-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, kFHxhl+RGfMo4k0CXV3KpsZl63RYm7/VWHWH5NItrUggFIFSGK/YD5E48XJjcxR6 JS2iO2LHgQ62CBmss2C7Gg== 0000950129-94-000371.txt : 19940511 0000950129-94-000371.hdr.sgml : 19940511 ACCESSION NUMBER: 0000950129-94-000371 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19940331 FILED AS OF DATE: 19940510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TESORO PETROLEUM CORP /NEW/ CENTRAL INDEX KEY: 0000050104 STANDARD INDUSTRIAL CLASSIFICATION: 2911 IRS NUMBER: 950862768 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03473 FILM NUMBER: 94526936 BUSINESS ADDRESS: STREET 1: 8700 TESORO DR CITY: SAN ANTONIO STATE: TX ZIP: 78217 BUSINESS PHONE: 2108288484 10-Q 1 FORM 10-Q -- TESORO PETROLEUM CORP. 1 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 March 31, 1994 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) Telephone: 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 22,456,968 shares of the Registrant's common stock outstanding at April 30, 1994. 2 TESORO PETROLEUM CORPORATION AND SUBSIDIARIES Index to Form 10-Q For the Quarterly Period Ended March 31, 1994
Part I. Financial Information: Page ---- Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets March 31, 1994 and December 31, 1993 . . . . . . . . . . . . . . . . . . . . . 3 Condensed Statements of Consolidated Operations Three Months Ended March 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . 5 Condensed Statements of Consolidated Cash Flows Three Months Ended March 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . 6 Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . . 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . 13 Part II. Other Information: Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . 28 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
3 PART I - FINANCIAL INFORMATION Item 1. Financial Statements TESORO PETROLEUM CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Unaudited) (Dollars in thousands)
March 31, December 31, 1994 1993* --------- ----------- ASSETS ------ Current Assets: Cash and cash equivalents (includes restricted cash of $26,550 and $25,420, respectively, as collateral for letters of credit). . . . . . . . . . . . . . . . . . $ 49,412 36,596 Short-term investments. . . . . . . . . . . . . . . . . . . - 5,952 Receivables, less allowance for doubtful accounts of $2,419 ($2,487 at December 31, 1993). . . . . . . . . . . . . . . 59,487 69,637 Inventories: Crude oil, refined products and merchandise . . . . . . . . . . . . . . . . . . . . . . 72,261 71,011 Materials and supplies. . . . . . . . . . . . . . . . . . 3,142 3,175 Prepaid expenses and other. . . . . . . . . . . . . . . . . 9,870 10,136 ---------- ------- Total Current Assets. . . . . . . . . . . . . . . . . . . 194,172 196,507 Property, Plant and Equipment, Net of Accumulated Depreciation, Depletion and Amortization of $177,188 ($172,312 at December 31, 1993) . . . . . . . . . . . . . . 222,418 213,151 Investment in Tesoro Bolivia Petroleum Company . . . . . . . . . . . . . . . . . . . . . . . . . . 6,823 6,310 Other Assets. . . . . . . . . . . . . . . . . . . . . . . . . 18,696 18,554 ---------- ------- Total Assets. . . . . . . . . . . . . . . . . . . . . . . . . $ 442,109 434,522 ========== =======
The accompanying notes are an integral part of these condensed consolidated financial statements. * The balance sheet at December 31, 1993 has been taken from the audited consolidated financial statements at that date and condensed. -3- 4 TESORO PETROLEUM CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Unaudited) (Dollars in thousands, except per share amounts)
March 31, December 31, 1994 1993* --------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current Liabilities: Accounts payable . . . . . . . . . . . . . . . . . . . $ 45,161 43,192 Accrued liabilities. . . . . . . . . . . . . . . . . . 32,623 24,017 Current portion of long-term debt and other obligations. . . . . . . . . . . . . . . . 6,094 4,805 --------- --------- Total Current Liabilities . . . . . . . . . . . . 83,878 72,014 --------- --------- Other Liabilities. . . . . . . . . . . . . . . . . . . . 35,277 45,272 --------- -------- Long-Term Debt and Other Obligations, Less Current Portion . . . . . . . . . . . . . . . . . 178,856 180,667 --------- --------- Commitments and Contingencies (Note 5) Redeemable Preferred Stock . . . . . . . . . . . . . . . - 78,051 --------- --------- Common Stock and Other Stockholders' Equity: $2.20 Cumulative convertible preferred stock. . . . . . . . . . . . . . . . . . . 57,500 - $2.16 Cumulative convertible pre- ferred stock . . . . . . . . . . . . . . . . . . . . - 1,320 Common Stock . . . . . . . . . . . . . . . . . . . . . 3,743 2,348 Additional paid-in capital . . . . . . . . . . . . . . 114,406 86,985 Retained earnings (deficit) . . . . . . . . . . . . . ( 31,337) ( 31,898) --------- --------- 144,312 58,755 Less deferred compensation . . . . . . . . . . . . . . 214 237 --------- --------- 144,098 58,518 --------- --------- Total Liabilities and Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . $ 442,109 434,522 ========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements. * The balance sheet at December 31, 1993 has been taken from the audited consolidated financial statements at that date and condensed. -4- 5 TESORO PETROLEUM CORPORATION AND SUBSIDIARIES Condensed Statements of Consolidated Operations (Unaudited) (Dollars in thousands, except per share amounts)
Three Months Ended March 31, --------------------------------- 1994 1993 ---- ---- Revenues: Gross operating revenues . . . . . . . . . . $189,087 224,494 Interest income . . . . . . . . . . . . . . . 523 451 Gain on sales of assets . . . . . . . . . . . 2,680 48 Other . . . . . . . . . . . . . . . . . . . . 450 1,488 -------- -------- Total Revenues . . . . . . . . . . . . . . 192,740 226,481 -------- -------- Costs and Expenses: Costs of sales and operating expenses . . . . . . . . . . . . . . . . . 167,605 213,737 General and administrative . . . . . . . . . 3,627 3,423 Depreciation, depletion and amortization . . . . . . . . . . . . . . . 6,677 4,822 Interest expense . . . . . . . . . . . . . . 4,877 5,013 Other . . . . . . . . . . . . . . . . . . . . 1,191 1,663 -------- -------- Total Costs and Expenses . . . . . . . . . 183,977 228,658 -------- -------- Earnings (Loss) Before Income Taxes and Extraordinary Loss on Extinguishment of Debt . . . . . . . . . . 8,763 ( 2,177) Income Tax Provision . . . . . . . . . . . . . 1,561 732 -------- -------- Earnings (Loss) Before Extraor- dinary Loss on Extinguishment of Debt . . . . . . . . . . . . . . . . . . . 7,202 ( 2,909) Extraordinary Loss on Extinguish- ment of Debt . . . . . . . . . . . . . . . . ( 4,752) - -------- -------- Net Earnings (Loss) . . . . . . . . . . . . . . $ 2,450 ( 2,909) ======== ======== Net Earnings (Loss) Applicable to Common Stock . . . . . . . . . . . . . . . . $ 561 ( 5,211) ======== ========= Earnings (Loss) Per Primary and Fully Diluted* Share: Earnings (Loss) Before Extra- ordinary Loss on Extinguish- ment of Debt . . . . . . . . . . . . . . . $ .27 ( .37) Extraordinary Loss on Extinguishment of Debt . . . . . . . . . . ( .24) - -------- ------- Net Earnings (Loss) . . . . . . . . . . . . . $ .03 ( .37) ======== ======== Weighted Average Common and Common Equivalent Shares (in thousands) . . . . . . 19,455 14,070
The accompanying notes are an integral part of these condensed consolidated financial statements. *Anti-dilutive. -5- 6 TESORO PETROLEUM CORPORATION AND SUBSIDIARIES Condensed Statements of Consolidated Cash Flows (Unaudited) (Dollars in thousands)
Three Months Ended March 31, ----------------------------- 1994 1993 -------- -------- Cash Flows From (Used In) Operating Activities: Net earnings (loss) . . . . . . . . . . . . . . . . . . . . . $ 2,450 ( 2,909) Adjustments to reconcile net earnings (loss) to net cash from operating activities: Loss (gain) on extinguishment of debt . . . . . . . . . . . 4,752 ( 1,422) Depreciation, depletion and amortization . . . . . . . . . . . . . . . . . . . . . 6,677 4,822 Gain on sales of assets . . . . . . . . . . . . . . . . . . ( 2,680) ( 48) Other . . . . . . . . . . . . . . . . . . . . . . . . . . 361 662 Changes in assets and liabilities: Receivables . . . . . . . . . . . . . . . . . . . . . . . 11,151 3,520 Inventories . . . . . . . . . . . . . . . . . . . . . . . ( 1,217) 13,372 Investment in Tesoro Bolivia Petroleum Company . . . . . . . . . . . . . . . . . . . ( 513) 377 Other assets . . . . . . . . . . . . . . . . . . . . . . 1,834 1,011 Accounts payable and other current liabilities . . . . . . . . . . . . . . . . . . . . . . 8,272 4,563 Obligation payments to State of Alaska . . . . . . . . . . . . . . . . . . . . . . . . ( 710) (10,797) Other liabilities and obligations . . . . . . . . . . . . ( 118) 1,262 ---------- --------- Net cash from operating activities . . . . . . . . . . 30,259 14,413 ---------- --------- Cash Flows From (Used In) Investing Activities: Capital expenditures . . . . . . . . . . . . . . . . . . . . (18,475) ( 5,084) Proceeds from sales of assets, net of expenses . . . . . . . . . . . . . . . . . . . . . . . . . 2,014 107 Sales of short-term investments . . . . . . . . . . . . . . . 5,952 20,021 Purchases of short-term investments . . . . . . . . . . . . - ( 8,410) Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 351 ( 206) ---------- --------- Net cash from (used in) investing activities . . . . . . . . . . . . . . . . . . . . . (10,158) 6,428 ---------- --------- Cash Flows From (Used In) Financing Activities: Payments of long-term debt . . . . . . . . . . . . . . . . . (10,222) ( 211) Issuance of long-term debt . . . . . . . . . . . . . . . . . 5,000 - Dividends on preferred stock . . . . . . . . . . . . . . . . ( 103) - Repurchase of debentures . . . . . . . . . . . . . . . . . . - ( 9,675) Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 1,960) ( 5) ---------- --------- Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . ( 7,285) ( 9,891) ---------- --------- Increase in Cash and Cash Equivalents . . . . . . . . . . . . 12,816 10,950 Cash and Cash Equivalents at Beginning of Period . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,596 46,869 ---------- --------- Cash and Cash Equivalents at End of Period . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 49,412 57,819 ========== ========= Supplemental Cash Flow Disclosures: Interest paid . . . . . . . . . . . . . . . . . . . . . . . $ 7,105 8,477 ========== ========= Income taxes paid . . . . . . . . . . . . . . . . . . . . . $ 961 755 ========== =========
The accompanying notes are an integral part of these condensed consolidated financial statements. -6- 7 TESORO PETROLEUM CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (1) Basis of Presentation The interim condensed consolidated financial statements 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. For information regarding the effects of the Recapitalization (as hereinafter defined), see Note 2 below. The results of operations for any interim period are not necessarily indicative of results for the full year. 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, 1993. (2) Recapitalization In February 1994, the Company consummated exchange offers and adopted amendments to its Restated Certificate of Incorporation pursuant to which the Company's outstanding debt and preferred stock were restructured (the "Recapitalization"). The Recapitalization has significantly improved the Company's capital structure. Significant components of the Recapitalization, together with the applicable accounting effects, were as follows: (i) The Company has exchanged $44.1 million principal amount of new 13% Exchange Notes ("Exchange Notes") due December 1, 2000 for a like principal amount of 12 3/4% Subordinated Debentures ("Subordinated Debentures") due March 15, 2001. This exchange satisfied the 1994 sinking fund requirements and, except for $.9 million, will satisfy sinking fund requirements for the Subordinated Debentures through 1997. The exchange of the Subordinated Debentures has been accounted for as an early extinguishment of debt in the first quarter of 1994, resulting in a charge of $4.8 million as an extraordinary loss on this transaction, which represented the excess of the estimated market value of the Exchange Notes over the carrying value of the Subordinated Debentures. The carrying value of the Subordinated Debentures exchanged was reduced by applicable unamortized debt issue costs. No tax benefit was available to offset the extraordinary loss as the Company has provided a 100% valuation allowance to the extent of its deferred tax assets. (ii) The 1,319,563 outstanding shares of the Company's $2.16 Cumulative Convertible Preferred Stock ("$2.16 Preferred Stock"), which had a $25 per share liquidation preference, plus accrued and unpaid dividends aggregating $9.5 million at February 9, 1994, were reclassified into 6,465,859 shares of Common Stock. The Company also agreed to issue up to 131,956 shares of Common Stock on behalf of the holders of $2.16 Preferred Stock to pay certain of their legal fees and expenses in connection with the settlement of litigation related to the reclassification. Of such 131,956 shares of Common Stock, 73,913 shares were awarded in April 1994 by the Delaware Chancery Court for legal fees and expenses, with the remaining shares to be issued to the -7- 8 TESORO PETROLEUM CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited) former holders of $2.16 Preferred Stock upon the court's order becoming final and nonappealable. The issuance of the Common Stock in connection with the reclassification and settlement of litigation that was recorded in 1994 resulted in an increase in Common Stock of approximately $1 million, equal to the aggregate par value of the Common Stock issued, and an increase in additional paid-in capital of approximately $9 million. (iii) The Company and MetLife Security Insurance Company of Louisiana ("MetLife Louisiana"), the holder of all of the Company's outstanding $2.20 Redeemable Cumulative Convertible Preferred Stock ("$2.20 Preferred Stock"), entered into an agreement (the "Amended MetLife Memorandum") with regard to the $2.20 Preferred Stock pursuant to which MetLife Louisiana agreed to waive all existing mandatory redemption requirements, to consider all accrued and unpaid dividends thereon (aggregating $21.2 million at February 9, 1994) to have been paid, to allow the Company to pay future dividends on the $2.20 Preferred Stock in Common Stock in lieu of cash, to waive or refrain from exercising certain other rights of the $2.20 Preferred Stock and to grant to the Company a three-year option (the "MetLife Louisiana Option") to purchase all of MetLife Louisiana's holdings of $2.20 Preferred Stock and Common Stock for approximately $53 million prior to June 30, 1994 after giving effect to the scheduled dividend payment on May 15, 1994, all in consideration for, among other things, the issuance by the Company to MetLife Louisiana of 1,900,075 shares of Common Stock. Such additional shares are subject to the MetLife Louisiana Option. The unexercised option price will be increased by 3% on the last day of each calendar quarter until December 31, 1995, and by 3 1/2% on the last day of each quarter thereafter, and will be reduced by cash dividends paid on the $2.20 Preferred Stock after February 9, 1994. The Company will be required to pay dividends (in either cash or Common Stock) when due on the $2.20 Preferred Stock in order for the MetLife Louisiana Option to remain outstanding. In addition, the MetLife Louisiana Option is subject to certain minimum exercise requirements to remain outstanding beyond one year and two years. These actions have resulted in the reclassification of the $2.20 Preferred Stock into equity capital at its aggregate liquidation preference of $57.5 million and the recording of an increase in additional paid-in capital of approximately $21 million in February 1994. If the Recapitalization had been completed at the beginning of the year, the pro forma earnings per share before extraordinary loss would have decreased from $.27 to $.24 for the three months ended March 31, 1994 due to the additional shares of Common Stock issued in the Recapitalization. -8- 9 TESORO PETROLEUM CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited) (3) Property, Plant and Equipment In January 1994, the Company sold its terminal facilities in Valdez, Alaska for cash proceeds of $2.0 million and a note receivable of $3.0 million, which resulted in a pretax gain to the Company of approximately $2.8 million during the three months ended March 31, 1994. (4) Credit Arrangements During April 1994, the Company entered into a new three-year $125 million corporate revolving credit facility ("Revolving Credit Facility") with a consortium of ten banks. The Revolving Credit Facility, which is subject to a borrowing base, provides for (i) the issuance of letters of credit up to the full amount of the borrowing base as calculated, but not to exceed $125 million, (ii) cash borrowings up to the amount of the borrowing base attributable to domestic oil and gas reserves and (iii) a 90-day option to convert up to $15 million of the commitment under the Revolving Credit Facility into a four-year term loan for the construction of a vacuum unit at the Company's Kenai, Alaska refinery (the "Refinery"). Outstanding obligations under the Revolving Credit Facility are secured by liens on substantially all of the Company's trade accounts receivable and product inventory and mortgages on the Refinery and the Company's South Texas natural gas reserves. Letters of credit available under the Revolving Credit Facility are limited to a borrowing base calculation. The borrowing base, which is comprised of eligible accounts receivable, inventory and domestic oil and gas reserves, has initially been determined to be approximately $97 million. As of April 28, 1994, the Company had outstanding letters of credit under the new facility of $31 million, with a remaining unused availability of $66 million. Cash borrowings (other than under the term loan facility for the vacuum unit) are limited to the amount of the oil and gas reserve component of the borrowing base, which has initially been determined to be approximately $32 million. Cash borrowings under the Revolving Credit Facility will reduce the availability of letters of credit on a dollar-for-dollar basis; however, letter of credit issuances will not reduce cash borrowing availability unless the aggregate dollar amount of outstanding letters of credit exceeds the sum of the accounts receivable and inventory components of the borrowing base. Under the terms of the Revolving Credit Facility, the Company is required to maintain specified levels of working capital, tangible net worth and cash flow. Among other matters, the Revolving Credit Facility has certain restrictions with respect to (i) capital expenditures, (ii) incurrence of additional indebtedness, and (iii) dividends on its capital stock. The Revolving Credit Facility contains other covenants customary in credit arrangements of this kind. The Revolving Credit Facility replaced certain interim financing arrangements that the Company had been using since the termination of its prior letter of credit facility in October 1993. The interim financing arrangements that were cancelled in conjunction with the completion of -9- 10 TESORO PETROLEUM CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited) the new Revolving Credit Facility included a $30 million reducing revolving credit facility and a waiver and substitution of collateral agreement with the State of Alaska (the "State"). In addition, the completion of the Revolving Credit Facility provides the Company significant flexibility in the investment of excess cash balances, as the Company is no longer required to maintain minimum cash balances or to cash secure letters of credit. (5) Commitments and Contingencies Tennessee Gas Contract. The Company is selling a portion of the gas from its Bob West Field to Tennessee Gas Pipeline Company ("Tennessee Gas") under a Gas Purchase and Sales Agreement (the "Tennessee Gas Contract") which provides that the price of gas shall be the maximum price as calculated in accordance with Section 102(b)(2) (the "Contract Price") of the Natural Gas Policy Act of 1978 (the "NGPA"). Tennessee Gas filed suit against the Company 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 March 1994, the Contract Price was $7.84 per Mcf, the Section 101 price was $4.58 per Mcf and the average spot market price was $2.09 per Mcf. Tennessee Gas also claimed that the contract should be considered an "output contract" under Section 2.306 of the Texas Business and Commerce Code and that the increases in volumes tendered under the contract exceeded those allowable for an output contract. The Company continues to receive payment from Tennessee Gas based on the Contract Price for all volumes that are subject to the contract under the Company's interpretation. The District Court trial judge returned a verdict in favor of the Company on all issues. On appeal by Tennessee Gas, the Court of Appeals 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 is seeking review of the appellate court ruling on the output contract issue in the Supreme Court of Texas. Tennessee Gas is seeking review of the appellate court ruling denying the remaining Tennessee Gas claims in the Supreme Court of Texas. Although the outcome of any litigation is uncertain, management, based upon advice from outside legal counsel, is confident that the decision of the trial and appellate courts will ultimately be upheld as to the validity of the Tennessee Gas Contract and the Contract Price. Therefore, if the Supreme Court of Texas does not grant the Company's petition for writ of error and affirms the appellate court ruling, the Company believes that the only issue for trial should be whether the -10- 11 TESORO PETROLEUM CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited) increases in the volumes of gas tendered to Tennessee Gas from the Company's properties were made in bad faith or were unreasonably disproportionate. The appellate court decision was the first reported decision in Texas holding that a take-or-pay contract was an output contract. As a result, it is not clear what standard the trial court would be required to apply in determining whether the increases were in bad faith or unreasonably disproportionate. The appellate court acknowledged in its opinion that the standards used in evaluating other kinds of output contracts would not be appropriate in this context. The Company believes that the appropriate standard would be whether the development of the field was undertaken in a manner that a prudent operator would have undertaken in the absence of an above-market sales price. Under that standard, the Company believes that, if this issue is tried, the development of its gas properties and the resulting increases in volumes tendered to Tennessee Gas will be found to have been reasonable and in good faith. Accordingly, the Company has recognized revenues, net of production taxes and marketing charges, for natural gas sales through March 31, 1994, under the Tennessee Gas Contract based on the Contract Price, which net revenues aggregated $21.1 million more than the Section 101 prices and $38.9 million in excess of the spot market prices. If Tennessee Gas ultimately prevails in this litigation, the Company could be required to return to Tennessee Gas the difference between the spot market price for gas and the Contract Price, plus interest, if awarded by the court. An adverse judgment in this case could have a material adverse effect on the Company. For further information regarding the Tennessee Gas Contract, see Management's Discussion and Analysis of Financial Condition and Results of Operations in Part I, Item 2. Other. In March 1992, the Company received a Compliance Order and Notice of Violation from the U. S. Environmental Protection Agency ("EPA") alleging possible violations by the Company of the New Source Performance Standards under the Clean Air Act at the Refinery. The Company is continuing in its efforts to resolve these issues with the EPA; however, no final resolution has been reached. The Company believes that the ultimate resolution of this matter will not have a material adverse effect upon the Company's business or financial condition. The Company is subject to extensive federal, state and local environmental laws and regulations. These laws, which are constantly changing, 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. The Company is currently involved with two waste disposal sites in 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 any site, the extent of the Company's allocated financial contribution to the cleanup of these sites is expected to be limited based on the number of companies and the volumes of waste involved. At each site, a number of large companies have also been named as potentially responsible parties and are expected to cooperate in the cleanup. The Company is also involved in remedial response and has incurred cleanup expenditures associated with -11- 12 TESORO PETROLEUM CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited) environmental matters at a number of other sites including certain of its own properties. At March 31, 1994, the Company had accrued $6.0 million for environmental costs. Based on currently available information, including the participation of other parties or former owners in remediation actions, the Company believes these accruals are adequate. Conditions which require additional expenditures may exist for various Company sites, including, but not limited to, the Refinery, service stations (current and closed locations) and petroleum product terminals, and for compliance with the Clean Air Act. The amount of such future expenditures cannot presently be determined by the Company. The Company transports its crude oil and a substantial portion of its refined products utilizing Kenai Pipe Line Company's ("KPL") pipeline and marine terminal facilities in Kenai, Alaska. In March 1994, KPL filed a revised tariff with the Federal Energy Regulatory Commission ("FERC") for dock loading services, which would have increased the Company's annual cost of transporting products through KPL's facilities from $1.2 million to $11.2 million, or an increase of $10 million per year. Following the FERC's rejection of KPL's tariff and the commencement of negotiations for the purchase by the Company of the dock facilities, KPL filed a temporary tariff that would increase the Company's annual cost by approximately $1.5 million. The negotiations between the Company and KPL are continuing. The Company believes that the ultimate resolution of this matter will not have a material adverse effect upon the financial condition or results of operations of the Company. -12- 13 Item 2. TESORO PETROLEUM CORPORATION AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1994 COMPARED WITH THE THREE MONTHS ENDED MARCH 31, 1993 A summary of the Company's consolidated results of operations for the three months ended March 31, 1994 and 1993 is presented below:
Three Months Ended March 31, 1994 1993 ---- ---- Consolidated Results of Operations Data (in millions, except per share amounts): Gross Operating Revenues . . . . . . . . . . . . . . . . . . . . . . . $189.1 224.5 Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 .5 Gain on Sales of Assets . . . . . . . . . . . . . . . . . . . . . . . 2.7 - Other Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 1.5 ------- ------- Total Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . 192.7 226.5 Costs of Sales and Operating Expenses. . . . . . . . . . . . . . . . . 167.6 213.8 General and Administrative . . . . . . . . . . . . . . . . . . . . . . 3.6 3.4 Depreciation, Depletion and Amortization . . . . . . . . . . . . . . . 6.6 4.8 Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.9 5.0 Other Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 1.7 Income Tax Provision . . . . . . . . . . . . . . . . . . . . . . . . . 1.6 .7 ------- ------- Earnings (Loss) Before Extraordinary Loss . . . . . . . . . . . . . . 7.2 ( 2.9) Extraordinary Loss on Extinguishment of Debt . . . . . . . . . . . . . ( 4.8) -- ------- -------- Net Earnings (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.4 ( 2.9) ======= ======= Earnings (Loss) per Primary and Fully Diluted* Share: Earnings (Loss) Before Extraordinary Loss . . . . . . . . . . . . . . $ .27 ( .37) Extraordinary Loss on Extinguishment of Debt . . . . . . . . . . . . . ( .24) -- ------- -------- Net Earnings (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . $ .03 ( .37) ======= =======
*Anti-dilutive Net earnings of $2.4 million, or $.03 per share, for the three months ended March 31, 1994 ("1994 quarter") compare to a net loss of $2.9 million, or $.37 per share, for the three months ended March 31, 1993 ("1993 quarter"). The comparability between these two periods was impacted by certain transactions. The 1994 quarter included a noncash extraordinary loss of $4.8 million on the extinguishment of debt in connection with the Recapitalization. Earnings before the extraordinary loss were $7.2 million, or $.27 per share, for the 1994 quarter. Also included in the 1994 quarter was a $2.8 million gain on the sale of the Company's Valdez, Alaska terminal. The 1993 quarter included a gain of $1.4 million on the repurchase and retirement of $11.25 million principal amount of Subordinated Debentures at market value. Excluding these transactions from both periods, the improvement in the 1994 quarter as compared to the 1993 quarter was primarily attributable to higher natural gas prices on increased natural gas production from the Bob West Field and improved gross margins in the refining and marketing operations. -13- 14 Item 2. TESORO PETROLEUM CORPORATION AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Refining and Marketing
Three Months Ended March 31, 1994 1993 -------- -------- (Dollars in millions, except per unit amounts) Gross Operating Revenues . . . . . . . . . . . . . . . . . . . . . . . $ 150.3 194.6 Costs of Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124.2 173.1 --------- --------- Gross Margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26.1 21.5 Operating Expenses and Other, Including Gain on Sales of Assets . . . . . . . . . . . . . . . . . . . . . . . 17.1 17.8 Depreciation and Amortization . . . . . . . . . . . . . . . . . . . . . 2.6 2.5 --------- --------- Operating Profit . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6.4 1.2 ========= ========= Refinery Throughput (average daily barrels) . . . . . . . . . . . . . . 45,320 52,911 ========= ========= Sales of Refinery Production: Sales ($ per barrel) . . . . . . . . . . . . . . . . . . . . . . . . $ 18.46 20.98 Margin ($ per barrel) . . . . . . . . . . . . . . . . . . . . . . . $ 4.24 2.94 Volume (average daily barrels) . . . . . . . . . . . . . . . . . . . 46,236 57,332 Sales of Products Purchased for Resale: Sales ($ per barrel) . . . . . . . . . . . . . . . . . . . . . . . . $ 24.12 26.43 Margin ($ per barrel) . . . . . . . . . . . . . . . . . . . . . . . $ 2.62 .88 Volume (average daily barrels) . . . . . . . . . . . . . . . . . . . 19,582 22,643 Sales Volumes (average daily barrels): Gasoline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,570 25,907 Jet fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,678 12,618 Diesel fuel and other distillates . . . . . . . . . . . . . . . . . 16,124 20,584 Residual fuel oil . . . . . . . . . . . . . . . . . . . . . . . . . 16,446 20,866 --------- --------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,818 79,975 ========= ========= Sales Prices ($ per barrel): Gasoline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23.92 25.51 Jet fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25.43 28.70 Diesel fuel and other distillates . . . . . . . . . . . . . . . . . $ 23.53 26.19 Residual fuel oil . . . . . . . . . . . . . . . . . . . . . . . . . $ 8.22 11.46
Revenues decreased in the 1994 quarter as compared to the 1993 quarter, primarily due to an 18% reduction in sales volumes of refined products. The reduction in volumes resulted from the Company's market-driven operating strategy implemented in 1993, which more closely aligns Refinery production with market demand in Alaska while minimizing the output of lower value residual fuel oil. Costs of sales were lower in the 1994 quarter, due to the reduced throughput level together with a decrease in crude oil prices. Included in operating expenses and other above for the 1994 quarter was the $2.8 million gain from the sale of the Company's Valdez, Alaska terminal. The overall improvement in gross margin and the gain on sales of assets were partially offset by a $2.1 million increase in operating expenses which included higher environmental and transportation costs. -14- 15 Item 2. TESORO PETROLEUM CORPORATION AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Exploration and Production
Three Months Ended March 31, 1994 1993 ---- ---- (Dollars in millions, except per unit amounts) United States: Gross operating revenues* . . . . . . . . . . . . . . . . . . . . . $ 17.4 7.7 Lifting cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 1.2 Depreciation, depletion and amortization . . . . . . . . . . . . . . 3.8 2.0 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 .3 ------- ------ Operating Profit - United States . . . . . . . . . . . . . . . . . 11.2 4.2 ------- ------ Bolivia: Gross operating revenues . . . . . . . . . . . . . . . . . . . . . . 2.8 2.8 Lifting cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 .4 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 1.0 ------- ------ Operating Profit - Bolivia . . . . . . . . . . . . . . . . . . . . 1.9 1.4 ------- ------ Total Operating Profit . . . . . . . . . . . . . . . . . . . . . . . . $ 13.1 5.6 ======= ====== Natural Gas - United States: Production (average daily Mcf) - Tennessee Gas Contract* . . . . . . . . . . . . . . . . . . . . . . 16,181 6,356 Spot market and other . . . . . . . . . . . . . . . . . . . . . . . 32,817 20,653 ------- ------ Total Production . . . . . . . . . . . . . . . . . . . . . . . . 48,998 27,009 ======= ====== Average sales price per Mcf - Tennessee Gas Contract* . . . . . . . . . . . . . . . . . . . . . . $ 7.80 7.36 Spot market . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.01 1.75 Average . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3.92 3.07 Average lifting cost per Mcf . . . . . . . . . . . . . . . . . . . . $ .53 .49 Depletion per Mcf . . . . . . . . . . . . . . . . . . . . . . . . . . $ .85 .82 Natural Gas - Bolivia: Production (average daily Mcf) . . . . . . . . . . . . . . . . . . . 19,137 17,747 Average sales prices per Mcf . . . . . . . . . . . . . . . . . . . . $ 1.23 1.19 Average lifting cost per net equivalent Mcf . . . . . . . . . . . . . $ .11 .23 - -----------------------
* The Company is involved in litigation with Tennessee Gas relating to a natural gas sales contract. See "Capital Resources and Liquidity--Litigation" and Note 5 of Notes to Condensed Consolidated Financial Statements. -15- 16 Item 2. TESORO PETROLEUM CORPORATION AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) The number of producing wells in South Texas in which the Company has an interest increased to 33 at the end of the 1994 quarter compared to 11 at the end of the 1993 quarter. The resulting increase in the Company's production levels in South Texas, together with higher average sales prices, contributed to the higher revenues. Total lifting costs and depreciation, depletion and amortization also increased in the 1994 quarter due to the higher production levels. The 1994 quarter production level, which was higher than the 1993 quarter's, was lower than the 58 MMcf per day produced during the three months ended December 31, 1993. In February 1994, the common carrier pipeline facilities transporting gas from the Bob West Field were at capacity and the Company's production from the field was curtailed. The curtailment affects only production subject to spot market prices, and the Company continues to produce and transport all of its gas in the Bob West Field that is subject to the Tennessee Gas Contract. Accordingly, the average realized selling price for the Company's domestic natural gas was $3.92 per Mcf during the 1994 quarter, which compares to $3.07 per Mcf in the 1993 quarter. A new common carrier pipeline, which will provide transportation for the increased gas production from the Bob West Field, is being constructed by Coastal States Gas Transmission Company. The Company expects that further curtailments will occur until June 1, 1994, the anticipated completion date of the new pipeline. Results from the Company's Bolivian operations improved by $.5 million when comparing the 1994 quarter to the 1993 quarter. Under a sales contract with Yacimientos Petroliferos Fiscales Bolivianos ("YPFB"), the Company's Bolivian natural gas production is sold to YPFB, which in turn sells the natural gas to the Republic of Argentina. The contract between YPFB and the Republic of Argentina has recently been extended for an additional three-year period ending March 31, 1997. The contract extension will maintain approximately the same volumes, but with a small decrease in price. The Company's contract with YPFB, including the pricing provision, is subject to renegotiation in May 1994 for up to a three-year period. As a result of the terms of the contract extension between YPFB and the Republic of Argentina, the Company expects the renegotiation to result in the same production volume but with a corresponding small decrease in the contract price. -16- 17 Item 2. TESORO PETROLEUM CORPORATION AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Oil Field Supply and Distribution - --------------------------------- Three Months Ended March 31, 1994 1993 ---- ---- (Dollars in millions) Gross Operating Revenues . . . . . . . . . . . . . . . . . . . . . . . $ 18.6 19.4 Costs of Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.9 16.6 ------- ------- Gross Margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.7 2.8 Operating Expenses and Other . . . . . . . . . . . . . . . . . . . . . 3.8 3.5 Depreciation and Amortization . . . . . . . . . . . . . . . . . . . . . .1 .1 ------- ------- Operating Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . $ ( 1.2) ( .8) ======= ======= Refined Product Sales (average daily barrels) . . . . . . . . . . . . . 7,424 6,897 ======= =======
Operating expenses and other for the 1994 quarter included a charge of approximately $.9 million for winding up the Company's environmental products marketing operations. The Company is continuing its wholesale marketing of fuels and lubricants. Interest and Other Income Other income in the 1993 quarter included a $1.4 million gain from the purchase and retirement of $11.25 million principal amount of Subordinated Debentures in January 1993. Since this retirement satisfied the sinking fund requirement due in March 1993, the gain was not reported as an extraordinary item. Income Taxes The increase of $.8 million in the income tax provision during the 1994 quarter as compared to the 1993 quarter was due to federal and state income taxes on the Company's increased taxable earnings. CAPITAL RESOURCES AND LIQUIDITY During the first quarter of 1994, the Company continued to achieve significant improvement in profitability, resulting primarily from (i) strong gross margins on the sales of refined products, (ii) the Company's recently implemented market-driven operating strategy to better align Refinery production with refined product demand in the Alaskan market and minimize the output of lower value residual fuel oil and (iii) higher natural gas production resulting from continuing success in developing the Bob West Field. The Company's liquidity and capital resources have been significantly enhanced as a result of the Company's improvement in profitability, together with the completion of the Recapitalization in February 1994 and the finalization of the Company's Revolving Credit Facility during April 1994. Significant components of the Recapitalization were as follows: (i) Subordinated Debentures in the principal amount of $44.1 million were tendered in exchange for a like principal amount of new Exchange Notes, which satisfied the 1994 sinking fund requirements and, except for $.9 million, will satisfy sinking fund requirements for the Subordinated -17- 18 Item 2. TESORO PETROLEUM CORPORATION AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Debentures through 1997. The Exchange Notes bear interest at 13% per annum, are scheduled to mature on December 1, 2000 and have no sinking fund requirements. (ii) The 1,319,563 outstanding shares of $2.16 Preferred Stock, together with accrued and unpaid dividends of $9.5 million at February 9, 1994, were reclassified into 6,465,859 shares of Common Stock. The Company also agreed to issue up to 131,956 shares of Common Stock on behalf of the holders of $2.16 Preferred Stock to pay certain of their legal fees and expenses in connection with the settlement of litigation related to the reclassification. Of such 131,956 shares of Common Stock, 73,913 shares were awarded by the court for legal fees and expenses, with the remaining shares to be issued to the former holders of $2.16 Preferred Stock upon the court's order becoming final and nonappealable. (iii) The Company and MetLife Louisiana, the holder of all the Company's outstanding $2.20 Preferred Stock, entered into the Amended MetLife Memorandum, pursuant to which MetLife Louisiana agreed to waive all existing mandatory redemption requirements, to consider all accrued and unpaid dividends thereon through February 9, 1994 (aggregating approximately $21.2 million) to have been paid, to allow the Company to pay future dividends in Common Stock in lieu of cash, to waive or refrain from exercising certain other rights of the $2.20 Preferred Stock and to grant to the Company the MetLife Louisiana Option (pursuant to which the Company has the option to purchase, until February 9, 1997, all shares of the $2.20 Preferred Stock and Common Stock held by MetLife Louisiana), all in consideration for, among other things, the issuance by the Company to MetLife Louisiana of 1,900,075 shares of Common Stock. Such additional shares are also subject to the MetLife Louisiana Option. Until June 30, 1994, the option price is approximately $53.0 million, after giving effect to a reduction in the option price for the scheduled cash dividend payment on the $2.20 Preferred Stock on May 15, 1994. The unexercised option price will be increased by 3% on the last day of each calendar quarter until December 31, 1995, and by 3 1/2% on the last day of each quarter thereafter, and will be reduced by cash dividends paid on the $2.20 Preferred Stock after February 9, 1994. The Company will be required to pay dividends (in either cash or Common Stock) when due on the $2.20 Preferred Stock in order for the MetLife Louisiana Option to remain outstanding. In addition, the MetLife Louisiana Option is subject to certain minimum exercise requirements to remain outstanding beyond one year and two years. For further information regarding the Recapitalization, refer to Note 2 of Notes to Condensed Consolidated Financial Statements. The Company is currently pursuing a registered public offering of its Common Stock (the "Offering") for the purpose of raising funds to exercise the MetLife Louisiana Option. Any net proceeds in excess of the amount required to exercise the MetLife Louisiana Option in full will be used for general corporate purposes. If the MetLife Louisiana Option is exercised in full prior to June 30, 1994, the Company will acquire 2,875,000 shares of $2.20 Preferred Stock having a liquidation value of $57.5 million and 4,084,160 shares of Common Stock having an aggregate market value of $47.0 million (based on a closing price of -18- 19 Item 2. TESORO PETROLEUM CORPORATION AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) $11 1/2 per share on May 4, 1994) in consideration for approximately $53.0 million. Upon the exercise in full of the MetLife Louisiana Option, dividend requirements of $6.3 million per year on the $2.20 Preferred Stock would be eliminated. Such offering and the exercise in full of the MetLife Louisiana Option will result in a net increase of only 915,840 outstanding shares of Common Stock. If the net proceeds from the Offering are less than the full exercise price, the Metlife Louisiana Option will be exercised in part to the extent of the net proceeds. The MetLife Louisiana Option provides that any partial exercise will result in the purchase of a pro rata portion of each of the shares of Common Stock and the shares of $2.20 Preferred Stock held by MetLife Louisiana. The Company is currently prohibited under the terms of the indenture governing the Subordinated Debentures from repurchasing its capital stock, except from the proceeds of a substantially concurrent sale of other shares of capital stock. Accordingly, if the proceeds to the Company from the Offering are not sufficient to exercise the MetLife Louisiana Option in full, the Company would be able to exercise the MetLife Louisiana Option only to the extent of the net proceeds of the Offering. There can be no assurance that the Offering will be consummated. The Company transports its crude oil and a substantial portion of its refined products utilizing KPL's pipeline and marine terminal facilities in Kenai, Alaska. In March 1994, KPL filed a revised tariff with the FERC for dock loading services, which would have increased the Company's annual cost of transporting products through KPL's facilities from $1.2 million to $11.2 million, or an increase of $10 million per year. Following the FERC's rejection of KPL's tariff and the commencement of negotiations for the purchase by the Company of the dock facilities, KPL filed a temporary tariff that would increase the Company's annual cost by approximately $1.5 million. The negotiations between the Company and KPL are continuing. The Company believes that the ultimate resolution of this matter will not have a material adverse effect upon the financial condition or results of operations of the Company. Credit Arrangements During April 1994, the Company entered into a new three-year $125 million Revolving Credit Facility with a consortium of ten banks. The Revolving Credit Facility, which is subject to a borrowing base, provides for (i) the issuance of letters of credit up to the full amount of the borrowing base as calculated, but not to exceed $125 million, (ii) cash borrowings up to the amount of the borrowing base attributable to domestic oil and gas reserves and (iii) a 90-day option to convert up to $15 million of the commitment under the Revolving Credit Facility into a four-year term loan for the construction of the vacuum unit at the Refinery. Outstanding obligations under the Revolving Credit Facility are secured by liens on substantially all of the Company's trade accounts receivable and product inventory and mortgages on the Refinery and the Company's South Texas natural gas reserves. Letters of credit available under the Revolving Credit Facility are limited to a borrowing base calculation. The borrowing base, which is comprised of eligible accounts receivable, inventory and domestic oil and gas reserves, has initially been determined to be approximately $97 million. As of April 28, 1994, the Company had outstanding letters of credit under the new facility of $31 million, with a remaining unused availability of $66 million. Cash -19- 20 Item 2. TESORO PETROLEUM CORPORATION AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) borrowings (other than under the term loan facility for the vacuum unit) are limited to the amount of the oil and gas reserve component of the borrowing base, which has initially been determined to be approximately $32 million. Cash borrowings under the Revolving Credit Facility will reduce the availability of letters of credit on a dollar-for-dollar basis; however, letter of credit issuances will not reduce cash borrowing availability unless the aggregate dollar amount of outstanding letters of credit exceeds the sum of the accounts receivable and inventory components of the borrowing base. The terms of the Revolving Credit Facility include standard and customary restrictions and covenants. For information concerning such restrictions and covenants, see Note 4 of Notes to Condensed Consolidated Financial Statements. The Revolving Credit Facility replaced certain interim financing arrangements that the Company had been using since the termination of its prior letter of credit facility in October 1993. The interim financing arrangements that were cancelled in conjunction with the completion of the new Revolving Credit Facility included a $30 million reducing revolving credit facility and a waiver and substitution of collateral agreement with the State. In addition, the completion of the Revolving Credit Facility provides the Company significant flexibility in the investment of excess cash balances, as the Company is no longer required to maintain minimum cash balances or to cash secure letters of credit. Debt and Other Obligations The Company's funded debt obligations as of December 31, 1993 included approximately $108.8 million principal amount of Subordinated Debentures, which bear interest at 12 3/4% per annum and require sinking fund payments sufficient to annually retire $11.25 million principal amount of Subordinated Debentures. As part of the Recapitalization, $44.1 million principal amount of Subordinated Debentures was tendered in exchange for a like principal amount of Exchange Notes. Such exchange satisfied the 1994 sinking fund requirements and, except for $.9 million, will satisfy sinking fund requirements for the Subordinated Debentures through 1997. The indenture governing the Subordinated Debentures contains certain covenants, including a restriction which 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 Exchange Notes bear interest at 13% per annum, mature on December 1, 2000 and have no sinking fund requirements. The limitation on dividend payments included in the indenture governing the Exchange Notes is less restrictive than the limitation imposed by the Subordinated Debentures. The Subordinated Debentures and Exchange Notes are redeemable at the option of the Company at 100% of principal amount, plus accrued interest. The Company is monitoring the feasibility of a debt offering that would reduce fixed charges by refinancing all or a substantial portion of such indebtedness at lower interest rates. The Company is not undertaking such a debt offering at this time because it considers the current interest rate environment unattractive; however, if interest rate levels decline, the Company may decide to proceed with such an offering. There can be no assurance whether or when such an offering would occur. If the Subordinated Debentures and Exchange Notes are redeemed prior to their respective maturities, the Company will be required to recognize a noncash extraordinary charge to earnings equal to the portion of -20- 21 Item 2. TESORO PETROLEUM CORPORATION AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) the original issue discount on the Subordinated Debentures and the debt issuance costs of both the Subordinated Debentures and the Exchange Notes that remain unamortized at the date of redemption (aggregating approximately $8.5 million at March 31, 1994). Capital Expenditures The Company has under consideration total capital expenditures ranging from approximately $65 million to $80 million in 1994. Proposed capital expenditures for 1994 include approximately $29 million for the continued development of the Bob West Field, which could be increased by $10 million to $15 million based on additional development drilling proposed by the operators. In addition, the proposed capital expenditures for 1994 include $32 million for the refining and marketing operations, of which $24 million is associated with the installation of a vacuum unit at the Refinery to allow the Company to further upgrade residual fuel oil production into higher-valued products. The Revolving Credit Facility, along with other available funds, is expected to provide sufficient capital to meet the Company's capital expenditure requirements during 1994. Cash Flows From Operating, Investing and Financing Activities During the 1994 quarter, cash and cash equivalents increased by $12.8 million and short-term investments decreased by $6.0 million. At March 31, 1994, the Company's cash totaled $49.4 million, which included $26.6 million as collateral for outstanding letters of credit. Subsequent to March 31, 1994, these interim cash-backed letter of credit arrangements were replaced by the Revolving Credit Facility (see Note 4 of Notes to Condensed Consolidated Financial Statements). Working capital amounted to $110.3 million at March 31, 1994. Net cash from operating activities of $30.3 million during the 1994 quarter, compared to $14.4 million for the 1993 quarter, was primarily due to net earnings adjusted for certain noncash charges and reduced working capital requirements. The 1993 quarter included a payment of $10.8 million to the State in connection with the settlement of a contractual dispute. Net cash used in investing activities of $10.2 million during the 1994 quarter included capital expenditures of $18.5 million, partially offset by cash proceeds of $2.0 million from the sale of the Company's Valdez, Alaska terminal and the sale of $6.0 million in short-term investments. Capital expenditures for the 1994 quarter included $11.7 million for exploration and production activities in the Bob West Field, where an additional six natural gas development wells were completed during this period. The refining and marketing segment's capital expenditures totaled $6.1 million for the 1994 quarter, primarily for initial installation costs for the vacuum unit and completion of the deisobutanizer unit. Net cash used in financing activities of $7.3 million during the 1994 quarter included the repayment of net borrowings of $5.0 million under the reducing revolving credit facility, which was replaced by the Revolving Credit Facility (see Note 4 of Notes to Condensed Consolidated Financial Statements). Litigation The Company is subject to certain commitments and contingencies, including a contingency relating to a natural gas sales contract dispute with Tennessee Gas. -21- 22 Item 2. TESORO PETROLEUM CORPORATION AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) The Company is selling a portion of the gas from its Bob West Field to Tennessee Gas under a Gas Purchase and Sales Agreement which provides that the price of gas shall be the maximum price as calculated in accordance with Section 102(b)(2) (the "Contract Price") of the NGPA. Tennessee Gas filed suit against the Company alleging that the 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 March 1994, the Contract Price was $7.84 per Mcf, the Section 101 price was $4.58 per Mcf and the average spot market price was $2.09 per Mcf. Tennessee Gas also claimed that the contract should be considered an "output contract" under Section 2.306 of the Texas Business and Commerce Code and that the increases in volumes tendered under the contract exceeded those allowable for an output contract. The Company continues to receive payment from Tennessee Gas based on the Contract Price for all volumes that are subject to the contract under the Company's interpretation. The District Court trial judge returned a verdict in favor of the Company on all issues. On appeal by Tennessee Gas, the Court of Appeals 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 is seeking review of the appellate court ruling on the output contract issue in the Supreme Court of Texas. Tennessee Gas is seeking review of the appellate court ruling denying the remaining Tennessee Gas claims in the Supreme Court of Texas. Although the outcome of any litigation is uncertain, management, based upon advice from outside legal counsel, is confident that the decision of the trial and appellate courts will ultimately be upheld as to the validity of the Tennessee Gas Contract and the Contract Price. Therefore, if the Supreme Court of Texas does not grant the Company's petition for writ of error and affirms the appellate court ruling, the Company believes that the only issue for trial should be whether the increases in the volumes of gas tendered to Tennessee Gas from the Company's properties were made in bad faith or were unreasonably disproportionate. The appellate court decision was the first reported decision in Texas holding that a take-or-pay contract was an output contract. As a result, it is not clear what standard the trial court would be required to apply in determining whether the increases were in bad faith or unreasonably disproportionate. The appellate court acknowledged in its opinion that the standards used in evaluating other kinds of output contracts would not be appropriate in this context. The Company believes that the appropriate standard would be whether the development of the field was undertaken in a manner that a prudent operator would have undertaken in the absence of an above-market sales price. Under that standard, the Company believes that, if this issue is tried, the development of its gas properties and the resulting increases in volumes tendered to Tennessee Gas will be found to have been reasonable and in good faith. Accordingly, the Company has recognized revenues, net of production taxes and marketing charges, for natural gas sales through March 31, 1994, under the Tennessee Gas Contract based on the Contract Price, which net revenues -22- 23 Item 2. TESORO PETROLEUM CORPORATION AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) aggregated $21.1 million more than the Section 101 prices and $38.9 million in excess of the spot market prices. If Tennessee Gas ultimately prevails in this litigation, the Company could be required to return to Tennessee Gas the difference between the spot market price for gas and the Contract Price, plus interest, if awarded by the court. In addition, the present value of estimated future net revenues on a pre-tax basis from the Company's proved domestic reserves has been calculated based in part on the price being paid by Tennessee Gas at the date of determination. At March 31, 1994, such present value was $171.0 million. If calculated using March 31, 1994 spot market prices instead of the Contract Price, such present value would have been $92.0 million. An adverse judgment in this case could have a material adverse effect on the Company. Environmental The Company is subject to extensive federal, state and local environmental laws and regulations. These laws, which are constantly changing, 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 clean-up expenditures associated with environmental matters at a number of sites, including certain of its own properties. Although the level of future expenditures for environmental purposes, including cleanup obligations, is impossible to determine with any degree of probability, it is management's opinion that, based on current knowledge and the extent of such expenditures to date, the ultimate aggregate cost of environmental remediation will not have a material adverse effect on the Company's financial condition. At March 31, 1994, the Company's accrual for environmental liabilities was $6.0 million. 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 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 costs. These energy prices, together with volume levels, also determine the carrying value of crude oil and refined product inventory. Likewise, major changes in natural gas prices impact revenues and the present value of estimated future net revenues from the Company's exploration and production operations. The carrying value of oil and gas assets may also be subject to noncash write-downs based on changes in natural gas prices and other determining factors. -23- 24 PART II - OTHER INFORMATION Item 1. Legal Proceedings Tennessee Gas Contract. The Company is selling a portion of the gas from its Bob West Field to Tennessee Gas under a Gas Purchase and Sales Agreement which provides that the price of gas shall be the Contract Price. Tennessee Gas filed suit against the Company alleging that the 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 March 1994, the Contract Price was $7.84 per Mcf, the Section 101 price was $4.58 per Mcf and the average spot market price was $2.09 per Mcf. Tennessee Gas also claimed that the contract should be considered an "output contract" under Section 2.306 of the Texas Business and Commerce Code and that the increases in volumes tendered under the contract exceeded those allowable for an output contract. The Company continues to receive payment from Tennessee Gas based on the Contract Price for all volumes that are subject to the contract under the Company's interpretation. The District Court trial judge returned a verdict in favor of the Company on all issues. On appeal by Tennessee Gas, the Court of Appeals 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 is seeking review of the appellate court ruling on the output contract issue in the Supreme Court of Texas. Tennessee Gas is seeking review of the appellate court ruling denying the remaining Tennessee Gas claims in the Supreme Court of Texas. Although the outcome of any litigation is uncertain, management, based upon advice from outside legal counsel, is confident that the decision of the trial and appellate courts will ultimately be upheld as to the validity of the Tennessee Gas Contract and the Contract Price. Therefore, if the Supreme Court of Texas does not grant the Company's petition for writ of error and affirms the appellate court ruling, the Company believes that the only issue for trial should be whether the increases in the volumes of gas tendered to Tennessee Gas from the Company's properties were made in bad faith or were unreasonably disproportionate. The appellate court decision was the first reported decision in Texas holding that a take-or-pay contract was an output contract. As a result, it is not clear what standard the trial court would be required to apply in determining whether the increases were in bad faith or unreasonably disproportionate. The appellate court acknowledged in its opinion that the standards used in evaluating other kinds of output contracts would not be appropriate in this context. The Company believes that the appropriate standard would be whether the development of the field was undertaken in a manner that a prudent operator would have undertaken in the absence of an above-market sales price. Under that standard, the Company believes that, if this issue is tried, the development of its gas properties and the resulting increases in volumes tendered to Tennessee Gas will be found to have been reasonable and in good faith. Accordingly, the Company has recognized revenues, net of production taxes and marketing charges, for natural gas sales through -24- 25 March 31, 1994, under the Tennessee Gas Contract based on the Contract Price, which net revenues aggregated $21.1 million more than the Section 101 prices and $38.9 million in excess of the spot market prices. If Tennessee Gas ultimately prevails in this litigation, the Company could be required to return to Tennessee Gas the difference between the spot market price for gas and the Contract Price, plus interest, if awarded by the court. In addition, the present value of estimated future net revenues on a pre-tax basis from the Company's proved domestic reserves has been calculated based in part on the price being paid by Tennessee Gas at the date of determination. At March 31, 1994, such present value was $171.0 million. If calculated using March 31, 1994 spot market prices instead of the Contract Price, such present value would have been $92.0 million. An adverse judgment in this case could have a material adverse effect on the Company. Recapitalization Matters. In October 1993, Croyden Associates, a holder of shares of the Company's $2.16 Preferred Stock, filed a class action suit in Delaware Chancery Court on behalf of itself and all other holders of the $2.16 Preferred Stock. The suit alleged that the Company and its directors breached their fiduciary duties to the holders of the $2.16 Preferred Stock in formulating the originally proposed terms of the Recapitalization, which provided for the reclassification of each share of $2.16 Preferred Stock into 3.5 shares of Common Stock or, at the holder's option, 2.75 shares of Common Stock and .25 share of a new issue of preferred stock. The suit sought, among other things, monetary damages and to enjoin the Recapitalization. In April 1994, the court approved a settlement agreement which provided for (i) the exchange of each share of $2.16 Preferred Stock into 4.9 shares of Common Stock and (ii) the issuance of up to 131,956 shares of Common Stock and an additional $500,000 in cash from the Company to pay attorneys' fees awarded by the Delaware Chancery Court. Of such 131,956 shares of Common Stock, 73,913 shares were awarded by the court for legal fees and expenses, with the remaining shares to be issued to the former holders of $2.16 Preferred Stock upon the court's order becoming final and nonappealable. Item 2. Changes in Securities In April 1994, the Company entered into the Revolving Credit Facility, under which the Company is required to maintain specified levels of working capital, tangible net worth and cash flow. The Revolving Credit Facility has certain restrictions with respect to dividends on its capital stock. For further information on the Revolving Credit Facility, see Note 4 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1. -25- 26 Item 4. Submission of Matters to a Vote of Security Holders (a) The 1993 annual meeting of stockholders of the Company was held on February 9, 1994. (b) The names of the directors elected at the meeting and a tabulation of the number of votes cast for, against or withheld with respect to each such director is set forth below: Votes
Name For Against Withheld ---- --- ------- -------- Charles F. Luce 16,568,999 0 230,695 John J. McKetta, Jr. 16,199,887 0 599,807 Stewart G. Nagler 16,568,768 0 230,926 Arthur Spitzer 16,586,952 0 212,742
The name of each other director whose term of office as a director continued after the meeting is set forth below: Robert J. Caverly Steven H. Grapstein Raymond K. Mason, Sr. Murray L. Weidenbaum Ray C. Adam Michael D. Burke Peter M. Detwiler M. Richard Stewart Charles Wohlstetter (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: -26- 27
Broker Description For Against Withheld Abstentions Non-Votes - --------------------------------------------------------------------------------------------------------------------------- Proposal to amend the Company's Certificate of Incorporation to (i) reclassify the $2.16 Preferred Stock into Common Stock, (ii) remove the provisions relating to the division of directors into three classes, and (iii) require, under certain circumstances, in the absence of the approval of 66-2/3% of the stockholders to amend, in a manner adverse to the Company, certain agreements with MetLife Louisiana All shares entitled to vote 14,661,289 251,743 88,841 0 1,797,821 Holders of $2.16 Preferred Stock voting separately as a class 911,114 38,207 11,346 0 234,370 Proposal to amend the Company's Certificate of Incorporation to eliminate, upon the occurrence of certain conditions, the requirement for the affirmative vote of not less than 80% of the outstanding shares of capital stock of the Company to approve certain transactions by the Company 14,624,055 277,621 98,431 0 1,799,587
-27- 28
Broker Description For Against Withheld Abstentions Non-Votes - --------------------------------------------------------------------------------------------------------------------------- Proposal to approve the Company's Executive Long-Term Incentive Plan 14,028,892 858,746 114,235 0 1,797,821 Proposal to appoint Deloitte & Touche as independent auditors for the Company for 1993 16,665,918 66,091 67,685 0 0
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. -28- 29 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: May 9, 1994 /s/ MICHAEL D. BURKE Michael D. Burke President and Chief Executive Officer Date: May 9, 1994 /s/ BRUCE A. SMITH Bruce A. Smith Executive Vice President and Chief Financial Officer -29- 30 EXHIBIT INDEX Exhibit Number - ------- 10.1 Credit Agreement (the "Credit Agreement") dated as of April 20, 1994 among the Company and Texas Commerce Bank National Association ("TCB"), as Issuing Bank and as Agent, and certain other banks named therein. 10.2 Guaranty Agreement dated as of April 20, 1994 among various subsidiaries of the Company and TCB, as Issuing Bank and as Agent, and certain other banks named therein. 10.3 Mortgage, Deed of Trust, Assignment of Production, Security Agreement and Financing Statement dated as of April 20, 1994 from Tesoro Exploration and Production Company, entered into in connection with the Credit Agreement. 10.4 Deed of Trust, Security Agreement and Financing Statement dated as of April 20, 1994 among Tesoro Alaska Petroleum Company, TransAlaska Title Insurance Agency, Inc., as Trustee, and TCB, as Agent, entered into in connection with the Credit Agreement. 10.5 Pledge Agreement dated as of April 20, 1994 by the Company in favor of TCB, entered into in connection with the Credit Agreement. 10.6 Security Agreement (Accounts and Inventory) dated as of April 20, 1994 between the Company and TCB, entered into in connection with the Credit Agreement. 10.7 Security Agreement (Accounts and Inventory) dated as of April 20, 1994 between Tesoro Alaska Petroleum Company and TCB, entered into in connection with the Credit Agreement. 10.8 Security Agreement (Accounts) dated as of April 20, 1994 between Tesoro Petroleum Distributing Company and TCB, entered into in connection with the Credit Agreement. 10.9 Security Agreement (Accounts and Inventory) dated as of April 20, 1994 between Tesoro Exploration and Production Company and TCB, entered into in connection with the Credit Agreement. 10.10 Security Agreement (Accounts and Inventory) dated as of April 20, 1994 between Tesoro Refining, Marketing & Supply Company and TCB, entered into in connection with the Credit Agreement. 11 Information Supporting Earnings (Loss) Per Share Computations. -30- EX-10.1 2 COPY OF CREDIT AGREEMENT DATED APRIL 20, 1994 1 EXHIBIT 10.1 CREDIT AGREEMENT Among TESORO PETROLEUM CORPORATION as the Company and TEXAS COMMERCE BANK NATIONAL ASSOCIATION Individually, as an Issuing Bank and as Agent, BANQUE PARIBAS Individually, as an Issuing Bank, and as Co-Agent and FINANCIAL INSTITUTIONS NOW OR HEREAFTER PARTIES HERETO $125,000,000 Revolving Credit Facility $15,000,000 Optional Advancing Term Loan April 20, 1994 2 TABLE OF CONTENTS
ARTICLE I DEFINITIONS; CONSTRUCTION Section 1.01 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.02 Accounting Terms and Determinations . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 1.03 Other Definitional Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 ARTICLE II AMOUNT AND TERMS OF LOANS Section 2.01 Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 2.02 Borrowing Requests. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 2.03 Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Section 2.04 Disbursement of Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Section 2.05 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Section 2.06 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Section 2.07 Interest Periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 2.08 Repayment of Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 2.09 Termination or Reduction of Commitments . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 2.10 Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 2.11 Continuation and Conversion Options . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 2.12 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Section 2.13 Payments, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Section 2.14 Interest Rate Not Ascertainable, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Section 2.15 Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Section 2.16 Increased Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 2.17 Change of Lending Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 2.18 Funding Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 2.19 Sharing of Payments, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 2.20 E&P Loan Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 2.21 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Section 2.22 Pro Rata Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Section 2.23 Disposition of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Section 2.24 Senior Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 ARTICLE III CONDITIONS TO BORROWINGS AND TO PURCHASE, RENEWAL AND REARRANGEMENT Section 3.01 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Section 3.02 Conditions Precedent to Initial Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
3 Section 3.03 Conditions Precedent to Each Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Section 3.04 Recordings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Section 3.05 Activation of Term Loan Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 ARTICLE IV REPRESENTATIONS AND WARRANTIES Section 4.01 Corporate Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Section 4.02 Corporate Power and Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Section 4.03 Binding Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Section 4.04 No Legal Bar or Resultant Lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Section 4.05 No Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Section 4.06 Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Section 4.07 Investments and Guaranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Section 4.08 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Section 4.09 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Section 4.10 Compliance with ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Section 4.11 Taxes; Governmental Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Section 4.12 Titles, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Section 4.13 Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Section 4.14 Casualties; Taking of Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Section 4.15 Compliance with the Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Section 4.16 No Material Misstatements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Section 4.17 Investment Company Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Section 4.18 Public Utility Holding Company Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Section 4.19 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Section 4.20 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Section 4.21 Mortgaged Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Section 4.22 Gas Imbalances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Section 4.23 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Section 4.24 Recapitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 ARTICLE V COVENANTS Section 5.01 Certain Affirmative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 (a) Maintenance and Compliance, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 (b) Payment of Taxes and Claims, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 (c) Further Assurances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 (d) Performance of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 (e) Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
-ii- 4 (f) Accounts and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 (g) Right of Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 (h) Operation and Maintenance of Mortgaged Property and Compliance with Leases . . . . . . . . 56 (i) Stock of Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 (j) Certain Additional Assurances Regarding Maintenance and Operation of Properties . . . . . 57 (k) Designation of Subsidiaries as Additional Guarantors. . . . . . . . . . . . . . . . . . . 57 (l) Minimum Capital Expenditures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 (m) Payment of Charters and Tariffs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 (n) Title Opinions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Section 5.02 Reporting Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 (a) Annual Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 (b) Quarterly Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 (c) No Default/Compliance Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 (d) Auditors' No Default Certificate; Management Letters . . . . . . . . . . . . . . . . . . . 59 (e) Engineering Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 (f) Title Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 (g) Events or Circumstances with respect to Mortgaged Property . . . . . . . . . . . . . . . . 59 (h) Bi-Weekly Borrowing Base Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 (i) Notice of Certain Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 (j) Shareholder Communications, Filings, etc . . . . . . . . . . . . . . . . . . . . . . . . . 60 (k) Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 (l) ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 (m) Borrowing Base Audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 (n) Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Section 5.03 Financial Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 (a) Consolidated Tangible Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 (b) Working Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 (c) Company's Cash Flow Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 (d) Tesoro Alaska EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Section 5.04 Certain Negative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 (a) Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 (b) Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 (c) Mergers, Sales, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 (d) Dividends, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 (e) Investments, Loans, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 (f) Lease Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 (g) Sales and Leasebacks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 (h) Nature of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 (i) ERISA Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 (j) Sale or Discount of Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 (k) Negative Pledge Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
-iii- 5 (l) Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 (m) Unconditional Purchase Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 (n) Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 (o) Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 ARTICLE VI EVENTS OF DEFAULT Section 6.01 Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 Section 6.02 Covenants Without Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 Section 6.03 Other Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 Section 6.04 Other Financing Document Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 Section 6.05 Representations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 Section 6.06 Non-Payments of Other Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 Section 6.07 Defaults Under Other Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 Section 6.08 Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 Section 6.09 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Section 6.10 Money Judgment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Section 6.11 Discontinuance of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Section 6.12 Security Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Section 6.13 Change of Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Section 6.14 Mandatory Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Section 6.15 Material Adverse Event . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 ARTICLE VII THE AGENT Section 7.01 Appointment of Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 Section 7.02 Nature of Duties of Agent and Co-Agent . . . . . . . . . . . . . . . . . . . . . . . . . . 75 Section 7.03 Lack of Reliance on the Agent and the Co-Agent . . . . . . . . . . . . . . . . . . . . . . 75 Section 7.04 Certain Rights of the Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 Section 7.05 Reliance by Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 Section 7.06 INDEMNIFICATION OF AGENT AND THE CO-AGENT . . . . . . . . . . . . . . . . . . . . . . . . 76 Section 7.07 The Agent and Co-Agent in their Individual Capacity . . . . . . . . . . . . . . . . . . . 76 Section 7.08 May Treat Lender as Owner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 Section 7.09 Successor Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
-iv- 6 ARTICLE VIII MISCELLANEOUS Section 8.01 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 Section 8.02 Amendments, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 Section 8.03 No Waiver; Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 Section 8.04 Payment of Expenses, Indemnities, etc . . . . . . . . . . . . . . . . . . . . . . . . . . 78 Section 8.05 Right of Setoff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 Section 8.06 Benefit of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 Section 8.07 Assignments and Participations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 Section 8.08 Governing Law; Submission to Jurisdiction; Etc . . . . . . . . . . . . . . . . . . . . . . 83 Section 8.09 Independent Nature of Lenders' Rights . . . . . . . . . . . . . . . . . . . . . . . . . . 84 Section 8.10 Invalidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 Section 8.11 Survival of Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 Section 8.12 Renewal, Extension or Rearrangement . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 Section 8.13 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 Section 8.14 Taxes, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 Section 8.15 Confidential Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 Section 8.16 ENTIRE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 Section 8.17 Attachments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 Section 8.18 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 Section 8.19 Survival of Indemnities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 Section 8.20 Headings Descriptive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 Section 8.21 Satisfaction Requirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 Section 8.22 Effectiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 Section 8.23 Conflict with E&P Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 Section 8.24 EXCULPATION PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 Section 8.25 Proposed Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
ANNEXES Annex I - Commitments Annex II - Eligible Inventory Valuation SCHEDULES Schedule 4.05 - Consents Schedule 4.07 - Investment and Guaranties Schedule 4.08 - Litigation Schedule 4.10 - ERISA -v- 7 Schedule 4.12 - Titles Schedule 4.13 - Defaults Schedule 4.20 - Insurance Schedule 4.22 - Gas Imbalances Schedule 5.04(a) - Existing Indebtedness Schedule 5.04(b) - Liens Schedule 5.04(k) - Negative Pledge Agreements EXHIBITS Exhibit A - Form of Revolving Note Exhibit B - Form of Term Note Exhibit C - Subsidiaries/Guarantors Exhibit D - Form of Borrowing Request Exhibit E-1 - Form of Opinion of Fulbright & Jaworski, L.L.P. Exhibit E-2 - Form of Opinion of James C. Reed, Jr. Exhibit E-3 - Form of Opinion of Groh, Eggers & Price Exhibit F - Form of Assignment and Acceptance Exhibit G - Form of Borrowing Base Report Exhibit H - Form of Activation of Term Loan Commitment Exhibit I - Form of Letter to Hydrocarbon Purchasers Exhibit J - Description of E&P Restructuring -vi- 8 CREDIT AGREEMENT THIS CREDIT AGREEMENT is made and entered into as of this 20th day of April, 1994, among TESORO PETROLEUM CORPORATION, a Delaware corporation (the "Company"); TEXAS COMMERCE BANK NATIONAL ASSOCIATION, individually, as an Issuing Bank and as Agent, BANQUE PARIBAS, individually, as an Issuing Bank and as Co-Agent, and each of the lenders that is a signatory hereto or which becomes a party hereto as provided in Section 8.07 (individually, a "Lender" and, collectively, the "Lenders"). RECITALS A. The Company has previously entered into a Continuing Letter of Credit Agreement, dated as of January 27, 1994, between the Company and the Banque Paribas (the "BP Letter of Credit Agreement") pursuant to which Banque Paribas issued certain Outstanding Letters of Credit (as hereinafter defined). B. The Lenders have agreed to assume, upon the terms and subject to the conditions stated herein, the obligations existing under the Outstanding Letters of Credit. In consideration of the mutual covenants and agreements herein contained, the Company, the Agent, the Issuing Banks and the Lenders agree as follows: ARTICLE I DEFINITIONS; CONSTRUCTION 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): "$2.16 Preferred Stock" shall mean the $2.16 Cumulative Convertible Preferred Stock of the Company. "$2.20 Preferred Stock" shall mean the $2.20 Cumulative Convertible Preferred Stock of the Company. "Account Borrowing Base Parties" shall mean Tesoro Alaska, PEDCO and Tesoro R&M, and "Account Borrowing Base Party" shall mean any one of them. "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 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: 9 (i) Eurodollar Loans - 3 Business Days; and (ii) Base Rate Loans - 1 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 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 Agent or any Lender has advanced funds or any 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. "Agent" shall mean Texas Commerce Bank National Association, acting in the manner and to the extent described in Article VII. "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, as security for the Lender Indebtedness, as the same may be amended, modified or supplemented from time to time. "Applicable Margin" shall mean, on any day and with respect to any Loan, the applicable per annum percentage set forth at the appropriate intersection in the table shown below, based on the ratio of EBITDA to Fixed Charges for the Rolling Period ending on the most recent Quarterly Date with respect to which the Agent shall have received the financial statements and other information (the "Current Information") required to be delivered to the Agent pursuant to Section 5.02 hereof (said calculation to be made by the Agent as soon as practicable after receipt by the Agent of all required current information): -2- 10
Ratio of EBITDA Base Rate Loan Eurodollar Loan to Fixed Charges Margin Percentage Margin Percentage ---------------------------------------------------------------------------------- Greater than 4:1 0.25% 1.25% Less than or equal to 4.:1 but greater than 3.5:1 0.50% 1.50% Less than or equal to 3.5:1 but greater than 3:1 0.75% 1.75% Less than or equal to 3:1 but greater than 2.5:1 1.00% 2.00% Less than or equal to 2.5:1 1.25% 2.25%
Each change in the Applicable Margin based on a change in the Current Information shall be effective as of the first day of the third month of each applicable calendar quarter (but based upon Current Information for the immediately preceding calendar quarter), or if such day is not a Business Day, then the first Business Day thereafter. Notwithstanding the foregoing, during the period beginning on the Closing Date and ending on December 1, 1994, the Applicable Margin shall be (a) .75% for Base Rate Loans and (b) 1.75% for Eurodollar Loans. The Applicable Margin beginning on December 1, 1994 until redetermination thereof in accordance with the above terms shall be based on the ratio of EBITDA to Fixed Charges for the nine-month period ending on September 30, 1994. "Application" shall mean an "Application and Agreement for Letters of Credit," or similar instruments or agreements, entered into between the Company and an Issuing Bank in connection with any Letter of Credit. "Assignment and Acceptance" shall have the meaning assigned such term in Section 8.07(b). "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 Loan Value. "Bankruptcy Code" shall have the meaning provided in Section 6.08. "Base Rate" shall have the meaning provided in Section 2.06(a). "Base Rate Loan" shall mean a Revolving Credit Loan or a Term 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 -3- 11 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 Loan Value. "Borrowing Base Report" shall mean the report of the Company concerning the amount of the Borrowing Base, to be delivered pursuant to Section 5.02(h), substantially in the form attached as Exhibit G. "Borrowing Request" shall mean a request for a Borrowing pursuant to Section 2.02, substantially in the form attached as Exhibit D. "BP" shall mean Banque Paribas, in its individual capacity or as an Issuing Bank, as the case may be and not as Co-Agent. "BP Letter of Credit Agreement" shall have the meaning assigned to such term in the Recitals of this Agreement. "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 and, for purposes of this Agreement, the amount of such obligations shall be the capitalized amount thereof. "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 of original issue discount and deferred financing costs on existing Indebtedness that has been replaced by Indebtedness permitted by Section 5.04(a)(ii), in each case for such period and determined as to such Person. "Change of Control" shall mean 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 -4- 12 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. "Closing Date" shall mean the as of date of this Agreement set forth in the first paragraph hereof. "Co-Agent" shall mean Banque Paribas. "Code" shall mean the Internal Revenue Code of 1986, as amended, and any successor statute. "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 "Total Commitment." Each Lender's Commitment is the sum of its Revolving Credit Commitment, its Unavailable Commitment and, if activated pursuant to Section 2.01(e), its Term Loan Commitment. "Common Stock" shall mean the Common Stock, $.16 2/3 par value of the Company issued pursuant to the Recapitalization. "Company" shall mean Tesoro Petroleum Corporation, a Delaware corporation. "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 good will, 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. "Consolidated Working Capital Ratio" shall mean, at any time and from time to time, the ratio of (i) the sum of accounts receivable plus inventory to (ii) the sum of accounts payable plus current accrued liabilities, in each case as of the date of determination and for the Company and its Subsidiaries determined on a consolidated basis. "Consolidating Statement Entities" shall mean, for the purpose of identifying the Persons or groups of Persons for whom consolidating financial statements shall be prepared, (a) the -5- 13 Company; the Account Borrowing Base Parties; Tesoro E&P; Tesoro Alaska Pipeline Company, a Delaware corporation; Tesoro Bolivia; Tesoro Northstore Company, an Alaskan corporation; Tesoro Natural Gas Company, a Delaware corporation; and any other Subsidiary of the Company designated from time to time by the Agent and (b) all of the consolidated Subsidiaries of the Company other than those specifically referred to in clause (a) above reported as a single consolidated group. "Cover" for Letter of Credit Liabilities shall be effected by paying to the Agent in immediately available funds, to be held by the Agent in a collateral account maintained by the 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 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 Agent in such collateral account until such time as the applicable Letter of Credit shall have expired and Reimbursement Obligations, if any, with respect thereto shall have been fully satisfied. "Current Information" shall have the meaning provided in the definition of "Applicable Margin." "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. "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. "Dollar" and the sign "$" shall mean lawful money of the United States of America. "E&P Loan Value" shall mean the amount of Revolving Credit Loans that the Lenders shall determine, pursuant to Section 2.20, can be supported by the BB Properties. "E&P Mortgage" shall mean the Mortgage, Deed of Trust, Assignment of Production, Security Agreement and Financing Statement dated as of the Closing Date granted by the Tesoro E&P, to Stephen H. Field, as trustee, granting a Lien on the Oil and Gas Properties of Tesoro E&P, as security for the indebtedness defined therein as "Indebtedness". "E&P Restructuring" shall mean the restructuring of certain Subsidiaries of the Company and their assets in accordance with the transactions described on Exhibit J. "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, plus, to the extent deducted from net income, interest expense, depreciation, depletion and impairment, amortization of leasehold and -6- 14 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 replaced by Indebtedness permitted by Section 5.04(a)(ii) hereof), 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 8.22 have been satisfied and (iii) the initial Loans have been made, 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 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 Agent, and the 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); -7- 15 (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; (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; (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 Agent, in its sole discretion, has determined that said account has been properly assigned to the 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 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. or any wholly owned Subsidiary of any one of them, or other obligors approved for such purpose by the Agent in writing (with such approval being reported to the Lenders), then said account shall be included as an Eligible Account to the extent that the total sum due to any of the obligors named above is less than 15% of the total balance then due on all applicable Account Borrowing Base Party's accounts, -8- 16 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 Agent, in its good faith discretion, to be unacceptable in accordance with its customary practices for facilities of this nature. "Eligible Inventory" shall mean, at any time, all inventory (as such term is defined in Section 9-104(4) of the UCC) of the Inventory Borrowing Base Parties, including, without limitation, the In Transit Inventory and inventory in the Tesoro Terminals, 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 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 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 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 or Washington, or to the extent that it qualifies as In Transit Inventory, is located in the territorial waters of Alaska, California, Oregon, Washington or British Columbia, Canada (and not in international waters); (d) Said inventory is not stored at any terminal other than a Tesoro Terminal; and (e) Other than inventory which qualifies as In Transit Inventory, said inventory is not in transit to or from the Kenai Refinery. For purposes of this definition, "In Transit Inventory" shall mean, at any time, feedstocks, blendstocks or refined products solely owned by an Inventory Borrowing Base Party that are in transit: (a) 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 Kenai Pipeline Company in the area of Cook Inlet, Alaska (the "KPL Facility"), or (iv) in the Cook Inlet Pipeline -9- 17 Company System in the area of Cook Inlet, Alaska, including feedstocks or blendstocks in storage at the Drift River Terminal in Drift River, Alaska; or (b) 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 (a) above). "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. -10- 18 "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 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 or a Term 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 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 VI. "Excess Cash Flow" shall mean (a) Cash Flow of Tesoro Alaska for any calendar year, minus (b) regularly scheduled payments of principal and interest, to the extent not previously deducted from net income of Tesoro Alaska, on the outstanding Term Loans for any calendar year, minus (c) capital expenditures of Tesoro Alaska (excluding capital expenditures for the addition of the Vacuum Unit) during such calendar year, minus (d) $10,000,000. "Exchange Notes" shall mean the 13% Exchange Notes due December 1, 2000, issued by the Company. "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 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, -11- 19 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. "Fixed Charges" shall mean, as to the Company and its Subsidiaries on a consolidated basis and for each Rolling Period, the sum of scheduled debt payments, plus cash interest expense, plus cash dividends. "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. "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 Guaranty Agreement dated as of the Closing Date 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 Agent or (ii) the Majority Lenders, in each case pursuant to Section 5.01(k). "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 -12- 20 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. "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. -13- 21 "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. "Inventory Borrowing Base Parties" shall mean Tesoro Alaska and Tesoro R&M, and "Inventory Borrowing Base Party" shall mean any one of them. "Issuing Bank" shall mean, for each Letter of Credit, TCB or BP 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 appurtances 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, -14- 22 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. "Lender Indebtedness" shall mean any and all amounts owing or to be owing by the Company to the Agent, the Issuing Banks or the Lenders with respect to or in connection with the Loans, any Letter of Credit Liabilities, the Notes, 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 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 or a Term Loan, and "Loans" shall mean collectively the Revolving Credit Loans or Term Loans or one or more of them as provided herein. "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 -15- 23 Credit Agreement or valued at current market as may otherwise be mutually agreed upon from time to time between the Company and the 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 sum of (i) the then Aggregate Revolving Credit Exposure, plus (ii) the then unpaid principal amount of the Term Loans at such time. "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 aggregate Revolving Credit Commitments as of such date and (b) the Borrowing Base as of such date. "Maximum Revolving Credit Loan Available Amount" shall mean, at any date, an amount equal to the lesser of (a) the difference between (i) Maximum Available Amount as of such date and (ii) the aggregate amount of all Letter of Credit Liabilities as of such date and (b) the E&P Loan Value as of such date. "MetLife Louisiana" shall mean MetLife Security Insurance Company of Louisiana. "MetLife Option" shall mean the option to purchase granted by MetLife Louisiana to the Company pursuant to which the Company shall have the option to purchase all shares of the $2.20 Preferred Stock and the Common Stock held by MetLife Louisiana. "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 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 a Guarantor and that has been designated by the Company to the Agent as a "Non-Guarantor Subsidiary;" provided, the aggregate amount invested after the Closing Date directly or indirectly by the Company in such Subsidiaries shall not exceed $1,000,000. "Notes" shall mean the Revolving Credit Notes and the Term 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 -16- 24 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 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 following letters of credit issued by BP under the BP Letter of Credit Agreement:
LC # Loan Party Stated Amount Expiry Beneficiary ---- ---------- ------------- ------ ----------- 023214 Tesoro Alaska $5,940,000 10/31/94 Union Oil Company of California 023215 Tesoro Alaska $1,107,700 10/31/94 Conoco, Inc. 024511 Tesoro Alaska $ 700,000 10/31/94 Exxon Pipeline Company 024512 Tesoro Bolivia $2,000,000 10/14/94 Banco De La Union S.A. 024515 Tesoro Bolivia $2,000,000 05/12/95 Banco De La Union S.A. 023248 The Company $ 854,250 09/30/94 National Union Fire Insurance Company (automatically renewable) 024513 The Company $1,000,000 09/30/94 Fireman's Insurance Company (automatically renewable)
-17- 25 024509 Tesoro Petroleum $1,045,000 06/30/94 Conoco, Inc. Distributing Company
"Payment Office" shall mean the Agent's office located at 712 Main Street, Houston, Texas, 77002; Attention: Mr. P. Stan Burge. "PBGC" shall mean the Pension Benefit Guaranty Corporation, or any successor thereto. "PEDCO" shall mean Tesoro Petroleum Distributing Company, a Louisiana corporation. "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 5.04(d). "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 Agent announces from time to time as its prime rate, and is thereafter entered in the minutes of the Agent's Loan and Discount Committee. 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 fluctuate. The Prime Rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer. The Agent may make commercial 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. -18- 26 "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, 1994; provided, however, that if any such day is not a Business Day, such Quarterly Date shall be the next succeeding Business Day. "Recapitalization" shall mean the consummation of (a) the exchange of a minimum of $44,116,000 of Subordinated Debentures for Exchange Notes, (b) the reclassification of the $2.16 Preferred Stock into an aggregate of approximately 6,465,859 shares of Common Stock, (c) an agreement with MetLife Louisiana, the sole holder of the $2.20 Preferred Stock pursuant to which it will agree to waive certain put options and mandatory redemption requirements existing in connection with the $2.20 Preferred Stock and make certain other concessions and waivers with regard to the $2.20 Preferred Stock and will grant to the Company the MetLife Option, and (d) amendments to the Company's Certificate of Incorporation to provide for the above described transactions, all as more particularly described in that certain Proxy Statement, Prospectus and Consent Solicitation of the Company dated January 3, 1994. "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 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 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 5.02(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 reasonably requested by the Agent in connection with any redetermination of the E&P Loan Value. -19- 27 "Responsible Officer" shall mean the Chief Executive Officer, the Chief Financial Officer, the Treasurer or the Controller, in each case of the Company. "Revolving Credit Commitment" shall have the meaning assigned such term in Subsection 2.01(c). "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)(ii); the Revolving Credit Loans shall not include any Letter of Credit Liabilities. "Revolving Credit Maturity Date" shall mean April 1, 1997. "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. "Security Instruments" shall mean the agreements or instruments described or referred to in Subsections 3.02(d)(iii) 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. "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 $10,000,000 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 3/4% Subordinated Debentures due March 15, 2001, issued by the Company. -20- 28 "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. "Taxes" shall have the meaning provided in Subsection 2.21(a). "TCB" shall mean Texas Commerce Bank National Association, in its individual capacity or as an Issuing Bank, as the case may be, and not as Agent. "Term Loan" shall have the meaning provided in Subsection 2.01(a)(i). "Term Loan Commitment" shall have the meaning assigned such term in Subsection 2.01(d) "Term Loan Drawdown Termination Date" shall mean March 31, 1995, unless extended to a later date pursuant to Subsection 2.05(b). "Term Loan Maturity Date" shall mean March 31, 1998. "Term Note" shall mean a promissory note of the Company described in Section 2.05(b) payable to any Lender and being substantially in the form of Exhibit B, evidencing the aggregate indebtedness of the Company to such Lender resulting from Term Loans made by such Lender. "Tesoro Alaska" shall mean Tesoro Alaska Petroleum Company, a Delaware corporation. "Tesoro Bolivia" shall mean Tesoro Bolivia Petroleum Company, a Texas corporation. "Tesoro E&P" shall mean (a) Tesoro Exploration and Production Company, a Delaware corporation and, (b) at all times after the consummation of the E&P Restructuring, 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 R&M" shall mean Tesoro Refining, Marketing & Supply Company, a Delaware corporation. "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. -21- 29 "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. "Unavailable Commitment" shall mean, for each Lender, the amount set forth opposite such Lender's name on Annex I under the caption "Unavailable Commitment" (as the same may be reduced pursuant to Section 2.01(f) or Section 2.09 or otherwise from time to time modified pursuant to Section 8.07(b) hereof) and "Unavailable Commitments" shall mean the aggregate amount, collectively for all Lenders, of each such Lender's Unavailable Commitment. "Vacuum Unit" shall mean the vacuum fractionation tower operating at near absolute vacuum and related hydraulic, heat exchange and process control systems. 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 (i) to make, on any Business Day prior to the Term Loan Drawdown Termination Date, term loans (each a "Term Loan") to the Company; and (ii) 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 and the Term 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. -22- 30 (c) Revolving Credit Commitments. Each Lender's Revolving Credit Exposure shall not exceed at any one time the amount set forth opposite such Lender's name on Annex I under the caption "Revolving Credit Commitment" (as the same may be increased pursuant to Section 2.01(f), reduced pursuant to Section 2.01(e) or Section 2.09 or otherwise from time to time modified pursuant to Section 8.07(b), its "Revolving Credit Commitment," and collectively for all Lenders, the "Revolving Credit Commitments"); 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 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) Term Loan Commitments. Subject to Section 2.01(e), the Term Loans made pursuant hereto by each Lender shall not exceed in aggregate principal amount outstanding the amount set forth opposite such Lender's name on Annex I under the caption "Term Loan Commitment" (as the same may be reduced pursuant to Section 2.09 or otherwise from time to time modified pursuant to Section 8.07(b), its "Term Loan Commitment," and collectively for all Lenders, the "Term Loan Commitments"). There may be no more than one Borrowing with respect to Term Loans during any calendar month. Any portion of each Lender's Term Loan Commitment not utilized on or before the Term Loan Drawdown Termination Date shall be permanently cancelled. Any Term Loans that are repaid or prepaid may not be reborrowed. (e) Term Loan Activation Option. The Revolving Credit Commitments as of the Effective Date shall be $100,000,000 and until the Company elects to activate the Term Loan Commitments, the Term Loan Commitments shall be $0. The Company may, at its option, activate the Term Loan Commitments at any time within 90 days of the Closing Date by providing the Agent with written notice in the Form of Exhibit H. Concurrently with such notice, the Company shall deliver the Term Notes to the Agent in accordance with Section 2.05(b), and the Term Loan Commitments shall then be available. Concurrently with such activation of the Term Loan Commitments, the Revolving Credit Commitments shall be permanently reduced by $15,000,000. (f) Unavailable Commitments. The Company may from time to time, by written notice to the Agent, the Issuing Banks and each Lender, designate all, or an aggregate portion in the minimum amount of $5,000,000 or in integral multiples of $1,000,000, of the Unavailable Commitments as Revolving Credit Commitments. Any amount of the Unavailable Commitments so designated, shall be permanently converted to Revolving Credit Commitments and the Revolving Credit Commitment of each Lender shall be proportionately increased. (g) 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 -23- 31 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) whether such Borrowing will be Revolving Credit Loans or Term Loans, (ii) the aggregate principal amount of the Loans to be made pursuant to such Borrowing, (iii) the date of Borrowing (which shall be a Business Day), (iv) whether the Loans being made pursuant to such Borrowing are to be Base Rate Loans or Eurodollar Loans, and (v) in the case of Eurodollar Loans, the Interest Period to be applicable thereto. (b) Notice by Agent. The 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 Agent may act without liability upon the basis of telephonic notice believed by the 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 Agent's record of the terms of such telephonic notice, absent manifest error. 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 an 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 such 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 (other than Outstanding Letter of Credit No. 024515), 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 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 -24- 32 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 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 such 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 Agent or such Issuing Bank may reasonably request, (E) such other information and documents relating to the Letter of Credit as the Agent or such 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 such Issuing Bank to make payment under the Letter of Credit; provided that such Issuing Bank, in its reasonable judgment, may require changes in such documents and certificates; and provided further that neither Issuing Bank shall be required to issue any Letter of Credit that on its terms requires payment thereunder prior to the next Business Day following receipt by such Issuing Bank of such documents and certificates. Each such notice shall be accompanied by the applicable 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 Subsection 2.03(b)(2)(i) 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 applicable 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 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, -25- 33 reimburse the Agent for the account of the applicable 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 Agent that the Company intends to reimburse the Agent for the account of the applicable Issuing Bank for the amount of such drawing with funds other than the proceeds of a Revolving Credit Loan or delivered to the 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 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 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 Agent to reimburse the applicable Issuing Bank for the amount of such drawing. (iv) If the Company fails to reimburse the applicable Issuing Bank as provided in clause (iii) above, such Issuing Bank shall promptly notify the Agent and the 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 Agent for the account of the applicable Issuing Bank on the date of such notice an 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 such Issuing Bank the amount of such Lender's participation in such Letter of Credit as provided in this clause (iv), such 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 such Issuing Bank any amounts made available by such Lender to such 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 such Issuing Bank was wrongful and such wrongful payment was the result of gross negligence or willful misconduct on the part of such Issuing Bank. The applicable Issuing Bank shall pay to the Agent and the 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 such Issuing Bank in respect of such Letter of Credit pursuant to this clause (iv). (v) The issuance by the applicable 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 such Issuing Bank, and that the Company shall have executed and delivered such other instruments and agreements relating to such Letter of Credit as such Issuing Bank shall have reasonably requested and that are not inconsistent with the terms of this Agreement including the applicable 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. -26- 34 (vi) AS BETWEEN THE COMPANY AND ANY ISSUING BANK, THE COMPANY ASSUMES ALL RISKS OF THE ACTS AND OMISSIONS OF OR MISUSE OF THE LETTERS OF CREDIT ISSUED BY SUCH ISSUING BANK BY THE RESPECTIVE BENEFICIARIES OF SUCH LETTERS OF CREDIT. IN FURTHERANCE AND NOT IN LIMITATION OF THE FOREGOING, SUCH 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 SUCH 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 CAUSES BEYOND THE CONTROL OF SUCH 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 SUCH 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 SUCH ISSUING BANK ARISING SOLELY OUT OF THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCH ISSUING BANK, AS DETERMINED BY A COURT OF COMPETENT JURISDICTION. (vii) Each Issuing Bank will send to the Company and the 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 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 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 Agent and the Company, and the 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: -27- 35 (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 such 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 such 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 such Issuing Bank, as determined by a court of competent jurisdiction; (E) any adverse change in the condition (financial or otherwise) of the Company; (F) any breach of this Agreement or any other Financing Document by the Company, Agent or any Lender (other than the applicable 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 such 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 11:00 a.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 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 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. -28- 36 (b) Funds to the Agent. Unless the 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 Agent such Lender's portion of the Borrowing to be made on such date, the Agent may assume that such Lender has made such amount available to the Agent on such date, and the Agent may make available to the Company a corresponding amount. If such corresponding amount is not in fact made available to the Agent by such Lender on the date of a Borrowing, the 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 Agent's demand therefor, the Agent shall promptly notify the Company, and the Company shall immediately pay such corresponding amount to the 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 Commitment hereunder. Section 2.05 Notes. (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 plus its Unavailable 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) Term Notes. The Company's obligation to pay the principal of, and interest on, the Term Loans made by each Lender shall be further evidenced by the Company's issuance, execution and delivery of a Term Note payable to the order of each such Lender in the amount of such Lender's Term Loan Commitment and dated as of the date of issuance of such Term Note. The principal amount of each Term Note shall be payable in twelve (12) equal installments commencing on the first Quarterly Date to occur after the Term Loan Drawdown Termination Date, and on each Quarterly Date thereafter; provided however, if the Vacuum Unit has not been completed and placed in operation on or prior to the Term Loan Drawdown Termination Date, the Company may extend the Term Loan Drawdown Termination Date to June 30, 1995 and defer the first such installment payment to the next Quarterly Date to occur after such extended Term Loan Drawdown Termination Date, in which event, the principal amount of each Term Note shall be payable in eleven (11) equal installments commencing on such Quarterly Date. The Company agrees to make such installments on each Quarterly Date with the final installment in the amount of the aggregate unpaid principal balance then owing thereunder being payable on or before the Term Loan Maturity Date. Any prepayment of the principal amount of the Term Notes shall be applied to the installments unpaid at such time in the inverse order of maturity. -29- 37 (c) 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 8.13: (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 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 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 (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 Agent. The 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. -30- 38 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 with regard to Revolving Credit Loans shall extend beyond the Revolving Credit Maturity Date and no Interest Period with regard to Term Loans shall extend beyond the Term Loan Maturity Date. Section 2.08 Repayment of Loans. Subject to the provisions of Sections 2.09 and 2.10, the Company shall pay to the 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. Section 2.09 Termination or Reduction of Commitments. (a) Revolving Credit Commitments. The Company may, upon at least three Business Days' notice to the 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. (b) Term Loan Commitments. The Company may, upon at least three Business Days' notice to the Agent, terminate entirely at any time, or proportionately reduce from time -31- 39 to time by an aggregate amount of $1,000,000 or any larger multiple of $500,000, the unused portions of the Term Loan Commitments, provided that any such reduction shall apply proportionately to the Term Loan Commitment of each Lender. If the Term Loan Commitments are terminated in their entirety, all accrued commitment fees with respect thereto shall be payable on the effective date of such termination. (c) Unavailable Commitments. The Company may, upon at least three Business Days' notice to the 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 Unavailable Commitments, provided that any such reduction shall apply proportionately to the Unavailable Commitment of each Lender. If the Unavailable Commitments and the Revolving Credit Commitments are terminated in their entirety, all accrued commitment fees with respect to the Unavailable Commitments shall be payable on the effective date of such termination. Section 2.10 Prepayments. (a) Mandatory E&P Loan Value 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 Loan Value as provided in Section 2.20, the outstanding aggregate principal amount of the Revolving Credit Loans exceeds the amount of such redetermined E&P Loan Value, the Company shall pay or prepay the Revolving Credit Loans in the amount of such excess within five Business Days of the date of such redetermination. All prepayments pursuant to this Subsection 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. (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 prepayment or Cover shall be payable or 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 Agent provides notice thereof to the Company. (c) Mandatory Excess Cash Flow Prepayments. On or before the 120th day after each December 31, commencing on December 31, 1995, the Company shall prepay (by payment to the Agent for the benefit of the Lenders) an aggregate principal amount of Term Loans equal to 50% of Excess Cash Flow for the Calendar Year ending on such date less the amount of any voluntary prepayments of Term Loans made by the Company as permitted in Subsection 2.10(d) during such calendar year, such prepayment shall be applied to installments of principal in the inverse order of their maturity; provided that such prepayments shall not exceed $5,000,000 in the aggregate. (d) 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, -32- 40 in the case of a Eurodollar Loan, three Business Days' prior written notice to the Agent, and, in the case of a Base Rate Loan, one Business Day's prior written notice to the 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 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 Rase 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. (e) Notice by Agent. Upon receipt of a notice of prepayment pursuant to this Section, the 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 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 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 Agent of such election, specifying each Interest Period therefor. -33- 41 (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. Section 2.12 Fees. (a) Revolving Credit Commitments. The Company shall pay to the 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 one-half of one percent (1/2%) per annum on the average daily excess amount of the Revolving Credit Commitments over the Revolving Credit Exposure, payable in arrears on the Quarterly Dates, commencing on the first Quarterly Date to occur after the Closing Date. (b) Unavailable Commitments. The Company shall pay to the 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 Unavailable Commitments shall have been converted or terminated entirely) computed at a rate equal to one-fourth of one percent (1/4%) per annum on the average daily amount of the Unavailable Commitments, 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 to designate all or part of the Unavailable Commitments as Revolving Credit Commitments pursuant to Section 2.01(f), the Company shall pay to the 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 of such designation (but in no event earlier than the Closing Date) to and including such date of designation computed at a rate equal to one-fourth of one percent (1/4%) per annum on the amount so designated. Payment of such additional commitment fee shall be due and payable upon delivery of the notice of designation provided to the Agent pursuant to Section 2.01(f). (c) Term Loan Commitments. The Company shall pay to the 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 Term Loan Drawdown Termination Date (or such earlier date as the Term Loan Commitments shall have been terminated entirely) computed at a rate equal to one-half of one percent (1/2%) per annum on the average daily unused portion of the Term Loan Commitments, payable in arrears on the Quarterly Dates, commencing on the first Quarterly Date to occur after the Closing Date. (d) Letters of Credit. (i) As consideration for the issuance of any Letter of Credit, the Company will pay to the applicable 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 -34- 42 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 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 at the time of the issuance of such Letter of Credit less one-fourth of one percent (1/4%) per annum, payable in arrears on each Quarterly Date. (e) Agent and Co-Agent Fees. The Company shall pay to the Agent such fees as are set forth in the letter agreement between the Agent and the Company dated as of February 7, 1994, and accepted and agreed to by the Company as of February 23, 1994, as the same has been or may be hereafter amended or supplemented, on the dates specified therein. The Company shall pay to the Co-Agent such fees as are set forth in the letter agreement, dated as of the Closing Date, between the Co-Agent and the Company on the dates specified therein. (f) Facility Fee. The Company shall pay to the Agent on the Closing Date for the account of each Lender, a facility fee in the amount set forth, for each Lender (other than TCB or BP), in a facility fee letter agreement dated as of the Closing Date between the Company and each such Lender. 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 Agent on behalf of the Lenders without defense, set-off or counterclaim to the 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 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 -35- 43 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 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 Agent's standard practice. If the 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 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, and in any such event, the Agent shall forthwith give notice (by telephone confirmed in writing) to the Company and to the Lenders of such determination. Until the 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 Agent of such determination (which notice the 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 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. -36- 44 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 (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 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 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 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 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 Agent shall forthwith give notice (by telephone confirmed in writing) to the Company and to the Lenders of such advice; -37- 45 (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 Agent), the 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 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 any 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 -38- 46 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 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 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 Loan Value. (a) Redetermination Date; Initial E&P Loan Value. The E&P Loan Value shall be determined in accordance with Section 2.20(b) by the 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 Loan Value, such redetermination shall remain in effect until the next successive Redetermination Date. "Redetermination Date" shall mean the date that the redetermined E&P Loan Value 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 September 1, 1994 unless redetermined pursuant to any unscheduled redeterminations, the amount of the E&P Loan Value shall be $31,700,000. (b) Redetermination. Upon receipt of the Reserve Reports by the Agent, the Agent will redetermine the E&P Loan Value. Such redetermination by the 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 Agent shall propose to the Lenders a new E&P Loan Value within 15 days following receipt by the Agent and the Lenders of the complete Reserve Reports. After having received notice of such proposal by the Agent, the Majority Lenders shall have ten days to agree or disagree with such proposal. If at the end of the ten days, the Majority Lenders have not communicated their approval or disapproval, such silence shall be deemed to be an approval and the Agent's proposal shall be the new E&P Loan Value. If however, the Majority Lenders notify Agent within ten days of their disapproval, the Majority Lenders shall, within a reasonable period of time, agree on a new E&P Loan Value. -39- 47 (c) Exclusion of Certain Property. The 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 Loan Value, 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 September 1 and March 1, commencing September 1, 1994 (each being a "Scheduled Redetermination Date"), the Agent and the Lenders shall redetermine the amount of the E&P Loan Value in accordance with Section 2.20(b). In addition, the Agent may initiate, with the concurrence of the Majority Lenders, a redetermination of the E&P Loan Value at any other time as they so elect one unscheduled redetermination during any consecutive twelve (12) month period by specifying in writing to the Borrower the date on which the Borrower 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 Loan Value 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 Agent. In the event of any such unscheduled redetermination, the Agent and the Lenders shall redetermine the amount of the E&P Loan Value in accordance with Section 2.20(b). (e) Notice by Agent. The Agent shall promptly notify in writing the Borrower and the Lenders of the new E&P Loan Value. Any redetermination of the E&P Loan Value shall not be in effect until written notice is received by the Borrower. 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 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 Agent, such 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 Agent, such Issuing Bank or such Lender is organized, or (iii) any jurisdiction (or political subdivision thereof) in which such Lender, such Issuing Bank or the 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 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, such Issuing Bank or the 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 -40- 48 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"). (C) INDEMNIFICATION. THE COMPANY WILL INDEMNIFY EACH LENDER, EACH ISSUING BANK AND THE 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 SUCH ISSUING BANK OR THE 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, ANY ISSUING BANK OR THE AGENT, AS THE CASE MAY BE, MAKES WRITTEN DEMAND THEREFOR. IF ANY LENDER, ANY ISSUING BANK OR THE AGENT RECEIVES A REFUND OR CREDIT IN RESPECT OF ANY TAXES OR OTHER TAXES FOR WHICH SUCH LENDER, SUCH ISSUING BANK OR THE 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, SUCH ISSUING BANK OR THE AGENT, AGREES TO RETURN SUCH REFUND OR CREDIT (PLUS PENALTIES, INTEREST OR OTHER CHARGES) TO SUCH LENDER, SUCH ISSUING BANK OR THE AGENT IN THE EVENT SUCH LENDER, SUCH ISSUING BANK OR THE 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, any Issuing Bank or the Agent, the Company will furnish to the 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 -41- 49 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 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 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 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 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 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 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 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 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 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 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 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 -42- 50 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 computing such Lender's portion of any Borrowing to be made hereunder, the Agent may, in its discretion, round each Lender's portion of such Borrowing to the next higher or lower whole dollar amount. Section 2.23 Disposition of Proceeds. The E&P Mortgage contains an assignment by Tesoro E&P to the 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 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 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 Agent shall execute and deliver a letter in the form of Exhibit I to such Persons as the Company may direct; provided, further, if the Agent, any 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 Agent (unless waived by the Agent) at least three Business Days' advance written notice of the proposed Effective Date, which shall be a Business Day not later than 10 days from the Closing Date, for the delivery of 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 such 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 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 -43- 51 disbursements of counsel to the Agent for which the Company has been provided an invoice and any fees payable to the Lenders or the Agent on or before the Effective Date), shall have been paid in full, and the Agent shall have received the following, each dated as of the Closing Date, in form and substance satisfactory to the Agent, with an original thereof for the 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): (a) Notes - A duly completed and executed Revolving Credit Note for each Lender and in each case payable to the order of the 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 5.02, 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 - The following opinions of counsel, in each case addressed to the Agent, the Issuing Bank and each of the Lenders and covering such other matters as any Lender through the Agent, the Issuing Bank or the Agent may reasonably request: (i) Fulbright & Jaworski, L.L.P., counsel to the Company and its Subsidiaries, substantially in the form of Exhibit E-1 hereto; (ii) James C. Reed, Jr., special counsel to the Company, substantially in the form of Exhibit E-2 hereto; and (iii) Groh, Eggers & Price, local Alaska counsel to the Company, substantially in the form of Exhibit E-3 hereto. -44- 52 (d) The Security Instruments - (i) Guaranty Agreement; (ii) Subrogation and Contribution Agreement dated as of the Closing Date among the Guarantors; (iii) Security Agreements dated as of the Closing Date executed by each of the Company, Tesoro E&P, Tesoro Alaska, Tesoro R&M and Tesoro Petroleum Distributing Company, a Delaware corporation, granting to the 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;" (iv) Pledge Agreements dated as of the Closing Date executed by the Company granting to the Agent a first priority security interest in 100% of the capital stock of Tesoro Alaska, Tesoro R&M, and Tesoro Alaska Pipeline Company, a Delaware corporation, as security for the Lender Indebtedness; (v) the Alaska Deed of Trust; (vi) the E&P Mortgage; (vii) Financing Statements, as appropriate, to perfect the security interests created by the instruments delivered under clauses (iii) through (vi) above; (viii) Stock certificates and corresponding stock powers to perfect the Agent's security in the stock pledged by the instrument delivered under clause (iv) above; (ix) all Property in which the 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 Agent or any bailee accepted by the Agent to the extent that such possession is necessary for the purpose of perfecting the Agent's Lien in such collateral security; and (x) the Cash Collateral Account Agreement described in the definition of "Cover". (e) Insurance. A certificate of insurance coverage of the Borrower evidencing that the Borrower is carrying insurance in accordance with Section 5.01(e) hereof. In addition, the Agent shall have received evidence satisfactory to the 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 any of the Kenai Refinery or Tesoro Terminals are situated in an area identified as having special flood hazards, the Agent shall have received a copy of the applicable flood insurance policies (or policy applications), in form and substance satisfactory to the Agent, indicating that the maximum limits of coverage have been obtained and that the full premium therefor has been paid in full. -45- 53 (f) Title Opinions. Title opinions as the Agent may require from attorneys satisfactory to the 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. A Mortgagee's Policy of Title Insurance in form and substance satisfactory to the Agent insuring the lien granted pursuant to the Alaska Deed of Trust and a current survey covering the Refinery Premises. (h) Environmental Report. A review by Pilko & Associates, Inc. of prior environmental site assessments for the Kenai Refinery and such other reviews or further assessments that may be determined to be required by the Agent, in its sole discretion, to assess existence of any environmental items which could reasonably be expected to have a Material Adverse Affect. (i) Miscellaneous. Such other documents or conditions precedent which the 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 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 Agent shall have received such other documents as the Agent or any Lender or special counsel to the Agent may reasonably request, all in form and substance satisfactory to the 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 Agent to the appropriate offices for filing or recording. Section 3.05 Activation of Term Loan Commitments. At the time of the activation by the Company of the Term Loan Commitments, the Agent and, as appropriate, each Lender shall have -46- 54 received the following, each dated as of the date on which the Term Loan Commitments are activated pursuant to Subsection 2.01(e), in form and substance satisfactory to the Agent, with an original thereof for the Agent and with sufficient copies thereof for each Lender: (a) Term Notes - A duly completed and executed Term Loan Note for each Lender and in each case payable to the order of the Agent for the benefit of such Lender. (b) Notice of Activation - Notice, in the form of Exhibit H, that the Term Loan Commitments have been activated pursuant to Subsection 2.01(e). (c) Termination of AIDA Financing - Evidence satisfactory to the Agent that the Indebtedness permitted by Subsection 5.04(a)(xii) has not been utilized and any commitments in connection therewith have been terminated. 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: 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 -47- 55 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, 1993, 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 Statement Entities as of December 31, 1993, and the related unaudited consolidating statements of income and cash flows, which shall be delivered to each Lender as soon as available and in any event within 90 days of the Closing Date and certified to by a Responsible Officer, 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, 1993, 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 5.04(e)(ii) through (vi), 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 provide working capital and for general corporate purposes. The proceeds of the Term Loan will be used only to finance the addition of the Vacuum Unit to the Kenai Refinery and constitute Expansion Debt as such term is defined in that certain Subordination Agreement dated December 15, 1992, 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. The Letters of Credit -48- 56 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 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. -49- 57 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 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. 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. 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 -50- 58 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 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 any of 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. (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, 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 -51- 59 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 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. -52- 60 Section 4.24 Recapitalization. As of the Closing Date, the Company has consummated the Recapitalization and all transactions required in connection therewith. ARTICLE V COVENANTS Section 5.01 Certain 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: (a) Maintenance and Compliance, etc. The Company will and will cause each of its Subsidiaries to (i) except as permitted by Section 5.04(c), preserve and maintain its corporate existence, rights and franchises and (ii) 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. (b) 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. (c) Further Assurances. The Company will and will cause each of its Subsidiaries 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. The Company at its expense will, as promptly as practical, execute and deliver to the Agent or the applicable Issuing Bank 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. (d) 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 its Subsidiaries to take such action with respect to their obligations to be performed and discharged under the Financing Documents to which they respectively are parties. -53- 61 (e) 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 Agent, the Company will furnish or cause to be furnished to the 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 Agent and if requested will furnish the 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, 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 Agent or the Lenders shall have a Lien under the Financing Documents, naming the Agent as a loss payee and containing provisions that such policies will not be cancelled without 30 days prior written notice having been given by the insurance company to the Agent. (f) 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. (g) Right of Inspection. The Company will permit and will cause each of its Subsidiaries to permit any officer, employee or agent of the 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 Agent or any of the Lenders. (h) Operation and Maintenance of Mortgaged Property and Compliance with Leases. Subject to Subsection 5.01(j), 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. (i) 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 Subsection 5.04(c). (j) 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 -54- 62 or such Subsidiary shall not be obligated, itself, to perform any undertakings contemplated by the covenants and agreements contained in Subsections 5.01(b), 5.01(e), and 5.01(h) 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. (k) 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 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. (l) 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. (m) 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. (n) Title Opinions. Within 60 days of the Closing Date, the attorneys who furnished the title opinions required pursuant to Section 3.02(f) will provide to the 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 5.02 Reporting 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 furnish to each Lender: (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 -55- 63 flows 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 cash flows for such calendar year, accompanied by a certification thereon of a Responsible Officer, stating that such consolidating financial statements form the basis of the Company's consolidated financial statements 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 50 days after the end of each calendar quarter 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, 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 cash flows, 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 form the basis of the Company's consolidated financial statements 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 compliance (including, but not limited to, showing all material calculations) as at the end of such calendar year or such calendar quarter with Subsections 5.03(a), 5.03(b) and 5.03(c); and (iv) containing or accompanied by such financial or other details, information and material as the 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 copies of each management letter issued to the Company by such accountants promptly following -56- 64 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 30 days after such date, a report (the "Reserve Report") in form and substance satisfactory to the Majority Lenders 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. (f) Title Information. Within a reasonable time after a request by the 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 Friday of the preceding calendar week. (ii) As soon as available and in any event by the 50th day after the end of each calendar quarter of the Company, a quarterly Borrowing Base Report dated and reflecting amounts as of the last day of such calendar quarter which have been reconciled to the financial statements delivered pursuant to Subsection 5.02(b). (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 -57- 65 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 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 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, but at the cost of the Company, a report of an independent collateral field examiner approved by the Agent in writing and reasonably acceptable to the Company (which may be the Agent or an affiliate thereof) with respect to the Eligible Accounts and Eligible Inventory components included in the Borrowing Base, and the Agent shall have the option to receive such additional reports as the Agent or the Majority Lenders shall reasonably request; provided, however, that so long as no Default has occurred and is continuing, neither the Agent nor the Majority Lenders shall request more than one such additional report (for a total of two such reports) per calendar year. -58- 66 (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. Section 5.03 Financial 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: (a) Consolidated Tangible Net Worth. Maintain Consolidated Tangible Net Worth in an amount not less than (i) for the calendar year ending December 31, 1994, $110,000,000, and (ii) for the calendar year beginning January 1, 1995, and for each calendar year thereafter, the sum of the amount calculated pursuant to this Subsection for the previous year plus 75% of the Company's consolidated net income for such previous year; 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 Subsection 5.04(d)(ii), 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 exercise of the MetLife Option pursuant to Subsection 5.04(d)(ii) or from the retirement of the Subordinated Debentures and Exchange Notes due to write-offs of original issue discount or deferred financing costs. (b) Working Capital. Maintain at all times its Consolidated Working Capital Ratio of at least 1.50 to 1.00. (c) Company's Cash Flow Coverage. Maintain a cash flow coverage ratio for itself and its Subsidiaries on a consolidated basis as of any Quarterly Date equal to or greater than 1.10 to 1.00 for the Rolling Period ending on the applicable Quarterly Date. As used in this Subsection 5.03(c), 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 E&P Loan Value 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 or for the addition of the Vacuum Unit, plus (D) cash dividends actually paid by the Company and its Subsidiaries on a consolidated basis. (d) Tesoro Alaska EBITDA. Cause Tesoro Alaska to maintain the Tesoro Alaska EBITDA (i) for each Rolling Period ending on or before September 30, 1995, in an amount equal to or greater than $15,000,000 and (ii) for each Rolling Period thereafter, in an amount equal to or greater than $20,000,000. As used in this Subsection, Tesoro Alaska EBITDA shall mean, as to Tesoro Alaska, and for any Rolling Period, the amount equal to net income of Tesoro Alaska less any non-cash income included in net income, plus, to the extent deducted from net income, interest expense, depreciation, depletion and impairment, amortization of leasehold and -59- 67 intangibles, other non-cash expenses, and taxes, provided, that, gains or losses on the disposition of assets shall not be included in Tesoro Alaska EBITDA. Section 5.04 Certain 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: (a) 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: (i) the Lender Indebtedness; (ii) 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 5.04(a) and any renewal, extension, refinancing or refunding of such Indebtedness; provided that (A) 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 than the Indebtedness being renewed, extended, refunded or refinanced; (iii) 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; (iv) 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; (v) 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; (vi) Indebtedness created, incurred, assumed or guaranteed after the date hereof not otherwise permitted pursuant to this Subsection 5.04(a), provided that the aggregate outstanding principal amount of such Indebtedness shall not exceed $10,000,000 at any one time outstanding; (vii) 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 -60- 68 Company, (C) the Company to any Guarantor and (D) any Guarantor to any other Guarantor; (viii) 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; (ix) Capital Lease Obligations not to exceed $7,500,000 at any one time; (x) 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; (xi) Indebtedness, not to exceed $10,000,000 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, or stay and appeal bonds; provided, however, to the extent such letters of credit or bank guaranties are used in lieu or in support of stay or appeal bonds, such $10,000,000 maximum amount shall be reduced by an amount equal to the aggregate amount of any Letters of Credit used in lieu or support of stay or appeal bonds; (xii) Indebtedness owed to National Bank of Alaska and the Alaska Industrial Development and Export Authority regarding financing for the Vacuum Unit; provided that such Indebtedness is subject to documentation (including, but not limited to, documentation setting forth the terms pursuant to which the Lien on the Kenai Refinery securing the Lender Indebtedness is subordinated) satisfactory to the Agent and the principal amount of such Indebtedness shall not exceed $15,000,000 in the aggregate; and provided further that such Indebtedness shall only be permitted if the Term Loan Commitments have been terminated in full as provided in Subsection 2.09(b); and (xiii) 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. (b) 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: (i) Liens existing on the date hereof and set out on Schedule 5.04(b); (ii) Liens securing the Lender Indebtedness; -61- 69 (iii) 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; (iv) 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; (v) 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); (vi) 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; (vii) 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; (viii) inchoate Liens arising under ERISA; (ix) any Lien on any Property securing Indebtedness incurred or assumed for the purpose of financing all or any part of the acquisition cost of such Property, provided that such Lien does not extend to any other Property of the Company and the aggregate unpaid purchase price secured by all such Liens at any time shall not exceed $2,500,000; (x) 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; (xi) 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, -62- 70 grant, license or permit which do not materially impair the use of such Property for the purposes for which it is held; (xii) 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; (xiii) 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; (xiv) 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; (xv) Liens on the Kenai Refinery securing the Indebtedness described in Section 5.04(a)(xii); provided further, up to the maximum amount allowed by such Section, such Liens may be prior to the Lien on the Kenai Refinery securing the Lender Indebtedness; (xvi) Liens securing up to $5,000,000 of the Indebtedness permitted by Subsection 5.04(a)(xi) to the extent such Indebtedness is issued in support of the Company's (or its Subsidiaries') Bolivian operations; and (xvii) extensions, renewals or replacements of any Lien referred to in Subsections 5.04(b)(i) through (xvi), 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. -63- 71 (c) 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, PEDCO, 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, PEDCO, 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 another Guarantor other than Tesoro Bolivia, PEDCO, Tesoro Environmental, or any Subsidiary thereof, or (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. 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, (E) sell the Property of or stock issued by Tesoro Bolivia, PEDCO, 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 Agent and the applicable Issuing Bank in their sole discretion and (F) consummate the E&P Restructuring. (d) Dividends, etc. 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, except that the Company may (i) declare and deliver stock dividends, (ii) redeem or purchase stock from MetLife Louisiana pursuant to the MetLife Option with, but only with, (A) the proceeds from the issuance of new shares of common stock of the Company, (B) the proceeds from the issuance of new shares of non-redeemable preferred stock of the Company having terms satisfactory to the Majority Lenders, or (C) the proceeds from up to $10,000,000 of Indebtedness permitted by Subsection 5.04(a)(vi), (iii) issue shares of common stock and pay cash not to exceed $1,000,000 in lieu of fractional shares of common stock upon the exercise of the MetLife Option, (iv) declare and pay cash dividends (A) on the $2.20 Preferred Stock or (B) at any time after all of the $2.20 -64- 72 Preferred Stock has been redeemed or purchased and retired pursuant to clause (ii) above, on common stock or preferred stock issued by the Company in an amount not to exceed (i) ten percent of consolidated net income up to $25,000,000 and (ii) twenty percent of consolidated net income in excess of $25,000,000 of the Company and its Subsidiaries in any calendar year; provided that both before and after giving effect to any such dividend, a Default shall not have occurred and be continuing. (e) 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: (i) investments, loans or advances, the material details of which have been set forth in the Financial Statements or are disclosed to the Agent in Schedule 4.07 hereto; (ii) investments in direct obligations of the United States of America or any agency thereof; (iii) 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 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; (iv) investments in commercial paper of maturities less than one year rated A1 or P1 by Standard & Poor's or Moody's Investors Services, Inc., respectively, or any equivalent rating from any other rating agency satisfactory to the Agent; (v) routine loans or advances to employees made in the ordinary course of business not to exceed (A) $25,000 at any one time outstanding to any one employee and (B) $250,000 in the aggregate; (vi) investments in securities purchased by the Company or any Subsidiary of the Company under repurchase obligations pursuant to which arrangements are made with selling 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 & Poor's or Moody's Investors Services, Inc., respectively; or (B) with the written approval of the 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; (vii) the purchase, redemption or acquisition of capital stock of the Company as permitted by Section 5.04(d); -65- 73 (viii) investments described in Exhibit J; (ix) 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; and (x) 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 or due to a failure by a participant to comply with the terms and conditions of a stock incentive as provided for under the terms of such incentive stock plans or stock incentive grants thereunder. (f) Lease Payments. Except for (i) oil and gas lease obligations permitted under Subsection 5.04(a), (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. (g) 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. (h) 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. (i) ERISA Compliance. (i) 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; (ii) 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; -66- 74 (iii) 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; (iv) 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; (v) 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; (vi) 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; (vii) 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 (viii) 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. (j) 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. (k) 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 5.04(k) 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. -67- 75 (l) 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 5.04(l) 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 $25,000 at any one time outstanding to any one employee, (iii) any other transaction with any employee, 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 or (iv) the consummation of the E&P Restructuring. (m) 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. (n) 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. (o) Capital Expenditures. (i) The Company. Make, or permit any of its Subsidiaries to make Capital Expenditures (excluding Capital Expenditures made (A) for the addition of the Vacuum Unit or (B) by Tesoro E&P during such calendar year for the acquisition, exploration or development of Oil and Gas Properties) in any calendar year for the Company and its Subsidiaries on a consolidated basis in excess of the following amounts; provided, however, that the maximum amount of Capital Expenditures for any calendar year ending after December 31, 1994 shall be increased by an amount equal to the difference between the maximum Capital Expenditures from the prior calendar year less the actual Capital Expenditures for such prior calendar year: Year Ending Maximum Capital -68- 76
December 31, Expenditures ------------ ------------ 1994 $22,000,000 1995 $15,000,000 1996 $20,000,000
(ii) Tesoro Alaska. Permit Tesoro Alaska to make Capital Expenditures (excluding Capital Expenditures made for the addition of the Vacuum Unit) in any calendar year in excess of the following amounts; provided, however, that the maximum amount of Capital Expenditures for any calendar year ending after December 31, 1994 shall be increased by an amount equal to the difference between the maximum Capital Expenditures for the prior calendar year less the actual Capital Expenditures for such prior calendar year:
Year Ending Maximum Capital December 31, Expenditure ------------ ----------- 1994 $ 8,000,000 1995 $ 6,000,000 1996 $10,000,000
(iii) Additional Capital Expenditures. Notwithstanding the maximum capital expenditure amounts set forth in clauses (i) and (ii) above, the maximum amount of capital expenditures for the Company and its Subsidiaries on a consolidated basis and for Tesoro Alaska may be increased by a total of $10,000,000 in the aggregate spread, as the Company may elect, among the calendar years of 1994, 1995 and 1996; provided that after giving effect to any such increased capital expenditures, the Company shall not be in Default. ARTICLE VI EVENTS OF DEFAULT Upon the occurrence and during the continuance of any of the following specified events (each an "Event of Default"): Section 6.01 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 6.02 Covenants Without Notice. The Company shall fail to observe or perform any covenant or agreement contained in Subsections 5.01(e), (g) and (i), Sections 5.04 (excluding Subsections 5.04(a)(iii) and (viii), and Subsection 5.04(l) hereof) or Section 5.03; -69- 77 Section 6.03 Other Covenants. The Company shall fail to observe or perform any covenant or agreement contained in (a) Subsection 5.01(k), Subsections 5.02(a), (b), (c), (d), (g), (h), (i), (j), (k) or (m), Subsections 5.04(a)(iii) or (viii) or Subsection 5.04(l), 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, any Issuing Bank or the Agent; and (b) this Agreement, other than those referred to in Sections 6.01, 6.02, or clause (a) of this Section 6.03, 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, any Issuing Bank or the Agent; Section 6.04 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 6.05 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 6.06 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 $1,000,000 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 6.07 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 $1,000,000 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 $1,000,000 or more in the aggregate of such Indebtedness; or $1,000,000 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 6.08 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 -70- 78 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; Section 6.09 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 6.10 Money Judgment. A judgment or order for the payment of money in excess of $1,000,000 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 6.11 Discontinuance of Business. The Company or any Guarantor shall cease to carry on its business as currently conducted or as contemplated to be conducted; Section 6.12 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 6.13 Change of Control. The occurrence of a Change of Control; Section 6.14 Mandatory Prepayments. The Company shall fail to make any mandatory prepayment required by Section 2.10; or Section 6.15 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 Agent, upon the written or telex request of the Majority Lenders, shall, by written notice to the -71- 79 Company, take any or all of the following actions, without prejudice to the rights of the Agent, any Lender or the holder of any Note, to enforce its claims against the Company: (i) declare the Revolving Credit Commitment, the Unavailable Commitment and other lending obligations, if any, terminated, whereupon the Revolving Credit Commitment, the Unavailable 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 6.08 shall occur, the result which would occur upon the giving of written notice by the Agent to the Company, as specified in clauses (i) and (ii) above, shall occur automatically without the giving of any such notice. ARTICLE VII THE AGENT Section 7.01 Appointment of Agent. Each Lender and the Issuing Bank hereby designate Texas Commerce Bank National Association, as Agent to act as herein specified. Each Lender and the Issuing Bank hereby irrevocably authorizes the 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 Agent by the terms hereof and thereof and such other powers as are reasonably incidental thereto. The Agent may perform any of its duties hereunder by or through its agents or employees. Section 7.02 Nature of Duties of Agent and Co-Agent. The Agent and the Co-Agent shall have no duties or responsibilities except those expressly set forth with respect to each of the Agent or the Co-Agent in this Agreement. Neither the Agent, the Co-Agent nor any of their respective officers, directors, employees or 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 Agent and the Co-Agent shall be mechanical and administrative in nature; the Agent and the Co-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 Agent or the Co-Agent any obligations in respect of this Agreement except as expressly set forth herein. Section 7.03 Lack of Reliance on the Agent and the Co-Agent. (a) Independent Investigation. Independently and without reliance upon the Agent or the Co-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 Agent and the Co-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. -72- 80 (b) Agent Not Responsible. The Agent and the Co-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 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 7.04 Certain Rights of the Agent. If the 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 Agent shall be entitled to refrain from such act or taking such action unless and until the Agent shall have received instructions from the Majority Lenders; and the 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 Agent as a result of the 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 7.05 Reliance by Agent. The 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 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 7.06 INDEMNIFICATION OF AGENT AND THE CO-AGENT. TO THE EXTENT THE AGENT OR THE CO-AGENT IS NOT REIMBURSED AND INDEMNIFIED BY THE COMPANY, EACH LENDER WILL REIMBURSE AND INDEMNIFY THE AGENT OR THE CO-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 AGENT OR THE CO-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 AGENT OR THE CO-AGENT FOR ANY PORTION OF SUCH LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS RESULTING FROM, AS TO THE AGENT, THE AGENT'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OR, AS TO THE CO-AGENT, THE CO-AGENT'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. Section 7.07 The Agent and Co-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 Agent and Co-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 Agent and Co- Agent in their individual capacity. The Agent and Co-Agent may accept deposits from, lend money to, and generally engage in any kind of banking, trust, -73- 81 financial advisory or other business 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 7.08 May Treat Lender as Owner. The Agent and the Co-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 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 7.09 Successor Agent. (a) Agent Resignation. The 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 Agent. If no successor Agent shall have been so appointed by the Majority Lenders, and shall have accepted such appointment, within 30 days after the retiring Agent's giving of notice of resignation or the Majority Lenders' removal of the retiring Agent, then, upon five days' notice to the Company, the retiring Agent may, on behalf of the Lenders, appoint a successor 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 Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Agent's resignation or removal hereunder as Agent, the provisions of this Article VII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. ARTICLE VIII MISCELLANEOUS Section 8.01 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 Agent and the Company; provided that a copy of all notices to the Agent (a) which are Advance Notices shall also be sent to Texas Commerce Bank National Association, 712 Main Street, Houston, Texas 77002, Telecopier No. (713)216-6387, Attention: Stan Burge, (b) which are requests for the issuance of a Letter of Credit by TCB shall also be sent to Texas Commerce Bank, Documentary Services Division, 717 Travis, 3 TCBS-300, Houston, Texas 77002, Telcopier No. (713)236-4222, and (c) which are requests for the issuance -74- 82 of a Letter of Credit by 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, with a copy to Texas Commerce Bank National Association, Loan Syndication Services, 1111 Fannin Street, 9th Floor MS 46, Houston, Texas 77002, Telecopier No. (713)750-3810, Attention: Roy Mendiola. 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 Agent shall not be effective until received. Section 8.02 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 Term Loan Drawdown Termination Date, the Revolving Credit Maturity Date or the Term Loan 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 8.02 or Section 8.04 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 Agent shall be effective without the consent of the Agent; (d) no amendment, modification or waiver which modifies the rights, duties or obligations of the Co-Agent shall be effective without the consent of the Co-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 8.03 No Waiver; Remedies Cumulative. No failure or delay on the part of the Company or the 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 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 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 Agent or the Lenders to any other or further action in any circumstances without notice or demand. Section 8.04 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 Agent and each Issuing Bank in the administration (both before and after the execution hereof and including advice of -75- 83 counsel as to the rights and duties of the Agent and the Lenders with respect thereto) 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 Agent and in the case of enforcement for any of the Lenders) and promptly reimburse the Agent for all amounts expended, advanced, or incurred by the 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 AGENT, THE CO-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 AGENT, THE CO-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 8.04(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 AGENT, THE CO-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 AGENT, THE CO-AGENT AND THE LENDERS, EACH PERSON CLAIMING BY, THROUGH, UNDER OR ON ACCOUNT OF ANY OF THE -76- 84 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 8.04(C) IN RESPECT OF ANY PROPERTY FOR ANY OCCURRENCE ARISING SOLELY AND DIRECTLY FROM THE ACTS OR OMISSIONS OF THE 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 8.04 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 8.05 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 -77- 85 during the continuance thereof and whether or not such Lender, such Issuing Bank or such holder has made any demand 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 such Issuing Bank to or for the credit or the account of the Company against any and all of the Lender Indebtedness then outstanding. Section 8.06 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 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 8.07 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 Agent and 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 F (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 Agent a processing and recordation fee of $2,500. Any such assignment will become effective upon the recording by the 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 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 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 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 -78- 86 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 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 or the Term Loan 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 8.15. Notwithstanding anything in this Section 8.07(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 8.07(b) shall not be considered a participation pursuant to this Section 8.07(c). (d) Registration Statements; Blue Sky Laws. Notwithstanding any other provisions of this Section 8.07, 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 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. -79- 87 (f) Assignees Treated as Lenders. The entries in the Register shall be conclusive in the absence of manifest error and the Company, the 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. Section 8.08 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) Designation of 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. (d) Service of Process. 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 the Company in any other jurisdiction. Section 8.09 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. -80- 88 Section 8.10 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 8.11 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 8.12 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 8.13 Interest. It is the intention of the parties hereto to conform strictly to usury laws applicable to the Agent, the Co-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 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 cancelled 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 -81- 89 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 8.14 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 8.15 Confidential Information. The Agent and each Lender agree that all documentation and other information made available by the Company to the 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 Agent or such Lender, or was theretofore known or hereinafter becomes known to the Agent or such Lender independent of any disclosure thereto by the Company) be held in the strictest confidence by the 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 Agent or such Lender may disclose documentation and information to the Agent and/or to any other Lender which is a party to this Agreement or any Affiliates thereof and (ii) the 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 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 Agent in connection with such potential transfers. Notwithstanding the foregoing, nothing contained herein shall be construed to prevent the 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 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 Agent or such Lender is compelled to disclose such confidential information in a proceeding requesting such disclosure, the 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 8.16 ENTIRE AGREEMENT. THE NOTES, THIS AGREEMENT AND THE OTHER FINANCING DOCUMENTS EMBODY THE ENTIRE AGREEMENT AND UNDERSTANDING BETWEEN THE 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 8.17 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, -82- 90 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 8.18 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 8.19 Survival of Indemnities. The Company's obligations under Sections 2.16, 2.18, 2.21 and 8.04 shall survive the payment in full of the Loans and the Letter of Credit Liabilities. Section 8.20 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 8.21 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. Section 8.22 Effectiveness. This Agreement shall not be effective until executed by all signatories hereto and delivered to the Agent in the State of Texas and accepted by the Agent in such state. Section 8.23 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 8.24 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." Section 8.25 Proposed Restructuring. The Company has indicated that it intends to pursue the consummation of the E&P Restructuring. The Agent, the Co-Agent, the Issuing Banks and the Lenders hereby approve, subject to satisfactory documentation, including, but not limited to, any reasonably -83- 91 required modification to this Agreement, the E&P Restructuring and the transactions contemplated in connection therewith. -84- 92 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/William T. VanKleef ----------------------------------------- Address: William T. VanKleef Vice President, Treasurer 8700 Tesoro Drive San Antonio, Texas 78217 AGENT, CO-AGENT, ISSUING BANKS AND THE LENDERS: TEXAS COMMERCE BANK NATIONAL ASSOCIATION Individually, as an Issuing Bank and as Agent By:/s/P. Stan Burge ----------------------------------------- Address: P. Stan Burge Vice President 712 Main Street Houston, Texas 77002 Attention: Mr. P. Stan Burge BANQUE PARIBAS Individually, as an Issuing Bank and as Co-Agent By:/s/Brian Malone ----------------------------------------- Address: Name: Title: 1200 Smith Street, Suite 3100 Houston, Texas 77002 Attention: Mr. Brian Malone By:/s/Patrick J. Milon ----------------------------------------- Name: Title: -85- 93 Address: BANK OF SCOTLAND 380 Madison Avenue New York, New York 10017 Attention: Ms. Catherine Oniffrey By:/s/Elizabeth Wilson -------------------------------------- Name: Title: With Copy To: 1200 Smith Street 1750 Two Allen Center Houston, Texas 77002 Attention: Ms. Janna Blanter CHRISTIANIA BANK By:/s/Peter M. Dodge and -------------------------------------- /s/Carl Petter Svendsen -------------------------------------- Address: Name: Title: 11 West 42nd Street, 7th Floor New York, New York 10036 Attention: Mr. Peter Dodge Address: THE BANK OF NOVA SCOTIA 600 Peachtree Street N.E. Suite 2700 Atlanta, Georgia 30308 By:/s/F.C.H. Ashby -------------------------------------- Attention: Ms. Lauren Bianchi Name: Title: With Copy To: 1100 Louisiana Street, Suite 3000 Houston, Texas 77002 Attention: Mr. Michael W. Nepveux NBD BANK, N.A. By:/s/James L. Caldwell IV -------------------------------------- Address: Name: Title: 611 Woodward Avenue Detroit, Michigan 48226 Attention: Mr. Russell H. Liebetrau, Jr. -86- 94 CONTINENTAL BANK, N.A. By:/s/Robert R. Ingersoll -------------------------------------- Address: Name: Title: 231 S. LaSalle Street Chicago, Illinois 60697 Attention: Mr. Robert Ingersoll FIRST UNION NATIONAL BANK OF NORTH CAROLINA By: FIRST UNION CORPORATION OF NORTH CAROLINA, as agent By:/s/Paul N. Riddle -------------------------------------- Address: Name: Title: 1001 Fannin Street, Suite 2255 Houston, Texas 77002 Attention: Mr. Paul N. Riddle Address: NATIONAL BANK OF CANADA 125 West 55th Street New York, New York 10019-5366 By:/s/Larry L. Sears -------------------------------------- Name: With Copy To: Title: 2121 San Jacinto, Suite 1850 By:/s/David L. Schreiber --------------------------------------- Dallas, Texas 75201 Name: Attention: Mr. David L. Schreiber Title: -87- 95 THE FROST NATIONAL BANK By:/s/Jim Crosby -------------------------------------- Address: Name: Title: 100 W. Houston Street San Antonio, Texas 78205 Attention: Mr. Phil Dudley -88- 96 ANNEX I Commitments
Revolving Credit Unavailable Total Term Loan Banks Commitment Commitment Commitments Commitment - ----- ---------- ---------- ----------- ---------- Texas Commerce Bank 12,800,000.00 3,200,000.00 16,000,000.00 1,920,000.00 Banque Paribas 12,800,000.00 3,200,000.00 16,000,000.00 1,920,000.00 Bank of Scotland 10,400,000.00 2,600,000.00 13,000,000.00 1,560,000.00 Christiania Bank 10,400,000.00 2,600,000.00 13,000,000.00 1,560,000.00 The Bank of Nova Scotia 10,400,000.00 2,600,000.00 13,000,000.00 1,560,000.00 NBD Bank, N.A. 10,400,000.00 2,600,000.00 13,000,000.00 1,560,000.00 Continental Bank, N.A. 8,800,000.00 2,200,000.00 11,000,000.00 1,320,000.00 First Union National Bank of North Carolina 8,800,000.00 2,200,000.00 11,000,000.00 1,320,000.00 National Bank of Canada 8,800,000.00 2,200,000.00 11,000,000.00 1,320,000.00 The Frost National Bank 6,400,000.00 1,600,000.00 8,000,000.00 960,000.00 ------------ ------------ ------------ ---------- Total 100,000,000.00 25,000,000.00 125,000,000.00 15,000,000.00
Annex I-1 97 EXHIBIT A FORM OF REVOLVING CREDIT NOTE $__________ April ___, 1994 TESORO PETROLEUM CORPORATION, a Delaware corporation (the "Company"), for value received, promises and agrees to pay to (the "Lender"), or order, at the Payment Office of TEXAS COMMERCE BANK NATIONAL ASSOCIATION (the "Agent"), at 712 Main Street, Houston, Texas 77002, the principal sum of ___________________________________ DOLLARS ($___________________), 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 March 31, 1997, 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 20th day of April, 1994, by and among the Company and Texas Commerce Bank National Association, individually, as an Issuing Bank and as Agent, Banque Paribas, individually, as Co-Agent and as Issuing Bank 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 A-1 98 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 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 99 EXHIBIT B FORM OF TERM NOTE $__________ April ___, 1994 TESORO PETROLEUM CORPORATION, a Delaware corporation (the "Company"), for value received, promises and agrees to pay to (the"Lender") or order, at the Payment Office of TEXAS COMMERCE BANK NATIONAL ASSOCIATION, at 712 Main Street, Houston, Texas 77002, the principal sum of ___________________________________ DOLLARS ($___________________), in lawful money of the United States of America and in immediately available funds, in installments 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 of the Term 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 Term Loan until such Term 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 payment 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 March 31, 1998, 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 Term Notes referred to in the Credit Agreement dated as of the 20th day of April, 1994, by and among the Company and Texas Commerce Bank, individually, as an Issuing Bank, and as Agent, Banque Paribas individually, as Co-Agent and as an Issuing Bank, and the 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 Term 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 Term Loan, the amount and date of each payment or prepayment of principal of each such Term Loan received by the Lender and the Interest Periods and interest rates applicable to each Term 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 Term 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 B-1 100 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 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 Term 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: B-2 EX-10.2 3 COPY OF GUARANTY AGREEMENT DATED APRIL 20, 1994 1 EXHIBIT 10.2 GUARANTY AGREEMENT (Subsidiaries) GUARANTY AGREEMENT, dated as of April 20, 1994 (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 PETROLEUM DISTRIBUTING COMPANY, a Louisiana corporation, TESORO LOUISIANA DISTRIBUTING CORPORATION, a Louisiana corporation, TESORO ENVIRONMENTAL RESOURCES COMPANY, a Delaware corporation, TESORO GAS RESOURCES COMPANY, INC., a Delaware corporation and TESORO E&P COMPANY, L.P., a Delaware limited partnership, (the "Guarantors"), in favor of TEXAS COMMERCE BANK NATIONAL ASSOCIATION, individually, as an Issuing Bank and as Agent, BANQUE PARIBAS, individually, as Co-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 even date herewith, Tesoro Petroleum Corporation, a Delaware corporation (the "Company"), Texas Commerce Bank National Association, individually, as Agent and as an Issuing Bank and the other financial institutions now or hereafter parties thereto entered into a Credit Agreement (as amended from time to time, the "Credit Agreement"). B. The conditions precedent to the effectiveness of the Credit Agreement and the obligations of the Lenders (as defined in the Credit Agreement) to make the initial Loans thereunder, include the execution and delivery of this Guaranty Agreement by each Subsidiary of the Company. C. Therefore, in consideration of the premises contained herein, the Guarantors agree, with and for the benefit of the Agent, the Issuing Banks and the Lenders, 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. "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 2 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. "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) (1) the Term Notes and (2) the Revolving Credit 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 8.04 of the Credit Agreement) or otherwise, and (ii) any and all other sums payable by the Company or any of its Subsidiaries under or in respect of any Financing Document. "Subrogation and Contribution Agreement" shall mean that certain Subrogation and Contribution Agreement of even date herewith among each of the Guarantors and the Company. 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; provided, further, that to the extent that applicable state or federal fraudulent conveyance or transfer laws would so permit or require, the Maximum Guaranteed Amount for such Guarantor (to the extent not previously adjusted for such amounts) shall be (a) increased by the aggregate fair value of such Guarantor's rights to contribution, reimbursement or subrogation pursuant to the Subrogation and Contribution Agreement or applicable laws relating to contribution, reimbursement or subrogation rights and (b) decreased by the aggregate amount of such Guarantor's liabilities with respect to contribution rights pursuant to the Subrogation and Contribution Agreement or applicable laws relating to contribution rights, and (c) multiplied by the Probability Factor (as defined in subsection (d) below) to reflect the likelihood of a demand being made hereunder or against such Collateral. (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. -2- 3 (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 the obligations and transfers of each Guarantor under this Guaranty Agreement and the other Financing Documents are not obligations or transfers that violate the provisions of applicable federal and state fraudulent conveyance or transfer laws resulting in such obligations or transfers being subject to avoidance under any such laws. In that regard the parties hereto intend that such obligations and transfers be in an amount that results in the Guarantors guaranteeing the Obligations and securing such guaranty in an amount that is equal to the maximum amount that is below the amount that such applicable fraudulent conveyance or transfer laws establish as the threshold amount for such Guarantor and for such obligations and transfers that would not be subject to avoidance under such laws. Accordingly, due to uncertainties in calculation and in the status of various judicial decisions and interpretations of such laws, each Guarantor, the Agent, the Issuing Banks and each Lender have agreed upon the limitation of each Guarantor's liability hereunder with the good faith intention of complying with such laws. Under many interpretations of such laws, contingent claims are deemed to be properly valued at the time of each relevant determination based on a percentage (the "Probability Factor") that is reasonably reflective of the probability at the time of determination that a demand or call on or against a guaranty obligation or collateral will be made in light of the financial conditions of the Company and other liable parties and other relevant facts that were available at such time, all as subsequently decided by the appropriate judicial authority enforcing the rights under this Guaranty Agreement or the other Financing Documents. For purposes of the limitations on the maximum liability of each Guarantor in Subparagraph (a) above, if a court in enforcing the rights of the Agent, the Issuing Banks and any Lender shall determine that the use of such a Probability Factor is appropriate, then the Probability Factor determined by such court shall be used to calculate the Maximum Guaranteed Amount, unless the Majority Lenders elect to waive such benefit in writing. In light of the expense and difficulty in determining the Maximum Guaranteed Amount at any particular time, the amount equal to the product of the Obligations multiplied by each Guarantor's Contribution Percentage as set forth on Annex I to the Subrogation and Contribution Agreement shall be presumed to be the Maximum Guaranteed Amount for such Guarantor for all purposes, including the filing of a proof of claim in any bankruptcy proceeding with respect to such Guarantor, or any foreclosure sale or any similar proceeding with respect to Property of such Guarantor, unless and until either such Guarantor or the Agent shall have demonstrated to the satisfaction of the relevant judicial authority the fact that the actual calculation of the Maximum Guaranteed Amount for such Guarantor results in a different amount. (e) 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 (e). -3- 4 (f) 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. (g) 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 hereby agrees that to the extent that any Guarantor shall have paid more than its proportionate share of any payments made under any of the Guaranty Agreements, such Guarantor shall be entitled to seek and receive contribution from and against any other Guarantor who has not paid its proportionate share of any such payments. Each Guarantor's right of contribution shall be subject to the terms and conditions of the Subrogation and Contribution Agreement and Paragraph 5 hereof. 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 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 -4- 5 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 Term Notes, the Revolving Credit 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, 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 -5- 6 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 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 -6- 7 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 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 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. -7- 8 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) 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. (d) 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. -8- 9 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: (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. -9- 10 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 PETROLEUM DISTRIBUTING COMPANY TESORO LOUISIANA DISTRIBUTING COMPANY TESORO ENVIRONMENTAL RESOURCES COMPANY By:/s/William T. VanKleef ------------------------------------------ William T. VanKleef Vice President and Treasurer -10- 11 TESORO E&P COMPANY, L.P. By: TESORO EXPLORATION AND PRODUCTION COMPANY, as its general partner By: /s/William T. VanKleef ----------------------------------- TESORO GAS RESOURCES COMPANY, INC By:/s/Mark S. Necessary ------------------------------------------ Name: Title: -11- EX-10.3 4 COPY OF MORT.,DEED,PROD.,SEC.AGR.,FIN.STMT.4/20/94 1 EXHIBIT 10.3 WHEN RECORDED RETURN TO: VINSON & ELKINS L.L.P. First City Tower, Suite 2669 1001 Fannin Street Houston, TX 77002-6760 Attn: Crystal L. Lightfield (TEXAS OIL & GAS PROPERTIES) MORTGAGE, DEED OF TRUST, ASSIGNMENT OF PRODUCTION, SECURITY AGREEMENT AND FINANCING STATEMENT FROM TESORO EXPLORATION AND PRODUCTION COMPANY, AS MORTGAGOR TO STEPHEN H. FIELD, AS TRUSTEE FOR THE BENEFIT OF TEXAS COMMERCE BANK NATIONAL ASSOCIATION, AS AGENT, AS MORTGAGEE 2 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Section 1.03 Indebtedness Secured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Section 1.04 Fixture Filing, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Section 1.05 Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE II Assignment of Production Section 2.01 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Section 2.02 Rights Under Texas Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Section 2.03 No Modification of Payment Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE III Representations, Warranties and Covenants Section 3.01 Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 3.02 Defend Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 3.03 Not a Foreign Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 3.04 Power to Create Lien and Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 3.05 Revenue and Cost Bearing Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 3.06 Rentals Paid; Leases in Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 3.07 Operation of Mortgaged Property, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 3.08 Operation By Third Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 3.09 Abandon, Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 3.10 Failure to Perform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE IV Rights and Remedies Section 4.01 Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 4.02 Foreclosure and Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 4.03 Substitute Trustees and Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 4.04 Judicial Foreclosure; Receivership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 4.05 Foreclosure for Installments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 4.06 Separate Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 4.07 Possession of Mortgaged Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 4.08 Occupancy After Foreclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3 Section 4.09 Remedies Cumulative, Concurrent and Nonexclusive . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 4.10 No Release of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 4.11 Release of and Resort to Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 4.12 Waiver of Redemption, Notice and Marshalling of Assets, Etc . . . . . . . . . . . . . . . . . . . . . 11 Section 4.13 Discontinuance of Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 4.14 Application of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 4.15 Resignation of Operator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 4.16 INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE V The Trustee Section 5.01 Duties, Rights, and Powers of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 5.02 Successor Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 5.03 Retention of Moneys . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE VI Miscellaneous Section 6.01 Instrument Construed as Mortgage, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 6.02 Release of Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 6.03 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 6.04 Successors and Assigns of Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 6.05 Satisfaction of Prior Encumbrance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 6.06 Subrogation of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 6.07 Nature of Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 6.08 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 6.09 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 6.10 EXCULPATION PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Exhibit A - Mortgaged Property -ii- 4 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 EXPLORATION AND PRODUCTION COMPANY, a Delaware corporation, whose address for notice hereunder is 8700 Tesoro Drive, San Antonio, Texas 78217 ("Mortgagor"), for the benefit of TEXAS COMMERCE BANK NATIONAL ASSOCIATION, a national banking association, as Agent for the benefit of the Issuing Banks and the Lenders, with offices and banking quarters at 712 Main Street, Houston, Texas 77002 ("Mortgagee"). R E C I T A L S: A. On even date herewith, Tesoro Petroleum Corporation (the "Company"), Texas Commerce Bank National Association, individually, as Agent and as an Issuing Bank, Banque Paribas, individually and as an Issuing Bank, 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 Stephen H. Field of Houston, Texas, as Trustee, whose address for notice hereunder is 712 Main Street, 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, 5 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. (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. -2- 6 (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. Section 9.319 (Tex. UCC) (Vernon Supp. 1989) ("Section 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, 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 -3- 7 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 Guaranty Agreement of even date herewith executed by the Mortgagor, among others, in favor of the Agent, 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 Notes with final maturity on or before March 31, 1998. (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 -4- 8 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 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 Section 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"). -5- 9 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. 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 -6- 10 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. 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. -7- 11 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 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 conveyance 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 conclusively 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, -8- 12 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 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 -9- 13 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 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 modification agreement unless expressly released and discharged in writing by Mortgagee; or (d) by -10- 14 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 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. -11- 15 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 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 -12- 16 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. 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. -13- 17 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. 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. -14- 18 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 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." WITNESS THE EXECUTION HEREOF, this 19th day of April, 1994, to be effective as of the 20th day of April, 1994 (the "Effective Date"). MORTGAGOR: TESORO EXPLORATION AND PRODUCTION COMPANY By: /s/ William T. VanKleef ------------------------- Name: William T. VanKleef Title: Vice President and Treasurer The name and address of the Debtor/Mortgagor is: TESORO EXPLORATION AND PRODUCTION COMPANY 8700 Tesoro Drive San Antonio, Texas 78217 The name and address of the Secured Party/Mortgagee is: TEXAS COMMERCE BANK NATIONAL ASSOCIATION, AS AGENT 712 Main Street Houston, Texas 77002 -15- 19 THE STATE OF TEXAS ) ) COUNTY OF HARRIS ) THIS INSTRUMENT was acknowledged before me on April 19, 1994 by William T. VanKleef, Vice President and Treasurer of Tesoro Exploration and Production Company, a Delaware corporation, on behalf of such corporation. /s/ Anne A. Griffin -------------------- Notary Public in and for the State of TEXAS 20 FINANCING STATEMENT This Financing Statement is presented to a Filing Officer for filing pursuant to the Uniform Commercial Code. 1. The name and address of the Debtor is: TESORO EXPLORATION AND PRODUCTION COMPANY 8700 Tesoro Drive San Antonio, Texas 78217 2. The name and address of Secured Party is: TEXAS COMMERCE BANK NATIONAL ASSOCIATION, as Agent 712 Main Street Houston, Texas 77002 3. This Financing Statement covers the following Collateral: All of Debtor's rights, titles and interests in and to the accounts, equipment, goods, fixtures, general intangibles, inventory and any and all other personal property of any kind or character described in and covered by the Mortgage, Deed of Trust, Assignment of Production, Security Agreement and Financing Statement from Debtor to the Trustee named therein and Secured Party, a copy of which instrument is attached hereto as Exhibit "A" and made a part hereof for all purposes, and the proceeds and products of such personal property. DEBTOR: TESORO EXPLORATION AND PRODUCTION COMPANY By: /s/ William T. VanKleef ------------------------- Name: William T. VanKleef Title: Vice President and Treasurer -16- EX-10.4 5 COPY OF DEED,SEC.AGRMT.,FIN.STMT. 4/20/94 1 EXHIBIT 10.4 WHEN RECORDED RETURN TO: VINSON & ELKINS L.L.P. First City Tower, Suite 2669 1001 Fannin Street Houston, TX 77002-6760 Attn: Crystal L. Lightfield (Kenai Refinery) DEED OF TRUST, SECURITY AGREEMENT AND FINANCING STATEMENT AMONG TESORO ALASKA PETROLEUM COMPANY, AS TRUSTOR AND TRANSALASKA TITLE INSURANCE AGENCY, INC., AS TRUSTEE AND TEXAS COMMERCE BANK NATIONAL ASSOCIATION, AS AGENT, AS BENEFICIARY DATED AS OF APRIL 20, 1994 THIS INSTRUMENT COVERS, AMONG OTHER PROPERTY, GOODS WHICH ARE OR MAY BECOME FIXTURES ON REAL PROPERTY DESCRIBED ON EXHIBIT A HERETO, AND IS TO BE FILED FOR RECORD IN THE REAL ESTATE RECORDS AS BOTH A MORTGAGE OF REAL PROPERTY AND AS A FIXTURES FINANCING STATEMENT UNDER THE UNIFORM COMMERCIAL CODE. 2 TABLE OF CONTENTS
ARTICLE I Definitions Section 1.01 Terms Defined Above . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.02 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.03 Other Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 ARTICLE II Grant of Lien and Indebtedness Secured Section 2.01 Grant of Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Section 2.02 Grant of Security Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Section 2.03 Indebtedness Secured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Section 2.04 Fixture Filing, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 ARTICLE III Representations, Warranties and Covenants Section 3.01 Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Section 3.02 Defend Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Section 3.03 Not a Foreign Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Section 3.04 Power to Create Lien and Security . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Section 3.05 Abandon, Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Section 3.06 Failure to Perform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Section 3.07 Maintenance of Mortgaged Property . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 ARTICLE IV Rights and Remedies Section 4.01 Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 4.02 Foreclosure and Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 4.03 Substitute Trustees and Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 4.04 Judicial Foreclosure; Receivership . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 4.05 Foreclosure for Installments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 4.06 Separate Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 4.07 Possession of Mortgaged Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 4.08 Occupancy After Foreclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 4.09 Remedies Cumulative, Concurrent and Nonexclusive . . . . . . . . . . . . . . . . . . . . 8 Section 4.10 No Release of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 4.11 Release of and Resort to Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 4.12 Waiver of Redemption, Notice and Marshalling of Assets, Etc . . . . . . . . . . . . . . 9
-i- 3 Section 4.13 Discontinuance of Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 4.14 Application of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 4.15 INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 ARTICLE V The Trustee Section 5.01 Duties, Rights, and Powers of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 5.02 Successor Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 5.03 Retention of Moneys . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 ARTICLE VI Miscellaneous Section 6.01 Instrument Construed as Deed of Trust, Etc. . . . . . . . . . . . . . . . . . . . . . . 11 Section 6.02 Release of Deed of Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 6.03 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 6.04 Successors and Assigns of Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 6.05 Satisfaction of Prior Encumbrance . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 6.06 Subrogation of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 6.07 Nature of Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 6.08 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 6.09 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 SECTION 6.11 EXCULPATION PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Exhibit A - Mortgaged Property
-ii- 4 DEED OF TRUST, SECURITY AGREEMENT AND FINANCING STATEMENT This DEED OF TRUST, SECURITY AGREEMENT AND FINANCING STATEMENT is entered into as of the effective time and date hereinafter stated (the "Effective Date") among TESORO ALASKA PETROLEUM COMPANY, a Delaware corporation, whose address for notice hereunder is 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 TEXAS COMMERCE BANK NATIONAL ASSOCIATION, a national banking association, as Agent for the benefit of the Issuing Banks and the Lenders, with offices and banking quarters at 712 Main Street, Houston, Texas 77002 ("Beneficiary"). R E C I T A L S: A. On even date herewith, Tesoro Petroleum Corporation (the "Company"), Texas Commerce Bank National Association, individually, as Agent and as an Issuing Bank, Banque Paribas, individually, as Co-Agent and as an Issuing Bank, 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 the Issuing Banks have conditioned their obligations under the Credit Agreement upon the execution and delivery by Trustor of this Deed of Trust, and Trustor has agreed to enter into this Deed of Trust. 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, Trustor hereby agrees with Beneficiary as follows: ARTICLE I Definitions Section 1.01 Terms Defined Above. As used in this Deed of Trust, the terms "Beneficiary," "Company," "Credit Agreement," "Effective Date," "Trustee" and "Trustor" shall have the meanings respectively assigned to them. Section 1.02 Definitions. As used in this Deed of Trust, the following terms shall have the meanings herein specified (to be equally applicable to both the singular and plural forms of the terms defined): "Alaska UCC" shall mean the Uniform Commercial Code as presently in effect in the state of Alaska. "Deed of Trust" shall mean this Deed of Trust, Security Agreement and Financing Statement as the same may from time to time be amended, supplemented or otherwise modified. "Improvements" shall mean all improvements owned by Trustor now or hereafter attached to or placed, erected, constructed or developed on the Kenai Refinery Premises (excluding the Property leased pursuant to the Solar Turbine Lease). 5 "Indebtedness" shall have the meaning assigned to such term in Section 2.03. "Kenai Refinery Premises" shall mean the real property owned by Trustor described on Exhibit A attached hereto. "Kenai Refinery Related Property" shall mean (i) all Improvements; (ii) all Refinery Personal Property; (iii) all water and water rights pertaining to the Kenai Refinery Premises; (iv) all building materials and equipment now or hereafter delivered to and intended to be installed in or on the Kenai Refinery Premises or on the Improvements; (v) all plans and specifications for the Improvements; (vi) all rights of Trustor (but not its obligations) under any contracts relating to the Kenai 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 Trustor (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 Kenai Refinery Premises, Improvements or Refinery Personal Property; (viii) all permits, licenses, franchises, certificates, and other rights and privileges obtained in connection with the Kenai 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 Kenai Refinery Premises, the Improvements or the Refinery Personal Property; (x) all proceeds of each policy of insurance relating to the Kenai Refinery Premises, the Improvements or the Refinery Personal Property; (xi) all proceeds from the taking of any of the Kenai 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 Trustor 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 Kenai Refinery Premises; (xiii) all of the leases, rents, royalties, bonuses, issues, profits, revenues or other benefits of the Kenai 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 Kenai 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 Trustor now has or at any time hereafter acquires in and to the Kenai 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 Trustor with respect to such Kenai Refinery Premises, Improvements or Refinery Personal Property. "Mortgaged Property" shall mean the Kenai Refinery Premises and the Kenai Refinery Related Property. "Permitted Encumbrances" shall have the meaning assigned to such term in Section 3.01. "Post-Default Rate" shall have the meaning assigned to such term in Section 3.06. -2- 6 "Refinery Personal Property" shall mean all equipment, fixtures, furnishings, inventory and articles of personal property of Trustor (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 Kenai Refinery Premises or the Improvements. Section 1.03 Other Defined Terms. Any capitalized term used in this Deed of Trust and not defined in this Deed of Trust shall have the meaning assigned to such term in the Credit Agreement. ARTICLE II Grant of Lien and Indebtedness Secured Section 2.01 Grant of Liens. To secure payment of the Indebtedness and the performance of the covenants and obligations herein contained, Trustor does by these presents hereby GRANT, BARGAIN, SELL, ASSIGN, MORTGAGE, TRANSFER and CONVEY unto Trustee and Trustee's successors and substitutes in trust hereunder, with power of sale, for the use and benefit of Beneficiary, all of Trustor's rights, titles, interests and estates in and to the Mortgaged Property. TO HAVE AND TO HOLD the Mortgaged Property unto the Trustee and to Trustee's 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 Trustor herein contained. Section 2.02 Grant of Security Interest. To further secure the Indebtedness, Trustor hereby grants to Beneficiary 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 Alaska UCC, including the proceeds and products from any and all of such personal property. Upon the happening of any of the Events of Default, Beneficiary is and shall be entitled to all of the rights, powers and remedies afforded a secured party by the Alaska UCC with reference to the personal property and fixtures in which Beneficiary has been granted a security interest herein, or the Trustee or Beneficiary may proceed as to both the real and personal property covered hereby in accordance with the rights and remedies granted under this Deed of Trust 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 Beneficiary under any other provision of this Deed of Trust or under any other Security Instrument. Written notice mailed to Trustor 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 Alaska 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 2.03 Indebtedness Secured. This Deed of Trust is executed and delivered by Trustor to secure and enforce the following (the "Indebtedness"): -3- 7 (a) Payment of and performance of any and all indebtedness, obligations and liabilities of Trustor pursuant to that certain Guaranty Agreement of even date herewith executed by the Trustor, among others, in favor of the Agent, 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 Revolving Credit Loans and Term 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 $125,000,000. (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 31st day of March, 1998. 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. Section 2.04 Fixture Filing, Etc. Without in any manner limiting the generality of any of the other provisions of this Deed of Trust: (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) this Deed of Trust is to be filed of record in the real estate records as a financing statement, and (iii) Trustor is the record owner of the real estate or interests in the real estate comprised of the Mortgaged Property. ARTICLE III Representations, Warranties and Covenants Trustor hereby represents, warrants and covenants as follows: Section 3.01 Title. To the extent of the undivided interests specified on attached Exhibit A, Trustor has good and indefeasible title to and is possessed of the Mortgaged Property. The Mortgaged Property is free of any and all Liens, except Liens allowed by Section 5.04(b) of the Credit Agreement and Liens described on Exhibit B hereto (collectively, the "Permitted Encumbrances"). Section 3.02 Defend Title. Subject only to the Permitted Encumbrances, this Deed of Trust is, and always will be kept, a direct first lien and security interest upon the Mortgaged Property and Trustor 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 Deed of Trust upon the Mortgaged Property or any part thereof or upon the rents, issues, revenues, profits and other income therefrom, -4- 8 except as permitted by Section 5.04(b)(xv) of the Credit Agreement. Trustor 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, Trustor agrees it will immediately defend against such adverse claim or take appropriate action to remove such cloud at Trustor's cost and expense, and Trustor further agrees that the Trustee and/or Beneficiary may take such other action as they deem advisable to protect and preserve their interests in the Mortgaged Property, and in such event Trustor will indemnify the Trustee and Beneficiary 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. Trustor 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. Trustor 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 Trustor has full power and lawful authority to grant, bargain, sell, assign, transfer, mortgage, and convey a lien and 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 Abandon, Sales. The Trustor will not sell, lease, assign, transfer or otherwise dispose or abandon any of the Mortgaged Property except as permitted by the Credit Agreement. Section 3.06 Failure to Perform. The Trustor agrees that if the Trustor or the Company fails to perform any act or to take any action which the Trustor or the Company is required to perform or take hereunder or under the Credit Agreement or pay any money which the Trustor or the Company is required to pay hereunder or under the Credit Agreement, each of the Beneficiary and the Trustee in the Trustor'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 Trustor and the Company, jointly and severally, to the Beneficiary or the Trustee, as the case may be, and each of the Beneficiary 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 Trustor and the Company to each of the Beneficiary and the Trustee pursuant to this Deed of Trust 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. Section 3.07 Maintenance of Mortgaged Property. Trustor will keep the Mortgaged Property in good condition and repair and will not commit or permit any waste, impairment or deterioration of the same and generally will not do any act by which the value of the Mortgaged Property may become impaired. Nor shall any Improvements or Refinery Personal Property be destroyed or removed from the Kenai Refinery Premises without the written consent of Beneficiary. -5- 9 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 Deed of Trust. Section 4.02 Foreclosure and Sale. If an Event of Default shall occur and be continuing, Beneficiary 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 Beneficiary may deem appropriate, and to make conveyance to the purchaser or purchasers. Where the Mortgaged Property is situated in more than one judicial district, notice as above provided shall be posted and filed in all such judicial districts (if such notices are required by law), and all such Mortgaged Property may be sold in any such judicial district and any such notice shall designate the judicial district 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. Trustor hereby irrevocably appoints the Trustee to be the attorney of Trustor and in the name and on behalf of Trustor to execute and deliver any deeds, transfers, conveyances, assignments, assurances and notices which Trustor ought to execute and deliver and do and perform any and all such acts and things which Trustor ought to do and perform under the covenants herein contained and generally, to use the name of Trustor 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 of sale 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 (Trustor 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 Trustor and its successors and assigns, (iii) each and every recital contained in any instrument of conveyance 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 conclusively 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, Trustor 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 Trustor, and against any and all other persons claiming or to claim the property sold or any part thereof, by, through or under Trustor, and (vii) to the extent and under such circumstances as are permitted by law, Beneficiary may be a purchaser at any such sale, and shall have the right, after -6- 10 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 Beneficiary shall have the right and power to proceed by a suit or suits in equity or at law, whether for the specific 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 Beneficiary in connection with any such receivership shall be a demand obligation (which obligation Trustor hereby expressly promises to pay) owing by Trustor to the Trustee and/or Beneficiary and shall bear interest from the date of making such advance by the Trustee and/or Beneficiary until paid at the Post Default Rate. Section 4.05 Foreclosure for Installments. To the fullest extent permitted by law, Beneficiary 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 Deed of Trust shall remain in full force and effect just as though no sale had been made hereunder. It is further agreed that, to the fullest extent permitted by law, 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 Beneficiary, 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. Trustor 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 Beneficiary 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 Trustor, its successors or assigns, or its or their agents or servants, and may exclude Trustor, its -7- 11 successors or assigns, and all persons claiming under Trustor, 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 Trustor, its successors or assigns, might at the time do and may exercise all rights and powers of Trustor, in the name, place and stead of Trustor, or otherwise as the Trustee shall deem best. All costs, expenses and liabilities of every character incurred by the Trustee and/or Beneficiary in administering, managing, operating, and controlling the Mortgaged Property shall constitute a demand obligation (which obligation Trustor hereby expressly promises to pay) owing by Trustor to the Trustee and/or Beneficiary 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 Deed of Trust 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 Trustor or Trustor's heirs, devisees, representatives, successors or assigns or any other person claiming any interest in the Mortgaged Property by, through or under Trustor, 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 Beneficiary 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 Alaska UCC and applicable to the Deed of Trust 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 Beneficiary, 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 Beneficiary 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 Trustor, 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 Trustor, or any guarantor or any other person so obligated to foreclose the lien of this Deed of Trust 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 Beneficiary extending, renewing, rearranging or in any other way modifying the terms of this Deed of Trust without first having obtained the consent of, given notice to or paid any consideration to Trustor, any guarantor or such other person, and in such event Trustor, guarantor and all such other persons shall continue to be liable to make payment according to the terms of any such extension or modification agreement unless expressly released and discharged in writing by Beneficiary; or (d) by any other act or -8- 12 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. Beneficiary 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 Deed of Trust 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, Beneficiary may resort to any other security therefor held by Beneficiary or Trustee in such order and manner as Beneficiary may elect. Section 4.12 Waiver of Redemption, Notice and Marshalling of Assets, Etc. To the fullest extent permitted by law, Trustor hereby irrevocably and unconditionally waives and releases (a) all benefits that might accrue to Trustor 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 for such notice as provided for in the Credit Agreement, all notices of any Event of Default or of Beneficiary'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 Deed of Trust and now in force, of which Trustor 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 Beneficiary 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, Beneficiary shall have the unqualified right so to do and, in such an event, Trustor and Beneficiary shall be restored to their former positions with respect to the Indebtedness, this Deed of Trust, the Credit Agreement, the Mortgaged Property and otherwise, and the rights, remedies, recourses and powers of Beneficiary 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 Beneficiary incident to the enforcement of this Deed of Trust, the Credit Agreement or any of the Indebtedness (including, without limiting the generality of the foregoing, expenses of any entry or taking of 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 Beneficiary under this Deed of Trust or in executing any trust or power hereunder; (b) second to payment of the Indebtedness in such order and manner as Beneficiary may elect; and (c) third, to Trustor; or as otherwise required by any Governmental Requirement. -9- 13 Section 4.15 INDEMNITY. IN CONNECTION WITH ANY ACTION TAKEN BY THE TRUSTEE AND/OR BENEFICIARY PURSUANT TO THIS DEED OF TRUST, THE TRUSTEE AND/OR BENEFICIARY AND THEIR OFFICERS, DIRECTORS, EMPLOYEES, REPRESENTATIVES, AGENTS, ATTORNEYS, ACCOUNTANTS AND EXPERTS ("INDEMNIFIED PARTIES") SHALL NOT BE LIABLE FOR ANY LOSS SUSTAINED BY TRUSTOR RESULTING FROM AN ASSERTION THAT BENEFICIARY 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 BENEFICIARY BE OBLIGATED TO PERFORM OR DISCHARGE ANY OBLIGATION, DUTY OR LIABILITY OF TRUSTOR. TRUSTOR 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 DEED OF TRUST OR THE EXERCISE OF RIGHTS OR REMEDIES HEREUNDER; SHOULD THE TRUSTEE AND/OR BENEFICIARY 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 TRUSTOR HEREBY EXPRESSLY PROMISES TO PAY) OWING BY TRUSTOR TO THE TRUSTEE AND/OR BENEFICIARY 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 DEED OF TRUST AND ANY OTHER SECURITY INSTRUMENT. THE LIABILITIES OF THE TRUSTOR AS SET FORTH IN THIS SECTION 4.15 SHALL SURVIVE THE TERMINATION OF THIS DEED OF TRUST. 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 Deed of Trust 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 Trustor, or to see to the performance or observance by Trustor of any of the covenants and agreements contained herein. The Trustee shall not be responsible for the execution, acknowledgment or validity of this Deed of Trust 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 Beneficiary. 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 Beneficiary or be removed at any time with or without cause by an instrument in writing duly executed on behalf of Beneficiary. In case of the death, resignation or removal of the Trustee, a successor trustee may be appointed by Beneficiary 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 -10- 14 given by Beneficiary to Trustor, 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 Deed of Trust 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, Beneficiary may appoint multiple trustees to serve in such capacity or in such jurisdictions as Beneficiary may designate. 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 Deed of Trust, 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 Beneficiary and the rights and authority granted to the Trustee herein may be enforced and asserted by Beneficiary 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 Beneficiary 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 Deed of Trust 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 Deed of Trust. If all Indebtedness secured hereby shall be paid and the Credit Agreement terminated, Beneficiary shall forthwith cause satisfaction and discharge of this Deed of Trust to be entered upon the record at the expense of Trustor and shall execute and deliver or cause to be executed and delivered such instruments of satisfaction and reassignment as may be appropriate. Otherwise, this Deed of Trust 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 Beneficiary 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 "Beneficiary" as used herein shall mean and include any legal owner, holder, assignee or pledgee of any of the Indebtedness secured hereby. -11- 15 The terms used to designate Trustee, Beneficiary and Trustor shall be deemed to include the respective heirs, legal representatives, successors and assigns of such parties. 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 Beneficiary at Trustor's request, and Beneficiary 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 Beneficiary, Trustor 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 Deed of Trust 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 Deed of Trust (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 Deed of Trust is being executed in several counterparts, all of which are identical. 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 Headings Descriptive. All titles or headings to articles, sections, subsections or other divisions of this Deed of Trust 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 6.11 EXCULPATION PROVISIONS. EACH OF THE PARTIES HERETO SPECIFICALLY AGREES THAT IT HAS A DUTY TO READ THIS DEED OF TRUST; AND AGREES THAT IT IS CHARGED WITH NOTICE AND KNOWLEDGE OF THE TERMS OF THIS DEED OF TRUST; THAT IT HAS IN FACT READ THIS DEED OF TRUST AND IS FULLY INFORMED AND HAS FULL NOTICE AND KNOWLEDGE OF THE TERMS, CONDITIONS AND EFFECTS OF THIS DEED OF TRUST; THAT IT HAS BEEN REPRESENTED BY INDEPENDENT LEGAL COUNSEL OF ITS CHOICE THROUGHOUT THE NEGOTIATIONS PRECEDING ITS -12- 16 EXECUTION OF THIS DEED OF TRUST; AND HAS RECEIVED THE ADVICE OF ITS ATTORNEY IN ENTERING INTO THIS DEED OF TRUST; AND THAT IT RECOGNIZES THAT CERTAIN OF THE TERMS OF THIS DEED OF TRUST 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 DEED OF TRUST ON THE BASIS THAT THE PARTY HAD NO NOTICE OR KNOWLEDGE OF SUCH PROVISION OR THAT THE PROVISION IS NOT "CONSPICUOUS." WITNESS THE EXECUTION HEREOF, this 19th day of April, 1994, to be effective as of the 20th day of April, 1994 (the "Effective Date"). Trustor: TESORO ALASKA PETROLEUM COMPANY By: /s/ William T. VanKleef ------------------------ Name: William T. VanKleef Title: Vice President and Treasurer The name and address of the Debtor/Trustor is: TESORO ALASKA PETROLEUM COMPANY 8700 Tesoro Drive San Antonio, Texas 78217 The name and address of the Secured Party/Beneficiary is: TEXAS COMMERCE BANK NATIONAL ASSOCIATION, AS AGENT 712 Main Street Houston, Texas 77002 THE STATE OF TEXAS ) ) COUNTY OF HARRIS ) THIS INSTRUMENT was acknowledged before me on April 19, 1994 by William T. VanKleef, Vice President and Treasurer of TESORO ALASKA PETROLEUM COMPANY, a Delaware corporation, on behalf of such corporation. /s/ Anne A. Griffin -------------------- Notary Public in and for The State of TEXAS -13- 17 EXHIBIT A PARCEL I: That portion of Section 22 and the Northeast 1/4 of Section 21, Township 7 North, Range 12 West, Seward Meridian, records of the Kenai Recording District, Third Judicial District, State of Alaska, described as follows: Commencing at the 1/4 corner common to Section 22 and Section 27, Township 7 North, Range 12 West, Seward Meridian, Alaska, marked by an Alaska Department of Highways survey monument found; proceed East 2640.92 feet along the section line, Basis of Bearing for this description, according to General Land Office datum for the Section corner common to Sections 22, 23, 26 and 27 marked by an Alaska Department of Highways monument found; thence N 00 degree 07'44" W 1982.23 feet along the section line common to Section 22 and Section 23 to the northeast corner of the Seaman property, the true Point of Beginning for this description, marked by a 5/8" X 30" rebar with 2" aluminum cap attached, set; thence S 89 degree 58'52" W 330.15 feet along the north boundary line of the Seaman property to the northwest corner of said property, marked by a 5/8" X 30" rebar with 2" aluminum cap attached, set; thence S 00 degree 07'59" E 660.69 feet along the western boundary of the Seaman property to the southwest corner of said property, marked by a 5/8" X 30" rebar with 2" aluminum cap attached, set; thence S 89 degree 59'26" W 2310.72 feet to the CS 1/16 corner of Section 22, marked by a 3 1/4" aluminum monument 4928-S, found; thence N 00 degree 08'43" W 1320.75 feet to the C 1/4 of Section 22, marked by a brass cap G. L. O. monument 610-S, found; thence S 89 degree 58'28" W 1320.53 feet to the CW 1/16 corner, marked by a brass cap monument 610-S, found; thence S 89 degree 56'49" W 991.57 feet to a property corner which is situated in a small pond; thence North 00 degree 05'58" W 1170.92 feet to a property corner marked by a 5/8" X 30" rebar, set; thence N 89 degree 59'53" W 330.64 feet to the section line common to Section 21, Section 22 and HES 74, marked by a brass capped monument, found; thence N 89 degree 59'53" W 659.87 feet to a property corner situated along the easterly right-of-way line of the North Kenai Road; thence N 20 degree 33'50" W 19.36 feet along said right-of-way to a point of curvature; thence along a curve of said right-of-way whose radius point bears northeasterly 1357.50 feet, delta of 1 degree 25'49", arc length 33.89 feet to a property corner marked by a 5/8" X 30" rebar with 2" aluminum cap attached, set; thence S 89 degree 59'53" E 678.10 feet to a property corner situated on the east line of Section 21, marked by a 5/8" X 30" rebar with 2" aluminum cap attached, set; thence N 00 degree 05'14" W 100.68 feet to the N 1/16 corner common to Section 21 and Section 22, marked by a brass cap monument 610-S, found; thence S 89 degree 59'34" E 1320.96 feet to the NW 1/16 corner Section 22, marked by a 3-1/4" aluminum monument 4928-S, found; thence S 89 degree 57'03" E 322.87 feet to the Southwest corner of Tract A, K.R.D. 86-135, marked by a 5/8" rebar with aluminum cap attached, found; thence N 00 degree 10'25" W 131.00 feet to the northwest corner of said tract, marked by a 5/8" rebar with aluminum cap attached, found; thence S 89 degree 59'05" E 997.56 feet to the northeast corner of said tract, marked by a 5/8" rebar with aluminum cap attached, found; thence N 00 degree 10'25" W 413.73 feet along the N-S centerline of Section 22 to a property corner, marked by a 5/8" X 30" rebar with 2" aluminum cap attached, set; thence N 85 degree 16'01" E 1324.75 feet to a property corner, marked by a 5/8" X 30" rebar with 2" aluminum cap attached, set; thence N 00 degree 09'47" W 668.93 feet to the E 1/16 corner common to Section 15 and Section 22, marked by a 3 1/4" aluminum cap monument 4928-S set; thence N 89 degree 58'44" E 1320.69 feet along the section line to the section corner common to Sections 15, 14, 22 and 23, marked by a brass cap monument 631-S, found; thence 18 S 00 degree 06'52" E 1320.60 feet to the N 1/16 corner common to Section 22 and Section 23, marked by a survey monument 3808-S, found; thence S 00 degree 15'44" E 780.99 feet to the W. C. 1/4 corner common to Section 22 and Section 23, marked by a brass cap monument G. L. O., found; thence S 00 degree 07'44" E 1200.83 feet to the northeast corner of the Seaman property and the true Point of Beginning. PARCEL II: That certain portion of the U.S. Government Lot Sixty (60) of Section 23, Township 6 North, Range 12 West, Seward Meridian, that lies West of existing Westerly right-of-way line of the North Kenai Highway, in the Kenai Recording District, Third Judicial District, State of Alaska. -2- 19 FINANCING STATEMENT (Central Filing) This Financing Statement is presented to a Filing Officer for filing pursuant to the Uniform Commercial Code. 1. The name and address of the Debtor is: TESORO ALASKA PETROLEUM COMPANY 8700 Tesoro Drive San Antonio, Texas 78217 2. The name and address of Secured Party is: TEXAS COMMERCE BANK NATIONAL ASSOCIATION, as Agent 712 Main Street Houston, Texas 77002 3. This Financing Statement covers the following Collateral: All of Debtor's rights, titles and interests in and to the accounts, equipment, goods, fixtures, general intangibles, inventory and any and all other personal property of any kind or character described in and covered by the Deed of Trust, Security Agreement and Financing Statement from Debtor to the Trustee named therein and Secured Party, a copy of which instrument is attached hereto as Exhibit A and made a part hereof for all purposes, and the proceeds and products of such personal property. 4. This Financing Statement covers goods which are or are to become fixtures to the real estate described in Exhibit A hereto. DEBTOR: TESORO ALASKA PETROLEUM COMPANY By: /s/ William T. VanKleef ------------------------ Name: William T. VanKleef Title: Vice President and Treasurer EX-10.5 6 COPY OF PLEDGE AGREEMENT APRIL 20, 1994 1 Exhibit 10.5 PLEDGE AGREEMENT BY TESORO PETROLEUM CORPORATION IN FAVOR OF TEXAS COMMERCE BANK NATIONAL ASSOCIATION, AS AGENT, APRIL 20, 1994 2 PLEDGE AGREEMENT THIS PLEDGE AGREEMENT is made as of April 20, 1994, by TESORO PETROLEUM CORPORATION, a Delaware corporation, with principal offices at 8700 Tesoro Drive, San Antonio, Texas 78217 ("Pledgor"); in favor of TEXAS COMMERCE BANK NATIONAL ASSOCIATION, a national banking association, with offices at 712 Main Street, Houston, Texas 77002, as Agent ("Secured Party") for itself, the Issuing Banks and the Lenders parties to the Credit Agreement referred to below. RECITALS A. On even date herewith, the Pledgor, Texas Commerce Bank National Association, individually, as Agent and as an Issuing Bank, Banque Paribas, individually, as Co-Agent and as an Issuing Bank, and the other financial institutions parties thereto entered into a Credit Agreement (as amended from time to time, the "Credit Agreement"). B. The conditions precedent to the effectiveness of the Credit Agreement and the obligations of the Lenders to make the initial Loans and the Issuing Bank to issue Letters of Credit thereunder, include the execution and delivery by Pledgor of this Security Agreement, and Debtor has agreed to enter into this Security Agreement. 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, Pledgor hereby agrees with Secured Party 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 3 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 prepetition or post-petition; (ii) the performance of all obligations and agreements under the Financing Documents, including this Security Agreement; and (iii) 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 Pledge Agreement, as the same may from time to time be amended or supplemented. ARTICLE II Security Interest -2- 4 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 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 (i) evidence that entries have been made on the books of a clearing corporation (as defined in Section 8-102 of the Code) to effect the pledge of the Pledged Securities to Secured Party, as provided in, and in accordance with, Section 8-320 of the Code, or (ii) evidence that a financial intermediary has identified the Pledged Securities as having been pledged to Secured Party, as provided in, and in accordance with, Section 8-313(1)(4) of the Code, or (iii) evidence that the Pledged Securities have been otherwise transferred to Secured Party in accordance with Section 8-313(1) 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 "bona fide purchaser" to the extent of its security interest as provided in Sections 8-302(1) and 8-320(3) 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, -3- 5 (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. 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). -4- 6 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 subsection 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 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, -5- 7 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. 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 -6- 8 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. 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 -7- 9 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 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. -8- 10 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 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. -9- 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. 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 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. -10- 12 (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 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 subsection 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. PLEDGOR: TESORO PETROLEUM CORPORATION By: /s/ William T. VanKleef ----------------------- Name: William T. VanKleef Title: Vice President, Treasurer SECURED PARTY: TEXAS COMMERCE BANK NATIONAL ASSOCIATION, AS AGENT -11- 13 By: /s/ P. Stan Burge -------------------- Name: P. Stan Burge Title: Vice President -12- 14 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 -13- 15 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. -14- EX-10.6 7 COPY OF SECURITY AGRMT. (ACCTS & INV.) 4/20/94 1 EXHIBIT 10.6 SECURITY AGREEMENT (Accounts and Inventory) Between TESORO PETROLEUM CORPORATION and TEXAS COMMERCE BANK NATIONAL ASSOCIATION, AS AGENT April 20, 1994 2 SECURITY AGREEMENT ACCOUNTS AND INVENTORY THIS SECURITY AGREEMENT is made as of April 20, 1994, between TESORO PETROLEUM CORPORATION, a Delaware corporation ("Debtor"), and TEXAS COMMERCE BANK NATIONAL ASSOCIATION, a national banking association, as Agent ("Secured Party"), for itself, the Issuing Banks and the Lenders. RECITALS A. On even date herewith, the Debtor, Texas Commerce Bank National Association, individually, as Agent and as an Issuing Bank, Banque Paribas, individually, as Co-Agent and as an Issuing Bank, and the other financial institutions parties thereto entered into a Credit Agreement (as amended from time to time, the "Credit Agreement"). B. The conditions precedent to the effectiveness of the Credit Agreement and the obligations of the Lenders to make the initial Loans and the Issuing Banks to issue Letters of Credit thereunder, 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 Debtor 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 hereby agrees with Secured Party as follows: 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): 3 (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 (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 prepetition or post-petition; (ii) the performance of all obligations and -2- 4 agreements under the Financing Documents, including this Security Agreement; and (iii) 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. "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 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. -3- 5 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 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, -4- 6 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 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. -5- 7 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 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 (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. 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 will not sell, lease or otherwise dispose of any of the Inventory without the prior written consent of the Majority Lenders, and -6- 8 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 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. 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. 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: -7- 9 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 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 -8- 10 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 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: -9- 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 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. -10- 12 (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 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. -11- 13 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 as specified in Section 8.01 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 8.02 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. -12- 14 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, 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 -13- 15 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. (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. -14- 16 DEBTOR: TESORO PETROLEUM CORPORATION By: /s/ William T. VanKleef ------------------------ Name: William T. VanKleef Title: Vice President, Treasurer Address of Chief Executive Office and Location of the Collateral: 8700 Tesoro Drive San Antonio, Texas 78217 SECURED PARTY: TEXAS COMMERCE BANK NATIONAL ASSOCIATION, AS AGENT By: /s/ P. Stan Burge ------------------------ Name: P. Stan Burge Title: Vice President Address: 712 Main Street Houston, Texas 77002 -15- 17 FINANCING STATEMENT This Financing Statement is presented to a filing officer for filing pursuant to the Uniform Commercial Code. 1. The name and address of the Debtor is: TESORO PETROLEUM CORPORATION 8700 Tesoro Drive San Antonio, Texas 78217 Federal Tax Identification No.: 98-0862768 2. The name and address of the Secured Party is: TEXAS COMMERCE BANK NATIONAL ASSOCIATION, as Agent 712 Main Street Houston, Texas 77002 Federal Tax Identification No.: 74-0800980 3. This Financing Statement covers the following Collateral: (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 this item 3; 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 item 3; (c) (i) all goods which were at any time included in the Collateral described in clause (a) of this item 3 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 item 3; 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 item 3, including, without limitation, insurance payable as a result of loss or damage to any of the property referred to in this item 3, 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 item 3, including, without limitation, any and all books of account, customer lists and other records relating in any way to the Collateral described in this item 3; (e) all of Debtor's general intangibles which are related (but only those related) to any property referred to in this item 3, 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 18 similar or dissimilar to the other property described or referred to in clause (a) of this item 3; and (f) all of Debtor's chattel paper, documents and instruments related to or arising out of any property referred to in clause (a) of this item 3. The Collateral shall not include and shall be exclusive of any equipment. DEBTOR: TESORO PETROLEUM CORPORATION By: /s/ William T. VanKleef --------------------------- Name: William T. VanKleef Title: Vice President, Treasurer -2- EX-10.7 8 TESORO ALASKA PETROLEUM CO. SEC. AGRMT. 4/20/94 1 EXHIBIT 10.7 SECURITY AGREEMENT (Accounts and Inventory) Between TESORO ALASKA PETROLEUM COMPANY and TEXAS COMMERCE BANK NATIONAL ASSOCIATION, AS AGENT April 20, 1994 2 SECURITY AGREEMENT ACCOUNTS AND INVENTORY THIS SECURITY AGREEMENT is made as of April 20, 1994, between TESORO ALASKA PETROLEUM COMPANY, a Delaware corporation ("Debtor"), and TEXAS COMMERCE BANK NATIONAL ASSOCIATION, a national banking association, as Agent ("Secured Party"), for itself, the Issuing Banks and the Lenders. RECITALS A. On even date herewith, Tesoro Petroleum Corporation (the "Company"), Texas Commerce Bank National Association, individually, as Agent and as an Issuing Bank, Banque Paribas, individually, as Co-Agent and as an Issuing Bank, and the other financial institutions parties thereto entered into a Credit Agreement (as amended from time to time, the "Credit Agreement"). B. The conditions precedent to the effectiveness of the Credit Agreement and the obligations of the Lenders to make the initial Loans and the Issuing Banks to issue Letters of Credit thereunder, 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 hereby 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. 3 "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 (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). -2- 4 "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: 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 -3- 5 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. 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 -4- 6 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, 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) 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 -5- 7 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. 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, -6- 8 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 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 will not sell, lease or otherwise dispose of any of the Inventory without the prior written consent of the Majority Lenders, and 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 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. 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 -7- 9 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. 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 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 -8- 10 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 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, -9- 11 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 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 -10- 12 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 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 -11- 13 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. 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. -12- 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 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 8.02 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. -13- 15 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, 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. -14- 16 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. -15- 17 DEBTOR: TESORO ALASKA PETROLEUM COMPANY By: /s/ William T. VanKleef ---------------------------------- Name: William T. VanKleef Title: Vice President and Treasurer Address of Chief Executive Office and Location of the Collateral: 8700 Tesoro Drive San Antonio, Texas 78217 SECURED PARTY: TEXAS COMMERCE BANK NATIONAL ASSOCIATION, AS AGENT By: /s/ P. Stan Burge ----------------------------------- Name: P. Stan Burge Title: Vice President Address: 712 Main Street Houston, Texas 77002 -16- 18 FINANCING STATEMENT This Financing Statement is presented to a filing officer for filing pursuant to the Uniform Commercial Code. 1. The name and address of the Debtor is: TESORO ALASKA PETROLEUM COMPANY 8700 Tesoro Drive San Antonio, Texas 78217 Federal Tax Identification No.: 74-1646130 2. The name and address of the Secured Party is: TEXAS COMMERCE BANK NATIONAL ASSOCIATION, as Agent 712 Main Street Houston, Texas 77002 Federal Tax Identification No.: 74-0800980 3. This Financing Statement covers the following Collateral: (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 item 3; 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 item 3; (c) (i) all goods which were at any time included in the Collateral described in clause (a) of this item 3 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 item 3; 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 item 3, including, without limitation, insurance payable as a result of loss or damage to any of the property referred to in this item 3, 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 item 3, including, without limitation, any and all books of account, customer lists and other records relating in any way to the Collateral described in this item 3; (e) all of Debtor's general intangibles which are related (but only those related) to any property referred to in this item 3, 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 19 similar or dissimilar to the other property described or referred to in clause (a) of this item 3; and (f) all of Debtor's chattel paper, documents and instruments related to or arising out of any property referred to in clause (a) of this item 3. The Collateral shall not include and shall be exclusive of any equipment. DEBTOR: TESORO ALASKA PETROLEUM COMPANY By: /s/ William T. VanKleef ----------------------------------- Name: William T. VanKleef Title: Vice President and Treasurer -2- EX-10.8 9 TESORO PETROLEUM DISTR. CO. SEC. AGRMT. 4/20/94 1 EXHIBIT 10.8 SECURITY AGREEMENT (Accounts) Between TESORO PETROLEUM DISTRIBUTING COMPANY and TEXAS COMMERCE BANK NATIONAL ASSOCIATION, AS AGENT April 20, 1994 2 SECURITY AGREEMENT ACCOUNTS THIS SECURITY AGREEMENT is made as of April 20, 1994, between TESORO PETROLEUM DISTRIBUTING COMPANY, a Louisiana corporation ("Debtor"), and TEXAS COMMERCE BANK NATIONAL ASSOCIATION, a national banking association, as Agent ("Secured Party"), for itself, the Issuing Banks and the Lenders. RECITALS A. On even date herewith, Tesoro Petroleum Corporation (the "Company"), Texas Commerce Bank National Association, individually, as Agent and as an Issuing Bank, Banque Paribas, individually, as Co-Agent and as an Issuing Bank, and the other financial institutions parties thereto entered into a Credit Agreement (as amended from time to time, the "Credit Agreement"). B. The conditions precedent to the effectiveness of the Credit Agreement and the obligations of the Lenders to make the initial Loans and the Issuing Banks to issue Letters of Credit thereunder, 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 hereby 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. 3 "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. "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, -2- 4 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: 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. Debtor's federal tax identification number is 74-1268973. 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. -3- 5 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. 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, 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 -4- 6 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. 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. -5- 7 (c) Debtor recognizes that financing statements pertaining to the Collateral will be filed with the offices of the Parish Clerk of Bienville Parish, Louisiana, 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; 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 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. -6- 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 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. 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. 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. -7- 9 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 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 -8- 10 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) With respect to Collateral not located in Louisiana. (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 -9- 11 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. (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 (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. (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. -10- 12 (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: (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. (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 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 -11- 13 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. (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 -12- 14 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 8.02 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 -13- 15 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, 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. -14- 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 7.10 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. -15- 17 DEBTOR: WITNESS TO ALL SIGNATURES: TESORO PETROLEUM DISTRIBUTING COMPANY /s/ Trina Chandler By: /s/ William T. VanKleef - ------------------------------ ---------------------------------------- Name: Name: William T. VanKleef Title: Vice President and Treasurer /s/ Frank T. Garcia - ------------------------------ Name: Address of Chief Executive Office and Location of the Collateral: 6100 Humphreys Street Harahan, Louisiana 70123 SECURED PARTY: TEXAS COMMERCE BANK NATIONAL ASSOCIATION, AS AGENT By: /s/ P. Stan Burge ---------------------------------------- Name: P. Stan Burge Title: Vice President Address: 712 Main Street Houston, Texas 77002 /s/ Anne A. Griffin ----------------------- Notary Public in and for the State of Texas -16- 18 FINANCING STATEMENT This Financing Statement is presented to a filing officer for filing pursuant to the Uniform Commercial Code. 1. The name and address of the Debtor is: TESORO PETROLEUM DISTRIBUTING COMPANY 6100 Humphreys Street Harahan, Louisiana 70123 Federal Tax Identification No.: 74-1268973 2. The name and address of the Secured Party is: TEXAS COMMERCE BANK NATIONAL ASSOCIATION, as Agent 712 Main Street Houston, Texas 77002 Federal Tax Identification No.: 74-0800980 3. This Financing Statement covers the following Collateral: (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 item 3; (c) all proceeds, replacements, additions to and substitutions for any of the property referred to in this item 3 and claims against third parties; (d) all books and records related to any of the property referred to in this item 3, including, without limitation, any and all books of account, customer lists and other records relating in any way to the Collateral described in this item 3; (e) all of Debtor's general intangibles which are related (but only those related) to any property referred to in this item 3, 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 other property described or referred to in clause (a) of this item 3; and (f) all of Debtor's chattel paper, documents and instruments related to or arising out of any property referred to in this item 3. The Collateral shall not include and shall be exclusive of any equipment. 19 Debtor's Federal Tax Identification No. 74-1268973 DEBTOR: TESORO PETROLEUM DISTRIBUTING COMPANY By: /s/ William T. VanKleef ----------------------------------- Name: William T. VanKleef Title: Title: Vice President and Treasurer -2- EX-10.9 10 TESORO EXPL. & PROD. CO. SEC. AGRMT. 4/20/94 1 EXHIBIT 10.9 SECURITY AGREEMENT (Accounts and Inventory) Between TESORO EXPLORATION AND PRODUCTION COMPANY and TEXAS COMMERCE BANK NATIONAL ASSOCIATION, AS AGENT April 20, 1994 2 SECURITY AGREEMENT ACCOUNTS AND INVENTORY THIS SECURITY AGREEMENT is made as of April 20, 1994, between TESORO EXPLORATION AND PRODUCTION COMPANY, a Delaware corporation ("Debtor"), and TEXAS COMMERCE BANK NATIONAL ASSOCIATION, a national banking association, as Agent ("Secured Party"), for itself, the Issuing Banks and the Lenders. RECITALS A. On even date herewith, Tesoro Petroleum Corporation (the "Company"), Texas Commerce Bank National Association, individually, as Agent and as an Issuing Bank, Banque Paribas, individually, as Co-Agent and as an Issuing Bank, and the other financial institutions parties thereto entered into a Credit Agreement (as amended from time to time, the "Credit Agreement"). B. The conditions precedent to the effectiveness of the Credit Agreement and the obligations of the Lenders to make the initial Loans and the Issuing Banks to issue Letters of Credit thereunder, 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 hereby 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. 3 "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 (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). -2- 4 "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: 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 -3- 5 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. 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 -4- 6 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, 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) 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 -5- 7 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. 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, -6- 8 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 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 will not sell, lease or otherwise dispose of any of the Inventory without the prior written consent of the Majority Lenders, and 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 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. 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 -7- 9 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. 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 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 -8- 10 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 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, -9- 11 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 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 -10- 12 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 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 -11- 13 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. 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. -12- 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 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 8.02 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. -13- 15 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, 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. -14- 16 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. -15- 17 DEBTOR: TESORO EXPLORATION AND PRODUCTION COMPANY By: /s/ William T. VanKleef ----------------------- Name: William T. VanKleef Title: Vice President and Treasurer Address of Chief Executive Office and Location of the Collateral: 8700 Tesoro Drive San Antonio, Texas 78217 SECURED PARTY: TEXAS COMMERCE BANK NATIONAL ASSOCIATION, AS AGENT By: /s/ P. Stan Burge ----------------------- Name: P. Stan Burge Title: Vice President Address: 712 Main Street Houston, Texas 77002 -16- 18 FINANCING STATEMENT This Financing Statement is presented to a filing officer for filing pursuant to the Uniform Commercial Code. 1. The name and address of the Debtor is: TESORO EXPLORATION AND PRODUCTION COMPANY 8700 Tesoro Drive San Antonio, Texas 78217 Federal Tax Identification No.: 74-2307903 2. The name and address of the Secured Party is: TEXAS COMMERCE BANK NATIONAL ASSOCIATION, as Agent 712 Main Street Houston, Texas 77002 Federal Tax Identification No.: 74-0800980 3. This Financing Statement covers the following Collateral: (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 item 3; 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 item 3; (c) (i) all goods which were at any time included in the Collateral described in clause (a) of this item 3 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 item 3; 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 item 3, including, without limitation, insurance payable as a result of loss or damage to any of the property referred to in this item 3, 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 item 3, including, without limitation, any and all books of account, customer lists and other records relating in any way to the Collateral described in this item 3; (e) all of Debtor's general intangibles which are related (but only those related) to any property referred to in this item 3, 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 19 similar or dissimilar to the other property described or referred to in clause (a) of this item 3; and (f) all of Debtor's chattel paper, documents and instruments related to or arising out of any property referred to in clause (a) of this item 3. The Collateral shall not include and shall be exclusive of any equipment. DEBTOR: TESORO EXPLORATION AND PRODUCTION COMPANY By: /s/ William T. VanKleef ----------------------- Name: William T. VanKleef Title: Vice President and Treasurer -2- EX-10.10 11 TESORO REF.,MRKTNG.,& SUPPLY CO. SEC. AGR. 4/20/94 1 EXHIBIT 10.10 SECURITY AGREEMENT (Accounts and Inventory) Between TESORO REFINING, MARKETING & SUPPLY COMPANY and TEXAS COMMERCE BANK NATIONAL ASSOCIATION, AS AGENT April 20, 1994 2 SECURITY AGREEMENT ACCOUNTS AND INVENTORY THIS SECURITY AGREEMENT is made as of April 20, 1994, between TESORO REFINING, MARKETING & SUPPLY COMPANY, a Delaware corporation ("Debtor"), and TEXAS COMMERCE BANK NATIONAL ASSOCIATION, a national banking association, as Agent ("Secured Party"), for itself, the Issuing Banks and the Lenders. RECITALS A. On even date herewith, Tesoro Petroleum Corporation (the "Company"), Texas Commerce Bank National Association, individually, as Agent and as an Issuing Bank, Banque Paribas, individually, as Co-Agent and as an Issuing Bank, and the other financial institutions parties thereto entered into a Credit Agreement (as amended from time to time, the "Credit Agreement"). B. The conditions precedent to the effectiveness of the Credit Agreement and the obligations of the Lenders to make the initial Loans and the Issuing Banks to issue Letters of Credit thereunder, 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 hereby 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. 3 "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 (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). -2- 4 "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: 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 -3- 5 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. 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 -4- 6 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, 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) 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 -5- 7 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. 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, -6- 8 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 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 will not sell, lease or otherwise dispose of any of the Inventory without the prior written consent of the Majority Lenders, and 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 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. 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 -7- 9 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. 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 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 -8- 10 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 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, -9- 11 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 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 -10- 12 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 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 -11- 13 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. 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. -12- 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 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 8.02 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. -13- 15 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, 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. -14- 16 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. -15- 17 DEBTOR: TESORO REFINING, MARKETING & SUPPLY COMPANY By: /s/ William T. VanKleef ---------------------------------------- Name: William T. VanKleef Title: Vice President and Treasurer Address of Chief Executive Office and Location of the Collateral: 8700 Tesoro Drive San Antonio, Texas 78217 SECURED PARTY: TEXAS COMMERCE BANK NATIONAL ASSOCIATION, AS AGENT By: /s/ P. Stan Burge ---------------------------------------- Name: P. Stan Burge Title: Vice President Address: 712 Main Street Houston, Texas 77002 -16- 18 FINANCING STATEMENT This Financing Statement is presented to a filing officer for filing pursuant to the Uniform Commercial Code. 1. The name and address of the Debtor is: TESORO REFINING, MARKETING & SUPPLY COMPANY 8700 Tesoro Drive San Antonio, Texas 78217 Federal Tax Identification No.: 74-2045147 2. The name and address of the Secured Party is: TEXAS COMMERCE BANK NATIONAL ASSOCIATION, as Agent 712 Main Street Houston, Texas 77002 Federal Tax Identification No.: 74-0800980 3. This Financing Statement covers the following Collateral: (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 item 3; 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 item 3; (c) (i) all goods which were at any time included in the Collateral described in clause (a) of this item 3 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 item 3; 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 item 3, including, without limitation, insurance payable as a result of loss or damage to any of the property referred to in this item 3, 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 item 3, including, without limitation, any and all books of account, customer lists and other records relating in any way to the Collateral described in this item 3; (e) all of Debtor's general intangibles which are related (but only those related) to any property referred to in this item 3, 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 19 similar or dissimilar to the other property described or referred to in clause (a) of this item 3; and (f) all of Debtor's chattel paper, documents and instruments related to or arising out of any property referred to in clause (a) of this item 3. The Collateral shall not include and shall be exclusive of any equipment. DEBTOR: TESORO REFINING, MARKETING & SUPPLY COMPANY By: /s/ William T. VanKleef ----------------------------------------- Name: William T. VanKleef Title: Vice President and Treasurer -2- EX-11 12 INFORM. SUPPORTING EARNINGS (LOSS) 1 Exhibit 11 TESORO PETROLEUM CORPORATION AND SUBSIDIARIES Information Supporting Earnings (Loss) Per Share Computations (Unaudited) (In thousands except per share amounts)
Three Months Ended March 31, 1994 1993 ---- ---- Primary Earnings (Loss) Per Share Computation: Earnings (loss) before extraordinary item . . . . . . $ 7,202 ( 2,909) Extraordinary loss on extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . ( 4,752) - -------- -------- Net earnings (loss) . . . . . . . . . . . . . . . . 2,450 ( 2,909) Less preferred stock dividend requirements . . . . . 1,889 2,302 -------- -------- Net earnings (loss) applicable to common stock . . . . . . . . . . . . . . . . . . . . . . $ 561 ( 5,211) ======== ======== Average outstanding common and common equivalent shares . . . . . . . . . . . . . . . . . . . . . . 19,455 14,070 ======== ======== Primary Earnings (Loss) Per Share: Earnings (loss) before the extraordinary item . . . . . . . . . . . . . . . . . . . . . . . $ .27 ( .37) Extraordinary loss on extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . ( .24) - -------- -------- Net earnings (loss) . . . . . . . . . . . . . . . . $ .03 ( .37) ======== ======== Fully Diluted Earnings (Loss) Per Share Computation: Net earnings (loss) applicable to common stock . . . . . . . . . . . . . . . . . . . . . . . $ 561 ( 5,211) Add preferred stock dividend requirements . . . . . . 1,889 2,302 -------- -------- Net earnings (loss) applicable to common stock - fully diluted . . . . . . . . . . . . . . $ 2,450 ( 2,909) ======== ======== Average outstanding common and common equivalent shares . . . . . . . . . . . . . . . . . . . . . . . 19,455 14,070 Shares issuable on conversion of preferred shares . . . . . . . . . . . . . . . . . . . . . . . 3,486 4,775 Other . . . . . . . . . . . . . . . . . . . . . . . . . 77 - -------- -------- Fully diluted shares . . . . . . . . . . . . . . . . 23,018 18,845 ======== ======== Fully Diluted Earnings (Loss) Per Share - Anti-dilutive . . . . . . . . . . . . . . . . . . . . $ .03 ( .37) ======== ========
-31- -----END PRIVACY-ENHANCED MESSAGE-----