do and, in such an event, Mortgagor and Mortgagee shall be restored to their former positions with respect to the Indebtedness this Mortgage, the Credit Agreement, the Mortgaged Property and otherwise, and the rights, remedies, recourses and powers of Mortgagee shall continue as if same had never been invoked. Section 4.14 Application of Proceeds. The proceeds of any sale of the Mortgaged Property or any part thereof and all other monies received by the Trustee in any proceedings for the enforcement hereof, whose application has not elsewhere herein been specifically provided for, shall be applied: (a) first, to the payment of all expenses incurred by the Trustee or Mortgagee incident to the enforcement of this Mortgage, the Credit Agreement or any of the Indebtedness (including, without limiting the generality of the foregoing, expenses of any entry or taking of -13- possession, of any sale, of advertisement thereof, and of conveyances, and court costs, compensation of agents and employees, and legal fees), and to the payment of all other charges, expenses, liabilities and advances incurred or made by the Trustee or Mortgagee under this Mortgage or in executing any trust or power hereunder; (b) second to payment of the Indebtedness in such order and manner as Mortgagee may elect; and (c) third, to Mortgagor; or as otherwise required by any Governmental Requirement. Section 4.15 Resignation of Operator. In addition to all rights and remedies under this Mortgage, at law and in equity, if any Event of Default shall occur and Trustee or the Mortgagee shall exercise any remedies under this Mortgage with respect to any portion of the Mortgaged Property (or Mortgagor shall transfer any Mortgaged Property "in lieu of" foreclosure), the Mortgagee or the Trustee shall have the right to request that any operator of any Mortgaged Property, to the extent such operator is either Mortgagor or any Affiliate of Mortgagor, resign as operator under the joint operating agreement applicable thereto, and no later than 60 days after receipt by Mortgagor of any such request, Mortgagor shall resign (or cause such other party to resign) as operator of such Mortgaged Property. Section 4.16 Indemnity. In connection with any action taken by the Trustee and/or Mortgagee pursuant to this Mortgage, the Trustee and/or Mortgagee and their officers, directors, employees, representatives, agents, attorneys, accountants and experts ("Indemnified Parties") shall not be liable for any loss sustained by Mortgagor resulting from an assertion that Mortgagee has received funds from the production of Hydrocarbons claimed by third persons or any act or omission of any Indemnified Party in administering, managing, operating or controlling the Mortgaged Property including such loss which may result from the ordinary negligence of an Indemnified Party unless such loss is caused by the willful misconduct or bad faith of an Indemnified Party, nor shall the Trustee and/or Mortgagee be obligated to perform or discharge any obligation, duty or liability of Mortgagor. Mortgagor shall and does hereby agree to indemnify each Indemnified Party for, and to hold each Indemnified Party harmless from, any and all liability, loss or damage which may or might be incurred by any Indemnified Party by reason of this Mortgage or the exercise of rights or remedies hereunder; should the Trustee and/or Mortgagee make any expenditure on account of any such liability, loss or damage, the amount thereof, including costs, expenses and reasonable attorneys' fees, shall be a demand obligation (which obligation Mortgagor hereby expressly promises to pay) owing by Mortgagor to the Trustee and/or Mortgagee and shall bear interest from the date expended until paid at the Post-Default Rate, shall be a part of the Indebtedness and shall be secured by this Mortgage and any other Security Instrument. The liabilities of the -14- Mortgagor as set forth in this Section 4.15 shall survive the termination of this Mortgage. ARTICLE V The Trustee Section 5.01 Duties, Rights, and Powers of Trustee. It shall be no part of the duty of the Trustee to see to any recording, filing or registration of this Mortgage or any other instrument in addition or supplemental thereto, or to give any notice thereof, or to see to the payment of or be under any duty in respect of any tax or assessment or other governmental charge which may be levied or assessed on the Mortgaged Property, or any part thereof, or against Mortgagor, or to see to the performance or observance by Mortgagor of any of the covenants and agreements contained herein. The Trustee shall not be responsible for the execution, acknowledgment or validity of this Mortgage or of any instrument in addition or supplemental hereto or for the sufficiency of the security purported to be created hereby, and makes no representation in respect thereof or in respect of the rights of Mortgagee. The Trustee shall have the right to advise with counsel upon any matters arising hereunder and shall be fully protected in relying as to legal matters on the advice of counsel. The Trustee shall not incur any personal liability hereunder except for Trustee's own willful misconduct; and the Trustee shall have the right to rely on any instrument, document or signature authorizing or supporting any action taken or proposed to be taken by him hereunder, believed by him in good faith to be genuine. Section 5.02 Successor Trustee. The Trustee may resign by written notice addressed to Mortgagee or be removed at any time with or without cause by an instrument in writing duly executed on behalf of Mortgagee. In case of the death, resignation or removal of the Trustee, a successor trustee may be appointed by Mortgagee by instrument of substitution complying with any applicable requirements of law, or, in the absence of any such requirement, without other formality than appointment and designation in writing. Written notice of such appointment and designation shall be given by Mortgagee to Mortgagor, but the validity of any such appointment shall not be impaired or affected by failure to give such notice or by any defect therein. Such appointment and designation shall be full evidence of the right and authority to make the same and of all the facts therein recited, and, upon the making of any such appointment and designation, this Mortgage shall vest in the successor trustee all the estate and title in and to all of the Mortgaged Property, and the successor trustee shall thereupon succeed to all of the rights, powers, privileges, immunities and duties hereby conferred upon the Trustee named herein, and one such appointment and designation shall not exhaust the right to appoint and designate a successor trustee hereunder but such right may be exercised repeatedly as long as any Indebtedness remains unpaid hereunder. To facilitate the administration of the duties hereunder, Mortgagee may appoint multiple trustees to serve in such capacity or in such jurisdictions as Mortgagee may designate. -15- Section 5.03 Retention of Moneys. All moneys received by Trustee shall, until used or applied as herein provided, be held in trust for the purposes for which they were received, but need not be segregated in any manner from any other moneys (except to the extent required by law), and Trustee shall be under no liability for interest on any moneys received by him hereunder. ARTICLE VI Miscellaneous Section 6.01 Instrument Construed as Mortgage, Etc. With respect to any portions of the Mortgaged Property located in any state or other jurisdiction the laws of which do not provide for the use or enforcement of a deed of trust or the office, rights and authority of the Trustee as herein provided, the general language of conveyance hereof to the Trustee is intended and the same shall be construed as words of mortgage unto and in favor of Mortgagee and the rights and authority granted to the Trustee herein may be enforced and asserted by Mortgagee in accordance with the laws of the jurisdiction in which such portion of the Mortgaged Property is located and the same may be foreclosed at the option of Mortgagee as to any or all such portions of the Mortgaged Property in any manner permitted by the laws of the jurisdiction in which such portions of the Mortgaged Property is situated. This Mortgage may be construed as a mortgage, deed of trust, chattel mortgage, conveyance, assignment, security agreement, pledge, financing statement, hypothecation or contract, or any one or more of them, in order fully to effectuate the lien hereof and the purposes and agreements herein set forth. Section 6.02 Release of Mortgage. If all Indebtedness secured hereby shall be paid and the Credit Agreement terminated, Mortgagee shall forthwith cause satisfaction and discharge of this Mortgage to be entered upon the record at the expense of Mortgagor and shall execute and deliver or cause to be executed and delivered such instruments of satisfaction and reassignment as may be appropriate. Otherwise, this Mortgage shall remain and continue in full force and effect. Section 6.03 Severability. If any provision hereof is invalid or unenforceable in any jurisdiction, the other provisions hereof shall remain in full force and effect in such jurisdiction and the remaining provisions hereof shall be liberally construed in favor of the Trustee and Mortgagee in order to effectuate the provisions hereof, and the invalidity or unenforceability of any provision hereof in any jurisdiction shall not affect the validity or enforceability of any such provision in any other jurisdiction. Section 6.04 Successors and Assigns of Parties. The term "Mortgagee" as used herein shall mean and include any legal owner, holder, assignee or pledgee of any of the Indebtedness secured hereby. The terms used to designate Trustee, Mortgagee and Mortgagor shall be deemed to include the respective heirs, legal representatives, successors and assigns of such parties. -16- Section 6.05 Satisfaction of Prior Encumbrance. To the extent that proceeds of the Credit Agreement are used to pay indebtedness secured by any outstanding lien, security interest, charge or prior encumbrance against the Mortgaged Property, such proceeds have been advanced by Mortgagee at Mortgagor's request, and Mortgagee shall be subrogated to any and all rights, security interests and liens owned by any owner or holder of such outstanding liens, security interests, charges or encumbrances, irrespective of whether said liens, security interests, charges or encumbrances are released, and it is expressly understood that, in consideration of the payment of such other indebtedness by Mortgagee, Mortgagor hereby waives and releases all demands and causes of action for offsets and payments to, upon and in connection with the said indebtedness. Section 6.06 Subrogation of Trustee. This Mortgage is made with full substitution and subrogation of the Trustee and his successors in this trust and his and their assigns in and to all covenants and warranties by others heretofore given or made in respect of the Mortgaged Property or any part thereof. Section 6.07 Nature of Covenants. The covenants and agreements herein contained shall constitute covenants running with the land and interests covered or affected hereby and shall be binding upon the heirs, legal representatives, successors and assigns of the parties hereto. Section 6.08 Notices. All notices, requests, consents, demands and other communications required or permitted hereunder shall be in writing and shall be deemed sufficiently given or furnished if delivered by registered or certified United States mail, postage prepaid, or by personal service (including express or courier service) at the addresses specified at the end of this Mortgage (unless changed by similar notice in writing given by the particular party whose address is to be changed). Any such notice or communication shall be deemed to have been given either at the time of personal delivery or, in the case of delivery at the address and in the manner provided herein, upon receipt; provided that, service of notice as required by the laws of any state in which portions of the Mortgaged Property may be situated shall for all purposes be deemed appropriate and sufficient with the giving of such notice. Section 6.09 Counterparts. This Mortgage is being executed in several counterparts, all of which are identical, except that to facilitate recordation, if the Mortgaged Property is situated in more than one county, only those portions of the description of the Mortgaged Property attached hereto as Exhibit A located in the county in which a particular counterpart is recorded shall be attached hereto. A complete Exhibit A will be attached to that certain counterpart to be attached to a Financing Statement and filed with the Secretary of State of Texas in the Uniform Commercial Code Records. Each of such counterparts shall for all purposes be deemed to be an original and all such counterparts shall together constitute but one and the same instrument. Section 6.10 Exculpation Provisions. Each of the parties hereto specifically agrees that it has a duty to read this Mortgage; and agrees that it is charged with notice and knowledge of the terms of this Mortgage; that it -17- has in fact read this Mortgage and is fully informed and has full notice and knowledge of the terms, conditions and effects of this Mortgage; that it has been represented by legal counsel of its choice throughout the negotiations preceding its execution of this Mortgage; and has received the advice of its attorney in entering into this Mortgage; and that it recognizes that certain of the terms of this Mortgage result in one party assuming the liability inherent in some aspects of the transaction and relieving the other party of its responsibility for such liability. Each party hereto agrees and covenants that it will not contest the validity or enforceability of any exculpatory provision of this Mortgage on the basis that the party had no notice or knowledge of such provision or that the provision is not "conspicuous." [SIGNATURE BEGINS NEXT PAGE] -18- WITNESS THE EXECUTION HEREOF, this 7th day of June, 1996, to be effective as of the 7th day of June, 1996 (the "Effective Date"). MORTGAGOR: TESORO E&P COMPANY, L.P. By: Tesoro Exploration and Production Company, its general partner By: /s/ G. A. Wright Name: G. A. Wright Title: Vice President and Treasurer The name and address of the Debtor/Mortgagor is: TESORO E&P COMPANY, L.P. 8700 Tesoro Drive San Antonio, Texas 78217 The name and address of the Secured Party/Mortgagee is: BANQUE PARIBAS, AS ADMINISTRATIVE AGENT 1200 Smith Street, Suite 3100 Houston, Texas 77002 -19- THE STATE OF TEXAS COUNTY OF HARRIS THIS INSTRUMENT was acknowledged before me on June 7th, 1996 by G. A. Wright, Vice President and Treasurer of Tesoro Exploration and Production Company, a Delaware corporation, general partner of Tesoro E&P Company, L.P., a Delaware limited liability company, on behalf of such corporation. /s/ Linda Daugherty Notary Public in and for the State of TEXAS -20- EX-27 15 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TESORO PETROLEUM CORPORATION'S FINANCIAL STATEMENTS AS OF AND FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1996 JUN-30-1996 5,494 0 163,552 2,156 82,796 259,289 522,265 237,396 572,810 107,649 168,599 4,382 0 0 242,070 572,810 472,370 477,473 409,378 409,378 20,170 0 8,000 27,453 9,473 17,980 0 0 0 17,980 .69 .69
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